Alistair Davidson on Business Strategy

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2011-12-05T20:25:00.001-08:00

Data Movement and the Cloud

http://connectedplanetonline.com/business_services/news/Cisco-Global-data-center-traffic-to-quadruple-by-2015-1129/

In a nutshell, Cisco's surveys of Internet and data traffic usage in recent years have had a simple message. Video. Video. Video. Not suprisingly, video is taking more and more of the traffic on the Internet. It's not a surprise when a music file might run 10 meg, an audiobook might run 100-300 meg., a movie for a portable device might run 1 gig, an SD movie might run 2-3 gig. and an HD movie in the 4 gig. or more range.

But today's report suggests a different insight. Roughly three quarters of data traffic happens within the datacenter. Such a statistic supports Cisco's move into the data center with its UCS product line that combines both blade servers and routing within the data center.

The other insight that over half of data will occur in the cloud is perhaps less interesting, given that cloud computing is used to describe private clouds, public clouds and hybrid clouds.

Crazy about keyboards

2011-11-30T16:08:00.001-08:00

People sometimes think I am obsessed with keyboards because I have strong views about them. So, let me put my views up front.

I like good keyboards.

I have always liked Thinkpad/Lenovo keyboards. And I typically use an external keyboard even with a laptop when in my office - the reason: I am a big fan of ergonomic keyboards such as the Microsoft ergonomic keyboard. It's the one with the hump in the middle so your hands are turned slightly up in the center, and even more importantly, it has a raised wrist rest.

Along with my ergonomic keyboards, I like my vertical mouse. It's a traditional mouse rotated 90 degrees so your wrist is not twisted. I learned about it from a programmers whose RSI was so bad, he had to give up programming.

More recently, I have purchased the rather elegant Logitech keyboard for Acer Android tablet. It's not a great keyboard in the sense that the Microsoft ergonomic keyboard is. But it is dramatically better than typing on the glass of a tablet. It's softer on the fingertips. It's faster. And even more importantly, it uses its case as a stand, so suddently you have low cost laptop for taking notes in meetings. Combine the keyboard, the case as stand with a $14 stylus and you have quite a useful little device. In many ways more useful than a tablet.

And because the distance between your torso and the tablet is short, there is little sense of having to over reach with the stylus. The whole combination works well. I even use the stylus on the keyboard and have gotten accustomed to using it my phone when the stylus is easily available.

You can, of course, pick up the tablet and use it with your fingers or the stylus, but those who I have influenced to add these apparently needless accessories (there is also a version for iPad), have had, as I have had, the sudden and unexpected realization of how much more useful they become.

It perhaps also explains the popularity of the ASUS Transformer which combines the form factor of a notebook with the detachable tablet.

How good is TV without a cable subscription?

2011-11-26T13:21:00.001-08:00

With lowered disposable income, many Americans are looking at ways of cutting their monthly expenses. Examples include:
1. Substituting Skype for long distance costs.
2. Cancelling land lines and using a cell phone as the only carrier based service.
3. Substituting WiFi whenever possible for 3G services to minimize the use of data plans.
4. Using fixed cost services such as Netflix rather than variable cost rental of movies.
But one important area, as measured by the amount of time, people spend watching TV is the cable bill.
So, over the past two months I have been experimenting with alternative approaches to cable. The big message is that I have been surprised at how little I miss cable TV and how many alternative ways of accessing programming exist.
The most useful services and web sites that I have found are as follows:
1. Hulu.com: upgrading to Hulu Plus gives you access to more TV, but the free service is till invaluable.
2. Netflix.com: at around $8 a month for streaming, it's an absolute bargain. While it does not have everything, it remain a superb value.
3. Over the past year, the major network sites have also become a useful source of free programming: abc.com, cbs.com, fox.com, nbc.com to list just the major sites. While they are a bit erratic in what they make available on-line and their user interface can be sometimes a little confusing, most recent shows can be viewed on demand.
4. Specialty channels: these vary more widely in their offering, but typically recent shows can be found on sites like KQED.org (e.g. Masterpiece Mystery), and other specialty channels such as syfy.com.
5. Sports is a more difficult area and perhaps the one area that holds back many sports-crazy viewers from cutting the cord. But even here there is hope: ESPN3 provides sports, often delayed relatively to the event by 24 hours.
6. Amazon Prime is probably justifiable if you order goods from Amazon, and so the access to thousands of movies and TV shows is a relative bargain as a result. However, Amazon does tend to duplicate what is available from Netflix and Hulu Plus so the increase in choice is not large.
7. Rentable streamable TV shows from e.g. Amazon or iTunes. I have not found it necessary to pay for shows as the availability from subscription or free resources is so rich.
8. Proxy servers: there are a number of proxy servers that allow you to access shows in other countries, e.g. the UK. These are typically free or low cost services. But typically you have to have a severe addiction to a show you cannot obtain easily in North America. M15, Dr. Who and Torchwood seem to be shows that have inspired their fans to expand their sourcing.
9. A Roku box is a relatively painless way of using WiFi to hook up most Internet delivered shows to your TV, but the most reliable way, better than Roku, tablets, WiFi enabled DVD players remains a general purpose computer hooked up to your TV.
10. I have not tested the usefulness of game players such as Xbox or the Sony Playstation for streaming video yet.
Conclusions
So, the conclusion is that having no cable is no impediment to watching most TV. But you still may have to have a physical DVD rental service on Netflix or at the shrinking number of movie rental stores to see premium programming from HBO. And you will have to wait a season.
Perhaps the biggest challenges is that it is more complex to figure out where and when a show is available, given the leads and lags, and changing policies of networks. For that a service such as Clicker.com becomes useful.

2011-11-25T08:12:00.000-08:00

Ultrabooks and the Shifting Value Added in Laptops

The most interesting thing about an ultrabook is not that it will finally provide an instant on feature - matching the major advantage of a tablet. What I find particularly interesting is that an ultrabook's value added profile looks very different than past laptops.

Consider the following costs:

Intel has three processors commonly used in the latest processors: the Core i3, i5 and i7. The least expensive versions of these processors are listed at $127, $184 and $294 as of November 14, 2011.
(http://files.shareholder.com/downloads/INTC/1531543009x0x517569/A19EA566-3E97-43C9-B73C-66BBE6F438F2/Nov_14_11_Recommended_Customer_Price_List.pdf). While there exist faster processors, there's a good argument that putting your money into a solid state drive or SSD will produce better performance for most people.

Ultrabooks are specified to have an instant on capability. While hybrid SSDs can be used to cache regular hard drives to lower the cost of instant on capabilities, the evolution is towards pure SSD devices. If we take a typical SSD sold today as likely in the 120 gigabyte range, we have the interesting situation that the cost of an Intel SSD is around $295. And of course, if you try to match a more typical storage capacity of laptop, you can easily spend $550 to get the storage up to 300 gigabyte.

Now clearly, the price of ultrabooks has to come down for them to more attractive to buyers, but we can expect a classic experience curve to drive costs down.

In other words, while the world sees Intel as a microprocessor company, in terms of value added, Intel has moved to capture even more value in the storage subsystem at least in the leading edge category of ultrabooks.

Now, traditional hard drives are not going to disappear. On a cost per gigabyte basis SSDs cannot compete with traditional hard drives. But given that Intel has had a hard time of diversification in the past, it's interesting to see how they are attempting capture more value in laptops.

And of course, AMD has been going down the same road of increasing its value added and share of components with its purchase of the graphics company ATI.

As usual in tight margin businesses, vertical integration looks attractive.

2011-11-06T11:34:00.000-08:00

A Cool Steampunk App for the iPhone

Yesterday, I downloaded one of the coolest apps for my iPhone. The 99 cent Farnsworth communicator app provides a 19th century interface on a video communicator. Right now it only provides video and audio messaging, not video communications as the characters in the show, Warehouse 13 obtain.

Perhaps the coolest part is the notification. It seems the antithesis of sounds chosen by modern phones.

Best of Times or Worst of Times for Starting a Business?

2011-10-21T15:02:00.000-07:00

Best of Times or Worst of Times for Starting a Business?

In a down economy with high unemployment, many managers aretempted to consider a startup. The current environment is both the best of timeand the worst of times for starting a business.

Conventional wisdomon what constitutes a good startup abounds in Silicon Valley, but some insightsabout what is likely to work require taking a larger and perhaps longer view of success in business.Let’s start however, with some examples of current conventional wisdom. It’snot a comprehensive startup checklist, but it does cover some highlights.

Example Conventional Wisdom

Businesses started in tough times do better thanthose in a boom. (An observation made by many people)
Semiconductor businesses are too expensive andhave low success rates. (Many Silicon Valley venture capital firms have closeddown their semiconductor investment groups)
Internet based businesses are attractive becausethey have low startup costs. (Frequent venture capital observation)
Putting businesses on the Internet that automatepreviously more labor intensive businesses is a low risk strategy. (Typicalventure capital observation)
Avoid businesses that large players such asGoogle, Apple, Microsoft, etc. can integrate easily into. (Often phrased as acomplaint that large companies are killing innovation because of their patentportfolio or pattern of vertical integration)
Venture capitalists are a pain in the neck andactually add little value, so avoid raising money if you can. (A invariablecomplaint of many entrepreneurs)
Manufacturing is impossible in the US. (A widelyheld assumption)
If I don’t have a business model, advertisingwill support my web site. (Frequently heard idea from startups)
My idea for a business is unlikely to be simultaneouslyinvented by other entrepreneurs. (Competitive analysis is typically weak withmost startups and even worse, parallel startups may have low or no visibility)
Starting a business is lower cost than it usedto be because of all the open source and free software that is available. (Anobservation made most commonly by technically oriented founders who downplaythe need for marketing, sales and partner development)
Bright and inexperienced managers are the onlymanagers worth considering. (Consider Google.)
Content is king and all content has value. (Theidea of “long tail” content is that the Internet provides a method formonetizing less popular or low demand content)

As with any conventional wisdom, while there may be grainsof truth in such observations, the reality is that gross generalizations arealmost always useless. Some people refer to them as a 40,000 foot view ofproblem. Strategic analysis of an industry or a company is almost always inadequate;one must look at individual opportunities at the level of a product, service,segment or business model (how one makes money).

But macro trends do matter. In starting a business, anentrepreneur needs to be aware of the gross assumptions floating around thebusiness environment, the business zeitgeist. In Silicon Valley, there are somelarge and often unquestioned assumptions floating around. Understanding theseassumption may allow an entrepreneur to “Think Different” about a problem andreduce the probability of direct competition. And reducing the probability ofhaving to compete with lots of competitors is a strong basis for a goodstrategy. In the past six months, I am continually surprised at how manyinnovations are being simultaneously invented by diverse people in differentlocations. It’s a little like the invention of television or the phone, bothinvented by multiple people at roughly the same time.

Some Useful Observations For Innovators Starting a Business

Supply and Demand

We are still at a very early stage of the digitalrevolution. As a result, many of thelessons learned by early innovators are less appropriate today. For example inthe early days of the personal computer, there was remarkably little software. Today, the problem is that for any productcategory there is often an overwhelmingly wide variety of choice. And not onlyis there choice, offering vary in their business model. Consider productivitysoftware. You can purchase the leading product category offering, Microsoft Office inmultiple versions including a low cost educational version that is availableeven if you are not a student. Open Office and Libre Office offer freeequivalents with only small penalties. Cloud based offerings are available fromboth Microsoft and Google and a host ofsmaller players.

The key insight is thathaving a good product is a whole lot different in an environment of scarce software than it is an environment with multipleoffering and multiple business models.

Content Availability and Distribution

As with software, the environment for content is nowtransformed as well. In the early years of the digital revolution, content wasrarely available on the Internet.

TV programming was hard to obtain and the scheduledetermined by the network, cable company or satellite company. Today, contentis everywhere. Video content is available by subscription, by rental, bypurchase, via broadcast transmissions, cable, cable on demand, cable Pay-TV,Internet delivery, physical rental. Again, the equation between supply anddemand has altered in favor of the user. And if greater access, more businessmodels and more methods of delivery were not enough, consumer created videorepresents a whole new category for consuming time.

The same is true for music. Offerings from iTunes, Amazon,Rhapsody, Spotify, Slacker, Pandora, traditional broadcast radio, Internetdelivered radio, satellite radio, etc. provide an overwhelming set of choicesthat did not exist before.

Written content availability is even more diverse today. Ina previous generation, few people had access to more than their local paper andthe odd national newspaper. The Wall Street Journal, USA Today and the New YorkTimes were typically the only daily newspapers with national reach. Today, aheavy consumer of news can draw upon a range of news sources that would havebeen impossible without the Internet.

The key insight withcontent is that the structure of the traditional news gathering industry isunsustainable when supply increases.

Technology Assumptions

Much of Silicon Valley is built on the assumption that thecost of technology will continue to decline. Moore’s Law is used to describethe observation that the number of transistors in a processor doubles every18-24 months or so. Similar cost curves are seen in other areas of technologysuch as hard drives, telecom costs, screens, and software tools.

When the cost of a technology keeps dropping, four thingshappen.

First, it is hard to maintain atraditional business model where service is incorporated into the price forfree. In some cases, the profitability is so low that sales costs are no longeraffordable – which explains the trend towards freemium models, where initialuse is free. Make the trial free to reduce the sales cost. You only pay whenyou reach some threshold of use or activity. Historically when you boughtexpensive mainframes from IBM, you received lots of service. The amount of freeservice declined as the cost of computers dropped. The same phenomenon existswith software. Expensive software is more likely to have paid or free support. Incontrast, getting support out of Google on their free offerings is a littlelike looking for hen’s teeth.
Second, companies need to increasethe performance and scope if their offering in order to maintain theirprofitability. An MP3 player such an iPod may be profitable, but a smart phonewhich generates several thousand dollars of service revenues is a lot moreattractive. Investment in these sustaining innovations represents the past roadto success for many product categories.
Third, companies will tend to over-servicecustomers leaving room for disruptive less capable products and services. Usinga netbook, tablet or smart phone for interacting with the Internet provideclear examples of usage where the less capable technology is more convenient,more affordable or merely sufficient. The lower cost of these disruptivetechnologies will often open up a new group of users that previously would nothave been able to afford the offering.
Fourth, when margins getcompressed, vertical integration occurs. Amazon’s launch of its Fire tabletdemonstrates this principle. Estimates of Amazon’s manufacturing cost varybetween $150 and slightly over $200, but it hardly matters any more to Amazonthat the cost of the razor does to Gillette. Both companies look at multi-periodprofitability and the revenues generated by the initial sale.

The key insight hereis that traditional views of business profitability – single periodprofitability and individual product profitability often are less important thatrelationship profitability over multiple periods. This is something wellunderstood in financial services where sophisticated banks and credit unionslook at relationship profitability. They promote products based upon theirability to bring in relationships that will be gateway products. It’s a bit like the heroin distributionbusiness. The initial product use leads to more sales.

One implication ofthis insight is that it increases the amount of capital needed to build abusiness based upon multi-period profitability. The challenge is that venturecapital firms like to keep their investees on a short leash. With wrong venturecapital investment group, a startup runs the risk of being put out of businessbecause of the need to iterate the strategy or the time required for frequentfund raising. And with some venture capitalists having difficulty in fundraising themselves, these “short leash” funding strategies can be even morerisky than they initially appear.

So What’s the Good News? Why is it the Best of Times?

There is good news.

The first piece of good news is that with the current highrate of unemployment and generally depressed state of the economy, businessesthat think differently about how to offer value demonstrate tremendous success.

Fix Customer Costs

Consider Netflix. Netflix is an extremely clever companythat understood before anyone else that there is an effective limit to theamount of time that people can afford to spend renting movies. By offering afixed price arrangement, they create value for customers by fixing theirmonthly cost. In contrast, many airlines seem to have an innovation departmentdesigned to make the cost of flying unpredictable.

The conclusion:customers like businesses where there is no pricing surprise. Competing againsta competitor that does not recognize this customer need is likely to be aproductive strategy.

Offer Synergistic andMultiple Value Propositions

Consider smart phones. Smart phones, as a productcategory, offer a consumer multiplebenefits. They are a music player, cell phone, video playback device, still andvideo camera, low end computer, email device, Internet device, GPS device.

The conclusion:offering multiple values can increase the perceived value of a product andservice offering. In the same way that Microsoft offered a bundled productivitypackage MS-Office, a cell phone is not a cheap purchase, but the cost per pieceof functionality is lower than the purchase of individual components.

Simplify Choice andPricing

Consider pricing. Pricing is a complicated area in mostcompanies. It’s an area where many people have input. There is almost never oneperson accountable. Pricing specialists vie with the VP Sales, VP Marketing andCFO for influence. What distinguishes a wildly successful company such as Appleis the clarity of its pricing. It’s hard to identify another company that hasmaintained consistency of pricing clarity over a changing product line. Manyhave observed that Apple typically offered three prices in the market so thatcustomers were not cognitively confused about their choices. If for example,you wish buy an iPad you face only two decisions:

1. Do I want the option of 3G so I connect whenoutside my home or office?
2. How much memory do I wish to pay for? 16, 32 or64 gig?

In a sense you can see these pricing options as influencedby software interaction design. Good software design typically reduces thenumber of choices that a user must make and it is typically goal oriented. Whenyou have this limited palette of choices, you are more likely to buy and lesslikely to worry that you are making a sub-optimal decision. In the smart phonearea, Apple’s limited choices make selection of an iPhone far easiercognitively than the bewildering array of Android phones.

In the same way, curated applications on the iPhone platformcontrast dramatically with the lower level of quality control on Android apps,where malware has been more of a problem.

The conclusion: yourpricing model can change perceptions and adoption of your product. Whilepricing may not be sufficient if you have a poor product, having a good productwith confusing pricing is a recipe for failure.

Shamelessly ExploitYour Competitors and Their Investment in Technology

Most engineering based startups put most of their initialcapital into product development. Whileto some extent, this is an understandable approach, it is often not the mosteffective method of learning about customers and growing a business.

Learning about what customers really value and will pay foris critical. Bob Cooper’s research on new product development success ratessuggests three important conclusions:

The strongest predictor of new product successis offering a differentiated high value product.
Value is not homogenous and varies by segment ofthe market and also by the objectives of the user.
The most common cause of new product failure isinadequate market research and understanding of customer needs.

The conclusion: theupside of the wide availability of products and services is that a startup canchoose to license, resell or repackage technology that has been alreadydeveloped. Honda distributed an SUV by Suzuki as a way of both filling a wholein its product line and learning about the SUV market. The same redistributionoption is often an attractive way of learning more about customers and theirneeds.

This strategy is oftenan excellent way of entering a market and reducing capital costs. Perhaps evenmore importantly, it allows the investment of scarce capital into marketing,promotion and sales. And with a track record of customers and revenues, it maybe easier to raise money from angel investors and venture capital firms. Evenbetter, if the innovations developed build upon the initial resalerelationship, there may be an opportunity to turn a supplier into a distributor.

Some Companies withPlatform Strategies Can Be Supportive to Some Small Businesses

Innovation often takes two forms: product innovation andplatform innovation. Platform innovation requires the development of partneringrelationships with other companies, who must develop applications to run on theplatform.

Nokia got into trouble because it generally built superbhardware devices but was weaker on its platform strategy and was forced to ally with Microsoft to catch up with Apple and Android. Companies that offerdedicated devices will increasingly find it hard to compete against moregeneral purpose platforms where software functionality can replace a dedicateddevice such as a remote at much lower cost. Sonos, the well designed wirelessmusic system offers a remote for its music systems but recognizing theproliferation of iTouches and smart phones also offers a free remoteapplication on the iPhone as does the video streaming box manufacturer Roku.

HP’s recent announcements about its tablet offering demonstratesthe importance of having a supporting ecosystem for a platform strategy. If youhave a platform strategy, you need to put in place programs to encourage orincent potential partners to adopt your platform. Without an ecosystem strategy, even the bestproduct is unlikely to succeed.

Ecosystem developers need to ensure that their environmentremains attractive. Apple’s current 30% distribution fee is increasinglyforcing its ecosystem to develop non-native applications that are browser basedto avoid its distribution fees and will over the longer term weaken Apple’shold on its developers.

The conclusion: largecompanies need partners to make their ecosystem work. A small company shouldshamelessly exploit this need and demand significant incentives and help from alate developer of an ecosystem. The availability of cross platform developmenttools and approaches can also provide greater customer reach.

Marketing Matters andMakes a Difference in Creating Successful Startups

Above all, the biggest opportunity is to remember thatmarketing matters. It makes a difference. There are at least five reasons whycompanies should invest in marketing:

First, understandingyour customers leads to better design of a product or service. Obtaining ongoing customer feedback quicklyallows for more rapid iterative improvement.

Second, while building general purpose products would seemto make sense from a product development perspective, customers look for easeof use and solutions that match their needs. Nailing down what customers needand delivering what they need means taking a general purpose product andensuring it solves the customer problem.

Third, benefits and positioning need to be tailored tospecific types of adopters. RIM has been very successful in the enterprisespace because it tailored its features (security, bandwidth, centralmanagement) to the needs of IT departments managing email to mobile users. Itsless successful tablet launch appeared designed for corporate users but wasmarketed as being appropriate for any user.

Fourth, what customers, prosumers, reviewers and other mediareport about your product or service is part of the “value” of the product.

Fifth, those who design products understand them too well.They lose their ability to take an outside-in or customer view of the problem.Product designers and developers typically focus on relatively obscure featureswithout quantifying the key benefits the customer may care about.

Perhaps the most important reason that marketing matters isthat in an environment with many competitors, spending money on letting yourcustomer know that your product exists creates more revenues for you than forcompetitors who don’t let customers know that they exist. Product leadership isnot just about who has the best product, it also involves reaching customers.

A Contrarian Strategy for HP

2011-10-15T12:47:00.000-07:00

With a new CEO at HP, there is much discussion over the strategy of whether or not to spin out or sell the personal computer division of HP.

My thought is that the focus of the question is wrong. HP essentially has three businesses: enterprise products and services, the PC business and printing.

For years, printing and the resulting ink business has been a major profit center for HP. Its brand is strong and the business is a classic razor and razor blade business - an annuity.

If HP were to sell a business, most people would tend to focus on which of the three businesses has higher margins and growth rates. But the other way of looking at the business is to ask the question, where can the business provide opportunities for growth and innovation.

Rating the businesses on room for innovation, it becomes pretty clear that the PC business is far more interesting than the printer business. Name a major innovation in printing that is likely to affect the overall revenue and profit growth -- it's pretty hard. In fact, the trend towards web sites, tablets, smart phones and other devices probably reduces the importance of printing for most users.

In contrast, the emergence of the phone business, tablets, game devices, home automation products all show how the notion of digital intelligent devices continues to provide opportunities for profitable innovation in adjacent and emerging markets.

Apple, sitting on $70B or so of cash, is living proof of the opportunities. In contrast, printer businesses are not taking the world by storm.

So, if HP is constrained by absence of capital, selling the printer business is likely to be a far better strategic move that selling the personal computer division.

High tech companies need to continually refresh their product and service offerings. A reliable printer business, a sense, reduces the pressure on HP managers to innovate. Having more capital and smart engineers might well unleash a series of exciting new businesses.

A Sideways Look at Apple and its Strategies

2011-10-09T11:56:00.000-07:00

Introduction

The death of Steve Jobs has caused an outpouring ofcommentary about his role at Apple. Most stories focus on his design skills,secrecy, showmanship, willingness to drop old products, project management andhigh level of product management centralization. But there is another way oflooking at Apple that reveals facets of Apple’s strategy that are less discussedand which reveals some ways of succeeding not often written about. Sixstrategies appear less recognized and even if recognized, less imitated:

The role of accidental advantage
Constructed synergies
Price simplification based on principles of good userinterface design
Software being more important than hardware
Scale economies and supplier preemption
The importance of active PR management andcontrol

Accidental Advantage

One of the most missed observations about Apple is that itssuccess in developing a digital music business was the result of Apple’sfailure in the 1990s as a computer company. Record companies were almostdestroyed by the emergence of illegal downloading sites such as Napster. Shell-shockedby the loss of revenues, companies were extremely reluctant to enabledownloading of their music for fear that their revenues would be ruined bytheft.

And along comes Apple, a marginal player in the computerbusiness in the 1990s with a history of customer lock in. Apple’s walled gardenand appliance-oriented computers combined with copy protection (referred to asdigital rights management or DRM) provided a low risk ecosystem within whichillegal downloading was less likely to be a problem. The record companies needfor protection of their assets and revenue model could be addressed by anunsuccessful company such as the Apple of that period more easily than a moresuccessful company such as Microsoft.

Apple built a music business because it had failed to becomedominant as a computer company and because it had a small ecosystem.

Constructed Synergies and Leverage

Many companies discover great strategies accidentally.

Hondais widely cited as having accidentally discovered that its low powered bikeswere appealing to Americans.

Perhaps less well known is the success ofDeloitte. Deloitte has historically been quite conservative and slow moving. Soit was no surprise to many that Deloitte was the last of accounting firms tothink about divesting their consulting arm under the name Braxton. Deloittechanged its mind at the last minute, when it realized to its great surprise thatas the last firm with an integrated audit/consulting offering offered a uniquepositioning opportunity. Because of Sarbanes-Oxley legislation, an audit firmmay not offer consulting services to avoid any conflict of interest. That waswhy other firm spun off their consulting arms. In effect, Deloitte constructeda new business model out of its core business audit/financial consulting and abusiness that they had intended to spin out.

But Deloitte realized shortly before the spin out that forthe 80% of the market that it did not audit, owning both accounting andconsulting capabilities gave it an integrated capability its competitors wouldlack. For the 20% of the market that it audited, it would just forego theconsulting opportunities.

Apple’s constructed advantage turned out to be equally asimportant. Steve Job’s investment inPixar, with its amazing track record of animated movie success, provided Applewith leverage that he used to gain access to one of the most important videocontent providers, Disney. With Disney on board, he could improve the iTunesoffering and attract other video content owners. It’s unlikely that thisconstructed advantage was planned, but Apple and its CEO were smart enough toconstruct an advantage out of these disparate assets.

User Interface Design Influencing Pricing and Product Portfolio Choice

Pricing is a complicated area in most companies. It’s anarea where many people have input. There is almost never one personaccountable. Pricing specialists vie with the VP Sales, VP Marketing and CFOfor influence.

What distinguishes Apple is the clarity of its pricing. It’shard to identify another company that has maintained consistency of pricingclarity over such a rapidly changing product line. Many have observed thatApple typically offered three prices in the market so that customers were notcognitively confused about their choices. If for example, you wish buy an iPadyou face only two decisions:

Do I want the option of 3G so I connect when outsidemy home or office?
How much memory do I wish to pay for? 16, 32 or64 gig?

In the same way, curated applications on the iPhone platformcontrast dramatically with the lower level of quality control on Android apps,where malware has been more of a problem.

Software Not Hardware

While Apple hardware has always been praised for itsindustrial design, in reality the key insight of Apple over the years has beenconsistent: software is more important than hardware. Hardware and good designprovide the skeleton, but the meat is always in the software. And softwarealways makes iterative improvement easier and faster.

This view may seem controversial as Applehardware is widely praised, but consider the recent unsuccessful launch of theRIM Playbook tablet. Its performance has been criticized for being buggy andmissing expected functionality such as non-RIM email. Good hardware and an excellent QNX operating systemare insufficient if the software does not work well or provide the right functionality.Just as importantly strategic schizophrenia at RIM over whether the Playbookwas a consumer or business product led to messaging confusing.

In contrast consider the following four comparisons thatdemonstrate Apple’s consistent use of software over hardware:

	Hardware emphasis	Apple emphasis
Keyboards	MS-DOS and Windows PCs have function keys	Functionality provided via soft and changeable menu and icon options on screen
Music playing	Traditional MP3 players typically provided control buttons for e.g. play, rewind, fast forward, go to beginning, go to end	Touchscreen interaction on iPhone, and iPod Touch not only matched existing hardware functionality but permitted new functionality such as web browsing or more generally apps
Operating system	Most hardware vendors separate the operating system from applications.	Apple provides both the operating system and much of the Pareto functional software, i.e. the software that provides most of the value for the purchaser
Integration across devices	Generally weak for most vendors. Many rely on simple copying of files.	Apple attempts to make the integration a central point of its offering via e.g. iTunes or its more recent iCloud offering.

Costs and Supplier Preemption

For those outside of the consumer electronics area, oneaspect of Apple strategy is almost invisible: its procurement strategy. Overthe years, Apple has pursued a strategy of locking up scarce components bycommitting to large purchases. With a high rate of product launch success,Apple’s commitment is lower risk than for other companies. And by preemptingkey scarce components, it reduces the likelihood of competitor productssucceeding.

Success of the iPod was aided by Apple making largepurchases of small hard drives and later flash memory. Advance purchases of the“retina” screen for the iPhone gave it significant advantage over competitors.And its massive success with the iPad gave it a procurement advantage there aswell, making it difficult for competitors to match Apple’s costs and marketingbudgets or obtain access to key suppliers.

Another aspect of its procurement strategy is that Apple isreported to assess the components of its value chain in one of five categoriesof strategic importance. The most important elements are preserved in-house.

Today, these critical areas seem to include: hardware design, operating system, content salesand integration, mobile microprocessor design and voice recognition. Criticalcomponents that Apple cannot or chooses not to possess are controlled bypreemptive procurement. In contrast, commodity or novel innovations are sourcedexternally. When an external innovation becomes a source of competitiveadvantage or provides a new set of capabilities it may end up being brought inhouse as has happened with the music service Lala.com, mobile chip designcapability and SIRI voice processing.

The Impact of Regis McKenna Upon Apple

Regis McKenna, a public relations specialist was an earlyinfluence upon Apple. He has suggested in his writings that information about a company becomes part of theattributes of products offered by thecompany. This is a lesson that appears deeply ingrained within Apple. Itaccounts for the secrecy and the centralization of disclosure at the firm. Itis also a lesson that many other company do not seem to appreciate today,thirty odd years after Regis wrote about it. HP’s recent announcement about itscancellation of its tablet offering and the spin out or sale of its PC divisionis in marked contrast to Apple’s approach to public relations and marketingmessaging. HP’s mishandling of the announcement led the board to fire its CEOsuggesting that they belatedly recognized the problem.

Taking a Bite Out of Apple: What Apple Tends to Get Wrong

Like any company, Apple has its strengths and weaknesses.Historically, Apple has been far less successful in building significantecosystems around its platforms. Microsoft, often criticized for being lessruthless than Apple in discarding past technologies goes unrecognized by manyfor its success in building the most diverse and comprehensive computer platformand ecosystem in history. Apple has rarely been successful in marketing tobusinesses because when ever faced with a choice of building the next bestappliance or developing its ecosystem, Apple always chooses the next bestappliance at the cost of its relationship with partners in its ecosystem.

And while the app market for iPhones is large and diversetoday, the loyalty of apps developers to Apple is based more upon the size ofthe installed base than any desire to be loyal to Apple. Practically allsoftware developers prefer multi-platform development approaches which permitthem to deliver on multiple phone operating systems (e.g. Android, WindowsPhone 7 and Apple). And Apple’s pricing model, where it takes 30% or revenuesactively discourages the development of native apps that only run on theiPhone. It encourages the development of browser based applications andcertainly must have influenced Amazon’s decision to enter the tablet business.

Summary

Apple is a fascinating company and one that is much writtenabout, a strange irony given its high level of secrecy. Some aspects of itsstrategies are stunningly obvious (design, integration, ease of use, product simplicity).Others such as those described here require more teasing out to appreciate andprovide useful examples of superb strategy design and execution.

2011-09-07T16:12:00.000-07:00

Bingeing: a new media pattern

The first time it happened to me was "Six Feet Under". For three days, I was glued to the TV. I think my eyes became square or at least oblong.

I was reminded of this bingeing recently when I read a review on Hulu by a subscriber who claimed to have spent thirty continuous hours watching the entire first season of a TV show named "Cover Me".

It's a guilty secret, not often shared in public, but the availability of full seasons of TV shows offers new ways of watching TV. And the experience of watching a full season changes the way in which plots, character development, repetition and plot reviews are experienced.

Personally, I found the first season of West Wing almost unwatchable because of commercial interruptions. But when viewed without commercials, the series represents some of the best TV writing and acting ever put on television. I have watched the entire series twice. It's certainly one of my favorites, but only without commercials. When a show is this good, almost Shakespearian in its range, advertisements just don't work. Imagine Hamlet with soliloquies interrupted by advertisements. It just does not work.

I have my list of past binges. They include "The Wire", "True Blood", "Six Feet Under", "Dead Like Me", "Slings and Arrows", "MI5" to name just a few.

What does this mean for content developers? Perhaps that there is a emerging and strong appetite for long form drama where characters evolve and are transformed, perhaps even where main characters are regularly killed off, as happens so frequently and surprisingly to Americans in BBC dramas. The traditional advertising influenced plot structure of many TV dramas seems less compelling after the longer form dramas.

People underestimate change. Long form drama seems the opposite of our world today where people are described as having short attention spans.

2011-09-07T10:08:00.000-07:00

Disruption and 4G

Reading a review of a 4G smartphone today in USA Today, http://www.usatoday.com/tech/products/story/2011-09-07/Droid-Bionic-finally-lands-and-its-a-winner/50296122/1, I was struck again by the strange nature of smartphone reviews.

The conventional wisdom is pretty standard. More features, faster speed, bigger screens are all desirable.

But unless you are grandfathered into an unlimited data plan, the merits of 4G for you as a consumer are somewhat questionable. Video and to a lesser extent music eat up the standard consumer 2 gigabyte plans very quickly. 4G makes a phone more responsive yes, but it also makes it easier to use up your entire allowance.

Only to the extent that that the IP technology of 4G increases the capacity of cell sites and delivers better service does it really provide significant value for most consumers and such a benefit is not likely to be immediate.

My guess is that 4G has much more value for the mobile user of tablets and laptops. And some people may end up substituting a mobile data plan for a fixed data plan, if and only if they have an unlimited plan (as is currently available on Sprint's Wimax network) or if an employer is paying.

Given current pricing models and capacity limitations, my guess is that it makes little sense to upgrade a phone to obtain 4G capabilities for most people in the short term. If 4G does not cost extra, then by all means buy a phone that includes the capability. Supporting this view is the speculation that the iPhone 5 will not include 4G.

For many consumers, a classic overservicing of needs may be occurring. The performance improvement of 4G may be exceeding the needs of many users, particularly those who don't use their phone as their primary data device.

The Cloud Opportunity for Storage

2011-09-05T10:31:00.000-07:00

Executive Summary

Strategic analysis suggests that in the maturing hard drive manufacturing business, there is a significant and strategically critical opportunity for hard drive manufacturers to integrate forward into services for both the consumer and business markets while simultaneously offering outsourced storage management and service for businesses offering cloud storage.

A major advantage of offering a cloud based back up service to consumers is the annuity-like nature of the revenue stream. And because hard drives can be bundled with an optional or prepaid service offering, sales costs of associated back-up services are likely to be lower. A $100 hard drive with hard won profitability can be converted to an upfront purchase plus an annual service revenue that could run in the $10-40 range. Alternative revenue models might include an annual service based pricing model with an on-site hard drive as part of the service offering, in other words charge for service and give away a hard drive.

Incremental revenues from hard drive restoration represent an additional opportunity.

Introduction

One thing is obvious about storage. Most consumers can’t tell the difference between storage offerings. In other words, it’s a classic commodity business where the most effective producer will win.

But as industries mature, companies need to reexamine their value proposition and see whether the business model has or could change. What are the adjacent businesses that represent a low risk opportunity to add revenues, but more importantly are sufficiently complementary to create a differentiated advantage.

With consolidation having already occurred in the hard drive business and two dominant players remaining, Western Digital and Seagate, how might the future evolve?

One alternative would be to accept the carving up of the market. Competition between WDC and Seagate would be comparable to the classic end game in many markets where two dominant players squeeze out other smaller competitors. Coke and Pepsi come to mind. Apple IOS and Google Android. Windows and LINUX.

But there are alternative evolutionary models that could emerge. One traditional weakness of Silicon Valley companies is that they tend to be product oriented. They often are uncomfortable with services and solutions. But as products become more mainstream, businesses often wish to outsource; consumers on average become less knowledgeable than the initial adopters. Another driving issue is that as markets become more competitive, vertical integration often presents advantages. For example, in the highly competitive computer business, the current success story, Apple, has vertically integrated to create an ecosystem that includes content ownership (Steve Jobs’ ownership position in Disney as a result of the sale of Pixar), on line and physical retailing, devices (Macs, iPads, iPhones, iPods) and services (MobileMe, cloud services). This approach is a far cry from the traditional horizontal model where the PC industry consisted of horizontal competitors (Intel in processors, Microsoft in operating systems, Microsoft in productivity software, WDC and Seagate in hard drives, Sandisk and Samsung in flash memory).

One way of looking at the problem is a task oriented approach. A hard drive vendor is not selling hard drives, rather it is selling a solution to a particular problem.

For example, most computer users have been faced with the problem of their system becoming unreliable and needing to restore their system to the previous successful state. While Windows provides the ability to roll back the operating system to a previous version, the comprehensiveness of the roll back is less than having a snapshot of the full hard drive so that it can be restored. This restoration is no trivial problem particularly for heavy users of PCs who many have dozens of pieces of software to reinstall. Reinstalling software on a machine can take several days, a costly exercise for an individual and even more costly for organizations with multiple employees unless they have set up facilities for automating backup and restoration.

A second example is music. An avid music collector may have 20,000 pieces of music. Replacement might well cost $20,000. And while additional hard drives are inexpensive, back up tends to be unreliable and recent material gets missed. Mindless and consistently reliable back up has value to protect the value of the investment.

A third example is memorabilia. Digital photos can easily be lost with a high emotional cost to an individual.

A fourth example is record keeping. Even individuals today often find their financial records stored on unreliably backed up computers.

Cloud Storage

Clearly, cloud storage is an area that is being targeted by many companies. Amazon, Apple, Google, Microsoft, Adobe, just to name a few of the more visible companies are offering free or relatively low cost storage. The intent in most cases is lock-in of the customer relationship as part of an overarching product or in some cases services and advertising strategy.

It’s easy to predict that price pressures in this market will be extreme, leading to efforts by the cloud storage offerors to reduce their costs. But as in all areas of IT, it is the total cost of ownership (TCO) that matters. One way of reducing their TCO will be to outsource storage to the low cost producer. And the most capable manufacturer of hard drives is likely to be well positioned to vertically integrate and offer outsourced storage to these large players. A secondary advantage of vertical integration for a manufacturer is the resulting increased production volume.

If a hard drive manufacturer integrates forward into services, it will lower its manufacturing costs. As the two dominant vendors in hard drive manufacturing operate with low margins, it takes a significant effort to increase the volume and thereby improve or maintain margins. Vertical integration represents a significant opportunity with likely first mover advantages.

The outsourced storage option can be structured in several ways. For large cloud operators, the outsourcing might involve management of in-house storage. For other businesses and consumers, a more traditional cloud storage services model would work. There would also be opportunities for premium storage with additional security attached.

First Mover Advantage

Hard drive manufacturers are highly specialized organizations with value chains that normally ignore service opportunities. Adding the capabilities needed for forward vertical integration requires new focus, new skills and new management. But accepting the opportunity, understanding that services will drive additional volume means that these skills need to be added.

The first to adopt this strategy will quickly gain additional volume. Additional volume lowers costs and makes the forward vertical integration more profitable or enables faster acquisition of downstream customers. It is, as is normal in learning curve businesses, a competitive advantage goes to those who move quickly. What is perhaps less obvious is that the slower the rate of cost improvement, the more necessary it is to seek innovative ways to increase the cost advantage.

Does Downside Exist?

At first thought, pursuing vertical integration might seem to run the risk of alienating large buyers who are already offering cloud services. But if the storage offering is positioned as being available to cloud services and lowering their costs in addition to being available as a consumer service, the cost advantage should be compelling. Owning and managing the storage at a company site also offers a way of capturing hardware volume and minimizing communications costs.

The company that is probably the largest risk is Google. Their use of a proprietary file system and in-house assembly of servers means that they are likely to be most resistant to outsourcing management of storage.

Resource Allocation and Innovation at HP

2011-08-30T09:44:00.000-07:00

HP’s recent decision to sell or spin off its low margin PC business represents a classic problem in strategy to which there are different points of views.

Option 1: Sell the Dogs

In the early years of modern business strategy (the 60s and 70s), the conventional wisdom was to perform a portfolio analysis and analyze the characteristic of your portfolio of opportunities. A common characteristic of such portfolio models, made popular by BCG and McKinsey was the decision to sell off the “dogs” in the portfolio. The dogs were typically characterized as low or negative growth businesses with poor profitability or cash flow.

Option 2: Rejuvenate the Dogs

Over the years, portfolio analysis has leaned away from this first generation view of portfolios and encompassed the idea that mature businesses can be rejuvenated and transformed into more profitable businesses through innovation, increased value added, new business models, tackling untapped adjacent markets, or through expansion into adjacent businesses.

Many have criticized the HP decision to move more in the direction of a services business and imitate the move IBM made earlier away from its personal computer business to a services and solution orientation.

The Value of News About a Company

Others have criticized HP for the clumsy and value destroying way in which it announced its decision to exit the PC, tablet and mobile business. As Regis McKenna, PR guru to Steve Jobs and Apple board member has pointed out in his writings, news about a company is as much part of a product and the perception of its brand and ecosystem value as is product information. This is clearly a lesson that HP has not understood as well as Apple.

But the decision to focus on corporate services rather having two lines of business one focused around business and the other around consumer technology and services shows the importance of thinking about the future, values and vision.

It’s pretty hard to imagine an HP that does not attempt to compete with IBM by offering services and solutions. The EDS acquisition was clearly part of that strategy.

Adjacent and Downstream Innovation

What surprised me personally was that HP would walk away from the products of the digital household. I have two reasons for being surprised:

First, increasingly product innovations for business are born in the consumer sector, where consumers often adopt technologies more quickly than businesses. Businesses are constrained by issues of standardization, support and security. By nature they are often more conservative in their adoption. CD-ROM drives, smartphones and Skype all represent examples of technologies adopted much earlier by consumers. Without a presence in the consumer end of the market, HP will miss many trends.

Second, the consumption of digital devices in the home is likely to be a large and growing area that will encompass many areas outside of HP’s traditional strengths in printers and PCs. There are many dollars at stake. Yes, the barriers to entry are lower and there are many consumer electronics competitors that HP would had to have faced, but the need to develop the design and user interface skills that Apple has demonstrated so ably would have been a significant benefit to HP in all its businesses. The ability to do deals to build ecosystems would also have been a core strength in a world where integration matters.

Centralized vs. Decentralized Innovation

Bob Sutton at Stanford’s engineering school has written about the success of Apple being tied to a centralized command structure and a small product line.

Reference: http://bobsutton.typepad.com/my_weblog/2011/08/5-warning-signs-apple-has-started-to-slip.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2FBobsutton%2Fmy_weblog+%28Bob+Sutton%29

HP’s history is one of decentralized innovation, in a way, a far more difficult culture to create and maintain. The spin-off of the PC business and all the downstream consumer innovations that it would inevitably have seeded may not be the most damaging consequence of this spin off. Rather it is the move away from strong decentralized innovation and impact on HP’s culture that may be the biggest loss.

What Motivated HP’s Decision

Without being party to the discussions on this decision, it’s hard to know which of two factors was more important in the decision.

One factor may have been that the capital costs of maintaining leadership in the business services market may have been the critical issue. HP’s core profit center – printers and ink – is certainly under pressure from competition and the substitution of devices and web servers for paper. If you can download to a computer or tablet, you print less. A networked world needs less paper.

A second factor may be the comfort zone of the new CEO. CEO’s come to the board room table with areas of comfort and discomfort. The rejuvenation of a consumer business is no small task and requires many strong innovators. It would likely take time.

It would be a terrible shame if the decision to spin out the PC business were driven by the unrealistic time expectations of the stock market, and even worse if it were motivated by the way in which senior management was incented.

Perhaps the best we can hope for is that HP’s PC division will be spun out and its new management team, newly refocused, can pursue innovation, unbound by the trade-offs of portfolio analysis in a business with radically different business models

2011-08-28T10:15:00.000-07:00

Strategies for Sharing

OK, so I use lots of different social networking and sharing tools. At some point, you have to ask yourself:

1. Am I using too many tools?
2. Am I spending too much time with them to the detriment of real work?
3. Has the world changed so that your personal brand deserves attention as much as a marketing budget and sales activities are required for larger businesses?

The Situation
I mainly use Linkedin, Facebook, my blog (which you are reading), and my two web sites, one personal and one business (www.eclicktick.com and www.alistairdavidson.com)

For research purposes, I track interesting pages with Evernote. With multiple computers, I use Dropbox for exchanging information between machines and with third parties.

What are my decision rules?

First, I try to use new technologies to understand them. That was one of the reasons for putting up my web sites. A particular challenge on my web sites is navigation, so I have experimented with different navigation approaches for accessing photographs and poems on my personal web site. I use a graphical map, categorization by theme, and ratings of quality. It's not social networking, rather it is the classic role of the editor.

Currently, I am experimenting with Twitter, Klout, Tweettronics, Gist and Hootsuite.

Second, I try to distinguish between content with "reader appeal" and content that is narrowly of interest to me. General appeal content I will put up on Facebook. More obscure material that I may use as a reference source in the future for a project or area I work in I will store on Evernote. Longer articles e.g. from consulting firms, I download as pdf files and store in a directory for future sharing. Base upon the number of Likes and comments I receive, I suspect that I put too much up on Facebook.

Third, most of my own writings get put up on my business web site, www.eclicktick.com under Free White Papers.

Fourth, I put very little content up on Linkedin. Linkedin strikes me as a very salesy site. There are a lot of people showing their wares. I use Twitter, linked to Linkedin to highlight my blog posts on the theory that if I bother to write something on my blog, I would like to think I have something to say that may be of interest to others. I also cross post to Facebook.

While Twitter receives a lot of press in the mainstream media, what is most surprising about Twitter is how few people have many followers and how many people have almost no one following them. Using Tweettronics to look at followership, 40% of Twitter authors have less than 15 people following. And if you have several hundred people following you, you are likely in the top 10% of Twitter authors.

As to the question of how much time to spend, I suspect that like all marketing problems, it boils down to short term and long term outcomes. It's surprising how an article or piece of content can generate business years down the road. This lag makes measurement of a personal brand and sales effectiveness difficult. But for the short and medium term, tracking followership, getting reaction from readers and inquires about business or e.g. job proposals on Linkedin is the only measure of whether your personal content strategy is working.

So, if you are reading this post, what are your decision rules? Are you randomly posting and tweeting? Do you have a content or segment strategy for your personal promotion? What decision rules are you using for allocating your time to different tools and topics?

2011-08-27T10:40:00.000-07:00

The Importance of Execution in Music and Content Sales

I am a great admirer of Amazon.com. I spend far too much there. I use Amazon.com almost exclusively for buying music in spite of also having a subscription to Best Buy's Napster.

One of the reasons I enjoy Amazon (and enjoyment is something many MBAs forget in their 40,000 foot view of strategy) is that when I visit Amazon, which I do every day, they offer free music that I might otherwise not listen to. To be frank, the hit rate is low. Few of the free songs end up in my playlists or my favorites list, but Amazon is a little like college radio, lots of coal and the occasional diamond (which sounds a lot like the addictive behavior of a variable ratio schedule of reinforcement for the followers of behaviorist B. F. Skinner)

This past week, Amazon offered a new album by Barbra Streisand as a promotional item at $3.99. An extended version of the album with more songs was priced at $16.99. I decided against the album, figuring I could always listen to it under my Napster subscription where it would cost me nothing.

But in a rare experience, listening to it on Napster made me fall in love with the album (appropriate given that the album is very sentimental). So I decided to buy the album on Amazon because I prefer the download experience with Amazon - songs get stored in the cloud and the integration with iTunes is better.

But strangely the extended version of the album did not show up in Amazon just the shorter version now back to its price of $9.99. Now it's quite rare that I cannot find something in Amazon, so I bought the extended album at Napster for $16.99

It's a small example, but it does show the importance, and, perhaps, the difficulty of perfect execution, particularly in a software based retailer.

What are the take-aways from this experience?

1. Amazon does not just sell products. It focuses upon the experience of shopping by offering bargains and implicitly recommendations on good or at least new music.

2. Search tools matter. My inability to find the album I was looking for led to a rare lost sale for Amazon.

3. User interface and integration matters. My preference for Amazon is, in no small part, due to its seamless integration of music downloads with iTunes. I find the same integration with my Kindle downloads and Audible. The strength of my preference is reinforced by the ability to store my music in the Amazon cloud (though to be fair it has taken several months for music stored in the cloud to be automatically downloaded reliably to my machine)

4. One of the small annoyances with Napster is that when music is downloaded, it does not end up grouped into a directory under the artist and album. Someone at Napster is not on their toes. I would be relatively indifferent between buying from Amazon and Napster if their download integration were comparable.

5. While Napster is a cloud based music service and exceptionally good value, its marketing people are not keeping up. Offering a service where music can only be downloaded once is not comparable to the Amazon offering where a buyer has the security of knowing his/her music collection is backed up in the cloud or redownloadable in the case of Kindle books or Audible audio books.

It's tough doing e-commerce. You not only need to have a good business model, you need to consider your search engine capabilities, your pricing, the experience you create with customers, user interface and integration issues. It's no wonder that many fail and the best pull ahead.

HP's Decision to Spin off its PC Division

2011-08-19T14:28:00.000-07:00

HP’s decision to spin off or sell its PC division strikes me as reflecting badly upon both the strategy and execution of the business.

Consider the following facts:

HP is the largest technology company in the world with the leading market share in personal computers. As such it has potential economics of scale, economies of scope, buying power and should have a cost advantage over its competitors.
HP is one of the few full service computer providers who can provide a wide range of hardware to business buyers, presumably allowing lower cost of sales and service.

On the negative side, HP’s branding is confused. I have never been clear on what HP’s brands stand for at the overarching level (what is the difference between Compaq brand and HP brand?), or at the product line level – there is very little successful branding to communicate different value propositions to different types of buyers.

Perhaps the biggest sign of problems in the HP brand is its lack of innovation. Why for example was HP so late to the tablet market? What was its offering reviewed as slow and buggy? How can major companies launch buggy products with anticipating consequence? Even if you are late to market, it’s a bad idea to create negative word of mouth from early adopters and reviewers. It’s negative viral marketing.

Perhaps the biggest condemnation of HP’s innovation is to ask the question why it cannot even design an equivalent to the Apple Airbook. It’s pretty obvious to anyone who has travelled with a computer, that less weight and small form factors are desirable. It was a need obvious before the Airbook was launched. It was obvious when the first generation of Airbook was launched. It is even more obvious today with the second generation of Airbook.

There are other reasons to be critical too. If a company like HP decides to compete against a large and dominant competitor such as Apple in the tablet market and it is not prepared to develop a superior product offering, it must anticipate a long uphill battle. To launch a product and then give up on it quickly suggests either that the company lacks a long term plan or that it seriously underestimated its competition. Even worse, in the consumer market, competition is based upon ecosystems. Lacking an explicit ecosystem strategy to compete with a dominant competitor’s ecosystem is a recipe for disaster.

HP claims that profitability is a major reason for spinning off the PC division. But profitability is under the control of management. If Apple can command premium prices for ease of use, for design, for their integrated ecosystem, why can’t HP? Lack of profitability represents a failure to seek superior value and obtain the pricing that superior value claims.

Research on new product innovations suggests that the single largest predictor of new product success is offering a differentiated high value product. HP seems not to have understood this lesson.

Perhaps the fundamental reason for HP’s lack of success is explained by research on product managers. Some researchers suggests that companies with strong and senior product managers who are both accountable and given authority produce better products and bring them to market faster. In organizations where the product manager is less experienced, has little authority and plays a more coordinating role, products take longer to get to market and are of lower quality.

2011-08-08T15:07:00.001-07:00

Public Speaking and Presentations: Eleven Thoughts

I attended a presentation this week where two people spoke. The first had no slides and his presentation seemed to be an ill thought out musing on his personal enthusiasm for his current role. The second bored us to death with an ill-conceived and disorganized presentation on his attractive sounding software.

By way of background, I have done many presentations in my career, some good, some bad. I have also received media training and done both radio and TV interviews with the benefit of a PR person to coach me. And I, in turn, have trained and coached sales people and distributors, consulted to firms who develop sales and sales training materials, helping them develop and deliver presentations, videos and sales pitches.

So, let me offer some simple rules about presentations for those who have not received training.

1. Prepare. There are very few people in the world who can stand up and interest a crowd. You are probably not one of them. If you were, you would probably be on stand-up comic circuit. I think it was Voltaire who apologized to a client on the extreme length of a book. He explained that shorter takes longer. It's also true with presentations.

2. Figure out in advance what message you would like to implant in the audience. Most people immediately forget what they have read or heard. So, you need to figure out what number you want them to remember, what picture you want them to be able to reproduce, and what story want them to be able to tell to their spouse, their boss, or their colleagues.

3. Don't assume that your audience knows what you know. Start with the basics so that even those in the audience who are not experts can get something out of the presentation.

4. Quantify. People are generally more interested in the implications of something than the something. I recently did some work with a major communications equipment vendor in the area of fixed mobile convergence. One of the exercises I did was to calculate the net present value over ten years of having voice calls diverted from congested cell towers to a WiFi connected call which went over the fixed broadband connection in the home or office. It turned out to be worth as much as $3.2B per million customers. Translating the general unquantified benefit to a number gets people's attention. It's not easy sometimes to come up with number, but more often that not, you can. Personal benefits matter too. For many managers, not getting fired for making a poor purchasing decision is an important issue. So, if you are a minor player and the client has committed to using a well established vendor, don't compete directly, pursue an indirect method of entry into the company.

6. Showing people software is generally extremely boring. My belief is that if you can't sell a piece of software without showing it, you are not very good at selling. Show the ideas behind the software so people can understand what is going on. If you are going to do a demo, automate it, practice it or use a canned slide show. Don't waste people's attention and time. If you do, you will lose them -- they will drift off and play with their tablet or phone.

7. Don't be confused. Most people don't buy software because it is better. They buy it because of momentum. So talk about momentum, your ecosystem, your backward compatibility and product evolution. Your software may well be the best thing since sliced bread was invented, but people tend to make decisions on technology momentum. If the technology is better but unsupported and lacking a long term future, it does not matter if your technology is better, unless it is orders of magnitude better. And if it is magnificently better, then it is likely only going to appeal to a niche.

8. Ask the audience questions. It gives you a chance to both wake them and keep them involved. It also allows you to gauge their level of knowledge.

9. Don't talk about yourself, your programs and how you are personally excited about everything your company is doing. Excitement should be the result of your presentation not a personal description of your emotional state.

10. Make the presentation easy to retrieve. Provide a web address from which it can be retrieved.

11. If you do a question and answer session, repeat the question before replying, so that those in the audience who could not hear the question have some idea on what you are replying to.

There are, clearly, many more guidelines, but these eleven seemed particularly obvious after the presentation this week.

2011-07-29T11:16:00.000-07:00

Stupid America, clever America? I suggest clever is better.

My late father, as international a person as you could ever meet, used to say about the US that the United States contains the best and the worst. Today, the worst seems terribly visible. Stupidity seems to abound. Notoriety and popularity seems more important that knowledge and truth. Misguided belief seems more important than the scientific method.

For a living, I am a strategist. In simple terms, this means, I try to figure out where the best bang for the buck is. If you have five products and one is really a huge opportunity, it is common sense that you should be putting more resources against the big opportunity and less on past products – ones that you might be investing in from tradition and perhaps inertia.

If iPods are declining, and iPhones are increasing, then you should spend more management attention and advertising on iPhones. If offering a solution, something that solves a customer problem is better value for a customer, it make little sense to merely offer a product and be surprised that you have missed pieces of the puzzle.

Management matters. It means prioritizing the important. It also means dealing with the truth, because companies, like marriages, if built on lies, rarely last. Management of a country matters too. And so does political leadership.

The Economic Environment Matters

It should hardly be controversial to Americans that the economic environment matters. In the 1970s and 1980s, Japan’s success led to many discussions of industrial policy. Today, in the US, industrial policy is a term that is never used. What people seem to forget is that the sum of all the investment decisions, investment encouragement by government, and the regulatory environment create a de facto industrial policy. Denying that it exists means that individual policies may end up acting in opposite ways and making growth difficult. Believing in free markets and their power should not mean denying that government, laws, policies and regulations exist and have a cumulative impact upon the birth of businesses.
Stupid people deny government exists and has an effect. Smart people think about optimizing.

The Healthcare Example

Some parts of America today remind me of stupid companies I have worked with. As a foreigner, but one who did both his degrees in the US, I expect that writing this article will result in rude comments from many Americans. When I have commented to some Americans that I thought the healthcare system in the US was, on average, inferior to other developed countries, I have received comments that in their polite version suggested I return to those countries. But by the way, well known researchers like Michael Porter and Elizabeth Teasberg would agree, as would the CEO of one of the most successful healthcare organizations in the US, George Halverson at Kaiser Permanente that research shows the US system is incredibly expensive, wasteful and inconsistent.

But as a strategist with an international background, I know that countries, like companies, which only see their competition as being American always get into trouble. Like any large and successful country, many Americans wear a set of filters that often causes them to miss how the US looks from outside. Even worse, stupid Americans today, seem to arrogantly assume that other countries have nothing to teach America rather than recognizing, like clever Americans, that America has been the beneficiary, a melting pot of the best from other countries.

In discussions of American healthcare, I am continually astounded by people who tell me that the US has the best healthcare system in the world. Their evidence is always anecdotal. Actual research says that the US has wildly inconsistent healthcare delivered at high cost. They try to tell me that Canadians are constantly coming down to the US because they can’t get treatment in Canada. (The data says otherwise.) But what they miss, and one would hope for better in a capitalist country, is that the US spends roughly $2.5 trillion or 18% of GDP on healthcare and produces worse outcomes than other developed countries. Even if the outcomes were equivalent, that spending is about twice the percent of GDP of other countries who spend from 6-12% of GDP. What this means is that a more effective healthcare system comparable to international developed countries with universal healthcare would be one that cost around a trillion dollars a year less. It would be equivalent to a trillion dollar tax cut per year.

When you see the numbers in this light, perhaps paying attention to more effective ways of delivering healthcare might be much more important than negotiating imaginary deficit reductions in Congress or debating the merits of universal healthcare (which is according to most, a requirement for reducing total healthcare costs). And if you think the problem is bad today, consider demographics, the most predictable of sciences as a general rule. The bulge of the Baby Boom is getting older and more expensive for healthcare. The current method of delivery is projected to get even more expensive without dramatic change. But as things cannot go up for ever, failing to reform healthcare means we will lose much of what we prize in healthcare.

What do the stupid in Congress focus on? Trying to eliminate universal healthcare and programs to improve healthcare performance. Stupid.

Infrastructure Investment

For many years after the Second World War, the US was the preeminent economic power in the world. Today, the US is still important, but its relative power is less. The European Union, for all its flaws, is roughly the same size as the US. And in many areas, the European Union is as successful as the US. The quality of life is high. Everyone has access to healthcare. The social safety net is strong. Things are not perfect: innovation is not as easy in Europe. Some European industries and countries are weak. But Europe does many things well and there are lessons to be learned there.

China has many problems, but it also has a high rate of growth. It is building cities for 300 million people over the next 10-15 years. Think about it. That’s like building housing for the entire US population. China, which clearly has significant infrastructure deficits, is investing around $3 trillion in infrastructure. This new infrastructure, like the infrastructure built in Europe after the Second World War, or in the developing five dragons of Asia (S. Korea, Hong Kong, Singapore, Taiwan, Japan) make doing business more attractive in these countries.

But what do see in the US. Bridges that fall down. Levees overcome by storms. Roads that are poorly maintained. Ports at capacity. Unrejuvenvated water and sewage systems.

While American innovation may be praised for developing an iPhone app that identifies potholes in Boston when you drive over them, it would be better if no such app were required. Postponing maintenance on roads does not mean postponing the repair cost one year. Rather it means that when you do repairs later than you should, the cost may be five or ten times higher. In a word, stupid.

Education

I am a big believer in education. My parents sacrificed to put me in good schools. And I think it is fair to say that I have studied at some of the best schools and universities in three countries. I have taught strategy, international strategy, IT strategy and innovation internationally. But I never had to worry about wildly fluctuating school budgets and class sizes. Is there anyone is the US who really believes that you can run a school system with a wildly fluctuating budget?

If one were to design a revenue stream for schools, would it not be a good idea to make it predictable? “We are not going to teach advanced mathematics this year as it is too expensive.” does not strike me as a good educational policy. It’s stupid.

Market Forces

Look, I have an MBA from a well known East Coast business school. I think markets and competition matters. Communism did not work, but there strikes me there are a number of important points that are missed by those with a poor understanding of capitalism.

First, economies go up and down. And while allowing companies to go out of business because they have been out-competed does make sense, allowing recessions to turn into depressions does not make sense. Micro policy is not the same as macro economic policy. In the same, way allowing frequent financial crises, a characteristic of lack of regulation in the 19th century also strikes me as a bad idea. I am in awe that so many people in the supposedly capitalist US seem to have no knowledge of economic history or no recognition of the cost of poor or nonexistent regulation. In a society that prizes the individual, failing to regulate (e.g. via contaminated food or transportation that is unsafe) means granting a right to kill or maim an individual or cheat someone. This right has a huge cost to the individual, and also a large societal cost. Regulation that prevents such events is great buy for the person who would be killed or hurt and typically represents low cost insurance for everyone. The absence of trust in society is costly in many ways: the higher cost of police, more use of lawyers, security systems, deals that don’t get done, economic activity that is too risky to pursue. Trust is advantageous. It makes people clever and enables clever people to start businesses more easily. Which leads to job growth.

The recent recession has a result in an economy that remains in trouble. Consumer demand, which represents the majority of the economy, roughly 72% of GDP historically, is down because people are poorer – their houses are worth less – and the resolution of the real estate bubble means that people will be and will feel poorer for a long time. Government spending is being cut back by ill guided policy decisions causing firing of government employees particularly at the state level. Companies and individual are reluctant to borrow because of uncertainty and lack of consumer demand. Exports are a relatively small percentage of the US economy. And real estate construction, a major contributor to the boom years of the first decade of the century, is likely to be depressed for some time. So where is economic growth and employment going to come from. Certainly not from the stressed and poor, not from real estate and not for companies with factories operating below capacity or who manufacture off shore.

What the brilliant economist John Maynard Keynes pointed out is that economies can get stuck, below their optimum level of output. If they do, tax revenues go down and deficits balloon. You need to use government spending to stimulate growth. It pays for itself. And if increasing economic growth and reducing deficits were not a sufficient idea, the historically illiterate might want to remember that while Franklin Delano Roosevelt was saving capitalism by introducing previously radical ideas such as counter cyclical spending, infrastructure investment, bank regulation, and deposit insurance, fascism took over in Germany, Spain and Italy. Unemployment is never a good idea politically either.

So, what are debating? Cutting spending, which will do nothing for employment. And if that were not bad enough, we are not attempting to prevent the excesses of unregulated financial markets. How many times to you have to shoot yourself in the foot to understand you should change your behavior?

It’s stupid.

Complexity

You don’t have to be a genius to notice that there are a lot more people on the planet. And with successful economic growth, more resources are being consumed and more pollution is being caused. So, there are three choices:

1. Slow population growth.
2. Hope that things work out.
3. Manage the growth.

So, what do we do in the United States. We discourage family planning, which has the side effect of reducing women’s economic choice. (That’s not only morally unfair, it deprives us of the brains of up to half of humanity.) The stupid seem to assume that things will work out magically. Without getting into the traditional debate between Malthusian views that overpopulation will create starvation and the idea that technology can also solve overpopulation problems, perhaps there lies some middle ground. Policies matter. Markets matter. Changing the cost of polluting will change behavior. It’s stupid not to realize it.

People under-forecast the variability of the future. Management 101 teaches our difficulty in forecasting the future. We also have difficult investing in projects to prevent future outcomes. You only see the costs, but not the benefits. Even if the disaster occurs and is more expensive, solving the disaster demonstrates “leadership”. That’s stupid. Post facto leadership is way more expensive. Consider the cost of New Orleans if you don’t believe me, or the potential flooding disaster around Sacramento, California if levees break.

In a complex world, you have to make more complex decisions. And complex decisions are not amenable to propagandistic debate. If you don’t believe that science is the most important tool for understanding systems, then on what basis do you want to make decisions? The Bible? The Koran? Dianetics? The purported saying of the Spaghetti Monster? The word of some lunatic who has eccentrically calculated when the world will end? How you felt this morning when you got up? Polling data? Being stupid does not prevent disasters. Learning from data, research and models reduces the probability of disasters.

And if you have not understood that politically powerful companies prefer not to pay for their effects on the environment, then perhaps it is time to go back and read Machiavelli. The current situation is always supported by the powerful who have political voice. The future has few supporters. I am consistently dismayed by those who argue the idea that scientists are somehow not a reliable source of information, when companies with billions of dollars on the line are investing politically to defend their position. The process of scientific review is about validating and reproducing data that independent scientists have reported. Learning is better than a fixed opinion. Fixed opinions are typically stupid if they don’t take into account new information.
It’s stupid to think that unfixed climate change is not going to be the most costly event the human race could have avoided, bar nuclear or other apocalyptic warfare.

Energy Policy

The Industrial Revolution is the basis for the economic growth of the past 300 years. We have been living in an age of cheap energy with little recognition of the cost of polluting the environment. The US has built cities based upon cheap energy. It has, some have suggested, gone to war to preserve access to inexpensive energy.

So, where are we today. We have, as many have pointed out, facing the fact that developing countries want a higher standard of living. More meat. Better transportation. More use of energy. With historical technologies, this growth will inevitably result in more pollution, a hotter planet, more destructive weather and higher energy prices, and in particular more expensive oil.
In the short term, nobody wants their standard of living to go down because the cost of energy goes up. They don’t want to be unable to drive because gas prices are too high. So, we need to do something about, what seems to be a pretty inevitable problem. It’s cheaper to do it now than to do it later. If you don’t remember the oil embargoes by OPEC in the 1970s and their impact, you are being stupid.

And yet many feel we have a god given right to drive big cars and have big homes far from work. So, here’s the bad news. Changing infrastructure is really hard particular when the poor are affected or when a particular industry may have to change. It’s probably a fifty year problem but one that needs to be tackled aggressively. There’s lot of political resistance and government is going have to help manage the transition. It takes a long time to replace a fleet of cars. It takes even longer to change cities and transportation networks. Don’t get me wrong. I like a house with a garden, but in a higher energy cost environment, urban planning needs to change. You need higher densities to support public transit. You need new infrastructure to support electric cars. And by the way, these are typically the kinds of things that don’t happen by accident. They require government policy – regional urban planning in particular.

Denying this just means the cost of transportation will go up and the value of your house will go down even more than if incentive policies are put in place to manage the transition to a higher cost world .

It would be stupid to think otherwise.

The Debt Limit

The current debate over the debt limit demonstrates the inadequacies of most politicians. No other country has such a foolish law. If Congress has approved spending and tax policy, then it is a simple set of mathematics as to how much debt is needed. Approving the debt more than once, first through spending and revenue legislation and then a second time, is the ultimate example of overlapping and redundant legislation. That’s stupid.

Shooting yourself in the head from a financial perspective and risking an increase in the cost of borrowing is not something a normally intelligent person would do. It’s much more costly in absolute dollars if you are a country with trillions of dollars of debt.

If you want to ruin a country, think short term. Think only about the next election. Be stupid. There is no better way.

2011-06-09T11:21:00.000-07:00

Making Sense of Media and the Cloud

Apple’s announcement of its iCloud service has long been predictable since Apple purchased Lala.com in 2009 and promptly closed it down. Lala was a clever web site that allowed you to upload your music to the Internet. In an intelligent move, Lala saved you the trouble of uploading if they already had a copy of the specific piece music in their site (after all, bits are bits). Many people may not understand the advantage of this approach, but in a word it boils down to asymmetry. Broadband connections are faster downloading than uploading. In my personal case, It would take several weeks to upload my digital music with a slow upload connection.

Apple is of course, not alone in using the cloud to sync content across multiple devices. Industry titans, Amazon and Google have as slightly different strategy of using the cloud to store files, back up your digital music and play music from the cloud. Google’s service, combined with its Android operating system is attempting to compete with Apple’s offering but with less emphasis upon syncing. Amazon is attempting to compete with the iTunes store. And there are many more ways of storing your vital assets in the cloud. Evernote is popular for notes that you can access from different devices. Dropbox is useful for sharing files with clients or different computers.

But the more general question is: “What is the future of digital media in the cloud?” Back in 2007, I wrote that a new framework for understanding the evolution of digital media would help predict the evolution of the market. Historically, when you bought a book, a magazine or a piece of music, the relationship of the buyer to the content was pretty well understood. If you owned a book, you could read it, keep it and lend it to friends. You could not make a copy of it with a copier and give it or sell it to other people. If you bought music, you could play it or lend it to friends. You could make a copy for personal use, but not redistribute it.

The digital revolution changed everything. All the legal rights attached to the digital content could in theory be unbundled and repackaged in different ways. Lala.com offered the innovative approach of allowing you to buy the right to stream music from the Internet for 10 cents a song, much less than the then conventional price of roughly $1 a song. Legal subscription services such Rhapsody.com or the reconstructed and now legal Napster offered programs where, for a monthly fee you could stream music from a library of millions of pieces of music.

But these examples don’t illustrate yet, the richness of marketing approaches now available. Consider for example the difference between the original digital music model and Audible, the well known audiobook seller now purchased by Amazon. Historically, prior to the emergence of cloud based music services, when you bought a piece of music, you typically had no right to re-download it if your hard drive crashed. Audible took a different approach. Its service was more like an online personal library. If you bought an audio book, you kept a copy in your online cloud library and you could download it any time you needed to. Amazon’s Kindle books have the same feature. Unlike music, you could download a book you owned many times from your on line Kindle library, as you now can with Amazon’s cloud service.

In the future, the purchase, rental or use of content will offer far more variety than we have been accustomed to in the past. Consider movies. Today, you can purchase a movie in various types of quality (DVD, Blu-Ray, 3D). You can download the movie for purchase or with varying time periods for usage. You can rent the movie from a store or Kiosk. You can also subscribe to a service like Amazon Prime, Hulu Prime or Netflix and pay for a subscription to a library of movies. You can also use the on-demand feature on cable to see some moves whenever you want. Or you can watch movies with commercial interruption on the Internet or cable.

In this new world of more complicated content marketing, content owners have more choice. They can choose some combination of five different ways of earning money from their content, what strategist call business models. They include:

1. Sale of content
2. Rental of content
3. Rental of subscriptions
4. Advertising supported content
5. Sponsored content

And for each of these business models, a content owner can choose to bundle different legal rights with the use of the content. Rights could, for example, include:

1. Ability to lend the content (e.g. Kindle book lending)
2. Ability to resell the content (common with physical media, less common with digital media today)
3. Ability to upgrade the quality of the content e.g. changing from a regular DVD to a Blu-Ray version.
4. Ability to re-download the content
5. Ability to play the content on multiple devices
6. Ability to share content with friends and family
7. The right to get paid a sales commission if the user triggers a sale to a third party
8. The right to reuse the content in a new work in exchange for defined payment.
9. Number of devices or type of devices on which the content may be used.
10. Number of simultaneous uses.

The recent decline in DVD sales shows how important this new choice has become. Many consumers now realize that they don’t need to purchase movies that they may only watch once. Once you subscribe to an online music service, you quickly realize that most music is not to your taste and not worth buying. The big savings from a subscription service is avoiding purchasing music you don’t play. It’s only worth buying music you care about for the purpose of being able to play it more conveniently on more devices (assuming of course, you have not made provision for some type of cloud streaming or access).

Perhaps the biggest surprise for most people is the role of sponsorship. Honda recently sponsored the Wall Street Journal for a day, making the subscription portions of the Wall Street Journal available to non-subscribers. The New York Times cut a deal with Ford’s Lincoln division to sponsor a subscription to readers deemed likely to buy Lincolns. It’s an example of how changing business models and unbundled legal rights are changing the rule of the game in content marketing.

2010-08-31T10:50:00.000-07:00

Review of Liquid Planner (www.liquidplanner.com)

Review by Alistair Davidson, Partner, Eclicktick Consulting

Strategic planning is not project planning. But strategic planning often requires project planning and dealing with high levels of uncertainty. There is, as a result, no single good way of managing execution that will apply to everyone’s situation. LiquidPlanner, an online project management software package, priced at $25 per user per month, is a simple package that includes an important element in project planning and project portfolio management – the difficulty of estimating how much work is required to complete a task.

Uncertainty about the length of time required to complete a task has numerous consequences. First, team members may pad their estimates of the work required to complete a task. Second, downstream tasks dependent upon the padded estimate will look even worse than they should. Put together too many padded estimates and projects may become impossible to sell internally. Restructuring of projects and resources become even more difficult than if better estimates were available. Even worse, arbitrary decisions about what is realistic and what is not may lead to top-down decisions by a senior manager or project manager—resulting it forecasts that are equally as erroneous and arbitrary.

LiquidPlanner’s solution is straightforward. Tasks are estimated as taking a range of time, e.g. from 2-4 hours or 1-4 days. The Gant charts (horizontal bar charts) that lay out the steps in a project show the most likely completion time for the task, the earliest possible date for the task and worse case for delivery. Promised or delivery dates now become easier to understand and more likely to be accurate.

LiquidPlanner is very much a child of 2010. The application comes with a portal where portions of the project can be shared with external participants (e.g. suppliers, customers, sub-contractors, partners, etc.). Messaging between participants is exposable through the portal. And an excellent series of video tutorials gets users up to speed quickly.

Adding in Monte Carlo or stochastic modeling to regular project management software is an option in many software packages, But usage of more probabilistic project management is still quite rare. LiquidPlanner is an easy to use and attractive tool for managing projects and small portfolios of time-based activities. Unlike many more complicated tools for Monte Carlo modeling, it keeps things simple.

2010-08-30T09:56:00.000-07:00

Raising Notebooks From the Dead

Don’t get me wrong. While I ran a software company for many years, I am not someone who likes to spend time delving into the innards of computers. And that perhaps makes this article more significant.

I had a problem, one that many households and small businesses share --lots of old notebooks sitting around that are essentially unusable – problems with drivers, old operating systems, slow speed, too little RAM. I am strategic and business development consultant who works with clients that always seem to be in crisis, so my time is more valuable that playing around with old computers.

But last week, I decided I had a quiet time in August. It was time to clean up. As an experiment, I downloaded Ubuntu from ubuntu.com, burned an installation disk and tried it out. Now there are four ways you can try out Ubuntu as an operating system.

1. Run it from the CD which makes no changes to the computer.
2. Install it so that when you boot your computer, you can choose which operating system to boot.
3. Install it as a window that runs within MS-Windows using for example the free VMPlayer from vmware.com.
4. Replace your old operating system with Ubuntu.

One of my notebooks would not let me dual boot the system but it is a machine that needs to have its Windows reinstalled. But I succeeded with practically no effort in setting up Ubuntu and VMPlayer on my desktop and latest notebook. And I converted an older notebook to a Ubuntu notebook that runs better and faster that it did with Windows, a fact that would be of no surprise to Unix/Linux enthusiasts.

Score 1 for easy installation for Ubuntu.
Score 2 for VMWare player.

But what about usability? The Macintosh (which is based upon UNIX) and Windows set the standard for ease of use. How does Ubuntu stack up? To my surprise, I would have to rate it acceptable verging on good for a normal, relatively unskilled user. Ubuntu comes with most of the applications a normal person needs in their daily computer usage, e.g. Firefox for browsing, Evolution, an Outlook like email client, Open Office, an open source equivalent of MS-Office, music playing software, video playing software and a convenient application center where you can download programs like GIMP, a Photoshop (TM Adobe) like application. All of this with a reasonable easy to use windowing environment (GNOME) which is easy to master.

Now, I have no personal interest in becoming a LINUX geek, but my “take away” from this small project is that Ubuntu and the supported software provides an inexpensive way of turning an older machine with the performance of a boat anchor, one with performance and driver problems into something useful. Given that buying a decent netbook might cost you $400, Ubuntu can save you money and provide an inexpensive way of making a second or third computer usable for “commodity” tasks such as word processing, spreadsheets, presentations, small databases, music, video and photography.

The bottom line: Ubuntu does not require as much hardware as Windows and the level of driver support, installation ease make it usable by just about anyone who can burn a disk in Windows. In fact, on my desktop, Ubuntu recognized a sound card and used it when Windows is currently failing to do so -- pretty impressive.

And did I mention that all the software mentioned - the Ubuntu operating system, the applications and VMPlayer from VMWare are all free?

2010-07-28T10:57:00.000-07:00

Why economics matters to strategists?

Recently, there has been a great deal of debate about the new iPhone 4, its ability to hold a signal and the quality of the AT&T network. In brief, the claim is that the antenna on the iPhone 4 is affected by being held and that AT&T has an inferior network to Verizon. And because iPhone users and detractors are often emotionally involved in their views, the framing of the problem is often not very useful to a strategist.

The economics of networks is not being considered in this debate. As smart phone users are a new category of uses and the iPhone was the first to make data usage easy, it is no surprise that AT&T has run into usage economics first.

Consider the following:

Customer usage: if you allow customers to use a much of a service as they like, they will use more of it up until the point where other constraints such as their willingness to use their phone all the time, becomes a barrier. Unlike mature markets, where saturation of usage has occurred (e.g Netflix which assumes you only have so much time to watch movies), in developing services, usage has often not yet reached a natural upper limit. In a fixed capacity network such as 3G, adding more users and making usage easier leads (surprise, surprise) to more usage.

Service provider investment: if you do the calculation on revenues per byte, voice calls are more profitable than data sessions – about two orders of magnitude more profitable. So if you are a service provider, you have the problem of expanding your network to justify less profitable usage. It’s no surprise that investment has lagged.

Next generation economics: as so often happens when people straight line their conclusions about growth, they fail to consider alternative ways of solving problems. In the case of smart phones, the alternative to using capacity on the cell tower is “diversion” or diverting traffic to alternate channels. These alternatives fall into three basic categories:

1. Public wi-fi sites
2. Home and business wi-fi sites
3. Femtocells

What all the first two have in common is that smart phones today typically offer wi-fi capabilities as well as 3G capabilities. And the speed of wi-fi is typically greater than 3G. So if you want to download a big file, it’s a good idea to do it via wi-fi.

Femtocells are less well known. They are, in effect, small base stations that provide better signal to a cell phone in a home or office, but rather than connecting to the mobile network via a public cell tower (and its backhaul), instead they link to the home or office fixed broadband that is pretty much always available at low cost and typically zero incremental cost for usage to the backbone or fixed network that connects the cell network.

Both wi-fi and femtocells divert traffic from overburdened cell towers and their backhaul and use an existing under-utilized and low cost fixed infrastructure. Because data is charged at a lower rate than voice traffic, diverting data is the most profitable from the perspective of return on capital. But voice can be diverted as well over wi-fi freeing up capacity at cell towers.

Not surprisingly, diversion is a multi-billion dollar issue for mobile companies -- unlike the difficult and time consulting process of putting up cell towers, wi-fi and femtocells require no regulatory input and are significantly cheaper (no bandwidth purchase needed, no rental fees, no backhaul costs).

Perhaps even more importantly, given that the majority of usage of cell phones occurs in the office or home, highly granular improvement in the network can be focused upon areas where most usage occurs. You can think of the use of wi-fi and femtocells as adding leaves to the branches of a tree.

2009-11-24T16:13:00.000-08:00

Practical Thoughts on Forecasting, Planning and Budgeting
Copyright Alistair Davidson, 2009. All rights reserved. Alistair Davidson is a strategic consultant with extensive experience in developing budgeting, strategic planning and business intelligence systems. He is a contributing editor to Strategy and Leadership magazine, author of three books on strategy and technology. His career includes developing numerous software planning systems and tools, in addition to facilitating business and IT strategies.
Contact information: alistair@eclicktick.com, +1-650-450-9011

Executive Summary
Developing a forecast or budget sounds like it should be a simple task.
It rarely is. A planning and budgeting process is often used for multiple purposes and has many stakeholders, each with his/her own interests, constraints, risk profiles, deadlines and commitment to the process. Often budgeting processes become a minimalist exercise that reflects the power of the CFO rather than a process that is useful to strategic thinking and strategic management in the organization. There is nothing worse than a budget developed six months prior to the beginning of the fiscal year that is out of date before the year has begun.

Developing a forecast or a budget is typically an iterative process. The number of iterations within a particular year will affect the perception of the value of the process (more iterations typically annoys people). Just as importantly, forecasts and budgets are exercises that will repeat typically at least quarterly and annually. They will always evolve over time.

Developing a successful forecast or budget requires five elements for success:

1. Senior sponsorship is required to ensure that cooperation is obtained from all participants.

2. The level of work imposed or solicited needs to be perceived as reasonable and appropriate, often a difficult task in a changing environment without good supporting technology.

3. Senior management should avoid using the forecasting process to educate themselves and causing significant workload on the numerous participants. This is best achieved by spending time up front to understand the workload caused by a forecast exercise.

4. A longer term perspective on the forecast should be addressed up front by analyzing the workload and number of pieces of data being developed for each forecast in the current and future periods. Perfect systems should be avoided and iteration anticipated.

5. The forecast should be strategic and focus upon critical issues rather than letting the apparent simplicity of spreadsheets drive linear extrapolations of past performance. Forecasts should explicitly address uncertainty and risk, capacity utilization and the process of forecast revision over the forecasting period.

Introduction: Why Is Forecasting Difficult?
Planning and budgeting (P&B)are basic tools in managing a business. Budgets are often used to control spending and set expectations. Forecasts are often thought of as revisions to budgets done on a periodic basis to make sure that the budget is compared based on more recent data. Forecasts often extend beyond the budget period as well. If you are doing a quarterly update, there is little point in a cycle of 9 month, 6 month and 3 month projections, it's often equally as easy to do a rolling 12 month forecast.

Forecasting is often a problem for a companies because it serves multiple purposes and the importance of these multiple purposes looks different to different stakeholders throughout the organization. In an ideal world, the designer of a P&B process would identify the key stakeholders (i.e. people or groups that make the project a success or block it) and identify their minimum requirements for the P&B project's success. Generally speaking a stakeholder will have a threshold that must be delivered for satisfaction and other elements which they want emphasized a great deal.

Let's examine the stakeholders for the process:

1. The Board of Directors typically expects a forecast so that they can determine the future performance of the company. Their bias is typically towards financial results and to a lesser extent risk management. Strategic issues are often downplayed particularly in diversified companies with many different business.

2. Senior management in the company often uses the budgeting and forecasting process to force the organization to make choices about allocation of capital budgets, operating budgets, new product development processes, sales and marketing efforts. Annoyingly for the developer of forecasts and budgets, the projections are often used as a way of educating senior management about the business leading to multiple iterations.

3. Middle management and financial functions in the organization often use performance against the budget and forecast to revise their activities to meet their goals and performance metrics. Just as importantly, they use revisions to the budgets to prepare other stakeholders for surprises. Failure to deliver a budget is frequently less of a problem than the problem of surprising a boss with a failure to meet a budget. The budgeting and forecasting process is often seen as a chore rather than a productive use of time.

A very common problem for managers is the design of and successful implementation of a planning and budgeting process. There are several key constraints that make the design process difficult.

First, most managers undertaking a P&B process have little experience in their design and consistently underestimate the effort involved.

Second, P&B issues change constantly. If the CEO or profit center owner decides something is important, it is likely to be dropped into a P&B process at the last moment causing significant work load to the implementers.

Third, planning systems often draw upon information in other systems and formal migration processes for designing, testing, rolling out and training users is weak. Integration issues and business intelligence issues are surprisingly rarely addressed even though the information used in a good P&B system is very valuable to many users.

Fourth, planning tools are often dictated by functional areas for their own benefit and don't consider other users.

Fifth, budgets for P&B systems are generally small. Custom work has to be shoehorned into short time periods without regard to the actual work required.

Sixth, year over year comparisons are often extremely difficult because the planning system varies from year to year. The consistent information is often not the most important information for operating managers.

Seventh, disagreement about the scope of planning is very common. Planning is a bit like the elephant in the apocryphal story about the six blind men and the elephant. It feels very different depending upon where you are relative to the elephant.

Diagnosing Your Forecasting Problems
Before you can improve your forecasting (and often before you can obtain cooperation from stakeholders), it's typically a good idea to seek to understand from stakeholders what past problems have occurred and what needs are going unmet.

Typical problems might include:

1. Poor accuracy in the budget or forecast
2. Time wasting revisions to the P&B data as stakeholder requests evolve.
3. Excessive manual work.
4. Irrelevance after the process has been completed due to the length of time taken, iterative approvals or changes in the environment subsequent to the development and approval.
5. Inappropriate levels of granularity i.e. budgeting at too detailed or insufficient detail (which we might refer to as the Goldilocks problem)
For each of these five problems, different solutions are available. The resulting P&B efforts and focus are likely to look different.

The Multi- Period Problem
Perhaps the most important problem with P&B systems is that they tend to be focused upon financial requirements and not upon customers. Consider the situation of a customer that buys a pilot project that if successful could lead to 10-100X more volume of purchases and significant profitability. However, if the subsequent profitable purchase falls outside the budget or forecast period, resource allocation decisions may cause underinvestment in developing pilot projects.

Customer profitability is rarely well represented by a single period view of a customer. P&B systems that only look at single year profitability may be missing the most important drivers of overall profitability. A software company that only looks at financial results can show revenue growth while in decline. If a healthy number of new customers are not being acquired, maintenance revenues may continue to increase but the competitive position may be deteriorating.

If the purpose of forecasting is to be useful, then the information base for the forecasting should be useful, relevant and flexibly capable of being modeled and changed.

The Multi-Forecast Problem
A common problem with P&B systems is that budgets and forecasts get revised. In theory, it should be easy to compare a budget with a revised forecast that is updated every three months. However, it becomes exponentially hard if the data is driven off detailed data and the detailed data does not exist on a quarterly basis e.g. a total market size number that is only revised annually by a tech consulting firm or if the forecasts have been inconsistent in their use of bottoms-up and top-down forecasting.

There are no easy solutions to this particular problem.

The Implicit Strategic Decision Problem
A common problem in forecasting processes is the hidden assumption that the forecasting process should force managers or enable divisional or head office managers to make resource allocation decisions while developing a forecast.
The challenge here is that budgeting and forecasting systems tend to be linear extrapolations of the past. Innovations, in contrast, are often harder to forecast and have higher uncertainty. As a result, plans and forecasts presented in a spreadsheet often seem to imply that each line of the forecast is equally certain and reliable.

The truth is typically otherwise.

And the more detailed the forecast, the more likely it is that each line will produce a variance in subsequent quarters. The solution is typically thought to be focusing at a high level of forecast that irrelevant or immaterial variances don't show up.

Infrastructure Issues

P&B systems typically cause the creation of spreadsheets and PowerPoint slideshows. More sophisticated systems have been developed for consolidating hierarchical budgets and forecasts. These typically fall into two categories - multidimensional spreadsheet or OLAP tools and relational databases. Because these tools are typically difficult to use, the reality is that most work is done in spreadsheets and then uploaded to consolidation tools.

However, it is not clear that these consolidation tools are helpful in the process of developing a forecast. Without going into the mechanics of building up a consolidation or reconciling a top down goal setting with a bottom up forecast, let's just say that it is messy and complicated. The result is that forecasts are often painful to develop and inaccurate.

Dealing with High Uncertainty - Scenarios vs. Business Success
In highly uncertain environments, there are four basic approaches to forecasting.

Multiple Forecasts
The approach used most often is develop multiple forecasts. A high, medium and low forecast is the most common version seen. A more sophisticated approach is to develop a probability weighted set of forecasts where each forecast is assigned a probability. Each forecast then results in an expected value that adjusts the revenue forecast by the probability of revenues. Probabilities add to up to 100% so that the sum of the expected values is the best estimate of revenues. The unattractive side of this approach is that while it is useful for revenue forecasting, it is less useful for many expenses as they will be adjusted to reflect different revenue cases. Another weakness is that research suggests that most managers underestimate variability and risk.

Monte Carlo or Stochastic Modeling
Spreadsheet based forecasts are typically characterized as deterministic. Monte Carlo modeling involves a more detailed approach to uncertainty. Each line in a forecast is mapped to a potential probability distribution (e.g. a normal or power curve distribution). A simulation is run hundreds or thousands of times to see the overall outcome distribution with each line item varying according to its probability distribution each simulation run. Because of the number of runs made and the need to map a distribution to each item in the forecast, more detailed consolidations are typically avoided in smaller companies and forecasts are done at a fairly high level of summary.

Scenarios
Multiple forecasts are often erroneously called scenarios. But more properly, a scenario is a term reserved for naming and describing a future in which the organization might have to operate. Scenarios represents ways of stretching the thinking of the organization so that the organizations anticipates the impact of a proposed strategy across a more diverse set of potential environments.

Resource Allocation Frameworks
Many organizations address resource allocation decisions separately from P&B processes. They may make resource allocation decisions within the P&B process, but they separate out earlier stages of resource allocation. Often these systems are characterized as new product processes, productizing processes (in service organizations where services migrate from custom to standard) and capital budgeting processes, where a limited pool of capital is allocatable to major investment projects via a formal approval process.

Thinking Outside the Box - What are you not measuring and not forecasting
It may seem strange to think about what you are not forecasting but well managed companies should look at what they are not addressing and the larger issue of how well an organization is doing in the overall environment.

There are several ways of thinking about this problem.

Some companies look at share of wallet or share of expenditures. They measure their forecasts as a percent of total spending by a group of customers. When forecasts are looked at in this light, companies can understand to what extent they are not obtaining revenues and profits from areas of the market where they have blind spots.

Another key measure that is important to look at is what is your addressable market vs. the total market. A forecast can often look good in the context of your addressable market. However, if competitors are making in-roads into the total market, you business may be in decline without you realizing it.

Benchmarked performance. International companies often have difficulty comparing markets. Having a benchmark allows for comparisons of performance that are independent of pricing, cost inputs and currency fluctuations. The publisher, Harlequin, used to look at books sold per thousand women over 18 per year as a measure of market penetration and maturity.

Capacity Management and Forecasting
Many organizations do a good job of forecasting revenues and expenses, but do a bad job of forecasting capacity and utilization. There are many reasons for this bias. It's difficult to forecast lagged variables such as hiring a person, training them and make them effective or processes whose cycle times are longer than the cycles times of marketing and sales. And developing people and capacity often needs to be done in advance of obtaining sales leading to a perception of risk, both in terms of internal evaluations of performance and financial outcomes.

The key task here is to make sure that assumptions are explicit rather than implicit and that the organization is committed to the marketing and sales objectives. By having clarity and consensus better decision are likely to be made and delivery failures are less likely.

Explicit decisions on training part time people can also be pursued to manage peak loading and capacity problems.

Summary
Planning and budgeting systems are more complex to design, specify and obtain compliance with than most managers anticipate. Making sure that sponsorship, scoping, evolution and links to the rest of the organization are considered early in the process will increase the likelihood of success.

2009-10-27T13:55:00.000-07:00

Restricting Senior Executive Pay

In the past week, there have been numerous comments about overreaching by the Federal Government in placing caps upon the pay of the top twenty-five executives in companies that have received major government investment.

Government determining the pay of executives is clearly an overreach, but I find it hard to criticize the modest restrictions.

Consider the situation if these institutions were not banks, where bankruptcy was a legal option. Under such circumstances, every employee in the organization would likely be facing firing, salary and other reductions in remuneration.

Banks are difficult to put into bankruptcy because such events would trigger complex and cascading contract events, so the Fed, the Treasury and other regulators have been forced to take over these financial institutions in a "soft" bankruptcy.

When government involvement is looked at in this light, perhaps the complaint should be that more has not been done.

2009-08-21T11:04:00.000-07:00

Chief Customer Officers and the Digital Living Room

The Digital Living Room still continues to fall between the cracks of the silos in organizations. Consider a recent experience with major vendors.

An evaluation HP Windows Media Server that I purchased recently for a project came with MacAfee for virus protection. The protection expired after the initial trial period of 7 months.

So, I decided to use Norton, which I use on my other machines. However, Symantec does not make it clear whether their products work on Windows Home Server. Nor did they reply to my support request. So, I decided to upgrade the existing MacAfee solution as the lazy man's approach.

After two support calls separated by three days, and after 50 minutes on hold, I determined on the second support call that the product currently has installation problems and also does not upgrade its data files. The conclusion was not shared with me on the first support call where a different answer had been suggested.

Now, as a past CEO of various software companies, I sympathize with the challenges of supporting continually changing software. And I am not particularly worried about this server, which is primarily used for file back up and music sharing.

But the whole experience of:

1. Having to determine whether a product works with a home server.
2. Inability to offer a clear and simple decision process on what to buy.
2. Confusing installation processes.
3. Difficult to use administrative software more appropriate for a small business than a home user.
4. Delivery of support via the small business support line causes unnecessary phone calls and downloads of support software.

reflects an inside-out silo'd view of the customer.

Persuading consumers to tackle the Digital Living Room will require a more customer centric perspective. A Chief Customer Officer would help a company transform the customer experience so that successful customers would become ambassadors on behalf of products and services.

2009-08-12T14:23:00.001-07:00

Getting Sued

I recently had an off the records conversation with a former CEO of major firm who had spent much of his CEO tenure dealing with more legal suits than any business should have to deal with.

The take away from our discussion was that with the full benefit of hindsight, the company's problem was that (1) it was small, (2) its patented technology was really valuable to very large customers, (3) the company priced licensing of its technology based upon the value of the technology to licensors and their customers.

What the company forgot -- and this is a common mistake of small companies in the United States -- is that a large company looking at a small company always has the choice of litigating and use the law as a weapon to beat the small company to death.

So, when I work with small high tech companies and their business plans talk about barriers to entry including a patent, I will often grimace.

If the technology is unsuccessfully, nobody will care.

If the technology is successful, then the chances of being sued go up.

If the technology is exceptionally successful or useful, it's pretty much a sure thing that you are going to get sued.

Without major reform to patent law in the US - which is clearly needed -- there are no simple legal answers to this problem, except to using pricing as a tool.

Pricing can encourage licensing and make it more attractive than suing. What people forget is that there are many ways of pricing a product. Pricing creativity can reduce legal risk, accelerate revenues and in some cases increase total revenues.

It's worth thinking about before you get sued.

2009-08-06T10:28:00.000-07:00

The Digital Living Room - Miles to Go Before You Can Sleep

Yesterday, I attempted to watch a Blu-ray movie obtained from Netflix, produced by Sony studios, on a six month old Sony Vaio multi-media laptop, hooked up to a 25.5 inch Samsung monitor as a secondary monitor. Blu-ray of course is a wonderful standard for high def movies developed by Sony.

It took me two hours and two support calls to get the movie started.

Now it's pretty hard to argue that compatibility should have been an issue with Sony controlling all the technology. If I were not doing consulting to firms in the digital living room area, I would have broken something in frustration. I rarely get so annoyed by technology that I curse out loud, but it was one of those evenings.

So, you may ask, what happened?

The problem began with the InterVideo software shipped with the notebook. When I stuck in the Blu-ray disk, it told me that I need to renew a key in the Blu-ray viewing software. I was sent to a confusing page with the software vendor Corel, a relationship I was unaware I had. My immediate thought: is this some kind of virus problem? The key transaction then failed twice. So far ten minutes wasted.
The courteous and knowledgeable support person in Costa Rica talked me through disabling user account control on my notebook and obtaining a key upgrade. I was fuming by this stage. Not only do I object to an unnecessary key renewal, the software does not even work well. So far, 60 minutes wasted.

But the problems did not stop there. I could not escape the previews on the DVD. Now, I would like to think I am a pretty knowledgeable about the digital living room. People hire me to look at their products and do competitive comparisons. But it was practically impossible to get to the movie. I think I saw the previews seven times. Unlike most people I have two media computers with Bluray from different vendors. Same problem on both my desktop and my notebook. Total time wasted now at around 70 minutes.

On the second support call, we determined that a second Netflix Blu-ray disk, immediately went to a main menu from which you could play your movie easily. Admittedly, the second disk did reveal I had a bad setting on my desktop, causing the colors to be wrong, which I eventually fixed by letting the video app control color settings. The conclusion from the second support call was that the Blu-ray disk was defective.

Now, I am not a typical user. I am way more persistent. I eventually figured out a way of getting to the movie with some additional experimentation. Total time invested over the entire evening ended up at over two hours. But I would have to say that the experience was ridiculous. A media notebook that can't play media. A Blu-ray disk that won't let you get to the movie on it. Disappearing menus. Software that won't let you play your movie on your external monitor. Multimedia computers that have non working registration software that prevent usage.

2009-08-06T09:58:00.000-07:00

Is Amazon the Most Interesting Media Company in the World Today?

The move to digital content has to a large extent was initially spearheaded by Apple. It's initial focus on its business system was on simplicity. Pricing per track was set at 99 cents. Simple and understandable. A good pricing model for a new and complex technology.

But today, the world looks quite different. Digital music is now mainstream. And with mainstream businesses, traditional retail issues and innovation start to become more important.

Amazon is at the forefront of this new trend. It is a result, possibly the most interesting media company in the world.

Consider the following:

Amazon sells traditional books, electronic books on Kindle or iPhone/iTouch, traditional physically delivered music, downloadable MP3s, new and second hand DVDs, downloadable movie purchases and downloadable rentable movie viewing. Other than a subscription model, Amazon has most of the purchase options covered.

Even more interestingly, unlike Apple, Amazon is behaving like a smart retailer. It uses free songs, free Kindle copies of the first book in a series to create traffic, in a way analogous to the supermarket offering cheap milk to bring in customers or samples to get customers to try a new brand.

And Amazon is testing pricing. It offers daily specials pricing anywhere from 99 cents to $2.99, with $1.99 as the most common price point to encourage traffic, obtain sampling and give customers a reason to keep coming back every day to their web site. It's better than advertising, because revenues are produced by the hook that pulls in the customer. And of course, the big problem with an ecommerce site is getting traffic. If they visit, you have a chance of selling them something.

But the really interesting capability that Amazon is building is deep understand of individual customer tastes and price elasticity, something that Apple has spurned. Amazon is learning about the tradeoffs that individual customers make on different types of purchase, lease or download of content. When will a customer own or rent? What do you need to do to create trial? When does it make sense to discount to trigger additional purchases of content from a writer or artist, or to addict a reader to a book series?

Great businesses don't freeze their strategy. They continually improve them. Amazon seems to be aggressively learning faster than other players. Kudos to them.

2009-08-03T14:17:00.000-07:00

To Pareto or Not To: Changing the Profitability of Your Business
Copyright Alistair Davidson, August 2009 as an unpublished work. Alistair Davidson is a strategic consultant with turnaround experience who has been CEO of several companies and helped companies improved their revenues and business development activities.

Contact: alistair@eclicktick.com Phone: +1-650-450-9011

Certain key insights in strategy seem to be continually important. Flanking a competitor is often a better strategy than attacking them head on is one example.

In many business and economic analysis, 20% or so of a market, customer group or products seems to account for a disproportionate result, often characterized as 80% of the results sought (revenues, profits, etc.). This Pareto or 20:80 rule became very popular in the 80s when activity based costing exercises revealed that for many companies profitability was driven by a small number of customers. The less intuitive conclusion, one that frequently has to be explained to first time readers is that if 20% of your customers account for in excess of 100% (say 150-200%) of your profits, then the you are losing money on the other customers.
What is challenging about the Pareto insight is that it offers a universal rule of thumb, frequently and consistently important, but the prescription from the insight is often less obvious. And sometimes it is wrong. The Pareto insight leads to one of two conclusions:

1. The 20% of customers represent a unique group and lessons learned from them are not directly applicable to the rest of the market.

2. The 20% of customer represent a model for my future business.

Business Model Revision

The Pareto rule is often difficult to apply is where a new business model is introduced. It is never 100% clear whether a potentially disruptive technology at the low end of a market will change market requirements or provide a platform for an initial insignificant competitor to build upon. In a parallel way, migration of high end features from premium products and services to the mass market is also difficult to predict in some markets.

The concept of Track and Trace (making parcels and envelopes trackable though out the logistics process), offered by FedEx and UPS was extremely threatening to the Canadian Post Office. They could see no way of matching the capability given the volume of mail and packages they delivered.

The internal debate revolved around whether they should take a Pareto approach and focus a Track and Trace capability only on parcels and high value added packages, or whether this would be a long term capability for all logistic operations. Their eventual conclusion was they needed to have more presence in the premium package and envelope business and Track and Trace would largely be restricted to the high end of the market. To this end, they bought a courier company, Purolator.

Dropping Customers

One potential prescription from learning that 20% of your customers account for 150% or more of profits is to slim down the business and focus upon the profitable customers. However this strategy is often emotionally very difficult for many managers and often pursued too late. Managers have spent so much time investing in acquiring customers that given up the customers is distressing.

Raising Prices

Raising prices for the less profitable customers seems like an obvious solution to a 20:80 insight, but resistance from the sales force, inadequate systems for tracking discounting behavior and negative feedback from customers are likely barriers that will need to be overcome. Slightly more clever approaches change the basis of pricing in ways that are more palatable to customers. Leasing and usage based pricing are particularly attractive to capital constrained customers and change the nature of the evaluation process.

Reducing the Cost of Delivery for Unprofitable Customers

Financial services organization frequently have used self service with ATMs and online banking to reduce the cost of less profitable services and less profitable customers. In contrast, wealth management services offer higher levels of service and advice.

Reducing Marketing Costs

A less obvious approach to making many customers profitable is to delight customers so that they become your sales agents. Strong word of mouth can significantly reduce a required marketing budget. Amazon uses daily specials in e.g. the MP3 download market to encourage daily visits to their site, a low cost way of generating traffic. Heavy users may tell their friends about hot music they have found a deal on.

Life Cycle Management

As with most costing decisions, it turns out that pricing is often a strategic decision. As a result, the time frame over which you measure customer profitability is critical as are the implications for organizational capacity.

Mature software companies like Oracle will often discount their software significantly to obtain sales (with the largest discounts occurring at quarter and year end when sales reps are under pressure to meet their goals). Part of their willingness to do so, is their knowledge that software is actually more a service than a capital expenditure with maintenance revenues a critical part of the annuity relationship with a customer.
The success of the Apple iPhone is based in part upon the fact that that a $600 cost of purchase by AT&T is resold to a subscriber for $200 in return for a two year contract that might add up to $2400 of revenues and a strong probability of retention at the end of the contract. These high ARPU (average revenue per user) clients are likely some of AT&Ts most profitable.
The challenge for AT&T is to how to grow their business. Are these customers atypical, i.e. a 20% that is atypical or do they represent a different business. Research suggests that there is a large gap between the number of subscribers that would like an iPhone-like service (i.e. with easy to use Internet access) and the actual number of data subscribers. One interpretation is that subscription rates would increase with lower data plan prices. A move in this direction would have significant implications on network architecture for AT&T mobile network capacity by reducing the revenue per user from data plans and lowering revenues per byte transmitted.

Increasing Value Propositions

Bundling is one example of changing value propositions. Companies like Hyperion (now Oracle) and Microsoft have used bundling to reduce the cost of individual applications, but create more value for customers. In telecom, triple and quad plays (combination of voice services, broadband, TV services and mobile services) are a common marketing approach.

In some ways, bundling can be slightly unintuitive. Most purchasers of e.g. MS-Office probably don't use most of the features they purchase, but the incremental cost of having compatible features available has value. Most fixed rate pricing programs e.g. Netflix make this same tradeoff. Netflix may lose money on some customers who are heavy users of the service, but the reality is that most people are at or close to the limits of time they can devote to viewing videos. Value perceived is not necessarily usage.

Changing the Basis of Competition and Cost of Delivery

The Pareto insight is one that many companies are facing in the current recession. When demand for a product category drops dramatically, downsizing assumptions are often affected by assumptions about demand and profitability distributions.
In the automobile industry, the politically unspoken "elephant in the room" is that gasoline prices will in the future be maintained at a far higher level than previously for reasons of balance of trade, security and global warming. This increase in the total cost of ownership of a car will make likely make small cars more popular and more expensive than they have been historically. It will also make driving more expensive reducing total demand for cars. Auto companies are faced, as a result, with downsizing, a cyclical downturn of unusual size and a longer term secular shift in purchase patterns.

As with many markets, the automobile market is likely to become far less homogenous. The market may evolve towards predominantly electric powered microcars for in city driving, hybrids for trips requiring greater range, and larger hybrid capacity vehicles for transporting larger groups of people.
For automobile companies, their cost structure, traditional assumptions about profitability, scale and scope economies are all open to question.
In the same way, telecom service providers faced with demand for low priced unlimited data plans are having to rethink their network architecture to divert home and office data traffic away from cell towers to home fixed broadband connections.

Summary
The key take-away from any Pareto analysis is that it is a useful rule of thumb that inspires important questions about making money in your business. Making the right decision means not only looking at product and customer profitability, but also your delivery process and value chain from the perspective of both current and emerging usage patterns.

2009-06-12T12:57:00.000-07:00

Could your sales drop suddenly and surprise you?
Multiple-technology substitution (MTS) provides a new way of losing or growing revenues

Alistair Davidson is a strategy marketing and technology consultant, former CEO of several high tech startups, and author of three books and numerous articles on technology and strategy. He has worked with telecom service providers, communications equipment vendors, software and media companies.

Copyright Alistair Davidson, 2009 as an unpublished work.
E-mail: alistair@eclicktick.com,
Phone: +1-650-450-9011

Executive Summary
Having your strategy be disrupted by a single inexpensive lesser performing product represents one type of disruption risk that has been frequently written about in the past decade. [1] A second type of disruption, Multiple Technology Substitution (MTS) is based on a collection of products or services that, in combination, compensate for individual weaknesses of the complementary technologies. The complementary nature of the collection of offerings – a “synthetic” product offering -- can compensate for individual low levels of performance, surprising established competitors which sell more capable product offerings.

During a period of initial customer experimentation, market growth due to the disruptive products/services maybe misinterpreted as a long term trend towards an increase in category use and/or spending. Marketers may overestimate market growth and fail to anticipate a sudden drop in users’ category spending. A 3-stage cycle of (1) increased spending due to experimentation, (2) learning how to use the inexpensive products, and (3) consolidation of usage is likely as users gain experience in assembling and optimizing solutions.

Adding to the impact of MTS is the idea of MTS amplification, or products/services that amplify the effectiveness of the MTS combination. MTS Amplifiers may present ways of changing customer relationships and represent opportunities both for competitors competing on a different basis than traditional competitors and for existing players defending their markets.

Introduction
There is nothing worse for a career than a nasty sales surprise. In the case of a small business case, the resulting cash flow problems can kill the business. In a larger business, it can kill your career.

For some industries, multiple technological substitution (MTS) presents an unperceived and hence unmanaged risk -- one that may be invisible to managers without new kinds of user research. Many markets demonstrate MTS – software companies facing open source solutions; hardware vendors facing open source software replacement; cable companies facing Internet-based video competition; to name just a few.

For a more detailed look at the phenomena, consider the specific situation of fixed line voice service providers (recognizing that telcos exist in various formats: fixed line, mobile only, integrated with both fixed and mobile, and virtual operators leasing capacity from companies with actual networks). [2]

Globally, there were 4 billion mobile cell phone contracts as of the end of 2008 [3]. As mobile phones have become more popular, fixed line telephone company executives in developed economies have worried about the substitution of mobile phone for the combination of mobile plus fixed services (FMS), Such replacement would cause them to lose highly profitable fixed line voice customers. And the data for telcos suggests that FMS has been occurring on a large scale as consumers cancel their traditional fixed phone lines.

If you are student, living at home in summers and on-campus during the school year, a mobile phone makes perfect sense for a transient live. Demographically, one would expect to see younger telephone users more likely to be mobile-only customers but the trend towards increased mobile usage is actually quite broad. Research on phone use shows that people will use their mobile phones in the workplace and at home for reasons of convenience and in order to always be reachable. Roughly 50% of mobile usage occurs in situations where a fixed line is likely to be also available.

But there is a more insidious danger for telephone companies, one that is less obvious. It comes in the form of a collection of voice communication services delivered over the Internet. Voice services like Gizmo, Yahoo Messenger with Voice, Microsoft Live Messenger with Voice MagicJack or Skype cost nothing or next to nothing to purchase. Skype accounts for 8% of world international call minutes according to the company fact sheet [4]. Like many disruptive technologies, the services can have unpredictable or lesser quality. MagicJack works well on a fast machine, and not very well on a slow machine. Skype works better with a Skype “box” attached to the router than it does on a personal computer. VoIP (Internet based voice calling) over WiFi on a WiFi enabled unlocked cell phone is sometimes difficult to set up and can be unreliable.

Sidebar: Internet Based Telephony Data Show That Low Cost Services Are Significant

Number of Magic Jack customers: > 2 million as of January, 2009. [5]
Number of Skype user accounts: 405 million as of Q4, 2008 [6]

Skype was reported as delivering 20.5 billion Skype to Skype minutes in Q4 of 2008 and 65.3 billion minutes for the full year. Skype calls to regular phones cost money: $2.6B of paid calls for SkypeOut minutes were used for calls to regular phone numbers. 33.4 million users were active in Q3.

To date, the unpredictable and lower quality of these Internet-based services (relative to the gold standards of the traditional fixed line or the higher quality of cable VoIP voice services) has been a disadvantage for these Internet IP-based voice providers. Voice quality is an important service attribute. It has represented a barrier to further market expansion by these free or low cost services. The need for some technology knowledge to figure out the best way of using the services makes them a poor choice for those unwilling to experiment. As a result, usage is often low and adoption has been limited to the tech-savvy.

The Risk of Synergistic Substitutes
But synergy between a mobile phone and an Internet IP-based phone service changes the value proposition significantly. If the IP-service does not work, you can always use your cell phone. If the mobile carrier is charging a higher rate for roaming or international long distance, the cost conscious user can use the Internet IP-based services. Skype additionally permits allows cell phone users to dial a local number in order to access Skype’s international rates, which are typically lower than cell phone international rates. One CEO of my acquaintance came back from S. Korea with a $500 roaming bill. The next day, he put in place a policy of using Skype when travelling internationally and calling home.

There is a general pattern here. When you have an established product/service category (e.g. fixed line phone service), and you are competing with multiple disruptive services (e.g. the available but slightly less reliable mobile service as well as a more unreliable Internet-based voice services), user behavior may become harder to predict. Users will initially try substitutable services; as they gain experience with the substitutable services, they may become decide that they have sufficient redundancy in their two or more new services; this insight means that they can drop their less used and now perceived to be redundant traditional (fixed line) service.

As validation for this insight, consider the following question: “How many people would give up their cell phone to retain their fixed line?” One could only imagine this choice occurring if the customer were using the fixed line for both dial-up Internet access and voice, a decreasingly common usage pattern. For most users, if they have to choose, a broadband connection ranks higher in importance than a fixed voice line. And of course, if you have a broadband connection, you can use it for voice calling so it acts as a strategic amplifier.

In the early stages of a new disruptive technology, reliability and ease of use may be poor, but over time, failed experiences may be replaced by more successful experiences as the technologies improve.

When consumers are financially flush, they are likely to try out new and potentially substitutable services in addition to “trusted” services or products. Total spending in the category goes up until the consumer becomes so comfortable with the cheaper technologies that they decide to drop the traditional service. Consumer cutback due to job loss or income reduction may trigger the decision even faster.

The implications for managers facing substitution is that past market spending and trends are likely to be misleading. The 3-stage cycle of trial, learning, and product/services consolidation means revenue growth can be followed by a sudden drop to a new and lower revenue level. This process of overestimation parallels the problem of pipeline fill in distribution organizations where initial demand for product inventory in the pipeline causes overestimation of end-user demand. The difference here is that the disruptive products are inexpensive so they don’t increase revenues proportionately as much as they increase usage, but when the traditional product or service is dropped, the revenue effect is dramatic. Free or low cost replaces traditionally priced products.

Amplifying MTS Disruption
For the example of fixed line telephone companies, the challenges don’t stop with the double substitution of mobile and Internet voice services for fixed lines. There exist “amplifying” products and services that make the substitution more effective. They improve benefits, lower risk and cost. These amplifying services may sometimes move the locus of account control to third parties which are using the benefit of the amplifying service as a novel way of building relationships with customers often by deploying different business models.

The combination of on-line advertising-supported video programming at sites such as Hulu.com or Joost.com offers another amplification example. TV and movie video content has only recently become legitimately available on the Internet. Here the amplifier is called “media extenders” or technologies for connecting the Internet-sourced video to the TV. Media extenders – typically a WiFi-based specialized set top box -- are a new phenomenon, so retail availability and consumer understanding have both been limited, and adoption has not yet been large. As the availability of devices for linking the Internet to TVs is adopted, the acceptability of the Internet for sourcing video content improves dramatically. Netflix’s download services which are free if you subscribe to the core product of unlimited TV rental also amplify any decision to eliminate cable subscriptions.

In the telecom sphere, Google’s GrandCentral service is a strategic amplifier. It is a free unified communications (UC) services with the feature of single number ring. UC single ring is actually simple in concept. You give out a new phone number to your contacts. The new phone number is controlled by the user via a web page and automatically rings all the phone numbers the user has specified. So, if a user doesn’t trust the reliability of his Internet based phone services, he can introduce redundancy by having more than one service and having his cell phone also ring. With a close to zero-cost Internet telephone service, users can rethink the nature of their communications services. And each time they chose to pick up their Internet phone (instead of their mobile phone), they avoid using their ‘basket’ of mobile minutes.

Many telephone companies have not picked up on unified communications with single ring for consumers -- perhaps for fear of loss of revenues to Internet services. Google’s service forces consumers to have yet another phone number. Mobile telephone companies already have assigned the consumer a telephone number so less work is required for the consumer if single number ring is accessed through a call to the mobile number. A wireless provider launching this product as first mover is likely to gain advantage and reinforce the primacy of its relationship with consumers who dislike changing phone numbers.

The results of these three overlapping technologies (mobile, Internet-voice and unified communications) is that a US consumer now has the opportunity of reducing his communications cost by $700-1000 per person per year. In other international markets where the cost of mobile minutes is higher than in the US, the savings might be even greater. From the carrier perspective, customers switching to an MTS solution represent a significant drop in market size. For the consumer, such a savings is significant in a normal economy and more so in a recession. It represents a savings in excess of that being claimed by online insurance companies for switching automobile insurance and therefore, is likely to be adopted. These technologies can also spread easily via word of mouth, corporate policy changes, and marketing to mavens and experts. [7]

Technology Amplifiers take a substitution problem and increase the effectiveness and perceived usefulness of the new substitute technologies. Just as importantly, Amplifiers can trigger permanently reduced spending on the product category. When Amplifiers are owned by different competitors, a non-amplifying company may be perceived as offering less value than previously.

Implications
The implications of Multiple Technology Substitution and Amplifiers is that competitive risks can, in some markets, become more complex to analyze, more difficult to anticipate. While some disruptive competitors may have a deliberate installed base strategy of pursuing users of the higher performing product, other may not. MTS introduces new accidental groupings of competitors, that pursuing their own narrow objectives, constitute a functional or virtual competitor. Traditional competitive analysis and extrapolation is insufficient to predict such emerging coalitions of use. Scenarios and forecasts need to be considered for these synthesized virtual competitors that could emerge and accidentally combine in almost biological way. For vendors launching a disruptive product, a failure to consider how complementary disruptive product can assist in a launch will lead to missed opportunities.

Understanding why customers are not buying is important in a downturn. MTS implies that it is just as important to investigate consumer patterns of usage and experimentation. Attitudinal research and the rate of change of attitudes towards potential substitute products should be tracked. If you understand where customers are experimenting with products and services, you may be able to anticipate the consolidation risk. In some cases, you can forestall consolidation through pricing and product changes. In other cases, the reasons for the exit may force you to change your business strategy and operations.

Telephone companies are being forced to face these new technologies. Not surprisingly, their reaction depends upon whether they see these new services as threats or opportunities. For mobile operator T-Mobile USA these disruptive technologies allow them to expand their service beyond their narrow product offering of cell phone services. T-Mobile USA now offers three kinds of phone service: (1) cell phone service, (2) WiFi-based phone services if you have a dual mode WiFi capable cell phone, where you trade off a fixed monthly fee for unlimited voice over WiFi services, and (3) a $10 a month fixed line service that runs over the home fixed broadband connection.

T-Mobile is attempting to displace the traditional phone company relationship for both fixed and mobile voice services without having to build an expensive fixed line network. It is changing the rules of the game by dramatically reducing the cost of a fixed line to reflect its dramatically lower cost of providing an Internet-based phone services.

As a side benefit, T-Mobile’s strategies also reduce the cost of delivering mobile services by converting regulated bandwidth-consuming cell phone calls to unregulated free WiFi which is then, in turn, transmitted over the consumer’s fixed broadband connection back to the operator’s backbone.

For marketers, understanding how different buyers see and are using your and MTS products may allow new segmentation, pricing, delivery and value propositions. Strategic costing studies often suggest that a small portion of customers are particularly profitable. Rules of thumb in activity based modeling suggest that roughly 10-30% of customers account for more than 100% of the profits of the organization in any given year. Understanding who is profitable is important. Losing the most profitable customers can be devastating. Equally as importantly, making explicit decisions about the life cycle profitability of customers may salvage a business in trouble or provide new growth opportunities than can grow sales and higher profit relationships. Some telephone companies are attempting to use femtocells, or small cellular base stations located within the home or office to improve their value propositions and capture a higher share of customer telecom spending.

The Amazon Kindle electronic book reader provides another example of an amplifying technology that preserves and grows market share for Amazon, but also offers significant opportunities for content that were previously uneconomic. The obvious benefit to Amazon is that Kindle owners are often frequent book buyers who have decided that they buy enough books that the breakeven on the Kindle will be achieved quickly. Travelers and readers with two homes will appreciate not having to carry piles of books. But non-Amazon entities such as authors and publishers can now can skip the traditional printing and distribution process. Perhaps more importantly they avoid the pervasive and costly problem that books are a returnable product, additionally lowering the cost of distribution.

Example Reconfiguring of Products for a New MTS Environments
Digital content is an example of a market where product reconfiguration is required in response to MTS. In digital environments there is often more opportunity for product reconfiguration that managers realize. Content companies will have to manage a more complex portfolio of business models and develop more sophisticated ways of integrating their view of individual consumers and their usage.. There are five basic forms of revenue models that will emerge or which can be bundled together:

1. Traditional advertising based models. (Examples: classic network or cable TV)

2. Fee-based models for one time viewing or viewing for a period of time, unbundled from subscriptions. (Examples: video on demand, Pay-TV, single viewing downloads, downloads valid for a narrow viewing time slot.)

3. Subscription models analogous to current cable or satellite tiered services. (Examples: premium cable subscriptions, satellite subscriptions, Netflix, music subscription services)

4. Product placement, sponsorship and brand integration models sometimes combined with other economic models. (Examples: various soap operas or drams financed by e.g. Procter and Gamble or Hallmark, combination network TV shows financed by product placement and advertising.)

5. Purchase models which include a variety of portability, versioning and resale rights. (DVD purchase, download purchases.)

These revenues models can more broadly be thought as a collection of pricing models, rights granted to consumers and services around the purchase, use, storage and management of the rights. Rights represent a new frontier in content marketing and can include:

1. Right to view on one or more devices
2. Right to save
3. Right to redownload to one or more devices
4. Right to transfer ownership
5. Right to share with a designated group e.g. a family
6. Right to upgrade to a new technology or quality
7. Right to resell
8. Right to receive a commission on referral leading to resale

The marketing of content with attached rights management is likely to be controversial among consumers accustomed to the current simpler legal environment.

It’s likely that as users become educated about the rights bundles attached to different ways of acquiring media, different consumers will evolve different buying patterns. For example, less technologically sophisticated users and audiophiles both still prefer to buy music and video on optical data media such as CDs and DVDs. Slightly more sophisticated technology users may find the integration of a music/video downloading service and device more attractive until they get annoyed at the difficulty of moving content or the lower quality of many digital media. More sophisticated digital downloaders will discriminate on the basis of absence of rights restrictions and higher quality. For example, Amazon’s MP3 music offering initially offered both a DRM and a price advantage over the brand leader, the iTunes Store. Apple finally responded by offering unrestricted music files, but at a higher cost.

Confusingly, while consumers may evolve their preferences over time, they will likely to continue to trade off rights against price inconsistently, based upon their involvement or interest in specific content.

Researching and Anticipating a Sudden Market Decline
Without research or deep interactions with customers, companies will have difficulty predicting customer exits or the extent to which they are progressing through the three stages of MTS model. As a result, they will find it difficult to figure out how best to reconfigure their offering.

These conclusions suggest three simple potential customer exit models. A step model (Type 1), a straight line decline (Type 2) and rapid initial decline with a long period of low usage (Type 3). Type 1 exits are the most dangerous because the drop in purchase rate is sudden and unpredicted and may be disguised by a period of higher spending before the sudden drop. Type 2 exits are predictable and therefore, easier to manage as long as you can distinguish between Type 2 and 3 exits. Type 3 exits may create a category of lingering but possibly unprofitable customers.

The most general prescription here is not to accept decline, but rather to actively manage the process. These steps should include the following elements:

Research and stratify your customers to determine to what degree they are at risk for exit. Understanding their testing and competence with the various disruptive technologies is crucial knowledge.

1. Estimate the potential revenue lost by customer profile.
2. Model the impact of customer loss using an activity based costing model.
3. Evaluate different pricing and business models targeted for different customers.
4. Identify the gateway products which maintain account control. In the telecom space, video services, fixed broadband and converged fixed/wireless services with unified communications all represent potential gateway products or bundles. In contrast, traditional fixed line services are essentially commoditized.
5. Reconfigure the marketing program. For some customers, ease of use will be a critical element in retaining customers. For other customers, launching disruptive collections of services, but making them easier to tie together will be a necessary strategy.
6. Reconfigure the value chain activities where required to be able to compete with the disruptive competitors, e.g. T-Mobile’s low cost fixed line service at $10 per month.
7. In many cases, integration and improved user interface design are required for the traditional offerings. Integrated telcos with WiFi hotspot, fixed and wireless operations are now introducing services that take advantage of their multiple networks. Less integrated operators are pursuing partnerships to enable the same capabilities.

Customer can be categorized into different groups. Examples might include:

Profitable customers, where the goal is increased usage.
Profitable customers, where the goal is retention.
Profitable customers where pricing, business model or value chain reconfiguration is required to preserve the relationship.
Marginal customers where different business models and value chains are required to make them profitable.
Marginal customers where cross selling is required to make the customer profitable, requiring e.g. bundled pricing.
Unprofitable customers that should be “fired”.

In actual practice, most enterprises have little ability to perform such analysis. Overstressed and matrixed product managers may be put under pressure to focus on existing and obvious competitors rather than emerging threats. And when the more difficult analysis of potential virtual competitor combinations is performed, it is done infrequently and often too late. The experience of the music industry demonstrates the cost of not adapting quickly to the disruptive effect of networking, peer to peer file exchange, software for ripping MP3s, digital music players and pervasive computer use.

In contrast, Adobe, which has increasingly been moving up-market with its successful suites of imaging products (containing well known products such Photoshop, Acrobat and Illustrator) is faced with an expanding and improving collection of free imaging products such as Google’s Picassa, the open source products, GIMP and Artweaver (to name just three of many) all which are increasing in capabilities. Adobe’s historical segmentation had been to provide lower cost versions of their software such as Photoshop Lightroom and Photoshop Elements for its consumer and hobbyist niches. Directly targeting the free software tools, Adobe has also set up a free online service, photoshop.com: it provides limited photography editing and 2 gigabyte of storage for storing and sharing photos and videos. Integration and ease of use provides some initial defense against MTS as does the additional value added of free storage.

Summary
The 2008 recession presents businesses with a significant challenge. The deflation of the speculative bubble in the US is likely to take many years to unwind. Consumer spending is no longer financed by increasing real estate prices. Many markets may not recover in ways that businesses and consumers hope for. The consequence will be permanent customer spending declines in many product categories.

Customers, seeking to reduce their spending, will increasingly use low cost MTS and amplifying products to save money. Companies that fail to research their users and markets may over-estimate the recovery of revenues due a failure to anticipate the permanence of the switch to collections of disruptive technologies as customers consolidate their spending and arbitrage their suppliers. Clever strategists can participate in and use MTS value chains to create new relationships with customers and win relationships at low costs.

References:

[1] Christensen, Clayton: The Innovator’s Dilemma, Collins, 2003

[2] Fixed Mobile Convergence for Integrated Service Providers, Cisco White Paper, 2008 https://www.cisco.com/en/US/solutions/collateral/ns341/ns523/ns519/white_paper_c11-480809.html

[3] Trends in Telecommunications, ITU, 2008, http://www.itu.int/itunews/manager/display.asp?lang=en&year=2008&issue=10&ipage=30&ext=html

[4] Preliminary data, TeleGeography Research, 2008. quoted in Skype corporate fact sheet, Feb. 12, 2009

[5] TelephonyOnline http://www.telephonyonline.com/residential_services/news/magicjack-two-million-customers-0106/index1.html

[6] Wikipedia, Feb. 12, 2008, http://en.wikipedia.org/wiki/Skype and corporate fact sheet.

[7] Davidson, Alistair, and Copulsky, Jonathan: “Managing Mavens: relationships with sophisticated customers via the Internet can transform marketing and speed innovation.” Strategy and Leadership, Vol. 34, No. 3. 2006 also available at http://www.deloitte.com/dtt/cda/doc/content/us_tmt_ManagingWebmavens_Article_022206.pdf

[8] Keith Nissen, Keith: “The Media Phone Has Arrived”, In-Stat, Document IN0904563RC

Trademarks referenced in the article are owned by the providing companies.

2008-11-05T12:32:00.000-08:00

When to toss shareholder value out of the window.

Alistair Davidson, alistair@eclicktick.com

Pity the poor CEO. Everyone comes to him/her for decisions. Specialists like the CFO look for a simple system for allocating scarce capital. Financial analysis such as net present value or shareholder value is positioned as providing the answer. But does it? Here are ten examples of where superficial financial analysis can drive your decision the wrong way.

1. The Big Picture

The claim: We need to invest in our core business(es) to maximize shareholder value.

Counterclaims: 1. Disruptive businesses may represent the long term future of the business. 2. Selective extravagance with some critical part of the business may have dramatic pay off.

Example of underinvestment in non-core businesses: IBM’s mainframe business was more attractive than the PC business. Microsoft was late to market on Internet advertising and advertising supported applications.

Example of selective strategic extravagance: Google’s commitment to offering the broadest, deepest and most up to date surveying of the Internet is core to their business model and an area in which they are strategically extravagant.

Prescription 1a: Keep disruptive businesses autonomous. Bear in mind that it takes as much as five years for a disruptive business to become economic. [1]

Prescription 1b: Most business planning can be summarized as “We are the best. Customers love us. We are going to more of everything and diversify and it will cost less to do so.” Instead, identify areas of critical importance in your business and overinvest in them. Overinvestment will ensure commitment and may also deter competitors from imitating your strategy. [2]

2. Planning Processes

The claim: Good planning and detailed budgeting will bring discipline to the organization and improve financial performance.

Counterclaim: The more lines in your budget, the more likely that you will have variances to explain. Unfortunately, the variances will be smaller and have less meaning

Example of wasted budgeting effort: Every business with an overly detailed budgeting system.

Prescription 2: Simplify budgeting and give more autonomy to line managers. Don’t insist on the same degree of detail every year. Consider having “heavy planning years” with more elaborate planning processes and light planning years where the planning exercise is incremental. Use scenario analysis to consider different environments for a given strategy.

3. Managers

The claim: We hire the best, pay them more and get more value for money by working them harder. We are an 80 hour a week shop.

Counterclaim: Working smarter is better than working harder.

Examples of not working too hard: How many times have your solved a problem in the shower or by putting it aside and letting it develop in your subconscious? Netflix is an example where a new business model, or working smarter, completely upset the strategy of traditional retail movie rental operations.

Prescription 3: Don’t measure people by effort. Measure them by quality of thinking and execution. Reward “lazy managers” who come up with more effective solutions.

4. Innovation

The claim: We focus our innovation efforts. We don’t want to waste money.

Counterclaim: The creativity of unleashed managers working in a group can be orders of magnitude higher than bureaucratic innovation processes.

Examples of wildly creative organizations: Nathan Myhrvold’s Intellectual Ventures is in the business of creating and patenting numerous innovations. Like many firms, they have discovered that the quantity of innovation is important in creating value.

Prescription 4: Encourage innovation throughout the organization. Set goals for the percent of revenues and profits that should come from new products. [3]

5. Management

The claim: We are a goal oriented company. Our resources are devoted to achieving our goals so that we can maximize return on capital.

Counterclaim: Innovation occurs in many places. Some companies free up 20% of managers’ time to encourage innovation.

Examples of decentralized innovation: Google encourages self directed innovation; 3M not only allow freedom to managers to develop new products, it sets goals requiring a certain percentage of revenue to come from new products.

Prescription 5: Pay people for useful creativity. Don’t let politics and authority kill off new ideas. Research suggests senior management approval of an idea has little correlation with new product success. Seek researchers and innovation outside the four walls of your organization among researchers, customers, distributors and suppliers. [4]

6. Customers

The claim: We are a marketing and sales company. We design and sell products and obtain premium prices because of the superiority of our offering.

The counterclaim: Designing a culture where companies create, marketing, sell and support products and services on behalf of their customers can create strong loyalty. Loyalty in turn reduces marketing and sales costs and increases word of mouth. The perception that a corporation will reliably offer superior value and support its customers may lower the cost of launching new products and services.

Examples of acting on behalf of customers: credit unions, REI, Eastern Mountain Coop, Netflix, Virgin.

Prescription 6: Focus the organization on customer satisfaction and Net Recommender Scores. Reward employees for accepting and solving customer problems. Let front line employees initiate service and product improvement suggestions and projects. [5]

7. Customer Service

The claim: We run a cost effective customer support operation. Our cost per service call is the best in the industry. We have moved aggressively to outsource to India and to provide self service solutions.

Counterclaim: Customer service centers are opportunities to improve the reputation of your brand, identify problems that need to be solved and sell new services. Most customers are exceptionally annoyed by script-driven customer service reps that simulate the experience of talking to a robot. They are even more annoyed when a legitimate suggestion for product or service improvement disappears down a black hole.

Example of good customer service: American Express offers superb customer service. One of the key reasons is that senior management actually listens in on calls on a regular basis.

Prescription 7: Try using your own product or service anonymously. Try the competitors’ products too. Create a culture where borrowing good ideas from competitors is not seen as betrayal.

8. Suppliers

The claim: We aggressively forced down the costs of our suppliers. We get the best prices in the industry.

Counterclaim: It does your organization little good if you put your supplier out of business or if their margins are so low they cannot innovate and seek dramatic improvement in costs from new technology.

Examples of helping suppliers: Toyota, Xerox, Walmart

Prescription 8: Work with suppliers to understand how what you do increases their costs. Seek opportunities for synergy by changing the way you inform, contract, deliver and support products and services. Reduce the premium for uncertainty built into their price by lowering supplier risks. If one of you has a lower cost of capital than the other, take advantage of this capacity.

9. Shareholders

The claim: We can’t disclose what is really happening in our business. If we aggregate our data, the investors won’t be able to figure out the problems we have and our shareholder value will drop.

Counterclaim: Research suggests that disclosing strategic performance drivers reduces investor uncertainty and increases the valuation of public companies.

Prescription 9: Interview investors to understand what they understand, misunderstand and don’t know about your business. Communicate key performance drivers and track investor understanding of your strategy. [6]

10. Proprietary Information

The claim: Proprietary information is valuable, creates shareholder value, and we should guard it. We should not let our competitors get their hands on it.

Counterclaim: Sharing information with your ecosystem may improve your brand and accelerate learning within the ecosystem. Some proprietary information has a short shelf life, so the challenge is capturing value from it before it becomes obsolete.

Examples: One major consulting firm has opened up its knowledge of ERP and shared it with customers. It has become a way of promoting their brand and building a relationship with key prospects and customers. [7] IBM now actively licenses its technology to competitors in order to capture value in the window of usage. [4]

Prescription 10: Have a third party document and assess your intellectual property and other assets. Develop a strategy for technology licensing, sale and spin off and value the results. Determine whether you are missing opportunities to capture value from unused or underused assets.

Building Platforms and Capabilities

What many of these prescriptions share is building capabilities, customer relationships,

processes, cultures and capabilities that set the stage for growth. Platform improvement strategies are more difficult to evaluate than incremental product development. Platform strategies sometimes involve “bet the firm” strategies whose shareholder outcomes are potentially highly variable. IBM’s development of the system 360, the first family of compatible computers is an example from the 1960s that clearly established IBM’s dominance for 20-30 years. Google’s focus on search before there was an economic model to monetize search is another example of betting on uncertain capabilities.

This theme of building capabilities is by no means a new one for CEOs, but three examples of competitive strategies that might be filtered out by overly aggressive shareholder value models include:

Losing money in order to build a superior cost position. This is a classic strategy in electronics markets with experience curves. You price based on where your costs are going to be rather on where your costs are today. If you price on where you are going to be on the learning curve, your volume increases and volume increases drive down per unit costs – you reach and descend beyond your initial cost.
Sell capabilities not products. Google is a rare but superb example of this strategy. Google’s dominance in search and rapid growth in the new market of paid search caused to gain higher brand recognition than Overture (purchased later by Yahoo). This brand equity translated into a major IPO and the ability to fund rapid growth with simultaneous diversification. The low cost of capital due to “sexiness” has provided a significant competitive advantage to Google, allowing to experiment with numerous high risk pieces of functionality that might extend its brand and customer relationships.
Build superior infrastructure. Amazon is an example of infrastructure development that is widely misunderstood. Amazon, like Google, rode the dotcom boom to be able to build infrastructure that is compellingly better than its slower moving competitors. But Amazon resells access to its e-commerce and cloud infrastructure in order to accelerate its growth and create difficult to match capabilities.

References:

[1] Christensen, Clayton and Raynor, Michael: The Innovator’s Solution, HBS Press, 2005

[2] Bonoma, Thomas: The Marketing Edge, Making Strategies Work, Free Press, 1985

[3] Varchaver, Nicholas: “Who’s afraid of Nathan Myhrvold?” Fortune, June 26^th, 2008.

[4] Chesbrough, Henry: “Open Innovation”, Harvard Business Press, 2006

[5] Reicheld, Fred: The Ultimate Question, Harvard Business Press, 2006

[6] Eccles, Robert; Herz, Robert; Keegan, Mary; and Phillips, David: The

Value Reporting Revolution.Moving Beyond the Earnings Games, Wiley, 2000).

[7] Li, Charlene and Bernoff, Josh: Groundswell: Winning in a World Transformed by Social Technologies, Harvard Business School Press, 2008

2008-10-31T09:00:00.000-07:00

White Paper Development Strategies
How to speed up the development cycle and make thought leadership more useful
Author: Alistair Davidson,
Contact Information:
E:mail: alistair@eclicktick.com
Phone: 650-450-9011

Contents
White Paper Development Strategies
How to speed up the development cycle and make thought leadership more useful.
Five Key Take-Aways
Introduction: why it’s difficult getting an effective white paper
Why Content Matters
The Content Development Process
Levels of Involvement
Level 1 Development
Level 2 Development
Level 3 Development
Rapid Content Development Based Upon Business and Technology Knowledge

Six Key Take-Aways
1. Many white papers are like highly processed white bread. You eat them and they are not very satisfying. Good white papers should seek to have high impact. They should be designed to be memorable, leaving behind a story, a key number, and a graphic that the reader will remember and be able to summarize or use. Ideally, they should be based upon the right combination of customer knowledge, market research and vision for the use of the technology, solution or consulting approach.

2. White papers take too long to create. Their value decreases if the production cycle time is too long. Most projects fail to begin with a messaging objective and a target audience. Without a clear messaging objective, the time and budget required for development and approval becomes large.

3. Bad white papers often represent a “regurgitation” of what an overly technical content expert thinks is important. Most white papers overemphasize the features of the technology, and are not sufficiently focused on the ROI and business decision of why to use a technology or business consulting approach.

4. Consulting firm white papers often have difficulty establishing credibility because they make unsubstantiated claims or propose models without sufficient business examples, cases and research. Even worse, consulting firms often don’t take the time and trouble to document their successes.

5. Many technology and consulting organizations don’t do enough cases to illustrate the value of their technology or consulting approach. Often concerned about the willingness of customers to cooperate, they don’t develop disguised cases, nor do they commission cases with non-clients to illustrate problems that their consulting or technology could solve.

6. White papers can not only create new sales, they can reduce the cost of sales particularly for hard-to-launch new products and services. The content around a product or service contributes to the brand value and may increase opportunities for premium pricing by establishing the value of an unfamiliar product or service.

Introduction: why it’s difficult getting an effective white paper
If you are already using white papers, you probably have a nagging suspicion that your white papers and cases aren’t working as well as they should. They seem to lack a hook and not very memorable. They don’t present a substantial ROI or present benefits from an end user perspective.

A successful white paper needs both technology and business analysis. It should be developed quickly by a skilled writer who knows the needs of the audience. Speed is important in competitive markets where staking a claim to technological and thought leadership is part of the branding process.

Most skilled writers are journalists with little understanding or experience of technology, business, consulting and finance. They are rarely state of the art in business theory and practice. They almost always lack business development and sales experience. They rarely have done business teaching or executive development. And it is extremely unlikely that they understand finance, spreadsheets and ROI.

And many good writers are high maintenance. Their work needs many revisions and multiple layers of review because they do not understand that publishing a white paper is always an art – revealing what may be revealed without incurring legal problems, upsetting clients or internal power brokers.

Why Content Matters
Good articles create customer interest. Good white papers simplify and clarify prospects’ decision making. Cases support white papers and can demonstrate quantified benefits for a particular company. Newsletters represent a useful way around the delays in getting articles published and provide a more focused marketing tool.

Good content generates sales, speed up sales process, short circuits (in a good way) long approval cycles, and can accelerate repeat purchase and increased usage. Even better, if done well, they will be forwarded by one client to another in a viral way. Brilliant white papers and articles can become classics that continue to generate business year after year.

Marketing materials must also be designed to be effective with spiders sent out by search engines. A good article or white paper should be written and accessible on the web so that it is easily findable – able to scoop in prospects and decision makers a company may not be in touch with through traditional sales methods.

How white papers or articles simplify or clarify depends upon what you are selling, but complicated or novel products, services or consulting approaches need to be explained before they can be sold. The process of selecting, deploying and using the product or service needs to be explained. The evolution of a technology often needs to be projected to reassure customers and prospects. And because there is always competition for resources, business cases are needed to help the client justify why a project should be highly ranked.

Loosely speaking, we distinguish between two types of content:

1. Push, where the business problem is that potential customers don’t have experience with a new technology or consulting approach. They need it explained, its implications mapped out, the likely benefits extrapolated.
2. Pull, where the technology is relatively well understood, but the justifications of why one vendor or technology is preferable to another.

Good content represents an investment that will reduce the cost of sales and increase sales volume. When used as part of an integrated launch strategy, good content becomes part of the brand attribute and increased pricing opportunities, particularly where the product has optional service or solution trade-ups.

The Content Development Process
An explicit process and set of review points speeds up content development, improves targeting and makes sure that maximum value for money is obtained. With a systematic approach, time can be reduced in both content development and review. A rough rule of thumb is that for ever day of content development large organizations will require 3-5 days of elapsed time for approval. But it’s worth pointing out that engaging a professional can speed up overall processes by up to 10X over internal development. Most managers are not naturally good writers. Even when they are, they are distracted by their ongoing activities.

Stage Initial discussion of needs
Activity Content and research availability is also reviewed.
Benefit Fact based marketing and message development is more effective

Discussion with content expert or customers
Activity: Optional
Benefit: Validation of initial discussion

Messaging strategy development
Activity: Required
Benefit: Build consensus among stakeholders

Content outline
Activity: Provides review point
Benefit: Reduces number of rework loops

First draft delivery
Activity: Can be provided rapidly
Benefit: Uncertainty about what is being delivered should have been reduced by now

Editing and review
Activity: Often longer than writing stage due to number of reviewers
Benefit: In some cases, the act of delivering the white paper will alter the strategy of the group

Levels of Involvement
Generally speaking, there are three levels of project involvement:

Level 1 Development
Here the goal is simple. Take several different sets of material as source material and weave them into a white paper, article, or set of newsletters. The key requirement here is the ability to digest, structure and write clear content. An outsider can often help the sponsor of the content to sharpen the material and make it more appropriate and relevant to the reader. Simplifying graphics are often missing and can increase the impact of the piece.

Typical time: 1-2 days
Involvement of sponsoring company staff: low

Level 2 Development
The sponsoring company provides background research on the industry and users. Judgments need to be made about the messaging strategy, segmentation decisions, number of pieces to be developed, types of pieces and publishing strategy. Multiple white papers, articles, internal and external cases, ROI and financial analysis are developed as part of an integrated marketing or launch program.

Typical time: 4-8 weeks
Involvement of sponsoring company staff: medium

Level 3 Development
Facilitation services are provided to create consensus within the team. Market research may be optionally commission if the sessions suggest that data or insights are missing. Judgments need to be made about the messaging strategy, segmentation decisions, number of pieces of content to be developed, types of pieces. Multiple white papers, articles, internal and external cases, ROI and financial analysis is provided as part of an integrated marketing or launch program.

Typical time: 8-12 weeks
Involvement of sponsoring company staff: high

Rapid Content Development Based Upon Business and Technology Knowledge

Alistair Davidson provides companies with needed capabilities for high quality thought leadership and content development. Alistair Davidson, managing partner provides the following capabilities:

1. Deep understanding of many technologies from running three software companies, a high tech incubator and consulting to over 60 Silicon Valley firms, both startups and major players. He has personally been involved in software, hardware, services and solutions development and promotion.

2. State-of-the-art in business knowledge with leadership experience, consulting experience, startup and turnaround experience. He has a strong background in finance and modeling, marketing and sales. In addition he is a trained strategic facilitator and a certified Myers-Briggs administrator who has run many strategic consulting processes for international companies large and small.

He is a skilled and rapid writer. His third book which has 110 pages was written in three days. The total publishing cycle for the book from start date to publication was four weeks. He has been published by a major publisher, HarperCollins Canada. Some of his content based marketing programs have produced ROIs of in excess of 1200%. His recent thought leadership clients have included multiple publications for Cisco, HP, Deloitte Consulting and Cushman & Wakefield.

Recent topics have included sustainability, risk management, succession planning, investing in China, refinancing real estate, IFRS, fixed mobile convergence market evolution, video services, new media advertising models, wireless services and fixed mobile convergence dual mode services.

Appendix 1: Alistair Davidson Background
Alistair Davidson is a former CEO of four high tech firms, a Harvard MBA, author of three books on strategy and technology, and several dozen articles, interviews and book reviews. As a contributing editor to Strategy and Leadership magazine, he is continually involved in assessing the latest ideas and research in strategic management. Occasionally, he writes books reviews of significant books. He is frequently involved with interviews with major thinkers, e.g. an interview with HBS professor Michael Porter and Elizabeth Olmstead Teisberg on reforming healthcare.

Business Experience: He has raised angel and venture capital for startups in two countries, been hired to turn around startups, has improved companies’ performance, has had full life cycle responsibility for over a dozen high tech and consulting products, and has hands on experience in all aspects of starting up and growing both high tech and consulting businesses including developing all the written materials.

Consulting Experience: he has worked with a wide variety of industries including major international and boutique consulting firms, real estate, telecom, semiconductor, communications equipment and solutions, financial services, pharmaceutical, military and government organizations. He has been involved in developing new consulting tools, simulations, executive leadership programs, IT strategy, IT portfolio management and staffing, launch strategies, syndicated consulting projects, budgeting systems, planning systems, artificial intelligence based strategy assessment, new product success prediction models, new product gating models and expert systems, process management and improvement, strategic facilitation and competitive analysis, organizational development, pricing strategy and execution, diversification and prediction of market and technology evolution.

Product Management, Marketing, Sales and Business Development Experience: he has a full range of business development experience including developing consulting projects, developing new product requirements, setting up distribution, training sales staff, web-site marketing and ranking improvement, press release, sales literature, newsletter, blog and thought leadership development. He has been involved in closing over 300 companies internationally and has sold products and services to major companies and organizations internationally.

Appendix 2: Alistair Davidson Recent Projects
Recent projects have included:

Deloitte Consulting, Technology Media and Telecom Practice
- IT portfolio management and strategy
- Strategy for outsourcing technologies as product categories mature
- Retail strategy for high tech products
- Pricing strategy and execution management
Visioning exercise for a major storage company
- Pricing strategy for a major security vendor company

Cisco
- Various cases on deployment of fixed mobile convergence solutions for consumer, enterprise and video solutions including financial analysis of benefits of technology solutions
- White paper on FMC for integrated service providers
- White paper on FMC for cable service providers
- White paper on FMC for fixed line service providers
- White paper on FMC for mobile service providers
- White paper on FMC for mobile virtual network operators
-
Cushman and Wakefield Real Estate Consulting
- International location decisions
- Investing in China
- The impact of the introduction of IFRS (International Financial Reporting Standard) to Canada and US
- Succession planning
- CFO as change agent
- Green strategies
- Risk management

HP
- development of ROI models for telecom solutions

VideoAnalytica LLC
- White paper on real time dynamic product placement in video streaming

Appendix 3: Sample Articles and White Papers
Example Book Review
Porter and Teasberg: On Reforming Healthcare
http://www.eclicktick.com/DavidsonReviewofPorterTeisbergRedefiningHealthcareFinal.pdf

Example Deloitte Articles
Managing Web Mavens
http://www.deloitte.com/dtt/article/0,1002,sid%253D2245%2526cid%253D112087,00.html

Pricing Execution and Strategy
http://www.deloitte.com/dtt/cda/doc/content/us_consulting_so_customermarketinsights_issue9_220806.pdf

Example Cisco White Papers
White papers on fixed mobile convergence service providers
In publication

Example VideoAnalytica LLC White Paper
White paper on dynamic product placement
http://www.videoanalytica.com/VideoAnalytica%20White%20Paper%20Targeted%20Product%20Placement.pdf (document address likely to change after May 6, 2008)

2008-10-30T23:29:00.000-07:00

The Future of Video Content Delivery

Contact Information alistair@eclicktick.com

Phone: +1-650-298-9077

Executive Summary

A revolution is under way in media. Traditional assumptions about broadcasting are forcing content owners and media content distributors to experiment. Innovations in business models, pricing and the packaging of content with different permissible rights represents a new frontier in marketing. While it’s not possible to predict with 100% certainty the shape of the future media industry, it is certain that companies will increasingly use multiple approaches to reach different consumers and expand the alternative ways of acquiring contents.

Restructuring of the media industry and its traditional distribution channels (“conduits”) will require the development of new infrastructure, new business intelligence capabilities and new integrated marketing approaches. A new key skill for media companies will be the collection, management and development of data and services for individual consumers. Today, most media companies separate the roles of production, DVD retail distribution, Internet distribution, and network syndication. These siloed approaches to managing the life cycle of content value capture are likely to be replaced by more integrated management processes design to maximize both the capture of value from consumers and the collection/use of customer interactions, ratings and involvement.

Three basic scenarios are suggested for the changing relationships between content owners, conduits and aggregators:

Forward Integration. In this scenario, large dominant media companies use their control of content to capture value that previously accrued to content aggregators and conduits.
Balanced World. In this scenario, aggregators are successful in creating sticky sites by developing capabilities and skills that are difficult for content owners to match. With control over eyeballs, aggregators remain successful and profitable conduits for content owners. The negotiating power of conduits and aggregators is lower because media companies have more choice in distribution (their own, aggregators or conduits).
Churning World. Decreased technology costs permit the continual emergence of new high quality content developers that can, as a group, challenge the traditional content developers. New content creating entities emerge. Some make the transition to major status. Some are acquired by traditional content firms and others by aggregators seeking to develop their own content and improve their negotiating ability with traditional content owners. Aggregators, content developers and conduits continue to merge and divest activities, but increasingly look similar in their portfolios.

Introduction

Technology change can begin in many places -- sometimes as a result of deregulation; sometimes as a result of a technology reaching sufficiently widespread adoption or new price level. Sometimes it is due to demographic and other usage changes.

Today, there are big bets being placed on the future of content and the business models around the creation and distribution of content. It’s a hard area to make predictions about. Not because the trends are hard to see, but rather the structure of the market, technology, networks capacities and the usage pattern of consumers are changing rapidly. And perhaps most importantly, the market is increasingly less homogenous. Different consumers have different appetites for different content and for different ways of accessing, viewing/reading/listening to content. As devices, image quality, prices and availability change, so do the habits of viewers.

This article outlines frameworks and observations for looking at the evolution of aggregator, content and conduit industries. By aggregator, we mean companies that represent points of entry for accessing content. This group includes social sites, search engines and content directories such as AOL, Ask, Facebook, Google, MSN, MySpace and Yahoo. By content, we mean the producers of video, audio, pictorial and written content. Conduits include all the various digital and non-digital methods of connecting with a consumer of content, e.g. satellite, cable, terrestrial broadcast, wireless cellular, wireless broadband (wifi mesh networks, WIMAX), CD, DVD, and Internet downloads.

Within the many ways of bringing content to market, there exist different networking strategies whose importance is likely to evolve over time.

Because the media industry is so large, this article focuses primarily upon video which is the most complicated form of content to transmit and manage. Video files are large and present capacity management challenges; preventing or discouraging theft is an onerous problem; and, new technologies create a threat to advertising based business models.

Media companies wonder today whether the advertising or 30-second spot based business model is sustainable in a world of digital video recorders. DVRs (such as TIVO) have a dramatic effect upon advertising viewing habits. While there is debate about the rate at which DVRs will penetrate the TV viewing population, what is clear is that DVR owners watch fewer ads. Even worse, the longer a DVR is owned, the more ads are skipped by the household.

Sidebar

Key Dates in Digital TV

Date	Digital TV Transition
2007	Digital TV switchovers complete in Luxembourg, Netherlands, Finland and Andorra. Austria, Czech Republic, Germany, Switzerland in process typically with regional roll outs.
2008	US completely digital by Feb. 17, 2009. Beginning of digital TV switchover on a regional basis in UK. South Africa starts three year process.
2009	Denmark terminates analog TV
2010	Spain, Greece terminates analog TV at end of year
2011	Digital TV switchover completed in Canada except in remote locations. Japan terminates analog.
2012	Completion of UK, Hong Kong, Ireland, Slovenia, Italy digital switchover
2013	Beginning of New Zealand switchover to be completed by 2017
2015	Chinese, Kenyan, Malaysia, Philippines, Ukraine digital switchover completed

Sources: Various including Wikipedia, UK Government, FCC, CRTC.

As a result, the impact of digital delivery of media leads to the question of what business models will be most important in the future for content delivery. Our view is that companies will have to manage a more complex portfolio of business models and develop more sophisticated ways of integrating their view of individual consumers. Roughly speaking there are five basic forms of revenue models that will emerge or which can be bundled together:

Traditional advertising based models. (Examples: classic network or cable TV)
Fee-based models for one time viewing or viewing for a period of time, unbundled from subscriptions. (Examples: video on demand, Pay-TV, single viewing downloads, downloads valid for a narrow viewing time slot.)
Subscription models analogous to current cable or satellite tiered services. (Examples: premium cable subscriptions, satellite subscriptions, Netflix, music subscription services)
Product placement, sponsorship and brand integration models sometimes combined with other economic models. (Examples: various soap operas or drams financed by e.g. Procter and Gamble or Hallmark, combination network TV shows financed by product placement and advertising.)
Purchase models which include a variety of portability, versioning and resale rights. (DVD purchase, download purchases.)

These revenues models can more broadly be thought as a collection of pricing models, rights granted to consumers and services around the purchase, use, storage and management of the rights. Rights represent a new frontier in content marketing and can include:

Right to view on one or more devices
Right to save
Right to redownload to one or more devices
Right to transfer ownership
Right to share with a designated group e.g. a family
Right to upgrade to a new technology or quality
Right to resell
Right to receive a commission on referral leading to resale

The marketing of content with attached rights management is likely to be controversial among consumers accustomed to the current simpler legal environment.

Examples of Rights Based Marketing Alternatives

	Audio Books, Podcasts	Music	DVD Video
Right to view/listen on one or more devices	Audible.com permits multiple devices and formats	Assumed. Consumers move music from CD/Vinyl to tape/MP3	Consumers can view DVDs on any device that plays DVDs e.g. computers, DVD players, or networking video devices such as Slingshot
Right to save	Part of delivery methods	MP3 can be backed up. CDs can be copied for personal use.	Consumers can back up a copy of a DVD for personal use.
Right to redownload	Audible audiobooks permits redownloading of audio books.	Available on some subscription services. Not availale on iTunes.	Movies on Amazon unBox can be redownloaded.
Right to transfer ownership	Generally not permitted	CDs can be sold. MP3s currently more difficult to sell without owning associated CD.	Generally not permitted
Right to share	Possible by sharing account access. Legality unclear.	Music can be shared with a group of friends in ways that are both legal and illegal.	Copying for friends generally not legal. Lending content provides a low tech way of sharing.
Right to upgrade to new technology or standard	Download options on quality can be reset but there are limitations.	Without a source file e.g. .wav file from a CD, no upgrade is typically possible. The option to upgrade to a higher quality resolution or video standard is normally treated as a separate purchase by content owners e.g. vinyl to CD, CD to MP3. MP3 low quality bit rate to audiophile bit rate.	Generally requires a new purchase. No major current examples of a content upgrade strategy that would parallel software companies offering upgrade pricing.
Right to resell	Not generally permitted.	CDs can be sold. MP3 licenses could permit resale and transfer of ownership.
Right to receive commission on resale or referral	Generally no	Generally no	Generally no

It’s likely that as users become educated about the rights bundles attached to different ways of acquiring media, different consumers will evolve different buying patterns. For example, less technologically sophisticated users and audiophiles still prefer to buy music and video on optical data media such as CDs and DVDs. Slightly more sophisticated technology users may find the integration of a music/video downloading service and device more attractive until they get annoyed at the difficulty of moving content or the lower quality of many digital media. More sophisticated digital downloaders will discriminate on the basis of absence of rights restrictions and higher quality. For example, Amazon’s MP3 music offering offers both a DRM and a price advantage over the brand leader, the iTunes store.

Confusingly, while consumers may evolve their preferences over time, they will likely to continue to trade off rights against price inconsistently, based upon their involvement or interest in the specific content.

Deregulation of Access Increases Consumer Choice

The world of content owners, aggregators and conduits is a complicated one. It’s hard to generalize about an industry that covers movies, videos, TV, DVDs, portals, on-line retailers, auction sites, search engines, DVD rental, cable networks, broadcast and satellite networks, local TV stations, radio stations, satellite radio, personal computers, MP3 players and game machines. A person’s brain quickly starts to hurt with the complexity of all the choices and potential ways in which devices, networks, sites and content might interact.

But one fact sticks out like a sore thumb. The world of content and conduit has changed irrevocably. We have moved from a world where accessing content was difficult and controlled by a small number of highly regulated players to a world in which choice has exploded. Not only is the availability of content greater, there are more ways of accessing and more devices for using the content. And if we can say one thing about the future, it is that the ability to access content will get even easier.

We can call this new deregulated world, the world of Megachoice. Megachoice poses certain obvious problems for content marketers. How do you keep the attention of consumers? How do you brand and differentiate your content? How do you build relationships with consumers to ensure high rates of repeat purchase and cross selling? How do you enlist consumers as sources of referral in a world where the number of solicitations for referral and ratings runs the risk of being as annoying as market researchers on the phone?

Today you can see a movie in a movie theater, be certain that within a short and decreasing period of time you will be able to see the movie again via video on demand (VOD), Internet download or DVD rental or purchase.

You can download music from multiple music sites (e.g., iTunes, Urge, Amazon, eMusic, Rhapsody, Starbucks/Apple, Universal’s planned Total Music, cellular service operator sites or joint ventures) or you can purchase it on DVD from multiple sources (e.g. Amazon, Barnes and Noble), or you can rent music from businesses that offer subscription services e.g. Rhapsody, Urge.

So from a consumer perspective the result is typical of a deregulating market: more choice. And not only can you access more current content, an entire backlist of past content is pretty much guaranteed to be available. Examples of choices that consumers can make today include:

See the movie in the first run theater or see it at home via DVD rental or purchase.
See the movie at home via video on demand from satellite, cable, telephone company or streaming Internet access.
Select a level of quality for viewing a movie e.g. for a mobile video device such as a digital music/video player, on a computer, on a TV with standard definition or on a high definition TV.
Rent, purchase new or purchase second hand.
Choose a format with varying degrees of portability.
Purchase a version with advertising or without.
Purchase a version with or without digital rights management.
Purchase different rights to multiple downloads to one or more computers.

The inevitable consequence of more choice is that there will be more potential marketing, pricing and digital rights strategies which will have different degrees of appeal to different segments of the market. For example, one recent study by Microsoft and Starcom suggests that 10-15% of adults 17-35 in the US could now be characterized as advertisement avoiders. Clearly, this segment is more predisposed towards non-advertising based versions of content or content where advertising can be skipped (which will presumably in the long run, threaten advertising business models).

Just as in other areas of retailing where consumers will shop at both at high end and discount stores, consumers will likely continue to select media with different economic bases. A low involvement video may be acceptable to a consumer with advertising. A high involvement video may end up being seen in the theater, rented and purchased.

In the music distribution business, we already see price competition emerging between Amazon and iTunes. But there is also business model competition with download models, subscription models and combination device/download or combination device/subscription business models and partnerships emerging. Amazon has considered a cell-phone like MP3 economic model where in return for a two year subscription, consumers would receive a “free” MP3 player.

Another consequence of the increased availability of consequence is likely to be a reduction in average prices in the market. We see some signs of this trend in a number of markets:

The average price of movies has dropped significantly as move distribution has moved from videotapes to DVDs to downloads. While downloads tend to be less expensive than the purchase of a DVD, the quality is typically lower. One could also argue that the current slow speed of download also currently detracts from the overall experience, at least in the US where bandwidth speeds lag more developed markets. The niche marketer, Jaman.com which distributes rentable or purchasable international content offers rentable movies at $1.99 and purchased copies at $4.99.
The average price of music has also dropped and is likely to continue dropping. In October of 2007, Radiohead received wide publicity for a decision to make its next musical album available at a price determined by the downloader. One could call this “guilt marketing” and draw analogies to public television and public radio fund raising. Or you could see the initial music release as a loss leader to attract listeners to concerts, where they will purchase tickets and physical goods. Enthusiastic audiophile fans may also purchase higher quality versions of the music when released on optical media. In some cases, digital downloads of audio books are less expensive than purchase of actual books on Audible.com, the current major site.

Implications

Branding

In a world of Megachoice, content owners face many of the problems that have been experienced by the book publishing business for years. Do you market an individual book? Do you market an author? Do you market a series of books by an author? Do you market a brand or imprint?

In book publishing, authors tend to be “brands”. Some authors write “series” books with similar formulas and characters. Some author write within genres (mysteries, science fiction, romance). Some authors write series (e.g. Tolkein’s Lord of the Rings in three volumes with The Hobbit as a prequel.)

Very few publishers have been successful in developing brands where the buyer buys the brand rather than the author. Harlequin Romances is one of the few exceptions to the rule. The closest analogy in video are TV series brands which have spawned a series of video offshoots, e.g. CSI in its three versions, Law and Order variants, Star Trek.

In a world of digital video content, branding is likely to take place at multiple levels. There are clear economies of scale and scope from having a successful destination portal. All the major networks are establishing major on-line presences in order to create destination portals e.g. Hulu.com . The high valuation of aggregators such as Google, Yahoo, MySpace or FaceBook makes a media portal look like a low risk way of adding to shareholder value for a media company in addition to increasing the leverage they hold over conduits and aggregators. Many networks have insisted that Google’s YouTube remove their proprietary content in order to force viewers to visit their own network portal sites.

The motivation for content owners to integrate forward and develop their own brand is clear. Branding a portal offers some significant advantages.

· First, it simplifies accessing content for viewers.

· Second, it allows the creation of an advertising driven portal that substitutes for more traditional delivery methods.

· Third, the flexibility of portals provides more opportunity for content experimentation particularly for series content. In many industries increased competition leads to margin erosion and pressure on distributors; similar pressures in media will increases the pressure to eliminate non-value adding layers in the channels of distribution.

But as with most fragmented markets, different content owners may take different distribution strategies. In 2007, CBS has chosen a strategy of distributing contents on over 21 sites. CBS management’s rationale is that they are in the “eyeball business”. The more eyeballs they reach, the more they can charge for advertising. The challenge for an “eyeball” strategy is to be able to manage and report on multi-site campaigns in order to sell to and meet the needs of advertisers. The value added for CBS will come from a mix of content creation, campaign selling and management tools and the development of viewer profiles.

NBC and Viacom have chosen to create a joint site to create a major destination for viewers. Long term, NBC and Viacom may view this portal as a transitional business strategy. Comcast has realized the need to have an Internet presence and is developing a non-cable based content site. And in perhaps the biggest validation of this trend, Time Warner transformed AOL.com from a walled garden, or subscription strategy, to an advertising supported open content site.

Revenue Creation

One obvious economic implication of increased availability of content is that the traditional model of scarcity marketing has gone by the board. The entertainment industry worried a great deal about the cannibalization possibilities of videocassettes until they realized that videocassettes expanded the size of the market for video. The same conclusion was reinforced with change in technology to DVDs. By 2005, DVDs accounted for 59% of movie studio revenues (Edward Epstein, Hollywood’s Death Spiral, August 1, 2005, Slate Magazine)

At least one study has suggested that simultaneous release of DVDs and theatrical releases would increase revenues to content owners by as much as 16%, and drop revenues to theater owners by as much as 40% (Reference: Henrik Sattler, Felix Eggers, and Mark Houston, The Last Picture Show? Timing and Order of Movie Distribution Channels, October, 2007, Journal of Marketing.)

As so often happens in business, we now hear the same concerns about digital downloads of movies. However, it’s reasonable to speculate that:

There is an upper limit to the amount of time that individual can devote to entertainment so obtaining viewing is likely to be at least as great a problem as in the past and probably a more difficult task.
Introducing digital ownership of content creates a management problem for consumers that is roughly analogous to being a small IT department. When you own lots of content, whether it be books, cassettes, vinyl records, CDs, DVDs or downloaded files, the heaviest content consumers will find that

They don’t have enough space to store physical artifacts.
Maintaining and backing up downloads can become an enormous chore and the loss of downloaded content can become an expensive event. A family might easily have acquired several hundred DVDs worth $1,000-2,000 at second hand prices of $8 per movie and more if purchased new. And it is not unreasonably for a music enthusiast to have 10,000 pieces of music in his collection, worth about $9,900 at current iTunes pricing and $8,900 at Amazon pricing (as of late 2007)

If the price is low enough, consumers will acquire content as insurance against future periods of boredom. Not all of the content will end up being viewed in the same way that all of us have bought books that we intended to read, but never did. Audible.com has a very clever strategy of featuring a book every 2-3 days that is so low priced that a heavy user of audio books is highly incented to purchase and accumulate audio books in advance of need. Audible needs to compete against physical books in its pricing and also to pre-fill MP3 devices to capture spending before the user experiences a book buying opportunity.

One to One Marketing

With the market for content becoming more fragmented, content developers will increasingly want to know more about their consumers. Traditional sampling techniques for measuring audiences will become increasingly less useful. There are at least three economic reasons motivating the desire to develop information repositories at the level of individual consumers:

Maximizing the capture of the value created for consumers means reaching consumers when the content has the most value e.g. first release for a movie, or when a piece of music is popular or promotes a concert series. It also means understanding the consumer’s life cycle relationship with the content. A consumer that likes a movie a great deal might want to leave the theater with a DVD or a discount coupon to download a personal copy of the film or a gift certificate for that relative that “has everything”.
As in book publishing, repeat sales of a video series (whether movie sequels or a multi-episode format) leads to higher profitability and lower marketing costs. Knowing who saw and enjoyed content creates revenue opportunities for series and sequel selling.
Knowing the taste of consumers and the status of their inventory of purchased content makes the development of new material and cross-selling of content more likely to be successful. We already see such exercises being done on an individualized basis by firms such as Amazon and Netflix. Another example of the personalization of content are new classes of smart Internet radio stations such as Pandora.com which will create personalized music streams based upon music similarity.

Repositories

It’s no surprise that the major portals are all attempting to develop repositories of information about their users. Whether you are a retailer like Amazon or Barnes and Noble, a search oriented services such as Ask, MSN, Google or Yahoo, a content aggregation site such as Yahoo or AOL.com, a distribution site such as Netflix, the information you collect about consumers represents an advanced form of profiling that can be used for either for “shameless selling” to consumers or helping consumers find content that they will enjoy, depending upon your mission. What has been less predicted is that conduits such as telephone, satellite and cable companies should be able to develop individual profiles on viewership and preference that is very specific to content viewing habits and taste preferences.

If you consider the rate that viewers change channels, skip or speed through commercials, the amount of data generated will rapidly create some of the largest information warehouses in the world.

Rough estimate of sizing of channel switching behavior database

	US	Total World
Number of TV households	110M	1.1B
Average hours of TV per day	4	4
Shows and ads per hour visited	3 shows, 40 ads and information spots, 40 product placements	3 shows, 40 ads and information spots, 40 product placements
Days per year	365	365
Records collected per year per household	40T	400T
Data collected event	Household identifier Time in Time out Channel Content ID e.g. show number, ad number	Household identifier Time in Time out Channel Content ID
Total data elements	200T	2000T

Note: assume that household identifier does not have to be repeated and ignoring minor data fields such as contact information. Estimate also does not include follow-up click-throughs or related search/behavioral information. (M = million, B = billion or 100 million, T = trillion or 1000 million)

Privacy

An emerging trend in consumer portals is resistance to behavioral tracking and targeting. Search engines have been forced to make more explicit their data retention policies and the topic is unlikely to go away.

Future strategies will likely need to turn tracking into a user-controllable service that is perceived as value creating for consumers and which will encourage opt-in. Such an approach will be less likely to attract the concerns of privacy watchdogs and regulators, particularly in Europe.

Pricing Strategies

Pricing is an area where we predict further innovation. We have identified already that different rights strategies represent a new frontier in marketing. But in addition, successful content owners and distributors need to experiment with more pricing/rights combinations. NetFlix’s launch strategy represented a brilliant example of how changing the economic relationship between consumers and content owners/distributors can create brand new businesses. Fixing the total cost of ownership to the consumer removes an enormous annoyance to consumers; it also represents an effective price reduction to consumers who would otherwise have incurred late fees. Another way of thinking about the problem is that fees paid to a content owner have different degrees of perceived value creation. A rental fee is perceived as fair. A late fee may induce a more emotional reaction. Like many ethical strategies, Netflix increased the perceived value of its service by putting itself in the shoes of its consumers.

In China, media companies have had to deal with pricing issues and piracy. With only the income levels of a developing country, Chinese consumers historically purchased illegal copies of films. By dropping the price and competing on quality, media companies have regained market share against pirated versions.

As bandwidth speeds improve in the US, it is likely that theft will become a larger problem. Response to the transition will likely include:

Significantly dropping the price of content in order to gain volume.
Selectively lowering the price of content for lower resolution versions of content with more limited rights e.g. standard definition TV resolution with limitations on storage and ownership to target more price sensitive demand.
Offering bundled access to content to increase the share of spending and viewing time. This approach offers simplification of purchase and lower average cost and is being used in the music distribution business by firms such as Rhapsody and Napster and device vendor, Nokia.
Eliminating layers of distribution in order to minimize margins obtained by non-value adding or non incremental audience creating distribution.
Loyalty based pricing where cumulative purchases affect individual content purchase prices.
Direct sales models where purchase of content can lead to income from referral and direct sales activities.

Campaign Management

In 2007, major portals such as Google, MSN, and Yahoo have made significant investments in ad server companies such as DoubleClick, eQuantive and Right Media Exchange.

The trend is clear: content based sites with economic models based upon advertising are more complicated than traditional TV advertising and the supporting infrastructure and tools for linking information across different kinds of media and sites will have to be more capable. The ability to target will be increasingly refined and permit micro campaigns. The reduction in cost of micro-campaigns will increase the number of advertisers and advertising campaigns, something we have already seen with paid search marketing (e.g. Google AdWords, Yahoo’s Overture) and with cable companies advertising programs that permit low cost advertising based upon head end household reach.

At the same time, campaign analytics will require more flexibility to analyze vastly more complicated campaigns that stretch across media, web sites and portals.

Technology Implications in the Home – the Terabyte+ Household

From a networking and storage perspective, the most demanding content in the home is video. Video is large. A large music collection of 10,000 songs would run around 100 gigabyte at maximum MP3 encoding level of 320 kilobit per second or roughly the equivalent of 25 standard definition movie files (though an audiophile might well store the actual .wav files, which are typically 4-5X larger).

In contrast, a typical 90 minute film in standard definition runs in the range of 1.2 gigabyte to 4 gigabyte in SD (standard definition) depending upon the target screen size and quality. High definition (HD) video at around 9 gigabyte is so large that it is unlikely that most deployments will permit more than 3-4 simultaneous HD video channels in a home.

The good news is that the size of video files has historically made video piracy more difficult. But in leading edge markets such as Korea or Japan, faster networks are more available and cost significantly less than in the US. So, this temporary bottleneck will not protect content owners in the future.

Just as importantly, it does not take a large movie collection to start filling up a DVR (digital video recorder) or hard drive attached to a media computer/game machine. In effect, households are becoming mini-IT departments with all the resultant problems of access, backup, rights management and content sharing.

These scaling problems represent significant opportunities to increase usability and integration. By providing services around rights management, there are opportunities to graciously transform DRM from a perceived restriction to a service offering, i.e. we will back up or store content to which you have rights, or to put in other words, “You can re-download your content when you need it again, so you don’t need to back it up or fill up your hard drive.”

Content Development Implications

The world of Megachoice suggests one key change will be critical: the importance of quality will increase dramatically. Quality is a loaded term in entertainment programming. One person’s favorite programming is another person’s “junk” TV. So quality is always particular to an individual, their taste, their device, their expectation about resolution, portability and rights. Assumptions about uniformity of taste and expectation are likely to cause content developers, owners and distributors to miss opportunities.

Tools that allow repurposing of content, change in resolution provided or device supported, addition or subtraction of legal rights, dynamic testing of product/rights/performance/services will require new sophistication for media companies and central tracking of relationships with individual customers.

Strategies for Content Owners

In a world where content owners are attempting to figure out what will be of interest to consumers, media companies appear to be experimenting with different ways of building momentum for series video such as TV series.

Dramatic shows with story arcs have become popular over the last decade. Some of the most important dramatic television – shows such as The Sopranos, The Wire, Six Feet Under, Rome, Lost, Grey’s Anatomy, Heroes, etc. can lose viewers who have been unable to regularly follow the story arc on traditional TV. Late arrivals to a series can often go out and rediscover the early seasons via DVD, video on demand (VOD) or downloads, but for current, “in progress” series, networks have experimented with allowing viewers to catch up on the early episodes in a season, or to finish off a season that has been cancelled in prime time. The lower costs of release on a portal and the lower opportunity cost allows for different economics than the scarce resource assumed in an over the air broadcasting model.

Some competitors have realized that the traditional model of Spring “Upfronts” (pre-buys of advertising in the Spring for the Fall new season) is only one alternative release model and launch new shows at different points in the year.

Strategies for Conduits

The three scenarios introduced in this article produce different pressures for conduits.

In the Forward Integration scenario, content owners, which tend to be large and powerful companies will put pressure on Conduits. With more conduits competing for content, margins for Conduits is likely to be reduced and some conduits will be forced to merge or go out of business.

In the Balanced World scenario, content owners will have successfully pursued strategies where they offer services that are difficult for Content Owners to match. By having sticky services and a better profile of viewers, they may be able to base a strategy upon service stickiness and the better repository of behavioral information that Content Owners will have less skill and opportunity to match.

In the Churning World scenario, high rates of innovation could lead to a new source of content that could give birth to new content companies, but ones that don’t have the muscle to set up broad access to consumers. This new category of “amateur” content developers will likely have to be much more professional and ambitious than the relatively short user-generated material on current user video sites. Aggregators and Conduits could use this new wellspring of content to construct alternative programming portals. But it is likely that Conduits and Aggregators will find, as many have before, that creative talents able to create blockbuster successes are a scarce resource and likely to become more scarce in a world where quality is increasingly important.

Strategies for Niche Players

One of the rules of economic geography is that small markets support few niches and larger markets support many niches. Content is, of course, no different. Given that the Internet expands the reach of a content provider, it’s likely that video content will increasingly resemble the book business with new featured content (“Best Sellers”), series publishing, genre publishing, and back list (sometime referred to as Long Tail asset) marketing.

A limited form of genre publishing has even slipped into network prime time with current networks developing a positioning around police procedurals (CBS), relationship dramas (ABC), legal dramas (NBC), and TV targeted at younger and minority viewers (CW). Specialty cable channels have pursued theme programming with varying degrees of commitment and it is likely that the greater flexibility of video on demand will increase the importance of branding, pyschographics, taste mapping and prediction at an individual level.

Forward integration – Content Owners Build the Portal Brand

An argument for forward integration by content owners is that in a world of Megachoice, a portal is like shelf space in the consumer’s mind. Consumers will likely only visit a limited number of portals and portals will have stickiness that will keep viewers at the site or cause them to bookmark or download inventory for later viewing.

A second argument for forward integration by content owners is that if increased supply of content and cross-content competition drives down prices, pressures on margins will cause the elimination of content distributors (conduits and aggregators) where the margins of the distributor exceed the value created.

A third argument for portal ownership is the increasing importance of creation of relationships with and information about consumers. In a world where advertising revenues are at risk, alternative economic models such as click through revenues for viewers following up on product placement or advertisements offer a potentially significant revenues source. Google in 2006 averaged approximately $1.52 per click through for consumer products under $100. The traditional 30 second spot revenue for an advertising model works out at about 2.1 cents per user in prime time. If networks with their content power can create click through models with the same success as Google, even a low click through rate can compensate for ad skipping.

Portals, in effect, become similar to the traditional prime time network with syndication a manageable option that can be done in parallel or sequentially depending upon the best value capture. In some situations, making content available at many sites may be economically preferable and technologically more feasible (if bandwidth is a constraint or reach is the key issue). In other situations, proprietary content acts to pull consumers to the site for the premium content and allows the site to keep viewers at the content owner portal.

Backward Integration – Do Conduits Build Content Empires?

For many traditional conduits, the threat of forward integration has forced them to consider whether they should be in the content business. Comcast considered purchasing Disney. Terry Semel, former CEO of Yahoo was brought in for his Hollywood connections. Google has been forced to pay for some of the news content that is aggregated on its site.

The issue for these firms is (1) Can they provide services that are sufficiently attractive to make their sites sticky enough to make them attractive redistribution or referral sites for content distributors? (2) Do they need to develop or acquire proprietary content? Google recently announced a joint venture with Nielsen’s to improve reporting on advertising viewing, an example of using value added services to differentiate its capabilities and network from aggregators that only sell eyeball access.

Horizonal Integration – Integrators Offer Eyeballs to Content Owners

Again looking for parallels in publishing, even if content owners deliver directly to consumers, there is still a role for “selectivity”. One buys The New Yorker magazine for the editorial talent of the magazine. It is far easier to delegate the responsibility for content creation to an intermediary if one is busy.

While the new functionality of the Internet gives choice to those that want it, the role of intermediaries, reviewers, aggregators, web mavens and ratings is to simplify choice. These intermediaries are the 21^st century equivalent of book, music or film critics and editors. (Alistair Davidson and Jonathan Copulsky, Managing Mavens, Strategy and Leadership Magazine, 2006)

Packaging Strategies – Packagers Build Device/Content/Conduit Packages

In a world of Megachoice, some consumers will be overwhelmed by the choice available. Many consumers find the emerging digital living room complex to understand, complex to buy, complex to install, and complex to use. Apple has taken the view that ease of use and pre-configured products and services makes adoption easier. Over time, we can expect more vendors to follow Apple leading in pursuing high degrees of integration and to reduce usage complexity. This shift in performance towards the ease of use expected by consumers will be a continuing area of challenge. Strategies that can be expected to emerge include:

Bundled products and services, e.g. Apple, Microsoft Zune, cell phones with video capabilities and attached services.
Families of integrated products and services, e.g. Xbox, Zune, Vista; Apple iPod, iTunes, Macintosh, iTV.
Standards based products and services e.g. MP3 music services without DRM.
Products and services focused on bundling capabilities into a single product to reduce complexity to consumers.
Open source, open content, open device combinations e.g. Gutenberg project to provide free copies of off copyright material; similar projects exist for audio books.

Viral Strategies

A current flaw in most digital models is that one of the most powerful mechanism for creating sales – recommendations from a satisfied content viewer -- is largely ignored as a sales channel.

The primary reason for not harnessing peer to peer recommendations seems to be the absence of a cost effective micropayment infrastructure coordinated with digital rights management (DRM). However, as the content explosion increases choice, distribution models based upon referral may become exceptionally attractive and the next generation of social networking. A secondary driver here will likely be pressure from writers seeking remuneration for reuse of their content on new digital media.

Financial Strategies: Own Content vs. Syndicate Risk vs. Consumer Financing of Project

It’s likely that some content owners will be unable to establish a destination quality portal. For these content owners, the availability of aggregator portals with many eyeballs will remain attractive and represent a way of raising funds or syndicating risk.

Large portals may from time to time want to syndicate the financing and distribution of large or risky projects in the same way that European TV networks may cooperate on content development with a US network.

Perhaps more interesting is the idea that disintermediation could emerge for cult video content. Under such a scenario, addicted cult-like viewers might choose to purchase content in advance of creation in return for the psychic satisfaction of prolonging a series, otherwise unfundable, in return for a lower price on the eventual release, or even for profit participation.

Capacity Management

No matter what the technology, it always seems that demand is greater than capacity in telecom. A critical issue in the world of Megachoice is the problem of blockbusters. It’s unlikely that any one major content vendor will, in the near term, have enough capacity to handle the demands of extremely popular content. Imagine for example that a content owner wanted to make available a blockbuster piece of content digitally in HD to 500M homes internationally. While time zones would provide some timing advantages, it’s likely that server and network capacity might have to be rented with third parties. If advertising sponsored, there are likely to be additional constraints on tracking viewer data.

A number of capacity strategies are possible:

Design capacity to handle an average volume of transmission.
Rent peak capacity to preserve purchase, rental or advertising revenues.
Distribute from multiple sites in order to maximize the value capture within a narrow time window.
Use differential pricing to manage capacity effectively. This strategy is a traditional phone company and utility strategy, but it has not yet been widely adopted in media environments. One could envision using auctions to get privileged access to popular content or differential pricing based upon capacity availability on an actual or predicted basis.

In other high tech markets, vertical integration has been replaced by horizontally dominant competitors. With computers, different companies dominate different components of the personal computer.

Category of value added	Dominant Player (s)
Microprocessor	Intel, AMD
Operating system	Microsoft
Hard drives	Seagate
Graphics boards	AMD/ATI, nVidia, Intel
Routers	Cisco/Linksys
PCs integrators	HP, Dell

In the world of networked media, companies are attempting to pursue similar horizontal strategies. One can characterize the layers as follows:

Category	Major Players
Content development	Disney, NBC/Universal, CBS/Viacom, News Corporation/Fox, TimeWarner
Aggregators	Content owner portals, search engine and directory portals, user generated content portals, social network sites
Content serving services	Akamai, Brightcove, Google (predicted)
Major transmission owners	Cable companies, satellite companies, IPTV networks owned by telcos, Google
Owners of last mile or mobile connection	Cable, telcos, electrical utilities, bandwidth owners, cellular companies, metropolitan wifi connections, Wimax networks
Content/ad viewing tracking services and ad tracking/serving	Google/DoubleClick, Microsoft/eQuantive, Yahoo, CBS, Nielsens,

Summary: Decisions, Decisions, Decisions

Strategists in media companies are dealing with a massive change in their industry. There are, as a result, no magic bullet decisions but rather a series of decisions that need to be made and managed over time as technologies and installed bases change. Common to all the likely decisions is the need to increase the granularity of information about customers in order to create appealing support structures for making the life of individual customers easier.

The basic approach will likely be:

To understand the economics of the distribution chain. Where are profits being made? What is the value of the intermediary role? What strategies are dependent upon the intermediary? Where can the intermediary be eliminated?
To build, rent or partner to create capacity to deliver different business models.
To develop, acquire and use highly granular information about individual customers’ preferences, behaviors and usage.
To understand where distributions and partnership deals are test beds, short term volume builders or long term relationships. A strategy of simplicity such as Apple’s 99 cent music pricing will inevitably change to a more complex pricing model as significant competition emerges.
To run series of experiments in business models and content packaging to understand the changing preferences, installed bases and habits of customers.

Author

Alistair Davidson is a strategic and marketing consultant who has extensive experience in software development, high tech start ups, and working with companies in markets with changing technologies and business models. He is the former CEO of a number of startups including firms developing strategic planning tools, new product success prediction tools, market simulation, new media advertising tools and exchanges. He has been responsible for developing more than a dozen high tech products including first of breed products and commercializing them internationally. He has an undergraduate and MBA degree from Harvard, is the author of three books on strategy and technology and is a trained facilitator. He has worked with telecom, communications equipment, financial, media, new media, publishing, high tech, healthcare and government clients. His business web site is www.eclicktick.com and his personal web site is www.alistairdavidson.com .

2008-10-17T09:37:00.000-07:00

A Canadian’s View on the 2008 Campaign
By Alistair Davidson, Alistair@eclicktick.com
Draft 1.5

Being a Canadian in the US means that you see the US election a little differently than Americans. Not all of my American friends follow politics closely. As a result, one of my less political friends asked me to put down on paper some of the ideas about politics that I had suggested in a conversation that reflect my perspective.

So at the risk of stating the obvious to some, I have put down the following ten observations about the US politics -- thoughts and ideas that seem to get lost in the shuffle of sound bites and partisan analysis of “political marketing” campaigns. They reflect an outsider’s perspective. Obviously I like the United States. I live here. So my comments reflect the perspective of someone who has lived and been educated in the UK, Canada and the US.

The Ten Observations
1. Throw the bums out regularly
2. Good performance should be rewarded
3. In troubled times, a decisive government is required
4. Women’s rights matter
5. Leadership and vision matters to America’s position in the world
6. Regulation is always required
7. Shameless nationalism is embarrassing and dangerous
8. Democracy is about political “voice” and civil rights being available to everybody
9. Policies do make a difference in your personal life
10. The US seems reluctant to consider structural change

Observation 1: Throw the bums out regularly
The genius of democracy is that it provides a way of changing government peacefully. People often lose sight of this fact. And changing government is important. Power corrupts. Parties run out of ideas. A new government breaks cozy relationships between governing parties and suppliers to government of goods, services and policy ideas.

What complicates the issue in the United States, unlike in Parliamentary democracies in the UK or Canada is that you need to change government in three institutions – the White House, Congress and the Senate. You need to control both Congress and the Senate to empower a President for change.

So when a Presidential debate starts to focus too much on the personality of the candidates, it is always a “big lie”. Yes, the decision to elect a President is important, but if you want change, real change, you need to effect change in all three institutions simultaneously. Because senators don’t all get elected at the same time, it’s particularly hard to change the composition of the Senate in one election.

The importance of controlling all three institutions has been demonstrated in the 2006-8 period because it is has been difficult for both Democrats to be effective because they lack the minimum of 60 votes needed for procedural control in the Senate. And of course, the President retains his veto.

The last election was fought largely around issues of corruption. But in this election voters should remember to pay attention to the need to change all three levers of government if you really want change and if you wish to punish the governing party for incompetence.

Observation 2: Good performance should be rewarded and bad performance punished
Politics is, in some ways, quite simple for a voter. If a government (i.e. the combination of the party and the President) performs well, you should reward it by reelecting it. If it performs badly, you should throw it out of office. Rejuvenation of a political party by appointing a new leader to run for President does not generally change the nature of or the ideology of a party. So in a sense, when you choose to vote, you are voting for an ideology and its effectiveness. What this means is that strategic voting is important. You may like your senator or representative, but if you really care about change, you should vote a party line. In multi-party democracies, strategic voting for a party is much more prevalent, but curiously many American seems indifferent to the consequences of splitting their vote.

When we look at the current administration, most neutral parties would observed that the past administration could be characterized by:

1. The largest financial collapse since the Depression;
2. A housing bubble that could have been avoided;
3. A low rate of job growth and a failure to create a high rate of high paying new jobs. (It’s important to remember that not you need to create somewhere between 100,000 and 200,000 jobs a month just to keep up with population growth, so anything less than 1.2-2.4 million jobs per year is just standing still. The current administration has created about 5.5 million jobs over its time in office, in other words, barely keeping pace with population growth.)
4. A massive increase in government and consumer debt;
5. A relative decline in the competitive standing of the US in the world;
6. A massive transfer of wealth to China and oil producing countries which in the long run will decrease the value of the American dollar further and increase the purchase of American companies by foreigners;
7. A decline in the value of the American dollar
8. The continued deindustrializing of America;
9. Decline in the maintenance of infrastructure in the US. Levees are inadequate. Bridges are not maintained. States have difficulty in financing education and healthcare.
10. Alienation of allies;
11. Alienation of the third world;
12. A pattern of devaluation of science;
13. A disastrous response to global warming;
14. Ill-thought out decisions to go to war;
15. Operational incompetence and corruption evidenced by FEMA and New Orleans, abuse of prosecutors in the Justice Department, incompetent war planning, incompetent nation building;
16. A lack of respect for the constitution as evidenced by illegal domestic spying, presidential letters attached to legislation in an attempt to increase the power of the presidency;
17. The corruption of the Republican K Street Project which attempted to tie legislation to donations
18. A pattern of inaction on renewable energy and energy import replacement including senseless policies that have weakened one of the more important industries in the US – the automobile industry – by not forcing development of energy efficient cars and trucks.
19. Increased income disparity.
20. No solution to illegal immigration.

The list could be longer, but, by any standards, it represents poor performance particularly for a party that controlled all three levers of power for the first six years of the administration. Even if one argued that some of these problems date back further than the Bush administration, there has been no real action on improving the competitive position of the US economy with the possible exception of making sure that large companies are making a lot of money.

Observation 3: In troubled times, a decisive government is required
While there are many virtues to the separation of powers, in troubled times, a country needs decisive and effective government. Few would argue that the US is facing difficult times in terms of climate change, energy policy, a failing educational system, R&D, diplomacy with allies and problem countries, wars in Iraq and Afghanistan. Voting so that a government can implement its decisions by having control of the executive and Congress is critical in a crisis.

Demographically, economically, and militarily, I think it is fair to claim that the decisions the US must make today have never been so important. Control of legislature and executive by one party is no guarantee that good decisions will be made, but making no decisions on energy policy, climate change, Medicare and Social Security is likely to be costly and to become even more costly the longer that decisions are put off.

Perhaps more importantly, in the American system, the budgetary role of the US President is actually quite weak. Unlike the Parliamentary systems in the UK or Canada, the separation of powers between Congress and the President makes government less decisive and budgeting more prone to pork barrel spending. I could go on with the many deceptions in the budgeting system in the US, but among the litany of deceptions are
(1) failing to account for incremental war expenditures, (2) failing to report on the actuarial liabilities from not funding Social Security and Medicare, and (3) failing to distinguish between infrastructure investment and non-infrastructure investments.

Being bi-partisan is a virtue according to many. In my view this belief is wrong: a little understood truth is that it is the purpose of the Opposition in a democracy to criticize the government in power. It is not their job to support the party in power except in times of crisis. And bipartisan consensus is impractical when parties are too different in views or too insulated from the voter as a result of gerrymandering.

Observation 4: Women’s rights matter
Lost in the discussion of culture wars is the simple observation that women’s rights matter. Countries with more equality and career access for women do better economically. Just look at the Middle East as an example of how not to preserve women’s rights.

With equality for women, there is a bigger pool of smart people to draw upon. And if you don’t believe this, look at how the educational system has gone into decline since women have had more choice. It used to be that smart women had limited career choice except in teaching or nursing. Now, they have as much choice as men. Teaching is no longer subsidized by smart women and we have not increased teaching salaries to make teaching more attractive for the men and women who dedicate themselves to the important job of teaching.

The next president will replace aging members of the Supreme Court and the consequence of these appointments are important for anyone who wishes to preserve the right of American women to control their own bodies and destinies.

If the Supreme Court were determining whether men could have sex, and if they had sex, whether they could work and be economically independent, I find it hard to imagine that there would not be a revolt by men. The only surprise to me is that so many Republican women will vote for a party that treats them like second class citizens incapable of making medical and moral decisions. Talk about voting against your own interest or that of your daughters.

In Canada, Parliament could not agree on rules for guiding abortion decisions, so the decision was made to leave it a medical decision between a doctor and his/her patient. This seems eminently reasonable to me if I wear a libertarian hat and equally as reasonable if I wear a liberal hat. It only seems reasonable to restrict medical decisions if I believe that my religious beliefs should trump your rights. However, individual rights under the US Constitution are designed to prevent the tyranny of the majority and to prevent one religion from imposing its values upon members of another religion.

And even if you don’t agree with a woman’s right to control her own pregnancy, then I have difficulty with those who believe that contraception is a bad idea. It’s intellectually inconsistent. If you are against abortion, you should be in favor of sex education and easily available contraception. If you are against both a woman’s right to abortion and contraception, then you are against sex. And if you are against sex, then you are against an American’s right to the pursuit of liberty and happiness. Or maybe you are just weird.

In terms of sex education and contraception, the equation is clear: more knowledge and access to contraception means fewer unwanted pregnancies. In the Netherlands, where contraception is taught early and is easily available, teenagers postpone having sex until older and have fewer teenage pregnancies than in the US. In other words, contraception is better for abstinence than education on abstinence. Those of us who are pragmatic are in favor of results that work. Those who work on faith should not be upset if their objective is met by pragmatic means.

And if you believe in religious freedom, the basis of the United States, how can you take seriously religious claims to special insights about reproduction? Since the birth control pill was invented in the 1950s, women have been given control of their biology. No significant religious founder ever faced the issues that birth control technology now offers. And few religions have treated women as equals. So why should we listen to their ancient writings that cannot possible address an issue they could not have conceived of, particularly in a secular democracy with multiple and competing religions.

In truth, abortion is a convenient theme for political parties that wish to distract their voters from more important issues. And we do have many more important issues rather than debating unresolvable conflicts or “settled law” as the current Supreme Court Justice, John Roberts has indicated in hearings. Jonathan Swift, 18th century English satirist, created an imaginary conflict around Big Endians and Little Endians (i.e. which end of the boiled egg you ate first) as an example of this political technique.

Observation 5: Leadership and vision matters to America’s position in the world
Many Americans are frustrated today by the loss of America’s moral authority. Guantanamo, Abu Ghraib, policies on torture, the mangled legal thinking of the current administration has proven a public relations disaster for the United States around the world. It seems strange to me for Republicans to claim ownership of American traditional values and culture, when they have this blind spot for America’s international reputation.

What is the cost of this loss of moral authority? Dollars and death. The US’s inability to build coalitions to prevent genocides has already been demonstrated in Dafur. Continued motivation of jihadists is the other obvious result.

Observation 6: Regulation is always required
Republicans have over the past eight years argued for less government regulation. An early Republican head of the SEC in this administration, Harvey Pitt, stated upon his appointment that his objective was a “kinder gentler regulation” by the SEC, an ill timed objective, just before the collapse of Enron and some of the largest frauds in American history.

The reprivatization of Freddie Mac and Fannie Mae represents one of the largest financial fiascos in US history, one that will potentially cost the US taxpayer and US economy tens if not hundreds of billions of dollars.

The additional failure to regulate sub prime mortgages properly and the failure to limit $50+ trillion of credit default swaps is more than a small regulatory lapse. It will cost the US and other economies for years to come and could cost more than the $600 billion bail-out. The Economist magazine suggests that a financial melt down has an average cost of around 6% of GDP so by any standards, the financial system melt down is a poor reflection on the current administration.

Eventually, markets recover, but there is a cost to the recovery process, one that often destroys the lives of individuals, small business owners, cities and regions. Good regulation creates value. One only needs to look at the success of well regulated stock markets where good disclosure exists vs. bad stock markets where promoters regularly rip off naïve investors. The more regulated markets work better and attract more listings. Gresham’s Law about fake currency: “Bad money drives out good.” is equally true for financial products. Bad financial instruments drive out good.

The ideological insight is not that markets don’t work. Markets do work and they are efficient. But there are many ways of structuring and regulating markets. Markets don’t exist in some platonic single ideal. One would not, for example, like to see deregulation of maintenance for airplanes. Yes, in the long run, markets will punish airlines that have a higher rate of crashes. But who wants to be killed on a poorly maintained plane in the time period before the market punishes a poorly performing airline?

Financial markets regularly have bubbles unless they are regulated. And the cost of preventing a bubble is much less than fixing the bubble. One only has to look at the Great Depression as an example.

The problem with regulation, and also with the related issue of industrial policy is that ideologically, many people deny that the US has a formal industrial policy. But the sum of the individual tax policy and regulatory decisions add up to a de facto industrial policy. Those that deny the existence of this de facto industrial policy stick their head in the sand and refuse to analyze, anticipate or intervene to prevent ugly consequences. A lack of deductions for savings and a deduction for home mortgages has led where one would expect – low savings and overinvestment in housing. Low energy prices discourage businesses that develop more efficient products.

Observation 7: Shameless nationalism is embarrassing and dangerous
After the Second World War, the United States was in the fortunate position of being the preeminent military and economic power in the world. Today, the success of capitalism globally is such that the US is proportionately less important in the global world economy. It is a mark of capitalism’s success that the world economy has grown. In a multi-polar world with 6 billion inhabitants, there are opportunities to benchmark US performance against other successful countries and to learn from what they do well.

Only the arrogant and the insular would think that the US does everything right. You only have to drive on French autoroutes, visit new Asian airports, use health care systems in other countries, understand how much faster and cheaper Internet access is in Korea or Japan, see the successful energy policies of Brazil which is now energy sufficient, to understand that the US does not lead in all areas. In a world, where Europe and Asia have similar levels of economic power to the US, they will be more successful in some industries and less successful in others. But innovation requires learning quickly from what works. In the past, the US was more innovative because it had a bigger market. Today the market is global. Learning needs to be global.

As an immigrant to the United States and a great admirer of many things American, I enjoy talking about politics and economics. I am, however, frequently astounded by Americans who resent an immigrant talking about American politics, institutions and the economy. If I am slightly critical of something or suggest that it is done better in other countries, they will often ask: “Well, if you are so critical, why did you come here? Why don’t you go back home?”

It is also a mark of disrespect by such critics, and dare I suggest, a mark of ignorance to suggest that the US cannot learn from other countries. As a melting pot, the US is a magical place that has historically been able to take the best from the rest of the world.

(This defensiveness is surprising to an immigrant from a smaller country. People from smaller countries like Canada always have to be more knowledgeable about bigger countries. The late Canadian prime minister, Pierre Elliott Trudeau described the relationship between Canada and the US as being similar to a mouse sleeping in bed with an elephant.)

I suspect these defensive reactions are from the same people who complain that immigrants don’t speak English rather than seeing the bilingual capabilities of immigrants as a plus. Compare European business people who typically speak a minimum of two or three languages, at least their native language and English. In Canada, the well-off send their children to school in their non-native language in order to give their children more mobility. In the US, most Americans would be reluctant to do so.

When the United States is in crisis along many dimensions, perhaps there is an opportunity to benchmark the world and see what we can learn from other countries. The Swedish model for bailing out its banking systems successfully (by investing in the banks) seems but one example of a foreign success that finally seems to being belatedly followed.

Observation 8: Democracy is about “political voice” and civil rights being available to everybody
There is a huge debate in the US about illegal immigration. There appear to be two basic views. The first view is that illegal immigrants have broken the law and should be punished. It’s hard not to be sympathetic to such a view if you believe in the rule of law.

The second view is that illegal immigrants are second class citizens who are abused by employers and who have no recourse to the courts, political representation or unions. In other words, they are abused by being unable to appeal to a rule of law.

Strangely, the people that hold the first view -- that immigrants should be punished -- have a blind spot around the moral issue of having a second class group of citizens without political voice or civil rights. Independent of the issue of how they got here, or what should be done about them, illegal immigrants have many obvious parallels to a class of slaves.

My personal view on illegal immigration is straightforward. Slavery is bad. As Thomas Jefferson wrote, slavery is bad for the slave owner and for the slave. Whether you believe that illegal immigrants should be sent home or whether you believe their status should be regularized, they should not be abused and should not exist outside the system of laws within the United States. In fact, the Supreme Court has ruled in a similar way about habeas corpus in the more difficult case of dealing with Guantanamo detainees.

America has a tradition of pragmatism. If there is no practical way of sending so many immigrants home, then surely the approach should be to minimize the existence of a lawless economy and individuals operating outside the law.

Observation 9: Policies do make a difference in your personal life
In the sophisticated marketing culture of the US, where consumers can debate the relative merits of an iPod vs. a Zune, a PC vs. a Mac, a Toyota vs. a Porsche, the variety of political debate is wide, but the majority of the debate has become bastardized. Sound bites and slogans substitute for real debate in much of the media.

The examples are everywhere. Energy policy, tax policy, immigration military spending, health care, birth control, global warming – all are complex areas. But policy and economic analysis do matter. Consider these examples:

1. Health care. The United States spends more of its GDP on healthcare than any other country in the world. Estimates vary but the US spends around 18% of its GDP on healthcare and other countries spend around 8-11%. Even worse, the outcomes in the US are typically worse than all other developed countries. And major US industries such as the automobile industry have been weakened and put at risk because of these high medical costs which have historically made them uneconomic and lose market share. And from a moral perspective, roughly 45 million Americans have no healthcare, sometimes for reasons of costs, sometimes for reasons of prior conditions disqualifying them from obtaining healthcare. But studies suggest that much of the healthcare spending is due to (a) defensive medicine, (b) malpractice costs, and (c) the higher administrative costs of having 1500 insurance companies in the US each with different policies and payment procedures. As well known strategy professor, Michael Porter and his coauthor Elizabeth Olmstead Teisberg have pointed out in their book, Redefining Healthcare, Creating Value Based Competition on Results, we have structured the healthcare system so badly that its performance continues to deteriorate. Radical reform would use a single-payer system to provide universal access and encourage competition on the basis of outcomes and innovation. The net result would likely be a dramatic increase in coverage and a lower percentage of the GDP devoted to healthcare administration – a clear win for both voters and businesses.
2. Military spending. The US spends more on its military than all other major countries put together. R&D in the US is heavily influenced by the military. And while military R&D does sometimes have civilian spin-off, whole industries have or are disappearing from the US. Perhaps some of these dollars could be better spent on basic research and non-military areas. The McKinsey Global Institute has suggested that energy conservation and renewable energy represent a road to solving about 40% of greenhouse gas consumption with side benefit of producing positive ROI (typically around 17%).
3. Energy policy. Writers as diverse as the NY Times’ Tom Friedman, Henry Kissinger and Martin Feldstein (former head of the Council of Economic Advisors) have commented US is transferring massive quantities of wealth to often undemocratic regimes by purchasing their oil. The US has purchased foreign companies for years. Americans may not feel so comfortable when US companies are purchased by foreigners from undemocratic or totalitarian regimes.

Much of the debate about these important issues operates at the level of slogans and simplistic analysis. Advertising seems more important than debates or written material. And the media itself is the beneficiary of this simplistic political advertising. It is a revenue source to them worth billions in election years. In contrast in other countries, government funding of campaigns and free media time reduce the barriers to getting elected and reduce the power of incumbency.

Nowhere is this desert of policy analysis more obvious than in the discussions of spending and taxes. The non-partisan Tax Policy Center, for example, has done an analysis of the proposed spending and taxes policy of the two parties in the 2008 election year. And the net result is that the Republican proposals add up to bigger deficits, primarily due to higher tax cuts. In fact, this is a historical trend. Republicans typically run much higher deficits than Democrats. The three largest deficit spenders in history have been George W. Bush (43), Ronald Reagan and Franklin Delano Roosevelt. But one would be hard pressed to learn that the Republicans are the party of big spenders and big borrowers unless you penetrate beyond the rhetoric.

More generally, research out of the Andersen School of Business at UCLA suggests that since the Second World War, economic growth has consistently been higher under Democratic administrations.

Observation 10: The US seems reluctant to consider structural change
It is hard to argue with the success of the US constitution and the US as a country. It has many attractive and brilliant features and has provided political stability for most of two centuries. (Though to be fair, the Civil War and the subsequent loss of political rights for African Americans after the Reconstruction are sometimes overlooked by Americans.) However, even the US needs to consider modernizing its system of government from time to time, as has Canada and the European Community in recent years.

It seems to an outsider that many in the US assume that the American system of government is perfect or as perfect as it can be. Others believe that the US system is imperfect but not reformable. But the litany of problems with which the US faced, suggests three basic conclusions:

1. Immediate change is required. In the short term, change requires one party to be able to reshape the economy, simplify taxes and change the energy policy of the United States as a minimum. Gridlock in the American system of government would also reduce the economic power of the US.
2. The power of the individual must be enhanced and the power of lobbyists minimized. Because the Supreme Court has ruled that political spending is “free speech”, reducing the power of lobbyists and the political voice of corporations seems absolutely necessary for reform. While more populist fund raising in elections through the use of the Internet may have has some small effect, reduction in the power of lobbyists may well require a constitutional amendment to overcome the Supreme Court rulings.
3. The United States has the resources for change, but not under the current budgetary system. Imagine the impact of reducing health care costs in the US by 4-5% of GDP, a scenario that is possible and has been mapped out in some proposed healthcare reforms. Imagine if the US were not the largest energy importer in the world, but rather was a lead exporter of renewable energy and conservation. Imagine if the US were making money off selling its carbon rights because it was a hotbed of renewable energy and did not need carbon credits in a global cap and trade system. Countries that have run large deficits have often had to change the rules of the game for their economy. And the US is no exception. The US may be exceptional but the rules of economics make for no exceptions.

We live in a world where the microcomputer, networking and biology have been improving by orders of magnitude. Change is being forced upon us. Population growth, the rising incomes of less developed countries, ecological limits, heterogeneous populations and cultures, water shortages present us with a world of huge risks and opportunities to improve our planet. But our institutions evolve slowly.

In the first half of the twenty-first century, we will have to make more difficult, more complicated, and more long-term decisions than we have ever been faced with. Political gridlock will neither solve our problems nor create the opportunities that future generations deserve. If you agree with the ten observations in this paper, then you should vote for change.

2003-12-29T12:25:00.000-08:00

US Companies for Sale
================
With the US dollar in decline, a massive structural imbalance in trade and a huge Federal deficit, and the US economy highly dependent upon stimulation from lower interest rates, the US dollar can be expected to remain low. It has dropped since my first comments several months ago about the decline of the US dollar.

The US dollar has declined the most against the ECU with many Asian countries tying their values to the US dollar.

The inevitable conclusion is that the US is about to experience a surge in takeovers by European companies in the next year.

The reasons are simple. Any time a company become less expensive, new suitors emerge. For European companies, American companies now look weak and inexpensive. This acquisition activity occurred in the UK when the pound was weak, and in Canada when the Canadian dollar declined. The US is no different.

However, one difference about competing in the US is that foreign companies have a high rate of failure in the US. So buying a North American company requires North American expertise and a much better understanding of the pitfalls, opportunities and strategies for success in the highly competitive US market. Daimler-Benz's purchase of Chrysler, which has led so far to a major deterioriation in shareholder value shows how, at least in the short term, the US market can be treacherous. And recent research by McKinsey suggests that even if you have had successful acquisitions in the past, past success is no predictor of future success.

For the smaller or medium sized company, successful in their own small domestic market, the big surprise about the US is the brutality of competition in the US market. The reasons are fairly simple.

1. In general, larger markets support more niches. So, as a result, competitive analysis is far more important in the US than when making acquisitions in smaller markets. In smaller markets, there are typically fewer competitors and competitors are more generalist with more dominant market-share positions.

2. The US market is highly legalistic. Lobbying, regulatory approval, legal suits are typical weapons of warfare in the merger and acquisition game.

3. Barriers to entry in many US markets are very low. And in markets like high tech, capital access is very high, often negating first mover advantages. And the US has few barriers particularly at the low end of size ranges that protect small companies from international competitors.

4. The US market is very sophisticated. Information about companies and their performance is as much an attribute of the products and services they provide as the actual product/service itself. Marketing and public relations are key tools in establishing value.

5. With so many competitors in most US markets, being foreign owned is often a disadvantage. While there are companies that have thrived based upon their international reputations, the general trend in the US market is for foreign ownership to be considered a disadvantage.

6. Strategy is far more important in the US market than in the most of the home base markets for acquiring companies. In the US, there is typically a greater variety of business models and experimentation than in smaller markets.

So, if you are thinking about acquiring a US company, talk to us about your goals. Eclicktick Corporation can help steer you in the right directions. We can help to:

1. Identify target companies;
2. Evaluate target company strategies;
3. Assist in strategic growth assessment;
4. Help you work with local financial institutions;
5. Facilitate integrated strategies that take advantage of your own strategy and that of the purchased company.

For more information, please contact Alistair Davidson at +-1-415-225-8610 or e-mail at alistair@eclicktick.com.

Alistair Davidson
www.eclicktick.com

2003-11-12T11:17:00.000-08:00

Improving IT Performance
Copyright Alistair Davidson, 2003. All rights reserved.
Draft 1. November 2003

Executive Summary
==============
Most companies do a pretty bad job of managing IT projects. And most software projects don’t actually deliver on expectations. So what do you do? It’s hard to avoid software and you can’t delegate everything to outsourcers.

Let me suggest that there are ten important steps in improving the value you get out of information technology.

1. Hire the best people you can find and overpay them. Get rid of bad IT people quickly.
2. Get rid of old projects faster.
3. Do fewer projects.
4. Pick projects with synergy. Pick people with synergy.
5. Don’t accept conventional wisdom. Seek extraordinary value.
6. Focus on iterating.
7. Measure outcomes and people frequently.
8. Don’t let budget cutbacks prevent experimentation. Encourage and permit small failures.
9. Classify projects and manage the different categories differently.
10. Manage the mix of in-house capabilities and outsourcing.

Hire the best people. Get rid of bad IT people quickly.
======================================
If there is one piece of advice about information technology that is critical, this first rule is it. Good people are passionate, knowledgeable, annoying and they get things done. One good person is worth ten bad people.

These kind of people are few and far between. Overpay them. Train them. Send them to conferences and you will be rewarded many times over. If you can’t afford to pay them right, get rid of other people.

Bad IT people subtract value from the good people, so you are better off with a few good people than a large team of people with mixed skills.

Get rid of old projects faster
====================
If you don’t get rid of old projects quickly, then you end up with an expanding and expensive IT budget. You get distracted by having to maintain the old code and projects. Be ruthless.
Do fewer projects.
Most software ends badly. Do what you do well. If in doubt, don’t do it. If you have to do it and you don’t have the resources, buy something off the shelf. If you are programming, license something already done.
Pick projects with synergy. Pick people with synergy.
Most organizations have lots of projects. Yet, they don’t look for synergy between projects. If a project can solve several problems at the same time, it is generally a good project.

In the same way, the composition of project teams is key. Good projects managers and good teams are rare. If you find them, keep them. Don’t break them up. Don’t lose them.

Don’t accept conventional wisdom. Seek extraordinary value.
===========================================
Conventional IT practices tend to focus on the technology side of IT. Today, information management is such a pervasive issue that projects should be selected on their business outcomes. They should be optimized for their business outcomes and impact upon the organization’s strategy and performance.

But there is a key assumption here often lost on managers. There is an extraordinary difference between good projects and average projects. In my experience, the difference is at least an order of magnitude (10X or more) in outcomes. But if you don’t seek such outcomes, you will not get them.

Focus on iterating.
=============
Information technology is inherently risky. The larger the project the riskier it is. The more novel the project, the riskier it is. So, phase the project. Don’t overpromise what you are going to deliver. Deliver small. Then expand. Learn what customer or users need. They don’t know what they want, can’t tell you, are probably wrong if they do tell you, so be cautious. Assume iteration is always required.

Measure outcomes and people frequently.
==============================
Long projects are risky. Frequent evidence of performance is critical. The only way of delivering on time is to select staff, technologies and suppliers that will allow you to keep in touch with the progress of the project. Any project that has long lags between work and measurement is likely doomed to failure. In software development, architectural strategies should be selected that force frequent demonstration of success.

If you hear that you have to wait until the pieces can be brought together at the end of the project, you are in trouble already.

Don’t let budget cutbacks prevent experimentation. Encourage and permit small failures.
==============================================================
Software is about learning and improving. There are two elements to learning. The first is learning about a technology and what is necessary to make it work. The second is about learning what customers and users do. Small experiments are often exceptionally valuable.

Technology expertise and user knowledge don’t emerge in a vacuum. You need to manage how you are going to gain and document such knowledge.

Classify projects and manage the different categories differently.
==============================================
Not all IT projects are the same. While we can argue about different types of classification schemes, some that I use include:

1. Experiments.
2. Platform development.
3. Application development.

Platform development is always risky. A platform development project often requires dealing with a new technology (i.e. the platform on which you will building applications), so using outside expertise to educate your internal staff is often critical here.

Another scheme I use is

1. Strategically critical
2. Strategically important
3. Maintenance
4. Compulsory due to regulatory requirements.

The resources put into each vary and each group of projects should be prioritized differently. Mixing them together in your prioritization will often end up causing bad business outcomes.

But it’s also important to look at synergy between the categories. Current Sarbanes-Oxley requirements can also help improve the management of the company if done well. You can turn compliance activities into a source of performance improvement if you are smart.

Manage the mix of in-house capabilities and outsourcing.
========================================
I once interviewed customers who had been implementing information warehouses and asked them the question: “Having implemented your first information warehouse, how much do you think you would save if you were starting from scratch and knew what you now know about the process of information warehouse development?”

In most cases, the answer was that they believed they could save 50%. What this means is that using knowledgeable suppliers with large and risky projects is critical. You can pay them their margin and still benefit with lower costs.

The challenge of course, is knowledge transfer. It’s critical to formally manage the knowledge transfer and not becoming dependent upon the external supplier unless you are proposing a strategic partnering arrangement with the external supplier.

=================================================================================
Alistair Davidson is the author of two books (Davidson, Gellman and Chung, Riding the Tiger and Turn Around! A free ebook available at www.eclicktick.com) on best practices in information management. He has developed numerous projects, developed first of breed technologies, helped turn a financial institution into a best of breed information technology organization, has turnaround failed IT projects and software companies. He has an MBA from Harvard and has been the CEO of five companies and has extensive CTO/CIO experience. He can be reached at www.eclicktick.com or emailed at Alistair@eclicktick.com

For more articles on outsourcing and IT strategy, visit www.eclicktick.com

2003-11-05T08:23:00.000-08:00

Improving Government Performance
=========================
How about managing government for results?

Step one in turning around California. Changing the TAO of government

Author: Alistair Davidson
Draft 4
Dated October 22, 2003

----------------------------------------------------------------------------------------------------------------------
Bio: Alistair Davidson is a performance improvement consultant who has been CEO of five companies, done turnarounds and also worked briefly in Canadian politics. He heads a California based boutique consulting firm, Eclicktick Corporation (www.eclicktick.com). His blog is alistairdavidson.blotspot.com.
----------------------------------------------------------------------------------------------------------------------

In the world of business, there have over the past 35 years been a conflict between the “financial types” (FTs) and the “capabilities people” (CPs). The same conflict seems to be crippling all levels of American government today. California evidences just such a conflict between the short term budget cutters and a longer term view of the state's needs. New Zealand's reforms in the 1980s may provide a useful roadmap for the way out for California.

The FTs believe that maximizing shareholder value is the “be all and end all” in running companies. In government, this view is typically shared by those who wish to downsize government and cut back government spending. For these “financial types”, most government spending is bad and less government means a fairer society and higher economic growth.

In contrast, CPs believe that financial results such as shareholder value may not reflect the true value of a company. They cite the irrational exuberance of the dotcom boom and the overpayment of executives whose remuneration skyrocketed during the recent boom.

In government, CPs tends to more concerned about the outcomes of changing spending levels. Does healthcare performance improve if we spend more money? Do children do better in smaller classes? What kind of pollution regime produces lower levels of pollution? Has social equity changed from a tax reduction? Does giving illegal immigrants produce more or less carnage on the roads?

The problem with these two contrasting views of the world is that to some extent they are ideological, though not necessarily a straight mapping with left wing and right wing. Nonetheless there is often more agreement on goals (e.g. higher income, better economic growth, better healthcare outcomes, lower carnage on the roads) than there is on methods (e.g. vouchers permitting choice vs. state funded schools).

Reframing Political Debate
==================
The recent recall of Governor Grey Davis in California represents dissatisfaction with the state of California (pun intended). California is about as difficult a place to govern as one could imagine:

- 70% of spending has been pre-specified by voter initiatives
- the tax base is structurally unsound-
budgets have to be passed by a two-thirds majority of the legislature, which requires getting political opponents to agree

All in all, it's no surprise that California, has, as a result, found it difficult to balance its budget. When the cyclical economy downturn, plus a regional economic downturn combined with an energy crisis and the transfer of fiscal pain to the states by the Federal government all hit at the same time, the inflexibility of California spending restrictions revealed the weakness of its governance approach for all to see.

As a result, the current debate about improving California government is unlikely to succeed without a reframing of the political process. Merely cutting spending is likely to be contentious with a Republic governor and a Democratic majority in the California legislature. Instead, something not discussed in the recent recall, political innovation is required.

The Way Out
=========
So what's the way out of the box? In testing an early version of this article on a group of leading business strategists, the Board of Contributing Editors of Strategy and Leadership magazine, the feedback was quite varied. There was little consensus. Some lent to the FT school: Cut spending. Restrict spending growth. Others more CP in view said: The problem is very complicated. There are no clear and easy answers.

But in this lack of consensus lies the answer. No one knows. And there are three reasons why we don't know. And even if we think we know, we don't agree. For short let's call this the TAO of government - Technocracy, Accounting and Outcomes. In other words, let's recognize government is complicated, measure using unbiased third parties and refocus the political debate on accurately reported outcomes.

Technocracy
=========
Technocracy is the T in TAO.

The first problem is that government is complicated. Determining what combination of programs and spending produces results is very complicated. And often it takes time and expertise to figure out. You have to be technocrat or specialist to understand the issues and policy choices.

International comparisons are often useful, but few voters have the interest to master such knowledge and debates.

The net result is that modern government is often about understanding what strategists call feedback loops or systems. What are the consequences of a program both short term and long term?

Both left and right wing talk about these issues. Milton Friedman, for example, has argued that rent control reduces the availability of low cost housing for the poor by reducing the incentive to build new housing. More liberal social activists focus on the impact of rising rents on reducing housing availability. In reality, low cost housing is much more complicated question affected by issues such as transportation access, tax deductions for mortgages, and the political voice of the middle class vs. the absence of political voice of the poor.

Both left and right wing presumably believe that low cost housing available to house the poor is a good idea, but they have not come to agreement on the system effects of policies. Political debate around the issue is often sterile, confusing and so simplistic that is become the political equivalent of “branding” -- a new and improved soap powder - new, but the value of the improvement (and debate) perhaps marginal.

The net result is that superficial debate about improving outcomes often does not contribute to informed political debate. Improvement in performance requires improvement in the interaction between programs and policies - a complex issue to talk and debate, let alone vote on.

And if the creativity and motivation of those in government is to be harnessed, then three issues have to be addressed. First, the lazy and the incompetent need to be fired, typically a difficult if not impossible problem in government. Second, more flexibility needs to be allowed in government. And, third, success of individuals needs to be measured over a time frame that allows for success to occur.

Accounting and Measurement
=====================
A second key element, the A in TAO, is the unfashionable, and, dare I say, dull topic of accounting and performance measurement. Without good accounting, government performance is not really debatable in any meaningful way.

The problem here is straightforward: politicians almost always lie about the numbers. There is really no debate about misrepresentation here. Yes, there are fluctuations in forecasts, but fundamentally politicians, “spin”, lie and misrepresent their numbers, their spending, their revenues and the expected results.

Now the assumption in a democracy is that you can “throw the bastards out” if they lie, but in a complicated world, people forget or get confused unless the lie is large. And if the lie is large, modern media can often be used for distraction in the short term.

Any decent reforming politician needs to be evaluated heavily on one important decision: that is, committing to transfer the accounting, forecasting and reporting of government expenditures, revenues and outcomes from the political process to neutral and politically independent third party.

What this would mean is that just like a public corporation, there should be standards controlled by neutral third party institutions for evaluating government spending and outcomes of policies. Governments should not be permitted to reclassify their expenditures for exactly the same reasons that most American are upset about the corporate malfeasance of Enron, MCI, Tyco,… the list keeps going on.

The quality of government accounting is so low in the US that if governments were private sector companies, government chief executives would go to jail. Balance sheets for government are rarely produced except in rare countries such as New Zealand. A simple distinction between the operating expenditures of government (what it takes to deliver services today) vs. the cost of investing in infrastructure like roads, bridges, etc. is almost never presented accurately. Contingent and future liabilities such as guarantees or leases are also misrepresented on a regular basis.

In the same way we have a court system for keeping government and legislators honest, we need the equivalent accounting role institutionalized. If the numbers are not presented correctly and, as a very minimum consistently, how can we have an informed democracy?

Outcomes
=======
The final part of the TAO is O for Outcomes - the results produced. In business, the state of the art in measurement and performance improvement requires reporting and measuring a basket of outcomes or a “balanced scorecard”.

In business and government, there are typically four types of outcomes:

Financial outcomes e.g. increase in shareholder value; (in government, the equivalent analysis is typically about deficits and share of the economy).
Customer and market outcomes, e.g. market share, repeat purchase rate, customer satisfaction; (in government, measures might include economic growth, bankruptcies, job creation, crime rates, education quality)
Process outcomes, e.g. mistakes made, quality levels, throughput, capacity utilization; ( in government, cost of delivering services, quality of services, range of government services)
People outcomes, e.g. skill levels, productivity, number of skills trained for (in government, outcomes might include employment levels, income per family, infant mortality, life expectancy, literacy, educational scores, percentage educated to different levels, infection rates).

Few would disagree that performance outcomes should be the focus of government and political debate. Some economists in the past few decades have invented short-form performance measures such as the “misery index” or the sum of the inflation rate plus the unemployment rate. But in reality, government is too complex for one simple measure like the misery index or for only one basket of performance measures.

Many recent governments have started to use scorecards for comparing school performance. Scorecards need to exist for programs, government departments and governments in general.

But let's be frank, scorecards are complicated. They vary by area of government. They are different in different states. The people who are going to seek to improve scorecards should be those being held accountable for performance improvement. Voting should be refocused on outcomes not spending. This places the TAO of government directly against the voter approved proposition approach in California. Voters should seek to approve baskets of outcomes not spending patterns.

Just as importantly, some programs should not be evaluated on a short term basis. A key issue in performance improvement is determining the period of evaluation. You don't evaluate a bridge with a forty year life on a four year political term. However, the consequences of delayed maintenance seem to be important to report, as lowered maintenance often trigger much more expensive later costs.

What this means is that an improved voter proposition process should (1) be voted on as a collection of outcomes not based upon one spending restriction, and (2) different parts of government should have terms that are consistent with the planning life of their spending.
Decisions about infrastructure and current expenditures need to be accounted for separately, but it's not clear that voting on the two should be separated. Single issue propositions should be discouraged as they tend to prevent consideration of their consequences and outcomes. And in the case of an area like road maintenance, postponement of routine maintenance can have disastrous long term consequences where future reconstruction costs rise much faster than the short term savings.

Taking a Page from New Zealand's Playbook
===============================
In the 1980s, New Zealand ran out of money as a government. It was effectively bankrupt. The US is currently fiscally unbalanced and some would say headed in a similar direction. Certainly, California's budget $38B deficit verged on bringing the state to bankruptcy.

But whether you believe the US will incur huge difficulties in the future as a result of tax cuts, Social Security spending obligations increasing due to demographics, the breakdown of the US medical system or not, presumably we all, as voters, agree that more effectiveness in government spending, more transparency in accounting for spending and outcomes is a good thing.

New Zealand did what many over-burdened governments have been forced to do. It sold off state enterprises, which became more efficient as a result. Most right wingers would have no objection to such sales.

But New Zealander went one stage further. They changed the way that government ministries were run. The eliminated the constraints upon government ministries and demanded that ministries table in Parliament the outcomes that they proposed to achieve and their total level of spending over a multi-year period. Specifying outcomes is likely something that both left and right wing might be able to agree on.

New Zealand is, therefore, pretty much the opposite of California. In California, voters constrain the spending patterns of government. The political process is superficial and overwhelming. There is little connection to outcomes in the way that government spending is managed.

The net result is that the while the propositions approved by Californians express the frustration of Californians, they are difficult to untangle if they don't work out. Getting rid of legislation or restrictions like Proposition 13 that limited the tax base is always harder than passing new legislation. The net effect of many individually good propositions has now so constrained California government that it is inefficient. And we can all agree that outcomes are what we seek, not spending patterns.

International Benchmarking: Lessons from the Ford Taurus
==========================================
When the first Ford Taurus was introduced in the 1980s, it was instrumental in the turnaround of Ford. A key element in the development of the Ford was competitive benchmarking. Ford bought, analyzed and tore apart over 20 leading competitive products. And research on innovation suggests that basing new products on global and success patterns often leads to superior performance.

In the same way, American government programs and spending need to be severely benchmarked against international alternatives and such comparisons allowed to frame political debate and delivery strategies for government programs. Surprisingly, I find this an unpopular idea for many Americans. Many, particularly the well-off, have concluded that America is the best country in the world and, therefore, has nothing to learn from other countries. Every time, I hear this reaction, I think one word “hubris”.

In contrast, a more humble Japan transformed itself from a poor agrarian nation into one of the most powerful industrial countries in the world over the past century by consciously studying and selectively imitating the best aspects its more modern competitors. And while Japan has stumbled in recent years, it is stumbling for reasons of entrenched interest and power, something the US shares today.

Let me argue that America, while an immensely successful country in many ways, could also benefit from comparing its approaches to other countries governmental programs. Normally, political debate tends to end up with code phrases such “Canadian socialized medicine” rather than more informed analysis of expenditures, programs and outcomes. How are Canada and Germany able to spend less and produce better healthcare outcomes? How do other countries encourage higher savings rates?

Having outcomes in the US compared to outcomes in other countries - something that certainly happens informally but mainly among the technocracy - should influence mass political debate more constructively.

Conclusions
=========
Changing the TAO of American politics does no more than formalizing trends that already exist informally in American society and government. The US has been a bold political experiment since its founding in 1776. It has frequently demonstrated the value of managerial innovation in its economic history.

The US has benefited from immigration since its founding, in creating the unique culture of the American melting pot. Imitating the best ideas in the world is something that entrepreneurs do all the time. We can do the same with government programs. Experimentation in improving government management follows in a long tradition of American innovation.

There are many ways of going wrong with any new approach to government, but without reframing government to focus upon outcomes and permit flexibility to those operating government, little in the way of improvement can be expected.

2003-10-07T08:43:00.000-07:00

Bad User Interactions or Why Geographic Information is Important
------------------------------------------------------------------------------------
The web is fascinating, chaotic, confusing and filled with examples of bad user interaction design.

In the days of mainframes, hierarchical menus were the bane of users. And if you have forgotten how bad they are, all you have to do is look over the counter of reservation agents at the airport or bank tellers. How many times have you heard the new employee asking an older employee: "Is it pF7 followed by PF3 to look up the account balance?" or some equally obscure key combination?

A classic problem that has reappeared on the web is the need to descend hierarchies to find what you are looking for? The problem exists everywhere. It takes numerous clicks to descend Yahoo's hierarchy to find a suppplier. And frequently you have to back up to go to a different leaf of the tree.

And from a use-case perspective, it's even uglier if you want to find two suppliers. Then you have to descend to two different leafs at the end of different trees.

In a more competitive Internet, where quality of user interaction is important, more companies are going to have go the route that firms like iiMap (www.iimap.com) have gone. (In the interests of disclosure, I sit on the company's board of advisors.) They start off with the question, "What does the user want?"

In many cases, the answer is that the user wants to know about location. Where is my closest supplier? What is near me?

In other words, I am here. What's nearby? This is revolutionary for the Internet, but actually it's returning user interaction design back to the early days of windowing. The breakthrough represented by windows and graphical interfaces, made popular by PARC, Apple, and eventually Microsoft, was that the grammar of interaction got simplified.

Object -- Verb - Action

I could point to a location, get a list of verbs or functions and immediately see the result.

Contrast the grammar to

Verb - Verb - Verb- Verb - Verb - Action - See result

in a hierarchical menu scheme on a mainframe or in Yahoo

Category - Category - Category - Category - See result

About the only simplification represented by Yahoo is the almost universal understanding that clicking or double clicking causes something to happen.

In a world where interactions need to minimized for commercial, customer satisfaction or user interface constraints (e.g. with cell phones or PDAs), simpler interactions are needed.

I am here.
I want a restaurant.
Show me what's close.

might be a prototype of such an interaction.

Interactions can be voice, keyboard or pen driven, but behind the interaction is the need to use geographical information to link information stored in other ways.

Alistair Davidson
www.alistairdavidson.com

2003-10-02T09:56:00.000-07:00

The Future of Data
------------------------

Data used to sit in islands of information.

Today networking has caused organizations to want to connect information. Much of information management is concerned with managing the portfolio of information sources, processes, projects and outcomes of old and new systems and changes.

Middleware, object oriented programming, software and design reuse, integrated ERP packages, portals -- all target the objective of tying together information in many places. Sometimes the tying together is done in a central database or information repository. Sometimes it is done dynamically and on the fly using newer middleware technologies such as application servers.

But there is another parallel trend occuring - the increase in the amount of digital sensor data. Current hot areas include:

- digital sensors
- RFID (radio frequency identification)
- barcoding (with a new standard in bar codes about to emerge)
- locational capabilities in cell phones and automobiles
- track and trace capabilities in parcel and letter shipment

It's an interesting question to think about what the world is going to look like with an explosion of such data.

The first key insight is that the amount of data in the world is likely to explode by several orders of magnitude. What this means is that all our assumptions about the appropriateness of current technologies is likely to change.

Second, in a world filled with digital sensor data, managing the difference between useful and archival data is not just a question of good economics, it's required for performance.

Third, it's likely that scientific and business breakthrough performance will require drawing conclusions about highly granular data. Figuring out such conclusions will likely require a lot of smart people, sophisticated analysis tools and a different class of information warehouses. These new information warehouses will be ones that can manage archival data well, ones to which software agents can be attached, because the sheer volume of data will be too large for human beings to deal with.

An example of this new class of tools is Alacrity Results Management described under Performance Management at www.eclicktick.com/id90.htm.

Alistair Davidson
www.eclicktick.com