5. The Rules of the Game Have Changed in Critical Ways – From Incremental to Exponential

FIVE

The Rules of the Game Have Changed in Critical Ways

CHAPTER SUMMARY: This chapter covers many of the social and technological changes retain underlying success and failure in business today, including changes in communication, changes in market dynamics and power, changes in the role of community in company formation and growth, and the increasing role that “open” business models are playing in the global economy.

Xiaomi is the biggest smartphone maker that no one seems to know about. In China, Xiaomi shot from obscurity to become the nation’s largest maker of smartphones in less than a decade. Often criticized as an Apple copycat, Xiaomi produced slick phones with beautiful designs running a custom version of Android software. Those who dismissed Xiaomi as a mere copycat missed a key fact: that it was an entirely new and different type of smartphone company, unlike any before it.

For starters, Xiaomi puts out new phones monthly, a pace unprecedented for a high-end phone maker; Apple puts out a new version of its iPhone every 18 months to two years. Xiaomi also consults very closely with a community of millions of its customers in highly active and enthusiastic online forums; they constitute its most influential product managers. The company also pioneered a business model whereby it essentially sold phones at cost and sought to profit from the content and applications sold to run on the phones. This model has proven challenging, but it makes perfect sense. From online music and videos to high-end designer clothing and even furniture, many old business models of selling single items are being converted into subscription models.

For new business models and new ways in which customers interact with companies, it’s often useful to look to China, where companies such as Xiaomi, Alibaba, and WeChat foretoken the future. That society of more than a billion people has sprinted ahead of Europe and the United States in many types of business innovation in how people interact with companies and with each other. In China, we see new ways in which companies can make money, with rapid-fire product development and extensive conversations between consumers and businesses. Western companies are increasingly emulating approaches originating in firms in Beijing or Shanghai.

In China, for example, audience recommendations guide a multi-billion-dollar market for subscriptions to home-grown online video channels—whose content often is the product of individuals in their bedrooms. In the United States, this process commenced with popular YouTubers; more recently, the online streaming platform Twitch (now part of Amazon) has emulated the Chinese strategy.

How quickly the structure of the game has changed.

This chapter details those changes. The failure by less innovative legacy companies to recognize them hampers severely their ability to innovate and transform. Here we detail six of the most basic structural marketplace changes that legacy companies struggle with.

Change 1:
Shift in Power from Seller to Buyer

For starters, there has been a marked shift in power from seller to buyer through a reduction in information asymmetry. In the past, buyers of everything from cars to insurance and professional services had no way to know what others have experienced with these products or to aggregate useful opinions and ratings. Now they can connect with other buyers from across the globe and gain important insights before making purchasing decisions.

The Internet, although it has not entirely removed the information asymmetry, has strengthened buyers’ knowledge of the market and thus their bargaining power. A new group of ratings intermediaries has emerged, and social networks have made it far easier to form groups and seek counsel from others with the insights and knowledge we seek, anywhere on the globe, at any time; they range from business-oriented social networks such as LinkedIn and enterprise-software rating and review sites such as G2 Crowd to the travel-rating site TripAdvisor. Yes, it is possible to cheat via these intermediaries; and there are limits on the information’s context (e.g., whether the person providing the review shares your taste). But the only options available before the Internet were the recommendations of paid expert intermediaries, such as travel agents and consultants.

Change 2:
Diminished Influence of Brand

In a similar vein, the security of brand equity has fallen dramatically. Customers, now able to choose on the basis of relevance to their immediate needs, are switching brands more easily—and one-third of respondents to a customer survey reported that they now “love to try new things.”1 Today, companies are constantly competing not only to attract new customers but also to keep their existing customers content to remain theirs.

Without a doubt, customers are now familiar with many more brands than they once were and are willing to try them out. In part, that’s because customers are able to learn about and validate new brands, in both the consumer and business realms, through the greater number and variety of means of communication now available to them: Instagram, blogs, Snapchat, WhatsApp, Facebook, YouTube, and many more ways to reach a mass audience.

Change 3:
Intellectual Capital Is “Leakier” Than Ever

In the realm of ideas and technical know-how, intellectual capital is far leakier than it was in the past—witness the job-hopping of engineers in autonomous vehicles and driverless cars as they launch new startup after new startup, each one utilizing knowledge and intellectual capital acquired at previous jobs.

The reality is that innovation is moving so quickly that the courts are no longer a viable mechanism to enforce intellectual capital in a way that actually polices transgressions. By the time a ruling is handed down, the new company may be worth more money than the one from which its engineers and intellectual capital came.

This leaves development of new products—or of new business models—the only way by which other companies can keep up.

Change 4:
Product Development Cycles Move Much Faster

Legacy companies may be at some disadvantage in this respect because the cycles of product development that their ivory tower design teams favor limit creativity, leave out significant customer and market inputs, and confine innovation. Though Frog Design and IDEO may still design great products, a team fresh out of design school and working from a garage can compete with them on a nearly even footing and can more nimbly test customer sentiment and product viability—and often succeed precisely because it hasn’t got the constraints that legacy companies do. Startups regularly measure market appetite by constructing landing pages selling products that they have yet to build. This is a move that an Apple, a Ford, or a Nike has never been comfortable doing.

Change 5:
Technology Shifts Are Opening Massive New Markets

Despite a sincere desire and even their best efforts, most legacy firms lack both diversity and global perspective, blinding them to changing realities. First, they miss the massive new markets that technology shifts are opening beyond the developed world—and these market shifts may return to haunt them. (As we mentioned earlier in this chapter, China’s technology-adoption practices have been preceding the West’s, and frequently have presaged future consumer tastes in the United States and Europe.) Second, because traditional hierarchies and command-and-control structures are ineffective for knowledge workers and their needs, these firms can be slow to adapt old modes of work, leading younger workers to resent them. Third, the legacy companies tend to fall prey to the “Not Invented Here” syndrome rather than allow partnerships or collaborations to breathe fresh thinking into them.

Change 6:
How We Communicate Has Changed—Changing Everything

In the old days, business communication occurred via memos, and gossip was spread around the water cooler. Now, information travels faster than wildfire, and everyone is always communicating—in a multitude of ways.

The social network TikTok, after launching in China as the short-video application Douyin in 2016 and absorbing a somewhat older U.S. short-video application, Musical.ly, in 2018, by the end of 2019 had fulfilled an astonishing 1.5 billion video downloads around the world.2,3 To call TikTok a social network would be to understate its functions. It is more like a hybrid of YouTube, SnapChat, and Instagram that gives creators tools with which to instantly personalize common memes, but even that description fails to do TikTok justice. The system runs A.I. algorithms that seem to suggest the perfect meme videos for everyone’s personal taste. Owned by the Chinese firm ByteDance, TikTok has grown so quickly that it has caught the eyes both of major corporate sponsors and of Western intelligence agencies, which fear an instrument of a foreign power that can gather so much intelligence and so easily influence such a large population of teenagers and young people.

TikTok joins Facebook, Snapchat, Instagram, Skype, WhatsApp, and Facetime as yet another communication app on our smartphones; but applications that begin with one function easily evolve to perform another. Gmail, for instance, integrates tightly with Google Hangouts, the company’s free video-conferencing system; and, at work, Zoom has (especially during the COVID-19 crisis) become the most popular video-conferencing application to replace dreary landline conference calls. (The largely unaddressed problems in Zoom’s privacy policy and misleading claim of end-to-end encryption, though, make other “large group chat” applications, such as Houseparty, Jitsi, and the particularly secure Signal, attractive alternatives.)

TikTok too illustrates the acceleration and diversification of communication. In parallel with the effects of other technologies’ transfers from analog to digital, communications’ digitization has predisposed it to control by software. As a result, the cost and other barriers to launching a full-blown communications network have fallen, and a small team of software engineers operating anywhere on Earth could launch the next disruptive communications application.

With the rise of the Internet, we leapt from phone calls, paper mail, and faxes to email, screen sharing, text messaging, and real-time video. We now stand on the cusp of a new form of reality sharing, one in which we can experience what others are seeing and doing, or share experiences, economically and all the time. Augmented- and virtual-reality applications have not yet hit the mainstream, but sales of the requisite gear are accelerating, and we are emerging from the trough of disappointment into the steep upward climb characteristic of the technology-adoption curves discussed earlier.

DIY, Cheap Communications Available to Everyone

This proliferation affects business innovation and growth too. Setting up the communications tools that a company needed used to necessitate an I.T. expert and a lot of money. Today, every knowledge worker already uses those tools as part of daily digital existence. Slack lets us not only chat but also share files and connect voice and video calls. Asana, Trello, and other project-management tools not only simplify communication within teams but also overlay email and Slack. For online storage of documents, we can use Google Drive, Box, Dropbox, Evernote, OneDrive, or any other of dozens of options.

Moreover, the cost of maintaining a communications infrastructure for a team is now a miniscule fraction of what it once was. In fact, it is entirely possible to set up everything necessary for creating, testing, and marketing products in less than an hour, online, for free. The smartphone is the biggest cost-reduction system ever introduced to humankind; each one now has, for free, devices and services that formerly cost tens of thousands of dollars in total, including the fax machine, scanner, media player, TV, video player, and camera, and even, for people comfortable with small devices, a laptop computer.

Unrestricted, Free Communications Means Loss of Control

The result of all this abundance is loss of control at all levels of authority, including the corporate level, as the tools of communication are now mastered and deployed by everyone with access to an Internet connection. That modern communication’s ease and variety have made it mundane is what makes it critical to fostering innovation. As the great technology analyst and scholar Clay Shirky wrote in Here Comes Everybody: The Power of Organizing without Organizations, his seminal book on the impact of Internet technologies on organizations: “Communications tools don’t get socially interesting until they get technologically boring.”4

Open Access, Open Source, and Collective Product Development

An early instance of a collaboratively supported and created community entering and winning a legacy market was the Linux operating system. Created as a personal project by Finnish developer Linus Torvalds in 1991, Linux grew a community of users and developers through online collaboration and communication. Today, the upstart operating system is the dominant enterprise software: it powers the greatest number of core capabilities of servers that run the Internet, our communications networks, and our businesses. That community persists today and is embodied in the Linux Foundation, the steward of Linux and its ongoing development and one of the most powerful organizations in the software world even in 2020.

A Model of Collaborative Innovation

Management thinker Don Tapscott and business researcher Anthony D. Williams further fleshed out a model of collaborative innovation with their book Wikinomics: How Mass Collaboration Changes Everything.5 The book was inspired by Wikipedia, the free user-generated online encyclopedia that supplanted the venerated Encyclopedia Britannica and came to be one of the most influential sources of online information in history. Edited as a collaborative effort by volunteers, Wikipedia serves as a fluid and sometimes controversial online test market for ideas and interpretations of history and facts. Based on his studies of Wikipedia, Tapscott lays out a theory of innovation whereby companies and organizations tap the collective intelligence of markets by facilitating and observing the results of mass collaboration on a global scale.

These same communications tools also give power to artists, musicians, and small businesses. Kevin Kelly, a co-founder of Wired magazine and a well-regarded technology thinker, laid the premise for this future business model built on community in 2008 with his brief article “1,000 True Fans.”6 The article’s premise was that musicians, artists, and others could build an existence doing what they loved by identifying a small number of true fans and nurturing that community. Kelly himself proved his maxim with a stream of books, paid newsletters, and other offerings to his newsletter subscribers. Kelly’s prescience took on further importance in the Internet age with the rise of crowdfunding sites such as Kickstarter, Indiegogo, and Patreon.

Legacy Communication Channels Are Withering

At the same time, legacy means of communication for marketing are diminishing in efficacy. Broadcast television, radio, and print are receiving decreasing shares of consumer attention. Even within each medium, the number of potential outlets is multiplying. Delivery of television and of short-form video news and content services has exploded, and podcasts are blurring into radio, further eroding that entire medium’s market share. Although the drop in print readership has slowed in the past two years, the total promotional reach of newspapers and magazines is radically diminished. This works against incumbent brands that, because of advertising’s high cost, formerly dominated these media. Broadcast television remains incredibly expensive, but advertisers are wary that major television networks may no longer deliver the same punch they once did.

How to reach customers has also become far less subject to legacy-company domination. Mass-media advertising and one-way messaging are losing efficacy; smart, focused digital advertising can cut through the noise. This digital scalpel is also accessible to anyone rather than just to the largest brands. In addition, as we have seen with SoulCycle, Toblerone, and many others, consumer and customer sentiment is just as easily influenced by social media, which can alter rapidly to render even the most thoughtful and resonant marketing useless and sully even the most respected brands.

Changes in Style, Substance, Mechanism, and Volume of Communications

This epochal shift in communication has come about through expansion in volume, style, and substance. We communicate now over many more platforms, including phone applications able to deliver text, voice, or video: a growing list that began with Skype, Messenger, WhatsApp, Facetime, and Slack. Even within companies, different teams use different systems.

How and how much we communicate has changed, increasing in traffic volume and transparency and shifting to a wider variety of media. This is true within companies too: employees communicate with each other all the time among locations, groups, divisions. Companies that fail to recognize it and continue to assume information asymmetry risk rebellion and ridicule. New tools, such as Facebook Groups and the anonymous professional network Blind, allow employees to organize and converse out of their employers’ sight.

Collectively held mindsets driven by communication can either foster tremendous creativity or quickly destroy a company (or industry) culture. We are seeing the emergence of a new type of collective action and mindset, as the Google walkouts and the efforts to organize Uber and Lyft drivers exemplify. Even if this never emerges as truly organized labor, the era in which management had a strong information asymmetry is over, and it must behave accordingly or risk alienating its workforce and torching its reputation.

Vox Populi Gets Louder, Stronger

This new facility and fecundity of communications presents businesses with the double-edged sword of exponential risks and spectacular opportunities for rapid, targeted growth. The fitness-cycling chain SoulCycle was one of the massive business success stories of the 2010s, until it ran into a boycott buzzsaw arising from political dissent.

In August 2019, news outlets reported that a major SoulCycle investor, billionaire investor Stephen Ross, was planning to hold fundraisers for U.S. President Donald J. Trump. SoulCycle’s primary clientele is urban upper-middle class women—a markedly anti-Trump demographic. When popular cooking celebrity Chrissy Teigen began tweeting in protest and calling for a boycott of the brand on Twitter, her missives gained hundreds of thousands of retweets.7 Protest crowds formed outside SoulCycle studios and studios of another brand in which Ross had invested, the high-end gym company Equinox. The fallout for SoulCycle was brutal and swift. Class attendance plummeted. Even across the pond, at SoulCycle’s studio in SoHo, London, attendance fell. The brand went from cool to cruel overnight, and the founding CEO of SoulCycle was forced to resign. Once targeted for an I.P.O., SoulCycle now faces an uncertain future.

In the span of a month, protests, rapidly spreading through social media, fueled a popular revolt that undermined a decade of work building a powerful brand. This is both a cautionary and a hopeful tale. With this explosion of media comes major decentralization of how a business talks with employees and customers, and of how members of both groups talk with each other. The same technology innovations that entertain us also empower customers and employees to organize, band together, and influence corporate and government behavior as never before. Uber legendarily used a plea for help in its phone app to drive a flood of emails and comments to the City Council of Washington, DC, when the city threatened to ban the ride-hailing app, and the Council quickly yielded.

At Facebook, ironically, employees used a rival network called Blind to vent grievances against their management as public debate raged over the company’s advertising and privacy practices. Blind creates micro-networks that allow validated past and present employees to participate in a fully anonymized environment. Naturally, Facebook itself is not allowed representation on Blind (and attempts by HR teams to infiltrate the application were rapidly repelled by the participants). Google’s engineers have organized walkouts using ad hoc communications tools to protest the search giant’s work with the U.S. military and intelligence communities. In Europe, online outrage about a price hike and size diminution in the triangle thickness of the famed Toblerone chocolate bar led maker Mondelēz International to revert to the bar’s previous dimensions.

Such cases illustrate the drawbacks that democratization of communication can represent for businesses wishing to keep a lid on dissension, internal or external. But the commercial benefits too of communications’ decentralization and proliferation are manifest. We have already seen how Dollar Shave Club tapped into the virality of YouTube to build a billion-dollar business. Savvy entrepreneurs are tapping into digital tools to craft focused go-to-market strategies that stimulate demand and lower the costs of potential failure.

From Zero to $600 Million in Five Short Years

In 2013, two childhood friends, Peter Rahal and Jared Smith, started making protein bars in their kitchen near Chicago, Illinois. They created recipes for plant-based, minimally processed bars that they thought would appeal to the growing crowd of adherents to minimalist eating principles. Those principles—few ingredients, all understandable in plain language—were popularized by author Michael Pollan and new diets such as Paleo and Whole30. Rahal and Smith initially handed out samples of their RXBAR products to CrossFit practitioners. Rather than spend money on fancy packaging design, Rahal and Smith designed their packaging in PowerPoint. It was simple and readable.

The entrepreneurs’ timing and approach were impeccable. But what allowed RXBAR to grow quickly and effectively was a digital-first strategy that focused on online ads and other marketing to its target markets. Rahal and Smith sold their product using Google and Facebook ads, testing and learning and fine-tuning to get the most from every dollar they spent, later expanding to more than two dozen digital channels and aggressively positioning their product on Amazon.com and other online marketplaces.

Only after all of this did RXBAR create a brick-and-mortar strategy to gain broad access to supermarkets and other physical locations. By then, the company’s brand was well established and it had a base of loyal customers, most of whom paid a monthly fee to have a box of bars delivered to their home or office. With that wind at their backs, Rahal and Smith could enter new establishments relatively confident that their tasty bars would sell. They also knew they could easily test and experiment with new products in an economical and iterative manner, running circles around legacy food companies that take years to perfect and test recipes.

By turning the traditional strategy for entering the specialty food market on its head, Rahal and Smith were able to grow faster and far more cheaply. They did not have to pay for trucks, representatives, distributors, or any of the usual accoutrements of traditional businesses marketing energy bars and other consumer packaged goods.

This new way of using digital communications channels and distribution strategies has become a path to success for a growing number of hot brands. A cooking-appliance sensation, InstaPots, followed a similar “Amazon-first” and digital-only path. Allbirds shoes sold online only before eventually opening a handful of small stores.

Really, this was all about communicating and using modern communication tools as advantages in cutting through the noise, promoting a brand, testing a product, or building a community. In interviews, Rahal and Smith have frequently cited “building a community” as a key part of their successful journey. This is a phrase that would probably not have entered the lexicon of a CEO even two decades earlier. Indeed, the idea of using cheap technology to build a community that supports and buys a product can trace its ascent to the rise of the Internet.