Insight+: Articles

Za Book Title

2009-06-11T00:29:25Z

Many people have helped me pick the title of my new book in contributing ideas or reviewing options. It seemed only fair to update you now that we've made the decision. (in this case, we means the great team at O'Reilly and myself).

The book is about a way to do collaborative strategy within firms. And it represents a new way to tap into the power of the full organization, a new way to generate ideas and pick amongst them, and a way for an organization to win. The way, being the New How. Hence the title:

Some people have asked about the background of the book. So,

One thing stands out across all the leaders, managers, and staff that I've worked with is that we believe collaboration produces better results.

Whether collaboration helps us to see the situation fully so we solve the real problem, provides the idea engine for more options to choose from, or helps us to align to achieve a new direction, the many flavors of
collaboration are valued. Not only that, collaboration in a corporate structure creates that elusive "buy-in" that every organization seeks.

Yet, most of us don't use a collaborative approach in tough problems. From that, I draw the conclusion that we don't work collaboratively because we don't know how, yet. We don't know how to do it without going slower, getting diluted, or having the focus more on working/together, instead of together/working.

Given the rate of changing markets, collaboration when applied in business is (IMO) the new black -- with good reason. Collaboration can fill that gap I call an Air Sandwich: the empty void in an organization between the high-level strategy up in the stratosphere and the realization of that vision down on the floor. Where there should be connective pieces between the vision and the reality, in an Air Sandwich the filling consists mainly of misunderstandings, confusions, and disinformation. It is that Air Sandwich which prevents us from winning.

As soon as I could see the Air Sandwich within the organization (years ago when I worked inside big companies like Autodesk and Apple) I knew it was precisely what we needed to eliminate. Most companies already have a bunch of knowledge within the firm, and most don't need an outside management consulting firm, or guru from on high to tell them the strategy. Instead, what companies need to fill the void of
the airsandwich is a practical approach that demands everyone have a voice, lets us gather insights from anywhere in the organization, allows us to make decisions that align with the vision, collectively debate, learn, and know better information, to embrace conflict and tension as part of the creative process, argue over things that matter, and still align. And, given the larger times, this approach better let us move faster, not slower, more practically than theory and it better let us tap into the power of the people in the organization.

Bottom line, it's not a lack of will to collaborate and set direction, but a lack of how. While many people say they value collaboration, they're behaviors, and processes, and organizational systems are not set up to achieve success. We need a New How. I'm hoping this book helps with the problem and helps strategy work get more effective. It's a practical book (no surprise) and it's been fun getting to this point.

Open Letter to Carol Bartz on Helping Yahoo Thrive

2009-02-03T14:00:00Z

To: Carol Bartz, CEO, Yahoo
From: The team at Rubicon
Re: The challenges ahead

Dear Carol:

Congrats on your new role. For many of us in the tech industry, Yahoo is more than a company, it's a Silicon Valley icon. By putting in the kind of strong management you represent, I hope the board is signaling the company's intent to reinvent itself and thrive once again.

Since the days when you and I worked together at Autodesk, I have gone on to form a strategy consulting firm that is defined by the diversity and experience of its members. We're all tech industry veterans, and we each have unique perspectives on what it will take for Yahoo to succeed. Your opportunities speak to opportunities for every tech firm, so we're going to make this an Open Letter in the hope that everyone can learn from the experience you're about to have.

Best of luck. We're rooting for you.

Nilofer

Making the right cuts, Nilofer Merchant

During an economic downturn like the one we're experiencing now, there's not a consumer product company that isn't cutting spending. Such cuts are rooted in fears that customers will stop buying, advertising will slow, and the conviction that it's better to cut quickly and hunker down for the rough road ahead. It's the business version of "fight or flight," and it causes severe problems.

You want to get ahead of the market trend, but slashing without a strategy is not the way to do it. Cutting randomly can reduce profitability by cutting your strongest market segments. Or you may cut your weak market segments too little, and they'll continue be a drag on revenue.

But how to make the right cuts?

Carol, I know the first thing you're going to do is to figure out what Yahoo really is, and what it aspires to be. I've heard some of your predecessors describe it as a media or technology or software or communications company ... sometimes it seemed like there was a new identity for every day of the week. You need to pick one. Take the first 30 days of your tenure to spend the brainpower of your board and exec team on this core question.

Next, your c-suite needs to develop a perspective on how the future might play out, so you can place strategic bets. You need to make sure these bets are relevant across the company because you want everyone engaged in this discussion. And I wouldn't have your team just talk to themselves; I suspect that's why they are where they are. You need new data, which means fact-finding with analysts and other smart people in the industry. Then you need to debate that information within the confidential walls of the company to evaluate what you're learning. Given where Yahoo is, I'd have you choose no more than three big disruptive opportunities because any more and you won't accomplish any of them.

Then and only then should you look at your current portfolio, in light of the new opportunities. What fits and what doesn't? Not many people remember that when Steve Jobs came back to Apple in 1997, he cut huge parts of the company, including significant revenue streams. He did it knowing he needed to focus. The market will accept this if you have a story to tell. And I know you will.

It is simple but not easy. But you've never been one to back down from a tough and fair fight. You can do this in the next 90 days.

Building a consumer internet culture at Yahoo, Harry Max

The biggest risk to your assessment of Yahoo's strengths and weaknesses is the kind of "diagnosis bias" that gets even the best doctors and their patients in dire trouble. It's a mental blind spot that causes people to accept information that confirms a given diagnosis, while unconsciously disregarding seemingly contradictory facts and dissenting opinions.

Given your unparalleled experience in the software industry, the most likely area you could fall prey to diagnosis bias is in the one area that, at Yahoo, demands a subtle, intuitive sense: the consumer internet and what makes it tick.

To help Yahoo not just survive but thrive, there are two categories of consumer internet experience to manage for: market facing and company facing. The market facing consumer internet experience involves understanding the utility, entertainment value, and psychology that promotes on-line conversations, community, commitments, and transactions.

The company facing internet experience, on the other hand, involves fostering a Yahoo culture that will produce great consumer internet experiences. The culture needs to embrace people as leaders of ideas, customer-driven innovation, agile development methods, experimentation, and a reverence for passion and heart.

As you assess the people, assets, and resources throughout Yahoo, seek out and listen mindfully to the people who can speak openly and honestly with you without fear of retribution, because business is people. Carefully consider the facts and opinions you gather in terms of what they mean in the context of consumer internet experience.

My priority list of Yahoo opportunities:

1) Win our kids' attention by offering an awesome social network / community like Facebook. Yahoo's core competencies in on-line community, user-experience design, communication, new media, and brand strength align perfectly to give people a real alternative to what's currently the only game in town.

2) Re-architect Yahoo shopping to give dissatisfied eBay users a new place to engage. Again, harness Yahoo's core strengths and extraordinary user base to provide a more elegant ecosystem of buyers, sellers, services, and enabling technologies.

3) Repair Yahoo Answers and sharpen its focus to identify and serve the unmet needs of on-line consumers.

4) Finally, invest meaningfully in design research to ferret out the opportunities that Google, eBay, Amazon, Facebook, and others are simply leaving on the table.

The best ideas can come from anywhere.

Beat Google by going around it, Michael Mace

Carol, one of the first questions people will expect you to answer is, "what will you do about Google?" It's the easiest thing in the world to reply, "search advertising is Google's financial engine, we have to go after it." That's what a traditional computer company would probably do, and it's certainly how Microsoft thinks.

My advice: Get over it. Most people in the US and Europe are now trained to search first on Google, and it's almost impossible to change that sort of muscle memory. But that doesn't mean you should give up. Apple still hasn't beaten Windows, but it has built a very nice business by thinking different(ly). That's what you need to do...

How to use your nimbleness. One of the greatest assets of any Internet software company is nimbleness. You're used to companies that have 18-month development cycles, and as a result do very thorough advance planning. In contrast, an Internet company may revise its products weekly or even daily. If something goes wrong, you just revert to the previous version. This improvisational development process will look incredibly sloppy to you, but don't be too quick to "fix" it. Maneuvering like a hummingbird can be a huge strength -- if you know where you're going.

Google has used its nimbleness to produce a paradise for engineers. It's a giant research lab where Ph.D's can try any clever computing idea that occurs to them, toss them into the market, and see what succeeds. The problem for Google is that most of those engineering fantasies don't succeed, at least in terms of making money. Other than search advertising, Google has been very bad at producing big new lines of business. You can do better...

Implement grown-up product management. Although you shouldn't burden Yahoo with traditional software engineering cycles, traditional product management is something that could help. The companies you've worked with are very good at understanding what a customer really needs and how to solve those problems (Autodesk is a case study in how to build deeper and deeper relationships with designers). Yahoo generally lacks this skill. It launches things energetically, and if one of them takes off it does a fine job of matching ads to content. But it rarely goes beyond that initial hit to deepen the user relationship systematically with new services and topical extensions.

My colleague Harry cites Flickr as a great example. It's a wonderful photo sharing site, but that's all it is. What if someone at Yahoo had the vision to grow Flickr into the best destination in the world for photography enthusiasts? You might have added a lot of other photography-related services to the site. You might have also bought DPReview.com, the leading camera review site, instead of letting Amazon snatch it up.

To play counterpoint to Google, you should make Yahoo a paradise for product managers, the people who identify real user needs and translate them into product visions.

So, when Steve Ballmer visits with his suitcase full of cash, it's OK to sell him the right to place ads in your search results. Let him go bash his forehead against the adamantine walls of Google's search advertising empire. But it's not OK to sell him the Yahoo search page, brand, or control over the user relationship, because...

The audience is your greatest asset. Another question you'll get frequently is, "are you a technology company or a media company?" The answer is: none of the above. Yahoo is an Internet company, which lives or dies on the volume of its traffic and its ability to monetize that traffic. In that spirit, the most important strategic fact about Yahoo is not that it's the #2 web destination after Google (link http://rubiconconsulting.com/insight/winmarkets/michael_mace/2008/10/online-communities-and-their-i-2.html ) -- it's that it is the #1 web destination whose users are willing to be marketed to. Unlike Google, your users expect to see prominent advertising for other Yahoo services and products.

That's the most exciting thing about Yahoo -- once you get the services right, you have the world's biggest channel to sell them through. That concept is just as valuable in the new computing world as it was in the old school.

Family synergies, Bruce La Fetra

Yahoo is not like other technology companies in Silicon Valley. It is a family of web properties under an umbrella of a common infrastructure and brand. Yahoo is all about content, segmentation, and leveraging multiple revenue streams. A successful Yahoo must be able to generate efficiencies without managing every property in the same way -- lots of common infrastructure has to support a variety of different properties. Yahoo is sick today because it has forgotten what it takes to make the whole greater than the sum of the parts. A hundred different properties backed by the powerful Yahoo brand should play like a fine orchestra, each part supporting the others, but currently Yahoo is managed more like 100 tubas playing without a conductor or score.

A good brand and good content attracts the users that form the core of your business. An informative segmentation model will identify user needs, interests, desires, and wants. Multiple revenue streams let you capture value in many different ways, allowing you to reach even more users in a virtuous cycle. If these work in harmony, the result is a company envied by others. Identifying appealing content is always a moving target, but this is both a current and historical strength of Yahoo's, and is reinforced by Yahoo's exceptional brand. Build on this. Yahoo's properties must be leveraged to develop the types of segmentation that advertisers, sponsors and users all crave. Google gets money from search, and not much else. Yahoo is a different kind of company, and must tap a variety of revenue streams: subscriptions, advertising, sponsorships, and data. So while display ads on the web provide a start, stopping there--or trying to make Yahoo into something it is not--will only lead you right back to where Yahoo is today.

Is Your Business Model Built for the Long Haul?

2008-09-22T23:59:12Z

Public statements notwithstanding, more business plans in Silicon Valley are built around technology than around customer relationships. It's just the way it is; we're talking about technology companies, right? The problem is that, given time, all technology either becomes obsolete or a commodity. With the increasing pace of technological change, this is happening sooner rather than later. The risk in building on technology rather than customer relationships is that you are never more than a wrong turn or two away from putting your business survival at risk. Customer relationships provide your business with more options, and strong relationships can be very forgiving of the occasional misstep, meaning your business is more resilient and your plans can be bolder. Further--and perhaps even more important--technology-centric business models limit your offerings and growth potential, so they are associated with lower valuations over the long term.

Are you planning for the long haul?

We all know examples of companies that dominated their markets until the technology changed. Some came up with new technology and survived, but many are filed under "where are they now?"

In an environment with as much technological change as Silicon Valley, it's dangerous to tie your fortunes to any specific technology. Every technology developed eventually will either become obsolete or a commodity. The challenge is to have something to show for your efforts when the inevitable happens. How do you want your efforts rewarded in the long term? Would you rather have a reputation for excellence in some obsolete or commodity technology or lasting customer relationships you can carry to new products or markets?

Whether you aspire to be the next Bill Gates or plan to be acquired, the correct answer is the latter one.

If the answer is so easy, why is this such a pervasive problem in Silicon Valley?

Why companies do it the way they do

Silicon Valley exalts the technologist -- the heroic figure is the inventor. It is generally easier to build a business around a technology than it is to build a business around a customer relationship. VCs want to hear about concrete problems and how you're going to offer a differentiated solution now, if not yesterday. It's hard to build a value-based relationship from scratch, so even the good relationship companies often start out as product companies. The truth is, maintaining these relationships is hard as well. Just ask anyone who runs a service business of any kind. (Disclosure: Rubicon is a service business, so we think about this a lot.)

Best value or best-in-class components

While we can't stop the relentless advance of technology, this doesn't mean that your company has to die or have a near-death experience when technology changes. Companies that base their business model on customer relationships are in a much better position to survive in the long term and can more easily bridge inevitable technological changes. You still have to invest in technology and having the right products, but a good customer relationship gives you an enormous leg up versus product-centric competitors. It even helps you to make the right product and technology decisions.

Sometimes this process, while inevitable, takes years to play out., Since everyone reading this is undoubtedly in the enviable position of change being years away, why should you care? The other reason to put customers, rather than technology, at the center of your business model is growth. The technology-centered company can grow only as fast as it can develop technology and the underlying markets for these technologies. Not only that, but the technology all has to be best-in-class as that is the chief selling point. The customer-centric business model provides a platform for selling additional products or services to your existing customers. Because you are selling to existing customers on the basis of your trusted relationship and the overall value provided, the individual components can be good and solid, but don't all have to be universally best-in-class individually.

Moving to a relationship-centric business model

A customer-centric business model is not about how much you love your customers, although that helps. A customer-centric business model is about finding lots of ways to touch your customers. If you offer a product today, think about services that you could offer to provide additional touch points. Think about the "whole product" and the related services and products that are needed to support or employ your technology from your customers' perspective.

Don't think about this from a technology perspective. You may be very good at some technical process that you could offer as a service to other companies. Resist the temptation. If you want to be a provider of outsourced services, recognize that you will be paid accordingly--and you are still exposed on the technology front, just with more customers. Instead, start by thinking about what else you can do with your existing customers, and let it grow from there. Make the transaction about your trusted relationship, not about a specific piece of technology.

When the Best Defense is Growth

2008-09-21T23:35:01Z

If your business is targeted by a larger competitor, the natural response is to want to play defense -- to squeeze pricing, take special care of the channel, maybe do some promotions and guerrilla marketing. We'd never advise you to take your eye off a competitor, but the defensive reaction isn't always the best way to fight. A larger competitor will expect you to do these things, and will usually be well prepared for siege warfare. They'll be ready to match your pricing and outspend you in the channel in order to drive you out of the market.

Sometimes the best defense isn't defending at all, it's finding ways to grow the market. If your customers are still early in the adoption curve, and especially if there are new segments you can open up, it's usually more cost-effective for you to bring in new users than it is to defend every inch of the turf you hold today.

This stands normal industry wisdom on its head; it's supposed to always be cheaper to keep an existing customer than to get a new one. But think about it -- if your market isn't already flooded by competitors, a new entrant can usually get 10% share just by showing up and being different. You should always defend the core of your market, but that 10% at the fringe can be very expensive to keep. If you made the same investment in a new part of the market where there's no competition, you might be able to grow in the new area faster than you lose people in the current segment.

This means that before you can decide what to do about a new competitor, you have to understand where you are on the demand curve. If your market's close to saturation, there's no alternative to hunkering down and fighting an all-out defensive battle. But if you're not saturated, driving new growth may well be the best option.

But finding where you are on the demand curve is a lot trickier that most people think. Marketing theory says that market growth is supposed to go through an S-curve, with a slow takeoff followed by rapid growth and then declining growth as the market saturates. If you grew rapidly last year, you're probably in the steep part of the curve. If growth has started to slow down, you're probably approaching saturation. Unfortunately, real-world market growth usually moves in fits and starts, so it's very hard to tell whether you're close to saturation. For example, here's the US penetration rate of telephones and automobiles, in the first hundred years from their invention:

If you stand back far enough and squint, you can probably label those S-curves, but we're sure they didn't feel like that to the business executives managing through them. Most importantly, what happened in the last year is virtually useless in predicting what will happen in the next.

Instead of relying on sales history to choose a defense strategy, the best approach is to stay deeply attuned to both your current and your potential future markets. If sales has been flattening (the traditional sign of a saturating market), treat that as an urgent question rather than an investment signal. Be sure you understand who's buying your products, and most importantly why they are buying. What problems are you solving in their lives? Are there other problems you could solve in the lives of different people? Have you ever marketed to them, and is your product properly configured to meet their needs? If you identify unmet opportunities, consider spending some of your defense budget on growth instead.

Dear Rubi

2008-09-21T00:03:38Z

Rubicon's response to those nagging business questions that you need to get answered but can't quite find the time to research.

Recently seen on Rubi:

Dear Rubi:

How do I measure the culture of my company, and hold the team accountable for it?

Submitted by: Nehal Gajjar, Principal, General Nautical, Inc.

Dear Nehal:

I assume that by "culture" of your company, you are concerned with values and behavior such as honesty, trustworthiness, and perhaps concern for the rights of others or the environment. While it is easy and straightforward to measure "hard" data like sales, profits and return-on-investment, measuring organizational culture is not so easy or straightforward.

Your concern should not be so much about measuring the organizational culture as about feeling confident that certain values are entrenched within your organization and exhibited by all your employees.

The values for any organization start at the top (that's with you). Anyone that tells you differently doesn't understand how organizations work. While what you say is important, it is not nearly as important as what you are seen to do by the rest of the organization. If you talk about the importance of honesty, but are seen (or even perceived) as shaving the truth when it serves your needs, you will find that the rest of your organization does the same thing. Ditto if you demand results that cannot be achieved via the desired behavior. Organizations are amazing in their ability to sniff out what the boss really cares about. You can try, but you can't fool them - at least not for long. If you even think privately that results are more important than behavior, your employees will pick up on it, and act accordingly.

Of course, not every organization is filled entirely with good apples. If certain cultural values and behaviors are important to you, you must trade out the bad apples for better ones. If you allow your top sales rep to get away with stuff because she's blowing out her number, you are sending a clear signal about what is really important to you. Likewise, if you put values first and force the sales rep to stay in line or leave the organization, you will send a positive message heard loud and clear throughout your organization.

Sincerely,

Rubi

Move Quickly to Strategic Alignment

2008-09-20T00:06:38Z

Executives at the helm of companies from small firms to large enterprises spend much of their time thinking about how to drive growth. But putting those thoughts into action can challenge even the most seasoned leader. Often executives focus on the "what" of strategy at the expense of the "how" -- neglecting the "how" makes success a long shot.

This is where individual business units have a distinct advantage over entire enterprises: Identifying interdependencies, conflicts, resources, and deliverables is easier to manage in a more compact organization. And business units are able to move more nimbly to put a strategy into action.

To succeed, business leaders should build bridges from ideas to implementation. These bridges allow employees at different levels throughout the organization buy in to the strategy, visualize how they will contribute, and take action toward the overall strategic goal.

Executives at the top of the organization often have no way to manage implementation after they determine the strategy: mid-level managers are the ones digging in and getting their hands dirty. And if mid-level management doesn't "get" the executives' strategy, they can't align different knobs and levers within the organization to achieve the goal.

Creating a common understanding of strategic goals across the organization is the essence of strategic alignment. With it, anything is possible. Without alignment, there's bound to be a gap between what the executives envision and what the organization actually does. It's the difference between strategy as theory and strategy as results.

Most employees want to help the company succeed. But often, they don't know how. Unclear communication is often the reason: When executives hatch a new strategic plan, mid-level managers may not get it or may misinterpret the intent, and employees never get a clear message about how they can contribute.

A Specific, Top 10 Model

This management system helps strategy and objectives flow throughout the organization and create a heartbeat method that reveals whether things are moving smoothly or not.

To achieve strategic alignment, a company must create cascading strategies that reach across the organization. This only happens with careful, deliberate planning. For example, many successful operating plans use a top 10 model. Based on the vision and mission of the organization, the company leaders (the CEO and executive team) develop the top 10 goals that will move the company forward for a given time period (e.g. a quarter or a year).

The top 10 goals aren't conceptual strategies. Rather, theses goals are a means to communicate the broad objectives of the company clearly; to be effective, a strategy requires buy-in from all members of an organization. And from 10 company goals, each department, group, office, team, and individual creates a top 10 list of deliverables. When these goals and deliverables are in alignment, as individuals complete their deliverables, the team deliverables are completed, and in turn the department deliverables, and so forth, cascading back up through the organization to the top 10 goals that comprise the strategy.
This top 10 approach fails unless it's specific. Many books about business strategy overlook the importance of specificity -- for a strategy to become reality, the goals and deliverables that support it must be concrete and measurable. Without specificity, strategy, goals, and deliverables remain open to interpretation in both implementation and outcome. "Win market share" isn't concrete or measurable, but "Close contract with company X for $10 million" is -- there's no ambiguity about the goal or how to assess if it has been achieved.

Specificity extends beyond the what of deliverables to the who and when: Successful deliverables have a name and a deadline. Assigning a deliverable to a team is vague, but naming an individual creates an expectation of accountability. The same is true with deadlines: "Q1" is open to interpretation, whereas "by 5 p.m. on June 30th" is not.

After Clarity, Drive Alignment

Pushing a strategy vision down through the organization with specific goals and objectives ensures that everyone understands what's expected of them and when. However, coordinating all those top 10 lists requires visibility available only to top-level executives. The CEO and other C-level officers bear responsibility for coordinating priorities between departments and divisions (that in turn drive the priorities for teams and individuals). Only by scrutinizing all the high-level goals and deliverables can top executives eliminate conflicts and redundancies that will doom a strategy to failure and identify interdependencies critical to success.

For example, an employee in one department might have a clear goal of "closing a contract with company X for $10 million by 5 p.m. on June 30." And though that goal is clear on both what and when, it's not achievable unless there's a corresponding commitment from an IT team to upgrade the systems architecture in a certain way by a certain date.

Coordinating these types of interdependencies requires visibility to identify them and often an executive commitment to invest in systems, materials, or staff. Identifying these interdependencies from the outset and then negotiating the required resources (the who, what, and how) creates a foundation for transforming a strategy from idea to implementation. But without that coordination, aligning strategy is only a hope, not an achievable goal. And hope isn't a strategy.

Looking Beyond Web 2.0

2008-09-19T00:12:24Z

A popular sport in Silicon Valley is arguing about what exactly Web 2.0 is or is not. Is it about collaboration? Social networking? Custom services?

We think the argument misses the point. Web 2.0 is just an effect of a broader trend: the fundamental remaking of the software industry as a result of the Internet. The label "Web 2.0" is being slapped on each new emerging symptom of that transition, as if each one was the whole picture. That's dangerous thinking for tech companies because it encourages them to invest in yesterday's news rather than looking ahead to what'll happen next.

To anticipate that, you need to look at the two underlying trends that are driving the change in software:

A massive reduction in the cost of running a software company, and

A massive increase in the ability to communicate with narrow market segments.

If you want to anticipate what people will be labeling "Web 2.0" (or "Web 3.0") a year from now, you need to understand these two forces.

Reduction in the cost of running a software company

Software companies often ask us to look at various aspects of the web applications community to track emerging competition. Invariably, what we find is that new business practices are gradually emerging that challenge the traditional economics of a software business.

The best-known example is modular software development, a practice the web community usually labels "mashups." The rise of open source software, and a movement to expose APIs within web applications, has produced a huge variety of tools and services that can be used by web application developers to create new web services at low cost and with relatively little development effort.

This trend toward low-cost development has been reinforced in the last two years by the rise of Amazon Web Services, infrastructure for websites that can be rented by web companies. This reduces the need to buy servers in order to launch a web application company, and further cuts the capital cost to create a web app.

This reduction in cost has opened the door for new software business models, such as advertising-supported software. Advertising is not a large enough revenue stream to support commercial software development, but web app development costs are so low that even a thin advertising stream can make a web application turn profitable.

This change in economics is also the real driver behind the rise of web communities. Although community is often presented as the central innovation of Web 2.0, there's nothing new about making a community online--CompuServe was doing it in 1979. What's changed is that it's now possible for even a small community site or service to break even because the expenses are so much lower, and because there are online advertising services that let small companies tap into an advertising revenue stream.

But the change in software economics extends far beyond product development. We're finding significant changes in even relatively obscure software business practices. A great example is user-driven translation of software. In traditional software companies, translation is a major expense, and the decision to add support for a new language can be one of the most contentious arguments in the company. Small web companies are starting to turn the translation task over to their users, by creating tools that they can use to translate menus, dialog boxes, and documentation. The popular weblog-creation tool WordPress is a great example of this--although it is produced by a small company, it has support in 53 languages. User-driven translation enables relatively small companies to quickly reach markets that even a large traditional software firm wouldn't find profitable.

We see this same pattern of Internet-driven reinvention being repeated in many parts of the software business model, ranging from marketing to support to pricing.

Increasing ability to communicate with narrow market segments

Traditionally, the most successful software applications have been the major horizontal tools that attracted millions of users--spreadsheets, word processors, photo editing programs, and so on. These applications typically became bloated as the developers crowded out competitors by absorbing their features. That huge code base eventually becomes a major barrier to entry by new challengers, because they would have to duplicate an enormous feature list in order to enter the market. A successful horizontal application is a natural monopoly.

The Internet makes it possible for small companies to start chipping away at these monopolies by targeting small groups of customers. A web app company can produce an application with features targeted at a small sub-market, and distribute it at extremely low cost. Because it doesn't have to pass through the straitjacket of retail distribution, such a product can become profitable on low sales.

Most of the public attention on web apps competition has been focused on high-profile products like Google Apps that aim to take down products like Microsoft Office. But we think the real action is going to be from the mice gnawing away from underneath. They're not as sexy, and they're getting almost no press coverage, but there are a lot of them and they are very active.

One example: the web is swarming with low cost tools to perform various image editing functions. A program called ColorPick, for instance, makes it easy to identify and match the colors in any online document. Basic image editing features are increasingly built into the leading photo management websites. Each one of these products takes a tiny bite out of the market for traditional image editing products.

What it all means

"Web 2.0" as a label is deceptive because it implies that the changes happening today are somehow confined to websites. This can lead to complacency among software companies, and it can cause web app companies to overlook opportunities. Instead of Web 2.0, we really ought to be calling it "Software 2.0." That tells the story of what's really going on.

What to do about it. If you're creating a web applications company, there are two tasks. First, look at the big software applications and ask which functions could be bitten off, for which customer segments. Make sure you're solving a meaningful problem for a well-defined group of users.

Second, look systematically at the business practices of software firms and ask which of them can be re-made by an online model that leverages fast development and communities of users. Consider creating a service to perform this task for software companies.

If you're working for a big software company, identify the features and customer segments that web application companies will target, and move them to web applications proactively. But remember that at the same time you'll need to adopt the new more economical development practices, or you'll price yourself out of the market.

You should also be intensely tracking the new business models in areas like translation, and adopting them aggressively. Unfortunately, most of the new models require a very different mindset and approach to business. We're skeptical that existing teams can get there on their own. A company may be better off developing the new practices in "skunk works" teams that can move fast and then transfer the knowledge into the rest of the firm.

Give us a call if you're interested in exploring these issues further. It's an area we're tracking closely, and we have a lot more information on what's happening and what to do about it.

Avoiding Strategy Failure

2008-09-18T00:23:51Z

I've watched strategy being developed within companies like Adobe, Apple, Autodesk, and Nokia. I've seen strategy created by individuals. I've seen the big suits of Bain and McKinsey at work. I've seen it done well, and occasionally I've seen it done poorly. Having read more than 100 books that define the best thinking on strategy, I've noticed that following the existing methods often doesn't yield success.

It's not just the methodology. Here are five reasons strategy fails in businesses:

1. The Blame Game

How many times have you seen a strategy move into execution, then fail? Typically, the postmortem involves blame. It was poor leadership. We didn't execute correctly. We had bad market data. Our customers decided they wanted something else. The timing was off. There are hundreds more, and you've heard many of them.
Underneath the failure is something deeper -- a strategy creation process that's gone off the rails.

The problem isn't actually people, management, or other issues. It's what strategy is seen as being and how it's developed within an organization.

When there's a mismatch, people can be fearful and confused if they have information that contradicts the new strategy. When the strategy doesn't gibe with what employees know to be true, they may wonder if they're supposed to speak out or remain silent. Employees wonder if they'll get in trouble if they do, or even if they don't, say anything. They worry about being called "too tactical" or "insubordinate" because their reality-check doesn't match up with what the CEO wants enacted.

When a business reaches this point, the strategy has already failed. In the musical The Wiz, the wicked witch Evillene sings a song titled "Don't Nobody Bring Me No Bad News." If that's your tune, get rid of it. It's a sign of serious structural problems.

2. Lack of Team Involvement

Large companies often see strategy as an annual activity done by an elite group of people who sequester themselves in a conference room. In smaller organizations, it more often comes as an edict from on high delivered to the people on the ground who must enact it.

Strategy is tricky -- it's both a thing and an action.

As a thing, a vision, a direction, everyone in the company owns strategy. As an action, it requires specific people to carry it out within the organization. Lack of such involvement is one of the major predictors of strategy failure. When employees aren't invited -- or even given permission -- to question high-level strategy, watch out. A CEO may miss key questions such as "Is this strategy the best way to achieve our goal?" "Do we even know how to do this?" or "Have we researched this fully?" The team, even if given permission, may not have a formal place to discuss such questions, and organizations don't usually invite conversations of this type.

The solution? Get the conversation going on an internal blog with comments, through a discussion thread, or on a strategy wiki that involves everyone in the organization. You'll be surprised how many times an important piece of knowledge is contributed by someone you thought wouldn't be interested.

3. Here We Are -- But Where Are We?

How did this happen? How did we get here? We need to understand where today's strategy models came from and how they operate. This will show us why the lack of key structural elements can almost always predict failure.

The two basic forms of traditional strategy are predictive and emergent. Both are highly codified and well-documented. They're usually used at the CEO level.

Predictive strategy is top-down and sets a direction based on research predictions about what market conditions are expected to be. The work is quantitative, relying on data, analytics, and expert intelligence to build a picture of an evolving market. It offers tools to design strategies that will succeed in the market as depicted.

Emergent strategy is bottom up and takes a wait-and-see approach. The ideas that catch fire are added to resources that help the whole bear fruit. The focus is on the enablement of the organization to develop competing options that mirror the real-time competition going on in the market. It supports a portfolio approach to an organization's evolving itself into the future.

The method you choose depends on the management structure of your organization, the industry the company is in, and the company culture -- among other variables. The emergent model is more flexible, where some might say the predictive model is old school. What causes failure in both is the failure to integrate feedback loops to enable adjustment on the fly.

4. Execution

Popular media has focused on execution for the past five years. The logic was that the problem was that companies simply didn't know how to execute strategy. Titles such as The New Science of Strategy Execution: How Established Firms Become Fast, Sleek Wealth Creators and Execution: How to Break It Down and Get It Done support this notion. This points us in the direction of the results that have been missing, but still misses the mark by suggesting that a systematic approach will guarantee better results.

This is an incomplete idea -- even the idea of "flawless execution" assumes there's a target everyone is aiming toward. When is the last time you saw that level of alignment in any business, regardless of size?

Point being that a process reinforces the ability of people throughout an organization to synchronize, know what to adjust for, make good decisions, and know when to feed information back into the system for fine-tuning.

Tools are just tools. What's important is the way companies make decisions and choose which tools to use, as well as when and how to use them; that determines how effective the tools will be.

5. Decision-Making

In the United States, we're surrounded by overabundance and often don't recognize it. The same thing can happen inside a company regarding the plethora of decisions that need to be made. Poor decision-making can kill a strategy if people in the organization are unable to see it as a source of strategy failure.

Too many goals or conflicting imperatives create a situation where everything is a priority. In that scenario, nothing really gets accomplished. Business owners must know how to select and prioritize, edit, and delete. Given a situation in which you're developing a new line of business, decide how you want to help customers choose, and communicate it clearly within your team and to the company. Make the branding, packaging, sales, and channel shift clean and easy -- including the conversation about compensation and rewards.

Great decisions can be made by teams. But sometimes when decisions are made by teams without broader review, feedback is missed or fails to take into account cross-functional understanding. That person in sales may just hold the key as to how you can better engage the channel. Build in time for review, but make sure you're looking for targeted input. This isn't a consensus-building exercise.

Whether the decision is solo or team-based, it can be a challenge. Make it, move on, and make sure you have installed a process that will provide you with an early-warning signal if you need to revisit what you've decided. The one thing that's always constant in the market is change. It's a given that adjustments will need to be made -- develop the ability to adjust to change smoothly.

Passion: Santa Clara University Keynote

2008-07-02T13:23:09Z

Nilofer Merchant, founder and CEO of Rubicon Consulting, gives a keynote address for the Santa Clara University Women's Leadership Conference. Her topic is "Unleash You! Your power, ideas, leadership".

About 110 Series A Entrepreneurs have formed into a collaborative through Montgomery & Associates Law Firm. A few of us industry experts are doing "faculty sessions" where we teach the essentials with the idea that quick, fast bursts of what really matters will help short-cut the learning curve and accelerate success. So a few weeks ago, I spoke at what is now called SuccessU (name is under construction) regarding Business Models, and the following are the video clips and notes from the talk. A PDF is available at the bottom of this entry.

Passion: Santa Clara University Keynote

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Warning: Don't adopt the software services model in increments

2008-06-23T17:27:37Z

Like an oyster, software as a service business models are best consumed in one gulp rather than nibbled over time.

We're seeing more and more clients struggling to integrate online services with their existing software businesses. Most are trying to integrate part of the services model with their current operations. For example, they'll try to create an on-demand product using traditional engineering practices; or they'll try to sell services through the same channels as shrink-wrapped software. The companies that do this are experiencing agonizing internal conflicts as they try to mesh the improvisational rhythms and needs of a flexible services business with traditional tops-down marketing and engineering practices. The result is usually frustrated people, blown deadlines, and big distractions for senior management as they are forced to referee employee conflicts.

Whether you call it software as a service or web applications, the new business model for software is an integrated whole. On-demand software is developed in small iterative chunks, marketed through rapidly-evolving messages online, and often sold direct or through significantly different channels. Marketing, sales, and engineering processes must all be adapted at the same time, or you can get the worst of all possible worlds -- software that is neither shrink-wrapped nor a service. Making all of these changes at once is very disruptive to a company that has developed deep expertise in making the old software business model work. But the alternative is like trying to run a car on vodka: bad for the car, frustrating for the driver, and you waste a lot of perfectly good liquor in the process.

In many cases, it's better to jump into services through an acquisition (many web app companies are relatively cheap to buy) or by spinning up a separate business unit that shares nothing with the parent company other than its brand.

Who's making money on the Web?

2008-06-23T17:20:47Z

While failure for the high-tech entrepreneur is less likely to result in death, the parallels between the Gold Rush and the current Web-based economy are many. In both cases, participants must to adapt to a new way of life, with new rules. Or rather, no pre-existing, fixed rules.

Silicon Valley's famous tolerance of entrepreneurial failure has its roots more than 150 years ago in the Gold Rush when more than 90,000 people made their way to California in the two years following John Marshall's discovery of gold near Sacramento in January, 1848. By 1854, more than 300,000--representing more than one percent of the total population of the United States at the time--had come west in search of fortune.

Ironically, the grueling trip west was often the best part of a 49er's experience. The life of a 49'er was a very hard one, and mining was back-breaking work. Accidents, disease, malnutrition and mining camp violence led to a shockingly high mortality rate that within six months claimed the lives of 20 percent of the miners who came to California in 1849.

Earnings--for many--were higher in California, but the prices of staples were astronomical: a loaf of bread that cost 4 cents in New York cost 75 cents; eggs were $1 to $3 apiece; apples $1 to $5; coffee $5 a pound; a butcher knife $30, and boots $100 a pair.

"As nowhere else," said historian J.S. Holliday, "you can fail in California. And I think the California Gold Rush taught people that failure was OK... and the result is that people accepted failure, which is the equivalent of saying they are willing to take risks. And California has been the most risk-taking society in the nation, maybe in the world."

While mining was a rough and mostly dead-end path to riches, the Gold Rush did create a number of fortunes. Some became famous, like the New York butcher who walked to California, opened a meat shop in Placerville and made enough money to start a meat-packing plant in Milwaukee. His name was Phillip Armour.

A whole service economy sprang up to feed, clothe and entertain the miners. Levi Strauss sold blue jeans, grocers sold $5 apples, and saloon owners and prostitutes could earn a nice living, provided they didn't extend too much credit.

Not so long ago, a canonical "dot-com" company's business model relied on harnessing network effects by operating at a sustained net loss to build market share (or mind share). These companies expected that they could build enough brand awareness to charge profitable rates for their services later. The motto "get big fast" reflected this strategy. We heard a lot about the "first mover advantage," the modern equivalent of mortgaging everything you have and moving to California in search of gold.

If you need help remembering the dot com bust, this classic E-Trade commercial is a good refresher. Unlike the allegorical pimentoloaf.com, there were a lot of Web businesses that got a lot of people very excited about changing the world. Like the Gold Rush nearly 160 years ago, some people got rich while many more suffered huge losses. What made the difference? Seven years on from the dot-com crash, it is worth taking a look at who ended up making money from the web, and why? But first, a quick review of some of the great ideas that didn't work out.

The Failures

Out of the dozens and dozens of well-known failures, here are a few representatives of those halcyon days.

Webvan. If we build it, they will come, only they didn't. It didn't work because, despite billions invested in automated warehouses and fleets of delivery vans, they didn't understand how people buy groceries.

Business-to-Business Exchanges. The 1520 exchanges in 2001 were winnowed 90% by 2003. Just because a miner struck gold in one hill does not mean that the mere act of digging in other hills will produce returns. Electronic interchange of business information is booming, but exchanges only work when there are a critical mass of people you want to exchange data with on a single exchange. More exchanges are not necessarily better.

Free internet and PCs. At the peak, a couple of dozen ISPs offered free connections and FreePC was one of multiple attempts to get consumers to watch ads in return for hardware. As it turns out, free is not always better, especially when you attach lots of strings.

AltaVista was the best, fastest search out there. The problem is they stopped focusing on search. Their index wasn't updated frequently. Their search slowed down. Quality dropped. They created an opportunity for someone who would focus on search (see successes list below).

The Successes

Focusing on the failures of the Internet Bubble can obscure the many valuable lessons learned from the many successful survivors who really did go on to change the world.

Google did not invent paid search (see GoTo.com), but Sergey, Larry and their gang of PhDs perfected the model and made themselves billionaires with their own 767 party jet.

Yahoo! figured out how to build a great Web portal by tapping into a variety of content. Unlike AOL, you could leave anytime you wanted, and most of the services were free. Where Google is fundamentally an advertising platform, Yahoo! is a media company.

eBay. Unlike Louis Borders and the Webvan gang, Pierre Omidyar understood how people buy and sell "stuff" and extended the fleamarket / classified model in both scale and scope.

Akamai took off when some big name clients decided to give the company a trial run. Paramount, ESPN, Apple, and Microsoft recognized the importance of Akamai's Internet optimization strategy: distributing servers and routing software to the "edge" or end users, rather than centralizing services.

We think about Amazon.com as a bookseller, but in reality Amazon is a sales platform. Amazon keeps track of what you buy and look at, offers reviews from ordinary people, and even seamlessly connects with hundreds of third-party merchants.

Amazon Web Services. Born well after The Bust, AWS is a huge development of lasting importance. AWS commoditizes Web services like transactions, storage, etc. so that developers can buy only the services and at volumes they actually use. What Google has done for advertising--namely make it more flexible, responsive and cost effective--AWS hopes to do for Web services.

Lessons Learned

What do the survivors have in common? Like the merchants of the Gold Rush, these companies all focus on providing services to others rather than directly profiting from end users. Levi Strauss didn't care in which hill or stream gold was found or who found it because everyone--successful miner or wannabe--needed his rugged blue jeans. Likewise, Google doesn't care what The Next Big Thing is because whatever it is, people will come to Google to search for it.

There will always be a great business to be had in selling lottery tickets--not buying them. Building infrastructure is not as glamorous as selling the latest fad or walking into the saloon with a big, fresh gold nugget--although having your own 767 is pretty cool--but history shows infrastructure to be a resilient business model with better odds for creating lasting fortunes than the needle-in-the-haystack approach to striking it rich.

It's a bird, it's a plane, it's Community!

2008-06-23T17:19:21Z

Last Friday, I went to a party in Atherton and met two CEOs who used the word "community" as their secret sauce.

As I listened to each one, I realized their models and what they were specifically describing were entirely different. Yet the word describing this thing of on-line community was used generically as if they were alike. How confusing.

My Space or Facebook are communities that focus on social engagement. Wikipedia is based on community input to aggregate knowledge. Amazon's marketplace is focused on "community" of reviewers. SAP software developers form a community that creates value on top of a community technology platform. These are all communities that contribute to a strategy for these different companies, but the ways and means and even the "what" are entirely different.

Recently, Harry Max was working on developing a monetization model for a client, based on a community destination site. And in the process he came up with a taxonomy for what he considers to be the five definitive types of community. It started to take the shape of the "what:" what was the user aiming to do in that community and therefore what could be done as a strategy from it. So he came up with community names like: purpose, proximity, passion, and so on. (yes, they are all Ps!). And it looked right.

It seems to me that even if we went out and named all five and put that lexicon of language into the tech thought-leadership community, it's still not enough. There would be yet another person's--or in this case, team's--opinion on what community is.

It strikes me we ought to know what drives people to participate in various types of online community and how it effects community member interaction (how long do they stay, what do they learn, how does it influence purchase decisions, etc.). So, we as a Rubicon team, are thinking deeply about this now. (If you want to talk about it, get in touch.) It just seems like with so many of us thinking about it, we ought to be talking less about the specifics and more about what makes these different kinds of community strategies work, what are the critical success factors, and how do they impact what we are able to do in business today. In Q3/Q4, we'll field and release a study on this topic so stay tuned.

And for now, on-line community continues to grow as a centerpiece of strategy that companies are betting the future on today. I look forward to when we can describe it more clearly and know it better for what it is. Then the toolkit becomes better for all of us.

Web 2.0: A Strategy Guide - Professor and Speaker Amy Shuen Captures the Essence

2008-06-23T17:16:46Z

In Web 2.0: A Strategy Guide, author Amy Shuen demonstrates subject mastery from the first sentence. Steeped in her topic (she's taught it at Wharton, Haas School of Business, CEIBS and École Polytechnique), the reader gets detailed information on the meaning of Web 2.0. This isn't a book filled with hype--it provides theory, thoughtful detail and is practical. Chapters end with strategic and tactical questions. The illustrations and screen captures provide depth and clarity. Companies like Flickr, LinkedIn, and Facebook are used as case studies.

In the first chapter, Users Create Value, she tags Flickr as the poster child for freemium-based businesses. Shuen points out that this model was first developed in 2006--and that low marketing, investment and distribution costs allow revenue streams to cover costs quickly. She's ahead of another book on the topic that's expected at the end of the year--Free by Wired's Chris Anderson.

LinkedIn and Facebook: The flexibility of web apps

Shuen looks at LinkedIn as the next iteration of the trusty Rolodex, and uses the application to demonstrate how many more possibilities are offered users through electronic contact management. She has a keen eye for what makes things work (growth, sharing, trust, ease of use, monetizing professional use and maintaining a tight core mission).

Facebook serves as an example of what was once a simple application in Chapter Three, People Build Connections. She uses a series of screen shots to demonstrate the increased sophistication now built into the application and shows how it helped fuel growth from 5 million users in October of 2005 to more than 7.5 million in April of 2006. Its success is a result of an open API, and Shuen quotes Facebook founder Mark Zuckerberg at length as she tells the now-familiar story about a company that helped define the term "viral growth." She also describes the major error Facebook made with its Beacon service, the dust-up that resulted and Zuckerberg's public mea culpa to quell the firestorm.

There's a great discussion on mash-ups in Chapter Four, Companies Capitalize Competencies. The final chapter of the book, Businesses Incorporate Strategies, contains Shuen's Five Steps to Web 2.0--thought-provoking reading for anyone in business. You'll have to read the book to fully understand her rationale, but here are the steps as she sees them:

Build on collective user value

Activate network effects

Work through social networks

Dynamically syndicate competence

Build a Web 2.0 business plan

More than the sum of its parts

Her final point in the chapter is the essence of Silicon Valley--look around while moving forward. The book's end notes provide a plethora of knowledge and references, while the 22-page bibliography provides a reading list that will keep anyone interested in the topic busy for the next year. If there's a shortcoming, the index feels a bit underweight. But so much is right about this compact book that it feels unfair to pick on a minor failing.

The publisher, O'Reilly, distributes Web 2.0: A Strategy Guide under their Safari imprint. This means that there is an online version of the book for quick access that allows a reader to put the material to work almost immediately. Other publishers should follow O'Reilly's lead--their organization clearly embraces multiple ways to provide value to readers.

I recommend this book for tech neophytes who know that they need to learn more about Web 2.0, and for seasoned experts who want to gain exposure to a rich set of cases--along with questions that will compel them to dig deeper on the topic.

Can the iPhone be Apple's next big thing?

2008-05-28T17:59:50Z

Apple's excellent April financial report -- revenue up 43% and year over year and profits up 36% -- masked the disturbing news that Apple's iPod business has basically stopped growing. iPod units were up only one percent year over year. Most of Apple's growth came from the Macintosh business.

Although Macs are on a roll at the moment, it's risky for Apple to rely only on the relatively mature personal computer market for all of its growth. With the iPod now saturating, Apple needs its new iPhone business to provide a second growth engine.

Rubicon's recent survey of current iPhone users showed that they're mostly technophile early adopters. Although they are enthusiastic about the product and are using it heavily, there are not enough of these early adopters to produce the sustained demand Apple needs. The iPhone's long-term success may depend on its upcoming software upgrades, and new iPhone products that are rumored to be coming later this year. If Apple can hit lower price points, if the 3G version of the iPhone ignites demand in Europe (something that has been lacking), if the planned enterprise e-mail solution works, and if the eagerly-anticipated third party software store is appealing, then Apple may be able to build the iPhone into its second growth engine. But the mobile market can be fickle, and Apple's success is not by any means guaranteed.

Rubicon Influencer Marketing Event

2008-05-27T22:26:09Z

A Rubicon Sparkler at the beginning of the season saw CEO Nilofer Merchant presenting a discussion on influencer marketing with Nick Hayes, co-author of Influencer Marketing: Who Really Influences Your Customers.

The interactive session provided a select number of friends of Rubicon with an overview of the strategy involved in developing a model for engaging with key influencers. The efforts of Microsoft, Palm, Lego, Adobe and other companies were reviewed and we spent some time discussing how social media can harness the power of influencers.

Influencers in vertical markets can provide a rich return

The approach has proven especially effective when targeting groups within vertical markets--especially early adopters who may be highly technical. One case presented a set of users so driven by their needs that they used a software product in ways the company that developed it never thought it could be used.

Here are a few nuggets from Nick's book:

As mass media impact wanes, the role of influencers grows

Blogs, wikis and other social media are enabling new influencers to emerge. They also disperse traditional sources of influence.

Most of the money spent on influencers is being spent on the wrong people, leaving the real influencers all too often untouched.

Influencers may not do the buying, may not be not obvious, usually can't be bought, and start off neutral - which is why their potential to affect sales is so great.

Influencers are not all equal - they can be assessed, ranked and prioritized to be used effectively.

Influencers can be influenced. The greater question is how to get to them to generate market awareness and leads.