Nonlinear Thinking

The Growth of the Internet of Things (IoT)

Cisco continues to be among the vanguard of enterprises that are embracing the emerging Internet of Things (IoT).  John Chambers, CEO of Cisco, recently delivered another speech on the concept and the bottom line, from Cisco’s viewpoint, is that the IoT is going to be a $19 trillion profit market in the next few years. That includes $2.9 trillion for manufacturing alone. Internet of Things is becoming the backbone (at least in rhetoric) of Cisco's overall business strategy, and Chambers pointed in that direction once again, stressing that Cisco's IoT game plan combines the company's cloud strategy with data analytics, mobile, collaboration, and most important of all, security.

Get Digital or Go Home

A recent study conducted by MIT Sloan Management Review and Capgemini Consulting suggests that organizations are now facing a digital imperative and must adopt new technologies effectively or face competitive obsolescence.

Among employees, while there is consensus on the importance of adopting digital technology, most find the process in their organizations to be too complex and slow and believe their leaders lack urgency and a vision for how technology can change the business. As with most initiatives, companies that successfully execute a digital transformation tend to have leaders who share their vision and define a road map, create cross-organizational authority for adoption and reward employees for working towards it.

 

Other key findings from the survey are:

• According to 78% of respondents, achieving digital transformation will become critical to their organizations within the next two years.
• However, 63% said the pace of technology change in their organization is too slow.
• The most frequently cited obstacle to digital transformation was “lack of urgency.”
• Only 38% of respondents said that digital transformation was a permanent fixture on their CEO’s agenda.
• Where CEOs have shared their vision for digital transformation, 93% of employees feel that it is the right thing for the organization. But, a mere 36% of CEOs have shared such a vision.

Companies that effectively manage the digital transformation can expect to gain in one or more of three areas:

• Better customer experiences and engagement
• Streamlined operations
• New lines of business or business models

Though innovative new business models are what every CEO dreams of, companies more often see digital technologies support a transformation of their customer experience or operations.

 

Why Business Models Matter Redux

As a strategist and market analyst, I have become prone over the years to collecting white papers, reports and any interesting treatment of key topics on my professional and personal agenda.  Then, every once in a long while, I go through the collection (mostly physical documents, to this point) and purge the ones that no longer resonate or seem to hold some continuing value.  Most of these end up in file 13 because their proposition or point-of-view was very much of the moment and that moment has passed them by, and the content is no longer relevant to my worldview.  A much smaller group consists of documents for which I can’t make a case for ever having wasted the time and paper to print them out.  The smallest and rarest of this library is composed of a few timeless treatments of topics that remain very close to my heart, falling generally in the strategy and marketing buckets.

Recently, I performed this cleansing process (and creating in the process, a great paper recycling event) and discovered several of those incredible reports and white papers that are actually more relevant now than they were when first published.  Perhaps, like a good Cabernet, laying them down for a decade or more has refined the cogent, cohesive and coherent arguments originally put forth by the authors.

One that emerged from the latter category is an article from the May 2002 edition of the Harvard Business Review addressing the key foci of my strategy work over the past two decades, that of business models.  Joan Magretta, currently a Senior Institute Associate at the Institute for Strategy and Competitiveness at Harvard Business School, authored the article, “Why Business Models Matter”, and after re-reading it several times over the past several weeks, I view it as perhaps the best rationale in support of the concept that I have encountered.

With that said, I thought it would be worthwhile and valuable to share some of Magretta’s key points in making the case for the importance of business models.

Business Models Tell the Corporate Story

• A good business model remains essential to every successful organization, whether it’s a new venture or an established player.
• The word “model” conjures up images of white boards covered with arcane mathematical formulas. Business models, though, are anything but arcane.  They are, at heart, stories – stories that explain how enterprises work.  A good business model answers Peter Drucker’s age-old questions:  Who is the customer? And what does the customer value?  It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?
• A successful business model represents a better way than existing alternatives.  It may offer more value to a discrete group of customers.  Or it may completely replace the old way of doing things and become the standard for the next generation of entrepreneurs to beat.
• Creating a business model is, then, a lot like writing a new story.  At some level, all new stories are variations on old ones, reworkings of the universal themes underlying all human experience.  Similarly, all new business models are variations on the generic value chain underlying all businesses.  Broadly speaking, this chain has two parts.  Part one includes all the activities associated with making something: designing it, purchasing raw materials, manufacturing, and so on.  Part two includes all the activities associated with selling something:  finding and reaching customers, transacting a sale, distributing the product or delivering the service.  A new business model’s plot may turn on designing a new product for an unmet need.  Or it may turn on a process innovation, a better way of making or selling or distributing an already proven product or service.

Business Model Origins

• The term “business model” first came into widespread use with the advent of the personal computer and spreadsheet.
• Before the personal computer changed the nature of business planning, most successful business models were created more by accident than by design and forethought.  The business model became clear only after the fact.  By enabling companies to tie their marketplace insights much more tightly to the resulting economics, spreadsheets made it possible to model businesses before they were launched.

The Value of Business Models

• When managers operate consciously from a model of how the entire business systems will work, every decision, initiative, and measurement provides valuable feedback. Profits are important not only for their own sake but also because they tell you whether your model is working.  Business modeling is, in this sense, the managerial equivalent of the scientific method – you start with a hypothesis, which you then test in action and revise when necessary.
• When business models don’t work, it’s because they fail either the narrative test (the story doesn’t make sense) or the numbers test (the P & L doesn’t add up).
• The irony about the slipshod use of the concept of business models is that when used correctly, it actually forces managers to think rigorously about their businesses.  A business model’s great strength as a planning tool is that it focuses attention on how all the elements of the system fit into a working whole.

Business Models ≠ Strategy

• Every viable organization is built on a sound business model, whether or not its founders or its managers conceive of what they do in those terms.  But a business model isn’t the same thing as a strategy, even though many people use the terms interchangeably today.
• Business models describe, as a system, how the pieces of a business fit together.  But they don’t factor in one critical dimension of performance: competition.  Sooner or later – and it is usually sooner – every enterprise runs into competitors.  Dealing with that reality is strategy’s job.
• A competitive strategy explains how you will do better than your rivals.  And doing better, by definition, means being different.  Organizations achieve superior performance when they are unique, when they do something no other business does in ways that no other business can duplicate.  When you cut away the jargon, that’s what strategy is all about – how you are going to do better by being different.
• When a new model changes the economics of an industry and is difficult to replicate, it can by itself create a strong competitive advantage.
• Because a business model tells a good story, it can be used to get everyone in the organization aligned around the kind of value the company wants to create.

I encourage you to read Magretta’s complete article for a view of business models that remains incredibly contemporary and relevant.

Recognizing Strategic Dissonance

Operating in a world where the competitive landscape is ever more ephemeral, challenges to the status quo ever more profound, and the life of a successful business model ever shorter, aligning a corporation’s strategic intent and strategic action becomes ever more critical.  The more dynamic the industry, the shorter the duration such alignment is likely to be.  As intent and action become misaligned, that divergence creates what Andy Grove termed “strategic dissonance” in a California Management Review article he co-authored as well as his 1996 book Only the Paranoid Survive.

Arriving at a point of strategic dissonance suggests that the incumbent strategy no longer works as the underlying market and competitive dynamics have shifted enough to require a new strategy.  Grove termed these “strategic inflection points” to describe the giving way of one type of industry dynamics for another.  Strategic inflection points signal fundamental change in a business and require a new strategy, a modified business model, and a change in the way business is conducted.  The driver might be new technology, new regulations, emergent competition, or any structural dynamic that obviates the current environment.

The challenge for anyone, management or otherwise, is to recognize the strategic dissonance and, more importantly, to perceive the opportunity being created by the strategic inflection point and requisite new strategy.

 

Recognition that the changing nature of the enterprise’s operating environment is a true strategic inflection point occurs in stages:

• Initially, identifying and articulating the existence of strategic dissonance – the growing divergence between what the company views as its strategy and the actual actions of its management team.
• Then, confirming and accepting that the new set of circumstances is indeed a strategic inflection point that will require changes to the old way of business.
• Finally, understanding the new strategic priorities, creating a framework for overcoming the strategic dissonance, and formulating a new strategic intent.

To manage through the envelope of strategic dissonance that is driven by the emergence of a true strategic inflection point requires the management insight and discipline to see that during this period of transformation, both the old and new basis of competition, distinctive competencies, strategies, and strategic actions will need to coexist.

That is a distinctive competency in and of itself.

The Complexity of Digital Marketing

This "transit map" from Gartner visually represents how hard it is to be a marketer today.

M2M and the Internet of Things

A dozen years ago in a white paper on emerging technologies I included a section on machine-to-machine (M2M) technology, though at the time that nomenclature wasn’t generally accepted.  My simple example of the power of M2M featured communications among a population of Coke machines in a large downtown area sharing real-time inventory data to allow any individual machine to direct a customer to the next closest machine should they be out of the carbonated beverage that customer desired at that particular time.

That example was fanciful at the time, but M2M has now gained traction as one of the “next big things” as hundreds of companies are combining wireless, Wi-Fi, mobile, web, and context technologies to offer information and convenience in innovative new ways.  The escalating pace of adoption for smart devices – phones, tablets, home appliances, industrial equipment - is creating new demands on enterprises and consumers around the globe which requires new thinking about the connected environment.

M2M technologies allow wireless and wired systems to communicate with other devices possessing the same capability.  M2M uses sensors, meters or like devices to capture event data (electricity usage, temperature, inventory) and share it via network with an application that translates the data into information that can be used by other devices, networks, applications and enterprises.

M2M is a critical platform for the enablement and maturation of the concept of the “internet of things” which includes everything from smartphone apps that control a home's living environment remotely to real-time analytics that help ease traffic congestion and city parking challenges.

The notion of an “internet of things” has been around for a while now.  Kevin Ashton coined the term in 1999.  Of course, a concept is never truly viable until it has its own consortium hence, the Internet of Things Consortium

The Internet of Things (IoT) represents the connection of all machines, devices, sensors, automobiles, cameras, and other "things" to help customers improve operations and save valuable time, money and even lives. The IoT connects places such as manufacturing floors, energy grids, healthcare facilities, and transportation systems.

With cloud infrastructure becoming more prominent, M2M applications have expanded beyond a one-to-one connection to become a system of networks that transmits data to personal appliances. This has made it far easier to effect M2M communication and lessened the amount of power and time necessary for information to be communicated between machines.

The critical dynamic here, and one that has been growing for at least 15 years, is that smart devices connected to the internet would eventually far outnumber the people that would be connected to the internet.  Voila! We are there.  Per Cisco, over 12.5 billion devices were connected in 2010 and Cisco’s Internet Business Solutions Group (IBSG) predicts some 25 billion devices will be connected by 2015, and 50 billion by 2020.

ERP solution provider SAP has begun to explore M2M and recently conducted a survey among IT decision makers on the impact, current and forecasted, of M2M.  Some interesting data points that emerged from that survey included:

• 85 percent of IT decision makers (ITDMs) think that M2M is a natural technological evolution and will advance the "consumerization of IT" trend
• 82 percent think that M2M interaction enables businesses to respond to real-world events
• Sixty-five percent of ITDMs think increased workforce mobility is the biggest opportunity for M2M
• 65 percent think the major challenge in M2M is managing and analyzing the real-time data.
• By year's end:
  • Mobile devices will outnumber the human population
  • Data volume will reach 4 billion terabytes
  • 90 percent of consumer-connected devices will have access to some personal cloud.
  • SAP estimated that by the end of 2020, there will be 24 billion connected devices and by 2015, 35 percent of mid-to-large organizations will adopt in-memory computing

The possibilities for machine-to-machine in concert with other emerging technologies are extraordinary. Almost every machine or device has the potential to become connected, creating interactions with other technologies and services and bringing significant impacts to processes in and across all industries.

As the notion of an “Internet of things” becomes increasingly mainstream, businesses will incorporate machine-to-machine technology to gather and use information towards both strategic and tactical ends. The end result will be new products and services that will drive new revenue streams and reduce costs for businesses.

Addendum: Social Business Gains Traction

As an addendum to an earlier post on social business, this chart from the second annual MIT and Deloitte Social Business Global Executive Study and Research Project survey on how businesses use social media suggests that the concept of social business is being adopted aggressively across all industries.  How well and how strategically it is being adopted is still an open question.

 In all 12 of the major industry sectors covered by the survey, the percentage of respondents who said social software or social business was “important to their organization today” increased from the previous year’s survey. No industry sector declined and none remained flat.

Interestingly, the industry sector with the strongest year over year increase in the survey was energy and utilities, moving from 7% of respondents ranking social business as “important” in 2011 to 29.1% in 2012.  That exponential increase may be linked with the increasing adoption of smart grid technologies that allow utilities to more easily interact with their customers.  A 2012 research report by Navigant Research predicted that by the end of 2017, the number of utility customers using social media to engage with the utility companies would rise from 57 million in 2011 to 624 million.

Unsurprisingly, for the second year in a row, the technology/media/telecommunications sector respondents were most likely to rate social business as important to their organization with 87% saying that social business was important or somewhat important to their organizations in 2012.  A bit more surprising was that the education (82%) and professional services sectors (76%) followed closely behind.

Another finding from the survey was that while companies in most industries are generating social data from their initiatives, few businesses were analyzing the data or integrating it into their organization’s systems and processes.

The new study from MIT and Deloitte will be released in July.

Mobile-First Strategy and the Growth of Responsive Web Design

As more and more consumers hold their “computer” in their hand rather than on their lap or use a venerable desktop version, the pressure on enterprises to improve/refine/perfect their active connection to these increasingly mobile consumers becomes ever more important.  For many businesses, commerce happens in a much more real-time and immediate manner than ever before and the ability to access those mobile consumers and influence their purchase decisions require that their digital access points be built for mobile.  Sadly, too few companies at this point are designing and developing business applications with the mobile interface as the primary design driver.  Traditional PC-based application development still rules over a “mobile first” strategy. 

A "mobile first" approach is where new websites and applications are designed for mobile devices first, instead of initially designed for laptops and desktops. Estimates suggest that by 2015, more people will access the Web via mobile devices than desktop computers.  Opinions on the validity of a “mobile first” strategy vary, but there are some reasonably strong advocates running around.

“Google programmers are doing work on mobile applications first, because they are better apps and that's what top programmers want to develop.” – Eric Schmidt, Google Chairman

“We're just now starting to think about mobile first and desktop second for a lot of our products.” - Kate Aronowitz, Design Director Facebook

“We really need to shift now to start thinking about building mobile first. This is an even bigger shift than the PC revolution.”  - Kevin Lynch, CTO Adobe

Still, every organization needs to assess what is the better process for engaging their key constituencies. One general school of thought is that if you don't design your products and services for what is rapidly becoming the dominant UI, you will not maximize the success of your business in the long run.

Not surprisingly, most Web development teams have designed for the desktop first. Mobile, if it even happens, is simply ported off the desktop version.  Consideration of what the mobile experience requires, in terms of user interface and navigation, seems cursory at best. But that thinking is based on a smart phone 1.0 context – challenges in browsing, Web access that was problematical, and slow network speeds.

As iPhones and Androids have driven a tidal wave of technological ease and sophistication in smart phones and smart devices, the necessity of designing for mobile has become more acute.  That is causing companies to consider adopting a mobile-first strategy to ensure that they capture mobile markets before going after the more traditional desktop community.

Into the breach a new approach, responsive web design (RWD), has arrived aimed at crafting sites to provide an optimal viewing experience—easy reading and navigation with a minimum of resizing, panning, and scrolling—across a wide range of devices (from desktops to smart phones).  The “philosophy” underpinning RWD is that designing for mobile first can not only open up new opportunities for growth, it can lead to a better overall user experience for a Web site or application.

Whether this all makes sense for your organization is a function of multiple components of your business model – who your customers are, the way you make money, and the channels that facilitate the most profitable engagement.  If your key markets are increasingly seeking you out via the mobile platform, it may be time to alter your app development strategy.

The Inevitability of Digital Marketing and the Digital CMO

A favorite debate focuses on the ascension of digital marketing over traditional marketing in today’s marketing model. Too many companies, even in the technology sector, still seem unable to grasp that such a transformation is taking place.

Perhaps the issue is that, even now, spending on analog/traditional marketing continues to exceed spending on digital marketing by a significant ratio according to Gartner Group’s 2013 U.S. Digital Marketing Spending Survey.  Based on the survey, average marketing spend as a percent of annual revenue, across all industries, is 10.4% while digital marketing spend is 2.5%. 

It should be noted that analog marketing tactics continue to be more expensive than digital options – media advertising being just the most obvious example.  Had the survey been broken down between B2C and B2B companies/industries, my guess is that analog and digital spending would be on a more even spending arc.

A related trend - how the advent of the digital marketing technologies that are reinventing much of the marketing model have altered the dynamic between CMO and CIO – is also highlighted by the results of the survey.  The CIOs of those same companies have seen their budget decline to 3.5% of annual revenue and with digital marketing spend at that 2.5% level, parity in technology-related spend seems not too far away.

In fact, in a 2012 report, Gartner predicted that by 2017, the CMO's technology budget will exceed the CIO's.  Pretty much every business should broadly consider itself a digital business but, right or wrong, marketing has emerged as the de facto owner of digital.  That makes the CMO responsible for driving the organization’s digital transformation, which clearly is built on many of the emerging technologies that are changing the conduct of business – mobile, social, cloud, SaaS/PaaS/IaaS.

SaaS and cloud technologies have had much to do with the changing balance of power between the two functions.  The ability to bypass the CIO organization to access key marketing technology platforms/solutions with ease in the new environment allows marketing leadership, or any other functional leadership, to avoid the traditional IT development/procurement queue and execute much more quickly on critical initiatives.

This would all seem to set the stage for the emergence and confirmation of the digital CMO, a marketing leader that not only recognizes the inevitability of this transition in the marketing model, but embraces and builds an organization to take greatest advantage of the new digital/social/mobile media.  Marketing strategy is still marketing strategy.  It is the tools, technologies, and channels that have been disrupted.  If there is a crossing of the Rubicon occurring in marketing today it is probably better to start thinking and acting digitally now than learn in some harder, and perhaps more final, way.

Demand Response and Learning Thermostats

In the electricity distribution world, demand response (DR) represents a dynamic demand mechanism for managing customer consumption of electricity during traditional heavy load or other critical times via incentives based on price. Solution, software and hardware providers have been attacking this space for over a decade in North America.  That includes incumbent providers (meter companies), electric utilities themselves, and a newer generation of startups building on increasingly sophisticated connectivity platforms (cloud, Wi-Fi).  One of those startups is a company in Palo Alto that has been generating some significant “buzz”.

Nest Labs designs and manufactures a sensor-driven, Wi-Fi-enabled, learning, programmable thermostat that is now in its second generation.  Nest is led by Tony Fadell, a former Apple executive with a stellar pedigree, having helped bring the iPod and iPhone into the world. He and co-founder Matt Rogers recruited an A-list team from Apple, Google, Microsoft, and Logitech, to drop but a few names.

With some solid market success selling the thermostat under their belt, Nest announced this week an expansion of their solution to incorporate DR as part of the overall value proposition, using the Nest thermostat as a platform for managing energy during peak times.

 

Whether the DR solution from Nest (called Rush Hour Rewards, BTW) is materially different than some of the other offerings already in existence is not yet clear.  However, the announcement included the creation of  new residential demand-response programs with Austin Energy, Green Mountain Energy and Southern California Edison, along with an existing one with Reliant Energy.  Combine that with the founders Apple heritage and the current Nest buzz could begin to make DR more top-of-mind with consumers.