In the natural world, the big winners are not always the strongest or fastest, but rather the ones that are best at adapting to changes in their environment. The business world follows similar rules – and its current environment is changing more rapidly than at any time in history, thanks to the digital revolution.
A changing environment naturally favours smaller actors, as they can manoeuvre with more speed and agility than their larger peers. This young century has been shaped mostly by startup companies like Facebook, Uber, Netflix and the rest– but this list also includes some larger companies like Apple and Samsung, which were able to anticipate the direction of events and act quickly to influence developments in their favour.
But what is it, specifically, that gives smaller companies the edge in the current environment? And what did successful giants like Apple and Samsung do differently than the other large companies that fell behind, like Blockbuster and Nokia?
The OODA Loop
During the heavy manufacturing periods of the 20th century, big business thrived on economies of scale. A modern world needed to be built, after all – and success in that project would depend on increasingly efficient manufacturing techniques at larger and larger scales.
Today, much of the added value in the economy comes from digital products and services, which increasingly provides solutions that cut out the need for the old ways of production. Though constant manufacturing defined the business imperative in the previous generation, the current period can be understood as the era of the OODA loop.
An OODA loop refers to the speed at which an actor can perform the following functions:
- Observe unfolding circumstances in the environment
- Orient oneself to these new conditions, analysing potential moves to make
- Decide on the next steps
- Act to execute the new plan
The model is circular, describing a continuous process of adaptation to changing circumstances. In a changing environment, entities that can perform faster OODA loops have natural advantages over slower actors that cannot. (In a relatively static environment, OODA loops are less important.)
Young companies have few employees and less expensive architecture that is set firmly in place. They recognise that they are outgunned by larger businesses in their industry, but their ability to more quickly adapt to changes in technology and circumstance give them an open lane to victory.
Examples of this phenomenon are plentiful in today’s society. Recall that automobile manufacturers around the world had sunk great investment into producing petrol-based cars. Their business model remained essentially unchanged until the startup company Tesla shook the entire industry by producing superior battery-powered electric cars.
Hotel companies also lost a huge part of their market share to AirBnB for similar reasons; the giants focused entirely on building new hotels, while AirBnB focused on providing accommodation instead. In these and many other industries, lack of a fast and effective OODA loop has led many companies to leave potential fortunes unclaimed.
Car companies and hotel groups had been perfectly capable of observing that technology had opened new avenues of business. They could have oriented themselves to capitalise on these changes, decided on an ambitious plan, and then acted on it – but they didn’t. Companies like Apple and Samsung did, and that has made all the difference.
Staying ahead of the Competition
To build a stronger OODA loop in your company, it is worth creating a new, separate division that functions like a startup. This division can develop and test innovations related to the general aims of the main business. Its small size allows for agility and a low price for failure, while retaining the vast potential for success that other startups enjoy.
Design and execution of new business operations, variations on how to go to market, and other experimental processes can perform the main functions of the OODA loop while leaving the other divisions of the company undisturbed until a new business model is close to being finalised.
Through this type of conscious arrangement, even the biggest companies can retain the speed and finesse of their tiniest rivals. This flexibility, combined with the power advantages that size can bring in other areas of operation, solves the riddle of whether it is better to be small or large in the current economic environment. By developing a fast and effective OODA loop, your business can have the best of both worlds.
In Part 2 of this article, we will explore the process of change within an organisation, including some recommendations on how (and how not) to structure your efforts towards adaptation.