Creative Disruption

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Nokia is one of the businesses I’m looking at in my book. Although, the way they’re currently announcing things at the moment, I’m keep having to add bits. A deal with Microsoft here. A new netbook there – it all adds up…

The reason I’m writing about them is a bit fiddly to explain, but they have been one of the great technology companies of the last couple of decades, and now they find themselves despite being the world’s biggest provider of handsets, they are having to play catch-up in the smartphone world with the recent upstarts Apple and RIM.

Their strategy has been to transform themselves from a handset manufacturer (an increasingly commoditised game) into a software and services business – initially announced in August 2007, resulting in a major restructure six months later (here is how the Economist covered it ).

This is a massive transformation programe – it’s interesting that even now, two years after initially telling everyone the chief exec Olli-Pekka Kallasvuo, still has to stress it in an interview with the FT on Monday .

When he says: ‘It is a big change, it’s very challenging’, you guess that just scrapes the surface of it.

The problem is that while they might be talking about services being the future, they know their smart phones have a fair bit of catching up to do if they want to be in the same usability league as the iPhone, Android and Blackberry (and I speak as an E71 owner who has used all of the others).

In other words, if they want to make it to a lovely software and services future, they’re going to have to deliver some kick-ass hardware to help them get there. Because we consumers love our gadgets.

I say ‘hardware’ rather than ‘handset’ because of the launch of their booklet (see the video below, if you haven’t already). With all that moody lighting, it looks gorgeous, but I wonder if it’ll feel quite so slick up close. It looks a bit solid if you ask me – and there’s a lot of netbooks out there. A lot of cheap netbooks from good brands.

Nokia’s history is well known – in particular the decision to focus on mobile in the 80s and the way they overtook pretty much everyone to become a global leader – a combination of great timing, and 15 years of great product development and (bar one horrific glitch in 1995) industry-leading supply chain management.

But the challenge they now face is of a different kind all together. They’ve gone from being the challenger and the rising star to being the incumbent.

And it is always harder for an incumbent to transform than a new entrant to innovate and grow.

Not only are they having to refocus a massive global organisation (and the services division is the result of a blitz of acquisitions over the last few years, which brings its own challenges), but they have to make sure that any software they launch works on dozens and dozens of different handsets.

And at the same time, they have to make sure that their core business doesn’t fall too far behind.

On every level, this is an oil-tanker-like turnaround. The big lesson so far is just how long it takes.

The obvious question is whether it will succeed – and I wouldn’t be so presumptuous to think I have the answer. But they have plenty on their side – and no shortage of ambition. This month’s Fast Company, gets all enthusiastic about their potential (a little too enthusiastic – but that’s what happense when business journalists meet rock stars).

But, I suspect ’success’ in the future is going to look very different to ’success’ in the past. At best, they will be one of a leading pack rather than an outright leader. Whether that gives them the growth and margins they have known in the past is another matter.

Judging on their current share price performance – it seems the market thinks not. But hey, what does the market know?

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How do you go about writing a book? The longest thing I’ve ever written professionally is a 5,000 word feature, and I felt quite dizzy by the end of that. My dissertation at university was 10,000 but it was mostly gibberish, so that’s hardly encouraging.

It’s not so much the crafting of a half decent sentence I’ve been worried about, rather it’s the knitting together of what at times seems like a set of jumbled thoughts and case histories into something that has some sense of coherence. Hell, maybe even something that someone somewhere might actually want to read.

The formal answer to this question is that you have to set up your outline, a set of headings with the key bullet points in it, and then you stick to that. And when I had to submit my book for approval, I had to put forward a pretty tight outline, even though I wanted to tear the whole thing up almost the second I’d submitted it.

The problem is, I’ve never really written an outline for anythign I’ve ever written. Somehow my mind just doesn’t quite work like that.

My best time-wasting option when confronted with not being able to write an outline is to start mind-mapping. But in this case, it just hasn’t worked.

I’ve always related to Paul Graham’s description of hacking compared to university-taught programming in his brilliant essay Hackers and Painters.

“I was taught in college that one ought to figure out a program completely on paper before even going near a computer. I found that I did not program this way. I found that I liked to program sitting in front of a computer, not a piece of paper. Worse still, instead of patiently writing out a complete program and assuring myself it was correct, I tended to just spew out code that was hopelessly broken, and gradually beat it into shape. Debugging, I was taught, was a kind of final pass where you caught typos and oversights. The way I worked, it seemed like programming consisted of debugging.

For a long time I felt bad about this, just as I once felt bad that I didn’t hold my pencil the way they taught me to in elementary school. If I had only looked over at the other makers, the painters or the architects, I would have realized that there was a name for what I was doing: sketching. As far as I can tell, the way they taught me to program in college was all wrong. You should figure out programs as you’re writing them, just as writers and painters and architects do.”

So for the last few months I’ve just been writing – getting down dozens of thousands of words, chunks of chapters, none of them finished. The equivalent of Graham ’spewing out code that was hopelessly broken’.

Every chapter or bit of a chapter is a separate file – all sitting there in a folder (backed up thanks to the utterly wonderful Dropbox).

Now, however, it tim eot beat it into shape.

So, this morning, on a flight to Stockholm, I’ve just gone through the slightly painful process of reading everything (all printed out and separated by little index tabs) through, and starting to put it all into order – weeding out the duplication, shuffling things round a bit, finding that a couple of my ‘big ideas’ are hardly ideas at all when I read them back, and something that I just rattled off on a train journey into town (about the types of denial incumbents go through when facing disruption) has a bit more potential than I thought.

And now, finally, I have my outline – scrawled on a piece of A4 (I tried photographing it to put it up here but the results were just too fuzzy) and it kind of works. It’s also not a million miles from where I started (I say that just in case my editor is reading this!).

I also have a fair of writing still to do – but it’s now clear where it’s all going. A bit late, I know – but I’ve crossed some sort of Rubicon.

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For the last decade and a bit, I have been working in a newspaper business, dealing with the myriad of threats and opportunities offered by the internet. During all of this, I’ve also been following the trials and tribulations of other businesses and sectors who have seen their world turned upside down by the arrival of all things digital.

Looking at the fates of the music industry, or travel agents, or how businesses like Kodak and Britannica have failed and then picked themselves up, how postal services struggle in a world of e-mail, or how an entertainment retailer like HMV avoids going bust in a world of Amazon, Apple and Pirate Bay, I’ve been struck by the similarities – both in the challenges faced, and in the solutions sought.

It was when I started to spot the same themes cropping up time and time again, I thought it might make a good topic for what will, all being well, be my first book.

Somehow, I managed to convince FT Prentice Hall that this was a good idea, and so I am now right in the middle of writing it – much more slowly than I, or they, would like, and the results of this exercise will hopefully be with you sometime early next year.

Why bother?

It has always struck me that there has been a huge amount written about Google, Amazon, Wikipedia and eBay and the general ways of the online world. Some of this is brilliant, and genuinely insightful, some of it is frothy digital euphoria.

There has also been plenty written about what is wrong with newspapers, broadcasters, Britannica, record labels etc, and what they should or could have done; but there have been very few books that I’ve come across that take a systematic look at the what has happened to these businesses – and what they have done that has actually worked, often in the most trying of circumstances.

The point is – businesses that have to deal with the internet are fundamentally different to those that are the products of it. It is great to look at Google; great to admire Amazon, and Wikipedia is as fascinating a social and creative phenomena as you fan find. But if you are running a business that is profoundly structurally challenged, you share very little of their corporate DNA.

Yes, everyone needs to know about their world, but thinking you can just graft on the bits you like from them in a hope that you will ‘get digital’ is no more likely to succeed than putting on a flashing bow tie and hoping everyone thinks you have a sense of humour.

This process goes beyond those who have had to make the leap from physical to digital and offline to online. Already the first wave of digital businesses are finding themselves challenged (eg eBay), and we currently have a Battle Royale breaking out on all fronts between Google and Microsoft which is entirely digital.

Defining ‘creative disruption’

My first thought for a title was ‘OMG, the Internet Ate My Business’ . Which was fine if I’m just going to chronicle woes, but, it’s a little bit negative (oh, and publishers prefer titles with just two words in!). So, we wanted something that summed up both cause and effect, and that offered a pragmatic blueprint for survival and success. This is where we came up with Creative Disruption. What, you might ask, do I mean by that? To me, it is the process of profound change in a business or sector driven by three things

a. Digital physics
There are some imutable laws that follow the move from atoms to bytes, and from offline to online. This is the stuff we know too well. Digital files can be infinitely copied and effortlessly distributed. Processing power, bandwidth and storage space continue to get faster, bigger and cheaper. The network is a platform. Everything online is instantly global. In some sectors this affects the core product (eg music, newspapers, classified advertising) which is where the greatest disruption occurs. In others, just the transaction and distribution (eg travel, cars) are affected, which is where we find the threat of disintermediation.
b. Changing consumer behaviour
Teasing out the affect between changes in behaviour caused by the internet, and behaviours that were latent but enabled by the internet is for bigger brains than mine. Either way – there are four powerful urges in consumer behaviour in the online age. People want to Create, Connect, Challenge and they want Control. These urges overlap, and converge – but they are like itches that the smartest online solutions scratch. We ignore them at our peril.
c. New entrants and entrepreneurs
If the first two provide the fuel for changing a sector beyond all recognition, it is entrepreneurs and new entrants two who provide the spark that sets the whole thing off. Apple in the music and mobile industries. Reed Hasting’s Netflix in DVD rentals. Brent Hoberman and Martha Lane-Fox with LastMinute.com. Niklas Zenstrom and Janus Friis with Skype. Incumbents sitting on steady growth and great margins have no incentive to change – which is why it takes Entrepeneurs to shake things up. Of course, entrepreneurs have always existed, and have always changed sectors; but in a digital world, the barriers to entry in many areas are so low, and the potential for disruption is so great in so many sectors, that we have a quite unparralleled wave of change.

This is not just disruption, it’s creative disruption

The reason I’ve been keen to add the ‘creative‘ label, is because as an incumbent, it is all too easy to focus on what is being knocked down, but it is even more important to think about what is being built up and created.

Entrepreneurs who just want to be destructive may well succeed in their goals. But it is only those who believe in creating brilliant customer experiences that will ultimately create great businesses.

Netflix, for example, didn’t just disrupt Blockbusters – it created a brilliant new way for you to get DVDs. Lastminute.com similarly wasn’t just about hacking away at Thomsons and Thomas Cook – there was a brilliant proposition, as much about convenience and price. And now, Kayak and Skyscanner are taking the travel world to the next step – a further creative disruption, by creating a business even thinner than LastMinute.com but with real consumer value of live price comparison.

Craigslist might well have hacked many newspaper’s classified revenues off at the knees, but to simply see it as that, ignores the phenomenal job Craig Newmark has done at the same time of turning something as creatively moribund as newspaper classifieds and turning them into a global community.

Standing on the shoulders of giants

The smart ones among you will have noted the nod in the title to both Schumpeter (‘Creative Destruction’) and Clayton Christensen (‘Disruptive Innovation’). This is deliberate. Both men loom large in my thinking – in particular Schumpeter, who I think should be getting much more of an airing in the current climate.

Schmpeter looked at a number of massive technology changes and how they affected different businesses – from the arrival of the Spinning Jenny to the launch of the motor car. His point – as I mentioned above was that dramatic change like this creates a whole new world, while often destroying the old one.

He was – as far as I can tell – the first economist to really stress the role of entreprneurs (‘new men’ and ‘new businesses’) in creating spectacular/ disruptive change in a sector. But he also analysed and described that change more vividly than anyone before, and most people since.

His description in Business Cycles of the impact of the railways on the businesses is perhaps the finest definition I’ve seen of the change that the internet would later cause to the business world as a whole.

“Upsets all conditions of location, all cost calculations, all production functions within its radius of influence; and hardly any “ways of doing things” which have been optimal before remain so afterward.”

And, if there is one phrase that sums up the challenge faced by so many businesses with Germanic (ok, he was actually born in Austria) precision is it that all their old ways of doing things are ‘no longer optimal’.

Christensen’s The Innovator’s Dilemma is one of the great works of modern business thinking. I sat through Christensen’s legendary 3 hour explanation of disruption that covers everything from steel mills to strawberry milkshakes a few years ago, and was blown away. As an exposition of what disruption is, and how it works – it is truly astounding. And, I think Christensen and his team’s templates for innovation are also pretty smart. But I think that while he identifies 95% of the problem, he only profers about 30% of the solution.

So what can incumbents do about it?

Well, I’ve got to hold something back for the book. But if you look at the turnaround at HMV, or if you start to ask yourself why Deutsche Post is deemed a viable business while the Royal Mail is a bit of a car crash. Or if you look at what we have beeen doing at Guardian Media Group, you will start to see some of the principles in action.

My general thesis is that the nice bit of the solution – smart innovation, often at the edge of the business, just isn’t going to be enough. To focus solely on that lacks credibility with anyone who is actually operating in this world.

The disruption that happens within a business is going to have to be at least as profound and radical as that happening outside. It will normally involve fundamentally rethinking how the core business operates, as well as looking a mix of diversification and edge innovations. It requires vision, the willingness to challenge pretty much every assumption about how you operate, and what has been branded by some academics as ’strategic agility’

It is not easy.

One of the things I’ve always noticed is that everyone outside a challenged incumbent such as Britannica or Kodak or the newspaper industry always knows what they should have done or, less often, what they should do next. But everyone inside them somehow seems to be getting it wrong. Why is that? Is it because there are no smart people in any of these businesses? Is there no chief executive who understands the digital world?

No, it’s the simple fact that having to actually do this, having to deal with both the people and the numbers involved is tough. Change takes infinitely longer to deliver than to describe. Revenue lines in decline can still be significant. Those on the up are likely to be very small. Managing that gap is anything but easy – especially in a public business. Changing the way a business thinks, the way it sees the world and its role in it – is also a big change. Especially when, as is the case in so many businesses affected in this way, the entire business has been built on doing one thing well for decades and decades.

Blogging and writing

When it comes to writing something like this, I’m like a mid-ranking middleweight getting back into the ring after retirement. Some of the moves are still there, but a lot of the pace and power has gone. After a decade in management (which effectively means a decade in Powerpoint with occassional bursts of blogging), going back to Microsoft Word to crank out tens of thousands of words is proving a little tricky. And a bout of RSI hasn’t helped matters. Nor has a day job and three young children. So, I need to focus, which means I’m not blogging my every thought, and I’ve left it till now to even explain what I’m up to.

However, it’s time to break cover – so I’ll be posting here occassionally, tweeting a bit (@Waldo) and also be setting up an e-mail list – which is very old fashioned, I know – but it’s the easiest way for anyone who’s actually interested in progress to follow.

And yes, of course I care what you think

This is just a very rough outline. If you have any thoughts or suggestions – please feel free either to add comments below (because spam, I’m afraid I have to premoderate), or e-mail me at Simon AT Creativedisruption DOT Net.

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