TIMnovate

We all have read about Coopetition: how to collaborate with competitors.

Now we are beginning to learn about the opposite: How to compete with collaborators. Shall we call it: Collabetition?  

What happens when your strategy leads your organization to pursue what strategy expert Koby Huberman calls “more to same” – selling higher-value higher-margin products to your existing customers? What if that strategy brings you head-to-head with those with whom you collaborated, crucial strategic partners, because you are now supplying products that your partners once provided? 

This now seems the case with Google. Google is launching Knol, a user-written ‘wikipedia’, in which users write content. Google’s business model has until now been that of a ‘conduit’ – a search engine, the leading one, that brings users to content generated by others. When Google begins to generate ‘content’ by itself,  it becomes a competitor to some of its key collaborators, to whose sites Google’s search engine brings millions of eyeballs.

Google insists this is not the case, that it remains a ‘conduit’. But the launch of Knol, and what I believe will be Knol’s rapid growth in usage, belies this. It was probably inevitable that Google, in its search for growth, would have to move beyond the search business and into content creation. How it manages this ‘invasion’ will be crucial for Google’s future.

This has happened before. Years ago, there was tension within the “Wintel” community – the collaboration between Windows (Microsoft) and Intel (microprocessors), as Intel put more and more software onto its chips, threatening to move up the value chain and appropriate some of Microsoft’s revenues. A competitive war was averted, partly because Intel has now moved to seek value elsewhere, for instance in mobility, mobile devices and wireless. Collabetition has also pre-empted key strategic moves – Dell’s direct-sale model has not been embraced or copied widely in the PC business, partly because for HP or IBM to engage in direct sale would place them directly in competition with their collaborators, value-added resellers.    

Strategically, moving up the value chain is crucial for growth and profit. Often, doing so leads to collabetition –  head-to-head competition with those in the value chain with whom you closely collaborate.  How to manage this key transition takes wisdom and planning. A good example of a company that managed it successfully is Infosys… see the fine case study by D.V.R. Seshadri on how they did it*.  
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*See D.V.R. Seshadri and James Narus, “Value Chain Migration at Infosys” (A), Int. Journal of Technology and Innovation Management  Education, vol. 1, issue 1, 2006 (available on request from smaital@mit.edu)

Increasingly, in the media business, innovation is about a race in which the winner takes all. Movie studios seek blockbuster hits, and run business models similar to VC’s – 9 losing movies are paid for by one ‘winner’ that strikes gold. 

Benny Meyer, chairman of the film studio Warner Brothers, has proved it. Warner Bros’ innovative Batman film The Dark Knight [See July 26 blog, “The Dark Knight”] just broke box office records for opening day, grossing $66 m. in receipts. The film may come close to Titanic for overall lifetime revenues. As Warner’s parent company Time-Warner downsizes, Warner Bros. films make big bucks for its struggling ‘mothership’. When new movies launch, there is ‘buzz’ – word of mouth quickly decides which picture is worth seeing, and then everyone has to see it, so they can talk about with their friends who have also seen it. Great movies that come second fare badly; it is winner take all. 

Not long ago, DVD sales were a key part of movie business models, often grossing more money than box office receipts. DVD sales often rescued movies that did badly at the box office. Now DVD sales have slowed to a crawl. The same thing has happened to movies as happened to music – pirated downloads. Moreover, this was predictable! But movie studios missed it, just as music companies missed it. 

Time-Warner CEO Jeffrey Bewkes notes (in an International Herald Tribune article), “Around the world the consumption of entertainment products is growing rapidly. The question is, how do you offer it? And how do you get paid for it?”  
 
This, of course, is the eternal key innovation question. How do you create value? And how do you capture it in revenue and profit?

A key principle of benchmarking is, you learn more outside your industry than within it. Music is a separate industry from film, but closely related – both generate ‘content’. Had movie studios tracked the music business, as Meyer clearly did, they may have better grasped the sweeping changes occurring in the industry, and may have adapted to the ‘winner take all’ blockbuster model, in which again, box office receipts drive profits, rather than DVD sales.

Time Warner now appears to be asking the right questions, and coming up with at least some of the right answers, led by its movie productions.

Innovation is about breaking the rules. Or, as Oracle founder Larry Ellison said in a recent talk in Israel,  “innovation is finding the flaw in the conventional wisdom”. [He clearly found it – the proof is Oracle, #462 in the Fortune 500, whose $18 b. revenues in 2007 were up 25 % over 2006. The bottom line wasn’t that bad either: $4.24 b., in net income, up 26% from 2006.]

The question is: Which rule should you break? Answer: The one that seems most inviolable, most sacred.

Take, for instance, the holy of holies: Raising money. After all, the rules about money are set by those who write the checks. Want a check? Follow their rules and procedures religiously. 

Recently, Eli Reifman, entrepreneur and kabbalist, founder of Emblaze, spoke to TIM’s MPEC participants.   His topic: How he raised over $2 b. by breaking some of the rules while adhering to others. If results are the best proof-of-concept, Reifman has results. Emblaze Group had revenues of $387 m. in 2007, but has lost money for the past three years, partly because of interest payments that probably accrued through financing acquisitions. Yet Emblaze survives and grows, partly because of Reifman’s skill in raising money.

Rules not to break: The key rule never to violate, when you seek money, is this: Never fail to understand fully, and appeal to, the underlying motive of the investor. 

•  For venture capitalists, it is ‘exit’ and little else. When seeking VC funds, be sure to present a forceful and realistic model for a 10x (ten-times) exit, one that brings the VC investor 10 times his or her investment.  

•  For an investment fund manager, the motivation is the bonus. Bonuses are based on investments outperforming the industry – not the market. If your Earnings Per Share falls by half, but that of the industry falls by two-thirds, you have outperformed. The investment manager’s bonus is secure. So, in speaking to them – show how and why you will outperform the industry. 

Which money-raising rule can and must you break, according to Reifman?

•    Do It Yourself…  break the rule that says, you need experts (i.e. investment bank clerks) to do everything for you, including writing the prospectus. 

A prospectus is just a business plan, Reifman explains. It is written in sometimes obscure language. When floating Emblaze on the London AIM market, Reifman did the IPO paperwork in record time. He and his colleagues read the British securities law, word for word. They acquired the appropriate template, filled in the blanks, and reduced the accepted time for writing a prospectus from three months to three weeks. Keep in mind, he says, that the junior employees of investment banks who do the ‘grunt work’ often, perhaps usually, know far less than you do. 

Reifman says raising money is a key skill. Like any skill, it can be learned. Problem is, there are no courses.   MBA programs teach the economics of finance, the theory, not the minutiae of practical IPO’s. You have to learn this skill by learning-by-doing, Reifman says. Conquer your fear, tackle it – and you will have a skill that can give you and your company enduring competitive advantage.

Reifman used an effective analogy to drive his point home. Want to learn parenting? He asks. He and his wife did. Before their first child was born, they called a well-known parenting institute. We want to learn how to be good parents, they said. How old is your child? They were asked. Not yet born, they said. Come back in a few years, when you have a child, they were told. Reifman now speaks widely on parenting, based on experience and common sense, partly to those who do not yet have children.  

Want to learn how to raise money? There may be no choice but to overcome your fears and tackle it yourself.  Learn by doing. 

Reifman arrived for his talk on a motorcycle. He is known in his industry as a maverick, and among other things speaks to 3,000 people every week on kabbalah. He says that the set-in-stone maxim – businesses must maximize profit – is false. Not so, he says. And indeed, Emblaze is not profitable. But who cares? It has money to spare, while other startups with brilliant technologies die, because their oxygen supply – money – runs out. 

There is one last rule Reifman urges us to break, a small one. Avoid Powerpoint, he advises. In his ‘road show’ presentations, he did not use slides. Maybe your audience will say, what a jerk, he came unprepared.  So what… they will remember you. By not using 285 slides, you have already differentiated yourself. And, you have forced yourself to prepare, to put the knowledge into your own head instead of onto the slides.

When it comes to innovation, alas, Sony just does not get it. And this, despite its brilliant CEO Sir Howard Stringer, a UK citizen knighted by the Queen*.
 
Many years ago, Sony and JVC (Japanese Victor Corp.) raced head-to-head to develop a home video recorder. Sony should have won hands-down. And in fact, technologically, they did. They developed Beta-Max technology which gave a superior crisp picture. But business-wise, Sony lost. JVC’s VHC technology was designed-for-manufacture, and as JVC raced down the learning curve, costs fell, and with them, the prices of its VHS recorders. JVC triumphed. Sony’s superior technology lost to a far better business design. And Sony ultimately was humiliated, having to lease JVC’s VHS technology. When master recordings of videos were made, they used Betamax technology; but our home machines were VHS. 

Today, Sony is locked in a similar duel, this time over e-book’s, with Amazon. Sony’s entry in the race is the Reader, a neat portable device for reading electronic devices, launched by Sony two years ago. It has a great screen, and is restful and easier to read than a compute screen.

Against it, Amazon has launched Kindle. Kindle, with inferior technology, will win – in fact, it already has.

Why?

A superior innovation model. Kindle follows Jeff Bezos (Amazon founder and CEO) and his philosophy of avoiding “cognitive overload”, meaning “help people avoid thinking too hard when they buy something.”  Amazon pioneered ‘one click’ shopping. Now, with Kindle, you can easily link to Amazon’s on-line store and download 145,000 titles. Moreover, Kindle connects to a 3G mobile network, so you can download books and newspapers within a minute. Sony’s Reader does not have this feature. 

And Sir Howard? After being trounced by Steve Jobs’ iPod, he has now ordered that 90 per cent of Sony’s devices should be networked, connected wirelessly, within two years.

Two years? Amazon already did it. Too late, Sir Howard.
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*Based in part on: John Gapper, Why Sony Lost the e-book battle,  Financial Times,  Thursday August 7, 2008, page 7.

An enormous amount of innovative energy is now pouring into energy – alternative ‘green’ energy sources, wind, solar, etc. 

Here are 10 things energy innovators need to know about oil, still the world’s major source of energy.

1. American oil production peaked at 11,297,000 bbls/day in 1970, and has gone downhill since. In 2007 America produced only about half that, or 6,879,000 bbls/day.

2. Saudi Arabia is still the world’s largest oil producer, producing 10,413,000 bbls/day in 2007, down from 11,114,000 bbls/day in 2005. 

3. Russia ranks #3 in oil production, behind Saudi Arabia, and America, with nearly 10,000 bbls/day in 2007, very close to Saudi Arabia.  

4. Iran ranks fourth in oil production, with 4,493,000 bbls/day in 2007. 

5. Iraq (in which America placed great hopes for higher oil production)  produced just under 2,000,000 bbls/day in 2007, far below its production peak of 2,800,000 bbls/day in 1989, before the First Gulf War. 

6. Canada and Mexico produce, together, nearly as much oil as America, and supply most of it to their huge neighbor.

7. America consumes 20,600,000 bbls/day (2007), leaving it with a shortfall between production and consumption of more than 14,000,000 bbls/day. 

8. America’s oil imports have grown from a small 2,500,000 bbls/day in 1965 to a massive 13,800,000 bbls/day  today (2007). This increase was completely predictable, given forecasts of oil field discoveries, development and production history. So, America has had 43 years to prepare an energy policy to reduce or even prevent U.S. energy dependence on nations (like Iran) that are hostile to it.

9. Failure to build such a policy, and failure to invest sufficiently in innovation for alternative energy sources, must rank as one of history’s great innovation failures, and policy failures, of all time. Democrats and Republicans share the failure alike.

10. Total world production of oil in 1965 was 31,800,000 bbls/day; in 2007, it was about 81,533,000 bbls/day. So oil production has risen by 156%. So has oil consumption. The result can be seen daily – just look at your outdoor thermometer.

In May-July 2007, the Asian Wall Street Journal surveyed some 2,477 executives and professionals, to find China’s most admired firms, and asked respondents to rate Chinese companies on five attributes: 

* responding to customer needs
* corporate reputation 
* management’s long-run vision
* quality of products and services
* financial reputation of firms.

Among the winners: Qingdao Haier, an appliance maker now campaigning to make Haier into a powerful global brand, as Sony did in the 1970s; and Lenovo Group, the company that bought IBM’s PC division, moved its headquarters to New York, left Stephen Ward as its CEO, and is now rapidly becoming a powerful global player.  

According to the Wall Street Journal, “Chinese business leaders approach innovation differently than in the West: by aiming to boost revenue, not costs, and by making incremental rather than fundamental improvements.” Chinese innovators often seek ways to adapt global products to local market needs, in ways that foreign firms cannot. For instance, the head of Qingdao Haier ordered that his firm’s washers be capable of cleaning vegetables – a common practice in China, not so common abroad. 

Take, for instance, Baidu.com. This is a search engine. In China, 60% of Internet searches use Baidu, rather than Google. Defeating Google is no easy task. Baidu does it, in part, by using a different corporate structure. According to the WSJ, some 60% of Baidu’s employees are in sales and marketing (the comparable figure for Google is about 40%). And Baidu employees’ average age? Believe it or not: 26. Many of their innovators are high school students, whizzes at computers, who are too young to formally hire.  

China Merchants Bank found ways to tap into the growing middle class.  Focus Media Holding Ltd. slashed through media clutter by simply placing ads in elevators (nowhere to run in an elevator)….

Here is the list of China’s most-admired firms, by category:
Overall: 1. Qingdao Haier, 2. China Merchants Bank, 3. Lenovo Group
Innovation:  1. Baidu.com  2. China Merchants Bank  3. Focus Media Holding 
Long-term Vision:  1. Lenovo Group 2. Qingdao Haier 3. China Merchants Bank
Quality:  1. Qingdao Haier 2. China Merchnats Bank 3. Wuliangye Yibin
Corporate Reputation: 1.  Qingdao Haier 2. Lenovo 3. Baoshan Iron and Steel
Financial Reputation:  1. PetroChina 2. China Mobile 3. China Merchants Bank

It is well known that open free-market capitalism is a powerful engine for creating wealth. Much of that wealth is generated through innovation. So innovation itself is an engine for capitalism’s wealth engine.

But capitalism, too, is a focus of innovation, not just the products and services that free-market capitalism generates.

What will be the form of capitalism that wins the evolutionary battle for survival?

In the ‘boxing ring’, we have American capitalism, a rather brutal form of capitalism, which has almost no safety net, leaves one American in six without health insurance, and which has offshored its production without offering production workers viable alternatives except minimum-wage Wal-Mart jobs. Taxes are so low, governments lack the funds even to maintain infrastructure. 

Facing it we have French, German, Danish, Norwegian and Finnish capitalism, with high taxes and high safety nets. Inefficient? Wasteful? Sluggish? Perhaps – but humane. Victims are not blamed.  

And of course we have Asian capitalism – the Chinese variety, for instance, which features significant economic freedom but very little political freedom.

We have seen rapid convergence in social and economic systems. When the Berlin Wall fell on Nov. 9, 1989,  nearly all countries in the world rushed to embrace some form of free-market capitalism. 

However, enormous differences among the various types of capitalism remain.

There is a highly competitive world market in ideas, not just in goods, services, capital, technology and skills. Just as companies scour the world for best practices, so do people and political leaders. We do not yet know what best-practice free-market capitalism is. 

Which form of capitalism will ultimately triumph? The battle seems to be between efficiency – the American form is highly efficient, though brutal – and equality – the French and Scandinavian models are perhaps less efficient, in France’s case much less efficient, but are very humane. 

My personal hope is that fairness and humanity will win – and quickly.

Google has just announced that it will begin offering a new service: A kind of Google wiki, in which search users write material and upload it, to become part of the Google information base. This is long-awaited, because it extends Google’s powerful vision:

Make all the written information available, all the time, anywhere, to anyone.

Now Google wants to add to “written”, the adjective “unwritten” or “tacit” as well – knowledge in people’s heads, but not written down. By asking people to write down this information, Google is extending its vision. 

The founders of Wikipedia say they do not feel threatened, because the Google wiki will be more like a blog than a Wikipedia. Time will tell.  

But a key message for innovators from Google’s planned wiki is this:

Most of the time, great innovative organizations do not know what they know. Because their creative people are so busy creating, they never take time to document what they are doing and how they are doing it. Much of this valuable information is later lost, when the innovators leave or retire. 

Does your organization have a wiki? Can you set up one? Can you persuade your developers to document what they do while they are doing it? Don’t wait for Google’s wiki. Build one of your own. You will find it is a powerful tool for building the new generation of innovators.

The latest Batman sequel, The Dark Knight, has opened and is breaking box office records, with over $200 m. in revenue grossed so far. It is the largest gross for a movie opening in history.
  
What can innovators learn from Batman and its director Chris Nolan?

* Break the rules. Batman is a ‘comic book’ movie. Movies in this genre have a formula. They have villains, but the villains are not that villainous, because viewers want to be amused and entertained, not frightened.  Nolan broke the rules. His comic-book movie raises real issues of ethics (can you break the law in order to enforce it?). His villain, The Joker, played by the late Heath Ledger, is truly unredeemably evil. Comic-book movies usually do not win Oscars. The Dark Knight may just break this tradition. Nolan was unafraid to make a serious movie out of a genre that previously has not been at all serious.

* Be like Bizet, not like Henry Ford. Bizet wrote the opera Carmen. Carmen was a rule-breaker, a game changer. Before Carmen, there was Comic Opera, and there was Grand Opera. Bizet combined them.  Audiences were puzzled and booed. But in the end, they got the idea. Carmen became one of the world’s best-loved operas – though Bizet did live long enough to see this happen. The Dark Knight may also have become a game-changer, and we may see more comic-book movies that treat serious issues and that make people think. 

The Ford Motor Co. is celebrating the 100th birthday of the Model T, first developed by Henry Ford in 1908.   The Model T was a smashing business innovation, of a kind that made competitors irrelevant, in Gary Hamel’s phrase. After Henry Ford invented the assembly line, no other business model for car production could compete with it. Ford changed the rules of the game, not only for cars but for all manufactured products. Ford’s business innovation made Ford the dominant car-maker for 20 years, until 1928. In that year, a business genius named Alfred Sloan introduced another game-changing innovation: Cars with different colors, styles, engines, and with closed bodies (the Model T was open). Henry Ford missed the boat. He failed to change his business model in time to meet competitive threats. Ford went downhill until 1965. And today, the company he founded is losing massive amounts of money and its existence is threatened, as is General Motors – the company Sloan founded. Both Ford and GM have lost the innovative talents of their founders. They have forgotten their core values. They have forgotten their history. They no longer make beautiful cars. They are no longer run by executives who live, eat, sleep and dream cars. And they certainly do not seek game-changing innovations, as Batman’s Chris Nolan does. Instead they pursue cost-cutting strategies, and those never ever sustain marketplace success by themselves.

And the rest, as they say,  is history.

“That just ain’t cricket!” This is a common English expression for anything that is not precisely according to rules. It comes from the fact that the game of cricket is played by gentlemen according to written and unwritten rules, without deviation.

Cricket is one of the world’s oldest organized sports, with history going back to the 16th C., and with international cricket played since 1844. One would expect, therefore, NOT to find innovation anywhere near the cricket ground.

Not true. Cricket test matches are normally long, sleepy events played by two teams of 11 players that can last up to five days. Years ago, someone invented one-day cricket – a match limited to, say, 50 ‘overs’ (an ‘over’ is a series of six bowled balls). It was a successful innovation. And now the British have invented Twenty20 cricket. According to Wikipedia:

Twenty20 is a form of cricket, originally introduced in United Kingdom for professional inter-county competition by the England and Wales Cricket Board (ECB), in 2003. Both teams have a single innings and bat for a maximum of 20 overs.

A Twenty20 game is completed in about two and half hours, with each innings lasting around 75 minutes, thus bringing the game closer to the timespan of other popular team sports such as football. It was introduced to create a lively form of the game which would be attractive to spectators at the ground and viewers on television and as such it has been very successful. The ECB did not intend that Twenty20 would replace other forms of cricket and these have continued alongside it.

The game has spread around the cricket world. On most international tours there is a Twenty20 match and most Test-playing nations have a domestic cup competition. The inaugural ICC World Twenty20 was played in South Africa in 2007 with India defeating Pakistan in the final.

But – guess what. The nimble Indians (India, as a nation, is utterly insane about cricket -–life stops there when an important international match is being played) grabbed the idea and created a hugely successful Twenty20 professional league. Now Britain is about to do the same, creating a televised British league. 

Conclusions? Even in the most conservative hidebound product can be innovated. To do so successfully, think ‘in the box’. The ‘box’, in this case, is television. You cannot really televise a five-day match! But you can televise a Twenty20 two-hour match. And without television revenue, you do not have a real product.   Once you assume that the rules of cricket must conform to the constraints of TV – Twenty20 follows instantly. Interestingly, the British invented Twenty20, but the Indians were first to make big bucks from it.  How many times have we seen that happen, decades ago, with American inventions and Japanese commercialization!
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p.s. My friend Richard Milecki, Kibbutz Tuval (in the Galilee) wrote to reveal the true origin of one-day cricket:

    Hi Shlomo!
One Day Cricket was initiated by Kerry Packer – the Australian Media Mogul. As you suggested, he did it to make more money out of television  advertising. The Brits of course could never have taken such a step. It  created a huge up roar at the time as did night cricket. He even had the  gall to dress the players in coloured uniforms! In retrospect the move ensured the ongoing survival of the game. 

One correction: As a child I remember sweating it out in front of the box for 5 days watching Test matches against England – it can be done!