Companies & Industries

How to Build a Next-Gen Business Now


The macro crisis tells us that it's time to get serious about building a better kind of business. So here's a five-step construction kit for tomorrow's revolutionaries

Posted on Edge Economy: September 24, 2008 4:42 PM

For the last ten days—as I've been predicting for the last few years both here and at bubblegen—a fire has raged through the heart of the global economy.

Central banks and governments are throwing money at an economic superstructure rotting from the inside—but given the severity of the situation, that's like trying to put out a fire by throwing Molotov cocktails at it.

So what should we do—what can we do—about it? Here's my answer.

The macro crisis tells us that it's time to get serious about what we've been discussing for the last few months: building a better kind of business. So here's a five-step construction kit for tomorrow's revolutionaries.

The first step in building next-generation businesses is to recognize the real problem boardrooms face—that we've moved beyond strategy decay. Building next-gen businesses depends on recognizing that they are not about new business models or even new strategies.

The stunningly total meltdown we just witnessed in the investment banking sector—the end of Wall St as we know it—was something far darker and more remarkable. It wasn't simple business model obsolescence—an old business model being superseded by a more efficient or productive one. The problem the investment banks had wasn't at the level of business models—it had little to do with revenue streams, customer segmentation, or value propositions.

And neither was it what Gary Hamel has termed "strategy decay"—imitation and commoditization eroding the returns to a once-defensible strategic position, scarce resource, or painstakingly built core competence.

It was something bigger and more vital: institutional decay. Investment banks failed not just as businesses, but as financial institutions that were supposedly built to last. It was ultimately how they were organized and managed as economic institutions—poor incentives, near-total opacity, zero responsibility, absolute myopia—that was the problem. The rot was in their DNA, in their institutional makeup, not in their strategies or business models.

The point is this: the central challenge 21st century boardrooms must face is not reinventing strategies, or business models, but reinventing businesses as institutions.

To make that less abstract, let's take the second step in building next-gen businesses: let's look at the big picture, to understand how the global economy, beyond all the chatter about bailouts, bankruptcies, and bubbles, is really changing.

The macroeconomic landscape is in a state of institutional flux. Investment banks are the tip of a bigger iceberg. Central banks no longer have the levers to shape economies. Hedge funds are on the cusp of a shockwave of deleveraging. And yesterday's industrial era corporate giants—from GM to GE to Microsoft to the Gap—are increasingly feeble, eking out a more and more tenuous and meager economic existence. In sum, all of these forces are slowly threatening to unravel a fragile web of free-trade deals painstakingly woven over a century—the beating heart of today's global economy.

The centuries-old institutions of orthodox capitalism cannot support the transition to a hyperconnected global economy. They are increasingly unable to allocate capital efficiently, much less grow it productively. And so what we are seeing nothing less than the wholesale deconstruction of the global financial and economic system.

Who's going to reconstruct it? We are. By bringing new DNA to a table packed with crony capitalists, CEOs more concerned about their cash-outs than the companies they captain, and agitpropagandists thinly disguised as so-called arbitrageurs.

That's the third, simplest, and most fundamental step in building next-generation businesses: understanding that next-generation businesses are built on new DNA, or new ways to organize and manage economic activities.

Think that sounds like science fiction? Think again. Here are just a few of the most radical new organizational and management techniques today's revolutionaries are already utilizing: open-source production, peer production, viral distribution, radical experimentation, connected consumption, and co-creation.

The need for new DNA is the most visceral lesson of the macro crisis—and it's why we've been discussing many of the radical innovators above in painstaking detail over the last few months.

So how do the rest of us begin reinventing yesterday's tired, stale DNA?

New DNA addresses the rot which pervades the economy at every level. That's the fourth step in building next-generation businesses. It's also the most complex, because it requires us to confront the sheer scale and scope of the rot in our economy head on.

We need no less than better corporate governance, a working shareholder democracy, a recognition of what capital really is (and isn't), radically more enduring incentives— aligned with outcomes that actually matter to people—the capacity to trust and be trusted, more accurate and timely reporting, strategy that creates authentic value instead of just shifts numbers around, and business models that can yield sustainable growth.

All of those are components of the economic superstructure that are failing. And all are avenues for radical innovators to rethink and reinvent business.

Yet, listing all of those components is just a start—and a poor one, because it's just the sterile, often meaningless language of economics. The fifth, final, and most difficult step in building next-generation businesses is this: we have to put the meaning back into business.

For too long, business has been meaningless: a passionless, soul-crushing game of ripping the next guy's head off, to attain a short-lived competitive advantage—often simply balanced out by someone else's disadvantage—in order to score points on an illusory scoreboard of "shareholder value creation".

That toxic recipe cannot power global economic growth in the 21st century. When your market cap, for example, can be utterly vaporized in a matter of days, it's a stark reminder that shareholder value is a videogame—and it is human outcomes that make work meaningful.

This final step—rediscovering meaning in the work we do—isn't just the most difficult to come to grips with. It's also the most critical—because though the other steps are necessary, they're not sufficient. Without a deeply felt—and a powerfully lived—sense of meaning, every business will devolve to what the investment banks became: machines engineered with relentless precision to destroy long-run value, often implosively so.

No wonder so many think anything "corporate" is a monstrosity. They're right—if the implosion of the investment banks tells us anything, it's this: when what we do is meaningless, it's neither economically valid, strategically viable, nor truly value-creating.

The macro crisis tells us in no uncertain terms: without meaning, businesses devolve to the lowest common denominator: empty exercises in trivial gamesmanship—not next-generation institutions built to fuel another century of economic growth.

We'll be discussing each of these steps in detail in the coming weeks, with even cooler examples—and I'll have a video to accompany this post up soon.

For now, fire away and feel free to add stuff, subtract stuff, or just vent :)


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