Thursday, July 31, 2008

There are some great insights from the recent Trend Watching update that I will share with you over the next few weeks. Here is the intro and some comments on design. Remember our discussion on the iPod and James Conley great article on how to protect it (May 19, 2008 blog posting)........

While most of the global business world is desperately trying to embed innovation processes into their organizations, we still prefer to focus on the brands and entrepreneurs who 'just do it’. And by the beard of Zeus, aren't they plentiful these days! In fact, we’re witnessing an absolute

INNOVATION AVALANCHE: There’s more innovation happening than ever before. New brands, new niches, new concepts, new products, new services and new experiences are flooding an equally fast expanding number of markets. Just as important, there are more freely available sources to track these innovations than ever before. And all of this is coming to (if not at) you from every corner of the world. The GLOBAL BRAIN has been unleashed, and there’s nowhere to hide for those who aren't part of it.

What is the link between INNOVATION AVALANCHE and trends? As focused as we are on emerging consumer trends, we never tire of pointing out that trends are only good for one thing: helping you get inspired to innovate, to come up with new goods, services and experiences for (or even better, with) your customers.

Now, one easy way to get started is by taking a look at innovative companies around the world that are already capitalizing on trends, and learn from them. But before you dive into the many trends and examples we've selected for you, a few quick pointers:

Innovation is not necessarily about serious people in white coats puttering about in R&D labs. In an experience economy (which we’re still in, like it or not), marketing innovation is equally important, and often trumps technical innovation.


To run with the above: sometimes consumer wants can be frilly, so sometimes innovation can also be less weighty. Really, innovation doesn’t have to be so damn serious all the time! Have some fun with it, too.


Wherever you live, you have absolutely no excuse to be unaware of innovation avalanches originating in Sweden, in the Netherlands, in Brazil, in the US, in Canada, in Australia, in Japan, in South Africa ... It’s all out there, reported on 24/7 by sources dedicated to trends and new business ideas. Free of charge.


As far as we’re concerned, there’s no category or product that cannot benefit from bold, brilliant redesign efforts. When done right, those redesigned objects and services will easily be lauded as, wait for it, innovations! In fact, with consumers' desire for the new, combined with their ever-shifting preferences, 'to-die-for design' has the ability to make earlier, status quo design feel more like diesign.

Now that designers are on an equal footing with starchitects and business gurus, you can count on someone working on a new design approach to your products while you’re wasting your time reading this briefing ;-) A few quick examples show how this trend works for something as mundane as fire extinguishers:

Swedish FireInvent’s The Safety Box is designed to provide complete fire protection in a single package. But the fire extinguishers, smoke detectors, fire blankets and torch lights included aren't just ordinary versions of those items. Rather, they've been revamped for a modern, attractive look. The Safety Box design, for example, includes a fire extinguisher and Snap Alarm in white or black; a black-and-white fire blanket in a modern, botanical design; plus an extra wall-mountable optical smoke detector. There will always be a need for functional products like fire protection devices, but there's nothing to say they can't be upgraded with a splash of color and design and sold at a similarly upgraded price.
(We define a value proposition for target customers into three categories: functional benefits, economic rewards, and emotive feelings. I believe design innovation is about attacking the emotive level of thought. If the functional and economic benefits are on target –which they are in this example of the fire extinguishers -- reaching the emotive state creates the greatest level of sustainable, competitive separation. This rarely if ever comes out of the lab!!!)

Wednesday, July 09, 2008

Google, Zen Master of the Market
NYT, Published: July 7, 2008

I believe one of the classic analyses of defining competitive positions was by Adrian Slywotzky in his classic “Profit Zone”:

The most powerful competitive level is creating The Standard of the industry and you know that happens when others develop their offerings based on your platform thereby enhancing each other. This is a powerful example of this in today’s digital world. By the way, where do your offerings fall in this matrix?

Bill Gates, who walked away from full-time work at Microsoft last month, was perhaps the foremost applied economist of the second half of the 20th century.

Mr. Gates and Microsoft fundamentally shaped how people think about the behavior of modern markets in which technology plays a central role. Under Mr. Gates, Microsoft also challenged the conventional wisdom about competition, business strategy and even antitrust law.
Now, in the early years of the 21st century, Google is the company prompting a rethinking of assumptions.

Microsoft was a master practitioner of “network effects,” the straightforward precept in economics that the value of a product or service often goes up as more people use it. There is nothing new about the concept. It was true of railways, telephones and fax machines, for example. (creating the standard)

Microsoft, however, applied the power of network effects more lucratively than any company had done before it.

Microsoft attracted consumers and software developers to use its technology, the software that controls the basic operations of a personal computer. The more that people used Microsoft’s operating system (DOS and later Windows), the more that third-party developers built products to run on Windows, which attracted more users. (The Standard)

So Microsoft’s success snowballed, and the company owned the essential technology, making it harder for users and developers to switch to alternatives. (The power of The Standard)

But the Internet has changed the rules of networked competition, partly because Internet software standards are more open than those in the PC industry. That helps explain why Microsoft has struggled to catch up with Google in the rich new market for Internet search advertising.

Google’s huge, widening lead in that business suggests that while some weapons of competition have changed, the market dynamics are similar, say economists and industry experts. At this stage, they note, Internet search appears to be a market that is winner take most, if not all.
Google, it seems, is the emerging dominant company in the Internet era, much as Microsoft was in the PC era. The study of networked businesses, market competition and antitrust law (How to redefine the impact of creating The Standard in this new medium) is being reconsidered in a new context, shaped by Google. Google’s explanation for its large share of the Internet search market — more than 60 percent — is simply that it is a finely honed learning machine. Its scientists constantly improve the relevance of search results for users and the efficiency of its advertising system for advertisers and publishers.

“The source of Google’s competitive advantage is learning by doing,” said Hal R. Varian, Google’s chief economist. (VERY powerful and difficult to replicate -- this is the new learning curve of the industrial manufacturing world)

In the Internet marketplace, Mr. Varian notes, users can easily switch to another search engine by typing in another Web address, so there is no tight technology control, as there is with proprietary PC software. Similarly, Mr. Varian says, advertisers and publishers can switch fairly easily to rival ad networks operated by Yahoo, Microsoft and others.

But economists and analysts point out that Google does indeed have network advantages that present formidable obstacles to rivals. The “experience effects,” they say, of users and advertisers familiar with Google’s services make them less likely to switch.(They are beginning to own the End Customer Relationship) There is, for example, a sizable cottage industry of experts who tailor Web sites to get higher rankings on search engines, which drive user traffic and thus ad revenues. These experts understandably focus their efforts on the market leader, Google — another network effect, analysts say.
Google executives often point out that personal data in its services like Web e-mail is not held in proprietary document formats, as it is in PC software. Formats aside, however, a person with a year or so of e-mail housed in Gmail is highly unlikely to switch as a practical matter, analysts say. .(They are beginning to own the End Customer Relationship)
Taken together, these networked advantages enjoyed by Google are significant, most analysts agree. “It certainly does have an impact on whether other companies can be competitive threats to Google,” said Michael Katz, an economist at New York University’s Stern School of Business. “But it’s a very different way to lock people in than it was for Microsoft. It would be a lot easier for people to walk away from Google.”

Michael A. Cusumano, a professor at the Sloan School of Management at Massachusetts Institute of Technology, sees the difference in terms of what he calls “direct network effects” and “indirect network effects.” The direct effects, he says, include software document formats and technology standards that are owned by one company and that are incompatible with a rival’s technology. The indirect effects, he adds, include large numbers of users, the ability to learn from those users, the power of a well-known brand and user inertia. .(They are beginning to own the End Customer Relationship)“For Google,” Mr. Cusumano said, “the indirect network effects are very powerful.”
Google’s market power, it seems, is the economic equivalent of what in foreign affairs is called “soft power,” a term coined by the political scientist Joseph S. Nye Jr. This is the power to co-opt rather than coerce.

The implications of Google’s market power for antitrust law are just beginning to be considered. The Justice Department is reviewing Google’s planned partnership with Yahoo. Under the agreement, Yahoo, the No. 2 company in search, would farm out some of its search advertising to Google, the leader. Google has said the deal is simply a voluntary outsourcing arrangement, while opponents say it will reduce competition in search advertising even further.

Google’s market share alone invites scrutiny worldwide. In the United States, antitrust law defines a dominant firm with potentially monopolistic power as a company with 70 percent market share or more. In America, Google has garnered more than 60 percent of searches conducted and about 70 percent of the search ad market. In Europe, the definition of a dominant firm is one that has as little as 35 percent of a market, legal experts say.

Still, dominance alone is not an antitrust problem. The issue is the powerful company’s behavior, says Andrew I. Gavil, a professor at the Howard University School of Law. “You have to be big and bad, not just big,” he said.

The telltale signs of a company’s bad behavior include raising prices, hindering innovation and excluding competitors. There is no evidence that Google is engaged in suspect behavior, but it could be hard to spot. Its ad auction system, for example, is essentially a private marketplace run by Google, without much disclosure to advertisers or to Web publishers.
Mr. Varian, Google’s chief economist, acknowledges that the company has been criticized for its lack of transparency. But he says that the Google approach is a byproduct of its virtue as a fast-moving learning machine. “The system is constantly evolving to optimize efficiency, improve ad quality and make the pricing smarter, so you don’t want set rules that say we do X and we don’t do Y,” Mr. Varian explained.
Whether that kind of “trust us” explanation will satisfy government regulators, if Google’s market power continues to grow, remains to be seen. But Google seems to have learned a lesson from Microsoft and its antitrust troubles. Mr. Varian said antitrust training is mandatory now for Google managers.
“Google looks at what happened to Microsoft, and we’re going to follow the rules,” he said. “If you’re really successful, you need to know about antitrust. That goes with the territory.”

Wednesday, July 02, 2008

Stop Kissing Frogs
Growth opportunities that hold out real promise for mature companies are rare. Success comes from careful selection and a willingness to reject all projects until a good one emerges.
Reprint: F0407D
HBR July/August 2004
by Andrew Campbell

A very insightful article!

Mature companies attempting to grow by entering new businesses fail far more often than not, as numerous studies confirm. Clayton Christensen estimates the failure rate to be over 90%, and a study by the Corporate Strategy Board suggests it may be as high as 99%. No matter how the terms are defined (what can be called a new business, what’s considered core versus noncore, and what constitutes success), the finding still holds.

The explanation most frequently offered is that companies mismanage the venturing process. They are too risk averse, their cultures are inappropriate, they fail to provide sufficient incentives, and they involve the wrong managers. As experienced venture capitalists point out, you have to kiss a lot of frogs to find a prince. If corporations would only copy more of the best practices from the venture capital industry or from serial new-business creators like 3M, they could reduce the failure rate to an acceptable level.(They have very strong processes for commercializing innovation)

Our findings suggest that this argument not only misses the real reason behind the high failure rate but may also promote practices that make things worse. Stemming from a project at Ashridge Strategic Management Centre, the research involved three studies: shadowing managers responsible for developing new businesses in large companies, gauging the success rates of various corporate-venturing units, and looking for patterns in a database of success stories.

The shadowing research included companies like Shell, McDonald’s, and Whitbread. In every case, the real problem we found was a shortage of opportunities rather than a shortage of courage or venturing skills. Given the companies’ strengths and weaknesses, few, if any, of their projects had a reasonable chance of success. (The need for process tools like developing clear Decision Criteria)In one company, 24 separate ideas were considered, and 11 were launched as new ventures. However, when our team applied a screen based on the principles of good strategy, only one of the ideas showed an honest chance of succeeding; two others were marginal. (The screen consisted of reasonable questions as to whether the proposed venture offered attractive market potential, was in a realm where the company held sufficient advantages to cover the learning costs, would be supported with an effective leadership team, and would complement, not undercut, the core businesses.) Three of the 11 ventures are still alive, but the total write-offs from failed projects exceed $750 million.

Our research into corporate venturing units also pointed to a lack of suitable opportunities. Many units were launched with gusto in the second half of the 1990s to mimic the processes and methods of the venture capital industry. Corporate financing and third-party venture funds were available for all promising projects; in other words, normal rules of corporate risk aversion were suspended. Yet only a handful of the more than 100 such units in our survey developed any significant new business. More to the point, the total costs exceeded even optimistic forecasts of the potential value of the few successes. Corporate venturing units do have their uses, but they don’t solve the growth problems of mature companies.

Finally, our database of success stories also suggests that frog kissing is not the way forward. Fewer than 5% of the successes in the database were launched as part of a new-businesses development process. The majority resulted from more deliberate strategy decisions that led managers to select one or two promising candidates and commit to them heavily. (It is critical to have clear, transparent decision and portfolio processes to enable supporting the critical growth initiatives to win while meeting the quarterly numbers)

A good example is a venture launched by the Prudential, one of Britain’s largest insurance companies. Insurance customers, when their policies mature, need to put the money they receive somewhere—and in the mid-1990s the Prudential decided to create an option within the company itself called the Prudential Bank. At about the same time, senior managers, led by a new CEO, became concerned about the rise of direct-to-consumer channels such as telesales and the Internet. So they decided to build the Prudential Bank into a significant new direct-to-consumer business. They hired the founder of First Direct, at the time Britain’s leading branchless bank, to head the project. Over the next few years, they invested around £500 million in the venture, renamed Egg, which is now, despite a setback in France, one of the world’s more successful Internet banks.

The conclusion that most mature companies have few new opportunities worth investing in might sound defeatist. (“You are asking me to commit premature suicide,” one manager complained to us.) If, however, the problem is an opportunity shortage rather than a lack of courage or venturing skills, the implications for managers are important.

First, firms should institute much tougher processes for screening out wild ideas and new venture suggestions. Most business books encourage managers to take more risks, fly more kites, and launch more ventures. The opposite is probably what’s needed.

Second, some companies must face up to a future of lower growth. A successful company with zero top-line growth can still produce an average return for investors. Making this the target and using cash to increase dividends and buy back shares is the easy part. Much harder will be learning how to communicate with shareholders and motivate managers in a low-growth organization. Most mature businesses have more mileage in them than their managers presume. Continuing to drive the existing businesses forward is often the option that will create the most value.

Third, just because a company has few opportunities for new businesses today doesn’t mean it will never have good opportunities in the future. Rather than pushing water uphill with new business initiatives, companies may have to learn a much harder skill—patience. A company may have to wait five years or more for the right new growth platform to come along.

Fourth, managers may need to develop a deeper appreciation for the grow-mature-die cycle of business and let go of the seductive grow-grow-grow view of business. Companies grow when they have a unique proposition that enables them to outperform competitors. During this phase, management’s duty is to exploit that advantage as fully as possible. But in the mature and die phases, the art is to return as much money to the financial markets as possible while still keeping a watchful eye out for other unique propositions.