The Future Does Not Fit in the Containers of the Past. Edition 29.
One of the long-standing tenets of business are the advantages of scale.
Scale has provided companies with many benefits from higher margins due to lower costs, to insulation from competition due to moats of marketing spending and widespread distribution.
Challenges to Legacy Scale
Over the past decade however the benefits of scale have diminished and in some cases are proving to be a disadvantage:
Scale of Distribution: With direct-to-consumer marketing enabled by the Internet and platforms like Shopify, widespread retail distribution is no longer as effective an advantage. Clearly distribution matters but there are ways to route around the big stores by going direct and creating demand that forces buyers to stock your product.
Scale of Communication: New media behaviors by people particularly search and social are leading to communication channels where spending power is no longer a competitive edge as it was in television or print where marketers cornered key inventory at advantageous prices. Platforms like Facebook enable millions of small businesses with personalization and targeting capabilities to discover customers and be discovered. As content supported by advertising declines to less than a third from nearly two thirds ( hello Netflix, HBO Max, Amazon Prime) scale of spending while still being important is losing its potency.
Scale of Manufacturing: The “Everything as a service” platforms from Amazon Web Services to Foxconn allow smaller companies to gain the edges of scaled manufacturing, distribution and technology without any of the legacy disadvantages of size.
Scale of People: From IBM to GE to Unilever to Walmart there are hundreds of thousands of employees and therefore ability to recruit and grow a range of talent and offer career advancement. Scale of people continue to be important to execute complex and large tasks but there are also new ways to re-aggregate talent. And a generation of talent wants to work in smaller and more entrepreneurial environments. In the post Covid world as we move to unbundled workplaces there will be far more ways to build teams both globally and in real time than every before.
Legacy scale still matters in most industries and is critical in quite a few like semi-conductors. In fabricating advanced chips, a new fabrication plant can cost over 4 billion dollars and there is no way around scale. Today TSMC (Taiwan Semiconductor Manufacturing Company) dominates due to its scale.
However while we can never underestimate legacy scale, there are new forms of scale that every smart company recognizes and is expanding into.
The Rise of New Scale
While there is a diminishment of legacy scale , there is also a rise of new types of scale that are becoming increasingly important.
Scale of Data: Increasingly companies are realizing that collecting, refining and leveraging data is what is driving the modern fast growing and highly valued companies from Amazon to Google to Uber. Data enables a new form of scale which is that of mass personalization.
Scale of Networks: On the Internet network effects play a dominant role in creating winners. Dominant platforms such as Facebook, Netflix, and Tencent (WeChat) enjoy flywheel effects of more users attracting more users and therefore marketers and businesses.
Scale of Influence: Today individuals have tens of millions of Instagram followers or leverage Twitter to reach hundreds of millions of people with single posts and tweets. If you look at scaled entities on social media, they are individuals. People are seen as authentic and certain folks like Elon Musk can move markets.
Scale of Talent and Ideas: One of the lessons of history is that every advance in technology places a premium on superior talent. Technology is a lever and when married with great talent a company enjoy major scale effects.
A vivid example of how the new scale works is Kylie Cosmetics. Kylie cosmetics was launched by Kylie Jenner to sell lipstick. In less than two years Kylie Cosmetics sold 900 million dollars of product making the 21-year-old the fast billionaire ever. Kylie cosmetics had less than 50 full time employees, outsourced manufacturing to Seed Beauty a contract manufacture and all e-commerce and fulfillment to Shopify. The single media channel besides PR that Kylie Cosmetics used was Kylie Jenner’s Instagram account with 120 million followers+ (more than the ratings of the top 10 prime time television shows combined)
This era of New Scale began to emerge in 2007 when the smart phone and social networks came to be. With mobile search, Facebook, Instagram, Twitter, You Tube, Shopify, Amazon Web Services and lots more the ground was laid for massive disruption of business in marketing today which has further expanded via enabling technologies from Square to Stripe to Paypal to Etsy among many others.
If we look at how Dollar Shave Club and others took on Gillette it was through a combination of You Tube advertising, Contract Manufacturing, Direct-to-Consumer Selling, and leveraging word of mouth on social media. Procter and Gamble’s second to none expertise in brand building, distribution at Walmart and spending scale on television did not stop double digit share declines when new approaches and mindsets were needed. Procter soon built and learned these skills but it did result in an 8 billion dollar write down for the Gillette acquisition.
The scale that many of today’s successful marketers enjoyed were the old scale which are not only diminishing but are seen as disadvantaged because not only are they not agile due to size but less authentic as a zone of control world is being replaced by a zone of influence world, and less customized as they struggle to use modern data, communication and manufacturing techniques.
So now they are aggressively buying the new companies as much for their expertise and talent as for the revenue and brands they have spawned. Coty spent over a billion dollars for half of Kylie cosmetics. Now new and legacy scale merge.
But many companies that enjoy legacy scale and now incorporate data and network scale sometimes forget one other scalable element: Talent and the influence and ideas they beget.
Scaling Talent and Ideas.
Today we are living in a world where the best companies realize that a key differentiator is talent.
Google pays its best engineers 5X to 10X its good engineers because they can be 100X more productive. While the returns to talent in non-software businesses may not be as radical there is no doubt that one superior player is worth some multiple of an okay player.
But how many companies are set up for this reality that talent is the key differentiator?
Great talent offered the scale of networks and scale of data can and will impact outcomes and returns disproportionately.
Fixating on the silicon and spread sheet side of the equation (digital data and networks, measurable input costs) without also emphasizing the carbon and story side (human talent, creativity, culture) is unlikely to lead to optimal outcomes.
In today’s world most companies care about two things:
a) How to grow or re-ignite growth.
b) How to cut costs and expenses to remain competitive.
World class talent cares about two things :
a) How to grow their income, their skill set and their reputations.
b) The purpose, values, and culture of the place they work at and the people they work with.
The challenge for many companies is how to reduce costs (talent being a key cost) while ensuring they have world class people in a world where capital is plenty and talent scarce.
One way is to make sure to recognize the difference between arrows and archers.
Buying cheap arrows is one thing but buying cheap archers is another. A great archer will hit the bullseye with one or two arrows in very little time. An okay archer may need dozens of arrows and could waste a lot of time. Great archers cost more but use fewer arrows to hit the target. Cheap archers blow through a lot of arrows and can hit you in the butt!
Talent should not be weighed or bought by the pound or by some algorithmic driven FTE rate.
Where silicon (technology) can replace carbon(humans) it should, and it will in most cases.
But do not believe that all talent is substitutable with technology or some other talent. In today’s world technology allows leverage and therefore amazing network and scale effects can result from world class human capital.
There is a difference between a rump steak from a diseased cow and a few ounces of fine Kobe beef which buying by the pound cannot differentiate! (Apologies to the vegetarians…think ordinary mushrooms vs truffles)
You are talent.
We are all gig workers with some of us having longer and better paid gigs as the work place becomes unbundled, companies work to manage variable cost (labor), half-lives of skills shorten and measurement increasingly become real time.
To thrive you need to play the scale game.
Here are some suggestions on how to scale your talent:
a) Plan your career over a long-time scale (most college graduates will work for fifty years till 70) and therefore work to remain relevant and reputable in the long run. (If you are 50 you have 20 years of work ahead of you and 3 to 4 significant shifts in the workspace so stop thinking “I will be retired soon and not have to deal with this new nonsense”
b). Scale up your skill set by setting aside to learn, investing in education and raising your hand to new opportunities and assignments. Change sucks but irrelevance is even worse.
c) Scale your reputation recognizing that truth will out and so do the right thing, be generous, do not take short cuts and only burn bridges that allow poisonous snakes to cross. Today you can only use PR and playing games to polish a rotten apple for a year or two before the rotten core thrusts through for all to see!
d) Scale through other people by helping, teaching and encouraging people. Nothing is as scalable as a unified team or people that believe in an idea. People are networks as much as any technology-based network. And when people you work with or you have helped grow you scale in ways you yourself would never have scaled alone.
In the end scale happens when you think beyond yourself, beyond your existing mindset and beyond the boundaries of your category!
All illustrations by Yukai Du
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Rishad Tobaccowala (@rishad) is the author of the bestselling “Restoring the Soul of Business: Staying Human in the Age of Data” published by HarperCollins globally in January 2020. It has been described as an “operating manual” for managing people, teams and careers in the age we live in and The Economist Magazine called it perhaps the best recent book on Stakeholder Capitalism. Business and Strategy named it among the best business books of the year and the best book on Marketing in 2020. Rishad is also a speaker, teacher and advisor who helps people think, feel and see differently about how to grow their companies, their teams and themselves. More at https://rishadtobaccowala.com/