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Strategy in the media
Article Type: CEO advisory From: Strategy & Leadership, Volume 42, Issue 4
When metrics are the enemy of growth
Like an old machine emitting a new and troubling sound that even the best mechanics can't diagnose, the world economy continues its halting recovery from the 2008 recession … . One phenomenon we've observed is that, despite historically low interest rates, corporations are sitting on massive amounts of cash and failing to invest in innovations that might foster growth. That got us thinking: What is causing that behavior? … What is holding growth back?
… we think we've figured out why managers are sitting on their hands, afraid to pursue what they see as risky innovations. We believe that such investments, viewed properly, would offer the surest path to profitable economic and job growth … .
In our view the crux of the problem is that investments in different types of innovation affect economies (and companies) in very different ways – but are evaluated using the same (flawed) metrics. Specifically, financial markets – and companies themselves – use assessment metrics that make innovations that eliminate jobs more attractive than those that create jobs. We'll argue that the reliance on those metrics is based on the outdated assumption that capital is, in George Gilder's language, a "scarce resource" that should be conserved at all costs. But, as we will explain further, capital is no longer in short supply – witness the $1.6 trillion in cash on corporate balance sheets – and, if companies want to maximize returns on it, they must stop behaving as if it were. We would contend that the ability to attract talent, and the processes and resolve to deploy it against growth opportunities, are far harder to come by than cash. The tools businesses use to judge investments and their understanding of what is scarce and costly need to catch up with that new reality.
Clayton M. Christensen and Derek van Bever, "The capitalist's dilemma," Harvard Business Review, June 2014.
Beyond single-point forecasts
In our research, we looked for a forecasting approach that could provide both accuracy and informativeness: one that will protect the forecaster from the known traps of overconfidence and biased forecasting, and provide an informative forecast that includes all plausible future scenarios as well as an assessment of how likely each one of them is. We have developed a method called SPIES (Subjective Probability Interval EStimates), which computes a range forecasts from a series of probability estimates, rather than from two point predictions … .
The rationale for calculating range forecasts this way is based on the finding that, while people tend to be overconfident in forecasting confidence intervals, they are much more accurate in evaluating other people's confidence intervals and estimating the likelihood that a particular forecast will be accurate. So the SPIES method divides the entire range into intervals, or bins, and asks the forecaster to consider all of these bins and estimate the likelihood that each one of them will include the true value. From these likelihood estimates, SPIES can estimate a range forecast of any confidence level the decision maker prefers … .
By making the forecaster consider the entire range of possibilities, SPIES minimizes the chance that certain values or scenarios will be overlooked. Second, this method gives the decision maker a sense of the full probability distribution, making it a rich, dynamic, planning tool. The decision maker now knows the best- and worst-case scenarios, but also how likely each scenario is, and the likelihood that the estimated value, be it production rate, costs or project completion time, will fall above or below an important threshold.
Don Moore and Uriel Haran, "Simple tool for making better forecasts," HBR Blogs, May 19, 2014, http://blogs.hbr.org/2014/05/a-simple-tool-for-making-better-forecasts/
Europe confronts Google's ambitions
… there is a dawning awareness that Google is forging a new kingdom on the strength of a different kind of power – ubiquitous, hidden, and unaccountable. If successful, the dominion of this kingdom will exceed anything the world has known.
… accessing the Web and the wider Internet have become essential for effective social participation across much of the world … . The chilling irony is that we've become dependent on the Internet to enhance our lives, but the very tools we use there threaten to remake society in ways that we do not understand and have not chosen.
… Six years ago I asked Eric Schmidt what corporate innovations Google was putting in place to ensure that its interests were aligned with its end users. Would it betray their trust? Back then his answer stunned me. He and Google's founders control the super-voting class B stock. This allows them, he explained, to make decisions without regard to short-term pressure from Wall Street. Of course, it also insulates them from every other kind of influence. There was no wrestling with the creation of an inclusive, trustworthy, and transparent governance system. There was no struggle to institutionalize scrutiny and feedback. Instead Schmidt's answer was the quintessence of absolutism: "trust me; I know best." At that moment I knew I was in the presence of something new and dangerous whose effects reached beyond narrow economic contests and into the heart of everyday life …
Mr. Schmidt's open letter to Europe shows evidence of such absolutism. Democratic oversight is characterized as "heavy-handed regulation."
… Schmidt warns that were the E.U. to oppose Google's practices, Europe risks becoming "an innovation desert." Just the opposite is more likely true. Thanks in part to Google's exquisite genius in the science of surveillance, the audacity with which it has expropriated users' rights to privacy, and the aggressive tactics of the NSA, people are losing trust in the entire digital medium. It is this loss of trust that stands to kill innovation.
Shoshana zuboff, "Dark Google," Frankfurter allgemeine zeitung, April 30, 2014, http://www.faz.net/aktuell/feuilleton/debatten/the-digital-debate/shoshanna-zuboff-dark-google-12916679.html
IBM faces the turbulent future
The real challenge for the CEO of IBM – now and in the future – is a fundamental shift in business goals and culture. Instead of a world where high-pressure sales teams can lock in customers to long-term contracts for using unchanging software with high margins, now IT services providers have to compete with firms that offer continuous innovation, pay-as-you-go fee structures and freedom to exit any time. To compete successfully in this emerging world, the IT service providers will have to delight their customers on a continuing basis, by offering continuous innovation.
As John Wookey, who runs advanced products for Salesforce, told the New York Times: "The economics are different, but what is really different is the relationship with the consumer. We issue a new version of the product every four months. If the customer doesn't like it, he stops paying."
"The best business returns," says Warren Buffett, "are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago." Put another way, "IBM had that stickiness and indispensability to many large corporate and government institutions worldwide." The question is whether this way of doing business is coming to the end of its effective life. Today clients prefer flexibility to stickiness.
Established firms like IBM are used to operating in a world where new versions of packaged software come out every few years, making it difficult to get out of a license when company data depends on it. The emerging world of cloud computing will require much greater agility. "The hardest thing is to be successful again when you've been successful in the old world," said Wookey.
A new kind of management is required, focusing on customer delight as the new bottom line of the firm's business. The old giants will have to learn how to disrupt their own cash cows and rapidly develop new products that have not even been heard of. Innovation has to happen not in sporadic "values jams", but on a continuous basis.
Steve Denning, "Why IBM is in decline" Forbes, May 20, 2014, http://www.forbes.com/sites/stevedenning/2014/05/30/why-ibm-is-in-decline
Questions hold key to effective strategy-making
Your grand strategy seems airtight on paper … . But as the saying goes, no battle plan survives first contact with the enemy. Generally, that's because multiple assumptions have been folded in to your strategy – unconscious leaps of faith you've made in your natural enthusiasm and optimistic outlook. If not attended to – teased out, made transparent, and tested in the real world – these leaps may indeed become the very blind spots that will put to rest your best-laid plans. That's why we so often hear that making assumptions is a bad thing. But … assumptions are unavoidable. It's how you handle them and exploit them that makes for the true art of strategy in any realm: innovation, business models … .
There is real power in making bold assumptions, because you can turn them into clear hypotheses, and then scientifically test them in a rapid, iterative way … .
The best technique I've found to alchemically turn assumptions into gold is one which I learned from master strategist Roger Martin a few years ago. It amounts to a single but powerful question: "What must be true?"
Here's how it works …
For each of your strategic options, ask six key "What must be true" questions, in this order:
1. What must be true about the size and attractiveness of our target segments?
2. What must be true about what our end users value?
3. What must be true about what our channels value?
4. What must be true about our capabilities vs. our competitors'?
5. What must be true about our costs vs. our competitors'?
6. What must be true about how our competitors will react to our strategy?
You now have six "best guesses." Each of those guesses are in reality hypotheses, which you can now test by getting out of the building, into the field, and into learning mode.
Matthew E. May "Strategy's Magic Question," Innovation Excellence, May 13, 2014, http://www.innovationexcellence.com/blog/2014/05/13/strategys-magic-question/%23sthash.Qod8vHnj.dpuf
Book publishers reap the whirlwind
Over the years, as Amazon became increasingly powerful, publishers began whispering about how someday that power would be abused. Amazon has always pushed hard for the lowest price possible, but what would happen if it truly became a monopoly? Wouldn't it then be able to raise prices at will, hurting book buyers? As its dispute with Hachette illustrates, Amazon is more than willing to flex its powerful muscles … .
But its goal is not to raise prices, which is contrary to Amazon's pro-consumer culture. Instead, it is trying to upend the economic model that has long sustained book publishers … .
The way I hear it, what Amazon is insisting upon is a deal where it would no longer have to bear the full brunt of its discounting – the publisher would have to bear some of it, in the form of tighter margins, or even losses. Hachette, meanwhile, contends that it needs to be compensated for the important things publishers do: editing, marketing, and curating.
This is an argument that may appeal to the cultural elite, but it is unlikely to move Jeff Bezos, Amazon's founder and chief executive. Publishers, he has been known to say, are gatekeepers. "Even well-meaning gatekeepers slow innovation," he wrote in his 2011 letter to shareholders, according to Brad Stone, the author of a recent book about Amazon, "The Everything Store."
… On some level, the book industry has never fit comfortably in the contours of big business. But over the years, as one house after another was bought by conglomerates, as they merged with each other, as they tried to increase profits with the kind of regularity that pleases Wall Street, they began the process of commoditizing books.
Jeff Bezos? He's only taking that process to its logical extreme.
Joseph Nocera, "Amazon's ‘bullying' tactics," The New York Times, May 30, 2014.
How digital technologies change global competition
Robust attackers are scaling up with incredible speed, inserting themselves artfully between you and your customers and zeroing in on lucrative value-chain segments.
The digital technologies underlying these competitive thrusts may not be new, but they are being used to new effect. Staggering amounts of information are accessible as never before … . Smart mobile devices make that information and computing power accessible to users around the world.
As these technologies gain momentum, they are profoundly changing the strategic context: altering the structure of competition, the conduct of business, and, ultimately, performance across industries … . seven trends that could redefine competition:
1. New pressure on prices and margins – Digital technologies create near-perfect transparency, making it easy to compare prices, service levels, and product performance: consumers can switch among digital retailers, brands, and services with just a few clicks or finger swipes.
2. Competitors emerge from unexpected places – Digital dynamics often undermine barriers to entry and long-standing sources of product differentiation.
3. Winner-takes-all dynamics – Digital businesses reduce transaction and labor costs, increase returns to scale from aggregated data, and enjoy increases in the quality of digital talent and intellectual property as network effects kick in.
4. Plug-and-play business models – As digital forces reduce transaction costs, value chains disaggregate. Third-party products and services – digital Lego blocks, in effect – can be quickly integrated into the gaps.
5. Growing talent mismatches – Software replaces labor in digital businesses. We estimate, for instance, that of the 700 end-to-end processes in banks (opening an account or getting a car loan, for example), about half can be fully automated.
6. Converging global supply and demand – Digital technologies know no borders, and the customer's demand for a unified experience is raising pressure on global companies to standardize offerings.
7. Relentlessly evolving business models – at higher velocity – Digitization isn't a one-stop journey. A case in point is music, where the model has shifted from selling tapes and CDs (and then MP3s) to subscription models, like Spotify's.
Martin Hirt and Paul Willmott "Strategic principles for competing in the digital age," McKinsey Quarterly, May 2014.
In search of the next eBay
The multi-sided platform business model connects customers to sellers directly. One big global success is Airbnb, which calls itself a "community marketplace." It links travelers to rental properties, including many private homes … . An MSP is a service, technology or product that lets two or more customer or participant groups have direct interactions. Examples of successful [online] MSPs include PayPal, eBay, Alibaba and Facebook. Apple's iOS is an MSP, since it connects application developers and users.
So how can a new MSP position itself to be among the winners rather than the losers? [Harvard professor Andrei] Hagiu offers some observations and advice:
1. Aim for volume. "An important feature of most MSPs is that the value to customers on one side of a platform typically increases with the number of participating customers on another side," Hagiu writes. He says this is known as the presence of "cross-side network effects," also called "indirect network effects."
2. Aim for economies of scale. Many MSPs see their average cost of serving a customer on one side decline with the total number of customers that participate. This is especially common, Hagiu says, with software MSPs, which have high up-front development costs and low or zero marginal costs when new users are added.
3. Understand that MSPs are a chicken/egg proposition. Getting an MSP to the critical mass it needs to be successful can create a high barrier to entry. But getting there is a challenge: No side will join without the other side in place. Think of Airbnb, the website for people to rent out lodging. Renters wouldn't visit a site unless it was well-populated with options, but people with homes or rooms to rent wouldn't bother posting their properties unless there was a significant potential audience. "Overcoming the chicken-and-egg problem is one of the most difficult challenges for many MSPs," notes Hagiu.
4. Answer the important strategy questions. Strategy questions include these: How many sides will be part of the platform? What kind of design should the platform have? How should pricing be set up (and should the service be free or subsidized to at least one side)? And what kinds of governance rules will be necessary to regulate fair play among participants?
Leslie Brokaw, "How to win with a multisided platform business model," Improvisations, May 20, 2014, http://sloanreview.mit.edu/article/how-to-win-with-a-multisided-platform-business-model/
Are retailers ready for the internet of everything?
Whether the concept excites you or scares you, the Internet of Things has the potential to change the way people make choices and go about their daily lives.
The term refers to a new reality where everything from clothing to household appliances are interconnected and tech-enabled to send data back and forth. For example: A grocery store chain sends consumers some recipes based on the items they place in their carts; or an alarm clock turns on and begins warming up the car when someone hits the snooze button.
It's the sector where "real change is going to happen" for retailers, according to Doug Straton, who heads the North American E-commerce Center of Excellence at Unilever. For a company like Unilever, which sells 400 brands across multiple categories of consumer goods, the question becomes: How do you react? Should the company build its strategy around certain devices or interfaces, partner with a company that manufactures those devices, or build and market devices of its own?
"It's incredibly important in the grocery delivery space to get [your product] on the list first," Straton said … . "If they're shopping [while using] a device, how do you interrupt to let somebody know there's a special on a product? How do you deliver messages within those different contexts?"
As an example, Straton cited Soma, a biodegradable water filter company that operates using a subscription model for delivery of a replacement filter every two months. "If something like that can also tell you how much you consumed, or how much you should be consuming, is that a throttle on [the growth of a company like Unilever]?" Straton asked.
… The data that can be collected through such devices and by consumer goods companies themselves also changes the game for brands in terms of forming a picture of the different consumers they are marketing to and what types of information those people want to see, Straton said.
"The internet of things: how it will change the way you shop," Knowledge@Wharton, April 29, 2014, http://knowledge.wharton.upenn.edu/article/internet-things-will-change-way-shop/
SAP makes room for dandelions
Like weeds in a green lawn, people who are "different" – whether behaviorally or neurologically – don't always fit into standard job categories. But if you can arrange working conditions to align with the abilities of such individuals, they can add significant value.
At its annual user conference in May 2013, German multinational software giant SAP AG announced plans to hire hundreds of people diagnosed with autism, with a target of having people with autism represent 1 per cent of the company's work force by 2020.1 The Merriam-Webster dictionary defines autism as a developmental disorder associated with "impairment of the ability to communicate with others" and "preoccupation with repetitive activities of restricted focus." Companies don't typically seek out these characteristics in new hires. In fact, the social struggles and behavioral patterns that accompany autism often make individuals on the autism spectrum unemployable. So why did SAP take this unusual step?
… the company had discovered that some people with autism have abilities that are extremely well-suited to performing some vital information technology tasks. The motivation was to hire people who are among the best in the world at jobs other people are not able to perform as well.
We believe this kind of thinking can be extended much further, to provide significant benefits for companies and society. SAP's move embodies an emerging management principle – we call it "the dandelion principle" – and offers an alternative way of thinking about human resources management. In some ways, it turns some of the basic tenets about how to recruit and manage people inside out.
Robert D. Austin and Thorkil Sonne, "The dandelion principle: redesigning work for the innovation economy," Sloan Management Review, May 2014.
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 (firstname.lastname@example.org).