Advertisements

My Ten Favorite Tweets – Week Ending 051509

From the home office in Pleasanton, CA…

#1: Fast paced start-up seeks Project Manager – Spigit job opening (posted to Craigs List) http://ff.im/2WcXy

#2: Spigit customer Pfizer is in today’s 24 Hours of Innovation (http://bit.ly/rkQiO). Preview their upcoming video: http://bit.ly/Rg6u0 #24hoi

#3: Why Do So Many Big Companies Suck at Innovation? asks @BobWarfield http://bit.ly/1qkRW

#4: Reading: 56 Reasons Why Most Corporate Innovation Initiatives Fail http://bit.ly/3lw6Ju

#5: Annals of Innovation: How David Beats Goliath http://bit.ly/1aikhU by Malcolm @Gladwell, The New Yorker (via @dpritchett)

#6: Webinars are a lot of work. Much creating and researching. Then practice and deliver it. After you do it, lots of work putting it out there.

#7: Digging the new NYT real-time feed. As soon as a story or opinion piece is published, it hits the timeline: http://bit.ly/19cj3P

#8: Smart post: Are you building an everyday app? (the LinkedIn problem) http://bit.ly/sa1IV via @louisgray

#9: Fun with Wolfram Alpha. Type in pi. One of the options lets you look at more digits, then more digits, then more digits…

#10: Playing Candyland with the kids on this Mothers Day. Key is to draw that Ice Cream Cone pink card. Sure path to victory.

Advertisements

When Being Rational Kills Your Business – Clayton Christensen

Clayton ChristensenLast week, I attended the World Innovation Forum on behalf of my company, Spigit. One of the speakers was Clayton Christensen, Harvard professor most famous for his book The Innovator’s Dilemma. His talk was one I really looked forward to, and he didn’t disappoint.

The theme of his talk was Disruptive Innovation as a Platform for Growth. A good all-purpose title, but one that really didn’t do justice to the range of topics. Clayton delivered a lot of good knowledge and analysis. I tweeted most of his talk, and I wanted to pull it together in a blog post here. So let’s get to it.

Big Steel vs. Mini Mills

He opened with a discussion that one can find in The Innovator’s Dilemma. It’s the tale of how big traditional integrated steel mills lost market share to upstart mini mills over the course of several decades. To the point where the integrated steel mills have for the most part been shuttered.

Key to the story is this: The steel market could be segmented into different segments, from low-grade to high-grade steel. And profit margins improved as you sold into the higher grade markets. The big integrated mills produced all grades of steel, which meant the profit margins for the different segments averaged out.

Cue the disruptive technology, mini mills in this case. The mini mills initially were too small to utilize the then-current technology to produce high grade steel. But they could produce low-grade quite well, and at a much lower cost. This meant they could easily underprice the big integrated steel mills, and they gained market share in the lower end of the steel market.

Ultimately ceding the low-end seemed OK to the big mills. It meant dropping the lowest profit business, which made margins look better, as the graphic below demonstrates:

Improve Margins by Exiting Low-Margin Businesses

In the short term, this strategy was quite beneficial to the integrated mills. The next part of the story is where the disruption really kicks in. The low grade mini mills’ technology got better, so that they could produce increasingly higher grade steel at lower costs. This forced the big integrated mills to retreat to ever higher margin segments, until there was no place left to hide.

Disruptive technology. Steel in this case, but it happens everywhere.

Why Do Companies Allow this to Happen? They’re Being Rational

This is a wide open question, and it’s one that cannot be answered completely here. But Christensen provided some valuable points.

In pursuing the higher margin business and jettisoning the lower segments, companies are being eminently rational. Fighting it out over low-margin business is generally not considered a good application of corporate capital. Why? Here’s my personal take on Christensen’s disruption model:

  • Existing customers are not clamoring for your low-margin business
  • Current manufacturing and installed base do not support lower cost production or delivery
  • Return on capital for protecting the low-margin business is poor
  • Low-margin business is not strategic to customers, and does not fit long term company goals

Indeed, all of the above are rational and generally the right approach to the problem. Spending large dollars pursuing low-margin commodity businesses is something most of us would view as folly. Christensen, in describing the big integrated steel mills’ management, noted that he never uses the word “stupid”. They’re actually being rational.

In being rational, companies encounter a significant problem when it comes to innovation:

A business model hijacks an idea and forces it to change to conform.

The existing business model rides on a set of processes and principles. Anything new must work with that “innovation infrastructure” to get anywhere internally. But often, this requires changing an idea so fundamentally that it no longer works like it’s originator thought it would. Innovation takes a hit.

Who’s Next for Disruption? Oracle and Toyota

Christensen mentioned some specific companies at risk for disruption.

Oracle, the ever growing enterprise software behemoth, is at risk for disruption from Salesforce.com. I get that. Salesforce clearly has lower cost applications that can target Oracle. In databases, Oracle seems to have prevented disruption by MySQL by acquiring it.

Toyota was a surprise pick for disruption…by the likes of Kia and Hyundai. As Christensen explained it, Toyota has been putting resources into higher margin luxury cars and pick-up trucks. Meaning they’re vulnerable at the lower end.

That’s one thing with these disruptive technologies. It’s really hard to believe it before it happens.

Key Strategies for Addressing Market Insurgents

Christensen offered three pieces of advice to companies in dealing with market disruption:

  1. Create separate units to deal with insurgents
  2. Frame the problem correctly
  3. Understand the job your product was hired to do

Separate business units. This advice is in his book, but it still makes sense. Essentially, the best way to handle disruptive technologies is to tackle them in a separate division outside the main corporate focus. Keys to this division:

  • Separate sales force
  • Leverage new technologies for cost-advantage, performance benefits
  • Be willing to cannibalize existing sales

Most companies do not do this. In the computer industry, Christensen cited IBM as the only company to successfully navigate disruptive technologies: Mainframe -> Mini computers -> PCs. Of course, they’ve jettisoned the PC business. I wonder if the next wave will be the mobile platforms emerging, like the iPhone.

Frame the problem correctly. Christensen believes the root cause for the inability to innovate is not framing the problem correctly. Companies do not understand what is happening with their customers as they use new technologies:

Expensive failure always results when disruption is framed as technological rather than business model terms.

There’s a tendency to view market competition through a technology lens, not a business one. A company will see a new technology, and note its obvious inferiority to what current leaders offer. It then becomes easy to dismiss it.

That’s the mistake.

Companies should think in terms of the business context for changes in their industry.Best way to do this?

Customers hire your product for a job. This was an intriguing way to put things. Christensen advises thinking in terms of “the job your product has been hired to do”. I heard this, and my initial instinct was…huh? But it really is a powerful way to understand how your customers use your products and services.

The crux of his point is that segmenting the market on demographics – e.g. urban hipsters, suburban soccer moms, etc. – is a way of performing marketing. But it’s not useful as context for product roadmaps or assessing new competition for your customers’ wallets.

Christensen referenced a Peter Drucker quote to bring this home:

The customer rarely buys what the company thinks it is selling him.

There’s an enormous amount to be learned when you consider your company’s product in the hands of a customer. In understanding the uses of the product, the  job of the product, you increase the likelihood of framing diruptioon in business terms, not technology. One example he gave is Ikea. Ikea’s not a low-priced furniture store. It’s integrated to get a job done – to get your place furnished fast.

The Disruptive Potential of Green Tech

Green technology has emerged as an important driver of our future economy. There’s a lot of investment in the sector. Here’s where Christensen put forth an interesting observation.

He traveled to Mongolia to see his kid who was on a mission there. While walking through a market, he came across some cheap solar-powered TVs. They were miniature, and the solar panels were low-cost materials. The quality wasn’t great, but they functioned well enough for that part of the world.

He compared these little cheap solar devices to the larger green initiatives underway today. And in his view, disruption of the traditional power industry is more likely to come from things like cheap solar TVs than from big heavy investments.

Those TVs are closer to the job people are hiring for.

Electric cars are often in the news today. The biggest challenge for them is that currently technology requires a heavy battery onboard. This causes them to be slow, and they don’t go very far on a charge. So who might be interested in “hiring” heavy, slow cars that can’t go too far? Parents of teenagers.

The Power of Employee Ideas

I’ll close out this post with this note. Christensen was engaged by Intel to talk to its employees about disruptive innovation, and framing the problem correctly. Led by then-CEO Andy Grove, the company held a series of employee meetings to discuss new ideas for their markets.

Last year, ideas coming from those employee ideas amounted to $18 billion for Intel. Not bad, not bad at all.

My Ten Favorite Tweets – Week Ending 050809

From the home office in the Nokia Theater, Times Square…

#1: Twitter is working on a reputation ranking for users, to be part of how search results are returned: http://bit.ly/hu3yX

#2: Seeing a number of enterprise 2.0 vendors moving hard into the idea/innovation management realm. Good place to be.

#3: CapGemini – companies that batten down the hatches & stop innovation during the recession will find themselves behind on the upswing #wif09

#4: Christensen – Intel did $18 billion in revenue from ideas generated by employees in breakout groups organized by Andy Grove #wif09

#5: Christensen – Strategy problem for companies. A business model hijacks an idea and forces it to change to conform. #wif09

#6: Christensen – Expensive failure always results when disruption is framed as technological rather than business model terms. #wif09

#7: Saffo – a Stanford colleague says that by 2030, half of all miles driven will be by robots. #wif09

#8: Saffo – you can always tell when a new tech is hot. Single males in that field can actually get a date. #wif09

#9: Nice article in the @latimes about the iconic California fast food chain – In-N-Out: Can perfection survive? http://bit.ly/sZUfb

#10: iPhone effect: my 5 y.o. son was pressing his finger on my laptop screen to navigate on a web page.

——-

You can find me on Twitter at http://twitter.com/bhc3

Google, Yahoo, Microsoft Want to Legalize For-Money Prediction Markets

$500 on the U.S. economy turning positive in the first quarter of 2010!

Wouldn’t it be great if you could put money down on your predictions of future events? If Google, Yahoo and Microsoft get their way, you just might be able to do that.

Money $20sBack in September 2008, Google and Yahoo, united under an organization called Coalition for Internal Markets (CIM), wrote a 28-page letter articulating their support for the legalization of small stakes prediction markets. On April 9, 2009, Microsoft added its support to Google and Yahoo’s letter. Here’s an excerpt from the CIM letter:

CIM believes that small-stakes event markets of the kind first developed by the Iowa Electronic Markets have the potential to provide significant public benefits and recommends that the Commodity Futures Trading Commission propose regulations under which such markets may operate, both as internal markets or as public markets.

I learned of all this through Oddhead, Midas Oracle and Bo Cowgill’s blogs. This has the potential to be quite powerful as a forecasting tool, and a way for people to profit from their prediction acumen.

Just how did this come about?

Commodity Futures Trading Commission Wants Input

The Commodity Futures Trading Commission (CFTC) is the government body that regulates the sale of commodity and financial futures and options.

In May last year, the CFTC put out a public notice that it was soliciting comments on the regulatory treatment of financial agreements offered by prediction markets. So apparently the idea of legalization is on the Commission’s mind. The CFTC distinguishes prediction markets as not including financial agreements on market prices (stocks, cotton, etc.) or broad-based measures of economic or commercial activity. Rather, they define them as:

Event contracts may be based on eventualities and measures as varied as the world’s population in the year2050, the results of political elections, or the outcome of particular entertainment events.

“Entertainment events.” Think American Idol, and putting your money down on who you predict will win. That Adam Lambert?

The CFTC notes that its staff has received “a substantial number of requests for guidance” on the propriety of prediction markets’ use. Sounds like a pretty healthy interest in this sort of thing.

Getting Ahead of the Regulatory Curve

In the CIM letter, Google’s Hal Varian and Yahoo’s Preston McAfee develop three themes:

  • CFTC has the right to regulate these markets
  • Prediction markets provide substantial benefits
  • Propose a set of sensible rules for regulation

Google states that it started operating internal prediction markets in April 2005, and that now it runs 25-30 prediction markets per quarter. The purposes of the markets include forecasts of product demand, internal performance (e.g. product release dates), company news and external business environment factors. Google also uses the prediction markets to assess the strength of relationships between different teams.

Yahoo operates internal prediction markets. It also operates public events, such as the Yahoo!-O’Reilly Tech Buzz Game, in which participants predict which technologies will be popular, and which ones lack merit.

The two primary benefits discussed in the letter for predictions markets are: (i) Generation of useful information by aggregating the opinions of individual participants; and (ii) Hedging exposure by making predictions related to some position an individual holds.

The two companies then smartly propose some rules that would govern the small stakes prediction markets:

  • Total exposure per market of $2,000
  • Maximum loss at $2,000 over the course of a year
  • Non-intermediated, electronic markets
  • Trading could be matching bids and offers, or there could be an automated market maker
  • Program to monitor trading
  • Maintain trading histories for five years

Generally, the letter asks for a fairly flexible approach to the markets, with adherence to core operating principles to ensure fair, open trading.

An Inevitable Question: Gambling?

Perhaps as you’ve read this, the thought occurred to you…isn’t the same thing I can do in Las Vegas? Bet on sports teams? What distinguishes this from gambling? Indeed, in its solicitation for comments, the CFTC asks this:

What objective and readily identifiable factors, statutorily based or otherwise, could be used to distinguish event contracts that could appropriately be traded under Commission oversight from transactions that may be viewed as the functional equivalent of gambling?

The CIM letter notes that gambling is generally associated with sports events and games of chance. It recommends the CFTC develop a definition of permitted markets based on a set of examples, and expand the list on a case-by-case basis.

This question will likely receive the most attention from the public. What will be interesting is how Obama’s administration views this versus Bush’s.

Count Me In

Add my YES vote to this. I think it’d be great to buy and sell positions based on predicted event outcomes. The example I led this post off with, the economic rebound, is a great way to tap public sentiment about the economy. We’ll have to watch how this unfolds.

How about you? Do you favor small stakes prediction markets?

I’m Heading to the World Innovation Forum

world-innovation-forum-logo

I’m heading out to the World Innovation Forum in New York on Monday, May 4. I’m really looking forward to this conference. It has a lot of wattage and great attendees.

Spigit will be there to take in the discussions and meet folks.If you’re going to be there, shoot me a DM or @reply on Twitter. I’d love to catch up. On Twitter, the hash tag for the event is #wif09.

Here’s the speaker list for the World Innovation Forum:

  • Clayton Christensen – Disruptive Innovation as a Platform for Growth
  • Vijay Govindarajan – Strategic Innovators: From Ideas to Execution
  • Fred Krupp – Untangling the Future: Why Innovations Never Follow a Straight Line (eco focus)
  • Dan Ariely – Changing Focus: Why Human Behavior is the Hunting Ground for Insight & Innovation
  • CK Prahalad – The New Age of Innovation
  • Paul Saffo – How Today’s Technology is Defining Tomorrow’s Creator Economy
  • Padmasree Warrior – Cisco CTO

There will case studies discussed as well. Media partners are the Wall Street Journal and Business Week. Dozens of large corporations will be there too.

There will be a number of specially designated people blogging and tweeting about the vent. Some details about this were put together by EMC’s Stuart Miniman in this presentation:

My Ten Favorite Tweets – Week Ending 050109

From the home office in La Gloria, Mexico…

#1: Not sure if it’s good or bad that I just learned that David Souter is retiring from the Supreme Court via Twitter Trending Topics.

#2: Had to do it, subscribed to @whitehouse

#3: The #TCOT grass roots conservative movement on Twitter is riven by feuding at the top: http://bit.ly/nwr1m

#4: Interested in corporate innovation? Join Forrester’s @oliveryoung & me for a webinar to learn practical ways to improve  http://bit.ly/cGI4W

#5: Reading: How to Get the Most From Your Best Ideas http://bit.ly/kuWci by @Accenture

#6: Looking at BW’s 50 most innovative companies http://bit.ly/18nBe7 How much of what #1 Apple & #2 Google do really applies to most companies?

#7: Reading – Enterprise 2.0 marketing score card: solid ‘C’ http://bit.ly/T1yJi by @sameerpatel Great Google Trends charts

#8: Joined foursquare, which asks you to add/rate stuff for cities. Hard to be hip as a parent, here’s my playground entry http://bit.ly/MBsE4

#9: Really interesting study and hypothesis about how our brains forget/rewrite memories just by recalling them http://bit.ly/1941k8

#10: Today is apparently a big day 4 college acceptance letters. Here’s a post that describes harshest/nicest reject letters http://bit.ly/1anN7p