Erich Joachimsthaler - The Interaction Field

F or most of my career, which spans four decades, the conventional wisdom about a companys ability to create value was that it comes in the form of competitive advantage, differentiation, and growth, usually evaluated in terms of tangible assets, revenue, and profit.

In todays digital agecharacterized not only by networks but by data-driven technologies, including artificial intelligence (AI), machine learning, and, soon, quantum computingwe have to think differently about how businesses create value.

The interaction field describes a new phenomenon that is just emerging and can be glimpsed in a handful of wildly successful companies such as Alibaba, Apple, Netflix, Google, and Amazon. It can also be found in some traditional businesses, from farming to fashion.

Interaction field companies thrive on the participation in value creation by many different groups: the company itself, its customers, suppliers, partners, and other stakeholdersas well as other entities you might not expect to see in the mix, such as competitors, observers, independent researchers, and government agencies.

By participating in these interconnected groups, interaction field companies can achieve a kind of unstoppable momentum and wild expansion that I call velocity. It is a new form of multidimensional, constantly accelerating, explosive and smart growth that goes far beyond the traditional measures of sales increase, profit, or market capitalization.

Velocity sounds complicated, perhaps, but nothings uncomplicated in this era of disruption, so let me simplify it with a metaphor. If you live in New York City, as I do, you quickly learn about the power of velocity just from trying to get around town. If you step out of a taxi on the wrong side of the car at the wrong moment, for example, you may step into the path of an oncoming bus and be killed instantly. Get out the other side, and you risk an early demise from a bicyclist bombing toward you at top speed.

Now, that seems counterintuitive. A bike and a rider can be just as deadly as a loaded bus that weighs ten tons or more? For sure. The bus gets you with mass. The bike gets you with velocity. Most traditional companies are like a fully loaded bus. They thrive by creating enormous scale and assets, huge distribution networks, technology infrastructure, and big brands and reputations.

But then along comes a bike-like rival that has very little mass, doesnt care much about conventional practices in the business, and has a much smaller center but enormous velocityit either rushes past its competitors or mows them down.

The traditional company is like BASF, Deutsche Bank, Siemens, or Volkswagen in Germany; or GE, General Motors, or Procter & Gamble in the United States; or Santander, Iberdrola, or Telefnica in Spain. These companies are the incumbent leaders in their industries. They run well-oiled, well-optimized value chains or pipeline businesses.

Consider a simple comparison between a traditional restaurant (the bus) and a food delivery business (the bike). In New York, a fine-dining restaurant is a combination factory, retail shop, and service provider. It costs about $300,000 to open a relatively small caf or fast-casual restaurant in New York, and up to $10 million to set up a four-star establishment. Whatever form it takes, the restaurant will be dealing with fixed costs, professional fees for interior design and identity materials, a long-term lease or mortgage, depreciating assets such as ovens and food-processing equipment, and, of course, administrative staff, kitchen employees, and waitstaff.

Contrast the restaurant business with a food delivery service such as Seamless, Postmates, Uber Eats, or the UK-based Deliveroo. They are solving essentially the same customer problem that the fixed-cost restaurant is: What am I going to eat and when? But these delivery services present a very different solution. They feature a number of food and meal providers on their app and take what is essentially a royalty on every order they deliver, typically in the range of 20 to 30 percent of the order value. For the most part, they dont actually prepare the meals, so their costs are much lower than whats required to open and run a restaurant. The operators do not have to purchase perishable foodstuffs. They dont sweat out the long grueling hours. They dont even have to hire or manage kitchen staff or servers. For delivery, they rely on a small army of cyclists, but dont pay them a salary or benefits. Like Uber drivers, the bikers are freelancers who get paid a commission for every order delivered.

Delivery companies can grow exponentially, from nothing to hundreds of thousands of daily users in a short period of time. Deliveroo, in fact, is the fastest-growing technology company in the United Kingdom. Just six years after founding, the company brings in over $600 million in annual revenue. And, of course, it is considered a unicorn start-up, with a market valuation of more than $2 billion. Deliveroo has rushed past some of the hottest restaurant chains, such as Shake Shack, and brings in twice the revenue.

Velocitymultidimensional, constantly accelerating, explosive and smart growthis what all companies must strive for today, no matter their size or how long theyve been in business. It doesnt matter whether the company is a start-up or an incumbent, a leading firm in an existing industry or part of a new and emerging category. So many of the business areas where traditional companies operate are being disrupted, disaggregated, and demolished by changing consumer habits, escalating customer expectations, and the effects of technology. The old business models cannot withstand or survive the torsion of these forces, but the new interaction field companies feed on them.

This kind of velocity is fueled by interactions. The more interactions a company can create among its participants, and the higher the quality or value of those interactions, the greater the velocity. As velocity increases, three things happen.