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Copyright © 2011, Emerald Group Publishing Limited
Strategy in the media
Article Type: CEO advisory From: Strategy & Leadership, Volume 40, Issue 1
Amazon is more than a retailer
Perhaps Jeff Bezos reread Sun Tzu on his Kindle. His “Fire” fight is neither a declaration of tablet war nor a clashing of clouds. It’s much, much bigger. Steve Jobs, Larry and Sergey, Reed Hastings, Steve Ballmer, and Mark Zuckerberg know exactly what’s going on. Amazon has plunked itself smack dab in the middle of their own business models and aspirations.
Amazon hasn’t simply come up with a new product or – as Bezos himself declared – a new service. That undersells the emerging reality. The net pioneer that reinvented retailing and redefined “word-of-web” recommendations has devised a new innovation ecosystem.
With a bravura mix of ingenuity, insight, and execution, Bezos is repositioning Amazon – and its myriad networks – as a global enterprise that can be every bit as informational as Google, as social as Facebook, software-savvier than Microsoft, as cloudy as any telco, as cinematic as Netflix and, of course, able to take a big bite out of Apple.
“Opportunities multiply as they are seized,” Sun Tzu observed. Amazon’s smart – and newly threatened – competitors will no doubt rapidly raise their games. Amazon’s presence will intensify the innovation tempo in every market touched.
When, or if, Amazon’s strategic ecosystem audacity will pay off is unknowable. But we do know Amazon pays ruthlessly close attention to user experience and customer behavior. The company has been brilliant at monetizing what it learns. As clever as Amazon’s technological innovations have been, Bezos’s flair for ecosystem innovation is even more impressive. Amazon’s ability to create and coordinate a constellation of partners, suppliers and lead users to consistently generate new value goes beyond the remarkable. Even when Bezos appears to be a fast follower, he’s attempting to generate leapfrog momentum.
Michael Schrage “Amazon’s fire and the new integrated platform,” HBR Blog Network, September 29, 2011, http://blogs.hbr.org/schrage/2011/09/amazon-plays-with-fire.html
Revolutionary technology and familiar forms
The future arrives wearing the clothes of the past. The first book that came off a printing press – Gutenberg’s Bible – used a typeface that had been meticulously designed to look like a scribe’s handwriting:
The first TV shows were filmed radio broadcasts. The designers of personal computers used the metaphor of a desk for organizing information. The world wide web had “pages.” The home pages of online newspapers mimicked the front pages of their print editions. As Richard Goldstein succinctly put it “every novel technology draws from familiar forms until it establishes its own aesthetic.” It’s tempting to look at the early form of a new media technology and assume that it will be the ultimate form, but that’s a big mistake. The transitional state is never the final state. Eventually, the clothes of the past are shed, and the true nature, the true aesthetic, of the new technology is revealed.
So it is with what we call “electronic books.” Amazon’s original Kindle was explicitly designed to replicate as closely as possible the look and feel of a printed book.
When Jeff Bezos, Amazon’s CEO, introduced the Kindle in late 2007, he went out of his way to emphasize its mimicry of the familiar, bound book …
To put it another way: the e-book, in its early form, used the metaphor of a printed book as the design concept for its user interface. But it was only a metaphor. The Kindle’s aura of bookishness was the modern equivalent of the Gutenberg Bible’s aura of scribalness. It was essentially a marketing tactic, a way to make traditional book readers comfortable with e-books. But it was never anything more than a temporary tactic …
With the Fire, as with its whizzy-gizmo predecessors, the iPad and the Nook Color, we are seeing the e-book begin to assume its true aesthetic, which would seem to be far closer to the aesthetic of the web than to that of the printed page: text embedded in a welter of functions and features, a symphony of intrusive beeps.
Nicholas Carr, “Beyond words: the Kindle Fire and the book’s future,” Rough Type, September 28, 2011, www.roughtype.com/archives/2011/09/beyond_words_th.php
Megatrends and disruptive innovation
“What are the potential megatrends that could disrupt my businesses in the future or make my business models obsolete?”
That’s the best single question companies should ask themselves if they want to innovate and succeed in today’s landscape, according to MIT Sloan School of Management professor of management Michael A. Cusumano.
Zipcar bills itself as “the world’s largest car sharing and car club service” and is an example of “the rising importance of services or service-like versions of products,” says MIT Sloan’s Cusumano.
Two megatrends that stand out in the industries he studies: “the rising importance of industrywide platforms as opposed to stand-alone products, and the rising importance of services or service-like versions of products,” he says Platform dynamics explain why Sony’s Betamax failed as a consumer product; service dynamics explain the rise of companies like Zipcar.
Companies also need to pay attention to the “dual trend of both innovation and commoditization,” meaning the demand for more innovation and features and the demand to pay less and less.
“They want to pay what they pay Google for searching on the Internet, which is zero. They want to pay what they pay for an open-source software product, which is zero,” says Cusumano.
Free, he notes, “creates tremendous pressure on companies to find ways to make money other than selling products. The essential question is: What will customers pay for? And, increasingly, the answer isn’t that they’ll pay for a great product. Many companies have turned to services or subscriptions or servitized versions of their products, where they’re delivering value and personalizing products in special ways.”
“The one question managers must ask themselves (hint: it has to do with megatrends),” Improvisations, September 29, 2011, http://sloanreview.mit.edu/improvisations/2011/09/29/the-one-question-managers-must-ask-themselves-hint-it-has-to-do-with-megatrends/
Macroeconomics: garbage in, garbage out
There’s one big reason why the current economic weakness in the US has come as such a shock … the state of macroeconomic data-gathering in the US is pretty weak.
In particular, the data coming out of the Bureau of Economic Analysis at the beginning of 2009 was way off. Here’s Cardiff Garcia, introducing an interview with Fed economist Jeremy Nalewaik:
“The initial GDP estimate for the fourth quarter of 2008 showed that the economy contracted by 3.8 per cent. It was released on January 30, 2009 – about three weeks before Obama’s first stimulus bill passed. That number was continually adjust down in later revisions, and in July of this year the BEA revised it all the way down to a contraction of 8.9 per cent.” …
So what’s being done to beef up the state of America’s macroeconomic statistics so that this kind of monster error doesn’t happen again? The BEA is doing the best it can, but it’s constrained both in terms of its budget and in terms of the quality of economists it can attract.
Once upon a time, extremely well-regarded statisticians put lots of effort into building a system which could measure the economy in real time. Today, I can tell you exactly how many hot young economists dream of working for the BEA on tweaks to the GDP-measurement apparatus: zero …
Increasingly the economists in the government who craft the policy responses to macroeconomic developments are working on a GIGO (garbage in, garbage out) basis. That, in turn, means more bad responses, more bubbles, more recessions, and in general more macroeconomic volatility. The world is getting messier – and we don’t even have a good basis for measuring just how messy it is, any more.
Felix Salmon, “How macroeconomic statistics failed the US,” Reuters, September 27, 2011, http://blogs.reuters.com/felix-salmon/2011/09/27/how-macroeconomic-statistics-failed-the-us/
Black swan events and self-inflicted disasters
During the last few years, a number of well-publicized “black swan” events – highly destructive calamities that seemingly come from out of nowhere, and that are diverse enough to include oil rig explosions, automobile recalls, major production delays, financial meltdowns, and at least one phone-tapping scandal – have had immense negative effects on the companies involved. When you look in more detail at these crises, you often find that they were self-inflicted to some degree …
… Analysis of the stock prices of companies that suffered such events in 2009 and 2010 in the oil, automobile, aircraft manufacturing, and financial-services industries shows that within two months after a visible self-inflicted crisis, an average of 18 percent of shareholder value was lost, relative to the S&P 500. Moreover, stock price performance continued to diminish over time: On average, shareholder value came down 33 percent within a year.
Self-inflicted black swans have occurred in many industries in widely varying circumstances, but always with one common factor. Although the initial trigger appeared to be an exogenous event, the critical decisions were largely under the control of management. Typically, a number of people within the company knew about the situation and saw the potential downside in advance; if this knowledge had been acted upon with diligence and in a timely manner, the problem could have been prevented …
Companies with self-inflicted crises nearly always have formal elements in place that are intended to help the organization avoid accidents and problems: reports, explicit procedures, and watchdog and prevention measures that prevent catastrophes when nominally followed. But the informal elements determine the way that policy is implemented. In many cases these unwritten rules, values, standards, and workplace routines treat these formal procedures as bureaucratic overkill. The reports are ignored, and the procedures are followed only in a pro forma fashion. Like the driver who texts in traffic, the company gets away with noncompliance for a long time, while the effectiveness of its procedures gradually erodes. The crisis doesn’t occur until a long time after the noncompliance began.
Eric Kronenberg, “How to prevent self-inflicted disasters,” Strategy+ Business, August 2011.
Bringing Moneyball to business
Of course, Moneyball isn’t just a baseball movie; it’s Michael Lewis’s account of the transformation of an industry by analytical decision-making. That’s a transformation that could take place in any industry, including yours. In fact, I see at least six ways in which your organization, whatever it is, is like the 2002 A’s, who won 20 games in a row and made the playoffs – though not the 2002 World Series – despite a very low payroll. Here’s what you have in common with them:
Analytics can provide you with a competitive edge. Just as the A’s used analytics to find undervalued players who got on base at a disproportionate rate, your company can crunch data to find the offers your customers will respond to best, the price points that will move the most products, or the supply chain configurations that will wring out most cost …
Analytics can help you recruit your best team. Competing on analytics has been a focus in management for a few years, but the hottest area of the field right now is HR analytics. Just as the A’s learned to spot a player with a superior OPS (on base plus slugging percentage) or WHIP (a pitcher’s walks and hits per inning pitched), you can home in on the particular strengths that would raise your organization’s game, and direct your recruiting efforts to the potential employees who have them.
The change to an emphasis on analytics will require strong leadership … Organizations don’t simply wake up to the notion that they will succeed with analytics; they need leaders to show them why and how to seize this new source of competitive advantage …
Getting an edge requires special skills–and sufficient attention. You may need a trusty analytical sidekick like “Peter Brant” in Moneyball … The same kind of close partnership could work for you.
You can count on opposition. For Beane and the A’s it came from the scouts, the media, and even the team’s on-the-field manager. Beane toughed it out, and he’s still GM of the A’s a decade later.
Analytics alone can’t carry the day. The insights generated can provide an edge, and sometimes that’s all you need. But the A’s didn’t win the World Series in 2002, or any year since. Even when they were the only team aggressively using analytics, they still found it difficult to overcome the disadvantages of a small-market team with a small budget.
Tom Davenport, “Six things your company has in common with the Oakland A’s,” HBR Blog Network, September 26, 2011, http://blogs.hbr.org/davenport/2011/09/six_things_your_company_has_in.html
The danger of choosing the wrong analogy
One of the great mistakes of America’s war in Vietnam was to allow a bad analogy to drive policy-makers’ thinking about what was at stake. Although it scarcely seems possible in retrospect, in the 1960s you heard over and over again that the war there was designed to prevent “another Munich.”
American opposition to the various Vietnamese insurgent factions, most of whom were avowed communists, and to their great power backers, the Soviet Union and China, was said to be the equivalent of what could have been achieved if only the British and their allies had stood their ground in 1938, when Hitler demanded sovereignty over the German-speaking regions of Czechoslovakia. What a lot of bunk!
It is may be that all the talk since 2008 of the specter of a second Great Depression may have been a similar blunder.
That’s the possibility hinted at last week by Barry Eichengreen, of the University of California at Berkeley, in a provocative presidential address to the Economic History Association meeting in Boston – the possibility “that the comparison between the events of 2008-09 and the Great Depression was exaggerated, leading policymakers to overreact.” …
But then neither event connected to the present crisis in nearly as many ways as did the narrative of the 1930s. That story had everything: an asset bubble, a banking crisis, currency problems, a breakdown of world trade, stubborn unemployment, arguments over deficits and monetary policy. And so the Great Depression became the crisis analogy of choice.
David Warsh, “Making it multiple choice,” Economic Principals, September 18, 2011, www.economicprincipals.com/issues/2011.09.18/1291.html
Outsourcing and the future of American manufacturing
Amazon couldn’t make a Kindle here if it wanted to.
Decades of outsourcing manufacturing have left US industry without the means to invent the next generation of high-tech products that are key to rebuilding its economy, as noted by Gary Pisano and Willy Shih in a classic article, “Restoring American competitiveness” (Harvard Business Review, July-August 2009)
The US has lost or is on the verge of losing its ability to develop and manufacture a slew of high-tech products. Amazon’s Kindle 2 couldn’t be made in the US, even if Amazon wanted to …
An exception is Apple, which “has been able to preserve a first-rate design capability in the States so far by remaining deeply involved in the selection of components, in industrial design, in software development, and in the articulation of the concept of its products and how they address users’ needs.” Pisano and Shih continue: “So the decline of manufacturing in a region sets off a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”
Steve Denning, “Why Amazon can’t make a Kindle in the USA”, Forbes, August 17, 2011, www.forbes.com/sites/stevedenning/2011/08/17/why-amazon-cant-make-a-kindle-in-the-usa/
The challenges for global banking
In Europe and North America, it’s clear that business as usual is not an option. Banks are squeezed for capital, profits are under pressure, and growth opportunities in the developed world appear to be in short supply. Emerging markets, we project, will contribute nearly half of all banking revenues around the world by 2020, compared with just one-third today, and will represent 60 percent of all revenue growth in banking over the next decade.
The process of transformation is already under way at many banks, but even market leaders must intensify their efforts to produce the long-term returns needed to attract investors. In our view, banks must combine three moves:
Shrink the balance sheet. Banks in both Europe and North America must find ways to work with less capital and to use what they have more efficiently. One way ahead for European banks is to shift a substantial part of their lending to the capital markets so that these banks do less direct lending and help revive the corporate-bond market. In Europe, such bonds address only 20 percent of the credit needs of companies, compared with 60 to 70 percent in the United States.
Rebase costs. To achieve a 12 percent ROE through cost cuts alone–taking none of the other actions we recommend–banks would have to reduce their expenses by up to 6 percent a year between now and 2015. That’s a tall order, since only about 1 bank in 50 achieved annual cost reductions of 4 percent or more in the years from 2000 to 2010 … Banking remains one of the most fragmented sectors globally, and depending on the stance of national regulators some institutions should be able to pursue large-scale mergers and acquisitions.
What’s more, we have found that banks can eliminate as much as half of the cost of their branches by moving sales and service online. Some banks have shown what can be achieved through the application of lean and other techniques–for example, cutting the time to process a mortgage to 60 minutes, from days.
Capture new opportunities. Banks have overcome previous crises by finding innovative ways to increase the top line. Although opportunities may seem to be limited, we see huge scope to improve pricing, to adapt products to the needs of customers, and to find new pockets of growth (taking advantage of the better risk-management processes many have introduced in the wake of the crisis). Opportunity lies in the potential for disruptive technology in both consumer and wholesale banking – yet many of banking’s digital strategies are still in their infancy.
“In search of a sustainable model for global banking,” McKinsey Quarterly, September 2011.
The “gamification” of life and business
It’s important to distinguish games from gamification, and they often do get mixed together. But there’s fascinating, important developments in terms of the significance of games. So the video game industry is a $50 billion business. It’s bigger than Hollywood by most metrics. The vast majority of people under a certain age have grown up with video games their entire life, not just the millennial generation, but people in the workplace, in their 30s, 40s and even 50s are familiar with these kinds of interfaces and techniques. So there’s a great deal that’s interesting that’s happening around games.
But gamification specifically is about taking things from games and putting them into things that are not games, per se. So this is not about going into an immersive 3D world, for example, to do simulation and training where you put a pilot in something that feels like the plane cockpit. That’s what I would call a serious game. It’s related. But it’s something that’s recognizably a game, a virtual environment …
Nike has a system called Nike Plus where they put a little accelerometer into your shoes and you can keep track of your runs and then plug it into your computer and do competitions with your friends, track and see leader boards. Four Square uses point systems and leader boards and concepts like being the mayor.
I would say we’re very early, so there’s a lot of hype about gamification and a great deal of excitement. But it’s just at the beginning of the curve. It’s the way social media was and even electronic commerce before that.
Kevin Werbech interview, “Rewards, motivation, competition: how businesses can benefit from the rise of gamification”, Knowledge@Wharton, http://knowledge.wharton.upenn.edu/article.cfm?articleid=2830
Management zen via twitter
Tomorrow’s management systems will need to value diversity, dissent and divergence as highly as conformance, consensus and cohesion. (September 24.)
Contentment and entitlement are the inevitable by-products of past success, and the implacable enemies of future success. (September 7.)
Bus drivers follow maps. Pioneers follow polestars. What’s yours? (September 1.)
Gary Hamel, http://twitter.com/#/profhamel
Innovation: good versus different
When thinking about product and brand innovation – what seems to elude many executive leaders is that people do not buy products, they buy into meanings.
Maybe the reason for this is simply the physics of most organizations inhibits radical innovation and the competitive advantage that results. What matters the most to people is not the function of a product, but their emotional, psychological and cultural connection to what a product means to them. The key to sustained competitive advantage for companies is to innovate around meanings rather than function and performance.
Radical Innovation does not happen when you bring people an incremental improvement of what they already know. Rather, radical innovation (and market leadership for that matter) is the result of “proposing” an unexpected meaning. This meaning, unsolicited by user needs, once discovered, turns out to be the very thing people where waiting for!
Forget user-centered innovationWith so many such examples in every industry to benchmark from, I am surprised most companies don’t seem to “get it”. Most are heavily invested in traditional market innovation – finding a consumer need and filling it. From our own experience working in early stage product and brand innovation, seemingly the conversation starts by the client explaining how their new product innovation has more buttons and is easier to use than the leading brand. A radical innovation of meaning rarely, if ever, comes from user-centered approaches …
To remove uncertainty and hedge risk in innovation, many companies rely on focus group testing. While useful for certain kinds of learning, people in focus groups have a frame of reference that is based on what is currently known to them. Most people usually want more of what they currently know – only with more features and cheaper. This is not an effective venue for discovering new meanings or competitive advantage.
Thomson Dawson “Brand leadership through radical innovation,” Brand Leadership Insider, September 28, 2011, www.brandingstrategyinsider.com/2011/09/brand-leadership-through-radical-innovation-.htm
Willie Loman no more
Many companies now have fewer and bigger customers, and relationships with those customers are increasingly critical…There is recognition that the sales organization blends expertise regarding product and expertise in the customer’s business to deliver business solutions that add real value. There is a real shift in process … to advance the science of sales and the art of the customer relationship. These involve quantifying what sales does and developing close relationships with customers in new ways. In particular this means articulating more complex sales processes and giving sellers the tools needed to effectively scale these new processes in a way that delivers both excellence to the customer and results to the company.
Noel Capon and Gary Tubridy, “Death of a salesman? Think again,” Ideas@Work, August 23, 2011, http://columbiauniversity.m.xtenit.com/ct/uz3750381Biz11605955
Perspective for dark times
We are living in a golden age of progress and opportunity for humanity. Let’s list some of the big changes in recent times:
There are more of us every year, but the numbers are stabilizing. We used to be with no more than 50 million some 3000 years ago, reached 1,5 billion in 1900, now count close to 7 billion, and can expect to be with close to 10 billion in 2050 after which a reduction is expected. Whilst the increased number of humans, who can all expect to live longer than our ancestors ever could, is itself a sign of success, the expected peaking, due to reduced fertility levels virtually everywhere in the world, is also very good news because it means the old nightmare-scenario of a Malthusian melt-down is now highly unlikely.
We are less and less violent … The basic facts are that the period just after WWII was easily 5 times as violent as the 1980s per capita, whilst the 2000s are easily twice less violent again than the 1980s. The trend for the last 10 years too has also been clearly downward in per capita terms.
Less of us are poor and more have access to basic facilities. Global output growth in 2011 is in the 2-3% range, the vast bulk of which in poorer countries.
We are getting happier as the poor amongst us are getting richer. As one can see from the World Value Survey, the relation between income and happiness is very robust by country and we furthermore know that countries who escape dire poverty also increase their happiness. So the world as a whole is almost certainly getting happier. Even within countries that are in an economic downturn like the US, the average life satisfaction is about as high as it was before the downturn.
And this is not even mentioning the Arab Spring or advances in science and gadgetry. Our ancestors could only dream of humanity having it this good.
Paul Frijters “Are we in a golden age?” Core Economics, September 22, 2011, http://economics.com.au/?p=8004
Craig HenryStrategy & Leadership’s intrepid media explorer, collected these sightings of novel strategic management concepts and practices and impending environmental discontinuity in the news. A marketing and strategy consultant based in Carlisle, Pennsylvania, he welcomes your contributions and suggestions (Craighenry@aol.com).