The Economist

An email in response to last week’s newsletter triggered a train of thought that lead to this post. I’d mentioned that in many businesses leaders are competence not creativity, despite creativity being what was needed. So this article is all about measuring disruption in the business environment 

Managerial Competence

Competent managers are really good at what they do. They can reliably increase sales, reduce costs and expand the business. They can create new products, build brands and increase the share price. These are all things that the science (or art) of management understand fairly well and has a roadmap to deliver.

These skills are in high demand when business is in a stable environment. They create value year in and year out (accounting problems, mergers and CEO megalomania aside). 

Fails in Periods of Disruption

This stops working when businesses enters a period of disruption. When a company faces a changing environment. In these circumstances you can have very competent management but company performance can collapse against almost all metrics. Blockbuster video is a case in point. It had a reliable business model but its managers were unable to successfully navigate the disruption of Netflix starting to offer streaming video.

Indicators of Disruption

It’s possible to ‘measure’ when a company enters a period of disruption. Measuring disruption can be done anecdotally: reports from sales and marketing are followed by declining sales figures or reduced margins. Sometimes these signals are masked by general economic noise. A robust company stress test on a regular basis can help identify them in time to respond effectively.These measures of disruption work at the company level and can be the spur to action. They don’t measure the temperature of the ocean….

In the larger economy, or on a sectoral basis it’s much harder to see. One of the reasons for this is that the technological revolution that we are going through has de-coupled work and value.

Decoupling Work and Value

Economists, I’m sure will tell me that those aren’t quite the right terms. Let me explain so that I am clear. Back in the 19th and early 20th century everything that a worker or manager did contributed to the company’s offering. The offering was sold. Work, whether knowledge, physical or managerial thus was directly related to the cash that was collected at the end of the month.

In the modern economy a lot of work creates stuff that is given away for free. Fifty years ago every time you read something that the Guardian Newspaper published you paid for it. Now only 5% of those readers pay for what they read. The work that we do is given away for free.

This article would one not have been written, or would have appeared in a book or a magazine that you paid for. Not knowledge is freely shared. Facebook gives away it’s products for free. So does Microsoft. So does Google. To be sure they still make money – pots of it. The direct linkage between the work that you do and the reward for the company has been broken.

Put another way we create vast amounts of intellectual property (IP) and then give it away for free.

Free and the Loss of Value = Stagnant Productivity

The result of this is that economic statistics that measure productivity (and implicitly disruption) find it very difficult to capture how much productivity is actually changing or growing. This article, by The Economist is one of a series, over the last twenty years that has worried about why despite all the advances in IT we have not see much growth in productivity.

Part of the answer is that so much value is given away for free.

Measuring Disruption 

How does this help measure the amount of disruption that your industry faces? One way is to see how much you can get for free.

As the owner of a coal station you could only get free coal through using your buying power to obtain discounts.

With information becoming easier to generate, manipulate and share information products can be offered for free in many areas. Music, news, video, art all became information products and business models were disrupted as a result.

Testing For Disruption

There are two tests for measuring disruption:

First, are companies in your core business area sharing key information for free with one or more customer segments (they may not be a customer segment for you)?

Second, are companies in different markets sharing information for free in your core area that customers find valuable?

Disruption in Education

Lets use education as an example. What we teach children is well known and clearly understood. It’s available for free from parents brains (as it always has been) but until 2000 is was otherwise locked up in in textbooks. Wikipedia, Khan Academy and Coursera have sought to disrupt the industrial model of schooling but by and large have had no impact. Schools still teach the same way to classes using teachers with boards and classrooms. 

In this case there is a little free information and some free tools. 

What I’d expect to see as disruption gathers pace is far more of that information becoming available and accessible so that people can do valuable work with it. 

Khan Academy for all it’s value is not even close to replacing schools. We will however start seeing products that bridge the gap and the move beyond. Or we may not and the education system may prove immune to disruption….

How Much Value Does Free Create?

What we can do is measure how much value free creates.

To create a metric I’d take this approach

What % of the value your business creates can be done for free? What % of a role can be done for free?

Measuring Disruption

I’m not entirely happy with this. It seems limited and only capable of measuring part of what we call disruption.  Going back to Schumpeter and his waves of creative destruction we need something that is better than anecdote and word of mouth. We need something earlier that the cold finality of lists of bankruptcies and a roll call of the newly unemployed. 

How would you measure how much disruption your sector or industry is facing?