15.09.2014

Thinking, fast (..and slow)

I admit, my previous blog was largely fuelled by frustration. I hope that I am not turning into a chronic by continuing to use the same propellant – on the other hand I hope to stimulate some likeminded people to share my thoughts – and I’ve been told by a recognized SOCIAList, that I should be angrier in my blogs if I wish to see any ripples at all in SOCIAL.

My previous blog was about the unjust environment SME companies operate in. Meanwhile, reading Daniel Kahneman’s inspiring best-seller “Thinking, Fast and Slow”, I couldn’t help noticing a connection with his thesis and how myopic decision-making is shaping the business environment. Kahneman’s fundamental thesis is based on understanding two, quite different systems of thought; System 1 (fast) which is based on primitive reaction, sub-conscious, intuition, instinct and emotions and System 2 (slow) which is based on logic, deliberation and conscious calculating. This is the way the brain works, whether we like it or not, says Kahneman. But when made aware of it, I believe one can at least better explain why certain decisions made were not necessarily the best ones. It takes Kahneman 500 pages to thoroughly explain how the systems work, I will not attempt to do it in this blog. Read the book, it’s worth it.

Why did this book inspire me? Well, part of my job is to understand what challenges my customers are facing and also trying to appreciate the decisions they are making to survive in today’s lunar market conditions. I acknowledge my customers are experts in their business and based on the same assumption, I am the expert of mine. Given that IT/ICT is seen by business management as one of the strongest sources of competitive advantage, it is surprising how little it has been exploited when times get tough. At the same time, while IT is seen as an opportunity, in reality it is still regarded as an expense. And when I talk about IT, I don’t necessarily mean software solutions, servers, licenses or even cloud – I see it in a much broader context of digitalization.

Looking back at the strategic choices many companies have made in the past year or so, there is little evidence suggesting that true innovation has been attempted or digital opportunities have been sufficiently explored. The corporate brain is using System 1 for decision making. System 1 suggests that when revenues nose-dive, everything is about losing ballast and right-sizing – the market and business environment is just temporarily out-of-order and sooner or later will resume operation. In their defense, when you need a quick fix (because strategic change is undone or fatally late), cutting-costs yields fastest returns. You can save the quarter, but lose your future.

Conventional actions will only drive businesses into ketosis and as there will be no turnaround, the prognosis is bleak. System 1 makes things even worse – drowning businesses are submerging their business partners with them. Suppliers and vendors are forced to agree to ridiculous payment terms, zero-margin deals, delayed payment milestones and completely asymmetric risk taking. This is truly corrosive and also morally questionable – if you ask System 2 that is.

System 2 would say that business models, markets, economic dynamics and competition is undergoing a universal transformation and there is no turning back. Conventional drugs will not cure the modern disease. Holding your breath forever equals suffocating. One can no longer think inside the box and denying the need to dramatically transform is suicidal. Many will need an entirely new breed of diagnosticians who don’t base their findings on yesteryear or resort to conventional industry expertise. Many should listen to those who have genuine foresight and who disobey classical rhetoric.

There are too many examples of how new technology, for example the Internet, Cloud and otherwise disruptive business models are true game-changers; where complete century-old-industries have been transformed practically overnight by companies who understood where the new center of gravity has moved: Amazon (revenues 75 B$), Google (60B$), e-Bay (16B€), Facebook (7B$) and newer ones: Alibaba (7,5B$), Baidu (5B$), Xpedia (5B$), Zalando (1,2B€), Netflix (>1B€), Tripadvisor (1B$). From a market capitalization/market value perspective, Internet companies have become massive. Xpedia & Tripadvisor (formerly part of Xpedia) are both massively successful and are valued at 5-10x their revenues. Skeptics will say they are grossly over-valued vis-à-vis their questionable earnings, others might say valuation merely reflects a bright future potential.

From a global perspective, none of these companies have truly invented fundamentally new businesses – they have harvested market share from old-world business (printed media, advertising, retail, travel, broadcasting etc.) and successfully harnessed new channels, platforms and technology combining these often with new-age capabilities (Social, mobile) to establish new selling and buying paradigms. The rise of new-age business often equals the fall of traditional business.

New-age businesses mushroom seemingly effortlessly – transforming old into new is far from easy. System 2 needs to be deployed big-time. Deploying new technology does nothing alone. It can enable change, but more crucial is to understand how emerging trends and patterns need to be addressed. Is there a foundation in the old core business? Where is value created in modern value-chains?

New age businesses seem to attract investors and financing whereas old-world companies are finding it increasingly difficult to get affordable financing because they are just looking for working-capital life-support. For an investor this would be a complete turn-off and for finance institutions, this is high-risk business.

So is there a solution or a recommendation I am coming to? The only universal one is that as a whole, we really need to wake up and face the reality. Giving life-support to the terminally ill can be a business for someone, but it cannot be the discipline of businesses as whole.

More precise recommendations are surely industry-specific. It will come as no surprise that the retail and wholesale business future is based not only on world-class e-commerce platforms. Mastering buying patterns, cross- and up-selling, value-chain optimization, exploiting social, exploiting geo-location, deploying predictive analytics can be partial solutions. Understanding tomorrow’s competitive advantage is also a precondition for business longevity.

I could go on forever, but to sum it up – especially in trying times, we should let System 2 do some work. Formerly obvious System-1-decisions based on gut and experience may prove to be false. The current state of business is not bleak; on the contrary, it is full of opportunity. Thinking out-of-the-box, giving way to fresh new logic, seeking guidance from those who represent the new-world and keeping an open mind is a good start.

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Mika Tanner

Bilot Alumni