Marina Gorbis's Blog, page 1600

Don't Draw the Wrong Lessons from Better Place's Bust

The failure last month of green-tech start-up Better Place, which promised to free drivers and nations from oil dependence and revolutionize transportation, has generated both attention and derision.

But a blanket dismissal of its effort is a mistake. For entrepreneurs, investors, and policy makers, there is plenty to learn from both the strategy and the outcome.

There was good reason for the attention and funding (over $800 million) that Better Place attracted. While every other player in the electric car space was focused on innovating individual pieces — vehicles, batteries, charge spots — Better Place's strategy was unique in innovating the larger puzzle to deliver an affordable drive-anywhere, anytime solution. Its approach was the first to align the key actors in the ecosystem in a way that addressed the critical shortcomings — range, resale value, grid capacity — that undermine the electric car as a mass-market proposition. (Note to Tesla owners: you are not the mass market).

Better Place's most visible and best-publicized innovation was its switchable battery technology, a novel way to overcome the short-range limits and long recharge times dictated by existing battery technology. Skeptics initially doubted the engineering feasibility of fast battery switches, the ability to roll out infrastructure on a national basis, and the willingness of carmakers to come on board. Renault came on board as the first (but ultimately only) car manufacturing partner, and switch stations deployed along major traffic routes successfully offered an almost-instant range extension that held the promise of promoting the electric car from a secondary short-haul vehicle to a primary, and possibly sole, family car.

Less touted but more important than the physical separation of the battery from the car was Better Place's innovation of separating ownership of the battery ownership and the car. EV advocates are quick to note that technology improvements in batteries will one day eliminate the range problem. What they often miss, however, is that these very same improvement will destroy the resale value of used electric cars with older batteries. Since resale value ranks high for mass market buyers, this has all the makings of a deal breaker.

Better Place's solution eliminated this risk. Instead of buying batteries, consumers would buy subscriptions for miles (just as mobile-phone operators sell subscriptions to minutes). Better Place would then use these multi-year contracts to finance its infrastructure investments and battery depreciation.

Finally, adding a service dimension to what had been a pure product sale allowed Better Place to address the final roadblock to mass adoption of electric cars: the generation and distribution of electricity itself. If just 5% of drivers in Los Angeles County were to attempt to charge their batteries at the same time, they would threaten to bring down the power grid, adding a load equivalent to two midsized power plants in an already strained system. Better Place's model, which had the firm intermediating in real time between utilities and drivers, allowed it to control the battery-charging load that would be placed on the system at any given moment.

What Went Wrong?

The shallow answer is not enough customers. Better Place started selling cars in Israel and Denmark in late 2012. By May 2013 it had sold fewer than 3,000 vehicles. A small number, but these are also small markets. In relative market terms, the results looked less than dismal: in May, Better Place sales accounted for 1% of cars sold in Israel, and its single available model, the Renault Fluence ZE, was outselling Toyota's category leading Prius. Moreover, Better Place's customer-satisfaction ratings were off the charts.

The deeper answer is not enough time to get enough customers. The clock, which started ticking in 2007, ran out. Which begs the question of why it took so long to get to market. Part of this time was spent, wisely, in perfecting the technologies (battery switch, network management, in-car intelligence) that would make the system run. Customer satisfaction is the testament to the success of the technology. Part of the time was spent in navigating the institutional hurdles that inevitably accompany every attempt at doing something new (zoning rules, insurance). But too much of this time was lost to wasteful efforts to establish toeholds and run pilots in a slew of new geographies (e.g., Australia, the Netherlands, California, Hawaii, Japan, China and Canada) before Better Place's two core markets, Israel and Denmark, had been secured.

When Better Place was founded, its strategy called for initial rollouts in Israel and Denmark. These were inspired choices to prove the viability of its strategy: They are small countries where gasoline is exceptionally expensive and purchase taxes on gasoline-powered cars are very high. They are superior to everyone else's target of California, where the high-end niche of rich environmentalists is attractive but cheap gasoline, vast driving distances, and an incredibly competitive car market undermine the appeal of electric cars for mainstream buyers.

Despite their relatively small populations, the economics in Israel and Denmark were such that even modest market success in just these two markets would have yielded the attractive financial returns critical for investors. Just as importantly, they would have yielded the meaningful sales volumes critical for retaining and attracting partners, most importantly automakers.

But in my conversations with Better Place executives over the course of the past three years, it was clear that the emphasis was shifting from "an idea this novel needs to demonstrate unquestionable economic viability," to "an idea this good needs to be deployed across the world as fast as possible." These were not opposing goals, but prioritizing the latter over the former would have profound implications.



As Better Place pursued new geographies it used up its limited resources: money, management attention, and, most precious of all, the patience of its partners, especially Renault. In early May, Renault announced that it was scaling back its commitment to switchable battery cars and that the long-awaited second model, the Zoe compact that Better Place had counted on to complement the mid-sized Fluence, would not be coming after all. This vote of no confidence would make it infinitely harder for Better Place to line up new car manufacturers, without which it was dead in the water.

In February 2013, after a series of mismanaged leadership transitions including the firing of founder and CEO Shai Agassi, Better Place finally reversed course. It announced its exit from all non-core markets to focus exclusively on Israel and Denmark. Within months of the decision it had captured 1% market share in Israel, but by then it was too late. It declared bankruptcy on May 26.

The tragedy is Better Place delivered on the most novel aspects of its business model, succeeding in both technology development and aligning the interests of the critical actors in the electric-car ecosystem. Its failure lies in its own discipline and execution. Entrepreneurs, investors, and policymakers should distinguish between the drivers of the failure and the elements that carry the seeds of (someone else's) future success.

Minijobs Give German Employers New Flexibility

Germany's relatively strong economy has led to a proliferation of "minijobs," a special employment classification originally designed for stay-at-home mothers that allows people to earn up to 450 euros a month tax-free. About 7.4 million people, or nearly 1 in 5 working Germans, now hold these low-wage, part-time positions, which include restaurant and clinic work, says the Wall Street Journal. Proponents say minijobs give employers flexibility to adjust their workforces and keep wages low; opponents say they trap workers in marginal occupations.

Leading People in an Anxious World

Safety is now Americans' overriding concern. Several years ago, as I sat in a secondary school board meeting, the visiting headmaster of a K-8 school was asked what he considered the highest priority for parents in choosing high schools. I was astounded when he said "safety" rather than, for example, "quality of education." But that was just a hint of how Americans' safety fears would blossom in the years to come. We have become the most anxious of nations, fearing terrorists, gun rampage, sexual assault, hurricanes, tornadoes, snowstorms, identity theft, discrimination, and germs, among other things, and not necessarily in that order.

CEOs and managers need to understand what that means to their organizations. Our colleagues at work harbor worries in varying degrees, and management faces the new challenge of non-judgmentally navigating this path to security while recognizing the cost of protection. While we might think that common sense should guide us in evaluating the appropriate action to take about heightened risks, my idea of "reasonable" might be one partner's concept of "reckless." I favor encryption when any sensitive numbers or identifying data is sent to clients, but would not safeguard the average email, where a few colleagues might raise our safety bar as high as possible, almost regardless of cost. As a firm, we're debate these issues more now than we ever did before.

When it comes to physical safety, the sensitivity of the topic can make debate feel untouchable. Prior to one of many storms last winter, our governor suggested that people stay off the roads to make way for plows. Even if I felt the directive was alarmist, safety does and should take precedent. In that case, our firm settled on a compromise where people use discretion in their travel to and from work, but the office is open. We can all estimate the cost in wages, rent and even missed opportunities to sit with clients or each other.

This new frontier demands an executive response aimed at making constituents feel secure, first, while also evaluating the cost of any added safeguards. Here are some considerations for managers that have been on my mind:

Recognize that we have widely different thresholds beyond which we begin to feel unsafe. In my financial services company, we have a broad range of attitudes about required security levels for everything from our office entrance, digital encryption, and road safety during severe weather. It is essential to listen and not force our own attitude onto our colleagues and employees.

Try to design policies so that employees feel empowered to make some decisions themselves. For example, if the governor advises residents to avoid driving during a hurricane warning, let people make their own choices about coming to or leaving work. Otherwise, companies run the risk of people being resentful, anxious, or distracted.

Analyze situations carefully in terms of potential costs, liabilities, and benefits. A few years ago, I had a stalker. After this man aggressively charged into our office, running past the security officer and into the elevator, several of my colleagues not surprisingly felt that we needed to create a safer environment. I was less worried, despite being the target of his interest, believing that a night in jail and a severe warning from the judge might have an effect. However, we needed to address everyone's anxiety; that required studying access and surveillance systems for doors, elevators, and hallways. We selected a new entry locking system and convinced our building-mates to install access card security in the elevators. While the costs were not extreme, they were still meaningful, but the benefit in terms of everyone's comfort level was worthwhile.

Sometimes it's worth it to take a well-calculated risk. On the day of the manhunt for the second suspect in the Boston Marathon bombing, the governor of Massachusetts ordered a "lockdown" in the highest risk towns and advised, but did not order, residents of other communities to stay home from work for the day. I had already driven into work before knowing the extent of the restrictions, having written an email suggesting that my colleagues listen to the news, use discretion, and follow the governor's instructions.

Part of my decision hinged on a meeting planned that day with a client prospect, who, I suspected, might decide to come into Boston that day anyway. I wrote him to say that I was available if, by any chance, he was in the city, but that if not, we should reschedule at his convenience. He was already at work in his office a block away. While not the major reason, I believe that one factor in his choice to hire us is that we shared a similar, albeit, contrarian view of the widespread lockdown, and he read something into that about my work ethic and that of a few colleagues who rode bikes, walked or drove into city.

Most importantly, managers must understand that this is a different world where we constantly face challenges related to safety. The cost to address security in the physical and digital workplace is simply a larger expense line than in the past, whether because of lost work days or because of the cost of securing computers, digital files, or buildings. I've realized that I must not judge anyone's decision to either come to work on a potentially dangerous day, or to stay home with their families. This is especially true when public transportation has been canceled, or when family dynamics factor into individual decision making.

As managers, we must be sensitive to our employees' fears and anxieties, which themselves reduce productivity and satisfaction, while also being aware of what that means financially. So when I suggest that we drive out to Six Flags and ride the roller coaster together as a bonding experience, I am ready to accept a toned down tilt-a-whirl option, predetermined "designated drivers" for the ride home, and pre-screening the amusement park for security protocol. This is our new world.

Pricing Strategies People Love

An interview with Sandeep Baliga and Jeff Ely, professors at the Kellogg School of Management and Northwestern University. For more, see The Power of Purple Pricing.

Download this podcast

A written transcript will be available by June 14.

You Have No Control Over Security on the Feudal Internet

Facebook regularly abuses the privacy of its users. Google has stopped supporting its popular RSS feeder. Apple prohibits all iPhone apps that are political or sexual. Microsoft might be cooperating with some governments to spy on Skype calls, but we don't know which ones. Both Twitter and LinkedIn have recently suffered security breaches that affected the data of hundreds of thousands of their users.

If you've started to think of yourself as a hapless peasant in a Game of Thrones power struggle, you're more right than you may realize. These are not traditional companies, and we are not traditional customers. These are feudal lords, and we are their vassals, peasants, and serfs.

Power has shifted in IT, in favor of both cloud-service providers and closed-platform vendors. This power shift affects many things, and it profoundly affects security.

Traditionally, computer security was the user's responsibility. Users purchased their own antivirus software and firewalls, and any breaches were blamed on their inattentiveness. It's kind of a crazy business model. Normally we expect the products and services we buy to be safe and secure, but in IT we tolerated lousy products and supported an enormous aftermarket for security.

Now that the IT industry has matured, we expect more security "out of the box." This has become possible largely because of two technology trends: cloud computing and vendor-controlled platforms. The first means that most of our data resides on other networks: Google Docs, Salesforce.com, Facebook, Gmail. The second means that our new internet devices are both closed and controlled by the vendors, giving us limited configuration control: iPhones, ChromeBooks, Kindles, Blackberries. Meanwhile, our relationship with IT has changed. We used to use our computers to do things. We now use our vendor-controlled computing devices to go places. All of these places are owned by someone.

The new security model is that someone else takes care of it — without telling us any of the details. I have no control over the security of my Gmail or my photos on Flickr. I can't demand greater security for my presentations on Prezi or my task list on Trello, no matter how confidential they are. I can't audit any of these cloud services. I can't delete cookies on my iPad or ensure that files are securely erased. Updates on my Kindle happen automatically, without my knowledge or consent. I have so little visibility into the security of Facebook that I have no idea what operating system they're using.

There are a lot of good reasons why we're all flocking to these cloud services and vendor-controlled platforms. The benefits are enormous, from cost to convenience to reliability to security itself. But it is inherently a feudal relationship. We cede control of our data and computing platforms to these companies and trust that they will treat us well and protect us from harm. And if we pledge complete allegiance to them — if we let them control our email and calendar and address book and photos and everything — we get even more benefits. We become their vassals; or, on a bad day, their serfs.

There are a lot of feudal lords out there. Google and Apple are the obvious ones, but Microsoft is trying to control both user data and the end-user platform as well. Facebook is another lord, controlling much of the socializing we do on the Internet. Other feudal lords are smaller and more specialized — Amazon, Yahoo, Verizon, and so on — but the model is the same.

To be sure, feudal security has its advantages. These companies are much better at security than the average user. Automatic backup has saved a lot of data after hardware failures, user mistakes, and malware infections. Automatic updates have increased security dramatically. This is also true for small organizations; they are more secure than they would be if they tried to do it themselves. For large corporations with dedicated IT security departments, the benefits are less clear. Sure, even large companies outsource critical functions like tax preparation and cleaning services, but large companies have specific requirements for security, data retention, audit, and so on — and that's just not possible with most of these feudal lords.

Feudal security also has its risks. Vendors can, and do, make security mistakes affecting hundreds of thousands of people. Vendors can lock people into relationships, making it hard for them to take their data and leave. Vendors can act arbitrarily, against our interests; Facebook regularly does this when it changes peoples' defaults, implements new features, or modifies its privacy policy. Many vendors give our data to the government without notice, consent, or a warrant; almost all sell it for profit. This isn't surprising, really; companies should be expected to act in their own self-interest and not in their users' best interest.

The feudal relationship is inherently based on power. In Medieval Europe, people would pledge their allegiance to a feudal lord in exchange for that lord's protection. This arrangement changed as the lords realized that they had all the power and could do whatever they wanted. Vassals were used and abused; peasants were tied to their land and became serfs.

It's the internet lords' popularity and ubiquity that enable them to profit; laws and government relationships make it easier for them to hold onto power. These lords are vying with each other for profits and power. By spending time on their sites and giving them our personal information — whether through search queries, e-mails, status updates, likes, or simply our behavioral characteristics — we are providing the raw material for that struggle. In this way we are like serfs, toiling the land for our feudal lords. If you don't believe me, try to take your data with you when you leave Facebook. And when war breaks out among the giants, we become collateral damage.

So how do we survive? Increasingly, we have little alternative but to trust someone, so we need to decide who we trust — and who we don't — and then act accordingly. This isn't easy; our feudal lords go out of their way not to be transparent about their actions, their security, or much of anything. Use whatever power you have — as individuals, none; as large corporations, more — to negotiate with your lords. And, finally, don't be extreme in any way: politically, socially, culturally. Yes, you can be shut down without recourse, but it's usually those on the edges that are affected. Not much solace, I agree, but it's something.

On the policy side, we have an action plan. In the short term, we need to keep circumvention — the ability to modify our hardware, software, and data files — legal and preserve net neutrality. Both of these things limit how much the lords can take advantage of us, and they increase the possibility that the market will force them to be more benevolent. The last thing we want is the government — that's us — spending resources to enforce one particular business model over another and stifling competition.

In the longer term, we all need to work to reduce the power imbalance. Medieval feudalism evolved into a more balanced relationship in which lords had responsibilities as well as rights. Today's internet feudalism is both ad-hoc and one-sided. We have no choice but to trust the lords, but we receive very few assurances in return. The lords have a lot of rights, but few responsibilities or limits. We need to balance this relationship, and government intervention is the only way we're going to get it. In medieval Europe, the rise of the centralized state and the rule of law provided the stability that feudalism lacked. The Magna Carta first forced responsibilities on governments and put humans on the long road toward government by the people and for the people.

We need a similar process to rein in our internet lords, and it's not something that market forces are likely to provide. The very definition of power is changing, and the issues are far bigger than the internet and our relationships with our IT providers.

Data Under Siege
An HBR Insight Center





Welcome to the "Data Under Siege" Insight Center
Four Things the Private Sector Must Demand on Cyber Security
Does Your CEO Really Get Data Security?
The Companies and Countries Losing Their Data

What Anonymous Feedback Will (and Won't) Tell You

A survey evaluating a team's performance can be a powerful tool for making that team more effective. And the first message that consultants and HR professionals often communicate on these surveys is: "To ensure that the team gets the best data and feels protected, we will make sure responses are confidential." The widespread assumption is that if team members know their answers are confidential, they will respond honestly. But if you ask for confidential feedback, it might create the very results you are trying to avoid.

If team members are reluctant to have their names associated with their responses, then you've already identified what is probably the most significant problem in your team — lack of trust. Leaders routinely insist that team members be accountable as a team, so the logic follows that they should also be accountable for giving good, critical feedback. But enabling respondents to comment without being linked to their responses actually catalyzes the situation the survey is designed to overcome: It seeks to create increased accountability using a process that lacks transparency and precludes accountability.

Without a basic level of trust among team members (including the team leader), team performance, working relationships, and individual well-being suffer. And when it comes to the negative outcomes of confidential surveys, there are some key unintended consequences you might recognize. I saw all of these outcomes early in my career, in part when I worked for the University of Michigan's Survey Research Center designing and administering surveys, and facilitating feedback meetings for leaders and their teams:

Even if the answers are honest, they aren't necessarily valid. Ratings may be inaccurate, biased, or even self-serving — but without survey-taker identification it's impossible to determine how each member responded and why. When results are presented confidentially and aggregated, they may be misleading; for example, one outlier response can greatly affect the team's average score.

Team members can't identify specific behaviors to change on their own. For your team to become more effective, they need to know the specific behaviors that influence their effectiveness. But responses to even well-crafted and validated survey items like "Team members follow through on group decisions" or "Conflict interferes with achieving goals" do not by themselves provide that level of specificity. Identifying specific behaviors that need to change requires that members talk directly with each other about what they might do differently.

Mixed messages create conflict and reduce trust. The second message that consultants and HR professionals communicate is: "The survey feedback session is an important time to discuss the results as a team and seek clarification from each other." But it's impossible to simultaneously clarify a response's meaning while maintaining confidentiality. Team members who expect anonymity are likely to feel threatened when those who are expecting clarification ask about their specific responses. The latter team members will inevitably become frustrated, further reducing trust.

When used well, surveys are a valuable tool for improving team effectiveness. I still use surveys with my leadership team clients to help them increase their effectiveness, but I design the survey administration and feedback to minimize these unintended consequences. But how do you resolve the tradeoff of confidentiality and accountability? Trust is the key, but there is no easy or fool-proof solution. If you, as the team leader, are one of the primary sources of team mistrust, the situation is even more challenging. Nevertheless, these specific actions may help:

Raise the dilemma with your team. Test your assumption that team members want confidentiality by asking them directly. Explain the tradeoff of survey confidentiality and effectiveness, including the issues of validity, behavior specificity, accountability, and trust. Ask team members for their reactions.

Ask which conditions would need to be met for them to complete the survey using their names. Work to create those conditions.

If you learn that low trust is a significant issue, address it. Ask members to be accountable for stating their views but emphasize that no one will be coerced into sharing information they are not yet willing to share. Assure members that providing information and opinions, even if negative, will not have punitive consequences, and ensure that this is the case. Use a set of ground rules to make the conversation safe and productive.

Don't be afraid to use outside help. An internal or external consultant can help the team engage in this conversation in a way that simultaneously maximizes the psychological safety and accountability of team members. It is challenging to create this environment alone, particularly if you, as the team leader, are one of the sources of team mistrust.

It's key to remember is that effective teams help each other improve. They provide each other with regular, specific feedback about how their behaviors are affecting the team and team goals. Research shows that regularly following up with colleagues is a powerful variable in creating long-term sustainable change in leadership behavior. To provide this effective feedback and support, team members need to agree on the specific behaviors that each member will change.

A Technique to Bridge the Gap Between Marketing and IT

Quick: when someone says "IT," what comes to mind? Usually, people think of the systems they use as employees inside organizations — not customers. Here's a familiar story: Marketing conducts research ("Big Data"! "Analytics"!) and uncovers new customer insights; it then turns to operations to translate the insights into action...and hits a wall. The people in operations are too focused on fulfilling internal requests and service agreements to worry about customers, the ones that pay real money.

This classic breakdown between marketing and IT is being bridged at a few leading companies such as ING, the Netherlands bank. ING's customer intelligence group does market research and "database" marketing — they develop sales campaigns for targeted customers. Kim Verhaaf, director of customer intelligence, told me: "A few years ago customer intelligence was mainly about finding customers for our products in order to push sales and conversion rates. The financial crisis changed the market conditions for banks and also people's attitudes towards banks. The Dutch market changed from a 'grow with the flow' market to a 'battle for share' market. And in a highly competitive market, emotional preference becomes important."

To learn more about emotions, the customer intelligence group took several banking products and processes and measured customers' reactions to them. They found that their offerings trigger more emotions than they had realized. Some provoked positive feelings, but some also prompted frustration, anger, and stress. They also found that customer satisfaction does not depend solely on the functionality of a product or service; it can depend on reliability and ease of use. Verhaaf said they realized that "to create more positive reactions and build trust with our customers, we really need the help of IT in changing our products and processes."

While the customer intelligence group was learning about customers' emotions, , the new chief information officer, was learning about ING's IT organization. He found IT to be completely detached from anything like a real end customer. The IT group treated the internal organization as their customers, rather than the actual bank customers. That meant that they were focused on delivering internal processes. For example, through a standard process model for IT (ITIL), they had identified the incident management process, (an incident is a customer problem), and were happy that 80% of incidents were resolved in two hours. But nobody looked at statistics that showed that incidents were increasing. And nobody looked at what these incidents were doing to the bank's customers. When they looked at the real customer impact, they realized they needed to reduce incidents dramatically. They started with 1,000 incidents per week. This was a surprising and scary number for their CEO. By focusing on reducing incidents, they got them down by 40% to 600 per week in a year. Van Kemenade: "In our most recent report we are down to 450 per week. Customers can now depend on a more reliable bank, which is helping us regain their trust."

How did marketing and operations at ING learn to marry these customer insights and operations? Answer: Cross-functional collaboration using "Agile Scrum."

As I described in a previous post, ING's IT organization has been transitioning from the traditional development approach of (1) define functional requirements, then (2) design, then (3) build (the "waterfall" approach) to making quick, small changes to systems ("Agile Scrum"). Ron van Kemenade: "Our focus on customers has led us to reduce our development cycle from months to days. We've moved from a project orientation to continuous delivery, applying Lean Six Sigma approaches."

Agile and Scrum have allowed ING to respond quickly to signals from customers. But moving to continuous delivery is a struggle. Some business people who are used to the traditional waterfall method can fall into an unfortunate cycle: taking months to develop requirements, then waiting for IT to respond, then telling IT that's not what they wanted. Now instead at ING they say, "Here's your team. You need to be in every daily or weekly Scrum cycle or sprint to decide if the work is meeting your needs." It demands more time from the business people, but they are engaged and own it.

While Scrum has been employed primarily in software development, ING shows that it has broader management applications. They have used Agile Scrum as a key tool for collaboration across functions in processes such as developing new products and in marketing campaigns. And the frequent (daily or weekly) meetings accelerate decision-making.

Historically, people at ING were either internally focused or externally focused. They worked either to increase efficiency or to address customers' emotions. They have learned that to be the preferred bank, they have to do both at the same time. And that requires close and constant collaboration between marketing and IT.

Don't Just Create Value; Capture It

In my recent HBR article, The New Dynamics of Competition, I present a new analytical tool called Value Network Maps, which I explain below.

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These Maps are an outgrowth of exciting new work by strategy scholars developing a mathematical model of firm strategy that I refer to as the Value Capture Model (VCM). The VCM calls our attention to three important truths of competitive strategy that other theories obscure. Business strategists ignore these truths at their peril. Value network maps are designed to ensure that your strategic thinking is complete.

The first truth is that, while value creation and value capture are crucial aspects of any strategic analysis, they are different and, as such, must be treated in distinct ways. As the exhibit below reveals, a Map analysis begins by looking at value creation. The center of the Map depicts the firm and the other agents (generally, a supply chain and its customers) who, jointly, contribute to a "pie" of economic value. These agents are called the "value network." This first step in a Map analysis requires managers to think deeply about how with whom they create value for the ultimate end-user. How much of this pie each agent actually captures is answered in the next two stages of the analysis, each corresponding to one of the remaining truths highlighted by the VCM.

The second truth is that competition is symmetric in its operation. This is something of a new idea in strategy. Since the mid-1800s all the way through Michael Porter, people have been encouraged to think of "competition" as a persistent driver of profit erosion - that is, as a threat. But the mathematics of the VCM vividly illustrate that competition works both on the firm and on those with whom the firm must transact in exactly the same way.

The Map captures the workings of competition in two locations. First, it surrounds the firm and its value network with a field labeled the "competitive periphery." The periphery is populated with those agents who generate competition either for the firm or for others in the firm's value network. Agents in a network are guaranteed a share of value commensurate with the intensity of competition for them. An agent's competition-guaranteed share is depicted in the Map as dark shaded slice of the value pie. This balanced view of competition both simplifies analysis (there are not five forces of competition, only one) and makes it comprehensive (by ensuring that the role of competitors for the firm is not ignored).

One of the interesting implications of this view of competition is that market share is not always the unalloyed "good" that many managers assume it to be. Why? Because, when a firm increases its market share it turns potential customers into actual customers. On the one hand, the firm's value network is expanded and more value is created. On the other, in joining the network, these customers leave the periphery, thereby reducing competition for the firm. Thus, while there may be more overall value up for grabs, the firm is guaranteed less of it by competition.

The third truth is that there are two essential ways a firm captures value — either through force of competition or through force of persuasion. This may be the most radical and far-reaching insight for competitive strategy yet to come out of the VCM. Once again, received wisdom in strategy suggests that value capture is entirely determined by competition. After all, prices are determined at the point where "the supply curve intersects the demand curve," right?

Fortunately, perhaps, the real world isn't quite so deterministic. Competition from the periphery for any agent (the firm, its suppliers, or its customers) does determine a minimum share that it must get of the value pie produced by its network, as illustrated by the Map. But competition rarely results in a complete allocation of value — that is, the shares guaranteed by competition do not typically add up to 100%. When they do not, a second avenue for value capture is opened up for the firm.

Imagine negotiating with one of your buyers. If there is a minimum price below which you can credibly walk away from the deal — because there are other deals you prefer to take below that price — then, that minimum is the amount guaranteed by competition. In symmetric fashion, your buyer may have a maximum he or she is willing to pay. Economists refer to these values as "reservation prices" (the VCM helps us understand how, exactly, those reservation prices are determined). Typically, your minimum does not equal your buyer's maximum, in which case the final price will be somewhere in-between.

In the VCM, we refer to all ways a firm captures value from its deals other than competition as persuasion and the portions of value created that are up for grabs through persuasion are shown in the map as the light shaded slices of the pie. In some industries, such as military contracting, this second source of value capture may be dominant.

Firms can be helped in their ability to persuade by a wide variety of factors. They may have superior bargaining skill (e.g., due to an extremely well-trained sales force). Industry norms (such as the structure of a bidding process) can also affect the relative ability of forms and the other agents in the network to negotiate a larger slice of the pie.

Relatedly, firms may forward integrate to a point in the supply chain at which they have "persuasive" advantages. For example, producers of products for mass retail markets can forward integrate into retail distribution. By doing so, they bypass negotiations with big distributors and, instead, deal with individual consumers. Big distributors typically have greater incentive to haggle over their share of the pie than do individual consumers. The latter can still walk away from prices that are not consistent with their alternatives (arising from competition for them), but within that range the firm can make take-it-or-leave-it offers such that the benefit of bargaining to the customer is below the cost of doing so.

To sum up, the Value Network Map shows how much value is up for grabs, the extended network of agents who interact with the firm to create that value, a periphery of agents who compete for those in the firm's value network and, finally, the shares of value guaranteed to the firm and its network partners by the competition from the periphery. The strategic significance of competitive versus persuasive factors is highlighted by comparing the shares guaranteed by competition to the total amount generated by the value network.

Being Digital Demands You Be More Human

The halls of every marketing organization are filled with rumors about the new crop of hires — computer scientists, math majors and big data experts. For them, consumers are a mass of 0s and 1s that represent online behavior that can be collected, analyzed and targeted.

But the one thing companies seem to keep forgetting is that customers are actually human beings.

The chocolatier Ferrero Rocher learned that lesson recently from Sara Russo, a big fan of its Nutella brand. Such a big fan, in fact, that she started an annual World Nutella Day in 2007. The event, conceived by Russo to celebrate the hazelnut spread, was held in mid-February this year; more than 40,000 fans like the event's page on Facebook. But Ferrero hardly had a positive reaction to the publicity blitz — the company had its lawyers send Ms. Russo a cease-and-desist letter.

Of course, Ms. Russo blogged about the letter and drew a great deal of media coverage. An outcry spread through social media as Nutella fans wondered why Ferrero would want to stop the celebration. Ms. Russo reported on her blog, "They were very gracious and supportive and we were able to have a productive discussion about World Nutella Day living on for the fans, which is the whole point."

I was on the other side of the same kind of interaction a couple of years ago. My son Harry, then 8, sent an airplane drawing to Boeing to see if they'd build his design. We got a very similar letter to the one Ms. Russo received from Boeing asking Harry to stop using the Boeing trademark in his drawings.

I gave my take on the situation in a 2010 blog post titled, "Is Your Customer Service Ready for the New World of Openness?". The dilemma for me was whether to tell Harry about the letter and the cold, hard truth about corporate communications — or lie to him and tell him we didn't receive the letter with the hope of continuing to inspire his childhood creativity for as long as possible.

As you can imagine, the media world blew the story up with articles on thousands of blogs, in hundreds of magazines and even on ABC. While Boeing wanted the story to go away, Todd Belcher, the company's Director of Communications, reached out to Harry personally. After a few chats, Boeing invited the whole family to Seattle to watch planes being built. It was the trip of the lifetime for Harry and it has continued to inspire his creativity.

But Todd's actions weren't only beneficial to my son. By realizing that Harry was just a child with a passion for planes, Todd turned a potentially bad situation into a positive one and Boeing changed the way it responds to the public's ideas.

Nutella and Boeing aren't unique in trying to figure out how to balance their need to control their intellectual property with their desire to connect with fans that demand — and have — more access than ever to corporations and a passion for broadcasting their love of a brand in the age of democratized communications driven by digital technology.

In 2000, Metallica sued 30,000 fans for illegally downloading their music on Napster. Likewise, Mattel has battled fans over making their own versions of Barbies. Fedex even used the DCMA (Digital Millennium Copyright Act) to force Jose Avila to take down a web site that displayed furniture that he'd made out of FedEx boxes.

Like it or not, every brand that has a following will have to deal with this unique digital-age problem.

As companies become more digital and equipped with advanced marketing analytic tools that allow them to know and predict consumers' behavior even better than consumers themselves, they need to be more human as well. It's time to shift the paradigm. Brands need to not only connect directly with their fans but also rethink the concept of brand ownership. Brands can be owned by both the company and the community of customers, fans, and followers that rallies around them.

As new digital marketing tools and systems are implemented they must be balanced by even more analogue systems than before. The ability to reach out, in a human way, to a Sara or Harry can quickly create either positive or negative momentum for your brand. That makes human interaction more important than ever.

Innovations in Digital and Mobile Marketing
An HBR Insight Center





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