Why being last is (sometimes) better

As Steve Forbes genuinely puts it:

“If you don’t disrupt yourself, others will do it from you”

Among competitors, the distinction is not between the better product and a less good one. It is between the winners and the losers, because in the new economy, winner takes all. This is Pareto’s law or the 80–20 principle, the one which states that 20% of the industries control 80% of the market. A striking case is Amazon’s one, as they are bigger than 5 of the major industry players in book retailing altogether.

But how do they do that?

They are more than 10x faster than their opponents, and that gives them the decisive edge. Amazon’s operational margin is about 0.8% while Alibaba’s one is about 26% as of October 2015. They even went on to make a machine that cuts carton packages to the minimal surface to reduce costs.

The truth is, there has been a shift in the way companies compete with each other.

A century ago, it was mainly driven by production. It was the time of the factory- that system where organized labor meets patient capital, productivity-improving devices, leverage.

The focal point forty years ago was the marketing. Hollywood industry is a good example as there was a correlation between the marketing budget you would put into a movie and the resulting benefice. It was if X ads brings me Y customers, then 2X ads will give me 2Y ones.

But that doesn’t work anymore, or at least partially.

Today, people inside the theater relates to those outside the truth about the movie.

Marketing didn’t disappear; it just transformed into product innovation. That is, a good product sell itself.

What explains this shift?

There are two revolutions at work here. A fulgurant one and a silent one.

The fulgurant revolution has been a consequence of the 4 Internets and their 3 fairies. Technic progress is based on three fairies that leant on the cradle of the era of information. They are treatment, stockage and transmission. As of the four Internets, many of us are familiar with two of them; the one use daily, and the Internet of Things. The last two are emerging at high speed. They are the Internet of the Energy, and the Internet of Homemade Objects supported by 3d printing.

The silent one consists of all implications provided by recent scientific discoveries. Some of the most influential findings — Godël’s theorem, non-separability and Heisenberg principles — had a deep impact toward management and the way business is done.

(Note: I will do a more detailed article about the aforementioned revolutions)

Thus, we moved from a materialism-based economy to an information-based economy.

But how to detect markets ripe for disruption, or even create one?

There are consistent steps around disruptive innovation

• The domain or technology becomes information enabled

Only two months after Steve Jobs announced the IPhone in 2007, Nokia acquired Navteq for $8.1 billion. To Nokia, it was mainly about the monopoly-ish road sensors market that Navteq had. They concluded that the control of those sensors would enable it to dominate mapping and mobile and online local informations. It would have act as a defensive barrier to Apple and Google progress in this field. Unfortunately for Nokia, a small company called Waze leveraged it’s user’s Iphones to crowdsource local information using GPS. About 5 years later, Nokia was worth $8.2 billion; which is almost the value of Navtek before 2007’s acquisition.

• The costs drop exponentially and access is democratized

Consider Coursera, the platform used by top universities to produce and broadcast MOOCS. To them, adding a new student has a really low marginal cost. But the same cost in a classroom is tremendously higher.

• Hobbyists come together to form an open source community
• New combinations of technologies and convergences are introduced
• The status quo is disrupted

We are seeing this evolution occur in drones, DNA sequencing, 3dprinting, sensors, robotics and, certainly , Bitcoin. Besides, the more fragmented a market is, the better it is suited for disruption.