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Archive for the ‘Innovation’ Category

The tendency to deconstruct business functions into ever finer units of specialization – what I call business reductionism – threatens the kind of coordinated action required to execute on a good business strategy and must be resisted.  The marketing in particular seems to have become susceptible to this sort of reductionism, brought on by the introduction of new marketing technologies , and hope for reconstitution rests on getting back to first principles.

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Things seem to be getting frothy in tech these days.  Facebook paying nearly 1/10th it’s market cap for the WhatsApp user base sounds a lot like paying for “eyeballs” in the Dot-com era of the 1990’s.  That acquisition was then quickly followed by the $2 billion Oculus announcement, which seems to be an even more awkward fit for the social network.  Facebook is definitely playing the long game here.

The other news maker recently has been Disney’s acquisition of Maker Studios for nearly $1 billion.  The fit between those two makes more obvious sense but the valuation still seems rich and has many around Silicon Beach scratching their heads.  (UPDATE 4/14/2014: The plot only thickened when Relativity Media made a counter bid for Maker for an estimated $1.1 billion under a slightly different structure.  This twist suggests a land grab for “new media” properties driven in part by fear of being shut out from all the good deals.)

The “follow the photos” theory for the WhatsApp purchase offered on PandoDaily (above link) sounds not only consistent with prior acquisitions (e.g. Instagram, a failed bid for Snapchat) but strategically sound as well.  (UPDATE 4/28/14: Others have since echoed this theory as well.)  An elegant explanation: co-opt the competition. Facebook can circumvent a disruptive threat by buying control now but letting the company continue to evolve separately.  A simple solution to the classic innovator’s dilemma.  A similarly consistent strategy and market view point probably lies behind Disney’s decision too.

Just last year, AwesomenessTV had around 14.5 million subscribers when it was acquired by DreamWorks Animation for $33 million (plus potentially $84 million more based on financial targets).  Compare that to the 380 million subscribers and 5.5 billion monthly views Maker has today, and the Maker deal starts to look more reasonable.  On a per subscriber basis, Disney paid (very) roughly $2.50 per Maker subscriber while DreamWorks Animation paid $8.00 per AwesomenessTV subscriber.

Of course there are a great many other metrics to consider -measures of engagement like average view duration, likes, shares, and comments as well as demographics and devices, all of which can drive differences in the value derived from one subscriber or viewer to the next.  One cannot simply impute a linear relationship between enterprise value and total subscribers.  It would be analogous to looking at just the spot price today to estimate an options value, but there is no Black-Scholes model for new media start-ups.

I’ve written before about M&A as an open innovation strategy, and I submit for your consideration that these MCN acquisitions are part of one such strategy – investments in future innovation.  Just as Box could rightly allocate to marketing some of the costs associated with supporting its non-paying customers (the customer acquisition costs of a freemium model), some of the premium being paid for Maker or AwesomenessTV could be considered investments in R&D.

Of course, some of the acquisition price still includes projected revenues.  Trends such as market consolidation (a.k.a. all the recent acquisition activity), the growing popularity of brand integrations, a shift in ad dollars away from traditional television, and pressure building on YouTube to share more of ad revenues all add up to rosier financial projections, but for a start-up, those are just vanity metrics.  (UPDATE 4/11/2014: As it turns out, Internet ad revenues have now overtaken broadcast.)  They don’t account for the derivative value of what a company might learn from all the experimentation and audience engagement taking place on the YouTube platform.

Both Maker and AwesomenessTV have access to coveted customers segments – users that acquiring companies like Disney actually need to understand better to ensure their futures.  They are paying for help figuring out where the market is going next so they can, “skate to the puck.”  Next generation, digital-native media companies such as MCNs, unburdened by legacy operations, are uniquely positioned to provide that help.

Return on R&D is notoriously hard to estimate, and in an environment like this one, beware the winner’s curse.  All that said, I get it.  You can pay to play or risk being shut out – without the subscribers, the revenues or the future product/service pipeline.

After today’s Big Frame announcement, which seems like a sensible roll-up at just $15 million, I wonder who will be acquired next.  (UPDATE 4/15/2014: Already DreamWorks Animation is rumored to be in talks with Vevo, in which YouTube also has a stake.  Now that Relativity has lost out on Maker, surely that company will be looking for other deals.  With Big Frame already out of play, one possibility would be going after a vertical like DanceOn or even looking outside of LA at something like Rooster Teeth in Austin or Diagonal View in the UK. I could see both of those latter two getting a reciprocal benefit from the connection back to the Media & Entertainment capital in California.  The only thing that seems certain is Relativity will have to move fast because no one else seems to be slowing down.)

UPDATE 5/2/2014:  Rumor has it that Relativity Media has decided to go after the most obvious next choice, one I considered but omitted above because I presumed to be too expensive.  I ruled out Machinima almost immediately because Warner put money in that company just the prior month, but I should have at least mentioned Fullscreen.  No deal has been reach, and if there’s truth in all the dramatic speculation in reports of a Relativity bid for Fullscreen, a deal may still be very unlikely.  Nonetheless I wanted to update this post yet again because this latest development clearly demonstrates something at play in addition to financial considerations and even open innovation.  My take is that Relativity sees the cost of acquiring Fullscreen for a loss (e.g. for an anticipated negative ROI) is less than the expected cost to its business of being shut out of any good MCN deals and slowly watching new media erode its business.  The situation seems analogous to an airline that continues to operate unprofitably because of its fixed costs; old media companies like Relativity are better off staying in the game and making a bid than forfeiting altogether.

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In the aftermath of the financial crisis of late 2008 and the resulting global recession, defenders of the US financial system maintained that it was a source of US competitive advantage.  Our capital markets facilitate the exchange of money and risk and thereby not only help maximize productivity but also attract businesses to our economy.

With the exception of some of the more exotic financial structures, I tend to agree.  Just as the shift from barter to physical currency enabled new economic prosperity, more sophisticated financial instruments and capital markets (properly regulated) benefit individuals, businesses and entire economies.

The same could be true of social capital.  Today people already exchange favors, debts of gratitude and obligations of reciprocity on a daily basis.  Indeed, reciprocity seems to be deeply ingrained in the social nature of humanity.  Dunbar’s number could be explained as the result of the cognitive limits on mental accounts in social groups.

What if companies could make all these invisible exchanges more visible?  How might collaboration and innovation benefit?  What would a system of social currency look like?  How would it effect rewards and incentives?

Such a system is both possible and relatively easy to implement using a combination of gamification concepts and social technologies.  Here is a hack that I have been mulling over recently.

Every year allocate to employees a set number of social currency point – say 200 per employee.  They can choose to hold onto the points or they can award points to colleagues as a thanks for helping out – say, 1 point for a discrete favor or for providing some much needed insight as a subject matter expert, 5 points for consistently being a team player who goes above and beyond, 10 points for saving the day and making the difference on an important project.  (Publishing very basic guidelines will help.)

Require some information on why the points are being awarded, and make that information public.  This will enforce some discipline and avoid frivolous exchanges.  Making the information public also reinforces the inherent value of the social currency.

For 1 point, the information required can just be an option in a drop down; for 5 points require an additional one or two sentences – for 10 or more, maybe a short blurb. Include the date.  As you collect information and track awards, you build a data set on social interactions that can be analyzed later.

At the end of the year, everyone is entered into a raffle for prizes with the number of entries per person being somehow proportional to the points that the entrants have accrued by the year’s end.  There can be multiple winners, and smaller prizes are probably better than really large ones.  The goal is to make the whole process fun and slightly augment the value of the currency without distorting the normal social incentives so much that employees start gaming the system just to win.

At the end of each year you can see who are the experts and who are the team players.  You can map out interactions and social networks and begin managing people with a new set of metrics.

We are only just beginning to understand the potential gains from harnessing social data.  The Enron corpus has proven to be an invaluable trove of data for analysis.  Imagine adding datasets from the exchange of social currency, one day maybe even gadgets like those that are already gaining popularity in the quantified self movement.  All sorts of new, more rewarding and more productive organizational structures and management practices could be possible.

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Someone recently asked me the question, “What is [business] strategy?”  Given that I call myself a “business strategy consultant,” I was disappointed to find myself fumbling around for an answer. I only managed to cobble together some vague metaphors involving “horizons” and “guiding lights.”

So what is strategy?

I should have a much clearer and more concise answer to this question, if for no other reason than to keep a better response at the ready for dinner parties when inevitably someone wants to know, “What do you do?”

When Porter came up with the Five Forces, strategy described at a high level how your company contended with these forces and beat the competition in the war for profits.  The martial language is both intentional and appropriate since the concept of strategy originated in military theory.

But Porter’s Monitor Group is now defunct, acquired by Deloitte under duress.  In an age when the pace of change from technological advancement is ever increasing, no competitive advantage is truly sustainable, and customers are better informed than ever about their available options. Simply aspiring to beat the competition will not suffice.

Firms need a more meaningful reason for being.  Call it a mission, vision or something else, they need something with which both their customers and their employees can identify.  That’s where strategy for the new era needs to begin – with the impact your company is trying to have on the world, above and beyond beating your competition.

Nonetheless, the Miltonian mandate to make money must also be heeded.  Strategy doesn’t stop with impact alone (outside of the social sector).   Rather, good strategy also identifies valuable problems to be solved and customers to be served who are willing to pay for that value.

Of course, competitors cannot be disregarded entirely in all this, but it makes no more sense to let your competitors drive your strategy than it does to drive your car looking in your rear view mirrors.  You might glance in the rear view from time-to-time, but your gaze generally remains out front on the road ahead of you.

Shifting the focus away from competitors and over to impact and customers and their problems actually leads to a more robust and responsive strategy.  Firms can better anticipate threats from disruptive new entrants and are more likely to recognize attractive opportunities in market adjacencies.

As I’ve considered my answer to the question, “what is strategy,” my conclusions have become more consequential than merely offering a new definition.  The time has come to replace the notion of business strategy entirely.  Music seems a more fitting analogy now than does war.

Imagine if we changed the conversation to be instead about winning business harmonies; rather than tactics, we discussed melodies; and in place of command and control hierarchies and processes, we empowered employees to improvise like jazz musicians.

What is business harmony then?  The broad targeting of people (consumers) and problems in the market that in turn guides organizational decision making, coordinates disparate activities, and ensures a consonant impact from a collective effort.

Just call me a business harmony consultant.

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Sometimes a picture is just better . . .

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A powerful analogy for innovation.

Catalysts are problems in need of a solution.

Adding heat means tapping into the passion of the individuals working on the problem.

Increasing the surface area amounts to opening up your organization and exposing it to more ideas.

Motion comes from changing the context – just mentally re-framing things in a new way or even physically moving your location, as you might do with an offsite.

When they all come together, there’s a transformative reaction.

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It’s been a while. Did you miss me?

Since I started this blog as a creative outlet to complement my day job, I have always tried to keep up a cadence of roughly one post per month, but I always let inspiration be the real metronome. If I was feeling particularly contemplative, I might queue up a couple posts at once to help keep the pace over slower periods.

Until recently, I have been decidedly uninspired, hence the lack of posts. There were just no topic coming to mind that I wanted to explore further in written word. Although I was reading as many books and articles as ever, nothing was all that provocative. Even after SXSW in March, zip (ok, maybe a few notes on topics I wanted to revisit later).

Writers block. Where does it come from and how can it be dealt with?

Creativity in all its forms seems to be a matter of pattern formation, all the way down to the neuronal level. Recognizing patterns where none are readily apparent. Constructing patterns that are both nuanced and pleasing. So why is it the patterns seemed to have been escaping my attention recently? What’s changed?

When I looked back at the date of my last posts (including one I never published), the dates seemed to coincide with when I decided I was ready for a change of scenery and prepared to move from the Bay Area to Southern California. Maybe there was more than coincidence or correlation at play here; maybe there was a cause.

Influenced by some work I did recently on telematics and the Connected Car, I came to suspect writers block might have something to do with cognitive load. Turns out cognition is a scarce resource. It stands to reason, then, that preoccupation with one thing or another would have a crowding out effect.

I hypothesize that concerns about my move – clearing things with my employer, finding a new apartment, moving out of my old apartment, packing up and transporting my life from one city to another – left very little to get creative and write about.

At the risk of extrapolating personal experience out too far, this hypothesis would seem to be consistent with social and cultural evolution. The arts and sciences have flourished in societies and periods of relative stability. If you’re worried about where you’re going to get your next meal, there’s no point pontificating on your navel.

This would also support practices such as Google’s famous 80/20 rule. If you want your people to innovate, you need to leave enough slack in the line for them to (mentally) explore a bit.

Bottom line, stress is the enemy of creativity. A happier workforce is going to be a more innovative workforce.

Well I’m back and feeling much more inspired.

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While spending some time recently in NYC, having gotten through all the reading I brought with me more quickly than expected, I decided to do a quick re-read of The Innovator’s Solution.  It is the first place I can recall seeing  “value networks” used in place of “value chains,” and so I began reflecting on the notion of value networks further.

“Value networks” suggests new complexity to creating what Geoffrey Moore calls a whole offering.  Value isn’t created sequentially, in a chain similar to the assembly lines of the factory system.  Value comes from multiple partners working in parallel value chains that assemble together into a larger network of value for customers.  Think about the value of the iPhone that is derived from the phone itself, the infrastructure provided by mobile carriers, and the population of app developers.

Companies need to be comfortable operating in these sorts of large and complex value networks.  They need to know where they sit within a given value network, and understand the relative position of their competitors and partners in theirs and other value networks.

Partner network development and management has become a business critical capability, enabling companies to take advantage of both open innovation and outsourcing and alerting companies to emergent opportunities and threats in adjacent markets.

It occurred to me that relative to its importance, little is available to aid firms in developing this competency.  Managers and executives need tools and frameworks to help design strategically advantageous partner relationships and actively manage partner networks.  While originally intended to help companies craft an open innovation strategy, the strategic openness matrix I started working on a few weeks back could help solve this problem.

Replacing research areas with capabilities, managers and executives could use the matrix to determine the capabilities most important to differentiation and competitive advantage (the so-called core) and those that are necessary but undifferentiated (sometimes referred to as context or periphery).  Core would be targeted for internal investment while context might be outsourced to a more capable partner.  Should the focal firm already be a leader in a “context” capability, offering that capability as a service to others may present an opportunity to launch and grow a new business (e.g. think Amazon Web Services).

What about selecting partners and designing (yes, willfully designing) the dynamics between partners?  For that I have drawn inspiration from Osterwalder’s business model canvas and customer value map.  I created what I’m calling (for now) the partner relationship map (referred to as “the map” for the remainder of this post).  As with the strategic openness matrix, I am making this early version available under a creative commons license so that others might build off of and improve what I started.

The map is separated into three sections.  On either side of the map are the sections representing the focal firm and the partner firm (which side is which is an arbitrary decision really).  Each firm/partner is endowed with a unique set of resources and capabilities that it employs in the service of specific customers and according to identifiable business imperatives, all of which is reflected in the map.

The middle section represents the interface between the two firms.  The interface is characterized by the level of interdependence and integration between the two firms.  Two firms might be highly interdependent with a customized interface that approaches vertical integration.  Of course, tight integration does not require mutual dependence (is Apple really dependent on any one developer for its iOS platform?), and such asymmetries  create business risk that must be recognized and actively managed.

The inverse of a tightly integrated interface would be a modular interface, characterized by a high level of standardization that allows firms to easily swap out one partner for another (or be swapped out).  Returning to the example of iOS, its noteworthy that from the perspective of the app developer, the app it is creating will only run on iOS and must be modified for Android, implying tight integration between the app and the platform.  From the perspective of Apple, the interface is standardized so that any app developer can plug into the iOS platform.  At the interface, perspective and directionality matters.  To understand how, it helps next to consider the arrows going in either direction labeled value proposition.

Firms present a value proposition not just to customers but also to partners.  In a partner relationship, there is an exchange of value, as reflected by the reciprocal value propositions in the map.  The partner uses its resources and capabilities to offer some value in service to the focal firm’s business imperatives or in service of its customer segments.  In return, the firm offers the same, perhaps most commonly in the form of a payment that serves the partners imperative to grow revenues and make a profit.

The value proposition of the firm may be appealing to lots of partners of the same sort (e.g. SFDC, Wal-Mart, and Amazon all offer valuable platforms to their partners) or only a few.  The value proposition of the partner may, too, be appealing to lots of firms (think of outsourcers all the companies they serve) or only a few.

Let’s consider another case of a focal firm that has created a valuable platform which its partners can leverage to reach their customers.  Facebook is one such case, with its partner Zynga.  From Facebook’s perspective, it has created a modular interface, accessible to all sorts of partners, Zynga included.  Facebook offers access to a large population of users who frequent the site.  From Zynga’s perspective, the interface is highly customized; offerings have to be built or adapted in some way to plug into the Facebook platform specifically.  Zynga enriches the Facebook user experience with fun games, but lots of other companies could offer a similar value proposition.

The partner relationship map can be used to identify these sorts of power asymmetries.  They can also be used to come up with win-win partnerships that balance out the power and value propositions on both sides.  I’d invite anyone who has gotten to the end of this post to try out the map; draw out one of your partner relationships or the partner relationships of an example company and reply in the comments with your thoughts on how useful the map is and how it might be improved.

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