What goes up can't come down?

I would call this my personal summary of the "Innovators Dilemma", a book I've recently read.

On a recent conversation some asked "So, what goes up and can't come down"? "Fuel prices, right?".

While this isn't particularly funny it made me think about why despite fluctuations in the petrol cost gas prices seem to consistently increase. Easy to give a quick dismissive answer but I kept thinking about it - mostly because I was bored and reading a book would be considered rude.

In a company like BP or Mobil you are indeed expected to "always go up and never go down". And to make the forecast come true you have to focus on opportunities that allow you to reach the projected growth - if you are a 200M/year company and forecast a yearly growth of 10% you have to make extra 20M to reach those projections. Failing to do so in a public company can be catastrophic - even good companies with excellent track records can fail after two successive bad quarters. At the very least it can impact their business which impacts their ability to remain competitive.

While this might seem perfect to the capitalist in you it really isn't. Simply because there isn't such thing as perpetual growth. Basic intuition tell you that everything that goes up does come down. It might take more or less time but one thing our world seems to be pretty good at is renewing itself. We all know the higher you go the higher you can fall.

I've drawn this graphic - it doesn't represent any actual market data and it is indeed completely made up. However it makes it real easy to illustrate the opportunities for growth in a Market (diverging stage) and how those opportunities slowly start to fade away (converging stage). Be fooled not my friends, this takes decades to happen even in a fast changing business like IT.

So what does this mean? Regardless of if the Market is growing or shrinking we probably have space for our growth for the next few quarters. If we act effectively it means we can focus on areas that yield more profits by improving our processes and focusing on the things that the customer values. But as the market starts to shrink opportunities get scarce and competition fearless. And companies begin to fail.

One question that the curious reader might have in mind is "Why does the market goes down?". Well renovation happens. Using our analogy of a renewing world a disruptive innovation would play the part of the new. When a new technology is "born" it doesn't solve the older problem, it normally under-performs established technologies, and customers can't understand it or see a need for it. "It can't even run for god sake". But as time goes and the technology substitution happens emerging markets grow as the old markets start to shrink. If you are a database geek like me you are probably thinking about the relational databases and NoSQL. NoSQL databases are clunky, can't do transactions or joins right? But the offer a different value on searching against large corpse or unstructured information at scale. And while this isn't exclusive from a relational database it means that some part of the old relational market will be, in the future, consumed by NoSQL.

A pragmatic solution is to prepare for the disruptive innovation. However there is something about innovation that makes this harder: It's unpredictable by nature.

Also think about it from our growing company perspective: They need to grow 10%. To invest in the disruptive technology would mean allocating resources to a less profitable market where you have no predictability on the outcome. Any responsible leader would opt to look for opportunities in markets that allow him to reach the growth figures and will have to disregard/postpone the disruptive innovation opportunity. And she/he will do it again. And again. And again. Until it's too late.

When new energy alternatives replace oil in mainstream markets and your customers come asking for it most of the successful oil companies will fail. New firms that focused on at what was at start a small emerging market of alternative energy will be the new energy suppliers of the world. Renewal happened again.

But can one prevent this? Studies suggest that the most efficient approach is to create independent organizations that operate exclusively in the new emerging markets. This way when the old market and new market meet in terms of revenue the independent organization can take over and it's revenue stream can keep the parent organization alive while restructuring happens. All without loosing your mainstream market leadership.

If you have enough money you can do what IBM, Oracle and Google do and buy anything that has a pulse so they never make you fail.

When looking at teams/companies that are not making profit or any measurable gain you have to understand that measure and mathematics only takes you so far. The only thing that is predictable are the things you already know. Innovation, by definition, isn't.

So if you are working in cool tech and aren't just growing boring margins remember this: Prepare to fail, prepare to be wrong all the time, respect the laws of nature, iterate fast, and don't make costly strategic decisions based on data you do not have.

If you are working in the predictable growing margins department remember that the guys next door might look like they don't know what their doing. That's not because they are unprepared or doing something wrong. It's the nature of your their job. If they were just applying the same models as you are they would fail miserable and cost you a fortune while at it. So be thankful for innovation and people willing to take the chance. In the end it's a lot less risky than it seems.