Thrust and lube

I’m presenting a somewhat ambitious session at Startupfest this week. This is a rough draft of my speakers’ notes, which I’ll come back and annotate sometime later. The speech has changed a bunch based on feedback since I wrote this, but hopefully there are some nuggets of useful in here.

You were built to think

We’ve been fighting friction since we first swung down from the trees. Humans are different from other species largely because of our use of symbols—our ability to think representationally, to speculate, to play “what if?”, and to communicate abstract concepts through language. We have huge brains. The human brain is only 2.5 percent of your body mass, but it consumes 20 percent of the food you eat and the air you breathe.

Our gigantic brains come at a price. In the first months of birth, a baby’s brain consumes nearly all of the calories it ingests. 85% of brain growth happens in the first three years. It has to grow quickly to reach adult size; it was small when born so that the head didn’t kill its mother on the way out. Humans have a higher brain-to-body weight ratio than any animals except birds, and that’s because birds have to be vanishingly light in order to fly.

In other words, you were literally built to think. But your brain writes checks your body can’t cash.

The real world crushes your dreams

The real world undermines our lofty aspirations. Atoms get in the way. We’ve dreamed of pyramids, plumbing the depths of the abyss, and flying through the air, only to realize that moving rocks around, holding our breath, and staying aloft is hard work. Giving all that organic attention to the brain leaves the rest of the body wanting.

We’re not that strong; we have small lungs; we can’t fly. We don’t even have very good senses. Just about the only thing we’re best at is long-distance running. Because we’ve got good ideas and lousy containers, much of what we’ve been inventing for the last million or so years has been tools.

The lever, the wheel, and the pulley gave us leverage over the physical world. They mitigated the limitations of our containers. A human might be weaker than a horse, but given a big enough block and tackle, the human wins every time. The printing press is another example of this.

We don’t have a bee-like hive mind; but we can print books, broadcast programming, and teach the world. Representative government is yet another hack to overcome the coefficients of friction. We can’t send everyone to Washington, or Ottawa, or London; so we elect representatives to reflect our intentions by proxy (at least, that’s how it was supposed to work.)

Fight thrust with thrust: the industrial era

We’ve been trying to get better at pushing atoms around since we crawled out of the primordial ooze. That’s why the industrial revolution was so amazing: for the first time, machines promised spare muscle, a beast of burden that never complained. Steam would set us free. We saw an explosion of innovation, commerce, and ingenuity on the backs of those machines.

We thought we’d found the answer: fight friction with friction. In the old world of machines, economists and business strategists tell us that scale is key. If you control the supply chain, the channel, or the resources, you’ll win. If you have patents and costly infrastructure others can’t copy, you’ll win.

If you get big you’ll win. Traditional, thrust-thinking business strategy says go after cost leadership and get large fast. Economies of scale and network effects are your friends. But there’s a problem with big.

As organizations grow, they have to coordinate, and that coordination becomes overhead.

Hierarchy and military structure

In the mid-nineteenth century, it was clear to Europe’s military leaders that a single commander couldn’t direct a war fought with many fronts and massive armies. The Prussians concluded that an army whose members were interchangeable and could act autonomously would work better in a distributed battle.

The arrival of telecommunications eventually let commanders issue order to troops more easily, but the idea of delegating tactical decisions to trained officers in the field, remained. While formal structures had existed for a long time in the military prior to this, it took the emergence of large organizations and governments to create the need for management in business and government.

In the 1850s, railroads were growing rapidly. Rail systems were huge undertakings, requiring substantial up-front investment and the creation of corporations that would run them. Unfortunately for their investors, small railroads turned a profit, but large ones didn’t. Daniel C.

McCallum, general superintendent of a large railroad line, observed a manager of a small railroad fifty miles long can be “constantly on the line engaged in the direction of its details; each person is personally known to him, and all questions in relation to its business are at once presented and acted upon” but that a railroad five hundred miles long is entirely different because “any system which might be applicable to the business and extent of a short road would be found entirely inadequate to the wants of a long one.”

McCallum concluded that a hierarchy of management was the solution. Dividing his railroad into smaller sections, he placed a superintendent in charge of each section and gave them specific tasks, such as reporting standardized information back up the chain of command. The result for McCallum’s line—and those of other large railroads who copied this approach—was that large ones could thrive. The transcontinental rail systems were born, and dominated industry.

The hole in the middle problem

Being big is still a path to success—that’s why corporations tend to grow and acquire. There’s good research to show that companies with a high market share are profitable, but so are those with a low market share. It’s those in the middle that struggle.

Marketing strategists call this theHole In The Middleproblem. Big companies focus on cost leadership (think Wal-Mart) and small ones focus on a profitable niche (think your local gluten-free cupcake shop.) It’s the guys in the middle that are less profitable, because they haven’t got a good competitive advantage.

They’re too big to focus, and too small to compete on cost.

Killing new ideas and squeezing margins

Big companies tend to do two things: eliminate innovation, and compete on cost. Both have bad consequences. Consider a big company like a phone carrier can only function with militaristic, standardized processes and procedures.

That means it not only fails to innovate, but it also infects its economic partners with risk aversion. It’s even worse. The carriers now have gained the upper hand in terms of the power of the relationship with the handset manufacturers.

And they’re starting to tell the handset manufacturers what to build. Such organizations survive despite this because they find a way to benefit from scale that’s not based on competition.

• That may be brand recognition (Coca-Cola, for example.)
• Perhaps it’s lobbying for favorable trade to get subsidies, import restrictions, and other external advantages.
• Sometimes, they become “too big to fail” and enjoy protections and cash infusions from government.
• Often, they turn into a utility, with legislative or practical barriers to entry.

Whatever the case, once large organizations stop competing on niche and start focusing on cost leadership, it’s a long, slow spiral to the bottom. But like I said, that’s traditional “more thrusting” thinking. Thrust pushes harder; lube makes it easier. We wanted more lube, and less thrusting.

The efficiency paradox

The answer wasn’t to fix friction with friction. No, the answer was to dramatically reduce the coefficients of friction themselves. The future isn’t thrust, it’s lube. In 1712, a brilliant engineer named Newcomen designed a steam engine that would pump water out of mines using the power of steam, condensation, and vacuums.

Between 1763 and 1775, James Watt improved on the design. His steam engine was dramatically more efficient, consuming 75% less coal to do the same work. In his 1865 bookThe Coal Question, English economist William Stanley Jevons presented a paradox. He observed that even though Watts’ engine was more efficient, and used less coal, the consumption of coal dramatically increased after it was introduced.

Shouldn’t a more efficient engine reduce consumption instead of increase it? Jevons concluded that an increase in the efficiency with which a resource is consumed tends to increase (rather than decrease) the use of that resource. We see this all around us. Think about Moore’s Law: computers double in performance every eighteen months.

A server today is aData Centerin 1994, when we were just launching the web. So Jevons would ask: why are we still building data centers? The answer, of course, is that efficiency drives consumption.

Abundance, not scarcity

Mark Andreesen said that “software eats everything.” When an industry has digital inputs and digital outputs, everything in the middle becomes software—and those who fail to catch up, die. Today, every edifice we’ve erected to fight friction is crumbling in the face of a frictionless future. Entire industries that depended on data are vanishing, because the barriers to entry they’d relied on are irrelevant. When friction goes away, things that were scarce become abundant.

When something goes from atoms to bits, there’s plenty to go around. New businesses make money from abundance. They don’t think like steam-powered factories, fighting thrust with thrust. They think like a coral reef, seining value and nourishment from the waters in which they grow.

You don’t charge to be the reef—you thrivebecauseyou’re the reef. Fighting thrust with thrust is so Victorian. But thrust and lube—that’s sexy.

Fire, aim, ready

Old business models were ready-aim-fire. First you built a business plan; then you got funding to act on it; then you launched. But today’s Lean Startup puts that in reverse. Fire wildly in all directions until something goes “ow.” Then keep firing in that direction until you can hit something reliably. In other words, prove a market, then a product, and then a business. Why fire-aim-ready? Because in a frictionless world, the bullets are free.

Some concrete examples

Taxis and Uber

The New York taxi industry had a good thing going. A New York taxi medallion goes for around half a million dollars. There are 13,087 taxis in the city with medallions. That’s $6.5 Billion dollars. What does that medallion get you? Basically the right to pick someone up without planning it ahead of time. With Uber, passengers and drivers can connect for a trivially small cost. The barrier to entry is gone, and a multi-billion dollar industry is disrupted.

Flipping the classroom

In a high-friction world, teaching is a distribution problem. But in a frictionless world, we don’t have to settle for the best teacher in the village. We can have Neil Degrasse Tyson teach us about the moons of Jupiter. Sites like the Kahn Academy put content online for free. In a recent movement known as flipping the classroom, kids study content at home, and work on problems at school. Teachers have gone from broadcasting knowledge to making it stick.

3D printing

What happens when the 3D printer is everywhere? Once, we went to Kinkos to print color copies; now, manufacturers give away the printer and make it back in ink. What happens when every home has a printer? If I were launching a company today—a billion dollar company—I’d spend all my time figuring out how an industry deals with its biggest point of friction, and then thinking about what happens when that friction vanishes. Today’s world lets you build anything you can imagine, if you can just:

• Embrace abundance and make money from because
• Use free bullets to fire first and scale later
• Be data-driven and act like everything is an experiment
• Find out how an industry overcomes friction, then build for a day when the friction is gone.

Enjoy the lube.