Yaroslav Kaplan, Kaplan Research Company: Business Intelligence is on the Precipice of Immense Changes and Opportunities

December 9, 2022 1:48 pm.

Original link:
https://www.cnews.ru/articles/2022-12- 29_yaroslav_kaplankaplan_research_company_biznes-intellekt

The number of private companies shutting down in Russia has surged dramatically this year. From March to May, the number of closures increased by nearly one and a half times compared to the same period in 2021. While many experts attribute this trend to external factors such as new sanctions and the global crisis, Yaroslav Kaplan, President of Kaplan Research Company, believes otherwise.

Kaplan, who is also the author of the book "Business Incognita," spoke to CNews about the true underlying causes of this high rate of entrepreneurial failure, as well as emerging trends in business intelligence. According to Kaplan, the main reasons for the rapid decline are rooted in different factors altogether.

CNews: Your book "Business Incognita" was recently published by Alpina Pro. Please share more details with us. What is it about?

Yaroslav Kaplan: In essence, this book delves into the true causes of business failure. I began researching this subject seven years ago, intrigued by the startling statistic that only 3 out of 10 entrepreneurs make it to their ten-year anniversary. Although this figure may vary slightly across different countries and industries, the overall trend remains largely the same. Driven by my quest to understand the root causes of such high entrepreneurial mortality, I conducted extensive research and compiled my findings into this book.

CNews: Am I right to assume that you studied the entire global market?

Yaroslav Kaplan: Absolutely, the trends are indeed universal. For instance, before the pandemic, Sberbank's statistics showed that approximately 65-70% of companies in Russia failed within the first three years. Similar figures can be found in other countries as well, indicating that high business mortality is a global issue. My research, which I completed in the first stage in 2019, confirms this. The COVID-19 pandemic has only intensified this existing trend, while also providing a convenient but somewhat superficial explanation for it.

CNews: What sectors of the economy experience the highest rates of business failure?

Yaroslav Kaplan: Business failures most frequently occur in sectors where technological advancements have been slow to arrive or are minimal. On the flip side, pure tech companies and startups in the IT sector experience even higher mortality rates, sometimes as high as 90%. According to my analysis, the industries least susceptible to failure are those involved in medicine, biotechnology, communications, and areas related to artificial intelligence.

CNews: What conclusion did you arrive at as a result of your research?

Yaroslav Kaplan: The core premise of my research argues that entrepreneurs often fail because they do not identify and address a specific "entrepreneurial task." Unlike other objectives—be it managerial, financial, or production-related—the entrepreneurial task is unique in that its solution, and often its very significance, lies in a precisely defined context. The methods for solving it are also largely dictated by the environment in which the problem exists, rather than the problem itself.

Herein lies the paradox: addressing other types of problems, such as managerial ones, does not necessarily solve the overarching issue. Failing to tackle the entrepreneurial task is akin to putting a bandage on a severed head—it's an ineffective solution. To elaborate, when people are asked to compare two companies, they usually resort to superficial criteria like turnover, profit, revenue per employee, or market share. Such a comparison is generally uninformative. A meaningful evaluation requires examining businesses in the context of their customer interactions; everything else could be largely irrelevant.

Consider the example of Blockbuster and Netflix in 2007. By financial metrics, Blockbuster was undeniably successful, boasting 9,000 stores and $5.5 billion in revenue. However, when evaluated within the context of its core business—renting VHS movies—the company was clearly in decline and eventually folded three years later. Despite excelling in management, finance, and marketing, Blockbuster failed because it did not properly identify and address its entrepreneurial task.

Contrast this with Netflix, which had revenues of $1.25 billion in 2007. Was it a valuable company? Absolutely, when viewed through the lens of customer interaction. Netflix was a rapidly growing startup with a leading position in a more scalable, profitable, and fast-growing sector—digital video streaming. The conclusions and decisions one makes are intrinsically tied to the context in which the business operates.

CNews: In this case, what is at the root of this entrepreneurial challenge?

Yaroslav Kaplan: In society, the role of an entrepreneur is often misunderstood and reduced to metrics like money, success, or power. However, in my view, the core of the entrepreneurial task lies elsewhere: in the perceived value of the entrepreneur's products or services to consumers. Most entrepreneurial ventures don't reach their tenth anniversary, either because there's no genuine product to begin with, or because the product loses its value to consumers over time.

Moreover, the concept of value is far from linear. Consider oil, for instance. Before its value was recognized, people actually paid laborers to remove it from their property as if it were waste. The same can be said for diamonds. Until their worth was realized, they were treated as mere rocks. The underlying point is that the value of a product or service is intricately tied to consumer perception, which can change over time or in different contexts.

CNews: Do I understand correctly that in the book you derive your own model of entrepreneurial behavior?

Yaroslav Kaplan: Yes, with certain caveats, that's a fair assessment. During my research, I primarily studied American scientific articles on various relevant topics. Gradually, I found myself piecing together a puzzle from thousands of seemingly unrelated bits of information. At a certain point, it became clear that I needed to organize these disparate elements into a cohesive framework. This realization led to a three-year period of synthesizing all the data from this "patchwork quilt" into a structured model for defining the entrepreneurial task.

CNews: The back of the book reads that "it will not be the right fit for everyone." Why is that?

Yaroslav Kaplan: Indeed, what we're talking about represents a profound shift in business mindset. Just as it would be pointless to transplant a new liver into an alcoholic without addressing the underlying lifestyle issues, it's equally futile to change entrepreneurial tactics without first altering the foundational mindset.

We're currently in the midst of what could be described as a "management epidemic." Entrepreneurs often try to solve their issues through managerial solutions. While there's nothing inherently wrong with management itself, the key is to be clear about what exactly you are managing.

Let's say you need to pivot a project. The conventional approach would involve breaking it into components, hiring specialists, and coordinating their efforts while awaiting outcomes. In my view, this method is flawed. What's required is a reorganization of your thought process into new categories. This enables the entrepreneur to perceive their enterprise as a holistic entity, a perspective often lost when activities are compartmentalized into hiring, sales, marketing, and production.

Take, for example, the mechanism of a watch, which is designed to tell time. No individual part can fulfill this function on its own, just as no single component of an airplane is capable of flight. If the objective is a functioning whole (a watch that tells time, an airplane that flies), then the value of that whole cannot be subdivided; it must be viewed in its entirety. The critical failing of traditional management lies in its tendency to overlook this holistic view, making it imperative for the entrepreneur to understand the integral nature of the value they're offering.

CNews: What, in your opinion, separates this book from other business books?

Yaroslav Kaplan: In my opinion, most business books fall into one of two categories: they are either autobiographies with a set of generalized conclusions, or they are written primarily for financial gain or audience building, rather than addressing the pressing challenges of entrepreneurship. If these books were truly effective solutions, we wouldn't see such a high rate of business failure today. I believe that, in the long run, adopting a new mindset will offer entrepreneurs something far more valuable than money—it will open up new horizons for development.

CNews: In your view, has oil been replaced as the primary source of value today?

Yaroslav Kaplan: In my view, the new form of value lies on an entirely different plane. It's not about overcoming a scarcity of resources, but rather fulfilling the human need to build relationships. We're on the cusp of transformative changes and opportunities.

Many will disagree with me, particularly fans of Philip Kotler, the author of the seminal book "The Fundamentals of Marketing." Today's marketing and financial sectors are rooted in the concept of 'need,' which can range from food to ideas. The role of marketing is to quantify this need, produce the requisite goods, and distribute them to those who need them. The same goes for money; it's a limited resource. This concept of 'need' is built on scarcity, leading to competition and a zero-sum game. If I profit, you lose, and vice versa. It's a system that cannot benefit everyone.

The difference between 'need' and the 'need for relationships' is immense and unbridgeable. The former is predicated on a sense of lacking something, which fuels consumer distrust and must be overcome to earn their loyalty. This is the primary developmental trajectory that marketing outlines for entrepreneurs. The latter—'need for relationships'—is about a distinct form of interaction, dictated by the intricacies of coexistence with another person. These divergent viewpoints manifest in differing interpretations of what a product should be.

In Japanese, there's a word "wa," which signifies a "common space for nascent relationships." In my book, I discuss how the entrepreneurial challenge emerges at the intersection of two realms: that of the entrepreneur and that of the consumer. This overlapping area is where relationship-building occurs. The 'need for relationships' offers a much richer context for human experience than simply satisfying a need. Modern technologies are increasingly validating this perspective.

CNews: In what way?

Yaroslav Kaplan: Consider all the trends related to social networks: the rise of exclusive club narratives, the evolution of "brand" into community-based forms, and the rapid growth of social tokens. Currently, we are transitioning from a focus on fulfilling needs to a new paradigm that emphasizes forming digital relationships with consumers. The shift is significant: long-term relationships can't be sustained on a foundation of scarcity; they require a different basis altogether.

CNews: How can you characterize this foundation?

Yaroslav Kaplan: In examining the core issue facing entrepreneurial activity—namely, the challenge of connecting entrepreneurs to consumers—I've concluded that the obstacle often lies in a paradigmatic fixation. Most entrepreneurs are stuck in the mindset of the natural sciences and have been unable to transition their focus to the humanities. These humanities are not merely academic disciplines; they are, to a large extent, the frameworks that shape human values, thought patterns, and social behaviors.

Surprisingly, I believe that the future of entrepreneurship depends more on a mastery of the humanities than of the natural sciences. This intellectual foundation will be the catalyst for robust development in the entrepreneurial sector.

CNews: You emphasize entrepreneurial thinking in IT, setting it apart from other spheres. What are the specifics of such thinking?

Yaroslav Kaplan: The IT mindset aligns closely with the entrepreneurial mindset, more so than in many other fields. The very structure of IT resembles an ideal entrepreneurial undertaking. In a traditional business setting, work often falls into one of three categories. The first category involves individuals who operate based on familiar, predefined systems—akin to someone given a hammer and nails who knows what to do with them. The second category consists of those who independently construct more complex systems from multiple components. The third category is engaged in designing a diverse range of activities that include parallel chains of interactions and business processes.

When an entrepreneur tackles complex software development, they can't merely be a worker or an engineer. They must serve dual roles: that of an engineer and a designer. Essentially, entrepreneurs in any field should aspire to be this kind of multifaceted specialist—an architect of business, if you will.

CNews: In this case, what features of IT-company management would you emphasize?

Yaroslav Kaplan: The distinguishing feature of high-tech companies is that they operate in an environment where both the breadth and depth of tasks coexist. In this regard, IT is arguably the most complex market. Managers in such companies have to engage with a multitude of contexts, each with its own level of complexity. Their primary challenge is akin to stitching together a patchwork quilt; they're not dealing with abstractions but with tangible elements—like writing code, for instance. As I see it, this necessitates a greater focus on methodological work.

CNews: What vector of development of entrepreneurial thinking do you see in the future?

Yaroslav Kaplan: What sets a club apart from an online course? Courses typically offer a ready-made solution for specific needs, while a club provides a platform for learning through communication and knowledge-sharing with fellow participants. In my view, business intelligence is evolving toward a model that emphasizes "club" interaction. Here, the focus isn't solely on meeting immediate needs; it's about cultivating long-term relationships with consumers.

This shift leads to the development of multi-layered business models where relationships take on a broader and more significant context. Entrepreneurs must adapt to the challenge of designing not just a single layer of their business model but a complex system of interacting layers. From a technical standpoint, this is a more intricate task.

CNews: What do you see as the potential of Russian entrepreneurship? What is its strength?

Yaroslav Kaplan: The potential of Russian entrepreneurship is anchored in the remarkable resilience and determination of its entrepreneurs, even when confronted with formidable challenges. Despite facing disruptions in various aspects of their business operations, there's an opportunity to harness this potential by creating and implementing the missing elements necessary for sustained value generation. This is an intricate task that demands both speed and the acquisition of new skills.

In essence, the current crisis can be viewed as either an opportunity or a threat, and in such times, innovative approaches to solving entrepreneurial problems become more relevant than ever before. This is precisely what my first book, "Business INCOGNITA," addresses—exploring new ways to tackle the challenges facing entrepreneurs, making it particularly pertinent in the current landscape.