Strategy in the media

Citation

Henry, C. (2009), "Strategy in the media", Strategy & Leadership, Vol. 37 No. 2. https://doi.org/10.1108/sl.2009.26137bab.001

Strategy in the media

Article Type: CEO advisory From: Strategy & Leadership, Volume 37, Issue 2

Strategy for troubled times

There is nothing like a crisis to clarify the mind. In suddenly volatile and different times, you must have a strategy. I don’t mean most of the things people call strategy – mission statements, audacious goals, three- to five-year budget plans. I mean a real strategy …

By strategy, I mean a cohesive response to a challenge. A real strategy is neither a document nor a forecast but rather an overall approach based on a diagnosis of a challenge. The most important element of a strategy is a coherent viewpoint about the forces at work, not a plan …

Hard times survival guide

• •

  If you can’t survive hard times, sell out early. Once you are in financial distress, you will have no bargaining power at all.

• •

  In hard times, save the core at the expense of the periphery. When times improve, recapture the periphery if it is still worthwhile.

• •

  Any stable source of good profits – any competitive advantage – attracts overhead, clutter, and cross-subsidies in good times. You can survive this kind of waste in such times. In hard times you can’t and must cut it.

• •

  If hard times have a good side, it’s the pressure to cut expenses and find new efficiencies. Cuts and changes that raised interpersonal hackles in good times can be made in hard ones.

• •

  Use hard times to concentrate on and strengthen your competitive advantage. If you are confused about this concept, hard times will clarify it. Competitive advantage has two branches, both growing from the same root. You have a competitive advantage when you can take business away from another company at a profit and when your cash costs of doing business are low enough that you can survive in hard times.

• •

  Take advantage of hard times to buy the assets of distressed competitors at bargain-basement prices. The best assets are competitive advantages unwisely encumbered with debt and clutter.

• •

  In hard times, many suppliers are willing to renegotiate terms. Don’t be shy.

• •

  In hard times, your buyers will want better terms. They might settle for rapid, reliable payments.

• •

  Focus on the employees and communities you will keep through the hard times. Good relations with people you have retained and helped will be repaid many times over when the good times return.

Richard P. Rumelt, “Strategy in a ‘structural break’”, McKinsey Quarterly, December 2008.

Business model innovation

In 2003, Apple introduced the iPod with the iTunes store, revolutionizing portable entertainment, creating a new market, and transforming the company. In just three years, the iPod/iTunes combination became nearly a $10 billion product, accounting for almost 50% of Apple’s revenue. Apple’s market capitalization catapulted from around $1 billion in early 2003 to over $150 billion by late 2007.

This success story is well known; what’s less well known is that Apple was not the first to bring digital music to market. A company called Diamond Multimedia introduced the Rio in 1998. Another firm, Best Data, introduced the Cabo 64 in 2000. Both products worked well and were portable and stylish. So why did the iPod, rather than the Rio or Cabo, succeed?

Apple did something far smarter than take a good technology and wrap it in a snazzy design. It took a good technology and wrapped it in a great business model. Apple’s true innovation was to make downloading digital music easy and convenient. To do that, the company built a groundbreaking business model that combined hardware, software, and service. This approach worked like Gillette’s famous blades-and-razor model in reverse: Apple essentially gave away the “blades” (low margin iTunes music) to lock in purchase of the “razor” (the high-margin iPod). That model defined value in a new way and provided game-changing convenience to the consumer.

Business model innovations have reshaped entire industries and redistributed billions of dollars of value. Retail discounters such as Wal-mart and Target, which entered the market with pioneering business models, now account for 75% of the total valuation of the retail sector. Low-cost airlines grew from a blip on the radar screen to 55% of the market of all carriers. Fully 11 of the 27 companies born in the last quarter of the century that grew their way into the Fortune 500 in the past 10 years did so through business model innovation.

Mark W. Johnson, Clayton Christensen, and Henning Kagermann, “Reinventing your business model”, Harvard Business Review, December 2008.

Can nearly everything be offshored?

“The newspaper business is not only crumpling up”, James Macpherson informed me here, it is probably holding “a one-way ticket to Bangalore.”

Macpherson – bow-tied and white-haired but boyish-looking at 53 – should know. He pioneered “glocal” news – outsourcing Pasadena coverage to India at Pasadena Now, his daily online “newspaperless,” as he likes to call it. Indians are writing about everything from the Pasadena Christmas tree-lighting ceremony to kitchen remodeling to city debates about eliminating plastic shopping bags.

“Everyone has to get ready for what’s inevitable – like King Canute and the tide coming in – and that’s really my message to the industry,” the editor and publisher said. “Many newspapers are dead men walking. They’re going to be replaced by smaller, nimbler, multiple Internet-centric kinds of things such as what I’m pioneering … ”

“In brutal terms,” said Macpherson, whose father was a typesetter, printer and photographer, “it’s going to get to the point where saving the industry may require some people losing their jobs. The newspaper industry is coming to a General Motors moment – except there’s no one to bail them out.”

He said it would be “irresponsible” for newspapers not to explore offshoring options. He said he got the idea to outsource about a year ago, sitting in his Pasadena home, where he puts out Pasadena Now with his wife, Candice Merrill. Macpherson had worked in the ’90s for designers like Richard Tyler and Alan Flusser, and had outsourced some of his clothing manufacturing to Vietnam.

So, he thought, “Where can I get people who can write the word for less?” In a move that sounded so preposterous it became a Stephen Colbert skit, he put an ad on Craigslist for Indian reporters and got a flood of responses.

He fired his seven Pasadena staffers – including five reporters – who were making $600 to $800 a week, and now he and his wife direct six employees all over India on how to write news and features, using telephones, e-mail, press releases, Web harvesting and live video streaming from a cellphone at City Hall. “I pay per piece, just the way it was in the garment business,” he says. “A thousand words pays $7.50.”

Maureen Dowd, “A penny for my thoughts?” The New York Times, 30 November, 2008.

How ownership gridlock destroys wealth

Not long ago, mortgage bankers sized up borrowers before making loans; lenders were a phone call away if home owners had trouble repaying. Not anymore. Investment banks engineered new mortgage instruments that gave larger loans on riskier terms to people with weaker credit. Banks pooled these new mortgages together, then split the pools into bonds with varying risk levels. The details were complex, but the results were magical: financial engineering seemed to transform dodgy mortgages into safe bonds. So long as interest rates stayed low and house values high, everyone made money.

But not for long. Fragmenting mortgage ownership broke the link between borrower and lender. When rates rose and prices dropped, the gridlock features of the new financial instruments came to the fore. There were so many partial owners of pooled mortgages that no one cared to act like an old-fashioned mortgage banker with careful underwriting and loan servicing. Until recently, foreclosure had been the banker’s last resort because it’s costly for everyone, including the lender. But in the new world of too many owners, widespread foreclosures became inevitable. Scattered owners of pooled mortgages could not easily reach agreement to restructure troubled loans. Today, there’s no one for a borrower to talk to at the other end of the phone.

There’s a regulatory gridlock story here as well. Mortgage regulation is still based on the old one-mortgage, one-banker model. (It’s the real estate analogue to the one-product, one-patent model that makes high-tech innovation so difficult.) New financial instruments fall between multiple federal and state regulators. No single agency can protect the integrity of the financial system as a whole, but each is powerful enough to block the others from stepping on its bureaucratic turf. Regulatory gridlock meant that no one checked as hundreds of billions in dangerous mortgage bonds were created and sold.

By the time you read this, the mortgage crisis may have been sorted out. My point is not to focus on yesterday’s story but to say that what is in the news often has a surprising gridlock angle. Too many owners mean too little prosperity … a tour of gridlock battle-grounds – from medieval robber barons to modern broadcast spectrum squatters; from Mississippi courts selling African-American family farms to troubling New York City land confiscations; and from Chesapeake Bay oyster pirates to today’s gene patent and music mash-up outlaws. Each tale offers insights into how to spot gridlock in operation and how to overcome it.

Michael Heller, The Gridlock Economy: How too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives (Basic Books 2008).

Did earlier reforms trigger the financial crisis?

The SEC began pushing for market value accounting in the early 1990s. The move was opposed strongly by Treasury Secretary Nicholas Brady, Federal Reserve Chairman Alan Greenspan, and Federal Deposit Insurance Corporation Chairman William Taylor.

Greenspan and Taylor pointed out that market value accounting on bank investment portfolios had been required by regulators until 1938. That year President Roosevelt asked the Secretary of the Treasury to convene the bank regulators to discuss how to get banks lending again to help the nation recover from the Great Depression. They concluded that market value accounting was impeding bank lending and abolished it in favor of historical-cost accounting.

Brady was prescient in his 1992 letter opposing market value accounting. He noted that market value accounting would introduce a great deal of volatility in bank earnings and make their financial statements more difficult to understand. Most importantly, he cautioned that temporary changes in market pricing could cause large hits to bank earnings and capital, which would diminish bank lending capacity and create severe credit crunches.

I considered market value accounting when I was Chairman of the Federal Deposit Insurance Corporation during the banking crisis of the 1980s. I thought it might force banks to keep the maturities of their assets and liabilities in better balance. The FDIC ultimately rejected the notion for three principal reasons.

First, market value accounting could be implemented on only a portion of the asset side of bank balance sheets (i.e. marketable securities) – it was daunting to even contemplate the liability side. A system that captures one change in value without picking up other changes can be very misleading. For example, an increase in interest rates would drive down the value of fixed-rate mortgages and bonds held by banks but might well increase the value of their floating rate loans. That same increase in rates would make most deposit accounts more profitable. The net affect on a bank’s business could be positive; yet, marking the government mortgages and bonds to market would destroy earnings and capital.

Second, we believed that market value accounting would impede banks in performing their fundamental function – taking short-term money from depositors and converting it into longer terms loans for businesses and consumers.

Third, we felt that market value accounting would be pro-cyclical and would make it very difficult for regulators to manage future banking crises. If we had followed market value accounting during the 1980s, we would have forced the nationalization of our largest banks, which were loaded up with third world debt for which the markets were not functioning. I believe the country would have gone from a serious recession into a depression.

William M. Isaac, “Market value accounting crippling economy”, The American Spectator Online, 11 December 2008, http://spectator.org/archives/2008/12/11/market-value-accounting-crippl

Will higher education be the next bubble to burst?

The idea of “bubble” has been on everyone’s mind since the escalating housing and economic crisis first erupted in July 2007. Throughout these turbulent times, one institution appeared to be coasting along above the fray: Higher Education. Higher ed has been growing for decades, becoming a staple in the national political economy. The supply and demand situation has been remarkably favorable to it: believing that higher education is a necessary, if not sufficient, ticket to personal success and social progress, the public has tolerated increasingly higher costs and tuition – forces that citizens have rebelled against in other consumer domains.

After all, didn’t ambitious citizens have to pay their dues to higher ed in order to have a meaningful chance at success? With seemingly no viable alternative or exit strategy, consumers have stretched their pocketbooks to the breaking point and taken out loans to purchase a chance at the American Dream. (Today over 35% of students rely on student loans, and the number is growing.) Not surprisingly, the last twenty years have seen tuition costs rise at over three times the rate of inflation. The overall costs for many private schools add up to $50,000 per year, while public universities cost up to $20,000 for state residents, and over $30,000 for those who hail from out of state. Meanwhile, wages for most Americans have been left in the dust …

In an article on Forbes.com a few months ago, a leading financial analyst observed, “We are at a trend line that cannot be sustained. Tuition must go down, or there will be limited demand for high-priced private schools.” The recent economic debacle enhances the credibility of this prediction. As we speak, high-priced Antioch College is closing its expensive (and excessively politically correct) doors after 157 years of existence. According to many sources, Antioch is the beginning of a national trend.

Donald Downs “The next bubble?” Minding the Campus, December 5, 2008, http://www.mindingthecampus.com/originals/ 2008/12/by_donald_downs_the_idea.html

Technology and decision-making

I ve argued for a while that organizations need to increase their focus on decision-making. In particular, they need to think again about the relationship between information and decision-making. I recently completed a study on this topic, with the sponsorship of IBM’s Information Management business unit, in which I looked at 26 efforts to improve decision-making in organizations. I concluded the following ten things about how business intelligence (BI) needs to evolve:

1. 1.

   Decisions are the unit of work to which BI initiatives should be applied.

2. 2.

   Providing access to data and tools isn’t enough if you want to ensure that decisions are actually improved.

3. 3.

   If you’re going to supply data to a decision-maker, it should be only what is needed to make the decision.

4. 4.

   The relationship between information and decisions is a choice organizations can make – from “loosely coupled,” which is what happens in traditional BI, to “automated,” in which the decision is made through automation.

5. 5.

   “Loosely coupled” decision and information relationships are efficient to provision with information (hence many decisions can be supported), but don’t often lead to better decisions.

6. 6.

   The most interesting relationship involves “structured human” decisions, in which human beings still make the final decision, but the specific information used to make the decision is made available to the decision-maker in some enhanced fashion.

7. 7.

   You can’t really determine the value of BI or data warehousing unless they’re linked to a particular initiative to improve decision-making. Otherwise, you’ll have no idea how the information and tools are being used.

8. 8.

   The more closely you want to link information and decisions, the more specific you have to get in focusing on a particular decision.

9. 9.

   Efforts to create “one version of the truth” are useful in creating better decisions, but you can spend a lot of time and money on that goal for uncertain return unless you are very focused on the decisions to be made as a result.

10. 10.

    Business intelligence results will increasingly be achieved by IT solutions that are specific to particular industries and decisions within them.

Tom Davenport, “10 principles of the new business intelligence”, The Next Big Thing, 1 December 2008, http://discussionleader.hbsp.com/davenport/2008/12/10_principles_of_the_new_busin.html

Can markets have too much information?

When people talk about the ongoing tumult in the stock market, they typically blame investors’ lack of information. There’s the uncertainty about the future state of the economy. There’s the confusion about what the government will do next with its ever-changing bailout program. And there’s the mystery of what the mortgage-backed securities clogging bank balance sheets are really worth. Yet, even with all these lurking unknowns, investors have far more information today than ever before. Your ordinary day trader, if any of those still exist, enjoys far greater access to economic and market data than men like J.P. Morgan did when they were running Wall Street. But this information isn’t necessarily making investors, or the market, any smarter. In fact, what may be driving the market crazy of late is that it knows too much.

The problem isn’t so much the never-ending stream of surveys, studies, and statistics – retail sales, housing prices, consumer confidence, unemployment claims, and so on. These numbers, though of varying accuracy and usefulness, at least offer a picture of what’s happening in the economy – which is, in the long run, the fundamental driver of stock prices. The real problem is that investors are also deluged with another data stream; namely, all the trading information from the world’s many markets, which gives them a constant, noisy, and often misleading impression of what other investors are thinking.

Investors have always paid attention to what other investors were doing, of course, but currently they’re assailed by a high-volume clang of market bellwethers twenty-four hours a day …

Markets work best when investors are thinking for themselves, and tend to go awry when the obsession with what everyone else is doing becomes a dominant concern. Maybe what investors really need is to periodically take a market-information vacation. On that count, the market’s recent performance may offer a small glimmer of hope: the other week, the foreign and futures markets signaled that a colossal US selloff was coming, but, when the stock market opened, investors were relatively restrained in their selling. These days, a broken mirror may bring good luck.

James Surowiecki “Everyone’s watching”, The New Yorker, 10 November, 2008.

The surprising influence of social networks

In a study published online today in the British Medical Journal, scientists from Harvard University and UC San Diego showed that happiness spreads readily through social networks of family members, friends and neighbors.

Knowing someone who is happy makes you 15.3% more likely to be happy yourself, the study found. A happy friend of a friend increases your odds of happiness by 9.8%, and even your neighbor’s sister’s friend can give you a 5.6% boost.

“Your emotional state depends not just on actions and choices that you make, but also on actions and choices of other people, many of which you don’t even know,” said Dr Nicholas A. Christakis, a physician and medical sociologist at Harvard who co-wrote the study …

The new study “has serious implications for our understanding of the determinants of health and for the design of policies and interventions,” wrote psychologist Andrew Steptoe of University College London and epidemiologist Ana Diez Roux of University of Michigan in an accompanying editorial … They discovered that happy people in close geographic proximity were most effective in spreading their good cheer. They also found the happiest people were at the center of large social networks.

“Happiness is contagious, research finds”, Los Angeles Times, 5 December 2008.

Detroit’s short-sighted marketing

In addition to its other mistakes, Detroit’s addiction to fleet sales, particularly of rental cars, was a killer. This strategy helped destroy the brand value of its sedans. Follow my logic:

Detroit was once an innovation hotbed in the world. During the first half of 20th century Detroit mattered to the US and global economies in the way that Silicon Valley matters now. This obviously is no longer the case. Does anyone wait breathlessly for the introduction of next year’s Big Three car models? We have stopped caring. Investors have stopped caring, too: GM’s market value of $2 billion is a blip in the scheme of things …

When evidence of its decline began pouring in, Detroit employed tricks to prop up its sales. Such as fleet sales.

Back in the 1980s and 1990s, buyers began to prefer the Honda Accord and Toyota Camry over the Ford Taurus. More a matter of pride than sound business thinking, Ford propped up the Taurus with massive discounts to fleet buyers. Ford simply would not let the Camry and Accord outsell the Taurus. Ford mistakenly thought people cared about sales rankings. But only Detroit insiders cared. Customers and investors didn’t give a fig whether the Taurus was No. 1.

In my opinion, Detroit’s fleet sales strategy was a marketing disaster. For many people who had switched their personal allegiance to German or Japanese brands in the 1980s and 1990s, renting an American car was the one chance to see what Detroit was up to. Stop and think about this. When was the last time you were impressed with a rental car? A rental car, usually an American nameplate, almost always a no-frills model, often reeking of cigarette smoke, makes the worst kind of branding statement.

Rick Karlgaard, “Detroit’s brand killer”, Forbes Digital Rules, http://blogs.forbes.com/digitalrules/2008/11/detroits-brand.html

Unintended consequences

Will the US and the world learn from the mistakes of the European Emissions Trading Scheme, or will we just repeat them?

Carbon credit cap-and-trade market systems have long been touted as the solution to efficiently reduce greenhouse gases. Yet four years after the EU unveiled its emissions trading scheme, the most polluting industries in the region have seen multibillions in windfall profits. Total reduction in emissions? Almost none.

Cap-and-trade worked well in the US for acid rain. The key problem with the European approach seems to be the decision to give out permits for free rather than auction them off. To simplify: Under an auction system, a coal-burning power plant would immediately have to buy the rights to emit each ton of CO2 equivalent; the money would go to the governments, like a tax. The market signal is swift and clear. Under the free-pass system, that same coal plant will get, well, a free pass to pollute the current amount. Reductions come only when companies decide to trade their permits.

Even worse news? Given the economic crisis, Europe agreed today to an even more weakened version of their plan, with even more free passes.

“Under the accord, industrial sectors such as cement, chemicals and steel will receive free carbon emission permits at least up to 2020, instead of having to buy them under an auction scheme, as envisaged in a Commission plan published last January.”

Will the Obama-led US have the cojones to learn from Europe’s bumbles to draft stronger future climate accords? Well, the US is not exactly known for its resistance to corporate influence in politics.

“Europe’s biggest polluters see windfall profits from carbon trading,” Fast Company Blog, 12 December 2008, http://www.fastcompany.com/blog/anya-kamenetz/green-day/carbon-tradings-bust-europe

Using metrics to define a competitive advantage

Although history celebrates James Watt as the mechanical genius whose steam engines launched the Industrial Revolution, Watt’s most enduring innovation reflects an even greater penchant for marketing. He invented horsepower – the metric and meme that effectively defined his industry. Most important, Watt’s neologism has outlived every engine he designed or built.

The term horsepower represented clever rhetorical engineering by Watt and partner Matthew Boulton, whose business had prospered by charging mine owners only one-third of the cost savings achieved by replacing less-efficient Newcomen steam engines with their own.

Seeking to broaden their market, the collaborators thought brewmasters might find value in this new production technology. But 18th-century British breweries used horses – not steam – to power the turning of their mills’ grindstones. So it behooved Boulton and Watt to recalculate their steam engines’ appeal accordingly. After a period of equine observation, Watt determined that the typical coal-mine pony could pull 22,000 foot-pounds per minute. To extrapolate this finding to a large horse, Watt increased these test results by 50 percent – i.e. 33,000 foot-pounds of work per minute – and called it horsepower.

Some historians believe that Watt overstated the amount of power that a horse can deliver over a sustained period of time. Nonetheless, his comparison of steam engine output to a team of horses working together proved to be a remarkably persuasive marketing metric for prospective purchasers, whether brewers, millers, or mine owners. Horsepower became a global standard that helped build the Boulton & Watt brand and business.

This notion of using innovative metrics – measures that gauge the unique value inherent in an innovation as a means of marketing it – goes well beyond the traditional approach of adding new “features” and “functionality” to attract consumers to products and services. By creating fresh language for the way people calibrate the worth and efficacy of a particular idea, innovative metrics have the potential to be so intrinsically compelling – or at least so creatively marketed – that they become, like horsepower, the overriding identity of a product or brand. Which means, in turn, that these metrics should be crafted with the same singular sensibility as the inventions themselves.

Michael Schrage “The metric behind the slogan,” Strategy+Business, Winter 2008.

Systemic risk and financial innovation

“Innovation can be a dangerous game,” said Andrew W. Lo, an economist and professor of finance at the Sloan School of Management of the Massachusetts Institute of Technology. “The technology got ahead of our ability to use it in responsible ways.”

That out-of-control innovation is reflected in the growth of securities intended to spread risk widely through the use of financial instruments called derivatives. Credit-default swaps, for example, were originally created to insure blue-chip bond investors against the risk of default. In recent years, these swap contracts have been used to insure all manner of instruments, including pools of subprime mortgage securities.

These swaps are contracts between two investors – typically banks, hedge funds and other institutions – and they are not traded on exchanges. The face value of the credit-default market has soared to an estimated $55 trillion.

Credit-default swaps, though intended to spread risk, have magnified the financial crisis because the market is unregulated, obscure and brimming with counterparty risk (that is, the risk that one embattled bank or firm will not be able to meet its payment obligations, and that trading with it will seize up).

The market for credit-default swaps has been at the center of the recent Wall Street banking failures and rescues, and these instruments embody the kinds of risks not easily captured in math formulas.

“Complexity, transparency, liquidity and leverage have all played a huge role in this crisis,” said Leslie Rahl, president of Capital Market Risk Advisors, a risk-management consulting firm. “And these are things that are not generally modeled as a quantifiable risk.”

Math, statistics and computer modeling, it seems, also fell short in calibrating the lending risk on individual mortgage loans. In recent years, the securitization of the mortgage market, with loans sold off and mixed into large pools of mortgage securities, has prompted lenders to move increasingly to automated underwriting systems, relying mainly on computerized credit-scoring models instead of human judgment.

Steve Lohr, “In modeling risk, the human factor was left out ” New York Times, 5 December 2008.

Supercomputing opens new frontiers for scientific research

A new crop of supercomputers is breaking down the petaflop speed barrier, pushing high-performance computing into a new realm that could change science more profoundly than at any time since Galileo, leading researchers say.

When the Top 500 list of the world’s fastest supercomputers was announced at the international supercomputing conference in Austin, Texas, on Monday, IBM had barely managed to cling to the top spot, fending off a challenge from Cray. But both competitors broke petaflop speeds, performing 1.105 and 1.059 quadrillion floating-point calculations per second, the first two computers to do so.

These computers … will enable a new class of science that wasn’t possible before. As recently described in Wired magazine, these massive number crunchers will push simulation to the forefront of science.

Scientists will be able to run new and vastly more accurate models of complex phenomena: Climate models will have dramatically higher resolution and accuracy, new materials for efficient energy transmission will be developed and simulations of scramjet engines will reach a new level of complexity.

“The scientific method has changed for the first time since Galileo invented the telescope (in 1609),” said computer scientist Mark Seager of Lawrence Livermore National Laboratory …

“The new capability allows you to do fundamentally new physics and tackle new problems,” said Thomas Zacharia, who heads up computer science at Oak Ridge National Laboratory in Tennessee, home of the second place Cray XT5 Jaguar supercomputer. “And it will accelerate the transition from basic research to applied technology.”

Betsy Mason, “Supercomputers break petaflop barrier, transforming science”, Wired, 18 November 2008.

Craig HenryStrategy & Leadership’s intrepid media explorer, collected these sightings of strategic management in the news. A marketing and strategy consultant based in Carlisle, Pennsylvania, he welcomes your contributions and suggestions (Craighenry@aol.com)