Environmental Beta — Understanding How Fast Things Are Changing Is the First Step To Innovation
Now more than ever, business is an exercise in the management of change. The fields that we operate in are dynamic and hard to predict. Though ‘change is a constant’, it is remarkable how little management conversation goes in to change itself as an explicit factor in business planning. Change is a property of the field in which a business operates and deserves a ‘seat at the table’ when doing any form of business planning. The first step in managing change is to give change an appropriate nominative label — a handle with which to can carry it into our conversations. For this purpose, ‘Environmental Beta’ describes the rate of change for areas of our business, an important though rarely recognized tool for your management process.
In my management practice running a portfolio of products, environmental beta is a key factor in the decision making behind everything we do. As an example, in 2012 my team took on the task creating a new online consumer brand for the automotive space — www.Auto.com. This while continuing to run other businesses and products in other markets. We built and grew Auto.com with a lot of hard work, and quickly grew to success. Though it was never spoken about in formal management settings, this success was only possible because the environmental beta for our other projects was sufficiently low. Our small team was able to multitask because the required Adaptive Input per unit time to maintain everything else was low enough.
Adaptive Input: The amount of work required to maintain state in response to changes of the environment.
We all clearly understand the feeling of how rowing a boat against a river current requires effort to simply stay in place. And even more effort if we plan to move the boat upstream. Every aspect of our businesses carries a similar property of flow, and variability. Environmental beta is the sum of unpredictability and change imposed on your business by the field in which it operates. Here are some examples.
How fast are the technologies that your business depends on obsolescing? The platforms, technologies, and systems that underpin our businesses are in constant change. Changing beneath our feet — sometimes suddenly and dramatically. In the case of our group, technology changes often have dramatic implications. Our use of the Ruby on Rails development stack helps us to deliver a lot of great product in a short time. Rails also comes with its own significant beta. It up-versions at unpredictable intervals, which means that support for software components can dry up quickly. We find ourselves having to rewrite our stack every 2–3 years. This beta can be hard to predict, and is a built-in cost that we are always planning for.
When building an online business, marketplaces such as Google, and the Apple App Store are often key. How stable are your traffic levels through these channels? Does the dynamic of the market force your team to be building all the time? (high beta). Or can you establish a level (or growing) rate of delivery that allows you to deploy resources to other areas? (low beta).
Are your competitors delivering innovation and driving high consumer expectations? Most competitive markets have innovation changes running tit-for-tat between the population of players. This high-beta scenario forces constant focus on research and development.
Cost of materials, cost of labor, legal frameworks. Contracts with vendors, and licensing of technologies. These are all examples of inputs to a business that are can change quickly. As the rates of change for these factors increases, the dedication of limited resources to managing that change increases.
Human Resource beta
The structure and composition of human teams, and the skill sets that they employ on behalf of your business are also under constant pressure of change from the environment.
The ‘startup mindset’ assumes that environmental beta is high, and that time is at a premium. Speed to market, time to delivery, hours and days (not months or years) are the mantras in a startup. The result of this mindset is a planning bias that favors action. This mindset is an excellent strategy for addressing environmental beta. Beyond keeping up, business must get ahead in the market. Keeping pace with change is rarely enough.
Without a formal process, environmental beta will usually fall into the category of ‘gut feeling’ or unspoken understanding. A numeric description of beta makes it easier to introduce to structured decision making.
Can we quantify environmental beta? Provide a scale? How is such a metric calculated? While we may be able to describe change itself, it is more instructive for planning purposes to calculate the cost of adaptive input for addressing change. An example of this from our technology stack as mentioned earlier. We assume the Ruby on Rails software stack underneath our brand will obsolesce on a 3 year time horizon. This provides a simple measure the amount code (lines) or time to rewrite (man hours) required to deal with it. We now have an estimate of the required investment per day/week/month to maintain state. In this simple example, we may be incurring a technical debt of 80 man hours per month (payable in aggregate at a later date).
For managers, recognizing the adaptive input requirements for the myriad parts of our business is foundational. This is the basis for finding a competitive advantage, a niche, and new markets. It is the basis of building and getting ahead. After all there is no getting ahead without first keeping up.