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At $10 Billion, Discord is a Cheap Buy for Microsoft

Microsoft is betting on a new shift in the consumer internet

Trends are often obvious. But it’s rare for a company to put money where it’s needed, consistently, over the years. That’s what Microsoft is doing these days. It’s buying Discord for $10 billion. If you are like me, Discord sounds like just another unrecognizable messaging platform, but all the young people are on it. 

That’s right. The craze for social media apps is endless. Even Instagram and TikTok look old. Adults are hanging out at Clubhouse. Kids are messaging on Discord. And of course, everyone is playing Roblox.

How Covid has driven online activities

The Covid lockdown has spurred more than just growth in garden-variety apps and games. The basic nature of the internet is changing too. Microsoft has taken notice and aligned itself with that change.

From Customer-Obsessed to Supplier-Centric

Here’s the thing. So far, the internet has been serving mostly advertisers and end-consumers. It’s great to buy stuff from Amazon. The company does everything imaginable to lower prices while increasing selection and enhancing the buying experience for its paying customers. Amazon has done so in online shopping, cloud computing (AWS), book publishing (Kindle), music and movie streaming (Prime), and now, healthcare (Care).

But it’s not so great when you are trying to sell things through Amazon. 

Amazon’s Marketplace hosts millions of small-business sellers. These are third-party merchants who rely on Amazon to fulfill their orders. They still need to do most of the work: market research, making and sourcing products, and taking individual financial risks. 

But Amazon competes against these merchants. It looks at sales information and then launch its own private labels to sell popular products. Amazon’s versions are, of course, cheaper.

That’s how Shopify has become a rising star. Shopify provides merchants with cloud-based payment and fulfillment services. It gives merchants complete control over branding and marketing. Merchants own the shoppers’ data: who buys what from where and when. In fact, shoppers won’t even know that they are dealing with Shopify. And that’s the point. Shopify exists to serve merchants, never to compete against them. 

What a refreshing way to grow. Investors are also better off choosing Shopify, as I’ve argued here.

Difference in share price performance between Shopify and Amazon

Of course, Amazon is hardly the only platform exploiting suppliers. Uber drivers who work over 10 hours a day receive no health benefits. YouTube’s biggest stars, with more than 10 million weekly views, earn less than $2,000 a month. Most writers on Medium, 94.6% of them to be exact, make less than $100 per month.

Looking around, you’ll begin to see how the entire internet has been built on freelancers who labor for very low wages—or sometimes for free. What started as empowerment for free agents looks increasingly like sharecropping.

All these factors make Discord an interesting acquisition for Microsoft. Through Discord, Microsoft is tapping into the next wave of growth. 

To Flourish in the Creator Economy 

At its core, Discord is like Slack for gamers. Kids use Discord to chat with one another while playing games. And they need to chat so much because these days, video games are highly social. Whether it’s Fortnite or Minecraft, they are often playing with other online gamers in a virtual world. Since there’s no fixed script or predetermined ending, players need to coordinate their strategy. Skype and TeamSpeak try to fill that need, but don’t work as well as Discord. 

And the need to communicate among online gamers only keeps growing. Every kid seems to be on Roblox these days. It’s sort of like Minecraft. Except Roblox is also a playground for anyone to design new games too. You don’t need to be a coder to create. There are numerous free courses available. Kids as young as eight or nine can master its simple code editor. 

Roblox developers make money through in-game purchase of virtual items. Now think about this. Not too long ago, it still took a professional coder to build games like Candy Crush or Farmville. What Roblox has done is to make things so easy that a pre-teen can enjoy their own invention. And wherever there’s a community of inventors, there’s the need to communicate. 

The gaming industry is hardly the only place you are seeing the shifting focus from obsessing over end-consumers to serving independent creators. Substack is helping individual writers to get paid. It doesn’t sell readers’ information to advertisers. It lets writers to charge a subscription fee of their own readers. NFTs promise to help musicians get a decent payday in the age of online music streaming.

The shifting focus of the internet

One exception is online food delivery. Small restaurants are getting killed by Uber Eats, Door Dash, and Deliveroo. Clearly, the current setup is hardly sustainable. There’s no path toward profitability for all parties, including the platforms themselves. This industry is screaming for help. 

Not the First, Nor the Last Chat App Acquisition by Microsoft

Microsoft didn’t decide to buy Discord for the immediate financial payback, obviously. It would be too expensive to justify such reasoning. But buying it lets Microsoft have a glimpse of what gamers and inventors are playing and working on. Discord has a growing list of more than 140 million monthly active users that includes thousands of top YouTubers. Microsoft wants to own that community. It needs to understand what games are trending, and what features people can’t stop talking about.  

This real-time data can then guide Xbox development, all the way to everything AR—augmented reality. Microsoft doesn’t have to fly blind when innovating anymore. 

In that context, $10 billion to buy a chance to cement the leading position in gaming is not just cheap. For Microsoft, it’s a steal.

 

Stay healthy,

P.S., What’s been your gaming experience? Or that of your children or friends? To what extent we should compensate content creators, freelancers, and small merchants? Have you seen something working for the little guys? Join the discussion. We’d love to hear your thoughts.

This article is co-authored with Angelo Boutalikakis, a research associate at the LEAP Readiness Project.

The post At $10 Billion, Discord is a Cheap Buy for Microsoft appeared first on Howard Yu.

The countdown is on! ⏳ How to Thrive After Crisis

Don’t miss out on this event tomorrow. March 26, at 11:00 a.m. (CET).

I invite you to join us for a virtual meetup at IMD. You’ll see how organizations are emerging stronger despite the Covid crisis. It turns out companies that are future-ready always win. 

So how do leaders prepare their organizations ahead of time? Don’t wait. Sign up here.👇

https://www.imd.org/event/leap-thriving-after-a-crisis/

Take a break and read our most popular articles. Trending. 👓

You’re Emailing More Because of Remote Work. Here’s Why You Should Email Less Instead

There are two types of work we do every day. One is reactive, fast-paced, brain-dead work. The second is intentional, slow, effortful work. Most of us have responsibilities in both.

Remote work is a bold experiment we are all taking part in by necessity. But the overall picture looks grim. A recent study by the Harvard Business School analyzed people’s email patterns and online meeting invitations. Employees are having longer and noisier days. 

READ MORE +

Here’s How You Can Judge a Leader’s Narrative: Five Charts

Everyone wants to tell their own version of the story. That was my feeling after I read Hot Seat by Jeff Immelt, the former head of the once-mighty General Electric. The company is a shell of its former self. Under Immelt’s watch, GE lost $500 billion in value. But it’s easy to play Monday morning quarterback. Without hindsight, any critic will make the same mistakes. 

Here’s what my research team found out after putting together five different graphs. 

READ MORE +

Two Charts That Explain How Mastercard and Visa Have Become Future-Proof

Disruption is everywhere, and that includes the world of finance. 2020 was a year for fintech innovation, and Covid-19 was the accelerant. When people shop at home, electronic payments take off. When people stop visiting banks, they manage their finances online.

At IMD’s Center For Future Readiness, we have been tracking how ready financial institutions are for a changing future. Here’s a glimpse into our latest 2021 ranking.

READ MORE +

 

Stay healthy,

The post The countdown is on! ⏳ How to Thrive After Crisis appeared first on Howard Yu.

You’re Emailing More Because of Remote Work. Here’s Why You Should Email Less Instead

There are two types of work we do every day. One is reactive, fast-paced, brain-dead work. The second is intentional, slow, effortful work. Most of us have responsibilities in both. 

The danger is that you become so busy that you mindlessly push through all the reactive tasks. You are lost in the busyness. Remember: you are paid to think, to create, and to do the hard stuff. You are not a human router, merely passing information along. 

Remote work is a bold experiment we are all taking part by necessity. But the overall picture looks grim. A recent study by the Harvard Business School analyzed people’s email patterns and online meeting invitations. They sampled three million people from 21,500 companies in 16 cities across North America, Europe, and the Middle East. 

Longer and Noisier Days

Here’s what they’ve found. After COVID lockdown, people saw their average workday lengthen by 8.2 percent. That’s 48.5 minutes more each day. 

People sent 5.2 percent more emails. Each email had 2.9 percent more recipients. More people were on CC. 

Participants in meetings rose by two, or 14 percent. As a result, people needed to attend 13 percent more meetings. 

Of course, the more meetings you have, the more coordination. Here’s an instant message conversation that’s all too common these days.

“We should talk. Let me know when works for you on Zoom.”

“Should we shoot for next week?”

“Sounds good to me. Usually, Tuesday and Friday are the best.” 

“I’m sort of swamped those days. Thursday?”

“Sure, when?”

“Around noon?”

“I could do 11:00, if that’s not too early?”

“I have a conference call at 10:30 and may run over. How does the following week look?”

And so on…

Is it any wonder why people are beyond burned out these days? Remote works mean to many people that their inboxes have become the agenda. The busyness pushes out the important, thoughtful stuff. They don’t get done. So our stress levels go up until the weekend arrives. Then the cycle repeats on Monday. 

Slow Down the Wheel

What we need is to go beyond productivity hacks. It’s not enough to put away your smartphone before going to bed. And yes, some companies have figured this out. The answer is not to spin faster; it’s slowing down the wheel for everyone. 

These are the companies that step-reduce ad hoc communications. They avoid real-time coordination. They build a system that lets employees pull in information, rather than being pushed. 

1. Document more to talk less

This might sound strange at first. But the reason for more emails while working remotely is the lack of chatter around the water cooler. 

The key to driving down ad hoc email then, is to document already-answered questions. Document everything in the open. Everyone contributes to a common source. Add a search engine. People can then search for what they need themselves. No one question should be asked and then answered twice, especially by email.

Can this work? The world’s largest all-remote company have already done so. Gitlab, as I previously wrote,  has some 1,300 employees working across 65 countries. But it has no physical office. Gitlab scaled by “writing things down and recording things,” said Co-founder and CEO Sid Sijbrandij. 

2. Eliminate multiple versions of information

In Sid’s mind, the biggest benefit of “documentation-first” is to ensure a “single source of truth.” Gitlab has a centralized online handbook. It’s a repository on how everything is done at the company. Anybody can update it or create a new page. After changes are made, the employee then raises a “merge request” by selecting other colleagues from the “reviewers” field. The reviewers ensure the content is technically correct and the presentation follows the documentation guidelines. 

Think about this. It’s crowdsourcing best practices from everyone around the clock. What it does is to codify every piece of tacit know-how inside Gitlab and turn it into something easily transmissible at scale. This is the Toyota Production System applied to knowledge work. With things written, there is no need for the inefficient job shadowing. No new recruit is supposed to learn by osmosis from observing an old master. 

So how big is Gitlab’s handbook? It’s over 10,000 pages long, with more than 4 million entries, and growing. But of course, no one would ever print it. People simply google the guide every day for everything. It the institutional memory for the entire organization. 

Historical Word and Page Counts Of Gitlab’s Handbook

3. Make real-time collaboration sharable instantly

Of course, there are always situations that you must collaborate with others real time. Such might be fewer at Gitlab, but they still exist. Employees are told, in their online handbook, to jump on a video call if they can’t resolve issues after going back and forth more than three times. 

During those conference calls, people open a linked Google Doc. It serves as a whiteboard inside a conference room, but better. Consider: 

Everyone can write, not just the most senior person in the room. Font is more readable than handwriting.You can add screenshots to visualize thoughts and add URLs to link to external resources.People can clarify any documentation errors on the spot. No more reviewing meeting minutes days later.

More Human Touch with Less Chatter

Less email doesn’t mean less humane. Gitlab is a very social place. The company runs employee retreats. It brings people face-to-face to build up team spirit. Social bonding is as important as getting things done. 

During these “coworking excursions,” Gitlab throws in mindfulness sessions, inspirational talks, and sporting events. Social events are choreographed, because face time is precious.

Why does this matter? Because less email, less ad hoc coordination, and fewer interruptions make us happier. Cal Newport calls it “deep work.” Our desire to be truly engrossed in doing something is primal. Mihaly Csikszentmihalyi calls it “flow.” 

What these researchers have shown us is the compelling evidence that people experience pleasure when we dissolve into what we do. When we run a race or solve a complicated logical problem, we forget that we exist. And that’s blissful.

The problem with constant email is that it fragments our attention. Our brains do not multitask, neuroscientists tell us. It only does context switching. We toggle between competing demands. The constant email stream is preventing us from experiencing “flow.” Our inbox is sucking out the joy of your working hours. You deserve better. We have to stop the craze. 

What’s at stake is not merely employee productivity. It’s the way employees experience work, and by extension, the ability of a company to keep its best talents. 

What’s been your experience while working remotely? What do you like about it? What do you miss? What do you dislike the most? Share with us your tips for avoiding burnout.   

 

Stay healthy,

P.S., This Friday on March 26, I’ll host a virtual meetup at IMD at 11:00 a.m. (CET). My research team and I will unpack how organizations are becoming stronger despite the Covid crisis. Sign up here: https://www.imd.org/event/leap-thriving-after-a-crisis/

The post You’re Emailing More Because of Remote Work. Here’s Why You Should Email Less Instead appeared first on Howard Yu.

Three Charts That Show How Nike Is The Most Future-Ready Retail Brand

Disruptions hurt. But occasionally, a few players reorient themselves to new trends ahead of time. They become future-ready. And during troubled times, like the Covid-19 pandemic, they grow further and become top dogs. Nike is one of them.

Nike released its latest financial results on Thursday evening. Sales reached $10.36 billion, up from $10.1 billion in the same period last year, during a time the world will remember as one of retail carnage. Neiman Marcus, Brooks Brothers, J. Crew, and Lord & Taylor have all filed for bankruptcy. So what explains Nike’s resilience in a sector as old as footwear?

At IMD’s Center For Future Readiness, we take a quantitative approach. We track how ready companies are for a changing future. Here’s a glimpse of our 2021 ranking of the major fashion brands.

To calculate the composite score, we’ve only used hard market data. They are publicly available and have objective rules. What we measure are the fundamental drivers that fuel innovation. They include the financial health of a company, its growth prospects, employee diversity, brand value, its degree of internationalization, and the early results of its innovation efforts.

On innovation specifically, we look at how tech-savvy these fashion brands are. How strong is their e-commerce presence in mobile apps, live-streaming, omni-channels, and direct-to-consumer engagement? How big is their fanbase on social media? How big is their search volume on Google? Can they personalize offerings? Are they seen as environmentally sustainable?

Now you ask, how did Nike manage all that?

What have been mentioned as “innovations” are merely the front-end operations. They are the flashy results that attract customers. Behind the scenes are a lot of the make-or-break technologies. A company may want to let consumers personalize their sneakers online and have them shipped in weeks. But to do so profitably at scale, it has to “digitalize” the entire supply chain. It has to automate all tracking and coordination with external partners.

To stay aligned with fickle consumer demands, a company needs advance analytics to gather insights around the clock. It can then execute markdowns and promotions to move inventory across continents. It must also locate and ship specific products to where the individual stores need them most. All I am saying is that any thriving fashion brands are digital-first companies, through and through.

Here, you can perform a second type of analysis. You can compare how digital these companies really are. How do they evolve over time? So our team took the next step.

We downloaded every report published in the last 10 years by the standard-bearers of business news. The Wall Street Journal. CNBC. The Financial Times. We included all the corporate press releases circulated during this period. Ten years of data were all fed into an algorithm, big-data style. We wanted to look at how digitally obsessed these fashion brands were, and to what extent the business community had come to understand them. This “textual analysis” may not be the perfect measure of a company’s digital efforts, but it should let us gauge how things evolve.

What you are seeing is the cumulative score over the year. You can again a divergence.

Does any of this really matter, you may ask. What stands out is the share price correlation because of the pandemic. Those who are more future-ready have seen their share prices recover. Some have even surpassed the levels those prices were at before the start of the pandemic.

And in the case of Nike, its digital push came early. Back in 2017, it had already vowed to make the company less reliant on brick-and-mortar stores. That alone helped counter the negative effects of lockdown-related store closures. By now, more than 90% of Nike’s stores have been reopened. Still, digital sales are expected to enjoy double-digit growth going forward. That’s how being future-ready helps companies rebound faster. They become more resilient as a result.

If you take a longer perspective, the pattern is unmistakeable: Being future-ready drives stock performance.
It turns out being digital is not an option. Not for fashion brands, anyway. It’s how they remain relevant. And that fact hasn’t escaped the notice of investors.

 

Stay healthy,

P.S., I invite you to join us for a virtual meetup at IMD on March 26 at 11:00 a.m. (CET). My research team and I will unpack how organizations are becoming stronger despite the COVID-19 crisis. Don’t wait. Sign up here: https://www.imd.org/event/leap-thriving-after-a-crisis/

This article is first published in Forbes and co-authored with Angelo Boutalikakis, a research associate at the LEAP Readiness Project, and Jialu Shan a Research Fellow at The Global Center for Digital Business Transformation.

The post Three Charts That Show How Nike Is The Most Future-Ready Retail Brand appeared first on Howard Yu.

A Bad Business Caused by Too Much Investor’s Money: Online Food Delivery

When people say the COVID-19 crisis is devastating the economy, it doesn’t apply in the startup scene. The investors’ money didn’t dry up. High-flying IPOs are followed by even higher-flying IPOs: DoorDash, Palantir, Airbnb, and Roblox. There are more startups forming during the pandemic than ever before, and their private valuation has been at an all-time high. Most of the evidence about these trends is illustrated by two charts compiled by The Information, which my team has redrawn below: 

Startup formation is clearly on the rise. 

And big bumps are in their valuations.

Onto the Gold Rush

It should be no surprise that another online food delivery startup, Deliveroo, is rushing to become an IPO this year. Deliveroo said it would be listed on the London Stock Exchange soon. It’s expected to reach a potential valuation of US$7 billion, a huge bump from the pre–COVID-19 estimate of US$2 billion to US$5 billion. 

There’s no doubt that online food delivery is growing. When a family’s stuck at home, they order food online. According to Morgan Stanley, the U.S. digital food delivery market alone will grow to $467 billion in the next five years. What’s troubling about the entire sector is the lack of profitability or the path toward it, even during the best time.

As I wrote before, Deliveroo just posted a loss of US$309 million for 2020 despite a 54 percent revenue growth. Its results for 2019 were worse, with US$1 billion in revenues while losing US$440 million. DoorDash and Grubhub similarly struggle to achieve profitability. 

And that’s not all. These online platforms are robbing the very viability of their own ecosystem. It’s hard to see how the current setup could last without a major pivot. 

Death by a Thousand Cuts 

Delivery platforms such as Deliveroo or Uber Eats typically charge a 15–30 percent commission on each order, but restaurants are subsisting on razor-thin margins (often less than 50 percent). 

Even before COVID-19, 80 percent of New York restaurants close in the first five years. It’s a tough industry driven by the passion of heroic entrepreneurs rather than money.

The New York Times reported that two pizzerias that previously generated profits between $50,000 and $100,000 started to lose as much as $40,000 annually once their customers shifted to delivery. The LA Times showed how the owner of a Chicago pizza restaurant pocketed only $376.50 from Grubhub after more than $1,000 in delivery orders.

There are many reasons for this. The orders for each delivery are often cheaper. Most people don’t order fancy cocktails or champagne together with takeout; they buy booze at stores. Since the customers don’t see the servers, tips are less generous. Then there are the additional expenses for drivers and bikers. 

There’s no single cause for the bad economics. It’s death by a thousand cuts. 

Little Sustainable Advantage

Meanwhile, delivery platforms are seen as interchangeable. You can’t tell the real difference when ordering from different platforms. The one differentiation is the number of restaurant listings. But then, most restaurants would sign up for multiple platforms anyway. 

That leads to ruinous competition. These delivery platforms become big spenders on paid ads on Google and Facebook. They call it market investment, but they are merely buying temporary market shares. The irony, of course, is that all the money ends up with no one except for Google and Facebook—again. 

What Lies Ahead

All these remind me about the bike-sharing craze in China a few years ago. What goes up must come down. Ofo, Mobike, and Bluegogo had mushroomed out of nowhere, but it was never clear how dockless bike sharing could ever be profitable. Still, the allure was so strong that Softbank, Tencent, and Alibaba kept pouring money into it—that is, until we saw hundreds of thousands of abandoned bikes piling up in the open space.

Such is externality, economists would call. Think of this as external pollution. Ofo and Mobike are chasing after high growth but choking off a city’s already congested landscape. When your business model is polluting your own backyard, it’s never a good sign. 

Usually, if such a sector were to survive or be unleashed by the next wave of high growth, there are new heroes going in with a new business model. This is what Scott Galloway called “a zag” in his latest podcast. An example is Amazon. It knows how squeeze merchants all too well. It hoards data and then launches its own private labels that kill off smaller players. So who is the darling on e-commerce today? Shopify. It zags while Amazon zigs. Shopify helps merchants set up their own online stores. It gives data back to the merchants and helps them get rid of their dependency on Amazon. Brilliant.

Amazon may be more financially powerful, but Shopify is growing much faster.

YouTube is similarly riding on the creator economy, but it grants little to content creators financially. So now you have Roblox. It zags by making easy-to-use tools for online game creators to monetize their own efforts. Substack is zagging in the publishing business. It’s helping individual writers get paid for their labor via a subscription model. It doesn’t sell readers data to advertisers to enrich the platform itself. Then you have NFT in full rage, promising to help musicians get a decent payday in the age of online music streaming. 

So there you have it. Online food delivery, like many predatory platforms, is increasingly exploiting the very people they are supposed to work with. Until restaurant owners improve their livelihood, any IPO values of these platforms are pure hype. 

 

Stay healthy,

P.S. Save the date. March 26, 11:00 a.m. (CET). I invite you to join us for a virtual meetup at IMD. My research team and I will unpack how organizations are becoming stronger despite the COVID-19 crisis. Don’t wait. Sign up here: https://www.imd.org/event/leap-thriving-after-a-crisis/

The post A Bad Business Caused by Too Much Investor’s Money: Online Food Delivery appeared first on Howard Yu.

How to Thrive After Crisis—Are You Ready?

Save the date:  March 26, at 11:00 a.m. (CET). 

Thank you for reading the Weekly Musing. We are passionate about the future and how companies become future-ready. 

I invite you to join us on March 26 for a virtual meetup at IMD. My research team and I will unpack how organizations are emerging stronger despite the Covid crisis. How do leaders pursue new opportunities when resources are scarce? How do they pivot toward a better future? 

Don’t wait. Sign up here.👇

https://www.imd.org/event/leap-thriving-after-a-crisis/

Take a break and read our most popular articles. Trending. 👓

Curiosity Lost? Here’s How to Stimulate It

Curiosity starts with an inquisitive mind. We’re all born with it. Infants prefer to look at new pictures, not familiar ones. As we grow older, some still enjoy mentally challenging activities more than easy ones. It’s a personality trait that psychologists call the “need for cognition.” It measures how much people love to think deeply, regardless of monetary reward. 

Are you ready to find out yours? 

READ MORE +

Here’s How You Can Judge a Leader’s Narrative: Five Charts

Everyone wants to tell their own version of the story. That was my feeling after I read Hot Seat by Jeff Immelt, the former head of the once-mighty General Electric. The company is a shell of its former self. Under Immelt’s watch, GE lost $500 billion in value. But it’s easy to play Monday morning quarterback. Without hindsight, any critic will make the same mistakes. Here’s what my research team found out after putting together five different graphs. 

READ MORE +

Two Charts That Explain How Mastercard and Visa Have Become Future-Proof

Disruption is everywhere, and that includes the world of finance. 2020 was a year for fintech innovation, and Covid-19 was the accelerant. When people shop at home, electronic payments take off. When people stop visiting banks, they manage their finances online.

At IMD’s Center For Future Readiness, we have been tracking how ready financial institutions are for a changing future. Here’s a glimpse into our latest 2021 ranking.

READ MORE +

 

Stay healthy,

The post How to Thrive After Crisis—Are You Ready? appeared first on Howard Yu.

If You Want to Innovate, You Must First Take Care of the Plumbing

Backsliding. Several executives told me last week that their innovation momentum has been slowing down. They were referring to the initial productivity gain when people started remote work. They felt empowered. Decisions were delegated. And they got a lot done. 

Then things started backsliding. Somehow red tape has been growing back like ivy vines. But this isn’t a cultural issue. It’s a design issue. Specifically, it’s the uncontrolled growth of invisible work that is choking off creativity. Let me explain. 

There are two types of work we do every day. The first is the execution of a task, like writing a PowerPoint for a sales pitch. The second is managing workflow. You might need to run through some figures included your PowerPoint with your colleagues in the finance department. The trouble is, a task is visible. But the overall workflow is often hidden and ad hoc. And workflow is what structures our collective efforts.    

When it’s time to innovate, managers look at what products and services to offer. After all, those are what customers can see. Except in the narrow fields of manufacturing and service delivery, we rarely interrogate how we produce the desired result collectively—how we integrate product design, marketing and sales, legal, finance, production and customer support. 

This is unfortunate. Because the actual mechanics of how work is assigned, executed, and reviewed can make or break a company. It goes beyond better leadership. It’s not about setting clearer objectives. It’s not even about team collaboration. It’s operational science. It’s hard stuff. 

How Google Wins By Making Things Simple

You know how Google won the smartphone battle. Its Android operating system is free to hardware manufacturers like Samsung and Huawei. It quickly attracts third-party app developers like Facebook and Twitter. But guess what: Nokia had the same strategy. 

Nokia’s Symbian platform also deployed open-source software. Nokia knew that it had to woo app developers. The company harbored no arrogance. The board knew that only the paranoid survive. And the company was on a burning platform. 

But no one could do anything. Here’s an insider view by a young board member named Risto Siilasmaa. He would later become Nokia’s chairman. It was Siilasmaa who eventually led the company out from its near-death experience. He ultimately turned Nokia into the world’s third-largest telecom equipment supplier. 

Siilasmaa had been perplexed by the tardiness of the Symbian team. It had spent hundreds of millions of dollars hiring new programmers. Despite the extreme sense of urgency, software was always delivered late, and it was often buggy.    

Then he learned that it took 48 hours for a software programmer to compile the source code.  

Compilation is the translation of what programmers are writing into machine language that a computer can execute. “It was the equivalent of a movie director on a set having to wait 48 hours to view the latest take before deciding whether it needed to be redone,” said Siilasmaa. “Even a 24-hour compilation time was appalling. Waiting 48 hours to test how well a program works is an eternity.” The software team at Nokia wouldn’t be able to build what they needed. 

To Siilasmaa’s horror, he further learned that the overall build time—the time needed to gather and compile code from different teams—was up to two weeks. If it took this long for anyone to determine whether a change worked or would have to be redone, the company was doomed. “This was a recipe for catastrophe, and a catastrophe was exactly what we had staring straight into our eyes,” Siilasmaa said.

At Google, the same process took less than 20 minutes, and people still wanted it faster.

How You Should Think About Lead Time, Not Work Time 

The principle that Google came to embrace is no secret. There’s a whole community of DevOps professionals expounding on the benefits of letting teams make decisions without having communicate and coordinate with people outside. What you want is to avoid having to get approvals from distant authorities or committees far removed from the local work, because those are people who have no relevant basis to make good decisions. 

This is obviously not merely a cultural issue. It’s about how you structure an organization so that monitoring can be done automatically. Information can then be searched easily. And knowledge can be shared through a centralized repository. 

As I’ve argued here before, every tech giant has gone through a near-death experience like Nokia’s. But they have taken the medicine just in time to radically rebuild their organizations from the ground up. Usually, that means the input and output of each department gets standardized. Different teams learn to communicate through APIs (application programming interfaces). This means less email and fewer manual Excel spreadsheets. Then comes the next step: automating the routine co-ordinations. 

That’s why at Google Android, an app developer can run production-like environments on their own laptop. People can create, on demand, the testing environment they need via self-services. This is sustainable advantage. Now, you may ask, what does this all mean for my daily work?

You always want to look at your assignments from two perspectives: the work execution itself and streamlining workflow. 

When you are assigned a task, check where the task handoff is. Is it seeking approval from someone out of habit? Is the approver or reviewer adding real value? You want to eliminate review as much as possible. Why? Because even if it only takes three minutes for the other person to check your email, your email will be looked at after that person has finished their own work. That might mean it will take up to three days for you to get a reply. And if that person, in turn, needs to clarify something else, the complexity of the situation will be compounded. Your lead time will grow exponentially. 

Over the medium term, you want to agree with other departments on what you and your team can decide for yourselves. Trust me, most people have enough on their plates. They would be glad to have this conversation with you. 

Then you must make the invisible visible. Spend time with your team discussing the overall workflow. Knowledge work is tricky because the workflow cannot be seen easily. In a factory, if something isn’t working, you will see inventories and work-in-progress piling up. For knowledge workers, inefficiency is less observable. So unless you map out the workflow, you won’t know how bad things really are. 

Finally, at management retreats, you need to think big. Innovation is not about the front end. Launching a new app is easy. A hackathon can become an innovation theater. What you want is to apply the same passion to streamlining and simplifying. 

Smart companies pay down their complexity debt every day. They know that if they don’t, complexity will strangle their work. So it’s good take care of the plumbing. 

 

Stay healthy,

P.S., Have you come across organizations that are disciplined in ridding themselves of complexity? How did they do so? What enabled them to stay focused? Join the discussion. Let us know what you think. 

The post If You Want to Innovate, You Must First Take Care of the Plumbing appeared first on Howard Yu.

Here’s How You Can Judge A Leader’s Narrative: Five Charts

Everyone wants to tell their own version of the story. That’s the trouble with autobiographies. And especially troubling is a CEO’s memoir. How much truth is in there?

That’s my feeling after I read Hot Seat by Jeff Immelt, the former head of the once-mighty General Electric. The company is a shell of its former self. Under Immelt’s watch, GE lost $500 billion in value. It laid off half its workforce. Its stock price plunged. It sold off businesses at a discount. Immelt, after leading GE for 16 years, stepped down in 2017.

But it’s easy to play Monday morning quarterback. Without hindsight, any critic will make the same mistakes. And I don’t doubt Immelt’s honesty in retelling the facts. I am only curious about his interpretation of those events. The only way to get closer to the truth is to cross examine data. Lots of it. Big data style. And this is what my research team did.

The CEO’s Dilemma

Here’s the gist of Immelt’s version of the story. “I’d become CEO of a company where perception didn’t equal reality,” he writes. Before he took over, for at least a decade, GE had relied on GE Capital—its financial operations—to make up the overall earnings.

“Few observers grasped how little we’d been investing in those industrial businesses. We were a sprawling conglomerate that encompassed everything from jet engines to TV networks to insurance policies for cats and dogs. Yet we were valued like a tech company, trading substantially above the value of the businesses we had.”

In Immelt’s view, GE’s actual businesses had been pretty average. It was the halo of GE, powered by commercial lending, leasing and insurance, that had inflated the corporate valuation. All were riding the wave of a decade-long economic expansion.

So the task for the CEO is to defuse the bomb without setting it off.

Not The Only Game In Town

GE has peers. Honeywell comes to mind, as they both compete in a similar space. My research team made a pair comparison. It’s noteworthy because the two would have merged in 2001, had the deal not been blocked by the European Union.

Here are four major contrasts.

1. Share price performance between GE and Honeywell between 2001 and 2021.

Of course, share price can be affected by many things. But one of the most reliable measures is the operating cash flows per share.

Amazon’s CEO Jeff Bezos prefers cash flow over earnings. “Why focus on cash flows?” he asks. “Because a share of stock is a share of a company’s future cash flows, and as a result, cash flows more than any other single variable seem to do the best job of explaining a company’s stock price over the long term.”

Our team decided to follow Bezos’s thinking and calculate the cash flow per share ratio between GE and Honeywell.

2. Operating cash flows per share.

You might notice right away that Honeywell overtook GE in 2006 by this measure. GE’s ability to generate cash has been declining ever since. What happened?

Immelt took over GE in 2001. He promised an “industrial internet” that GE would build. Data could be captured from GE’s wind turbines, jet engines, MRI machines and diesel-electric locomotives. The future of industrial companies was in software and computing, and GE pronounced it would become the world’s first “digital-industrial” company.

That sounded like a great strategy for profitable growth. We want to evaluate the result of this effort.

Our team downloaded every report published in the last 10 years by the standard-bearers of business news—The Wall Street Journal, CNBC, and Financial Times—along with corporate press releases from this period. Ten years of data were all fed into an algorithm. We want to look at how digitally obsessed Honeywell and GE were. To what extent the business community had come to understand how digitally savvy each of these players was. This “textual analysis” may not be the perfect measure of their digital efforts, but it should give us a gauge.

3. The intensity of “digital” mentioning between GE and Honeywell.

Of course, just because a company talks a lot about digital technology doesn’t mean it’s meaningfully bringing digital innovations into the marketplace. If a company spreads its investments everywhere and doesn’t focus on a few targeted areas, its money and resources get wasted. Without making tough choices, a team ends up making a millimeter of progress in a million directions.

This is certainly a reflection of GE’s complexity. The company was busy divesting its financial operations, expanding its geographic footprint outside of the U.S., fending off active investors, and then dealing with investigations by the Securities and Exchange Commission. All these added distractions. They certainly drowned out GE’s digital plan.

To validate this claim, we added a second dimension. We wanted to see how focused and committed Honeywell and GE are. Who is exploring everything without focus? Who is committed to exploiting a few chosen areas to their full potential? Along this Explore-Exploit spectrum, how do GE and Honeywell compare?

4. The Exploration–Exploitation comparison.

It turned that out as time went on, GE had become less committed. It tried to keep all options open, as if it couldn’t make up its mind.

Ironically, it was GE that had been especially bullish about its own future. GE is willing to take risks in order to realize future opportunities. Honeywell, in contrast, is the one trying to avoid an unnecessary downside. We’ve made one last analysis to understand these corporate attitudes.

5. Attitude towards risk.

Despite all the mishaps, GE is still more risk-seeking until the very last moment.

One thing is for sure. Immelt grew up inside GE when it was the paragon of corporate success. GE had been a company that enjoyed a large advantage against its competition. Its core market was growing. It enjoyed a long period of peace.

But what GE needed after Jack Welch was a wartime CEO. The company was repeatedly trapped by imminent existential threats, one after the other, for sixteen years. Immelt essentially had a single bullet in the chamber and needed, at all costs, to hit the target. Unfortunately, he was groomed as a peacetime leader.

 

Stay healthy,

P.S. Can a CEO build the skill sets to lead in both peacetime and wartime? Have you come across such an example? Share your thoughts with us. Join the discussion.

This article has been co-authored with Angelo Boutalikakis and Iulia Calota, researchers at the Center Of Future Readiness.

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Here’s What Boeing 777’s Engine Problem Teaches Us

Boeing is in the hot seat again. Its 777 airliner made an emergency landing in Moscow last Friday after the pilot saw an engine problem. This came less than a week after another flying Boeing 777 was dropping engine parts over Denver in Colorado. That prompted United Airlines, Korean Air, Japan Airlines, and a few others to ground their fleets.

But here’s what makes the incident most remarkable: The plane landed safely without any injuries.

Pilots are routinely trained. Their training includes handling engine failures and flying after one engine has quit. That ability is almost “innate” for any experienced pilot. Ed Coleman, a former Air Force pilot, noted the calm tone among the UA crews recorded during the incident. “Their voices don’t even go up an octave,” he said.

Statistically speaking, flying is far safer than driving. The odds of dying in a motor accident are 1 in 98 for a lifetime. For air transport, the odds are 1 in 7,178. So, how exactly does the aviation industry manage to reduce catastrophe? How can you design a safe system when incidents are unavoidable? You may not be a pilot, but you might want to build a safer system for your own work. How?

Separate Fact-Finding and Policy Changes

Two main players are involved in any aviation incidents. There is the National Transportation Security Board, or the NTSB. Then there is the Federal Aviation Administration, or the FAA.

The NTSB operates as an independent federal agency. Its role is to investigate accidents and to formulate safety recommendations. The FAA, on the other hand, is a branch of the Department of Transportation. It is a regulatory agency responsible for enforcement of safety rules.

In other words, rule-making is separated from fact-finding. Enforcement is cleaved from investigation.

This distinction is key. The FAA will consider policy changes only after the NTSB has completed its investigation. Such separation limits the influence of industry lobbyists. But more importantly, it prevents investigators from data-gathering bias.

Now, think about the approach a company should take to conduct any after-action review.

Inquire First, Without Blame

Companies also make mistakes. A new product launch can bomb. The company website can suffer an outage. A negotiation with suppliers can collapse. An important project can miss its deadline. An incident is always a combination of technical problems and human error. You need to first identify the root cause without bias in order to remedy both.

The first step is to assemble a timeline and gather details on what happened. The goal here is to enable people closest to the incident to share what they saw. The only rule here is that you can’t say, “I should have done X” or “If I had known about that, I would have done Y.” As I have written before, hindsight is always perfect. It is not acceptable to make your countermeasures to merely “be more careful” or “be less stupid.” In a crisis situation, no one person actually know what’s really going on. Saying what people should have done doesn’t explain why it made sense for them to do what they did.

The first step to improvement is to stick with assembling the timeline. You need to know how the event unfolded step by step.

Obviously, at this stage of the inquiry, a lot depends on the leader’s behavior. The fleeting condition that allows everyone to share openly with their peers comes from psychological safety. Some team members might become distraught during the process. They might blurt out apologies. Remember, this is not a confession. The focus should always be: Why did it make sense to me when I took that action? Suspend judgement. Focus on facts.

What typically happen is that everyone comes to learn something about how the system works. In stark contrast with their mental models of how they thought it works, they see the reality in a new light. There are likely very specific things that people can recommend that will prevent future mistakes.

Publish the Findings as Widely as Possible

The goal of a blameless post-mortem is to record what actions people took at what time and what effects people observed. This is a marked departure from the usual subjective narrative. It also documents what resolution is being considered.

Here is the hard stuff. After the inquiry, we need to publish the meeting notes and all the associated evidence. It could be the timeline and chat logs and the results. High-performing companies do this routinely. They tend to centralize findings in one single location so the entire organization can access them and learn from past incidents.

At Bridgewater Associates, founder Ray Dalio calls such an approach “radical transparency.” It’s the world’s largest hedge fund, with around $160 billion in assets. But there are no “closed-door” conversations across all ranks. Before Zoom or WebEx, Dalio would videotape every managerial meeting, including his own. He then hired a small team to edit the tapes, focusing on the most important moments, and turned the lessons gleaned from the tapes into case studies for employee training.

Doing this ensures that an organization translates local learnings into global improvement. Google does this through its search engine. “As you can imagine, at Google everything is searchable. All the postmortem documents are in places where other Googlers can see them,” said Randy Shoup, former engineering director for Google App Engine. “And trust me, when any group has an incident that sounds similar to something that happened before, these postmortem documents are among the first documents being read and studied.”

Or consider Booking.com, which saves all its experiments. The successes and the failures are all on its IT platform. These results are all made searchable to anyone in the company. It doesn’t matter which division you are from. Every engineer gets access to all experimental protocols and the resulting data.

The Key to Improvement

The approach of fact gathering and information publishing has served all of us well. Commercial aviation fatalities have decreased by 95 percent during the past 20 years. The only way to improve performance is to make unbiased knowledge transparent. The converse is also true: to restrict access to information is to allows politics to fester. Non-transparency and incompetence go hand in hand.

 

Stay healthy,

P.S. Have you observed a good postmortem where everyone learned? What’s the best way to achieve “psychological safety” in this delicate process? Share your thoughts with us. Join the discussion.

 

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Animated Infographics: The Epic Quest by Visa and Mastercard To Become Future Ready

Fintech is all the rage. And the big accelerant for this has been the pandemic. When people shop at home, mobile payments take off. When people stop visiting banks, they manage their finances online. 

We at IMD business school have been tracking how ready financial companies are for a changing future. You can check here for our latest 2021 ranking. Payment companies, like PayPal and Square, are doing very well. So are credit card networks, like Mastercard and Visa. They’ve all been outperforming retail banks and insurers. 

But not American Express. Amex may have the best airport lounges and personal concierge services. But that $550 annual fee for a platinum card is a non-starter when we can’t even dine out in a local restaurant. 

The trouble is that COVID-19 doesn’t only create a temporary setback for companies. It exposes their long-term readiness. But great companies don’t create dramatic results in one fell swoop. Rather, they do so through cumulative efforts over time that build up an inexorable momentum. You can’t simply point at one defining action, one killer innovation, or one solitary lucky break. 

So my research team decided to run an epic analysis. We’ve created an animated infographic, or a short film, that shows how Visa, Mastercard, and American Express have evolved over the last 10 years. They started off at a similar size. Visa was worth about 40 billion in 2010, while Mastercard was worth 30 billion. American Express was the biggest at close to 50 billion in 2010. Today, Visa has grown to over 450 billion and Mastercard 350 billion. Amex has fallen to a distant third at under 120 billion. What happened? 

Here is what my team did. We’ve downloaded every report published in the last 10 years by the standard-bearers of business news—the Wall Street Journal, CNBC, and the Financial Times—along with corporate press releases from this period. Data from the last 10 years was all fed to an algorithm. We want to look at how digitally obsessed these companies were and to what extent the business community had come to understand how digitally savvy each of these players was. Such “textual analysis” may not be the perfect measure of their digital relevance. But it should give us a good gauge.

This was where things stood back in 2010.

Notice that there’s a second dimension on the x-axis. We want to see how focused and committed these companies are. Are they being open-minded and exploratory on the right? Or are they focusing on exploiting a few chosen areas on the left?

You can play the short film below. We’ve combined this exploit–explore spectrum with digital relevance on a two-by-two. The size of the bubble represents the valuation of the company. 

I find the movie to be almost hypnotic, especially when playing on a loop. A few key themes jumped out. 

During the earlier years, Visa and Mastercard maintained a good balance. They both explored new areas and exploited existing opportunities. Meanwhile, American Express focused largely on exploitation in the short term. 

As they explored new technologies, Visa and Mastercard became increasingly digitally capable. They went beyond merely being aware of the new areas. But they invested further in data analytics, cybersecurity, and artificial intelligence. 

American Express eventually took notice and started to explore. As I wrote here, Amex became bold in its social media marketing. It partnered with BuzzFeed to create the “Epic Everyday” campaign in the summer of 2016. That campaign, which featured Tina Fey, used Facebook to engage the younger generation. Then the company experimented with a Facebook messenger bot. It also let people pay their friends through Facebook. 

The problem was that this digital evolution was confined to the marketing side. Just like a better coupon campaign wouldn’t have saved Blockbuster, none of Amex’s new marketing efforts changed the fundamentals of its business model. 

Interestingly, during the same period, Visa and Mastercard became very focused. They had built up enough digital capabilities to exploit new opportunities. Mastercard, for instance, made the commitment to grow into cybersecurity and data analytics. No more experimentation. Instead, the company has clarified its vision to make any payment seamless and secure. That includes payments through credit, debit, and prepaid cards or any other system that might evolve, including blockchain. 

The end result is that Amex got trapped in its legacy business model. It tries to get customers to spend more and stay loyal. In stark contrast, Mastercard and Visa are forging digital partnerships everywhere. One remains a credit card company. The other two have become IT companies that just happen to be in the payment business. 

 

Stay healthy,

P.S., A picture is worth a thousand words. A short film can illustrate corporate histories even better. Are there other sectors you would like us to cover using a similar approach of analysis? Let us know. Our research team is hard at work.

This article is co-authored with Angelo Boutalikakis, a research associate at the LEAP Readiness Project.

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