Strategy in the media

Citation

Henry, C. (2008), "Strategy in the media", Strategy & Leadership, Vol. 36 No. 3. https://doi.org/10.1108/sl.2008.26136caf.002

Strategy in the media

Article Type: CEO advisory From: Strategy & Leadership, Volume 36, Issue 3.

Craig HenryStrategy & Leadership’s intrepid media explorer, collected these sightings of strategic management in the news. A marketing and strategy consultant based in Carlisle, Pennsylvania, he welcomes your contributions and suggestions (Craighenry@aol.com).

How misapplied metrics can kill innovation

For years, we’ve been puzzling about why so many smart, hard-working managers in well-run companies find it impossible to innovate successfully. Our investigations have uncovered a number of culprits.... These include paying too much attention to the company’s most profitable customers (thereby putting less-demanding at risk) and creating new products that don’t help customers do the jobs they want to do. But now we’d like to name the misguided application of three financial-analysis tools as an accomplice in the conspiracy against successful innovation. We allege crimes against these suspects:

The use of discounted cash flow (DCF) and net present value (NPV) to evaluate investment opportunities causes managers to underestimate the real returns and benefits of proceeding with investments in innovation.

The way fixed and sunk costs are considered when evaluating future investment confers an unfair advantage on challengers and shackles incumbent firms that attempt to respond to an attack.

The emphasis on earnings per share as the primary driver of share price and hence shareholder value creation, to the exclusion of almost everything else, diverts resources away from investments whose payoff lies beyond the immediate horizon …

[The problem with NPV]: While the mathematics of discounting is logically impeccable, analysts commonly commit two errors that create an anti-innovation bias. The first error is to assume that the base case of not investing in the innovation the do-nothing scenario against which cash flows from the innovation are compared is that the present health of the company will persist indefinitely into the future if the investment is not made … The mathematics considers the investment in isolation and compares the present value of the innovation’s cash stream less project costs with the cash stream in the absence of the investment, which is assumed to be unchanging. In most situations, however, competitors’ sustaining and disruptive investments over time result in price and margin pressure, technology changes, market share losses, sales volume decreases, and a declining stock price. As Eileen Rudden at Boston Consulting Group pointed out, the most likely stream of cash for the company in the do-nothing scenario is not a continuation the status quo. It is a nonlinear decline in performance.

It is tempting but wrong to assess the value of a proposed investment by measuring whether it will make us better off than we are now. It’s wrong because, if things are deteriorating, we might be worse off than we are now after we make the investment but better off than we would have been with out it. Philip Bobbitt calls this logic Parmenides’ Fallacy after the ancient Greek logician who claimed to have proved that conditions in the real world must necessarily be unchanging.

Clayton M. Christensen, Stephen P. Kaufman, and Willy C. Shih, “Innovation killers: how financial tools destroy your capacity to do new things,” Harvard Business Review, January 2008.

Innovation: beyond the mythic epiphany

We’ve all heard the tales of the apple falling on Newton’s head and Archimedes leaping naked from his bath shrieking “Eureka!” Many of us have even heard that eBay was created by a guy who realized that he could help his fiancée sell Pez dispensers online.

The fact that all three of these epiphany stories are pure fiction stops us short. As humans, we want to believe that creativity and innovation come in flashes of pure brilliance, with great thunderclaps and echoing ahas! Innovators and other creative types, we believe, stand apart from the crowd, wielding secrets and magical talents beyond the rest of us.

Balderdash. Epiphany has little to do with either creativity or innovation. Instead, innovation is a slow process of accretion, building small insight upon interesting fact upon tried-and-true process. Just as an oyster wraps layer upon layer of nacre atop an offending piece of sand, ultimately yielding a pearl, innovation percolates within hard work over time.

“The most useful way to think of epiphany is as an occasional bonus of working on tough problems,” explains Scott Berkun in his 2007 book, “The Myths of Innovation.” “Most innovations come without epiphanies, and when powerful moments do happen, little knowledge is granted for how to find the next one. To focus on the magic moments is to miss the point. The goal isn’t the magic moment: it’s the end result of a useful innovation.”

Janet Rae-Dupree, “Eureka! It really takes years of hard work,” New York Times, 3 February 2008.

Dramatic changes ahead in American neighborhoods

In the Franklin Reserve neighborhood of Elk Grove, California, south of Sacramento, the houses are nicer than those at Windy Ridge many once sold for well over $500,000 but the phenomenon is the same. At the height of the boom, 10,000 new homes were built there in just four years. Now many are empty; renters of dubious character occupy others. Graffiti, broken windows, and other markers of decay have multiplied. Susan McDonald, president of the local residents’ association and an executive at a local bank, told the Associated Press, “There’s been gang activity. Things have really been changing, the last few years … ”

The decline of places like Windy Ridge and Franklin Reserve is usually attributed to the subprime-mortgage crisis, with its wave of foreclosures. And the crisis has indeed catalyzed or intensified social problems in many communities. But the story of vacant suburban homes and declining suburban neighborhoods did not begin with the crisis, and will not end with it. A structural change is under way in the housing market-a major shift in the way many Americans want to live and work. It has shaped the current downturn, steering some of the worst problems away from the cities and toward the suburban fringes. And its effects will be felt more strongly, and more broadly, as the years pass. Its ultimate impact on the suburbs, and the cities, will be profound.

Arthur C. Nelson, director of the Metropolitan Institute at Virginia Tech, has looked carefully at trends in American demographics, construction, house prices, and consumer preferences. In 2006, using recent consumer research, housing supply data, and population growth rates, he modeled future demand for various types of housing. The results were bracing: Nelson forecasts a likely surplus of 22 million large-lot homes (houses built on a sixth of an acre or more) by 2025 that’s roughly 40 percent of the large lot homes in existence today.

For 60 years, Americans have pushed steadily into the suburbs, transforming the landscape and (until recently) leaving cities behind. But today the pendulum is swinging back toward urban living, and there are many reasons to believe this swing will continue. As it does, many low-density suburbs and McMansion subdivisions, including some that are lovely and affluent today, may become what inner cities became in the 1960s and ’70s-slums characterized by poverty, crime, and decay.

Christopher B. Leinberger, “The next slum?”, The Atlantic, March 2008.

The surprisingly rosy future of banking

With the midsummer credit crunch taking its toll, 2007 turned into a bleak year for the world’s big financial institutions, and 2008 may not be much better. As executives respond to the immediate pressures, however, they should maintain a clear perspective on the long-term outlook, which in our view is considerably brighter. Despite the current correction, we believe that during the next ten years the growth rate of the global banking industry will exceed that of GDP. Driven by powerful basic trends, such as demographics and the math of wealth accumulation, the industry will likely more than double its revenues and profits over the period.

Just as strikingly, McKinsey research also indicates that the industry’s patterns of growth will be diverse and uneven. Our comprehensive analysis of data since 2000 suggests that banking is one of the global economy’s few large industries that isn’t rapidly converging around a single structure or following the same market dynamics everywhere. Indeed, banking’s revenue performance has varied sharply and unexpectedly within regions, countries, subsectors, and product groups and will continue to do so.

More than in other major industries, it appears, long-term success in banking hangs on being in the right place at the right time. Over the last ten years, for example, 88 percent of the growth in the revenues of Europe’s 20 largest banks was attributable to market momentum in other words, competing in or entering territories and market segments that enriched everybody. Moreover, timing is critical. Buying into retail-banking markets across Asia in 2000 would have destroyed value over the next four years, as falling stock market multiples more than offset revenue growth. Buying into them in 2004, however, would have been richly rewarding.

In 2000, the global banking industry’s future looked decidedly downbeat: the Internet was widely expected to compress margins, thus disintermediating or even commoditizing many parts of the business. Banks mostly missed out on the stock market upturn that followed the dot-com debacle, though their empty M&A pipelines were partly to blame.

In retrospect, the gloom proved unwarranted. Global after-tax profits for banks soared to a historic high: from $372 billion in 2000 to $788 billion in 2006, or $672 billion in constant dollars. Along the way, banking became the industry with the highest absolute level of profits. In fact, those of US banks alone $328 billion in 2006 were larger than the combined profits of the retailing, pharmaceutical, and automotive industries around the world. What’s more, in that year the banking industry’s profits per employee were estimated to be 26 times higher than the average of all other industries, and its $2.8 trillion in revenues equaled 6 percent of the global GDP.

Miklos Dietz, Robert Reibestein, and Cornelius Walter, “What’s in store for global banking,” McKinsey Quarterly, January 2008.

Employee satisfaction and the bottom line

Contrary to management theories developed in the Industrial Age, employee satisfaction is an important ingredient for financial success, according to a new research paper by Wharton finance professor Alex Edmans. His findings also challenge the importance of short-term financial results and may have implications for investors interested in targeting socially responsible companies.

In a paper titled, “Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices”, Edmans examines the stock returns of companies with high employee satisfaction and compares them to various benchmarks the broader market, peer firms in the same industry, and companies with similar characteristics. His research indicates that firms cited as good places to work earn returns that are more than double those of the overall market.

Companies on Fortune magazine’s annual list of the “100 Best Companies to Work for in America” between 1998 and 2005 returned 14% per year, compared to 6% a year for the overall market, according to Edmans. The results also hold up using an earlier version of the survey that dates back to 1984. “One might think this is an obvious relationship that you don’t need to do a study showing that if workers are happy, the company performs better. But actually, it’s not that obvious,” says Edmans. “Traditional management theory treats workers like any other input get as much out of them as possible and pay them as little as you can get away with.”

Those ideas came to dominate management thinking during the industrial age when economic expansion was based largely on industrial machinery. In that environment, workers were required to perform relatively simple tasks and they were easily replaceable. Companies motivated workers mainly with money, paying by the piece in order to reward employees who churned out the most products.

In today’s business world shaped by new technology, knowledge and creative thinking, the value of each employee is increasingly important, although hard to measure directly, Edmans says. “Nowadays companies are producing more high-quality products. They are focusing on innovation and looking for the value-added to come from workers rather than machines.” Since key outputs, such as teamwork, building client relationships and idea generation, are difficult to measure, motivating workers by paying by the piece is less effective. This leads to the increasing importance of employee satisfaction as a motivational tool. Pleasant working conditions can lead to employees identifying with the firm, and thus exerting more effort than the minimum required by the employment contract. Moreover, it can be a powerful method of retaining key employees.

“How investing in intangibles like employee satisfaction translates into financial returns,” Knowledge@Wharton, 8 January 2008.

Merck’s unexpected comeback

Over the past two years Merck has exceeded expectations on all fronts - scientific, financial, and legal. Since the beginning of 2006 it has gained FDA approval for seven new drugs, more than any of its peers. At the same time, the company has won the majority of the jury trials in its defense of Vioxx, the painkiller it was forced to withdraw from the market in October 2005 after studies linked it to heart attacks and strokes … Investors have noticed, sending Merck’s stock price up 75% since the beginning of 2006, far outpacing its peers.

The lion’s share of credit for Merck’s recovery goes to three men: CEO Richard Clark, chief scientist Peter Kim, and former legal counsel Ken Frazier. Clark, who started at Merck in 1972 as a quality-control inspector, became CEO in mid-2005. Aware that the Vioxx recall had shaken the company, Clark immediately began to hold small meetings with Merck employees. “Over time Merck had developed into several fiefdoms, each doing their own thing,” says one insider. Clark, 61, insisted on “One Merck,” a catch phrase he repeated often. Beyond the words, he sought to unite Merck operationally. “We needed a more integrated approach,” says Clark. “From the moment we begin talking about a particular drug franchise, I want researchers, marketers, and manufacturing people sitting in the same room.”

As Clark kept his eye on the big picture, Kim focused on the labs. Merck’s scientific excellence had long inspired admiration and envy; corporate leaders voted it America’s Most Admired Company in Fortune from 1987 to 1993. By the early part of this decade, however, Merck was finding it difficult to turn its science into new, profitable medicines. In Merck’s case, there was a unique element added to what was an industry wide drought. Merck was so pleased and proud to be Merck that its research culture had become haughty and insular. The company refused to consider medicines discovered outside its own labs and spurned the mergers and research alliances that were reshaping the industry.

Enter Peter Kim. Until landing at Merck in 2001, Kim had no business experience, having spent most of his career as a biologist at MIT. He took over day-to-day management of Merck’s labs in 2003. As an outsider in a place with a clubby, insider culture, Kim had a perspective longtime employees lacked. He made it his mission to convince researchers that good-quality science could actually be done outside Merck and that the company should compete to acquire the fruits of others’ research.

By late 2004, Kim had overseen a new system that allows scientists to mine scientific literature to identify promising chemical compounds. He also encouraged Merck scientists to use their connections to open doors for Merck’s acquisitions department. The results have been striking. In 1999, Merck entered into just ten collaborative licensing deals; by 2006, there were 53 joint-development transactions and small acquisitions.

“How Merck healed itself,” Fortune, 7 February 2008.

McDonald’s and coffee: a prisoner of its own success

McDonald’s has nearly 14,000 stores nationwide, all of which will be equipped with full-fledged coffee bars and baristas by year’s end. Having already begun adding plush seating, gentler lighting and subtler colors to their franchises, the big M is looking to steamroll the limping Starbucks on its own turf. Starbucks, however, isn’t going anywhere; rather, it’s McDonald’s that will be maimed most by its own campaign to destroy the Seattle super-brand.

Admittedly, McDonald’s is one of those monolithic brands that will likely have a longer half-life than radium but that hardly makes it invulnerable. By adding the “theatre” of a coffee bar (as one McDonald’s VP has phrased it), the company has gained little more than the potential to alienate customers, confuse its menu and open up a black hole for capital.

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McDonald’s has spent decades refining its menu and its accompanying drink selection. When you go to McDonald’s, you step in the door knowing that the company’s ubiquity was built on its reputation for hamburgers and fries. With hamburgers and fries, you drink cold soda. So it is written, and so it will stay.

Remember McPizza? Me neither. I’ve read it was neither better nor worse than Pizza Hut or Domino’s Pizza, but it was a miserable failure. Why? Because when you go into a McDonald’s, you’re going to be bullied out of your pizza-eating mood (assuming you entered with one in the first place) by the sweet stink of the flagship fare. The place reeks of fries and beef. McDonald’s has spent millions of dollars developing chemical aromas for its fries, burgers and chicken, and they are every bit as intoxicating as they were meant to be. You know that frustration you experience when you try to hum one song while another is playing on the radio? That very dissonance was the demise of the McPizza, and will claim McCoffee next.

When you step into a Starbucks, however, you probably begin to anticipate your coffee even more than you did on your way over. The place smells of beans, frothing milk, and pastries. That visceral impression will stay with you the next time you want coffee, but the visuo-olfactory confusion of getting coffee in a McDonald’s probably won’t initiate the same kind of conditioning in your coffee-loving brain.

“Competition: how McDonald’s will kill itself killing Starbucks,” Fast Company Blog, 9 January 2008, http://blog.fastcompany.com/archives/2008/01/09/ competition_ how_mcdonalds_ will_kill_itself_ killing_starbucks.html

How Starbucks lost its magic

When a Starbucks moved in next door, the coffee fanatics who run the Broadway Cafe trembled. Sure, they roasted their own beans and served up handmade espresso drinks to a loyal clientele. But would it be enough to fight off a corporate behemoth?

That was nearly 10 years ago, and now the results are in: the Starbucks is about to shut down. The store had a funereal air the other day as a handful of loyal customers sipped beverages and jotted goodbye notes in what amounted to a book of condolences.

Next door, the Broadway Cafe was bustling. “You win because of the coffee,” said Jon Cates, one of the owners.

After more than a decade of sensational buzz, Starbucks is struggling nationwide as it faces slowing sales growth and increased competition.

The man who built the chain, Howard D. Schultz, has retaken the reins in an effort to revive it. He is scheduled to roll out a plan on Wednesday that will almost certainly involve shutting down more stores in the United States while accelerating expansion overseas.

Mr Schultz has said he wants to refocus on the “customer experience,” recapturing some of the magic of the chain’s early years, when employees who had heard the term barista before Starbucks came along? made the drinks by hand and customers were excited by top-notch coffee.

Mr Schultz faces a difficult task: He has to slow down the company to make stores feel more like hip neighborhood coffeehouses while also delivering the steady growth that investors have come to expect from Starbucks.

After going head-to-head with Starbucks for almost 10 years, Mr Cates, the Broadway Cafe owner, said he no longer worried much about competition from the company. Starbucks, he said, has lost its focus on coffee, noting that the company switched from making espresso by hand to robotic machines that pump out drinks with the push of a button.

“For them, the move to fully automated machines was inevitable, but they lost something,” Mr Cates said. “If you are a barista, you have to roast your own coffee. It’s a necessity. You cannot compete by selling music or WiFi.”

“Overhaul, make it a Venti,” The New York Times, 30 January 2008.

Magazine taps the ‘wisdom of crowds’

International Data Group, the trade magazine publisher based in Framingham, Mass., will restart The Industry Standard as an online-only technology news site with a twist: readers will be asked to wager virtual money on whether various anticipated news developments and business deals in high-tech are likely to happen.

So-called prediction markets are seen as a way to use the wisdom of crowds to forecast future events, such as who will win the presidential election or the Super Bowl. On sites like the Hollywood Stock Exchange, NewsFutures and TradeSports, people can bet on the outcomes of films, news and sporting events. The new Industry Standard will extend that model to news about the Internet at www.thestandard.com …

The centerpiece of the new site is the predictive market. When people register for the site, they will receive 100,000 “Standard Dollars,” which they can use to wager on such propositions as “another company will emerge as a suitor for Yahoo or “TiVo will be bought by the end of the year.”

The listings, which can be suggested by readers but must be approved by The Standard’s editors, will each have associated odds. If the chances are 50 percent that “Google and Dell will team up to make a mobile phone” and it actually happens, a reader would double his money …

Prediction markets have been evangelized in the writings of Thomas W. Malone, a professor at the Sloan School of Management at the Massachusetts Institute of Technology, who is advising IDG.

Professor Malone says prediction markets can tap into the hidden wisdom of crowds, drawing out expertise and insider knowledge.

Google and Microsoft use prediction markets to bet not only on industry events but also on whether a certain product might be shipped on time, Professor Malone said. The results of the betting, he said, often reveal internal problems that managers may not know about.

“Internet-era magazine is revived to look at the future,” New York Times, 4 February 2008.

Do “influentials” matter?

In modern marketing, this idea that a tiny cadre of connected people triggers trends is enormously seductive. It is the very premise of viral and word-of-mouth campaigns: Reach those rare, all-powerful folks, and you’ll reach everyone else through them, basically for free. Loosely, this is referred to as the Influentials theory, and while it has been a marketing touchstone for 50 years, it has recently reentered the mainstream imagination via thousands of marketing studies and a host of best-selling books. In addition to The Tipping Point, there was The Influentials, by marketing gurus Ed Keller and Jon Berry, as well as the gospel according to PR firms such as Burson-Marsteller, which claims “E-Fluentials” can “make or break a brand.”

According to MarketingVOX, an online marketing news journal, more than $1 billion is spent a year on word-of-mouth campaigns targeting Influentials, an amount growing at 36% a year, faster than any other part of marketing and advertising. That’s on top of billions more in PR and ads leveled at the cognoscenti.

Yet, if you believe Duncan Watts, all that money and effort is being wasted. Because according to him, Influentials have no such effect. Indeed, they have no special role in trends at all.

In the past few years, Watts a network-theory scientist who recently took a sabbatical from Columbia University and is now working for Yahoo has performed a series of controversial, barn-burning experiments challenging the whole Influentials thesis. He has analyzed email patterns and found that highly connected people are not, in fact, crucial social hubs. He has written computer models of rumor spreading and found that your average slob is just as likely as a well-connected person to start a huge new trend. And last year, Watts demonstrated that even the breakout success of a hot new pop band might be nearly random. Any attempt to engineer success through Influentials, he argues, is almost certainly doomed to failure.

“It just doesn’t work,” Watts says, when I meet him at his gray cubicle at Yahoo Research in midtown Manhattan, which is unadorned except for a whiteboard crammed with equations. “A rare bunch of cool people just don’t have that power. And when you test the way marketers say the world works, it falls apart. There’s no there there.”

And this is not, he argues, mere academic whimsy. He has developed a new technique for propagating ads virally, which can double or even quadruple the reach of an ordinary online campaign by harnessing the pass-around power of everyday people and ignoring Influentials altogether.

“Is the tipping point toast?,” Fast Company, February 2008.

Your brand is not your reputation

Many executives speak about corporate reputation and brand as if they are one and the same. They are not, and confusing the two can be costly a lesson which companies like Nike Inc. and Wal-Mart Stores Inc. have learned the hard way. Focusing on reputation at the expense of brand can lead to product offerings that languish in the market. However, concentrating on brand and neglecting reputation can be equally dangerous, resulting in a lower stock price, difficulties in attracting top talent and even product boycotts.

Brand is a “customercentric” concept that focuses on what a product, service or company has promised to its customers and what that commitment means to them. Reputation is a “companycentric” concept that focuses on the credibility and respect that an organization has among a broad set of constituencies, including employees, investors, regulators, journalists and local communities as well as customers. In other words, brand is about relevancy and differentiation (with respect to the customer), and reputation is about legitimacy of the organization (with respect to a wide range of stakeholder groups, including but not limited to customers).

For most companies, even an outstanding reputation almost never comprises any unique characteristics that an organization can own and be known for. In short, reputation is a necessary but not sufficient condition for excellence because companies also need strong brands, which are characterized by high customer loyalty, pricing power and the ability to drive growth. Ultimately what drives customer preference and revenue is the ability of a company to create relevant products, services and brands and communicate and deliver them in a way that customers want to buy. Thus, executives need to do more than just keep their company’s reputation on track. They need to differentiate their offerings in ways that win the hearts, minds and wallets of customers, and what helps make a company and its products special and preferred is its brand, not its reputation.

Richard Ettenson and Jonathan Knowles, “Don’t confuse reputation with brand,” Sloan Management Review, Winter 2008.

What hath Google wrought?

No corporate computing system, not even those operated by big companies, can match the efficiency, speed, and flexibility of plants such as Google’s. One analyst estimates that Google can carry out a computing task for one-tenth of what it costs a typical company.

That is why the big data centres make Bill Gates and other technology executives so nervous. They encapsulate the full disruptive potential of utility computing. If people and businesses can rely on central stations to fulfill all or most of their computing requirements, they will be able to slash the money they spend on their own hardware and software. All the dollars saved are ones that would have gone into the coffers of Microsoft and the other tech giants.

What is happening to computing today is a revolution, the biggest upheaval since the invention of the PC in the 1970s. But it is not without precedent. It bears a close resemblance to what happened to mechanical power 100 years ago.

Until the end of the 19th century, businesses had to run their own power-generating facilities, producing all the energy required to run their machinery. As industrial technology advanced, the means of generation grew more sophisticated, progressing from waterwheels to steam engines to electric dynamos, but the equipment was always located at the site of a business and maintained by its employees.

Like data-processing today, power generation was assumed to be an intrinsic part of doing business.

But with the invention of the alternating-current electric grid at the turn of the century, that assumption was overturned.

Suddenly, manufacturers did not have to be in the power-generation business. They could run machines with electric current generated in distant power plants by big utilities and fed to their factories over a network of wires. With remarkable speed, the new utilities took over the supply of industrial power. Scores of private power stations were dismantled.

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The transformation in the supply of computing promises to have equally sweeping consequences. Software programs already control or mediate not only industry and commerce but entertainment, journalism, education, even politics and national defence. The shock waves produced by a shift in computing technology will thus be intense and far-reaching.

One place where the changes will be particularly sweeping is the corporate IT department. As the capacity and capabilities of the computing grid expand, it will continue to displace private systems as the preferred platform for computing. Businesses will gain new flexibility in assembling computing services to perform customised information-processing jobs. They will no longer be constrained by the limits of their own data centres or the dictates of a few big IT vendors.

Nicholas Carr, “A revolution is taking shape,” Financial Times, 29 January 2008.

P2P moves into financial services

When Walter Kond needed $25,000 to buy a shipment of home-theater seats for his company to resell, he didn’t go to the bank. He went online. Kond posted a loan request on Prosper.com and a few days later, more than 300 absolute strangers had pooled together the cash for a three-year loan at 13 percent interest.

Welcome to the world of peer-to-peer lending where anyone with Web access can be a banker and small business owners like Kond are finding a new way to raise cash. The industry is still in its infancy, but has been catching fire as major players enter the market. The UK’s Zopa considered the grand-daddy of the niche launched its US operations in December, California-based Lending Club debuted on social networking giant Facebook in May, and billionaire Richard Branson relaunched Circle Lending as Virgin Money USA in October.

“There is so little innovation in traditional consumer finance that anytime something new like this comes along, it’s a rarity and something to watch,” said George Hofheimer, chief research officer at Filene Research Institute in Wisconsin, which studies the lending sector. “This has a high probability of being what academics refer to as a ‘disruptive innovation’.”

Each of the services offers its own twist on peer-to-peer lending, but in Prosper, Kond says he found an intuitive, pain-free way to finance the imports for his online store Miacom.

Walking through the Miacom warehouse stacked with everything from shredders to mahogany security doors Kond said he first heard about Prosper during an eBay convention a few years ago. Last June, seeking a short-term loan to buy a shipping container of home-theater chairs he had spotted in Asia, Kond posted a seven-day ad on Prosper outlining what he wanted to do with the money and offering a 14.5 percent annual return.

“For the first three or four days there was nothing, but then we started getting corporate bidders and people who (make loans) for a living,” Kond said. Prosper’s lenders offered amounts from $50 to $1,000 and bid the interest rate down to 13 percent. “The next thing you know we have 25 grand and the container was on its way,” Kond said.

“Anyone can be a banker with peer-to-peer lending,” Raleigh News and Observer, 28 January 2008.

The continuing opportunity for IT-fueled productivity

A little while back I spoke at a conference sponsored by Fidelity Equity Partners, a private equity firm that’s part of Fidelity. FEP has an interesting investment strategy: they “focus on investing in established high-growth midsized companies that have gained meaningful competitive advantage through the innovative use of information and systems …” The presenting companies were in dissimilar industries and had wildly different business models. What struck me, though, were their similarities, which went beyond an affinity for or reliance on information technology …

The power of novel IT-embedded business processes. The entrepreneurial insight behind each of these firms, I found, could be loosely summarized as “Wait a minute here’s a process that isn’t working very well. It takes too long, costs too much, and/or delivers unsatisfactory results. We can make it work a LOT better by applying some technology to it.”One of the things I find fascinating about process innovations like these is that they’re often only obvious in retrospect. This is also the case with many product innovations. Most of us didn’t realize that our gear for listening to music was sorely lacking until the iPod showed up, and I once heard the history of the pharmaceutical industry summarized as “giving us drugs for medical conditions we didn’t know we had.” The companies presenting at the FEP conference highlighted for me that the same is probably true for many, or even most, of our current processes. How many of them have been looked at with a fresh, critical eye, a holistic perspective, and a technology-friendly mind? Relatively few, I’d guess, which explains why I’m optimistic that the IT-fueled productivity boost has not yet run its course.

These companies and many other examples have also showed me the difference between simply re-engineering a business process on a whiteboard and embedding the new way of working with IT. A process embedded in technology is more standardized, repeatable, and amenable to monitoring than one that’s deployed only with memos, manuals, and training and enforced via audits and checkups.

Andrew McAfee, “What I learned about Fidelity,” 5 February 2008, http://blog.hbs.edu/faculty/amcafee/index.php/faculty_amcafee_v3/what_i_learned_about_fidelity/

HP thinks big as it tackles internal IT

Randy Mott is something of a CIO superstar, having made his bones as the engineer of Wal-Mart’s highly regarded data warehouse. Since late 2005, Mott has been working on a “transformation” of Hewlett-Packard’s approach to internal IT. Newly ensconced HP CEO Mark Hurd coaxed Mott from his job at the time as the CIO of Dell for just that purpose.

Transformation is Mott’s own word, and he doesn’t use it lightly. He and Hurd have set as a goal the consolidation of 85 HP data centers worldwide down to six in the United States; 6,000 legacy applications down to 1,500; 1,240 IT projects down to 700; and 19,000 internal IT and contract workers down to 8,000. They’re also looking to flip the ratio of IT workers supporting old applications versus those working on new apps from 70%-30% to 20%-80%, and increase the percent of IT projects being delivered on time from 81% to 98%. And all this in just three years, which means the deadline for this ambitious IT overhaul is fast approaching.

Another value Hurd wanted out of the IT makeover: to use the story of the transformation, and the resulting hyper-efficient IT operation, as a showcase for customers and potential customers on the most effective way to use computers in business. To that end, Mott and Hurd have been traveling the country giving quarterly updates to conference-room-sized crowds of technology managers on the company’s progress, and the attendant benefits to business when the makeover is complete. Thus the meeting in Austin.

The first step, Mott told the Austin crowd, is that technology managers must realize that a radical IT transformation is the only way to achieve significant and lasting results. Trying to pick and choose among various and equally pressing IT priorities server consolidation, application portfolio management, rationalizing IT resources is a recipe for failure. “Choosing is losing,” he said. “You’re going to guarantee you’ll never get finished. The incremental fashion just doesn’t work.”

A deep dive into a company’s technology infrastructure will help open a technology manager’s eyes. Some of the 1,240 IT projects Mott cataloged at HP during a 30-day review weren’t slated to be finished for 20 years. “If it takes 20 years to finish, it can’t be that important,” he jokingly pointed out …

Significantly reducing the cost of IT. For HP, that means lowering the IT budget from 4% of revenue to 2% “while delivering more to the business,” Mott said. Many companies have similar IT challenges, such as the considerable amount of legacy code they’re forced to support. Dealing with those challenges effectively can mean a radical change. “Most companies have the opportunity to cut IT costs in half,” Mott said.

“HP CIO Randy Mott: incremental IT ‘just doesn’t work’” Information Week, 11 January 2008.

World not so flat when it comes to start-ups

Silicon Valley, the wellspring of the digital technologies fueling globalization, is itself a collection of remarkably local clusters based on industry niches, skills, school ties, traffic patterns, ethnic groups and even weekend sports teams.

“Here, we have microclimates for wines and microclimates for companies,” said John F. Shoch, a longtime venture capitalist.

Silicon Valley, home of Stanford and other universities, has long been the model of success for a modern regional economy, and policy makers worldwide have tried to emulate it by nurturing high-tech companies around universities. There have been a few winners, like the semiconductor manufacturing hub in and around Hsinchu Science Park in Taiwan.

Yet a look at the microclusters within Silicon Valley demonstrates the business relationships, the social connections and the seamless communication that animate the region’s economy. It also suggests the human nuance behind the Valley’s success and shows why that success is not easy to copy, export or outsource.

“These microclusters turn out to be a very efficient way to innovate, to see what works and what fails, and do it extremely rapidly,” said AnnaLee Saxenian, an expert in regional economies and a professor at the University of California, Berkeley.

New companies, and emerging industry clusters, seek to build on and tap the skills of older clusters. While there are plenty of exceptions, it is generally true that hardware clusters semiconductors, disk drives and network equipment, for example are in the South Valley, around San Jose and Santa Clara. The actual manufacturing of hardware, of course, moved to cheaper places years ago. What remains in the Valley is product design and engineering.

Moving farther north in the Valley typically means moving farther away from the guts of the machine and climbing up the tiers of computing — from chips to layers of business and consumer software and then into San Francisco, home to people with online advertising and digital design skills.

“Silicon Valley shaped by technology and traffic,” The New York Times, 20 December 2007.