Thoughts on our three-speed economy and business planning in the 21st century

Steve Denning, one of my new favourite writers recently wrote on Forbes about Leadership in the three-speed economy. This concept of a a three-speed economy is powerful, although I think ‘three-sector’ would be more accurate. For a while now I’ve been struggling to reconcile vibrant growth in parts of the tech industry with lack-lustre growth at the macro-economic level, and the best explanation I’ve come up with is that some industries are declining whilst others, most notably tech, are growing quickly and that they are balancing each other out. Denning makes a similar, but more sophisticated argument, backed up with an explanation of why we have different sectors of the economy growing at different speeds.

He rightly thinks of financial capitalism as a distinct sector of the economy, giving us three segments overall

  • The traditional economy – a real economy with many large firms providing real goods and services, but their hierarchical management and focus on shareholder value are preventing them from responding well to the challenges and opportunities of the 21st century. The traditional economy is much larger than the creative economy but it is in decline and faces a grim future. Good examples of firms are GE, Walmart and HP.
  • The creative economy – a real economy that generates real products and services. It’s companies are different to traditional economy companies because they are focused on delighting customers and rapid innovation. Creative economy companies typically enjoy fast growth. Good examples of firms are Apple, Amazon, Whole Foods and Costco.
  • Financial capitalism – comprised of firms primarily focused on generating profits from trading financial instruments that are often disconnected from the real economy. These firms have had a significant impact on growth over the last 20 years through the bubbles and crashes they create – e.g. the Long-Term Capital Management crash of 1998, the Dot-Com crash of 2000, and the housing meltdown of 2008.

The creative economy has emerged because the increasing pace of change is rendering 20th century management techniques ineffective. The time taken for information to filter through companies to the centre and then for policies and decisions to filter back out to the rank and file limit the speed at which these firms can respond to new opportunities and customer demands, and creative economy companies employing radically decentralised management techniques to react more quickly are having a field day. Moreover, decentralised management is so different from hierarchical management that few traditional companies are able to switch to the new paradigm. It is simply too hard for managers who are used to having detailed workplans and clear schedules that show when everything is supposed to happen to switch to an environment which values flexibility over knowing what will happen when.

As much as I seek to empower our portfolio companies to do what they think is right and to avoid over-planning I sympathise with these ‘traditional managers’ in the sense that when you switch from operating with a detailed operating plan to operating without one it feels like you are flying blind. When our companies started switching from ‘waterfall’ to ‘agile’ development methodologies we went from having detailed pictures of how products were going to evolve (albeit with delivery risk) to little visibility of what new features would emerge and when. Budgeting became more difficult because we could no longer tie marketing and sales efforts to major release dates, assessing dev teams became more difficult because they were no longer accountable for long term deliverables, and, probably most importantly, reporting within DFJ Esprit and to our LPs became harder because there was less we could say to get people excited about the future.

Much of the comfort with plans was, of course, based on the illusion that they wouldn’t slip, and in even if the plans were good the difficulties listed above are more than offset by the improved productivity and flexibility that comes with agile, but they are real difficulties none-the-less. Creative economy companies have, in effect, adopted agile methodologies across all their business areas and it isn’t surprising that most traditional companies find it impossible to copy them.

One very interesting question which I don’t have an answer to yet is ‘how much planning is optimal in a creative economy company’? Different departments need to be co-ordinated and raising money requires projecting success over a timeline so some planning is still necessary. Just less than before.

  • neil_lewis

    Very interesting Nic – I’d never thought that leadership of a company would determine which ‘economy’ it would fall into… this does push the leadership style of a company to the top most level. And, I guess, following this argument through, as a VC, the most important question to ask a potential investee is ‘what is the leadership style….’?

  • http://www.theequitykicker.com brisbourne

    Leadership style is definitely looming larger and larger in our decision making process.

  • frabcus

    Useful post – thanks Nic. I’m struggling with how to convey organisational structures now. Hierarchy is seemingly easy to understand and explain, but I have an instinct doesn’t really work, certainly not the way it appears. There are always other network structures layered on top.

    Yet there doesn’t seem to be enough common vocabulary for describing other methods (there are notable exceptions, like Valve’s structure, and some writers like Michael O. Church)

    Not so sure about Apple being agile / non-hierarchical. Doesn’t it famously have a very strong structure with managers deciding things?

  • http://www.theequitykicker.com brisbourne

    Yes – Denning cites Apple as a creative economy company because they are a great example of a company that focuses on delighting the customer, but they don’t fit the mould well because they are hierarchical. I guess that they are pretty agile though, in the sense of being flexible and responsive to outside stimuli. Or at least they were when Jobs was around.