This chapter is from the book
This chapter is from the book
This chapter is from the book
Dynamics of Change
If overcoming these three inconvenient truths were not enough, there are three modern dynamics of change that add to the challenge—the rate of change, the magnitude of change, and the unpredictability of change (see Figure 1.2).
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Figure 1.2 The dynamics of change.
These three dynamics of change are why in my research a little more than 80 percent of companies listed “leading change” as one of the top-five core leadership competencies for the future. Perhaps more importantly, of those that listed it as a core leadership competency, 85 percent felt that this competency was not as strong as was needed within their high-potential leaders. In a nutshell, when it comes to leading change, demand is high (and growing), and supply is short.
Rate of Change
There is no question that change has been a part of the human experience for millennia. In that sense, there is nothing new about change. However, the rate of change is new. The reason that a change in the rate of change matters is fairly simple if you mentally contrast a slow rate of change with a fast one. Imagine that the rates of change in technology, regulations, customer preferences, competitors, and so on were slow enough that you could easily digest them one large bit at a time, like eating an elephant over the course of a year. In contrast, image a rate of change so fast that it is analogous to having to eat an entire elephant in one day entirely on your own! Maybe the rate of change is not quite at that level, but when you have 941 business books on Amazon.com that have either “agile” or “agility” in their titles, you know that something different is going on.
To give you a sense of the rate of change, consider the following:1
- One week’s worth of The New York Times contains more information than someone would have encountered in a lifetime in the eighteenth century.
- There are 540,000 words in the English language, which is five times as many as in Shakespeare’s time.
- There were 1,000 Internet devices in 1984; 1,000,000 in 1994; 1,000,000,000 in 2008.
- From 2005 to 2020, the digital universe will grow by a factor of 300, from 130 exabytes to 40,000 exabytes (or 40 trillion gigabytes), which, put another way, means that more information was generated in 2010 than was generated in the previous 5,000 years combined.
- Every day more new information is added to Wikipedia than you could keep up with, even if you read just the new information 24 hours a day, 7 days a week.
Facts like these can give us a sense of the rate of change, but two simple concrete examples add some color and nuance.
Today, Skype is well known and loved by millions of users. However, to put in perspective how quickly Skype went from not being known by anyone to being known and loved by nearly 300 million people, consider that the technology upon which Skype was built (VoIP, or Voice over Internet Protocol) was first mentioned in the popular business press only in 2000 in Fortune magazine.2 Just three years later in 2003, Skype was founded. One year later, in 2004, Fortune told us not to believe all the hype about VoIP. One year after that, in 2005 (just two years after its founding), Skype had 53 million customers, and at any given moment Skype had more than 2 million customers using the service and calling friends, family, and loved ones all across the globe at 2–7 cents a minute. Later that same year, eBay bought Skype in a deal valued at around $4 billion. Skype was subsequently taken private by investors for $2 billion in 2009 and resold to Microsoft for $8.5 billion in 2011. In 2013, Skype announced that it had 280 million active monthly users who spent a total of more than 2 billion minutes per day on Skype, and more than 50 million of its users were online at the same time.
To understand a portion of the shock this change caused the traditional telecommunication companies, we only need to recall that in 2005, AT&T (the “Mother of all Bells”) was bought out for $16.9 billion by SBC, one of the “Baby Bells” it gave birth to in 1984. In other words, the 25-year-old child bought out the 135-year-old parent! (However, to keep it all in the family, SBC adopted and now goes by the AT&T name.)
As impressive as the speed of change was in VoIP, the rate of change in social media has been even more astounding. To get a sense of this, we only need to take a look at one company—Facebook. Facebook was founded in 2004, and by the end of that year it had nearly a million active users. Zero to a million customers in less than a year. Impressive. However, just four years later (August 2008), Facebook had 100 million users. Four years after that (October 2012), Facebook had more than 1 billion users. By March 2013, Facebook had 1.11 billion active users. That means that Facebook added approximate 209 new customers every second of every hour, of every day, of every year since its founding. Put differently, if Facebook were a country, it would be the third-largest country by population in the world, just after India, with its population of 1.2 billion people, and far out in front of the fourth-most populous country, the United States, with its 375 million citizens.
Magnitude of Change
If the rate of change were fast and the magnitude small, maybe we could more easily cope. However, the problem is that not only is the rate of change high but the magnitude is large as well.
For example, in 2004, IBM was not a small company, at $76 billion in annual sales, and its PC business was one of the largest and best known in the world. Thus, when Lenovo bought the division for $1.25 billion and the assumption of $500 million in debt, making Lenovo the third-largest PC company on the planet, it represented a major change for the industry.
In late 2006, the largest IPO ever to that point occurred when Industrial and Commercial Bank of China (ICBC) simultaneously listed its shares on the Shanghai and Hong Kong stock exchanges and pulled in $21.9 billion! Not to be outdone, the Agricultural Bank of China (ABC) raised $22.1 billion in mid-2010 to become the largest IPO in history.
In 2012, AMC was a major player in its industry. It was the second-largest movie theater chain with nearly 6,000 screens and $2.6 billion in revenue in the largest movie market in the world—the United States. As a consequence, it was no small change when Dalian Wanda from China, with businesses in real estate, hotels, tourism, and entertainment, bought AMC for $2.6 billion to become the largest movie theater operator in the world.
The examples of Lenovo, ICBC, ABC, and Dalian Wanda all come from China in part to illustrate that this big country has generated and will likely continue to generate big changes. Some might argue that with all the investment going into China, others are funding their own future change and disruptions. Whether or not this is true, it is interesting to note that from 2000 to 2013, not only did foreign direct investment (FDI) into China more than double to more than $150 billion, but China sucked in nearly nine out of every ten foreign dollars, euro, and yen that were invested in all of Asia.
As investment goes into China, it continues to send what it makes out. For example, the large shipment of goods from China to the U.S. coupled with the relatively smaller amounts shipped from the U.S. to China has spawned a new business in California—container storage. There are so many empty containers piling up in the state (more than 800,000 according some estimates) that real estate agents and landowners are making good money simply storing the empty containers on vacant land. In fact, in some cases, the containers are stacked so high that they block the views of homeowners living next to these “temporary” storage facilities.
However, big change has not been and will not be confined to China. Consider, for example, the major and recent change in the global mobile phone industry. In 1979, Motorola invented the fundamental technology upon which early mobile phone communication was built. Motorola rode that technological prowess to its number-one position in mobile phones up through 2001, when it was surpassed by Nokia. As a testament to how much things can change, it is worth noting that Nokia only really entered the mobile phone industry about a decade prior to overtaking Motorola as the number-one player in the industry. However, Motorola continued to fight on, but after struggling for a decade, in 2011 it split itself into two separate companies—Motorola Solutions and Motorola Mobility. This was no small change. However, it was arguably an even bigger change when in 2012 Google, which wasn’t even in the telecommunication hardware business, bought Motorola Mobility (the mobile phone side of the split) for $12.5 billion.
Unpredictability of Change
If change were fast, large, but predictable, we might be able to cope better, but the fact is that much of the change is also hard if not impossible to predict. As should be evident from the previous examples on the magnitude and rate of change, many of the biggest and quickest changes have also been hard to predict. Would fortune tellers have done any worse job predicting the rise of VoIP than Fortune (or any other magazine) did? I doubt it. To be clear, I am not picking on Fortune. It’s a great organization and produces a quality product; this is why it is one of the most widely read and quoted magazines. But that is exactly my point. If the best business journalists talking with the best business minds can’t get the future right, then it just reinforces how unpredictable the future is.
As an example of the unpredictability of change, consider the rise and fall of Encyclopedia Britannica. Encyclopedia Britannica invented the category in which it competes. The first edition was published progressively from 1768 to 1771 as Encyclopædia Britannica. When it was completed, it contained 2,391 pages and 160 engraved illustrations in three volumes. For more than 200 years, it dominated the category it created. It was considered the most authoritative encyclopedia in the market. By the third edition, published 1788–97, it contained 18 volumes plus a two-volume supplement of more than 16,000 total pages.
After the 11th edition (often called the “1911 edition”), the trademark and publication rights were sold to Sears Roebuck of Chicago, Illinois. Thirty years later, Sears Roebuck offered the rights to the University of Chicago. From then until his death in 1973, William Benton served as the publisher.
For the next decade, Britannica continued to dominate the market. A full set was priced at between $1,500 and $2,000. Then, in the mid-1980s, a little known company called Microsoft (only 10 years of age) approached Britannica, Inc., to discuss a potential collaboration. Britannica turned them down flat. Why would a company with such a stellar brand and reputation that had been successful for more than 200 years team up with a new and unknown company in general, and one that had no place or standing in the publishing world specifically? Rebuffed, Microsoft used content from Funk & Wagnall’s Standard Encyclopedia to create Encarta. Executives at Britannica could only smile as desperation drove one of its more lowly esteemed competitors into the arms of such a strange and immature bedfellow as Microsoft. This view was only reinforced by the growing sales at Britannica during the next five years, hitting $650 million in 1990.
Just three years later in 1993, Microsoft began bundling Encarta with its MS Office suite of products. Although Encarta’s content was not nearly as good as Britannica’s, it was essentially free. Britannica’s sales dropped like a rock. Determined to survive, Britannica came out with a CD-ROM version of its full set, but all the information could not fit on one disk. It came on three disks, making it inconvenient for customers—depending on what information you wanted, you had to make sure you put in the correct disk. On top of that, Britannica priced its CD offering at $995. The hope was that such a high price for three CDs would encourage customers to stay with the nicely bound volumes. The plan did not work, and in 1994, Britannica launched an online version of its famed encyclopedia. However, the cost of a subscription was $2,000. Again, the hope was that such a high-priced online subscription would encourage customers to stay with the nicely bound, traditional book sets.
Sales plummeted yet further. In 1996, only 20,000 hard copy versions were sold, compared with 117,000 in 1990. Owing to its financial difficulties, in 1996, financier Jacob Safra bought Britannica, Inc., for $135 million, a fraction of its book value.
Up to this point, the tale of Britannica is a sad one. The size of the change (Britannica shrank by more than 80 percent) and speed of the change (it happened in just two percent of the company’s life span) were both dramatic. However, in the end, Britannica’s fate was sealed not by Microsoft, but by a company that didn’t exist—nor was its existence even possible in 1996 when Jacob Safra swooped in to try and save Britannica. That company was Wikipedia. In fact, the ironic point of this tale is that virtually all the information I have conveyed about Encyclopedia Britannica can be found at www.wikipedia.com—a free, online, and “open source” encyclopedia that relies on literally tens of thousands of contributors. Neither Britannica nor Microsoft envisioned this form of encyclopedia in 2001, the year Wikipedia got going. No one predicted that by 2013, Wikipedia would have 4.2 million articles in English totaling more than 500 million words. To put this in perspective, this made it nine times larger than the largest Encyclopedia Britannica set. Who could have foreseen a pace of change so fast that, in just a few short years, Wikipedia would have 29 million articles consisting of 1.4 billion words across 200 languages? The changes were so fast, so large, and so unpredictable that in 2012 Britannica finally fell to the competition and decided to stop publishing its print edition after nearly a quarter of a millennium (250 years).