Business Models

We have been asked to be on the Microsoft Business Re-Imagined panel on the 15th of May, looking at the potential impact of Social Media in business. We've been consulting to and building social media systems for clients since 2005, and it seemed like this was a good time to boil down our experience down. Above is a simple value creation flowchart, and we look at how, in our experience, social media can impact value creation. Stripped to it's bare bones, a business creates sustainable value by increasing revenues and/or reducing costs. Social Media is a new set of technologies that can help in a number of ways.

Revenue Increase

Essentially, there are only 2 ways of increasing revenue, which is sell more stuff, or increase the price at current volumes. In my view, Social Media is more powerful (with current technology, anyway) in dealing with Consumer sales, rather than Business sales, as the main cost in a consumer sale is reaching the large mass of disparate consumers. With business sales the target market is much easier to identify, and there are less customers to contact so current approaches work well.

Sell More - Social Media is a potentially very powerful tool to generate new demand - to find new customers, to bring them to the enterprise, create trust, ease their purchasing journey, and help optimise website design to maximise sales throughput. Taking it to greater extremes, Social Media data can be used to start to psychologically profile your customer base to understand what sort of people may also be your customers. It is also a very powerful tool to optimise the product - to discover the features or configurations that customers really value, and you can identify what competitors do well and include those in your product. But it is not a substitute for existing methods today, it is an adjunct, it can't be the only tool. It is not an appropriate tool for overt "hard sell" marketing, for example.

Increase ARPU (Average Revenue Per Unit) - Social Media has two main functions here - to aid in communicating the value proposition of the product, and to improve the perceived value vs competitive offerings. Communicating the value is fairly straightforward, as it serves as an extension of traditional channels, with the added benefit is that it has a strong feedback loop so it is quickly possible to see what is working and what is not. It is also probably better at communicating implicit values than more traditional media. Social Media can also help to improve the pricing point by optimising product differentiation amomg dofferent customer groups, and find pricing points for these different customer groups. That feedback loop, and the data it drives, can be used to to find attractive product combinations, and to optimise the website design to maximise value per sale. Taking it to greater extremes, Social Media data can be used to start to psychologically profile your customer base to understand their hot buttons better

Cost Decrease

Again, essentially there are only 2 ways to reduce costs - reduce operating expenses (Opex) and reduce Churn (Customer defection). I will ignore Capital expenditure (Capex) for now. Social Media in my view is as useful in both consumer and business facing enterprises, as it's power is about increasing productivity and effectiveness in reducing costs

Reducing Opex - In most companies, there are two major cost areas - raw materials and labour, the sum of them is typically the "80/20" of the cost pie (companies with near zero raw material costs tend to be professional service businesess, with very high labour costs). So far in or experience the two major Social media impacts are from:

(i) getting better market information (both pre and after sales) from customer to company, allowing the company to both reduce costs or lead times of raw material while not reducing value, and being able to better place its human resources where it really matters - it can work like a real time value engineering approach. It's not just useful for line operations, social media can be used to influence better design and innovation, and can be used to increase "brain cycle cpacity" by tapping into customers and the overall milieu without having to employ it

(ii) getting a better flow of information between people in the company, so co-ordination is better (less balls are dropped because A didn't know what B knew about customer X) and spped of reaction is faster.

The third cost element, overheads, is interesting. I have some thoughts about using Social Media transaction data to better allocate some overheads, but I don't have a fully formed set of ideas and I haven't seen it put into practice anywhere yet.

Reducing Churn/Increasing Retention

Churn is often not well understood, as many businesses are not aware of the huge differences in cost between retaining an existing customer, and finding a new one. There is often an order of magnitude difference. Thus reducing churn can have a massive impact in cost reduction and revenue increase Social Media can be used to aid customer service, to serve as an early warning for customer problems, to find out what people really value in post sales service, and to improve the product lifecycle. Social media also means bad service is more likely to leave a company's reputation punished, which can also impact sales, as customers typically research online before buying. In saturated industries, having a better churn than the competition can radically alter the market share and strategic positions within a few business cycles.

A brief word on Capex costs - if Social media is helping a busines to make better use of existing assets, in theory it will slow down future Capex requirements - but Social Media technologies do have Opex and Capex costs of their own, and these are typically incurred early up, while the benefits are then gained over a series of cycles. Which brings us to the dreaded Return on Investment (RoI) question.

Return on Investment

For any new technology, ROI is hard to work out, as few case studies exist to allow calibration of cost and benefit. If history is any guide, new and risky ideas are typically implemented first where forces are greater than a pure ROI worry:

- Piloting: trying out the New new thing in some areas of the business, somethimes structurally, often though by "Intrapreneurs" who do it locally out of passion, or seeking promotion etc.
- Pressure: A company realises it will not succeed doing "Business as Usual", and has to do "Business as Different". Recessions are for this reason more likely times to see new ideas implemented
- Politics - needing to be seen to be "with it", intra-divisional rivalry etc - all these can drive early day projects

But eventually, for Social Media to take off and scale, believable ROI needs to exist. We are dubious of some of the various "Returns on" currently touted for Social Media, as it is hard to tell which are valid proxies for hard to measure benefits, and which are just Snake Oil. Our test is that if a proxy measure cannot be linked to an underpinning economic benefit logically, its more likely than not to be snake oil.

Other Impacts

So far we have seen 3 meta-impacts of Social Media occurring

Firstly, there is a synergy when multiple of the above areas are pursued. The marketing listening systems can influence the customer satisfaction and product design systems, the customer satisfaction system can improve the marketing message, better staff co-ordination can improve customer service and salesforce knowledge and thus effectiveness. In general as more information flows in a business, better decisions are made throughout the business. But its not a given - if organisation culture is not open, if individual reward structures do not encourage sharing, if management use the new dataflows to further expolit staff, these systems can go nowhere, even potentially accelerate problems as they are just better ways of making sure all the sh*t hits the fan.

Secondly, the same influencing ability that works on attracting potential customers can influence sentiment, and thus share price. But this has always been a temporary game in the past, and its unlikley Social media will be any better at selling the sizzle if there is ultimately no beef.

Thirdly, expanding on this, a basket case will be exposed far more quickly - disaffercted customers, employees, investors etc will make their feelings known. In teh old days, they sued to say one disgruntled customer would on average tell 7 people. Now they will tell tens, hundreds, thousands, will write on review sites, will push negative pages higher in the search rankings than "official" company narraticves, etc etc.

Beware the Snake Oil

There are too many Social Media snake oil merchants promising miraculous cures today. We talk about what Social Media can do above. This is what it cannot do:

(i) Replace the modus operandi of most businesses. Social Media is essentially a communications medium, like telephony or IT. Telephony made a major difference to the cost of selling retail insurance for example, but it did not replace insurance. Web sales has restructured the book industry, for example - but not replaced it.

(ii) Replace existing operating techniques - marketing and sales techniques, service techniques, working practices etc - or not straight away, anyway. This is for 2 reasons. Firstly, existing techniques exist because they still work a lot of the time, and Social Media is not an appropriate complete replacement, but is an adjunct to improve them in most cases. Now it may come to pass that eventually Social Media might replace, say, telephone call centres - it's plausiblee - but than a bunch of other things need to change too so it will more likely be a phased change, not a big bang. Secondly, history tells us that any new enabling technique actually doesn't replace the old, it usually just slowly supercedes it in the pecking order. The revolution will (in the main) be evolutionary.

(iii) Massively replace employees with other peoples' brain cycles - "crowd -X'ing" is overblown, because most businesses do not win the day on one-off surge efforts, but on day to day execution over many cycles, and to do that you need well trained and motivated teams, not an ever-shifting cast of part-time volunteers. Adhocracy is a great way of getting Ad hoc one-offs done, and we are all for it in its place - but its not a great way of delivering reliable, predictable products and services day in day out.

(iv) Be the Silver Bullet that saves the day. It will need to integrate into a number of other existing systems in any enterprise. Social Media is a new layer of enabling communication technology, that makes existing practices and processes more productive, or effective, or both. The degree of just what, where and how it is apporopriate will vary by company and industry.

(v) Ensure that This Time Things Will Be Different, save the Planet, bring Universal peace and Love, etc etc. Humans are humans, with the same foibles as they have ever had. Social media is not going to bring about a Business Utopia, where people give warm personal service all the time, all goods are maximum quality at minimum price, and cheaters never prosper - but because it lowers transaction costs, all those things will become a bit easier to police - and thus new ways of cheating, skiving and flogging lemons will emerge.

If we had to give our sanguine view, Social Media is the sort of cluster of technologies that today can give low % increases to all those areas we cover above - but once you sum up say a 5% increase in sales volume, a 5% increase in ARPU, a 5% reduction in OPEX and 5% reduction in churn, you wind up with a shift from (ay) 5% margin to near 30% margin. That is life changing for any business, but it has to be done within the current business systems to get the full impact. The medium may be the message, but it isn't the modus operandi*.

The Downside Risks

As with any powerful new technology, used improperly it can blow up in ones face. There are two main dangers that have emerged so far

- Leaky Ships: Sensitive information will leak more easily, so there does need to be more attention paid to keeping things tight where required. This is of course in direct opposition to the need to be open, and finessing the systems that handle commercially important data is still an emerging area and in our view is still a limit to Social Media reaching its theoretical potential.

- The Viral Faux Pas: The inappropriate and inopportune tweet that goes viral and pours opprobrium on the company is a frequent enough occurrence to be a Social Media standard trope. Apart from blaming it on the Intern, companies do need to be careful and have checks on their output, and damage limitation measures in place

The devil in doing all of this is of course in the details. So, we hope to see you on the 15th.....

(*With the exception of wholly new businesses that are Social Media businesses, of course - but that is the subject of another post)

After all this hullabaloo today, all you need to do is look at Apple over 35 years and you will see that they:

1. Are typically a very early entrant, integrating a variety of existing systems in a hitherto poorly served early adopter sector with promise, to create an easy-to-use product.

2. Use great design to create a demand for a high margin product. In recent years they have also become "cuter" at doing software as well as hardware after being caught out by the MS-DOS ecosystem

3. As that market matures, retreat to the highest profit quartile. Follow the money, not the volume.

Its a waveform. Find a wave, ride a wave, find the next wave. Quarterly numbers are irrelevant. They rode the PC wave very well, then the portable music device, then the smartphone, now the tablet.

What will they go after next? And will they be able to reproduce Job's genius for getting onto the board at the right time?

Update - my colleague Keith McMahon nailed the current tactic perfectly when he notes that market expectations currently outstrip reality, hence best strategy - buyback shares

I went along to hear Geoff Mulgan (NESTA CEO) at the RSA tonight, talking about his new book "The Locust and the Bee" - a larger summary of the book than this post is over here. The topic is parallel to our Big Potoatoes Innovation manifesto (we aessentially argue that "Innovation" in the last 20 years or so isn't, and Mulgan to an extent explains why. In essence he believes that Capitalism has two forces:

Creative capitalism - the Bee - make great things people want

Predatory capitalism - the Locust - predatory companies making money from asymmetric power structures

These have been with capitalism (and I'd argue human nature) forever, but from the 1980's (especially post fall of Communism in 1989) Predatory capitalism has moved into the limelight. Now Mulgan is not the first to make these observations (cf Karl Marx, Paul Colinvaux, Jared Diamondl), but the narrative needs repeating. Leading up to 2007, Finance had become increasingly detached from real economics, and predatory behaviour made more money than investing in innovation (apart from innovation in money making). Hence the stultifying of real innovation over the last 20 years or so. The 2007 Crisis was caused by Predation.

The question of course, is what to do next. Six years later, there is still no real agreement on what happened leading up to 2007, the vested interests that caused it are largely still in situ, so its hard to find solutions. Failure to agree cause and solution has led to sullen resignation and resentfulness by populations. In a perfect market, a reciprocal "do unto others as you would have them do unto you" ethos reigns, and in simple transactions we feel unfairness - viscerally - but in complex markets it's far harder to see/control predation. There is an evolutionary argument in New Scientist on this as well, i.e that we are well adpated for controlling predatory (cheating) in small groups, but we haven't yet evolved to control it in large groups where the pain is diffuse:

The result is that lobbies often trump what we fondly refer to as the people's will, as long as really serious, electorally significant moral indignation in the populace can be avoided. Banking institutions loom large on the lobbying stage. A 2009 report from the International Monetary Fund concluded that lenders who lobbied most were those engaged in riskier practices.

Mulgan notes that Adam Smith wrote a lot on predation, and he showed us how to spot it - profits are from reciprocal relationships, but Rents - surplusses due to are asymmetric power - are predation, and are still all too common in every value chain today. Mulgan argues these rents are why the Western public is still very wary of Capitalism.

The need of course, going forwards, is to control predation, and help creation. But how? Mulgan argues that Passionate "More" and "Less" Capitalism advocates are both ineffective and unhelpful, and a new way is needed as the old polarities don't work. He cast back in history to look at what worked, and some examples are:

- 1930s - initial attempts were to return to 1920s, but new solutions emerged (He emphasized the "good" ones however, while glossng over other solutions, like Nazism and Stalinism), and noted the pain of the 1930's set the building blocks for the social transformations of the next 50 years

- Iceland - made tough decisions, sorted out economy, had meetings of people to rewrite constitution and also Prosecuted the Guilty (To me the real lesson of Iceland is so far is it has been the only country to put the financial pain back where it belonged and also prosecuted the wrongdoers. Only when that happened, I would argue, were the population willing to move out of sullen mode and willingly co-operate)

Mulgan's message is essentially one of "do good things, and good things will happen"

- Promote the creative side
- Key is to think about new ways of thinking about wealth and waste, as we have become more efficient at production we have got a lot more wasteful in consumption, especially top 1%
- Allow people to realise that things can change from today - Monarchy seemed natural 200 years ago but unravelled fast in next 50 years. Contemporary capitalism is at same point today, in his view. What is needed are people to point to new ways of doing things, and energise creative energy in new ways
- Purely individualistic predatory capitalism won't work, sows the seeds of its own destruction (but how long does it take, one wonders? Feudalism lasted a long time, for example)

All good stuff, but nagging away in my mind the whole talk was a slightly different fable, the Locusts and the Ants. Except the version in my mind was not Aesop, where the Locusts played all summer while the Ants toiled and stored up grain, then come the winter the Locusts all starved. No, the fable in my mind was the one in Disney's "Bugs Life", where the Ants toil and the Locusts rob them of all their surplus every so often. I'd argue that that is a far closer analogy to where we are today. And right now, it seems to me that the only country that has got shot of its Locusts, Bugs Life style, is Iceland

Incidentally, talking of NESTA, we did some work a few years back on Innovation in the 1930's US Great Depression. It showed that yes, creativity and innovation absolutely flourished (a large number of the really Great US corporations of In Search of Excellence fame started off in that period, and they tended to last 1-2 generations longer than the average corporate lifespan. But the work also showed that the Locusts died - old companies crashed in the Depression - leaving space for new, innovative ones. Braver 1930's politicians cracked down harder and faster on the Locusts than - Iceland excepted - we are seing today (separation of retail and domestic banking happened in 1933, only 4 years after the crash. We are still waiting for that now, 6 years in and counting...) Roosevelt's New Deal in 1936 was direct government interruption on the side of teh ants. Arguably, without some form of pest control of the Locusts today, as eventually occurs in Bugs Life, I think a far more plausible future is that the capitalism of next few decades driven by Sovereign Wealth funds and "Financial Repression", with minimal real innovation and ever poorer living standards.

On that gloomy note, there was an interesting possible solution mooted - Innovation in "Life Models". Mulgan pointed out that there were a huge number of Utopias being put forward in the late 1700's /early 1800's, just when Monarchism seemed to be at its most powerful (except for a few years in France before Napoleon crowned himself Emperor) and these ceated huge debates, among large number of people, creating a common drive for freedon that, by 1848 had caused open insurrections and by 1860 Monarchism was radically changed, and power had shifted hugely to more democratic institutions, releasing a never before seen period of Innovation before (or since, as we have argued) that pretty much created todays world.

Our argument is that a New Utopia should be based on a massive, societal investment in fact based innovation. If Sao Paulo can spend 1% of its taxes on Innovation, with measurable benefits, why can't London?. Or the UK? Or any country? Hence the Big Potatoes Innovation manifesto. Part of our Innovation Utopia is to use innovative technology to remove Locust rents, which will eventually disempower them. As to agents of this change, two other points of interest from tonight:

- Cities willbe agents of change rather than nation state, as nation state influence was waning - then 2007 hit and "global" companies had "national" debts - and now no one trusts them (I'd argue post Cyprus no one trusts Super States either). But would you die for your city yet?

- Social Media is both a boon and risk. It has a power to gather people but also promotes "groupthink" and removes mindfulness, we are too responsive to everyone else so less originality.

But history shows that as well as creation, we still need some Locust pest control as well. And if no one steps up to play Roosevelt, history tells us some far less salubrious characters wait in the wings.

These graphs come from The Atlantic, and contradict a supposed Science/Technology/Engineering/Maths skills shortage we continuously hear about:





So what is happening? How can you have a skills shortage and a decling level of employment for skilled PhDs. Well, one argument is that they are over-educated and useless outside academe. In fact, one of the commentors to the piece notes that it doesn't look at the BSc and MSc data. But, before I am accused of having Mr Wolowitz Syndrome (as only a lowly holder of a Masters in Eng myself), I must note that it doesn't take a rocket scientist to work out that IF there was a major skills shortage, these graphs wouldn't look like this (the 2001 dotcom spike is a clue...) and all the BScs and MScs would be over-employed and companies would also be sucking in PhDs post haste.

Neither do I see a huge increase in STEM wages over the period of the supposed shortage of the last 2 decades or so, which, if there was a vast shortage, you would expect to see.

Thus, I think there is something else going on, which is that STEM graduates are not prepared to work for the sort of wages that those always wailing about a "shortage" in STEM skills want to pay. My hypothesis on this is based on three streams of data:

(i) some pro-bono work I did some years ago in the UK for one of the Engineering institutes, who bewailed the lack of people (i) going into their branch of Engineering and (ii) if they graduated, staying in Engineering. My research showed that the salaries for Engineers in the UK were poor compared to what a bright kid could earn doing something else at University, and (ii) an Engineering graduate could instantly earn 2-3 x in Finance, Consulting or IT (I think IT is now where Engineering was a decade or so ago, fwiw). Their solution was to try and design an outreach programme to go into schools, rather than fight for better salaries for their Chartered Engineers. To the best of my knowledge, this situation hasn't changed substantially.

(ii) I know quite a few people who have done natural science degress, some with lots of hard maths and physics, but salaries in this area in the UK are lower than they can get teaching, never mind using their skills in IT, Finance etc.

(iii) I know a lot of engineers, from many OECD countries. Of those I know, those still in engineering 10 years after graduation are less than 25%. All the others are in - IT, consulting, banking, media....mainly because it pays a lot more.

You get what you pay for, and if you won't pay*.....

Now admittedly The Atlantic data is US based and my datapoints are from the UK, but (having lived in the US) I have heard similar tales of woe about STEM pay in traditional engineering and science R&D vs other opportunities.

* I have no hard proof, but I'd hypothesize a strong correlation between those wailing about a skills shortage and those using (cheaper) skilled labour from developing countries.

One has to pity Marissa Mayer, as soon as she climbed into the Yahoo hot seat the stock price rocketed (see above). That is the sign of naive investors thinking one person can turn around a megatanker in a few weeks. Now of course, 6 months later, without the anticipated miracle, there are rumblings of discontent - CNN:

Analysts want to see a return to strong growth, not just stabilization. BCG Financial analyst Colin Gillis put his thoughts in a haiku: "Time for the next stage, of the turnaround story: drive revenue growth," he wrote in a note to clients Tuesday.

Gillis called Yahoo's display performance "anemic," and he's not happy with revenue from Yahoo's search partnership with Microsoft's Bing. Mayer herself called Yahoo's search results "disappointing" last quarter, and analysts will look to her after Monday's earnings report for more clarity on what she plans to change.

J.P. Morgan analyst Doug Anmuth offered tepid optimism about Mayer's reign, saying in a note Friday that he was "encouraged" by her focus on user experience, search, mobile, and more. Like Gillis, he wants more information on changes to search and display, plus investment and recruitment efforts.

The message from the Analysts, as CNN notes, is that Mayer's honeymoon period may be ending. One assumes the short sellers are lining up now, just to add to Mayer's woes....

Our message to the Analysts and Yahoo Investors is that expecting a dramatic turnaround of a basket case company in 6 months is nuts extremely unrealistic. Prepare to be eaten by your shorts....

There is no problem - Economist


Well, I don't know - you co-write a manifesto (Big Potatoes Innovation Manifesto) in 2009 railing about the main issue with modern Innovation, i.e that its been watered down to safe, easily funded, short term ROI "Continuous Improvement" (see some previous blog posts on this), and that R&D spending is draining down the plughole even faster than bankers' bonusses are rising (a true measure of where Western society places its value, and why it's going bankrupt) - and people tell you that you are being too alarmist, contrarian, just seeking controversy. This was not a popular message at the time.

Then this week, at the beginning of 2013, 3 articles appear in the same week - the Economist, Wired on Larry Page of Google, and the BBC all covering the dilution of innovation.

The Economist one is really a reflection of the "corporate comfort zone" resistance we have found, as it bye-lines "The idea that innovation and new technology have stopped driving growth is getting increasing attention. But it is not well founded". Their argument, beautifully written as always, is that Innovation is there - it is just that we can't see it, that Innovation takes longer than you think anyway, and - an Economist drum they always bang - is that there is Too Much Regulation, which is slowing diffusion down. That these 3 arguments are contradictory is avoided by much circumlocution of the issue that even their own data shows - something has slowed down drastically (see chart, above). They also take the oppotunity to pooh-pooh Paul Romer's 80's research, that ease of access to cheap global labour meant that OECD countries took the foot of the Innovation pedal (despite the visible evidence of reducing R&D spend over these same decades) - but then The Economist Luffs Globalisation, so no surprises there either. It really is one of the more disingenuous attempts to explain away vast swathes of data all pointing in the opposite direction.

Maybe the best way of illustrating the poverty of modern "Innovation" in the consensus the Economist defends is to look at the interview Larry Page had with Steven Levy in Wired (linked above), and this summary paragraph:

Larry Page lives by the gospel of 10x. Most companies would be happy to improve a product by 10 percent. Not the CEO and cofounder of Google. The way Page sees it, a 10 percent improvement means that you’re basically doing the same thing as everybody else. You probably won’t fail spectacularly, but you are guaranteed not to succeed wildly.

That’s why Page expects his employees to create products and services that are 10 times better than the competition. That means he isn’t satisfied with discovering a couple of hidden efficiencies or tweaking code to achieve modest gains. Thousand-percent improvement requires rethinking problems entirely, exploring the edges of what’s technically possible, and having a lot more fun in the process.

Now its a puff piece, sure - but it makes clear what the Google ambition for "Innovation" is. It also possibly goes a way to explaining why Google is where it is today, and many of those The Economist would defend...aren't.

The last piece was a BBC piece looking at the career of Mario Capecchi, who studied genetics at Harvard but concluded it had become a bastion of 'short-term intellectual gratification' (In my view one of the main causes of the popularity of "Innovation as Continuous Improvement" - it is easy to predict progress, so everyone looks liek a winner, it's easy to understand what they are doing as as it isn't "novel", and it rocks no existing boats). So he went to the University of Utah and set up the Eccles Institute of Human Genetics. His work there on the 'knockout mouse' is the foundation stone for mucch of gene therapy and won a Nobel Prize.

What the BBC article points out is that the problem with this 'short-term intellectual gratification' model of Innovation is that despite an illusion of progress every year, there is an inevitable "decrease in returns", as continuously improving the existing thing will always eventually reach a point of no further benefit. People like Capecchi however "look like they are failing" - until of course they succeed and hit the new idea. As the BBC points out, some researchers never do hit the new things all their lives, and the piece shows that overall, in a new study of medical research, the places that do follow the harder path and go after radical Innovation, despite not being able to show a year on year progress, are the ones that hit the home runs - and measured over a longer timeframe of several decades, that is what makes all the difference. They are the more effective approach.

Update - this piece has been picked up on Y Combinator and elsewhere asking the question "Is an obsession with Lean and Agile killing true innovation?"

I can see why it arose, as "Lean" is used these days to describe a bunch of techniques, Continuous Improvement among them, to reduce all wastage in an existing process. I think there is the potential for the "Lets Not Innovate" issue to emerge with "Lean" thinking - initially is an easy win, progress is predictable, everyone looks good, it is improving what is already being so there are fewer political battles to fight, investment is returned in short timescales. Accountants, funders and bosses love this therefore, so yes I think the obsession with Lean - or more accurately with the low hanging fruit it picks - is an enemy of Innovation if people forget to also invest in Innovation (finding the next fruit tree). Lean then falls over when the product/process has been "leaned out" (or more typically you get a hyperbolic curve, where the costs of going from 70% to 80% to 90% Lean rise massively, with 100% being near infinity). The risk (as can be seen in quite a few industries) is that if the enterprise spends all its time and braincells on going Lean with the current technology cycle, then it doesn't innovate for the next wave - poor ROI, dont you see - and gets sidewiped. Being the Leanest movie rental business store on the planet does not save you from Netflix, etc etc*.

Agile is slightly different, it is (re)designing existing processes so that they have resilience and flexibility - but in a Lean World though you can't use capacity redundancy in the design, so it has to be done with multi-skilling/multi tasking/multi purpose assets, culling all lead times, and breaking the product into very modular parts, so any set of operations/workers/etc can be rapidly shuffled to face a new situation. My experience of "Agile" - in both manufacturing and software - is that it is fine within bounds of capacity fluctiuation, but can't cope easily with rapid up-spikes. But I don't see Agile as an enemy of Innovation per se, in fact with ite emphasis on groupwork, multi-skilling, resource sharing and so on I think its probably an ally. But I would note that a disproportionately large amount of "change the world" innovation does not fit in any set process, and happens when there is space, time (and money) to dream of blue skies, and put pies in them.

*Arguably Blockbuster - or any major bricks n' mortar retailer - could have invented their industry NetFlix by applying some Lean analytical approaches (Value Engineering, say) to its supply chain - but this very seldom happens, as it requires a "leap" (aka Innovation and Risk) to go to online while the Lean methodology favours continuous, incremental improvement of what is (and the company gets hooked on short-term gratification). Which of course leaves the space open for startups....

Bricks and mortar retail is coming back into fashion - NYT:

After years of criticizing physical stores as relics, even e-commerce zealots are acknowledging there is something to a bricks-and-mortar location. EBay and Etsy are testing temporary stores, while Piperlime, the Gap Inc. unit that was online-only for six years, opened a SoHo store this fall. Bonobos plans to keep opening stores, and Warby Parker, the eyeglass brand, will soon open a physical location.

The companies say they are catering to customers who want to see what they are buying in person, and who see shopping as a social event. As they build the locations, though, the retailers are reimagining some long-established rules — carrying less inventory, having fewer staff members and embracing small and out-of-the-way locations. In the process, they are creating what could be a model for efficient in-store operations: the store as a showroom.

Why? Well, in the words of the proverbial bank robber, "it's where the money is"

“Well over 90 percent of sales still happen in physical stores, so there is a huge, compelling reason to think about the physical store as a driver of sales,” said Sucharita Mulpuru, an analyst at Forrester Research. She said Web retailers had advantages over traditional ones: they are not stuck with old cash registers and sales software, and the weak commercial real estate environment combined with their Web sales history allow them to get leases on good terms.

Or to put it another way, the dog days of the biggest recession since 1930 is a good time to score some cheap retail space, and come in with low cost retail techniques.

I'd also look at it strategically - it was always predictable that the online world would succeed with low cost, low uncertainty goods; i.e. where you don't need to experience it first, either because it is a commodity (or at least least getting product testimonials was fairly low hanging fruit, eg books, movies, white goods etc) and/or the risk of getting it wrong was low. But getting out of that bottom left box (see graphic above*) was always going to be much harder. Pre Internet, catalogue retailers used devices like self measurement, lots of photos, no hassle returns (satisfaction guaranteed, or your money back), "lifetime" guarantees (some to extraordinary lengths), and of course discount pricing. Online retailers are experimenting with all these, and new ways to reduce uncertainty (brand trust is playing a big part here), Amazon succeded largely by building an extremely well oiled end to end supply machine (as has iTunes in the digital world, by the way). But even so there comes a point at which you have to experience the product first, before buying, and as online retailing starts to saturate the low cost, low uncertainty (aka low risk) box, it needs hybrid strategies to do this. As yet there is no way of seeing if your bum looks big in those jeans, or that car is just "you" (and not a lemon), without trying it. At that point only trying it on or out yourself will make the sale. Also, there are still large areas of the retail market where only a relationship (high touch) will work.

And since the higher value demand mountain isn't coming to Mahommed fast enough.....here we are, the online players are gettin' on down(town). This is happening while some old Bricks and Mortar retailers are coming in the opposite direction, so it seems like a New Retail World is potentially emerging - New Argos, anyone?

Thing is, bricks and mortar have higher costs, and are easier to tax - so these hybrid retailers need to ensure that there is extra margin to cover them. Maybe temporary stores avoid this, still - one to watch....

(*That graphic, by the way, is about 20 years old, I first did something like it in the mid 90's)

All you need to know about why this happened, above (exalt to Pinboards via The Atlantic)


So Instagram sold to Facebook, and now Facebook is imposing their own unique concept of sharing on them (Whats yours is ours, irrevocably and forever) - NYT lists 5 impacts of the new changes to their TOS.

1. Instagram can share information about its users with Facebook, its parent company, as well as outside affiliates and advertisers.
2. You could star in an advertisement — without your knowledge.
3. Underage users are not exempt.
4. Ads may not be labeled as ads.
5. Want to opt out? Delete your account.

I'm surprised anyone was surprised, its what Facebook does - its even in the Facebook T&C fergawdssakes, here is point 2.1.

“You own all of the content and information you post on Facebook, and you can control how it is shared through your privacy and application settings. In addition:

1. For content that is covered by intellectual property rights, like photos and videos (“IP content”), you specifically give us the following permission, subject to your privacy and application settings: you grant us a non-exclusive, transferable, sub-licensable, royalty-free, worldwide license to use any IP content that you post on or in connection with Facebook (“IP License”). This IP License ends when you delete your IP content or your account unless your content has been shared with others, and they have not deleted it.”

etc

Mining your data is how Freeconomic businesses make money - selling YOU to them.

Anyway, what does surprise me is the size of the backlash. Interesting..does it imply the Mass market is starting to understand the downside of FreeConomics - there is no Free lunch, and if you can't see who is paying, then you are the lunch....

As I noted a few days ago with respect to Walled Garden Services' evolution overall over the years, they only stay walled until someone spooks the sheep (and they always do eventually, cash always trumps common sense)

in my experience these models work until they don't, and all the fooled sheep wake up, jump over the wall and go someplace else.

What is quite entertaining is that they are all jumping back to Flickr instead of a New New Service, which is a shot in the arm for Yahoo. Napoleon used to say "give me a lucky general over a good one"...seems to me Marissa Meyer has just go a very lucky break.

Update - I think Fred Destin writes a very good article about the risks of Social Network "bait and switch" over here: This comment is a real take-away:

I understand why Wall Street is maniacally focused on making sure facebook can monetize its ad inventory, but I am patiently waiting for the real bait-and-switch from these guys. Once facebook login is deeply embedded into every social service and the company effectively becomes the identity API for the world, who's really going to be surprised when they start monetizing the identity calls ?

Caveat (Free) Emptor......

Will automated author algorithms be the first Turing test cases? It just had to come.....Singularity Hub:

Philip M. Parker, Professor of Marketing at INSEAD Business School, has had a side project for over 10 years. He’s created a computer system that can write books about specific subjects in about 20 minutes. The patented algorithm has so far generated hundreds of thousands of books. In fact, Amazon lists over 100,000 books attributed to Parker, and over 700,000 works listed for his company.

Who needs monkeys and typewriters, that's inefficient and messy - algorithms are where its at:

..this isn’t just software alone but a computer system designated to write for a specific genre. The system’s database is filled with genre-relevant content and specific templates coded to reflect domain knowledge, that is, to be written according to an expert in that particular field/genre. To avoid copyright infringement, the system is designed to avoid plagiarism, but the patent aims to create original but not necessarily creative works. In other words, if any kind of content can be broken down into a formula, then the system could package related, but different content in that same formula repeatedly ad infinitum.

The success (and brilliance) of this system is that Parker designed the algorithms to mimic the thought process that an expert would necessarily go through in writing about a topic. It merely involves deconstructing content within a genre. He has some experience in this, as he has written at least three books the old fashioned way. It’s the recognition of how algorithmic content creation is (for the most part) that allows it to be coded as artificial intelligence.

And the economics?

A sampling of the list of books attributed to Parker is instructive:

- Webster’s Slovak – English Thesaurus Dictionary for $28.95
- The 2007-2012 World Outlook for Wood Toilet Seats for $795
- The World Market for Rubber Sheath Contraceptives (Condoms): A 2007 Global Trade Perspective for $325
- Ellis-van Creveld Syndrome – A Bibliography and Dictionary for Physicians, Patients, and Genome Researchers for $28.95
- Webster’s English to Haitian Creole Crossword Puzzles: Level 1 for $14.95

Considering that a single book costs somewhere between $0.20 to $0.50 to produce (the cost of electricity and hardware), the prices shown are considerably profit, even if very few of them are sold.

It gets better - some types of fiction are also very formulaic, like Romance. Boy meets Girl meets Algorithm:

Although a novel is a work of fiction, it’s no secret that certain genres lend themselves to formulas, such as romance novels. That may not make these works rank high for their literary value, but they certainly do well for their entertainment value. Somewhat suprisingly, romance fiction has the largest share of the consumer book market with revenue of nearly $1.37 billion in 2011.

But can artificial intelligence produce creative works on par with what a human can produce? Yes…eventually. Perhaps the better questions are how soon will it happen and how relevant will they be? The answers may be right on the horizon if Parker can churn out romance novels that are read by the masses. Frankly, any creative work produced by artificial intelligence will be “successful” if it reads like a human being wrote it, or more precisely, like a human intelligence is behind the work.

So, it may well be that the first real Turing Test will be passed when an algorithm authored book wins the Bad Sex award....after all, we know porn leads the way, and it trumps literature every time

Geometric Progression of patent trolling (Source: Scientific American)


We've been writing about how broken the Patent system - especially the US one - is for some time. Now patent trolls are now 61% of all US patent lawsuits - Reuters:

For the first time, individuals and companies that do not themselves make anything - commonly known as "patent trolls" - are bringing the majority of U.S. patent lawsuits, according to a study by a California law professor. The sharp increase in this type of lawsuit serves as a milestone likely to exacerbate the tension over patent issues and increase calls for patent reform and scrutiny of the system.

This year, about 61 percent of all patent lawsuits filed through Dec. 1 were brought by patent-assertion entities, or individuals and companies that work aggressively and opportunistically to assert patents as a business model rather than build their own technology, according to a paper by Colleen Chien, a law professor at Santa Clara University. That compares with 45 percent in 2011 and 23 percent five years ago....

......

About 35 percent of startups that have raised $50 million to $100 million have been sued on a patent, Chien said, as have 20 percent of the companies that have raised $20 million to $50 million.

The other side of the coin is that many of these companies do try and ride over real patent owners:

....many patent litigants who do not make products or develop technology think of themselves in a better light. Many of them represent inventors, sometimes university researchers, who often cannot afford to defend patents on their own.

Even so,the cost of filing a patent is many orders of magnitude lower than the cost and risk of setting up a technology business. The cost of setting up and running a Patent Troll business is negligible compared to that of actually starting a productive business, which is why its such a growth industry. The problem is the the risk and rewards are massively skewed here.

Of course, as we have argued for some years, many tech patents shouldn't actually exist (just type "patent" in this site's search function...) as they are not much more than a paper napkin idea turned into a patent, or are so everyday that prior art is everywhere - yet the US system lets them through. - a view which Technology heavyweights are now putting some muscle behind (interesting development).

Be interesting to see how long it takes to break this, as any ecosystem where nearly 2/3 of all patent challenges are by non-players is unsustainable, and killing the golden goose is seldom a good survival strategy - especially if a lot more than the trolls aneed the goose to live. Probably needs some form of law around risk sharing - ie original patent owner gets xxx% of revenues after $yy sales, so it can be factored in to any business plan.