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Strategy in the media
Article Type: CEO advisory From: Strategy & Leadership, Volume 42, Issue 2
More than just Big Data at Amazon
Within Amazon.com (AMZN) theres a certain type of e-mail that elicits waves of panic. It usually originates with an annoyed customer who complains to the companys founder and chief executive officer. Jeff Bezos has a public e-mail address, mailto:firstname.lastname@example.org. Not only does he read many customer complaints, he forwards them to the relevant Amazon employees, with a one-character addition: a question mark.
When Amazon employees get a Bezos question mark e-mail, they react as though they have discovered a ticking bomb. Theyve typically got a few hours to solve whatever issue the CEO has flagged and prepare a thorough explanation for how it occurred, a response that will be reviewed by a succession of managers before the answer is presented to Bezos himself. Such escalations, as these e-mails are known, are Bezoss way of ensuring that the customers voice is constantly heard inside the company … .
Amazon employees live daily with these kinds of fire drills. “Why are entire teams required to drop everything on a dime to respond to a question mark escalation? an employee once asked at the companys biannual meeting held at Seattles Key Arena, a basketball coliseum with more than 17,000 seats. “Every anecdote from a customer matters, Wilke replied. “We research each of them because they tell us something about our processes. Its an audit that is done for us by our customers. We treat them as precious sources of information.
Brad Stone, The Everything Store (2013).
What has changed since the 2008 financial crisis?
The big and important news is that bankruptcy cannot work for large, complex financial institutions in the US, at least not using the current bankruptcy code. On this there was complete unanimity among the countrys top financial-sector lawyers, some of whom work for big banks.
More specifically, if any such companies were to go bankrupt – as Lehman Brothers did in September 2008 – then global financial panic and potential chaos would follow, on the scale of fall 2008 or greater. There were three reactions to this stark agreement on the facts … .
Experience in the case of Lehman has not been encouraging, particularly with regard to how courts coordinate across different legal systems (in general, they do not). One reason for the global panic was that regulators and other officials seized or froze assets in their jurisdiction, hoping to reduce the cost of the collapse there. But the overall effect was to increase the uncertainty over the worth of various kinds of financial claims.
Another prominent issue is that many banking experts – and some regulators – feel that large banks would need “liquidity loans if any of their operations were to remain a going concern at a time of trouble. It is hard to see a bankruptcy judge administering such loans, running into the billions or tens of billions of dollars (think about the scale of support provided to A.I.G.). What would be the economic impact of and political backlash against those decisions?...
Third, the Board of Governors of the Federal Reserve has a much bigger problem with big banks than it has acknowledged. There is a process, mandated under Dodd-Frank (Title I, Section 165), through which very large financial institutions prepare what are now known as “living wills. In this context, the term is a misnomer, because these documents are supposed to explain how it would be possible for these companies to fail – i.e. go bankrupt – without any kind of official intervention or help.
It is hard to find anyone – official or in the private sector – who thinks that living wills currently provide a road map explaining how bankruptcy could become a real possibility for large complex financial institutions.
Simon Johnson, “The bankruptcy exemption, The New York Times, 7 November 2013.
Firing customers: a tricky but sometimes necessary strategy
Many customers simply are not profitable. Letting them go is one option, but so is trying to train them out of expensive behavior.
In 2007, Sprint Nextel had a dilemma. Some of its customers contacted customer service on a regular basis. In the companys opinion, they contacted customer service on too regular a basis. They became unprofitable to the company because of it.
Sprints decision essentially was to “fire them as customers. The company sent these high-cost customers a letter that stated, in part: “The number of inquiries you have made to us during this time has led us to determine that we are unable to meet your current wireless needs. Therefore after careful consideration, the decision has been made to terminate your wireless service agreement.
The Sprint example is one of several that authors Jiwoong Shin and K. Sudhir, both of Yale School of Management, examine in their article “Should you punish or reward current customers?…
There are, however, steps companies can take before making such a drastic move. Here are three suggestions from Shin and Sudhirs article:
1. Reduce services to unprofitable customers. For example, the authors report that Royal Bank of Canada would prioritize and expedite a check trace for profitable customers in one day, while for unprofitable customers, it would conduct a less expensive three- to five-day trace.
2. Charge fees for costly services. This is a strategy, Shin and Sudhir write, “to rein in the undesirable behavior and convert the customer into a profitable one. Some banks, for instance, now charge for paper statements while offering the less expensive e-statements for free.
3. Educate customers to use less costly service channels. Fidelity investments did this, pushing customers to use its website instead of calling customer service reps … .
Leslie Brokaw, “When should you fire customers?, Sloan Management Review, Winter 2014.
Big Data as a strategic necessity at Netflix
Netflixs big problem is that it cant afford the content that its subscribers most want to watch. It could try to buy streaming rights to every major Hollywood blockbuster in history – but doing so would cost hundreds of billions of dollars, and could never be recouped with $7.99 monthly fees. Whats more, the studios can watch the Netflix share price as easily as anybody else, and when they see it ending 2013 at $360 a share, valuing the company at well over $20 billion, thats their sign to start raising rates sharply during the next round of negotiations. Which in turn helps explain why Netflix is losing so many great movies.
As a result, Netflix cannot, any longer, aspire to be the service which allows you to watch the movies you want to watch. That is how it started off, and that is what it still is, on its legacy DVDs-by-mail service. But if you do not get DVDs by mail, Netflix has made a key tactical decision to kill your queue – the list of movies that you want to watch. Once upon a time, when a movie came out and garnered good reviews, you could add it to your list, long before it was available on DVD, in the knowledge that it would always become available eventually. If you are a streaming subscriber, however, that is not possible: if you give Netflix a list of all the movies you want to watch, the proportion available for streaming is going to be so embarrassingly low that the company decided not to even give you that option any more. While Amazon has orders of magnitude more books than your local bookseller ever had, Netflix probably has fewer movies available for streaming than your local VHS rental store had decades ago…
So Netflix has been forced to attempt a distant second-best: scouring its own limited library for the films it thinks you will like, rather than simply looking for the specific movies which it knows (because you told it) that you definitely want to watch. This, from a consumer perspective, is not an improvement.
What is more, with its concentration on streaming rather than DVDs by mail, Netflix has given up on its star-based ratings system, and instead uses what it calls “implicit preferences derived from “recent plays, ratings, and other interactions.… Netflix itself wants to replace something which accumulates many more viewer-eyeball-hours than Blockbuster ever did. It does not want to be movies: it wants to be TV. That is why it is making original programming, and that is why the options which come up on your Netflix screen when you first sign in are increasingly TV shows rather than movies.
Felix Salmon, “Netflixs dumbed-down algorithms, Reuters, 3 January 2014.
When marketers miss their real market
One of the most infamous advertising campaigns in the history of the auto industry was called, “This is not your fathers oldsmobile.
The premise was that Oldsmobile was suddenly a vehicle for young people. There were only three problems with this campaign:
1. Young people couldnt afford and didnt buy new cars.
2. When they did, theyd rather (…) than buy an Oldsmobile.
3. The campaign insulted the people who did buy these cars – their parents.
Apparently, Oldsmobile thought it was a good idea to malign their real customers and flatter the people who would never buy their products. Why? Because their real customers were old, and everyone in advertising and marketing hates old people.
It may have been the first time in the history of business that a company told its customers that their product was no longer for them … .
Well, believe it or not, the Oldsmobile campaign flopped, and ultimately Oldsmobile folded. What has not folded, however, is marketers irrational obsession with young people and loathing of old people … .
Automobile marketers continue their idiotic habit of targeting people 18-34 for “youth cars despite the fact that 88 percent of the people who buy these cars are over 35.
Almost everyone you see in a car commercial is between the ages of 18 and 24. And yet, people 75 to dead buy five times as many new cars as people 18 to 24 … .
Marketers contempt for and prejudice against older people is a remarkable and fascinating story. They have volumes of data that tell them about the size and power of the over-50 market, but because of their hard-wired prejudices they are blind to it … .
If you could find a group … who was responsible for about half of all consumer spending … who control over 70 percent of all the wealth in the country … who buy almost 2/3s of all new cars … who owned 57 percent of all second and vacation homes and all the stuff that goes with that … who are far easier and cheaper to reach than other groups … would you ignore them?
“Why do marketers hate old people?, Ad Contrarian, December 02, 2013, http://adcontrarian.blogspot.com/2013/12/why-do-marketers-hate-old-people.html
Social media is not just for teenagers anymore
If you are managing social media for your business, it might be useful to know about some of the most surprising social media statistics this year. Here are ten that might make you rethink the way you are approaching social media.
1. The fastest growing demographic on Twitter is the 55-64 year age bracket.
This demographic has grown 79 percent since 2012.
The 45-54 year age bracket is the fastest growing demographic on both Facebook and Google+.
For Facebook, this group has jumped 46 percent.
For Google+, 56 percent.
Those are impressive numbers against the prevailing idea that social media is “just for teenagers. It certainly points to the importance of having a solid social media strategy if these age brackets fit into your target demographic.
Rethink it: Keep older users in mind when using social media, particularly on these three platforms. Our age makes a difference to our taste and interests, so if you are focusing on younger users with the content you post, you could be missing an important demographic.
“10 surprising social media statistics that will make you rethink your social strategy, Wired, November 2013.
The crisis in higher education: declining value of its main product
From the evaluators standpoint, credentials provide signals that allow one to make quick assumptions about a candidates potential contribution to an organization and their ability to flourish on the job. To a prospective student (or parent), the value lies in assuming these signals will be accepted in employment markets and other times of social evaluation … .
Higher education, however, is in the midst of dramatic, disruptive change. It is, to use the language of innovation theorists and practitioners, being unbundled. … And with that unbundling, the traditional credential is rapidly losing relevance. The value of paper degrees lies in a common agreement to accept them as a proxy for competence and status, and that agreement is less rock solid than the higher education establishment would like to believe.
The value of paper degrees will inevitably decline when employers or other evaluators avail themselves of more efficient and holistic ways for applicants to demonstrate aptitude and skill. Evaluative information like work samples, personal representations, peer and manager reviews, shared content, and scores and badges are creating new signals of aptitude and different types of credentials. Education-technology companies EduClipper and Pathbrite, and also general-interest platforms such as Tumblr and WordPress, are used to show online portfolios. Brilliant has built a math-and-physics community that identifies and challenges top young talent. Knack, Pymetrics, and Kalibrr use games and other assessments that measure work-relevant aptitudes and attitudes. HireArt is a supercharged job board that allows applicants to compete in work challenges relevant to job openings. These new platforms are measuring signals of aptitude with a level of granularity … never before possible.
Michael Staton, “The degree is doomed, Harvard Business Review Blogs, 8 January 2014, http://blogs.hbr.org/2014/01/the-degree-is-doomed/
A dying college becomes a disruptive innovator
Five years ago, Southern New Hampshire University was a 2,000-student private school struggling against declining enrollment, poor name recognition, and teetering finances.
Today, it is the Amazon.com of higher education. The schools burgeoning online division has 180 different programs with an enrollment of 34,000. Students are referred to as “customers. It undercuts competitors on tuition. And it deploys data analytics for everything from anticipating future demand to figuring out which students are most likely to stumble.
“We are super-focused on customer service, which is a phrase that most universities cant even use, says Paul LeBlanc, SNHUs president … .
He had long been friends with Clay Christensen, the Harvard Business School professor and author of the groundbreaking book The Innovators Dilemma, which examines the impacts of disruptive technologies on traditional industries. LeBlanc made Christensen an SNHU trustee and consulted extensively with him about embracing online education as a way to escape what seemed like certain decline.
In 2009, instead of cutting, LeBlanc asked the board to double down on the online division. He argued that rapid growth in online could quickly produce new revenues that could save the main campus in Manchester, N.H. “It was a big-gulp moment, he says … .
His solution was to tackle what colleges were doing poorly: graduating students. Half the students who enroll in post-secondary education never get a degree but still accumulate debt. The low completion rate can be blamed partly on the fact that college is still designed for 18-year-olds who are signing up for an immersive, four-year experience replete with football games and beer-drinking. But those traditional students make up only 20 percent of the post-secondary population. The vast majority are working adults, many with families, whose lives rarely align with an academic timetable.
“College is designed in every way for that 20 percent – cost, time, scheduling, everything, says LeBlanc. He set out to create an institution for the other 80 percent, one that was flexible and offered a seamless online experience.
Gabriel Kahn, “The Amazon of higher education, Slate, January 2014, http://www.slate.com/articles/life/education/2014/01/southern_new_hampshire_university_how_paul_leblanc_s_tiny_school_has_become.single.html
Peter Drucker and Big Data
The perpetual Peter Drucker “insight-lag effect has occurred again.
As the business world tries to gets its head around the explosion of Big Data, Druckers words from more than 25 years ago ring louder than ever: “Information is data endowed with relevance and purpose, he wrote. “Converting data into information thus requires knowledge.
In other words, Big Data is meaningless in and of itself. The trick is to turn the reams of facts and figures now available in our hyper-connected world into truly useful information – information that can help your company decide what to stop doing, what areas of strength to build upon and expand, and what to start doing.
The businesses that have figured out how to do this clearly have an advantage. The management consultancy Bain recently found that companies with the most advanced analytics capabilities are twice as likely to be in the top quartile of their industry in terms of financial performance and five times more likely to make faster decisions.
But how do companies develop such capabilities? From what we have seen with our clients, two important factors are at play.
First, executives need to embrace that “data-driven does not mean letting go of ones intuition. Instead, an individual managers views on business and the world should drive the process of formulating hypotheses that, in turn, should be confirmed or invalidated by data analysis.
Second, executives need to interact directly with data. To keep up with the surge of business information, corporations have increased the complexity of the tools used to process it. As a result, decision makers are being left out from interacting with the data themselves.
Alex Vayner “Intuition and interaction: the two keys to winning with big data, The Drucker Institute, 9 January 2014, http://thedx.druckerinstitute.com/2014/01/intuition-and-interaction/
New lending models that bypass banks
Peer-to-peer (P2P) lending bypasses banks by connecting borrowers with lenders through online platforms for mostly small loans – like credit card debt – using proprietary technology to assess risk, creditworthiness and interest rates. Enthusiasts say banks have left open a wide and growing market for P2P lending, given that the banks are burdened with stiffer capital adequacy requirements, brick-and-mortar costs, legacy technology and impaired loan portfolios.
Indeed, despite a few red flags raised by critics, participants in the industry feel it is ready for broad-based expansion. The two biggest P2P platforms in the US – LendingClub and Prosper, both based in San Francisco – are witnessing triple-digit growth. LendingClub expects to close 2013 with loan origination of $2 billion, while Prosper is looking at $350 million, compared with a combined $871 million last year. …
“This is a niche that probably has some future, says Wharton finance professor Franklin Allen, adding that the P2P lending industry has overcome the biggest hurdle in capturing the market of credit card debt. “Unless you have some kind of a technology platform or computing system, it is extremely costly to process these loans. Using advanced techniques for credit scoring and risk evaluation, the major platforms have made P2P lending viable, he adds. P2P lending also has a natural advantage in the current financial system, Allen says. “If you think of the low rates that most depositors get and the high rates on credit cards, it is a big opportunity…
“Peer-to-peer lending: ready to grow, despite a few red flags, Knowledge@Wharton, 8 January 2014, http://knowledge.wharton.upenn.edu/article/peer-peer-lending-ready-grow-despite-red-flags/
Whither China in 2014?
Chinas labor costs continue to rise by more than 10 percent a year, land costs are pricing offices out of city centers, the cost of energy and water is growing so much that they may be rationed in some geographies, and the cost of capital is higher, especially for state-owned enterprises. Basically, all major input costs are growing, while intense competition and, often, overcapacity make it incredibly hard to pass price increases onto customers. Chinas solution? Higher productivity. Companies will adopt global best practices from wherever they can be found, which explains why recent international field trips of Chinese executives have taken on a much more serious, substantive tone … .
Gordon Orr, What could happen in China in 2014?, McKinsey Quarterly, January 2014.
Strategy & Leaderships intrepid media explorer, collected these examples of novel strategic management concepts and practices and impending environmental discontinuity from various news media. A marketing and strategy consultant based in Carlisle, Pennsylvania, he welcomes your contributions and suggestions (Craighenry@aol.com).