Solution seeks problem

An imaginary conversation between Peter Drucker and 26-year-old Marc, founder of a rapidly growing technology company

This is the fourth part of a series of fictional conversations. In it, Peter Drucker meets well-known figures and people like you and me. People with different roles in organisations who embody technological optimism, pragmatic application, historical caution and economic reality. Today, he talks to Marc, the founder of HyperPost.

HyperPost uses artificial intelligence to generate hundreds of posts for social networks from a single keyword. User numbers are exploding. At the same time, server costs are rising massively. So far, not a single user has paid for this service. Marc is desperately searching for investors and the right niche in the market. He is absolutely convinced of his technology and defends it vehemently. Nevertheless, he feels a growing and nagging uncertainty as to whether the path he has chosen is really viable. In this critical situation, he seeks out Peter Drucker for a conversation. He hopes that the world-renowned management thought leader will provide him with the decisive strategic insight he needs.

Growth before value creation

Marc: “Mr Drucker, it is an extraordinary honour and pleasure to speak with you. You see, just this morning, HyperPost broke the magical mark of five hundred thousand active users. That is a milestone for us. Our algorithms process and generate countless millions of words every day. The growth curve is absolutely skyrocketing.

I love the principle of “move fast and break things”. We live by it here at HyperPost, and everything is going fantastically. We are changing the way people communicate. Only monetisation is still a long way off. But that’s completely normal in this early phase of a company, isn’t it? We’ll find the business model later; reach and market dominance come first. How do you see it with such new and exponential technologies?‘

Peter Drucker: ’A company without paying customers is simply not a company. It is rather a very expensive and risky hobby. You speak with great enthusiasm about users, algorithms and data volumes. I’m glad to hear that. Do you also talk about value creation?

In my book Innovation and Entrepreneurship [1], I describe very clearly and unambiguously that innovation is not merely a technical invention, but the systematic search for changes that can be used for economic or social gain. A technological gimmick only becomes an innovation when it tangibly improves people’s lives or work. What real economic impact are you achieving with your software?”

Marc: “We are revolutionising content creation for the entire internet. That is our impact. Anyone can now create a complete marketing campaign with a single click. We are democratising reach on the internet. In the past, you needed expensive agencies or brilliant copywriters to do this. Today, all you need is our HyperPost solution.

The technology we have built is absolutely groundbreaking. We use the most advanced neural networks in the world. People love it because it’s free and incredibly fast. Every day, we see thousands of new accounts being created. The entire market will have to adapt to our technology. Old structures will disappear. This is called disruption, and we are the driving force behind it.”

Peter Drucker: “Disruption is a very big word for what is actually a very simple service. You proudly say that people love your product because it’s free. However, that is absolutely no proof of a successful innovation. It is merely irrefutable proof that people love getting things for free. If your technology is really as revolutionary and valuable as you claim, why is no one willing to pay a reasonable price for it?‘

Marc: ’Well, you have to understand the dynamics of modern markets. Nowadays, you first build a gigantic ecosystem. Just think of companies like Amazon or Spotify in their early years. They didn’t make any profits for years, and yet they now dominate their industries. We are currently investing heavily in the growth of our user base. Venture capital investors demand precisely this kind of aggressive expansion. If I show up there with a small, profitable niche business, they’ll laugh at me. They want to see the next unicorn. A company with a valuation in the billions. To achieve that, I need network effects and maximum market penetration. At this stage, profits only distract from the ultimate goal.”

Peter Drucker: “Your comparisons with Amazon and Spotify are a common misconception among your generation of founders. Amazon may not have reported profits in its early years, but they had paying customers from day one. Every single book buyer put money on the table. The company simply reinvested that revenue immediately into its own growth.

There is a huge difference between a lack of profit and a lack of revenue. You have no network effect. A network effect occurs when the value of the product to the individual user increases as more users join. A telephone network becomes more valuable the more people own a telephone. With your text-generating software, there is no increase in value for the individual user when a thousand other users also generate text. All that increases is your own computing costs.”

Disruption as a convenient excuse

Marc: “You may be right in theory. But in practice, artificial intelligence is all about data. Every piece of text generated helps us to further train our models and make them even better. We are establishing an unassailable technological leadership position. Our software now writes better advertising copy than many average human copywriters. The quality is improving day by day. We are on the verge of turning the entire advertising and communications industry upside down. Those who do not join us will simply disappear from the market.‘

Peter Drucker: ’You are once again confusing the tool with the purpose. Destroying an industry is never the goal of a business. The goal is to create new value. The decline of old industries is merely a side effect.

New innovations should always be very simple and focused, addressing a specific problem. You see your solution as a universal panacea. But a universal tool rarely solves a specific business problem particularly well. Tell me about your users. What exactly happens after they generate their first free texts?‘

Marc: ’Admittedly, that’s our biggest operational problem at the moment. We are monitoring this very closely in our data. Users come to our platform and are initially very enthusiastic. They type in a few keywords and generate hundreds of different posts for social networks in seconds. They may post them on the same day. But then often nothing happens for a long time.

As soon as we even begin to try to introduce a payment model for advanced features, users jump ship en masse. For many people, the texts generated are apparently still too impersonal or too generic for long-term professional use. We are therefore currently searching intensively for the right product market fit. We have undoubtedly built an incredible technology. We just need to find the right market for it. Do you have any ideas?”

Solution urgently seeks problem

Peter Drucker: “And this is precisely where your crucial strategic error in thinking lies. You have created a classic solution-seeking-problem situation. Historically speaking, this is the surest and quickest way to business ruin.

True and sustainable entrepreneurship always starts at the exact opposite end of the spectrum. It always starts with the customer and never with the technology. Who exactly is your customer? And what pressing and painful problem do you solve for them so well that they are happy to spend money on it repeatedly?‘

Marc: ’That’s easy to answer. Our customer is basically anyone who wants to be visible on the internet. We target young entrepreneurs, students, bloggers, small agencies and large corporations. Today, absolutely everyone needs new content for the countless social media platforms. The internet is hungry for content, and we provide the machine to satisfy that hunger without limits.‘

Peter Drucker: ’If everyone is your customer, then in reality no one is your customer. A young student with no budget whatsoever has a completely different problem than an established communications agency. The agency certainly doesn’t need a hundred mediocre and generic texts from a computer. The agency may need three excellent texts that precisely and irrevocably match the voice and culture of the respective brand.

You have fallen head over heels in love with your own technology, Marc. You have built a brilliant machine that produces quantity on an unimaginable scale. But quality and specific benefits alone create economic value. You have to stop viewing the market as an abstract mass of users.”

Marc: “But we can’t just ignore what our technology can do. We can compress the knowledge of the entire world in seconds. You see, my team consists of the best developers money can buy right now. We work day and night to reduce the computing time of our models. We optimise the code down to the smallest line. We want to reduce server costs so that we can scale our enormous reach more profitably. If we can reduce the cost per generated word to a fraction of a penny, our model will automatically become profitable. It’s a simple mathematical equation.”

The trap of false efficiency

Peter Drucker: “You are currently putting enormous effort into doing the wrong thing more and more efficiently. One of my favourite sayings is this: ‘There is nothing more useless in this world than doing with the utmost efficiency something that should not be done at all.

You are optimising the costs for something that apparently no one really needs. Forget your brilliant code for a moment. Leave your air-conditioned office. Talk to ten real professional agencies. Don’t ask these people what they think of HyperPost. Instead, ask them what their biggest and most expensive problem is in their daily business when it comes to content creation. Just listen without trying to sell your product.”

Marc: “If we do that and really focus on the specific problems of individual industries, we would probably have to completely rebuild our software from the ground up. We would have to radically move away from pure mass production. We might have to focus on a very specific industry, say medical texts or legal publications. We would have to train the artificial intelligence precisely for this in-depth specialist knowledge and guarantee extremely high quality standards. But that would slow down our rapid growth in user numbers considerably. The curve would flatten out immediately. We would no longer have hundreds of thousands of users, but perhaps only five hundred. That would be the absolute end of our big story for ambitious investors!”

Peter Drucker: “The curve of free and unprofitable users may flatten and perhaps even drop dramatically. However, the curve of your real revenue will finally begin to rise. That is precisely the moment when your fascinating technical gimmick becomes a real and viable business with a real product. Innovation means translating new knowledge into new products that provide specific benefits. Five hundred paying customers whose deepest business problem you reliably solve with HyperPost are infinitely more valuable than a million users who only see your software as a free toy.

Stop breaking things that work just to move fast. Finally build something that has lasting value for society.”

The true purpose of a company

Marc: “I’m starting to understand very clearly what you’re getting at. This perspective really changes everything. We’ve been completely blinded by the general hype surrounding artificial intelligence. We really thought that the mere existence of superior technology was enough to automatically guarantee success. We’ve actually created an impressive solution that is now desperately searching for a suitable problem.

We need to stop writing universal software for the masses that no one really needs. Instead, we need to find that one special customer who absolutely needs our solution because it relieves them of work they hate or can’t handle. For example, if we could pre-formulate legal contracts without errors, law firms would pay any price for it.”

Peter Drucker: “Exactly. The only legitimate purpose of any business is to create value for customers. When you focus on the customer’s problem, technology becomes what it should always be. It becomes a powerful tool.

Find out in detail what real value means for your specific customer. Then the right business model will emerge naturally and almost effortlessly from this created value. And believe me, your investors will appreciate a sound strategy with real revenue and a clear target audience far more than an unprofitable and artificially inflated explosion of free user numbers. True growth always comes from deep relevance.”

Notes:

This fictional conversation is based on the theoretical principles described in the first article in this series – Peter Drucker meets AI. Among other things, it deals with the true value of knowledge work.

True entrepreneurship starts with the customer, not with technology. The purpose of a business is to create value for customers. Exponential user growth is worthless if it does not solve a real problem. Instead of blind growth, businesses should focus on genuine value creation, as this is the only way to build a sustainable business model.

In the next imaginary conversation, Peter Drucker meets the historian Yuval Noah Harari. The two discuss one of the most important questions of our time: how do we preserve our human autonomy in the age of all-powerful algorithms?

Dierk Soellner supports specialists and managers in their current challenges with professional coaching and offers useful training courses on AI.

[1] Peter Drucker: Innovation and Entrepreneurship: Practice and Principles

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