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7 reasons why startups shouldn't adopt the agile business model

Photo: Jamie Squire/Getty Images.

Australia’s growing technology-led startups and small businesses are being prescribed a new element for success — be agile. Young entrepreneurs are being sold the Silicon Valley myth that it is all right to fly by the seat of your pants to launch your startup and to just be agile. Even our prime minister has endorsed the approach.

But our advice is don’t spend your energy on being agile. Use your energy to deliver high quality solutions to problems for which your customers are willing to pay top dollar. Spend the remainder of your energy cultivating what your startup is good at — that focus will deliver you a competitive advantage.

While “agile” could help some companies to innovate, it does not determine an innovator’s ability to capture profits from their pioneering designs and technologies.

Agility alone will also not help overcome the competitive conditions of the industry in which they operate and can be a dangerous innovation policy for businesses in a nation seeking to build long-term, defensible value.

Take this simple example. You are starting a new company in cyber security, a key industry supported by the Australian Government’s Cyber Security Growth Centre. Your company distributes a cyber security product that promises to protect clients from various attacks. Around the world, procurement directors in large banking corporations are looking for ways to protect their company as well as their clients. Will they buy your offering? Doubt it.

Here’s seven agile assumptions that just don’t hold water:

1. Being agile applies to any type of technology

Unless the core of your technology has been developed, tested, and validated, being agile won’t help. It is the core technology that gives your company long-term value.

Agility is not the right strategy to make improvements if a technology is in its infancy or in an exploratory stage. Is it likely that businesses such as Virgin Galactic or Tesla are developing their core technology with an agile methodology? Don’t think so.

2. Investors prefer agile companies

Not all investors like agile companies. In our research on selecting innovation projects, many investors have told us that they explicitly stay away from startups that use agile especially if quick repetition is their primary competitive advantage.

However, it is important to own a technology that is on a fast learning curve — the downside is a technology that is easy to improve may be one with basic intellectual property. Think of it this way. If it’s easy to make changes, what’s the barrier to entry?

3. Agile is itself the competitive advantage

Being agile is a process any company can learn. Everyone can reproduce it easily especially if the technology is easily imitated. It’s the thinking behind innovation that is difficult to replicate.

4. Agile applies to business models as well

A business model defines the logic of the firm, its mode of operation, and the mechanisms of value creation and capture. Changes to these aspects entail significant transaction costs, a detail companies often forget. Business model activities such as establishing new contractual arrangements with partners or acquiring and integrating new assets into your operations may have dramatic transactions costs that are never simple to predict. Just ask Woolworths. A business model is the realization of a thought-out strategy. Companies that survive the long term are built on focused strategies, not ever-changing options.

5. Agile can scale linearly

If being agile really works, then you can simply assign more people to a project to iterate faster. You will achieve a directly proportional improvement in the results. But it just does not work that way. At the margin, improvements are not linear. Decreasing returns are the norm. Linear or super linear scaling is not commonly found in natural or artificial systems.

6. Agile helps you to capture the majority of the value in your innovation

It’s an uncomfortable truth, but innovating firms often fail to reap the economic benefits from their own innovation. Imitators, second-movers, or other industry participants can sometimes profit from the innovation more than the developer of the technology. We all talk about blockchain at the moment, but we still can’t make much sense of how value will be created for the final customers, what the final offerings will look like, but most importantly, who will reap the profit. Being agile does not safeguard your company from being ill positioned in the market.

7. Agile companies will help nations to innovate and flourish

Technology writers and startup CEOs have a tendency to forget how much funding governments from around the world have provided at the very early stage of new technologies or industries. Think about artificial intelligence (AI), another buzzword at the moment. AI has been around for well over 50 years. We studied various areas of AI during our own university degrees. AI technologies were not developed in an agile fashion. The machine learning and natural language processing algorithms underpinning many products today have been tried and tested based upon vast amounts of government-funded research.

Andy Dong is the Warren Centre Chair for Engineering Innovation and ARC Future Fellow and a professor at the Faculty of Engineering and IT. Dr Massimo Garbuio lecturer in entrepreneurship at the University Sydney Business School.

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