In a rapid succession in the space of two weeks, two major Australian banks raised a red warning flag signalling their deep concern of what could be their biggest existential threat. The threat comes from not from the Bank of America, or Citibank, HSBC or Bank of China, but from unexpected sources, in form of nimble technology companies from Silicon Valley.
Commonwealth Bank CEO Ian Narev expressed this view at the G100 Congress in Sydney in May this year.
The new competitors are “the Apples, the Googles, the Samsungs, the PayPals, the credit card companies, who can pick particular slivers as a result of the application of technology into financial services and compete. We need to be prepared for that.” he said.
Ian Narev alluded that regulations have to be adapted to reign in a new type of competition. The trouble with this competition is that there is no precedent. Disruptive innovators create solutions that address needs outside the boundaries of traditional models before invading the established markets threatening to displace the incumbents. What to do?
Take for instance the case of Dwolla. Founded by a 28yo young entrepreneur from Des Moines, Iowa, USA, Ben Milne, Dwolla is a 12-person startup that invented an online payment system that bypasses credit cards completely. This startup is onto something because large financial institutions are very interested in this idea. Venture capitalists are backing the company with money. Just last month Dwolla received $16.5m in funding, its biggest investment yet. It is hard to predict the impact of Dwolla and other similar innovators on the banking system in the near future if the momentum continues.
A couple of weeks ago, the ANZ chief executive Mike Smith described the technological innovation wave that is about to hit the financial industry as “terrifying”. Smith made this statement to the board based on information received following a study undertaken by the bank during a tour in California. “Much of it is being driven by small companies that are very active in payments but very well-funded, and they are moving very quickly.” It is interesting how quickly ANZ followed Commonwealth to look at what is happening in the Silicon Valley. Something must make them nervous.
Reputable banks have some of the deepest moats protecting their business from new competition, something that Warren Buffet always liked about banks. But rapid changes can ruin that assumption. The transformation will go beyond improvement of operations. It’s about service, it’s about having a different presence in the peoples’ lives, with new perceptions. If a “normal” bank is still something that brings to mind images of prestigious physical old buildings (you-come-to-us), the new banks need to become virtual, quick, creative and very social (we-come-to-you).
Will the disruptive innovation brought by super-smart technology companies become a systemic threat to the traditional banking system? Maybe not, not entirely that is. It is more likely that a wave of restructurings, consolidations, and small bankruptcies will re-shape this business. Banks that “read” the market signals will either buy some of the successful fresh innovators, or innovate themselves, or establish alliances to surf this new wave of opportunities and reap the benefits. Others that refuse to see the threat may well as disappear.
In a recent article titled “Virtually Exhausted” William Deresiewicz, editor at The American Scholar, suggested that believing hard work is a way to achieve is “one of those notions that is so stupid it has to embody a deeply held belief“.
In this notion he refers to the Protestant religious system that has elevated hard work to the status of virtue which, Deresiewicz argues, has infiltrated the work ethics of America with presumably with some terrible consequences, one of them being wide spread exhaustion. According to him, working hard to reach a dream couldn’t be farther from the truth, according to Deresiewicz, because distribution of talent is “undemocratic” and hard work is futile, just an illusion of choice for the naïve masses.
This elitist view calmly dismisses any hopes that one has for changing less fortunate circumstances. It begs the question of what is talent. It must be something you are born with, something that takes you to through an Ivy League college and gives you secure employment for life. It’s a privilege that cannot be acquired through hard work.
Just last week, whilst on the other side of the planet, Gina Reinhart, the Australian mining magnate, caused a furore when she said that if you want to get wealthy “spend less time drinking, or smoking, or socialising, and more time working”. This may sound like a good tip to the wasteful, but it is nothing more unsettling than having a person that inherited a fortune of billions of dollars to give this kind of advice to the populace in general. The thousands of people, who work hard deep in the mines owned by her scratching the guts of the planet in search for minerals, don’t make themselves wealthy. They make her wealthy. In this context, the message has the opposite meaning, because the reality in the mine can be used to prove the point that hard work doesn’t make you rich, luck does.
So far, this idea of hard work does seem trivial. Who would want to labour when in the end there is nothing to celebrate, there is no change, but just more struggle when the genes won’t let you have it?
And yet, there are many who have no doubt that hard work is necessary to make it in life. Research studies show that if you concentrate your efforts through hard work you can master almost any skills. It is estimated that you need to invest ten years to achieve mastery in your chosen domain, if you put in the long hours. People who were born without such talent can succeed when initial evidence suggests otherwise. The legendary Wayne Gretzky comes to mind as a brilliant example. Against all odds, he became the best of all those who were deemed to be ‘talented’.
There is a common element of caution that we can learn from what Deresiewicz and Reinhart said: hard work without creation does not pay well.
If Deresiewicz remembers well, the core philosophy of The American Scholar is based the eponymous speech delivered almost 200 years ago. In that speech, Ralph Waldo Emerson talks brilliantly about the need for each of us to aspire to become One Man, as someone that is not subjugated to routine of his craft. For a scholar, that is to become a Man Thinking, not just “a mere thinker, or, still worse, the parrot of other men’s thinking”. He goes on to say “History and exact science must learn by laborious reading. Colleges, in like manner, have their indispensable office, – to teach elements. But they can only highly serve us, when they aim not to drill, but to create”.
We suffer for too much hard work as a drill, not as a creation. We should question the mindless long work hours, but not the hard work driven by passion and desire to create something better. Replace the industrial factories with creative studios, repetition with innovation, and slavery with freedom.
Hard work is encouraged in schools. It is one of the character traits that are most valued as a prerequisite for individual and social improvement. Try to tell a teacher that talent is to be praised and not the effort! If we raise our children with the belief that hard work is an illusionary key to success, then our future is bleak.
Successful innovation is difficult because it is not enough to have a bright idea. Everybody has one, including me. What separates the boys from men is the implementation. The road to heaven is paved with hard work from the initial blueprint until the finalised product, and its successful adoption which requires team work, focus sustained over a long period and ability to execute and deliver.
The core team that innovates successfully is the equivalent of a queen bee starting a new colony: it produces ideas continuously while surrounding itself with a growing team that takes on tasks derived from those ideas, all of them orchestrated into a collective effort to build a long-lasting product enterprise.
At the beginning, there is no light around innovation, but just a faint white star shining in the distance. There is little information, no training classes and no user manuals. Could your normal team or business units do it? Not likely. They are not suitable for this kind of undertaking because there is no documented process or job description. You need a special team: a small community of practice whose members are innovators.
A community of practice is made of people who have frequent face-to-face meetings; they meet around the water cooler and talk and pick-up clues from little things to spark a creative chain of thoughts. The members of such community are highly skilled, they have knowledge far beyond what is required by the standard job description and they thrive on uncertainty.
Creative enterprises know this very well. Valve’s HR (blasphemy!) induction manual is an interesting case of encouraging teams to work as small communities of practice. It is all about having strong relationships that work, are creative, productive and fun.
Adoption however, although it still depends on communities of practice to figure out how to use the innovation, relies on large social networks to fire-up the spread of the idea.
In fact, the adoption works best if the network is a huge collection of groups linked through weak connections. This is because the networks of strong ties are usually small due to impossibility of individuals to maintain strong relationships beyond say 20 people. Great networkers may go up to 150, but for the average person, even maintaining 10 strong relationships is a struggle. This means that if a community of practice adopts your innovation, you shouldn’t rush to pop that bottle of Don Perignon yet. Settle for a Stella Artois and a barbecued shrimp for the time being.
Mark Granovetter coined the term ‘weak ties’ to describe lose connections in a social group. His research led him to the conclusion that these types of connections are actually the ones that make a personal network very effective. Christakis and Fowler demonstrate in Connected that weak-ties are great for finding fresh information, aka code for new habits.
So, if your Facebook is limited to close friends that think like you, you are missing on a great opportunity to learn something new and useful you and your close friends never thought of before. Better ‘like’ someone different soon!
Globalisation is the other side of localisation. They are like yin and yang, embracing each other.
Two consequences derive out of this:
- The local innovators need to have access to great networks to spread their ideas. If the innovators are not great communicators and if they don’t have network bridges, their innovation will be lost in anonymity and dry
- Innovators and adopters need to think alike as they need each other, but both need to influence a lot more people to get the network going. If the growth in adoption doesn’t keep growing to reach about 16%, they are doomed. They fall into the chasm, Moore’s chasm.
In a recently published book, The New Geography of Jobs, Enrico Moretti says that despite the popularity of the global social networks, the vast majority of the phone calls and web traffic is local. The most innovative cities and regions are based on small, tightly knight, and local communities. With other words, the secret of global success of Silicon Valley is local, very local.
This is also why the local economies’ prosperity depends so much on innovation and free trade.
In a longitudinal research study funded by Kauffman Foundation found that over 46% of all innovative new businesses that lasted over five years were founded by “user entrepreneurs”. This figure is even more impressive when you consider that these startups represent only 10.7% of all US startups. The study tracked over 5000 startups founded in 2004 and it was released yesterday.
This fully validates the trend towards end-user lead product innovation described by Eric von Hippel in his book Democratizing Innovation. The two single most important aspects of this group of innovators is their deep knowledge in the subject area and their motivation to improve the existing conditions. This is mainly because the mainstream product manufacturers have no incentives to supplant their current production line with new risky products and because no one listens to end-users who have daring ideas.
The Kauffman funded study found that the professional-user entrepreneurs are very knowledgeable and on average they have a much better human capital involved in the startup than the other types of entrepreneurs. It makes sense in my mind, because I imagine, those people are driven by passion for creating something that they would love to use, attracting a similar breed of people from their industrial field. They are the experts and they know the people in the field better than any outsiders. It is not that the other groups don’t have passion, but while they want to make good products one of their pressing goals is to sell their products to the users, the other people.
The democratisation of innovation favours the end-users, people who want to create better products for personal use. In this group especially females and some minority groups are attracted by the idea to follow their dream and have a go. A high proportion of these entrepreneurs manage to attract good venture capital financing.
This is very good news, because this may be a sign of the future of employment. Individuals from all walks of life drawing from their personal experience to detect an unmet demand, and in the course of inventing a new source of supply they create high value add jobs for themselves and for many others.
Qantas vs. Unions represents a battle of two forces from which only one will win. On one hand we have a global business that needs to stay competitive on lower labour costs and on the other hand we have unions that want to stay relevant on higher labour costs. This is total misalignment. The emotional charge of these two forces is such that it is impossible to reconcile the two.
Qantas and the Unions have 20 days now to resolve their dispute and “bargain” for an outcome. The way things are going, Fair Work Australia will have to use its powers to force an outcome. What will that be? If Unions win, Qantas is doomed because it cannot compete on costs with Asian airlines or other competitors that are less unionised and have the support of a flexible labour market regime. If Qantas wins, it will be very painful and it will need to act quickly and expand in Asia before conflict has time to develop caused by an unhappy labour force. This will not be easy because an Asian expansion needs time to recruit and train proper workforce. There is no large pool of skilled labour floating around waiting to be poached by Qantas. Without the support of a happy workforce in Australia, Qantas will have difficulties to sustain its business. However, this type of cooperation seems to be a very remote possibility because the inherent divergence of goals.
Is there a better alternative? I think it is. As competition in this business is heating up, the demand for a different kind of travel will increase significantly. First of all the new types of aircraft, Airbus 380 and Boeing 787, offer opportunities for more diversified service. We should also note the rise of space travel open to the public. This will open enormous opportunities. An airline that wants to stay competitive in the long term will have to have a strategy in place and prepare its workforce to exploit these opportunities and grow. Qantas in 2075 could service regular flights to the Moon, if it survives that long; that is a real possibility judging by the speed with which commercial space travel develops.
This means that the Unions and Qantas have a common ground: prepare the workforce in Australia for that transition to compete with specialised low volume but high margin services and support the expansion in Asia to compete in high volume low cost services. This is the only way to find a long term solution. The opportunities are many, but this solution requires commitment from the Unions, Qantas and the government because its implementation is not your traditional train-a-skill program. It is about re-educating a large workforce and adopting a new way of thinking.
Most often the wide public’s perception of government is dominated for right or wrong reasons by images of monolithic positioning, inflexibility and appetite for taxes and control. Recent financial buffeting resulting in slashed budgets and staff culling made it even more difficult for governments to appropriate large public projects aimed at reaching grandiose goals.
Perhaps the current financial turmoil is an opportunity to re-invent themselves. They could become nimble and innovative operators and do-gooders again as they were back then when the land was vast, unpopulated and uncharted.
Public good initiatives are rarely the strong point of private enterprise. They are large, they require huge initial investment and they are difficult for profit extraction in a short time frame as demanded by corporate reporting requirements. This is an area where the government should and could excel. However, the voting system in a digital democracy has made this task extremely difficult even for a big government flushed with surplus money.
Public good doesn’t have to be created in form of portentous public spending as the traditional connotation might be tempted to suggest. Public good is… good distributed equally to the public at low or at no cost. For instance, low carbon economy is about promoting products and services with reduced the carbon dioxide emissions which are accessible to the public and for the public benefit. Other examples are: be green energy, important high impact medical discoveries, clean environment, public safety, etc.
What does the government do when these things start to become noticeably important in public opinion? There are two things the government has a preference for: raise the taxes or punish the companies to force them into providing certain products and services. The unifying theme here is that the focus of these actions is on the “push” side: cause a change on in the supply. This is expensive, artificial and it risks alienating both business and public in the same time. This type of action carries also the risk of damaging the country’s reputation for doing business. If the regulations are too unfriendly global suppliers will be reluctant to do local business and go elsewhere.
There are other alternatives which could lead to better results, but they require much more effort and higher skills. The government could focus on creating a “pull” force in the marketplace by stimulating the demand. This is more complex implementation of governing imperatives, but it is much more effective. This smart approach to design of policies and regulatory frameworks provides more certainty, it builds a foundation in which improvements could be added and it creates opportunity for prosperity for both business and consumers.
Smart regulatory frameworks require the government to think about ways in which fair competition between producers is promoted in a transparent way, the system of transmission is open and it offers the opportunities for standard product packaging and the distribution to the public is accessible by the public in a simple, no-hassle manner. This will stimulate the demand side but also the supply side which will have clear incentives to innovate.
This is what governments should become experts in. It is a bit difficult in the current state of affairs where emphasis is on short term polling satisfaction.