Please Do Not Leverage Actionable Frameworks

I was doing a little business reading today.  When I came across a tweet on the Business Week article Embedding Innovation in Leadership, about General Electric’s recent innovation training initiatives, I was intrigued.  GE clearly has one of the best people development programs of all big companies, and I enjoy learning from their practices.

Unfortunately, the article was mostly a rehash of time-worn homilies like getting leadership buy-in and sharing best practices.  Really, is this what passes for business writing these days?  But the part that motivated me to blog about it was this stinker:

Leverage actionable frameworks. GE applies a “three-box” framework to strategic planning that helps leaders balance managing through the present, which is largely about driving efficiencies, and creating the future, which is about innovation. Translating a concept like innovation into a workable framework enables leaders and their teams to apply new strategies with consistency and rigor across the organization.

“Leverage actionable frameworks”?  That’s one of the more meaningless pieces of corporate jargon I’ve come across recently.  I think it might mean having a defined process, which is vague enough.  This is one of those cases where it’s better not to write anything than to remove all doubt.  The writers would have done better to focus on one element of GE’s innovation strategy and actually explain it in action.  That’s why I enjoy war stories so much; they’re inherently specific.  In contrast, writing that strives to be professional and analytical often just obfuscates the real issues.

I’m being a little particular about this, but the reason is that clear communication is one of the requirements for good strategic thinking.  If you spend all of your time trying to make non-ideas sound like ideas, you lose your ability to accurately judge your company’s direction, not to mention your own.

Why Peter Thiel Is Wrong About the Search Monopoly

Peter Thiel claimed at Farsight 2011 yesterday that running a search engine currently incurs about $5-10 billion in fixed costs, meaning that search is a natural monopoly where players can’t make money unless they have about 30-35% market share (video here starting around 8:00). It’s a fascinating analysis of the search industry, although in my mind hopelessly misguided.

First of all, Blekko is a clear counter-example. It’s a viable search option and has a much lower burn rate. DuckDuckGo is also an interesting product, although it doesn’t quite qualify as a contradiction of Thiel’s thesis since it runs partially on APIs like Yahoo’s.

Ignore the Existing Cost Base

More generally, taking the existing cost base as a given in technology markets is pretty foolish, from a couple of perspectives.  Consider the 80/20 rule.  In most areas, Google and Bing have already exceeded user needs and are working on features that provide very incremental benefits.  It might be nice getting to a result a couple of seconds faster with Google Instant, and Google’s spelling correction (which occupies an entire development team) is pretty cool.  However, a new competitor can get to 80% of Google’s spelling correction pretty quickly. No one’s going to miss the remaining 20% if that product provides some truly novel benefit.  Whether DuckDuckGo’s privacy or Blekko’s slashes qualify as something many people want remains to be seen.  But Thiel is ignoring the entire concept of disruptive versus sustaining innovation.

Would Thiel make the same argument in the car industry?  If we looked at Toyota and General Motors, would we assume that starting a car company requires billions in fixed costs?  Clearly not; just look at Tesla.

Fixed Costs Aren’t Really Fixed

We all know that fixed technology go down over time, from hardware to bandwidth to (open source) software.  New upstarts in search will be able to do more with less, especially if they choose to focus on providing value along a specific dimension of customer needs rather than trying to do everything at once. Think about what that $5-10 billion in fixed costs really represents: video search, image search, ad serving, real-time search, and a million other things.  Do you really think every search engine needs to offer all of those features?  Clearly not!

The search field is disintegrating into more specialized applications.  Although it’s in Google and Bing’s interest to keep all of those applications under the hood of one monolithic search engine, that’s clearly not the only model.  I will bet you that Hipmunk is going to beat the pants off Google and Bing for flight search (at least until they get bought), and with much less investment. There’s incredible value in not being tied to an established mindset and infrastructure.  That’s the whole point of startups.

What’s Really Disruptive?

The key for search startups in avoiding the fixed cost trap is that their innovations must be truly disruptive.  They have to satisfy a need that current search engines do not, that users care about, and that is not too tightly coupled to the entire search infrastructure that incumbents have in place.  I think this the main problem for Powerset, the semantic search startup Thiel invested in.  They were targeting the mass market, and thus their strategy was tightly coupled to all the features that mass market users have come to expect.  In addition, generalist users probably didn’t care enough about semantic search to give up other features.  If customers aren’t willing to give up other benefits for your innovation, then it’s not really disruptive.  Powerset might have done better if they had focused on a niche that absolutely had to have semantic features (maybe patent search?) and then expanded over time into other segments.

I’m Biased

Since I’m working on a vertical search engine, I’m hopelessly biased. And I actually think Thiel’s plans to invest in underlying infrastructure technology make a lot of sense. I just wish he hadn’t described the economics of search in such a superficial way.

The Hard Road to Good Customer Segmentation

Anthony Tjan’s Harvard Business Review blog post, Approximately Correct Is Better than Precisely Incorrect, perfectly illustrates the value of customer segmentation.  Your customers are different, and treating them all as if they were the same results in poorly targeted offers, lower sales, and dissatisfied customers.

The trick is that customer segmentation is hard.  Otherwise, everyone would be doing it well!  The ideal segments are cohesive (everyone in a segment has similar behavior and preferences) and actionable (you can identify which segment a customer is in and respond appropriately).  There are more or less three generic flavors of customer segmentation, and all of them have drawbacks. Continue reading The Hard Road to Good Customer Segmentation

The Bar for Being an Expert

Management consulting is an industry with funny quirks.  One of them is that you can do one project in an area and be considered an “expert.”  My first consulting job was at a small boutique firm, and one of my early projects involved doing a discounted cash flow model.  I had learned some Excel in college, and I used a couple of old projects lying around as examples.  After I had done the model, I was suddenly the go-to person in the firm for financial modeling.  I thought this was due to being at such a small company, but the same thing has happened at various firms in areas including healthcare, pricing, personalization technology, and packaging.  This phenomenon is why no consultant wants their first project to be in a dull industry.

This trend is also in direct conflict with the concept popularized by Malcolm Gladwell that it takes 10,000 hours of mindful practice to be a world-class performer in any area.  Bill Gates spent those hours programming in high school, and violin virtuosos spend that much time playing before becoming recognized as first-class.  Unfortunately, this principle has been shortened in popular usage to “it takes 10,000 hours to become an expert,” which I don’t believe is true.  This version prevents people from realizing how quickly they can increase their perceived value.  Depending on the context, you could become an “expert” in your organization in a few weeks or months. Continue reading The Bar for Being an Expert

What Makes a Great Business Drama?

As a business strategist, I find competitive battles like the Apple iPhone vs. Google Android vs. Blackberry pretty fascinating.  It’s like watching the playoffs or the latest season of Dexter.  Ok, maybe not quite that intense.  But some business stories really do take on a life of their own.  Boeing vs. Airbus.  Sony, Nintendo, and Microsoft.  Amazon, Barnes & Noble, and now Apple in the ebook reader market.  What makes them stand out so vividly? Continue reading What Makes a Great Business Drama?