Playing a game where the rules and goalposts are changing with accelerating speed, new opponents emerge from every direction and where the playing field is filled with uncertainties can be frustrating. Three major shifts in competitive dynamics have made the business environment more uncertain and accelerated the speed of change. Cost of starting and scale-up of a new business has decreased dramatically, platform players continuously expand their offering and consumers’ loyalty towards incumbent brands is decreasing. These shifts have made traditional five-year strategy cycles and command & control corporate cultures obsolete. Mission-driven organizations that empower individual employees to make decisions will prevail.
The cost of starting & scale-up of a new business has decreased dramatically. Fixed initial investment to start a new business has been reduced due to as-a-service business model. Everything from CRM software, IT infrastructure and even banking license can be obtained via subscription. Also cost of many of these services are decreasing continuously. For example, Amazon Web Services – the critical provider of IT infrastructure for many start-ups like Uber and Airbnb – has decreased its pricing 23 times during last 10 years.
Raising funds for scale-up of a new business has never been as easy as today. As Bain Macro Trends Group states “Financial capital is no longer a scarce resource—it is abundant and cheap.”1 Improved access to capital can be seen in number and funding of unicorns – the number of start-ups with more than 1B$ valuation has increased from 4 in 2009 to 279 in 2018 and the combined valuation of unicorns has skyrocketed from 13B$ in 2009 to 1000B$ in 2018.
In addition, platform players such as Google, Alibaba, Tencent, Apple and Amazon are continuously expanding their offering to new areas. These companies operate in winner-takes-all markets where the network effect of every new buyer and producer increases the value of the whole network for everyone involved. One of the most famous examples is Amazon that started as an online bookstore and quickly expanded to over 20 other consumer packaged goods categories. In addition, the company nowadays offers IT infrastructure services via AWS brand, eBooks via Kindle, AI assistant Alexa, smart home speaker Echo and is even planning expanding to the healthcare sector. These ecosystems of connected businesses enable platform players to learn more and more about consumer behavior and preferences and fuels their expansion to additional industries.
The selection and variety of consumer products exploded, also switching to competing brand is easier than ever before. Consumers are willing to make the switch if user experience, availability or pricing does not match the ever-increasing standards. Consumers are so used to everything to be effortless and lighting fast that based on Google’s data: “53% of mobile site visits are abandoned if pages take longer than 3 seconds to load” 2. According to Harris Interactive one third of shoppers will instantly switch to competitor’s site when faced with negative online shopping experience 3. Incumbent brands that can’t innovate quickly see their price premiums and market shares erode as consumers switch to competitors. For example, in FMCG markets less expensive private label brands have been taking market share so quickly that Nielsen recently released a report headlined “The rise and rise of private label”. Only the most innovative brands that are able to adapt and move fast have been able to escape the private label trap.4
In 2013 Donald Trump was hosting the wildly popular ‘The Celebrity Apprentice 6’, a relatively unknown San Francisco-based taxi company had just reached annual revenue of $100 M and Nokia was still leading Apple in the battle for second place in mobile phones market. Traditional five-year strategy cycles are not enabling companies to move fast enough in an environment where speed of change is accelerating, and unpredictability is increasing.
Building an organization that is able to change strategic direction quickly when needed is now more important than ever before
Consider for example Netflix – originally a DVD rental service - that was able to execute two major pivots between 2006 and 2011. After witnessing the success of YouTube in 2006 Netflix started the development of its own online video streaming service. The renewed Netflix was widely successful, as the service became the largest source of Internet streaming traffic in the U.S already in 2010. However, the company was raking losses due to difficult and expensive content licensing negotiations with its partners. In 2011 Netflix decided on another pivot by starting production of original content. Also, this second change in strategic direction proved to be successful: in 2017 the company finally achieved break even while releasing more than 125 original productions, gathering 91 Emmy nominations and 20 wins in the process.
What are the explaining factors behind the success of companies like Netflix? How do you build an organization that is able thrive over increasing competition and satisfy the ever-increasing customer needs? Technology, business models and processes are important factors in building successful companies but do not offer a sustainable competitive advantage - standing still or slowing down is fatal. Continuous testing, learning and evolving does not happen by command and control but by empowered employees that are working towards a common goal. For example, according to Netflix the key factor in their success is “our unique company culture that puts people over processes”, while Amazon uses the “divine discontent of the customer as a North Star” in all levels of the organization.
This is something we have seen in our work with our clients. We have learned again and again that even the greatest strategies can be watered down by strong company cultures.
If potential contradictions between strategy and company culture aren’t addressed it’s usually the culture that prevails
Culture eats strategy for breakfast is a cliché because it’s mostly true. The most successful and innovative companies of our era have been able to build company cultures that embrace a certain set of behaviors. These behaviors enable the organizations to move fast despite increasing uncertainty.
This essay is a part of blog series on Digital Culture Change. In our next blog post we will discuss in more detail what kind of company culture is needed to thrive in the new normal - business environment characterized by accelerating speed and increasing uncertainty.
Valtteri Taube, Consultant at BearingPoint Digital & Strategy, is specialized in strategy implementation and culture change
Ville Poikolainen, Senior Consultant at BearingPoint Digital & Strategy, is specialized in driving digital agenda through strategic renewal and company culture