A Lifecycle of Ideas

I’m going to meditate on the maturity cycle of products and ideas, and introduce some ideas I’ve been kicking around for the last few months.


The Inevitable Two-by-Two Grid

The core of the idea is that value added by anything, whether intellectual or physical, passes through four distinct stages, as shown in the two-by-two grid below.





This cycle applies to ideas and intellectual property as well as machines, weapons, computers, infrastructure and factories. Let’s refer to a ‘widget’ to represent any of the above.

The cycle kicks off when one of the smallest players in an industry decides that the widget will provide competitive differentiation. It’s always one of the smallest players because large corporations are structurally unable to make this kind of leap (see Atomic). The small player piles money into the widget, and often bets the future of the entire company on the idea. Most times, of course, it fails and the company turns up its toes. But sometimes, the entire industry is redefined by what the widget does and a dinosaur-killer is born.

Later, of course, the widget becomes key to the efficient functioning of the industry and the competitors race to adopt it. Very soon, while the widget no longer has the power to change the world, it is essential to the running of the business.

Later still, the idea becomes a utility – vital to business operations but providing little differentiation. Everyone has it, and while there’s no more margin to be made out of it, being deprived of it could be fatal. The key factor in provision, therefore, is that risk is minimised.

Finally, the idea falls out of the conscious mind but is retained as a necessary ‘part of doing business’ – there may even be better ways of doing it, and provision at lowest cost is the driver. Eventually, of course, another small player in the industry comes up with a bright idea…

A nice example of this cycle is the adoption of the electric motor in factories. Throughout the Industrial Revolution, factories relied on a single point source of power – originally water-wheels and later steam engines. The mechanical energy was transferred around the factory by overhead drive shafts in the ceilings and the machines were powered by a large and complex (not to mention bloody dangerous) series of belts and gears. When electrical motors came in around the beginning of the 20th Century, they were originally used to replace these point sources of power. The breakthrough came when electric motors were fitted directly onto the machines. This eliminated the dangers and power losses of the shaft-and-belt system and meant you could pack more machines onto the factory floor. So in the early part of the 20th Century, electricity and the electric motor were differentiators. Within ten years, they were core manufacturing technology, and perhaps ten years after that electricity was, in the modern sense, a utility.

Now let’s look at an example we all know and hate: Information Technology.

Killing Dinosaurs with a Carrier Pigeon

Consider the Rothschilds. If you know your financial services history (then you really should get our more) you will know that the sons of this famous family spread out from the Jewish ghetto in Frankfurt to the principal cities of Europe, and sound business sense and their family ties made them one of the earliest international banking institutions. The Napoleonic wars in the early part of the nineteenth century made such an institution essential, and they grew moderately wealthy.

But the true foundation of their wealth was laid in 1815 by cleverly exploiting new technology – the carrier pigeon. One of Rothschild’s agents had accompanied Wellington to the battle of Waterloo, and he was able to use the pigeons to pass news of the allied victory back to London and Paris faster than anyone else. When the Rothschilds in London started selling stocks, the market assumed that they knew that Napoleon had won and that Europe was doomed. Panic ensued, and the Rothschilds were able to gobble up everything in sight.

There have been a few other cases where a good network has been a differentiator – an oft-quoted case is that of American Hospital Supply, who placed computer terminals in their client’s hospitals. While they did it to remove the need for a salesman’s visit, it made the ordering process so much simpler that orders shot up, and AHS had a true market edge…until the rest of the competition cottoned on. In fact, computing had the potential to be a differentiator for about five years, between the introduction of the IBM 360 in 1964 and the end of that decade.

There is a very, very small class of business where IT is still a competitive differentiator today. The factor shared by all these businesses is a reliance on mathematics. If you are in the business of code-breaking or in trading derivatives, then having a better algorithm can be the difference between domination and extinction. At the time of writing, programmers are being recruited for a New York bank with a starting salary of half a million dollars…for people with a PhD in mathematics, physics, engineering or finance. Compare that to starting salaries for other types of programmers - typically something like ‘fresh straw for your cage once a week, and all the pizza you can eat’ - and you can see how much of a differentiator an algorithm can be.

Otherwise – and I don’t expect this to be too controversial – IT is almost never a differentiator, and your business should never look at its IT in this light.

Core Technologies

There are two classes of business where IT can be regarded as firmly located in the ‘core’ quadrant, and the chances are that your business isn’t in one of these classes, either.

The first class is the ‘web-only’ business, which will probably have sprung up in the last ten years. Here, the entire business model rests on exploitation of computer technology. As there are precious few barriers to entry, continued heavy investment in computer technology has put a few corporations ahead of a pack of loss-making imitators: think Google.

The second class is even smaller – where a traditional corporation has changed its business model from the creation of value by the movement of physical things to the creation of value by the movement of information about things. Take Federal Express, for example. Fedex moves parcels around like everyone else, but they stay ahead of the pack through the ubiquitous use of IT - frequent scanning of a parcel’s barcode gives them (and, more importantly, their customers) the ability to locate a package on every step of its journey. Another nice example is the New York Stock Exchange (or any other bourse, for that matter), where physical trading of assets has more or less disappeared.

So in each of these cases, IT provides the corporation with a strong competitive edge, but in neither case has it proved to be a killer technology that has done for the competition. You will also notice that each of these cases has another core asset in addition to IT, without which the business equally would not prosper. In the case of Fedex, it’s the warehousing and logistics network, and in the case of the NYSE it’s the ownership of market data.

So we can extrapolate from these examples to say that IT is a core technology – a strategic asset – for a small number of leading corporations in each industry. In all cases the corporation has to excel in at least one other core technology, and in all cases there are a score of wannabe corporations spending a fortune trying to keep up.

Utilities

Looking again at the two-by-two grid above, you can see that for something to appear in the Utility quadrant it would have to be of high operational importance to the business but of relatively low strategic importance. And for most businesses - by ‘most’ I guess I mean about 90% - their use of IT is firmly stuck in that Utility quadrant.

To be sure, if we didn’t have it the business might suffer, but IT is not what makes the corporation great. It’s not what makes the difference between success and failure. It’s just a necessary evil.

Now repeat after me: “There’s nothing wrong with regarding my IT as a Utility… There’s nothing wrong with regarding my IT as a Utility…”. For some of you, this little piece of therapy might be liberating as it puts IT in its proper place: provided that we can guarantee continuity of supply, the computing function should not consume much more management attention than the plumbing. After all, pretty much every company in the world uses electricity, but how many businesses have a Chief Voltage Officer on the main board?

There is, however, quite a lot wrong in having IT stuck in the Utility quadrant but thinking it’s in the Core quadrant. Thinking something is (or should be) a strategic asset when it isn’t is one of the biggest blunders a business can make – it leads to all sorts of expensive and risky decisions about its provision.

Yet when we look at how computers and software are bought, this delusion of strategic grandeur is everywhere. Consultants and IT providers blithely tell their customers that so-and-so is a strategic system, or buying a hundred of this-and-that will transform their profitability. It isn’t, and they won’t. They are really trying to get you to pay them to build you a space shuttle, when in fact all you needed was a pair of roller skates.

Commoditisation

It’s a measure of the ubiquity of Information Technology that very few businesses will be able to regard their IT as a true commodity, in other words being of ‘minimal operational and strategic importance’. Until that happy day when we can lay on the beach and let the robots do all the work, most businesses will continue to rely on information systems. The small group that do not rely on computing (other than, perhaps, on spreadsheets and word processors) hardly register on any measure of IT spend, as they are lucky enough to be able to buy commodity PCs at commodity prices. They doesn’t mean that the IT they do buy isn’t a bucket of shit, as any user of Microsoft products will testify.
So what?

Perhaps the most important use of this matrix is in helping with make-or-buy decisions. I have gone on – and on and on – about how important it is to reduce the size of your corporation, and that outsourcing is a terrific way of doing this.

However, two criteria have to be met before something can be shoved out of the corporate nest. Firstly, there has to be a mature enough market so that you can be sure that someone else can do it whatever it is you are doing at a lower prices than you can, and you have to be sure that your strategic and operational risks will not be increased by doing so.

Clearly, you can’t outsource a differentiating technology, as the market won’t exist. And you should NEVER outsource a core technology – if it is truly core, your business rests on keeping it in house. There may be small elements – the operation of the systems the software runs on – that can be outsourced, but be very careful of touching software development.

As the stuff in the Commodity quadrant falls under the radar, most often we will be outsourcing stuff that’s in the Utility quadrant. Going back to our example of the IT industry, this would generally be operations, desktop, networking, telecoms, software maintenance and (usually) software development given that it generally doesn’t provide any competitive advantage. And, of course, you should buy your IT as you would electricity, paying for what you consume based on a simple menu (“I think I’ll have 100 MIPS, 2 gigs of storage and a small side-order of bandwidth, please”).

Procurement people will also note the congruency of this grid with the standard two-by-two Product Portfolio Analysis. That’s either too dull to go into, or the subject of my next fascinating piece (I haven’t decided yet) but it is valuable, as it allows us to define the procurement approaches that we can use at any stage in the maturity cycle.