Strategy in the media

Citation

Henry, C. (2014), "Strategy in the media", Strategy & Leadership, Vol. 42 No. 3. https://doi.org/10.1108/SL-03-2014-0025

Strategy in the media

Article Type: CEO advisory From: Strategy & Leadership, Volume 42, Issue 3

The changing pattern of global risks

The World Economic Forum (WEF), based in Davos, Switzerland, issued its "Global Risks 2014" report this week. Two of the report's contributors – Howard Kunreuther, Wharton operations and information management professor and co-director of the school's Risk Management and Decision Processes Center, and Erwann Michel-Kerjan, the center's managing director – offered Knowledge@Wharton their assessments of the report's major takeaways and the challenges that lie ahead for global risk managers… .

Perhaps not surprisingly, perceptions about what constitutes a major risk have transformed rapidly in recent years. For example, the top five global risks identified in the 2014 Report are entirely different from the top five risks identified by executives, researchers and other experts who were surveyed in 2007, Kunreuther and Michel-Kerjan note. This year, the most likely five risks, ranked in descending order, were income disparity, extreme weather events, unemployment and underemployment, climate change and cyber-attacks. In 2007, the five systemic risks rated most likely were, in descending order, the breakdown of official information infrastructure, followed by chronic disease in developed countries, oil price shock, China's economic hard landing and, finally, asset price collapse… .

According to Kunreuther, the disparity is "extremely interesting" because "it highlights one of the major challenges one faces as one begins to look at the likelihood and consequences" of various risks. On the likelihood side, there is the "broader challenge of short-term thinking and myopia" whenever a threatening event occurs, he says. At the time such events occur, there may be good reason to believe they will continue to have an impact, such as the prominence of an oil and gas price spike on the lists in 2008 and 2009. "It may be right that attention has to be paid [to these challenging events when they happen], but … over a period of time, as with asset price deflation, that [event] may not emerge as [a major risk] from the point of view of likelihood or even consequences."

"What are the top five risks the world faces in 2014?" Knowledge@Wharton, January 17, 2014, http://knowledge.wharton.upenn.edu/article/what-are-the-top-five-risks-the-world-faces-in-2014/

Global rise of the smart machine

The advances we've seen in the past few years – cars that drive themselves, useful humanoid robots, speech recognition and synthesis systems, 3D printers, Jeopardy!-champion computers – are not the crowning achievements of the computer era. They're the warm-up acts. As we move deeper into the second machine age we'll see more and more such wonders, and they'll become more and more impressive.

How can we be so sure? Because the exponential, digital, and recombinant powers of the second machine age have made it possible for humanity to create two of the most important one-time events in our history: the emergence of real, useful artificial intelligence (AI) and the connection of most of the people on the planet via a common digital network.

Either of these advances alone would fundamentally change our growth prospects. When combined, they're more important than anything since the Industrial Revolution… .

Soon countless pieces of AI will be working on our behalf, often in the background. They'll help us in areas ranging from trivial to substantive to life changing. Trivial uses of AI include recognizing our friends' faces in photos and recommending products. More substantive ones include automatically driving cars on the road, guiding robots in warehouses, and better matching jobs and job seekers. But these remarkable advances pale against the life-changing potential of artificial intelligence.

To take just one recent example, innovators at the Israeli company OrCam have combined a small but powerful computer, digital sensors, and excellent algorithms to give key aspects of sight to the visually impaired (a population numbering more than twenty million in the USA alone). A user of the OrCam system, which was introduced in 2013, clips onto her glasses a combination of a tiny digital camera and speaker that works by conducting sound waves through the bones of the head. If she points her finger at a source of text such as a billboard, package of food, or newspaper article, the computer immediately analyzes the images the camera sends to it, then reads the text to her via the speaker.

Erik Brynjolfsson and Andrew McAfee "The dawn of the age of artificial intelligence," The Atlantic, February 14, 2014.

Broadband competition: markets or regulators?

We already have perfectly adequate pipes running into our homes, capable of delivering enough broadband for nearly everybody's purposes. Creating a massive parallel national network of new pipes (or pCells, or whatever) is, frankly, a waste of money. The economics of wholesale bandwidth are little-understood, but they're also incredibly effective, and have created a system whereby the amount of bandwidth in the USA is more than enough to meet the needs of all its inhabitants. What's more, as demand increases, the supply of bandwidth quite naturally increases to meet it. What we don't need is anybody spending hundreds of billions of dollars to build out a brand-new nationwide broadband network.

What we do need, on the other hand, is the ability of different companies to provide broadband services to America's households. And here's where the real problem lies: the cable companies own the cable pipes, and the regulators refuse to force them to allow anybody else to provide services over those pipes. This is called local loop unbundling, it's the main reason for low broadband prices in Europe, and of course it's vehemently opposed by the cable companies.

Local loop unbundling, in the broadband space, would be vastly more effective than waiting for some hugely expensive new technology to be built, nationally, in parallel to the existing internet infrastructure. The problem with Cowen's dream is precisely the monopoly rents that the cable companies are currently extracting. If and when any new competitor arrives, the local monopolist has more room to cut prices and drive the competitor out of business than the newcomer has.

In broadband, it's the cable operators who could, if they wanted to, bring the marginal cost of broadband down to zero. (There's no reason, in principle, why they can't provide broadband for free to anybody with a cable-TV subscription.) Meanwhile, any would-be disruptor, needing to repay a massive capital investment, is going to have less ability to slash prices than the incumbents do.

So don't count on competition to bring down prices in the broadband space. This is an area where the regulators – and only the regulators – can really be effective.

Felix Salmon, "You won't have broadband competition without regulation," February 21, 2014 http://blogs.reuters.com/felix-salmon/2014/02/21/you-wont-have-broadband-competition-without-regulation/

The problematic data behind big data

Behavioral data – and most big data about humans is, in some sense, observed behavior – seemingly avoids those issues through the "objective" measure of things. Well, big data has … a dual problem:

Most big data sets are take it or leave it. They are not (generally) designed around categories that are scientifically motivated. Which would you prefer as a measure of diet – asking people how many servings of fruits and vegetables they have each day? Or: how many dollars they spend each day on fruits and vegetables, based on what is recorded on their credit cards? Both measures have their problems. The self-report measure is subject to recall bias, ambiguities over what constitutes a serving, the heterogeneity of the category of "fruits and vegetables" (does ketchup count?), and the normative pressure some people might feel to report eating more fruits and vegetables than they really are… .

That sounds like a pretty bad measure. But now consider the credit card measure. How do dollars translate into servings of fruits and vegetables? Are purchases for a single individual or for multiple people? How much do you use other means to pay for fruits and vegetables? … Small mediocre data will often trump big lousy data in terms of scientific insight. I say, that with the caveat that it does depend on in what ways the data are mediocre and lousy, and exactly what your questions are.

Big data does not avoid the socio-cultural prism. … our behaviors as captured by the socio-technical system is not neutral with respect to the socio-cultural system in which we live. Consider: if we could capture a snapshot of the network of the entire country based on number of texts from one phone to another, what would this tell us? It would tell us that teenage girls are at the center of the universe, and that most people over 50 are completely isolated. Or, if we looked at e-mail-based communication, teens would barely exist, and people over 50 would rule the net. The issue is that we have many ways of connecting to each other, and these behaviors vary at the individual and subcultural levels.

David Lazer "Big data and cloning headless frogs," Complexity and Social Networks, February 16, 2014 http://blogs.iq.harvard.edu/netgov/2014/02/big_data_and_cloning_headless.html

Diagnosing a company in distress

It's next to impossible to come up with one working definition of a company in distress – and dangerous to think that you have one for your own company. Depending on the situation, there are probably 25 different signs of potential distress. The problem is seldom made up of just one or two of these things, however. Rather, it is the result of a greater number of them interacting together and with other external factors.

There are numerous signs of distress … a distressed company is typically dealing with multiple signs.

Force yourself to criticize your own plan. The biggest thing you can do to avoid distress is periodically review your business plans. When you're creating them, whether at the beginning of the year or the start of a three-year cycle, build in some trigger points. A simple explicit reminder can be enough: "If we don't have this type of performance by this date or we haven't gotten the following 12 things done by this date, we'll step back and decide if we're going down the right path, given what's happened since our last review." …

Expect more from your board. The beauty of a board is that it has enough distance from the company to see the forest for the trees. …

Focus on cash. A successful turnaround really comes down to one thing, which is a focus on cash and cash returns. That means bringing a business back to its basic element of success. Is it generating cash or burning it? And, even more specifically, which investments in the business are generating or burning cash? …

Create a great change story. Companies in distress don't focus enough on creating a change story that everyone understands – and that creates some sense of urgency… .

Treat every turnaround like a crisis. Without a crisis mind-set, you get a stable company's response to change: risk is to be avoided, and incrementalism takes over… .

Build traction for change with quick wins… .

Throw out your old incentive plans. In a turnaround, take a lesson from the private-equity industry and throw out your old plans. Instead, offer managers incentives tied specifically to what you want them to do. Do you need $10 million of improvement from pricing? Then make it a big part of your sales staff's incentive plan. Need $150 million from procurement? Give your chief purchasing officer a meet-or-beat target… .

Replace a top-team member – or two. Experience tells me that most successful turnarounds involve changing out one or two top-team members… .

Find and retain talented people.

Doug Yakolaen, "Tips for leading companies out of crisis," McKinsey Quarterly, March 2014.

The Toyota way to a greener world

To understand Toyota, you have to understand its long-standing corporate philosophy. The company's core values revolve around having a sense of duty to contribute to the development and the welfare of the society at large rather than using the company just as a money-making machine. Toyota's official website puts these values in terms of a concept that may be unfamiliar outside of Japan: "Toyota has always sought to contribute to society through the monozukuri philosophy – an all-encompassing approach to manufacturing. In its application of monozukuri to the production of automobiles, Toyota has pursued a sustainable method of making its cars ever more safe, environmentally friendly, reliable and comfortable."

The Japanese word monozukuri has a literal meaning of "production" – "mono" is the thing that is made or created, and "zukuri" refers to the act of making. Monozukuri, however, has meanings beyond the literal; it can be best compared to the word "craftsmanship" in English, which describes the making of an object with particular skill, care or artistry.

There is, however, a difference between the two concepts: "craftsmanship" emphasizes the skill and attentiveness of the maker, whereas monozukuri focuses more on the qualities of the object being made and less on the qualities of the person making it. This subtle difference reflects the Japanese sense of responsibility for the inherent value of the materials of production and the Japanese culture's deep respect for the world at large, both animate and inanimate.

In the Japanese tradition of monozukuri, the craftsman takes great care using resources not to be wasteful or frivolous. When an item or human effort is taken into use, there needs to be a benefit for the society in the result – while, at the same time, the balance between production, resources and the society should be maintained. You could even say that monozukuri is the older sister of the concept of sustainable manufacturing.

On the whole, Toyota's environmental performance is driven far more by a commitment to monozukuri and the company's role in the society as a value-adding corporate citizen than it is by environmental regulations.

Keivan Zokaei, Hunter Lovins, Andy Wood and Peter Hines, "Recapturing Monozukuri in Toyota's manufacturing ethos", Sloan Management Review, Winter 2014.

Why seven really is a lucky number for teams

In 1957, British naval historian and management satirist Northcote Parkinson painted a cynical picture of a typical committee: It starts with four or five members, quickly grows to nine or ten, and, once it balloons to 20 and beyond, meetings become an utter waste of time – and all the important work is done before and after meetings by four or five most influential members.

As Parkinson would have it, numerous studies now confirm that, when it comes to teams, many hands do not make light work. After devoting nearly 50 years to studying team performance, the late Harvard researcher J. Richard Hackman concluded that four to six members is the team best size for most tasks, that no work team should have more than 10 members, and that performance problems and interpersonal friction increase "exponentially as team size increases."

These troubles arise because larger teams place often overwhelming "cognitive load" on individual members. Most of us are able to mesh your efforts with and maintain good personal relationships with, say, three or four teammates. But as a group expands further, each member devotes more time to coordination chores (and less time to actually doing the work), more hand-offs between the growing cast of members are required (creating opportunities for miscommunication and mistakes), and because each member must divide his or her attention among a longer list of colleagues, the team's social glue weakens (and destructive conflict soars). Following this LinkedIn piece, findings about group size are reminiscent of psychologist George Miller's famous conclusion that seven was a "magical number" because people could only hold "seven, plus or minus two" numbers in short-term memory. Both Hackman and Miller found that, once people start trying to deal with double digits, the cognitive overload takes a toll.

Bob Sutton, "Why big teams suck: seven (plus or minus two) is the magical number once again" March 2014, http://bobsutton.typepad.com/my_weblog/2014/03/why-big-teams-suck-seven-plus-or-minus-two-is-the-magical-number-once-again.html

The power of brand focus

A tale of two brands illustrates the value of brand focus. McDonald's, the $27.5 billion corporation with over 34,000 locations worldwide, recently reported its fifth consecutive quarter of disappointing sales. Shake Shack, the burger-and-shake chain with 34 locations, continues to open profitable units around the world. The CEO of McDonald's admits the company has "lost some of our customer relevance," while Shake Shack enjoys such strong appeal that the lines to get into its locations are as legendary as they are long.

While the difference in the scale and complexity between the two organizations is significant, the importance of having a focused brand is the same. Leading the list of reasons for the golden arches' recent poor performance is the company's seemingly scattershot approach to innovation. … One analyst observed that "as with its admittedly overcomplicated menu that now has over 180 items, the company's priority list seems just as long." …

McDonald's diffused focus starkly contrasts with the singular brand focus behind Shake Shack's success. Shake Shack has become one of the category's most remarkable success stories in recent years by committing and staying committed to its brand mission: being "the best burger company in the world." Its CEO, Randy Garutti, explains his organization's commitment to the principle "Do what you want to do really well in its most basic version."

From selecting new restaurant sites, to hiring and developing employees, to creating the unique look of each location, the folks at Shake Shack use their brand values as a compass and their heritage as a guide for everything they do … Out of an expressed commitment to an extraordinary burger experience, they find themselves frequently rejecting otherwise-enviable growth opportunities, such as catering or operating a food truck, because they fail to square with the company's brand identity.

Denise Lee Yohn, "What Shake Shack knows about growth that McDonald's has forgotten," Harvard Business Review Blogs, March 7, 2014, http://blogs.hbr.org/2014/03/what-shake-shack-knows-about-growth-that-mcdonalds-has-forgotten/

Reinventing the news business

I am more bullish about the future of the news industry over the next 20 years than almost anyone I know. You are going to see it grow 10X to 100X from where it is today. That is my starting point for any discussion about the future of journalism. Here's why I believe it, and how we will get there… .

It requires the following.

Vision. The difference between vision and hallucination is others can see vision. It is critical to articulate a bright future with clarity that everyone can see.

Scrappiness. Tough challenges call for resourcefulness and pragmatism. You need to stay close to the ground, wallowing in every detail and all over any opportunity that arises.

Experimentation. You may not have all the right answers up front, but running many experiments changes the battle for the right way forward from arguments to tests. You get data, which leads to correctness and ultimately finding the right answers.

Adaptability. Ask yourself, would you rather be right or successful? That needs to be top of mind at all times because times change and we change. You want strong views weakly held.

Focus. Once you gain clarity from experiments and adaptation, then it's time to focus on a small number of ultra-clear goals. When those are defined, then it's all-hands-on-deck.

Deferral of gratification. You need the stomach (and resources!) to reject near-term rewards for enduring success. In journalism this means refusing to participate in the race to the bottom.

An entrepreneurial mindset. This is true both for new companies and existing companies. It's a bit of a mantra. We own the company. We make the business. We control our future. It's on us.

Marc Andreeson, "The future of the news business", February 25, 2014, http://a16z.com/2014/02/25/future-of-news-business/

Goodwill reinvents its business model

Going into its seventh year, the e-commerce division of Goodwill Industries of San Francisco, San Mateo and Marin Counties has grown into a $4 million endeavor that's looking to expand.

"It's funny. It's like this online startup that has really bootstrapped its way into this viable business," said Tim Murray, vice president of brand, marketing, and communications for Goodwill.

Through eBay and Amazon, the nonprofit sells donated items in top condition – including designer handbags, shoes and jewelry – to online consumers, while a media division handles books, movies and music. Items are authenticated and checked for quality, and thousands turn out to be ripe for resale.

"Our donors are extremely generous," said Goodwill CEO Maureen Sedonaen. "We receive anything you can imagine, including really nice items that we're able to resell and reach a national audience."

Goodwill ships approximately 800 items a day that are sold through eBay, with shoes, bags and jewelry as the biggest sellers. Another 1,200 books and other media daily are sold on Amazon… . All the sales, in turn, go back into Goodwill's workforce training programs that help hundreds of unemployed and homeless people a year get jobs… .

"The jobs here are good paying jobs that will grow into careers in e-commerce," he said: "There have been people hired on to work for UPS on the warehouse and processing side. Some have gone on to online startups like LikeTwice. There are so many success stories."

Renee Frojo, "Goodwill turns charity into $4 million e-commerce business," San Francisco Business Journal, March 3, 2014, http://www.bizjournals.com/sanfrancisco/blog/2014/03/goodwill-e-commerce-ebay-amazon.html

Why business schools ignore their own lessons

Business schools are well aware of the threat of disruption … the failure of businesses to respond to the competitive threat of disruption is a staple of the curriculum. So why don't business schools themselves do something about the imminent threats of disruption that they themselves face… .

Ironically, business schools also find themselves chained to the treadmill of making money. Business schools often constitute a significant revenue stream for their universities. Students from around the world want "a standard MBA." Administrators are hesitate to tamper with core curricula lest it jeopardizes this revenue stream… .

Further, the accreditation process of business schools is slow, cumbersome and inflexible. This creates additional pressure to stay with the status quo.

Business school rankings by the Financial Times and others are built on criteria such as acceptance of articles in academic journals, the academic accreditation processes and starting salaries of graduates – thus reinforcing the status quo.

Steve Denning, "Why aren't business schools more business-like?" Forbes, February 7, 2014, http://www.forbes.com/sites/stevedenning/2014/02/07/why-arent-business-schools-more-business-like/

Innovation and the social fabric

The effect of today's technology on tomorrow's jobs will be immense – and no country is ready for it… .

Optimism remains the right starting-point, but for workers, the dislocating effects of technology may make themselves evident faster than its benefits (see article). Even if new jobs and wonderful products emerge, in the short term, income gaps will widen, causing huge social dislocation and perhaps even changing politics. Technology's impact will feel like a tornado, hitting the rich world first, but eventually sweeping through poorer countries too. No government is prepared for it.

Why be worried? It is partly just a matter of history repeating itself. In the early part of the Industrial Revolution the rewards of increasing productivity went disproportionately to capital; later on, labour reaped most of the benefits. The pattern today is similar. The prosperity unleashed by the digital revolution has gone overwhelmingly to the owners of capital and the highest-skilled workers. Over the past three decades, labour's share of output has shrunk globally from 64 to 59 per cent. Meanwhile, the share of income going to the top 1 per cent in America has risen from around 9 per cent in the 1970s to 22 per cent today. Unemployment is at alarming levels in much of the rich world, and not just for cyclical reasons. In 2000, 65 per cent of working-age Americans were in work; since then, the proportion has fallen, during good years as well as bad, to the current level of 59 per cent.

Worse, it seems likely that this wave of technological disruption to the job market has only just started. From driverless cars to clever household gadgets (see article), innovations that already exist could destroy swathes of jobs that have hitherto been untouched. The public sector is one obvious target: it has proved singularly resistant to tech-driven reinvention. But the step change in what computers can do will have a powerful effect on middle-class jobs in the private sector too.

"Coming to an office near you," The Economist, January 18, 2014.

Capitalism and inequality

Thomas Piketty's new book, Capital in the Twenty-First Century, described by one French newspaper as a "a political and theoretical bulldozer," defies left and right orthodoxy by arguing that worsening inequality is an inevitable outcome of free market capitalism.

Piketty, a professor at the Paris School of Economics, does not stop there. He contends that capitalism's inherent dynamic propels powerful forces that threaten democratic societies.

Capitalism, according to Piketty, confronts both modern and modernizing countries with a dilemma: entrepreneurs become increasingly dominant over those who own only their own labor. In Piketty's view, while emerging economies can defeat this logic in the near term, in the long run, "when pay setters set their own pay, there's no limit," unless "confiscatory tax rates" are imposed.

Piketty's book – published four months ago in France and due out in English this March – suggests that traditional liberal government policies on spending, taxation and regulation will fail to diminish inequality… .

There are a number of key arguments in Piketty's book. One is that the six-decade period of growing equality in western nations – starting roughly with the onset of World War I and extending into the early 1970s – was unique and highly unlikely to be repeated. That period, Piketty suggests, represented an exception to the more deeply rooted pattern of growing inequality.

According to Piketty, those halcyon six decades were the result of two world wars and the Great Depression. The owners of capital – those at the top of the pyramid of wealth and income – absorbed a series of devastating blows. These included the loss of credibility and authority as markets crashed; physical destruction of capital throughout Europe in both World War I and World War II; the raising of tax rates, especially on high incomes, to finance the wars; high rates of inflation that eroded the assets of creditors; the nationalization of major industries in both England and France; and the appropriation of industries and property in post-colonial countries.

At the same time, the Great Depression produced the New Deal coalition in the USA, which empowered an insurgent labor movement. The postwar period saw huge gains in growth and productivity, the benefits of which were shared with workers who had strong backing from the trade union movement and from the dominant Democratic Party. Widespread support for liberal social and economic policy was so strong that even a Republican president who won easily twice, Dwight D. Eisenhower, recognized that an assault on the New Deal would be futile. In Eisenhower's words, "Should any political party attempt to abolish Social Security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear from that party again in our political history."

The six decades between 1914 and 1973 stand out from the past and future, according to Piketty, because the rate of economic growth exceeded the after-tax rate of return on capital.

Thomas B. Edsall, "Capitalism vs democracy," The New York Times, January 28, 2014.

Craig Henry
Strategy & Leadership's 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).