Kieran Levis.com

28 April 2010

A striking example of the ubiquity of obliquity is that scarcely anybody sets out deliberately to create a new market, yet that is what nearly all of my subjects in Winners and Losers did. One exception is eBay – Pierre Omidyar’s idea was always to create ‘a perfect market’, a level-playing field for part-time traders. Its genesis however was largely serendipitous – he did not originally think of it as a business at all, but more of a communitarian utility.

Does it make sense to plan to create a new market? Until recently I would have said no – far better to concentrate on building a robust business. Now that we understand much more about how the networked economy works, not least from eBay’s history, that judgement needs qualifying. Where there are powerful network effects and positive feedback loops, a race often develops for who can reach critical mass first, and the winner can expect to hold onto his prize for a long time. Here fortune favours the prepared mind and those with a head start.

Continue reading How to create a new market

19 April 2010

John Kay’s Foundations of Corporate Success is one of the best books on business strategy, a brilliant counterweight to Michael Porter’s thinking, with its emphasis on barriers to competitive entry. Like Porter, Kay is primarily an economist, though one with many intellectual interests. His latest book, Obliquity, pulls together ideas he has been developing for several years in his columns in the Financial Times, (many of which are available free at johnkay.com.)

In Obliquity he argues that our most important goals in life are best achieved, not by systematic planning and rational analysis, but obliquely. Indeed, the goals themselves are rarely clear-cut and explicit, and are frequently adjusted in the light of experience.

Virtually all my stories in Winners and Losers bear this out. None of the market creators I studied were slaves to their business plans – if indeed they had one – but modified both their strategies and their objectives in the light of what they learned through trial and error. One of my most surprising discoveries was that making shed-loads of money was not a primary goal for any of them. Kay argues that those who are obsessed by it are unlikely to be successful in the long run, bankers providing all too many recent examples.

Continue reading The subtle charms of obliquity

3 April 2010

Hubris gets a bad press, and deservedly so. The reckless arrogance of the leaders of Enron and WorldCom not only destroyed their businesses but took some of them to jail. Many feel that bankers deserved a similar fate after ludicrous levels of overconfidence spurred them to take on unprecedented levels of debt, speculate in markets they did not understand and lead their businesses to insolvency.

But capitalism depends on irrationally optimistic entrepreneurs, most of whom fail without doing enormous damage to others. The line between supreme self-confidence and dangerous arrogance is a fine one, invariably invisible to those who have crossed it. The most hubristic follies are committed by those who have previously made risky bets that paid off against the odds, and come to believe they are invincible. At the time they make their fatal last bet they are mostly hailed as heroes, which is a big part of the problem. Wise counsel, if only to remind masters of the universe that they are mortal, can make a big difference.
Continue reading The perils of hubris

17 March 2010

The term business model only really entered the mainstream in the 1990s, when so many unfamiliar ones emerged. Earlier inventors of revolutionary models like Henry Ford (mass production) and Frank McNamara (credit cards) just thought they had come up with a good business idea. Now business model innovation is analysed by academics and, according to IBM’s annual survey of CEOs, is a top priority for most global companies.

This is all very sensible. I just wish I could think of a great new business model that was the outcome of careful process and systematic analysis. Finding a business model was one of the critical phases in the birth of all the businesses I studied who created entirely new markets, but in every case it emerged gradually, often serendipitously, and was rarely the starting point. The genesis of the model is often indistinguishable from that of the business itself, which in most cases was the product of trial and error rather than anything resembling strategic planning.

Continue reading The birth of business models

10 March 2010

Two fascinating books on the troubled media industry have appeared recently. I have written a great deal about Google lately so I will comment on Ken Auletta’s Googled later. Reading The Curse of the Moguls by Jonathnn Knee, Bruce Greenwald and Ava Seave is a bit like coming across Machiavelli’s The Prince for the first time: on the one hand it’s a brilliant critique of how badly the industry is led, but on the other, much of its case rests on the authors’ conviction that competitive advantage is synonymous with barriers to competitors and holding customers captive

This post is mainly about why I disagree, but anyone who cares about the media industry should read their book to understand why so much of it has gone so badly wrong. Pursuing spurious synergies and size as an end in itself, and acquisitions as a means to achieve both, the leaders of Time Warner, Viacom, Vivendi and Comcast have destroyed rather than enhanced shareholder value. Knee, Greenwald and Seave make the case for the prosecution with forensic skill and they savagely debunk myths like Content is King, First Mover Advantage and the cults of convergence and growth. Their analysis of how media firms almost invariably pay too much for acquisitions – which accounts for much of the industry’s poor financial performance – is particularly juicy.

Where we part company is on the question of what makes businesses successful in the long-term, the basis of sustainable competitive advantage. This will probably always be fiercely debated, not least because some pundits even deny its existence. Knee, Greenwald and Seave offer a simplified version of Michael Porter’s thesis: “competitive advantage and barriers to entry are the same thing”. They are not alone in seeing business as a continuation of war by other means, and war of a rather mediaeval kind, mainly about building the biggest fortresses and the deepest moats.

Continue reading Competitive advantage

21 February 2010

I discussed last week how different combinations of network effects and positive feedback loops have enabled a few winners to take something close to all the prizes in some markets. But we should beware of being deterministic and over-schematic about this – each case is different. Microsoft and eBay established effective monopolies where large numbers of customers have been lucratively locked-in: their customers face substantial switching costs. Google and Facebook are rather different.

Google’s shares both of the search audience and of the market for search-based advertising have continued to rise fairly steadily but its customers are loyal rather than locked-in. If they weren’t happy with what they’ve got they could quite easily switch to other search engines or advertising media. This is not because Google is vastly superior to other search engines. It certainly was for several years, but others, not least Microsoft’s Bing, now offer very good search and features that make them more suitable for some purposes. But they would have to be massively better to tempt more than a few consumers away, and they’d have to win millions of them before they could make a dent in Google’s share of the advertising market.

Continue reading Winners and prizes

February 11, 2010

The Economist recently published a special report on social networking, which attributed Facebook’s extraordinary growth to ‘the network effect’. This is more or less true but the writer is conflating two different phenomena: network effects, a concept drawn from economics, and positive feedback loops, from the world of engineering. It is their combination that sometimes produces exponential growth and allows one winner to take all.

Network effects arise because the bigger a network is, the more valuable it becomes to its members. This is true whether it is a physical network like a telephone system or a virtual network like the buyers and sellers on eBay and the subscribers to dating agencies: they have more people to speak to, to trade with, to fall in love with. Bob Metcalf, the creator of Ethernet and of the ‘law’ that bears his name, suggested that the value of a network is proportional to the square of the number of its members.

Continue reading The Network Effect

4 February 2010

William Goldman’s aphorism about Hollywood producers failing to guess which movies will be hits is equally applicable to new products and technologies like the iPad. Our first impressions – especially when we haven’t even seen or touched one – are almost invariably wrong. The immediate reaction of most commentators when the iPod and the iPhone first appeared was to dismiss them as yet more examples of Steve Jobs’ eccentricity. We have not heard too many humble retractions – pundits don’t like admitting errors any more than CEOs.

In most cases the initial scepticism of crowds is justified – nearly all new products and technologies fail to find a market – but some succeed big time. Apple’s unparalleled track record in devising insanely great, fabulously successful, counter-intuitive products means we should at the very least keep an open mind in this case. The crime is not being wrong the first time, but refusing to acknowledge the mistake.

Continue reading The iPad – nobody knows anything

27 January 2010

Up in the Air is a rather good movie that’s been hailed as a great piece of social commentary, but the picture it paints of the business world is a fantasy. George Clooney and Vera Farmiga are terrific, especially together; the clips of real people, devastated at losing their jobs, are moving; and there are some brilliant touches: Clooney’s chilling motivational speeches about ridding your life of emotional baggage, his tricks for breezing through airports and his ridiculous obsession with air miles. Many of us can recognize that state of being cocooned in a weird little closed world, almost oblivious to real human life.

But the ‘career transition’ consultancy he works for does not ring remotely true. I wonder how much exposure the people who made the film had ever had to real lay-offs, management consulting and business in general. About as much, I suspect, as those who’ve praised it so extravagantly.

Continue reading Up in the air

20 January 2010

Google’s announcement that it is no longer prepared to cooperate with the Chinese authorities in ‘filtering’ search results and may pull out of the country altogether is proof positive for the faithful of just how different a company it is. The fact that there were probably business considerations behind the decision as well as moral scruples makes some commentators cynical, but cynicism is just another form of over-simplification: not to have weighed up the business implications would have been negligent, just as there was certainly a case for the original rationale that a global company ought to have a presence in China and that offering Chinese users some information was better than nothing.

The fact that Google has now come close to acknowledging that that was a mistake shows that it is pretty different from most large companies. For businesses feeling threatened by the Google juggernaut, however, its ‘don’t be evil’ mantra is hypocritical cant: Google is as ruthless and destructive as Microsoft was in the 1990s. But if we look at what Google has actually done, as opposed to what strategic speculation suggests it might do, there is not much evidence.

Continue reading How evil is Google?