Critical mass

The essence of technological advance in the twentieth century was encapsulated in the phrase: "To know the future is to invent it". The dotcom bubble illustrated how this philosophy is not appropriate for the Information Age.

Inventing the future, implies that clever people, with good ideas, can determine what the future holds. Many well funded dotcoms tried to do this and failed miserably. What they proved is that the future, in a rapidly expanding technological environment, is beyond the power of humans to control. The future may evolve out of inventions, but, it isn't invented.

Perhaps a new phrase might be more appropriate for the Information Age: "To know the future is to GROW it". This would involve admitting the future is unpredictable and basing business strategy on the notion of providing businesses with the ability to grow, adapt and evolve by themselves.

This philosophy is anathema to the twentieth century, Industrial Age mind set. It suggests a lack of control, a lack of organisation, a lack of leadership Ð an inefficient system that is random and aimless. But, nothing is further from the truth: it is just a question of knowing how to control it.

The key to controlling a self organising, evolving business it to understand the concept of critical mass. Critical mass is a single number. It may be expressed as a number of participants, a number of customers or a number of orders. It is the number that defines the point at which a business breaks even.

For every business there is a break even point, where the income is just sufficient to take care of the outgoings. If income is above this point, the business is profitable and can develop and evolve from its own resources. If income is below this point, the business runs the risk of spiraling downwards out of existence. This much is common sense, but, somewhere in between, there is a quasi state: where a business might go through a period of negative cash flow during a transitional stage in its growth.

Negative cash flow Ð or capital burn rate Ð most commonly occurs at the start up stage, or, during a period of expansion, or, at a time of redirection. The nature of e-business is such that it is continually in one of these three phases Ð due to constant technological change and unpredictable competition initiatives. This makes the hemorrhaging of a business's capital base the single most important problem an e-business strategist has to deal with; not least because it is an ever present danger.

Seed capital, loans, past profits and various stages of equity capital are traditional sources of funding used to finance negative cash flows. Such funding is assumed to be bridging finance, used to achieve new levels of business profitability with sound business plans aiming to meet well defined targets.

However, planning and making projections involve anticipating the future. This is not reliable in an environment so unpredictable as e-business. It puts the business strategist in much the same position as a marksman trying to fire at a fast, random moving target. There is nothing stable to focus upon.

The only predictable metric is critical mass. It is this, rather than future targets, that should form the focal point of an e-business strategy. Unlike targets, critical mass is not the aim of a strategy but represents a minimum acceptable performance. This requires a large paradigm shift for anyone used to conventional business planning because anticipated results are not specific, but vague and open ended. Not an easy thought for anyone with a managerial mind set.

The trick to understanding why critical mass is a better basis than targets for e-business strategies is to imagine a high jumper, jumping over a bar. If the high jumper isn't sure whether or not he can jump over it, he can spend more time training to perfect his technique. He may then succeed, but, a far surer way of jumping over the bar would be to set the bar lower. The point is that critical mass is knowable. It can be calculated. It is also adjustable. If it seems too high, it can be lowered to a point that makes it easier to achieve profitability..

This provides a tenth rule to apply when deciding upon an e-business:

10) The critical mass must be easily adjustable.

Note: It must be emphasised that critical mass is the single most important metric in e-business. It is the only figure that is certain, controllable and calculable in a bottom up strategy. Almost all other metrics are vague and unpredictable