I stopped writing the blog in 2011 when I started work on a new book, Momentum, when change becomes unstoppable. Extracts will be available shortly.

Robert Lane Greene has written a sparkling account in Intelligent Life of the growing rivalry between Google and Apple. For years Steve Jobs was an inspiration to Larry Page and Sergey Brin, and, Eric Schmidt sat amicably on Apple’s board until 2009. As Greene puts it, ‘the companies could have been a match made in heaven: Apple’s gorgeous devices running Google’s miraculous services.’ But when Google launched Android and challenged the iPhone in the glittering smartphone market , they became serious rivals and now compete on several fronts: operating systems, browsers, email, photos, app stores, cloud computing, even books and music. (Though not exactly ferociously.)

Greene is particularly good on what he calls the clash of cultures. The key to understanding Steve Jobs, he suggests, is that calligraphy was the most important course he took in his brief time at college. Design is Apple’s supreme value and Jobs has always been a perfectionist, obsessed with getting every tiny detail exactly right. His colleagues used to moan about his reality distortion field. Now that he’s a god, they simply venerate him. Google on the other hand is a ‘herky-jerky place’, where engineers experiment endlessly, happy to put out beta products that often fail. According to Eric Schmidt, ‘the Apple view is coherently closed. Ours is the inverse model: the web, openness, all the choices, all the voices.’

Yes, but they’re doing very different things. You don’t produce beautiful objects like the iPad and the iPhone through open source, nor is Google simply a mouthpiece for the wisdom of crowds, any more than YouTube is merely a platform for other people’s videos. Apple and Google are only competing obliquely, and their cultures and values have far more in common than what separates them.

They are the shining exceptions to the general rule that, as companies become large incumbents, they lose the ability to produce really radical innovations. Apple and Google are exceptional even by the standards of start-ups, way ahead of the field, and able to attract and inspire the most talented people. They are still driven by the visions that inspired them from the start, much more than by how to keep Wall Street happy. They also greatly respect each other. Schmidt recently called Jobs ‘the best CEO in the world by any measure.’

This is more a contrast of cultures than a clash and it’s a long way from being a ‘death match’, closer to Federer v Nadal than Achilles v Hector. Whoever wins – if there is one winner – won’t be dragging the mangled remains of the other through the dirt. Android is well on the way to becoming the most popular operating system, but iPhone users are likely to retain a significant market share, like RIM’s Blackberry. The crucial difference from the PC world of the late 1980s is that Apple will not be cut off from the mainstream in the way that it was when Wintel became dominant.

There could only be an outright, dominant winner in the smartphone market if one player enjoyed enormous network effects or switching costs. That isn’t yet the case and John Gapper has made a strong case for suspecting that it may never happen. Greene makes much of the fact that ‘there is no easy way out of Apple’s system . . . Apple’s offerings hardly ever let you down, but when they do, you are stuffed, left with sunk costs and a reputation as an Appleist that you would publicly have to disavow.’ But this is not lock-in in the way that most businesses are still stuck with Windows and Office, because the cost of switching would be prohibitively high. Appleists have chosen to be different and put up with inconveniences like iPods dying young, as they used to rather frequently, because they simply adore them. Some aspects of the cult may be ridiculous, but this is true love. Brands don’t get any better than that.

Neither of these two have serious rivals in their core domains. Despite disrupting just about every part of the media industry, the only adversary Google has seriously sought to displace is that master of customer lock-in, Microsoft. Apple has long learned to coexist with the old enemy – for years Microsoft was its most important software developer and even now Office for Mac remains crucial for its credibility as an alternative to the PC. Surpassing Microsoft’s market cap must have brought enormous satisfaction to Steve Jobs, but right now he has more important things on his mind.

We can be sure that Schmidt, Page and Brin wish him well. As we all do.

In my last post I sang the praises of Daniel Pink’s book Drive. If anyone needs any convincing that the Type X approach to managing professionals is counter-productive, they should look at how demotivated so many teachers in Britain have become as a result of top-down targets from politicians, inane box-ticking and morale-destroying inspections by Soviet-style Ofsted officials.

But I do wonder how universally applicable are the Type I (for intrinsic) principles that Pink and the ‘positive psychologists’ regard as fundamental. Autonomy, common purpose and something more than mere competence are clearly crucial for those doing highly skilled, problem-solving, creative and professional work. But even then the scope for attaining anything like real mastery is limited by the fact that most businesses and the people who work in them have more pressing priorities. The most successful firms will generally be those where everyone is encouraged to take pride in doing good work, but only a tiny number really aspire to or have the chance to pursue mastery.

Mastery is a noble ideal, but like empowerment, innovation and passion it’s in danger of being devalued, the chief culprits being universities and masters degrees. The term was always hyperbolic for a year or two of study, typically straight after an undergraduate degree. Nobody ever believed that it made anybody a master of anything in the way that Julia Childs mastered the art of French cooking or Roger Federer that of tennis. A masters used to be a stepping stone to a PhD and an academic career, but now it’s mainly a means of differentiating yourself from the hordes of other graduates on the job market.

Real mastery of anything comes from years of deliberate practice and experience, actually doing the cooking, hitting the tennis balls, playing the piano, speaking the foreign language. The key to it is learning by doing. (Contrary to all the rhetoric about investment in skills, not much of that happens in universities. What they are best at is the acquisition of knowledge, sometimes by students, more often by those academics who become masters of their subject after years of immersion and thought.) Most of those who deserve the epithet would be embarrassed to use it of themselves – they’re so intent on trying to attain perfection that they’re always conscious of how far they have to go.

This kind of mastery is rare. Malcolm Gladwell gives a compelling account in Outliers of how outstanding successes, from Bill Gates and Bill Joy in computer programming to Mozart, Lennon and McCartney in music, got to be so good at what they did. According to some researchers this is entirely because they spent inordinate amounts of time when they were young, close to 10,000 hours over ten years, practising their art and honing their skills. It was not so much their natural talent that made them exceptional as their willingness to work much harder than everyone else. To achieve excellence at something really demanding you have to care about it deeply and be prepared to sacrifice the many other things you could be doing if you weren’t practising for three hours every single day. Only an obsessive few make it.

The origin of our use of the word master is the mediaeval concept of master-builders and master-carpenters who employed other craftsmen and took on apprentices. Even after qualifying as artisans, they had to spend years as journeymen practising their trade, before they could apply to their guild to be recognized as master craftsmen themselves. Well into the twentieth century, mastering a traditional craft was a path both to satisfying work and modest economic security for boys without much formal education. But those days are long gone.

New technology and ever more efficient business processes have wiped out one craft after another, from the handloom weavers of 200 years ago, forced to become unskilled factory workers, to blacksmiths, saddlers and ostlers a century later when motorized vehicles replaced horses. More recently, dressmakers, dance bands, watch repairers, typesetters, printers and even mainframe computer programmers are just a few of those to have been marginalized. The pace of innovation and creative destruction in the last twenty years has speeded up so much that the skills acquired as a youth are unlikely to remain useful for an entire working life. It is not just businesses that have to reinvent themselves – we all have to acquire new skills and knowledge throughout our lives. Investing 10,000 hours of your youth acquiring mastery of something for which there may be no demand in twenty years makes little economic sense.

Those who make that commitment do it, not for economic reasons, but because they are pursuing a dream, a vocation. For a few like Lennon and McCartney (but not Mozart or Schubert), there were enormous financial rewards, but that wasn’t why the Beatles played their hearts out in Hamburg and Liverpool. And although Bill Gates’ early prowess at writing code set him on the path to founding Microsoft, what he turned out to be outstandingly good at was business strategy and eliminating competition, and he learned that as he went along. Contingency and character play a bigger part than planning in most people’s lives.

People who get to the very top in business have one thing in common with those who become masters in music, cooking or computing: they want it so much that they are prepared to sacrifice most other things to get there. With the notable exception of Steve Jobs, their ambition has little to do with dreams of perfection. For most would-be CEOs, power, status and the material rewards that go with them are the real prizes.

Creators of groundbreaking new businesses have rather more in common with obsessive artists and technologists than with captains of industry. They are pursuing a dream rather than climbing the greasy pole, and initially getting rich comes second. Building distinctive capabilities is very much a form of mastery in which the founders normally take the lead.

Those heights may be beyond the grasp of most of us, but many succeed in doing work that brings intrinsic satisfaction at least some of the time. Mihaly Csikszentmihalyi has argued convincingly that people are happiest when they are completely absorbed in what they are doing, using their skills to the utmost, stretched but not stressed. Some of us have the good fortune to be paid for doing this. Sadly most do not, but we all have to make painful choices and compromises between economic necessity and personal fulfillment. The fundamental reason we go to work is to put bread on the table and pay the mortgage, and businesses are rightly governed primarily by economic imperatives.

But making short-term financial performance paramount risks, not just the contentment of employees, but the firm’s own long-term survival. The only businesses able to survive creative destruction are those who learn how to reinvent themselves and develop new capabilities. And they can only do this if they manage to attract and retain exceptionally talented people and give them the chance to develop something very close to mastery. Outstandingly innovative companies like Apple and Google have values very similar to those that Masara Ibuka proclaimed in 1946 when he founded the company that became Sony: “an ideal workplace, free, dynamic and joyous, where dedicated engineers will be able to realise their craft and skills at the highest level”.

(Next month, the growing rivalry between Apple and Google.)

Some books change your view of the world, not so much because they tell you something completely new, as crystallise ideas you half-understood already. Or as Proust put it, you see the world with new eyes. Daniel Pink’s Drive is such a book. Anyone who cares about work – how it can be a source of enormous satisfaction, but more often is a dreary necessity or worse – should read it.

At first I thought it was merely a re-working of ideas I’d discovered, but half-forgotten, decades ago – Douglas McGregor’s Theories X and Y, Abraham Maslow’s self-actualisation at the top of his hierarchy of needs, and Mihaly Csikszentmihalyi’s wonderful Flow. Then I realised that Drive was much more than this, a new synthesis that takes account of these seminal concepts (of which most managers are still wilfully ignorant) and more recent research that greatly amplifies them. McGregor and his contemporaries showed what was wrong with carrot and stick approaches to motivation. More recent psychologists like Csikszentmihalyi have concentrated on what it takes for people to be highly motivated. How easy it is for these conditions to be achieved is open to question, but this is the most compelling overall account I have come across.

Drive also reinforces some of my convictions about the conditions for business success: that the founders of great businesses are inspired more by a vision of creating something radically new than dreams of riches; that balancing entrepreneurial spirit with management discipline is almost as important as developing distinctive organizational capabilities; that human capital is more valuable than most physical assets; that most large companies are too obsessed with efficiency, execution and short-term financial results to be capable of radical innovation; that the only organisations that survive and prosper in the long run are those who learn how to extend their capabilities.

The starting point of Drive is that approaches to motivation that rely on carrots and sticks not only don’t work in many cases, but can be counter-productive. Highly motivated people who are good at what they do mostly enjoy their work – they derive intrinsic satisfaction from it. This is most likely to happen, not when they are offered extrinsic rewards, but when they enjoy a degree of autonomy over their work, are able to get better and better at it, and have a sense of purpose.

The reward and punishment approach to motivation, equivalent to McGregor’s Theory X, sees workers basically as factors of production and reduces the function of management essentially to supervision and control. This miserable philosophy is in direct line of descent from FW Taylor’s scientific management, BF Skinner’s behaviourism and Homo Oeconomicus beloved by so many economists. Carrots and sticks may improve performance in the short-term, particularly for routine tasks where the processes are well defined, but not in the long-run or where creativity and initiative are required. Offering rewards for these and emphasising compliance reduce feelings of autonomy and the desire to do the job for its own sake. When rewards do incentivise, research has shown that they often distort behaviour. We’ve all seen spectacular examples recently of bankers and mortgage salesmen addicted to bonuses and taking ludicrous risks.

Instead of this ‘Type X’ approach (named in honour of McGregor), Pink advocates a Type I (for intrinsic), based on the work of ‘positive psychologists’ like Csikszentmihalyi, Edward Deci and Richard Ryan. (Deci was actually fired from Rochester business school in 1973 because of his heretical views on incentives.) Their research suggests that all human beings have innate psychological needs for competence, autonomy and relatedness to others. Only if these are satisfied can people be happy in their work. In the long run, Type Is perform better than Type Xs, mainly because they are engaged with their work. Extensive research by Gallup and McKinsey suggests that only a minority are highly engaged and that many are actively disengaged. That is partly a reflection of how poorly most of them are managed, but also raises the question of how universally achievable Type I behaviour really is.

Quite apart from all the research, this thesis is immensely appealing intuitively to someone like me who gave up working in big companies, including consulting groups, partly because there was never enough time to think. I’ve had the luxury of pursuing private passions, but I’m acutely aware that satisfaction comes at a price. Nor am I typical – not everyone is as turned on by autonomy, mastery and purpose as some of us are. Nobody wants to be a slave, but do we all want to be masters?

In my next post I’ll consider some qualifications to Daniel Pink’s excellent book.

The Social Network may be one of the best films ever made about the birth of a business, but it only tells a tiny part of the Facebook story. Its main theme is the friendship between Mark Zuckerberg and Eduardo Savarin that was a casualty of the business’s explosive growth, with the aggrieved Winklevoss twins providing comic relief.

The movie, like Ben Mezrich’s Accidental Billionaires on which it is based, is seen mainly from Savarin’s point of view, and he comes across as a normal, sympathetic human being, where Zuckerberg is arrogant, charmless and unscrupulous. This view is not inconsistent with David Kirkpatrick’s more detailed and much more sympathetic account in The Facebook Effect, written with the company’s encouragement. As Saverin gave Zuckerberg crucial moral and financial support in the early days, he had every reason to feel aggrieved.

However, there is little doubt that if he had remained Zuckerberg’s partner – had been more than the nominal CFO – the business would never have taken off in the way it did, and he would have had 30% of nothing, instead of 5% of $30 billion. For him this was a part-time project, which he had no intention of diverting him from completing his education. He stayed on the East Coast, when Zuckerberg and his team had moved to California and were working round the clock. Savarin’s ideas on the importance of generating advertising revenues quickly would have made perfectly sense if this had been a normal business, but Facebook was not remotely normal. It still isn’t.

Facebook in 2004 was growing at breakneck speed, faced enormous strategic challenges, and could easily have been wiped out. Saverin, in the withering Silicon Valley phrase, ‘didn’t get it’. That’s no reflection on him – hardly anyone else got it then either – but Zuckerberg did and so did Sean Parker, who supplanted Saverin. The only way that Facebook could win the race to become the mass market social network was through massive expansion of capacity and continuous development of the service. This would require, amongst other things, serious amounts of capital, and Parker knew how to obtain it. The angel investor he persuaded to put up the first, crucial, $500,000 of funding was someone who understood more about network dynamics than probably anybody else – Peter Thiel, the founder of PayPal and the godfather to Linked-In, Slide and Yelp. Saverin was a bright college kid, but with no understanding of the networked economy and completely out of this league.

The remarkable thing is how far-sighted and single-minded the 20 year-old Zuckerberg was, not unlike another bright young nerd who dropped out of Harvard thirty years earlier, Bill Gates. Most entrepreneurs who build something substantial are driven far more by a vision of what they are trying to achieve than by dreams of enormous riches. Like Zuckerberg, they can be obsessive to the point of becoming obnoxious. In that they are no different from highly ambitious people in most milieus – big business, politics, media. Entrepreneurs however only succeed if they are able to build teams of people who are almost as committed to the vision as they are. That may make them slightly less ruthless on average than those whose careers can only advance at the expense of their rivals.

Zuckerberg’s sin, according to The Social Network, was his betrayal of his friendship, but almost certainly this was not deliberate. He was completely obsessed by Facebook, whose scale and scope were constantly changing, and he certainly needed to give stakes in it to new investors and crucial collaborators like Parker. There was no way that Savarin in late 2004 could have justified having 30% of what was now a completely different company, to which he was making no creative contribution. Zuckerberg handled the situation dreadfully, but it would have required exceptional social skills to have handled it well, and Zuckerberg had virtually none of those.

Similar stories to this could be told of the birth of other businesses. Apple too was born out of a friendship that went sadly sour, but this was a partnership where both Steve Jobs and Stephen Wozniak were essential to success. Ironically in view of his current iconic status, Jobs was often accused of taking the credit for Woz’s brilliant technical innovations and of treating colleagues appallingly. For years, Jobs’ reputation amongst engineers was that of an egotistical, manipulative shyster. There was probably some truth in that but, as with Zuckerberg, it was far from being the whole story.

The French Revolution was another striking example of history moving like a runaway train. The monarchy had been in dire financial and moral straits for almost a century, since Louis XIV’s grandiloquent expenditure on follies like Versailles and his disastrous wars. Subsequent wars led to more humiliating defeats at the hands of the hated British, the loss of Canada and ever-mounting debts. Helping the American rebels defy the British crown brought brief satisfaction, but took France to the verge of bankruptcy and inspired patriotic aristocrats like Lafayette to dream of liberty for France. Brilliant writers like Voltaire and Montesquieu catalogued the many failings of an absolute monarchy that was both incompetent and unjust.

By 1786, interest payments on debts consumed half of the crown’s income and no more could be borrowed. Radical reform was clearly necessary, but without constitutional change the elite refused to cooperate. In 1788 Louis XVI finally agreed to summon the closest thing France had to a representative assembly, the long defunct Estates General. His suggestion that each part of France should draw up lists of their grievances generated a mountain of paper. In the months leading up to May 1789, when the Estates finally met, expectations and excitement rose to fever-pitch. The King’s failure to treat members of the Third Estate (commoners) with respect dashed almost everybody’s hopes. Nobody wanted to replace the monarchy, merely to reform it, but events spiralled out of control and Louis had no idea what to do.

These years of mounting political crisis coincided with a social and economic one: a series of bad harvests culminated in widespread failure. As supplies of grain ran out in 1789, the price of bread soared, just when manufacturing slumped and there was no other work to fall back on. All over France rumours spread that aristocrats, corrupt officials and hoarders were conspiring to starve a desperate people into submission. Violent riots erupted everywhere.

The revolution really started in June when the Estates defied the King, proclaimed a National Assembly and swore to give France a constitution. Louis responded by summoning troops to Paris, but when they fraternised with the people, he lost his nerve and withdrew them. On 14 July revolutionaries stormed the Bastille to get their hands on arms. There weren’t any but they hacked the governor to pieces, and lynchings became commonplace and patriotic. Across the country peasants sacked chateaux and attacked grain merchants and tax collectors. In August, the Assembly voted a Declaration of the Rights of Man, but France was becoming ungovernable. In October an armed mob marched on Versailles and forced the Royal family to return to Paris with them.

From that point on Louis was almost a prisoner in the Tuileries and head of the government in name only. A cacophony of eloquent voices in the Assembly, urged on and sometimes intimidated by the Parisian mob, debated abstractions and produced a succession of constitutions. In 1791 Louis tried to escape, confirming suspicions about his loyalties. In 1792, war broke out with Austria and the Duke of Brunswick threatened Paris with ‘exemplary vengeance’ if the King were harmed. This triggered an orgy of violence and the declaration of a republic. Armed gangs massacred over a thousand innocent prisoners in what Danton, the Minister of Justice, called ‘an indispensible sacrifice . . . to appease the people of Paris’. Terror became the order of the day and politicians competed in ferocity, often directed at each other.

In January 1993, Louis was sentenced to death. The Queen and thousands of other ‘enemies of the people’, including Danton, followed him to the guillotine, and the streets of Paris ran with blood. Civil war in the West of France cost the lives of 400,000. The fall of Robespierre in July 1794 ended the nightmare of the Terror, but France only achieved stable government with the military dictatorship of Napoleon. Nobody had wanted five years of violence and chaos, but nobody had been able to end it. Everyone was at the mercy of uncontrollable events.

There is no shortage of comparable cases – the outbreak of the First World War in 1914 and the disintegration of Yugoslavia in the 1990s are two other horror stories from the last century. Some, like the collapse of communist governments in Eastern Europe in 1989, were benign rather than catastrophic. (Though not of course for the apparatchiks and party loyalists whose worlds fell apart.) The cycle of events feeding on each other is often fuelled by a mixture of hope and fear that change is in the air, expectations that quickly become self-fulfilling. In the velvet revolutions in Poland and East Germany, the hopes and confidence of the protestors rose steadily, while the morale of officials crumbled.

Feedback loops are of course a metaphor for how change accelerates, but the best one we have to describe the general phenomenon – virtuous circles can easily spiral into vicious ones. They are never the cause of a war or a revolution, of a singer suddenly becoming a star or a business collapsing into bankruptcy, but they play a crucial catalytic role and the concept helps us to understand some of the complexities of change. Very few things in life have single causes, and complex events like revolutions, the rise to power of dictators and the explosive growth of businesses like Google and Facebook have many. It’s when they interact and reinforce each other that feedback loops speed things up and surprise us.

One big global tide of change that seemed to be entirely to the benefit of the English-speaking world has been the growth of English as the universal second language. One international group after another – air traffic controllers, scientists and, crucially, businesses – adopted English as their lingua franca. The more people who spoke it, the more others wanted to. Between 1975 and 2000 the number of people speaking English as a foreign language rose from 100 million to 700 million, and growth has intensified since. Fewer and fewer young people now study other languages, especially the English themselves, but this has left them as the only monolingual group in a multinational world. English people working in European organisations can find themselves at a distinct disadvantage. Feedback loops almost always produce unexpected consequences.

Part of my long summer break was spent writing a new talk, Winner Takes All , and thinking further about the role feedback loops and network effects played in the rapid rises of Microsoft and Google to market domination. For relaxation, and entirely by chance, I read Malcolm Gladwell’s Outliers and Ian Kershaw’s biography of Hitler. This unlikely assortment of topics set me thinking about the part that feedback loops play whenever things change suddenly. Yet most of us are only dimly aware of them: neither Gladwell nor Kershaw mention them explicitly, yet they both show brilliantly how they work.

Gladwell’s thesis is that people who become outstandingly successful do so because of the interaction of many social factors, notably when and where they are born, and through achieving mastery of their core skills by repeated practice. Great composers, from Mozart to Lennon and McCartney, got to be so accomplished, not because of innate genius but because they spent enormous amounts of time in their youth practising their art, something like 10,000 hours each. Exactly the same pattern can be seen in the formation of computing prodigies like Bill Joy and Bill Gates, who had exceptional opportunities as teenagers to spend hours every day, programming obsessively.

We may quibble about how complete an explanation this is for genius, but the underlying argument is sound and applies to how any of us acquire a skill: we learn how to drive a car, play football or speak a foreign language mainly by repeated practice. The more we do, the better we get, and the younger we start, the faster we learn, which encourages us to keep going. Feedback loops play a crucial reinforcing role in this kind of continuous learning: initial progress boosts confidence, and the will to aim higher; further improvement brings intrinsic satisfaction and raises motivation further in a continuous virtuous circle. The encouragement and praise of others provides another boost. For less talented and determined youngsters, without good support networks, feedback loops can also feed a vicious circle of giving up trying if they don’t seem to be making progress. Nothing succeeds like success.

That pattern – though not the early dedication – played a big part in the growing self-confidence of Adolf Hitler in the 1920s. After a youth spent drifting aimlessly, never applying himself to anything, he discovered after the war that he had a talent for public speaking – he could mesmerise an audience. (Maybe in those years spent tramping the streets of Vienna he was muttering speeches to himself.) After a series of rhetorical triumphs and the growing adulation of his supporters, his self-belief reached megalomaniacal proportions long before he was anything more than a marginal figure in German politics. In 1928 the Nazis won a mere 2.6 % of the vote in national elections and most people dismissed Hitler as a vulgar demagogue.

What happened next was the most extraordinary, and disastrous, rise to power in history. In 1930, the Nazis won 18.3 % of the vote and became the leading voice of the nationalistic Right; in 1932, they took 37.4 % of the vote, which made them the largest party in the Reichstag. In January 1933, following the machinations of reactionary politicians advising President Hindenburg, all of them intent on dismantling the democratic republic, and deluding themselves that they could easily control the former corporal, Hitler was appointed Chancellor of Germany. Within months he had gone much of the way to establishing a personal dictatorship and had set Germany on the path to rearmament and war.

Many factors contributed to this revolution, but the most dramatic was a cascade of economic catastrophes: the collapse of food prices and exports and the impoverishment of millions of farmers; the Wall Street crash, the failure of banks and businesses, and the start of the Great Depression; by January 1933 six million German workers were unemployed. Coming after a gruelling war, a bitter and deeply shocking defeat, humiliating peace terms and an inflation that had wiped out the savings of anyone who had any, despair, panic and anger were almost universal. To more and more people, Hitler seemed like the man with answers to their problems. His early successes in putting men back to work through a massive rearmament programme and his defiance of foreign governments led most Germans to believe for a while that this man was their saviour. Hitler himself had no doubts about his own infallibility, but hubris led inevitably to the most appalling nemesis, particularly for the German people.

Whenever events seem to speed up and spiral out of control in a way that nobody had anticipated, several interlocking feedback loops are at work. One trend reinforces another, particularly moods of mass panic. (Euphoria can have a similar effect in, for example, stock market booms.) A similar pattern to the German crisis leading up to 1933 applied to the development of the Great Depression across the world, but particularly in the US. One bank failure led to another, mortgages were foreclosed, farms and businesses sold at knock-down prices; unemployment rose to record levels; government after government slashed spending and imposed tariffs on imports; even those people who had jobs tightened their belts in anticipation of worse to come. The inevitable result was a massive contraction of the global economy: between 1929 and 1933 world trade shrunk by two thirds. We have all recently lived through a financial/economic crisis that threatened to have similar consequences, but fortunately this time governments took steps to expand rather than contract the money supply.

(Continued in next post.)

In my last post I discussed five fundamental questions every business entering a new market needs to consider. In this one we consider the other five:

6. Does our value proposition give customers a compelling reason to choose us repeatedly?

7. How will we achieve an organisational culture that combines entrepreneurial spirit and management discipline?

8. Who are/could be our most formidable competitors and how do we measure up?

9. What’s special about us? How will the firm differentiate itself?

10. How coherent and realistic is our strategy?

I ended last week with the challenge of winning the first customers, which leads directly to the next question: does our value proposition give customers a compelling reason to choose us, and to do so repeatedly. Webvan’s didn’t; Ryanair’s does. It’s not a delightful experience, but it’s cheap and reliable, so even though passengers moan about it, they keep coming back. That’s the acid test – coming back. We only have a business if they come back again and again. There has to be a reason, but a surprising number of businesses would be hard put to spell out what theirs is.

The safest and simplest reason is exceptional value, but that requires capabilities and economies of scale that most new companies don’t have. Amazon and Ryanair are textbook cases of how to build capabilities with a clear value proposition always in mind.

Technology companies can have a tough time defining value propositions – it’s in the nature of major innovations that they start as solutions looking for problems. That term applied to the most successful technologies of the last 30 years, the PC, the Internet and the mobile phone. They took time to discover benefits for customers, but that was too late for most of the early technological pioneers, who did not earn rich returns from their innovations.

Customer propositions are infinitely more important than mushy mission statements. They effectively encapsulate my first four questions. The most fundamental questions for any business are: What exactly do we have to offer customers, and why should they buy from us?

Question number seven: how will we achieve a degree of disciplined entrepreneurialism? Creativity without discipline means products don’t get delivered on time and costs run wild. But too much efficiency and focus can easily stifle experimentation, and crush the creative spark. It’s an incredibly difficult balance that very few firms really manage, for any length of time. It’s basically about building balanced teams. Brilliant entrepreneurs like Steve Jobs and Jim Clark rarely have all the qualities necessary to make things happen and to take well-judged decisions – they’re often prima donnas. They need sensible people around them with complementary skills, but people they’ll listen to, who’ll occasionally remind them that they’re mortal. That’s why partnerships have played such a crucial role in the birth of great entrepreneurial firms like Apple, Sony, Microsoft and Google.

The next question is one that previously successful organisations frequently fail: who will be our most formidable competitors, and how do we measure up? None of us like facing up to our weaknesses, and strong organisational cultures can make it almost impossible. They reinforce intellectual rigidity and block out dissent. The more successful they’ve been in other fields, the more likely they are to think they’re invincible.

Nearly all the companies I’ve studied that came to grief underestimated their rivals and overestimated themselves: Apple versus IBM, IBM faced with clone PCs and Microsoft, Sony blundering into Hollywood and having to write off four billion dollars, Netscape attacking Microsoft, Webvan challenging Wal-Mart, AOL thinking it was a real media company that could transform Time Warner.

Entrepreneurs and business leaders need extraordinary levels of self- confidence and optimism. It’s often their stubborn belief in an idea everyone else thinks is crazy that leads to enormous success. But there needs to be someone in the organisation prepared to challenge the consensus view and ask the difficult questions. All too often, hubris leads to nemesis.

There certainly needs to be something special about the business, something people in it can believe in, something that differentiates it from competitors. If a new market’s growing fast, there’ll be a flood of new entrants, typically with near-identical strategies and offerings. That happened during the dotcom boom, with discount telephony and even wine-growing in New Zealand. The end result is invariably massive over-capacity, commoditization and a big shake-out. To have any chance of survival, you have to follow Apple’s advice – think different, and stay different. Great market creators do it by being better than anyone else. That’s a wonderful strategy if your capabilities are truly distinctive, and you can keep them distinctive. And some companies achieve differentiation through strategic assets like brands, customer relationships or exclusive rights to content or technology.

Entirely new ventures don’t have these advantages, so they need to think of other ways of being different. It doesn’t have to be one big thing, it can be dozens of little ways of providing better service or being memorable, but it has to add up to something that others can’t easily imitate. There’s no such thing as an inherently attractive market, and sexy ones are dangerous – lots of other people are swarming around them. Really attractive opportunities are ones where we have something special to offer, where we have a chance of establishing a competitive edge, where there’s some white space. The vast majority of businesses can’t aspire to create an entirely new market, but the next best thing can be a niche it can dominate.

If we have plausible answers to all these questions, we’re most of the way towards the last one: how coherent and realistic is our strategy? That mostly means thinking clearly about the market we’re addressing, and being honest with ourselves about our capabilities compared to the competition. Almost certainly both will change, and we must be prepared to revise our previous assumptions and adapt our strategies frequently. But great ventures don’t start with realism and coherent plans – above all, they need imagination, energy and passion. Both heart and head are important, and the willingness to try many things. But every now and then, enthusiastic entrepreneurs need to step back, and ask themselves some hard questions – and not just these ones.

1. What exactly is the market?

2. What will it take to compete in this market? What are the essential enabling capabilities and assets to be a credible player?

3. Do we have all of them? What would it take to acquire them?

4. Who is/who will be the customer and why should they choose us?

5. Who pays? Does our business model add up?

6. Does our value proposition give customers a compelling reason to choose us repeatedly?

7. How will we achieve an organisational culture that combines entrepreneurial spirit and management discipline?

8. Who are/could be our most formidable competitors and how do we measure up?

9. What’s special about us? How will the firm differentiate itself?

10. How coherent and realistic is our strategy?

In Winners and Losers I aim to describe and explain, not to prescribe or predict. The success factors I identified for organisations that create new markets and establish lasting industry leadership certainly contain lessons for any business, but they’re mostly implicit. In my workshops for business audiences, I suggest ten any business entering a new market needs to consider before it makes too heavy a commitment to a new venture. Most are deceptively simple, which may explain why they’re so often overlooked – with fatal consequences.

None of the winners described in Winners and Losers had clear answers to most of them at the outset – they discovered them as they went along. But for them the market was tabula rasa; for new entrants, it will be at least starting to take shape. Entrepreneurs shouldn’t spend too much time on analysis, but every now and then, entrepreneurs need to ask themselves some fairly fundamental questions.

In this post I’ll consider the first five:

1. What exactly is the market?

2. What will it take to compete in this market? What are the essential enabling capabilities and assets to be a credible player?

3. Do we have all of them? What would it take to acquire them?

4. Who is/who will be the customer and why should they choose us?

5. Who pays? Does our business model add up?

The first question is: what exactly is this market? How do we define it? People often talk loosely about ‘the online market’ or ‘the retail market’, as if they were made up of comparable groups of buyers and sellers, with broadly similar products and prices. They are of course made up of several distinct markets, each with very different competitive structures, even if the boundaries are fuzzy and frequently shifting. Any new market is always likely to be a moving target, and our first impressions will probably be proved wrong.

The point of the question is to think harder about the market or segment we’re looking at. The more narrowly we define it, the closer we’ll be to understanding whether it represents a real business opportunity for us. We could start by asking who’s selling what to whom, but in virtually all the new markets I’ve examined, at least one of those things wasn’t clear – and sometimes none of them. Customers and competitors are the most difficult to pin down, but it can take a while to make out what the generic proposition is. There are also complementary markets to consider – for mobile phone markers in the 1990s, the retail sector became crucial, but it too was a completely new, unfamiliar market with its own structure. Sometimes it makes sense to think in terms of ecosystems, rather than markets, with many firms co-existing, rather then competing directly.

Another starting point is the characteristics of any new or transformed market. (See New markets.) These are all likely to be hazy at first, but they do provide a framework for thinking about it. If for example we find a wide range of capabilities, customer needs and business models, we’re looking at more than one market. We need to decide which one we’re interested in, and why.

The most important difference from any market we’re familiar with will probably concern capabilities. What will it take to compete in this market? What are the essential enabling capabilities and assets to be a credible player? (And what role do strategic assets like brands and network effects play? If an incumbent has powerful assets they can be show-stoppers.)

The most crucial question of all is: do we have these attributes? And how easily could we acquire them? Not asking this question, or not really answering it, is probably the commonest reason for failure. Apple in the early 1980s thought it knew infinitely more about personal computers than IBM, but it didn’t have a clue how to sell them to businesses, and it was squeezed out of the overall mass market that evolved. That market changed so fast that eventually IBM realised it didn’t quite have what it took either.

It’s also possible to overestimate the difficulty of acquiring capabilities. Many old economy businesses did this in the 1990s – the online world seemed so exotic that they thought only a new caste of digerati could understand it. There was some truth in that initially, but it soon became quite easy for conventional retailers, for example, to establish an online presence. It was particularly easy for mail order companies, as they had most of the capabilities already – customer knowledge, direct marketing skills, expertise in prompt fulfilment – which is more than many dotcoms had then.

The business that most tragically exaggerated the mysteries of the Web was Time Warner which thought AOL could sprinkle some digital stardust on its resolutely analogue old business, and gave away billions of dollars of shareholder value in the most misconceived merger in corporate history.

Acquiring companies isn’t generally a good way of acquiring capabilities. I’ve only come across one business that did this successfully on any scale, Cisco. (See Must mergers always be dangerous?) But this wasn’t reckless diversification – these were capabilities within a field it knew well.

The next deceptively easy question is: who is the customer? Or who might the customers be, when they eventually emerge? The people who invested in Webvan, mostly time-poor millionaires living around San Francisco, thought that other people would attach the same importance to avoiding supermarkets as they did. Even now, this is still a fairly narrow market segment.

Mistaking early adopters for the advance wave of a mass market’s a common mistake. A big part of Nokia’s success came from treating each market segment differently, and consumers with respect. Its rivals thought their customers were network operators.

Understanding who your customers are can be a very difficult question and it gets harder when the most important customer isn’t the one who’s paying. Many business models now don’t require the end user to pay directly. One of the quickest ways for a web business to build market share, and sometimes an impregnable competitive position, is to give customers something for nothing – something they really value of course. But this strategy can be dangerous, unless the business finds at least one group of customers, such as advertisers, prepared to pay something. Not many are as fortunate as Google, which has something to offer both its sets of customers.

One of the problems with providing software or content free is that competitors may be able to match you and go one better, make them an offer they really can’t refuse. Another danger is that you may never find a way of making enough money from other customers, or from charging a few users a premium. Many newspapers now rue the day they put all their content on the Web free – their online advertising revenues haven’t remotely compensated for the loss of sales. Only titles like the FT, with something really valuable to its customers, can get away with charging for it.

In a competitive market, the important supplementary question is why should the customer choose us, rather than any other supplier? Or which customers might choose us? If we already have customers in an adjacent market, that makes entry much easier. When supermarkets started selling books and DVDs, they knew that a proportion of their existing food customers would pick one up occasionally. That’s a very different kind of market entry, the sort Microsoft was rather good at, and that Google is pursuing now. For most new ventures, winning the first customers is an enormous challenge,

That leads directly to another question, which I’ll consider in the next post.

Jason Fried and David Heinemeier Hansson, the authors of Rework, are right to call it ‘a different kind of business book for a different kind of reader’. With their passion for doing a few things really well it has some of the qualities of that enduring classic, Zen and the Art of Motorcycle Maintenance. Fried and Hansson are resolutely practical and pragmatic, but this is also a work of philosophy that challenges most of the conventional wisdom about measuring business success primarily in financial terms.

For them business is not about ambitious business plans, getting big fast and exit strategies, but doing good work you care about, being different, and frugal. Their own software company, 37 Signals, founded in 1999, is successful despite still only having 16 employees. Rework is basically a set of maxims for doing likewise, and they make it clear that they are not starry-eyed idealists – ‘a business without a path to profit is just a hobby.’ The vast majority of small businesses have only the tiniest chance of becoming a giant corporation and very few aim to do so. This is pretty much the path I decided to follow myself when I turned my back on corporate life and became an independent management consultant.

Why, ask the authors, should expansion always be the goal? ‘Small can be a great destination in itself’. Staying small means that you can stay flexible and true to what you really care about – you may also be able to resist becoming a workaholic. You also avoid having to raise external finance, which takes you away from attending to customers and running the business, and will probably mean you lose control of your baby. Investors always want to ‘cash out’, which distorts priorities. Fried and Hansson compare founders who become more interested in their own exit strategies than the long-term health of the business to meeting a divorce lawyer on your wedding day. There’s no commitment – ‘building to flip is building to flop’.

Their core value is frugality, a quality not much prized during stock market booms like the great NASDAQ bubble of 1995-2000, when so many dotcoms burned so much cash. Start-up for Fried and Hansson is a word that suggests profligacy and playing at business. Spending other people’s money fosters the notion that it’s all a game and can easily become addictive. According to them, most new businesses need much less money than they think – they could often easily work from home instead of acquiring fancy premises, outsource manufacturing and IT, and do their accounts using Quicken.

They’re mostly right, but there is a danger with this line of argument. In some markets, scale really is important and networked markets can tip very quickly towards a single supplier. That’s fine if you happen to be that supplier, as Craigslist, a business which shares some of Rework’s values, turned out to be. But many software and Internet companies have been drowned in the wash created by big players like Microsoft and Google. And sometimes the opportunities arise to become very big, very quickly, as they did for eBay and Amazon. If they hadn’t seized theirs decisively, they could easily have been marginalised or crushed by bigger, more determined players.

Rework is mostly right about business plans, which it describes as guesses about the future. ‘Writing a plan makes you feel in control of things you can’t really control.’ But businesses ignore strategy, and in particular competitors, at their peril. In fact Fried and Hansson believe strongly in differentiation, though they can’t bring themselves to use such a business school word. What they advocate is ‘decommoditizing’ the product and ‘pouring yourself into it’, fine precepts.

I’m also uncomfortable with their view that learning from mistakes is overrated – it is surely essential to experimentation and exploration. They’re quite right to say that evolution doesn’t linger on past failures, but builds on what has worked. That is not inconsistent with learning from mistakes, which doesn’t have to mean breast-beating about failures. It’s basically about always seeking ways of doing better, which is something they’re very keen on, so the differences between us may be more semantic than real. We all make mistakes and they sometimes provide our most valuable learning experiences. If something fails badly, as happened recently to financial capitalism, it behoves everybody to try to learn from it. If we don’t we’re surely condemned to repeat the miserable experience.

These are fairly minor quibbles. This is a refreshing, sensible, witty, occasionally wise work, which offers a healthy corrective to the snake-oil salesmanship of so many self-help business books. Next week I’ll offer my own suggestions on questions every business, large and small, should ask itself when entering a new market.