How does the Amazon innovation formula keep replicating?

How does the Amazon innovation formula keep replicating?

Amazon is an astonishing company for a whole lot of reasons, but there is one that is not front and centre in most conversations I have seen and in which I have been involved. This is the means by which Amazon just keeps on innovating, genuine, disruptive innovations, time after time, at astonishingly small intervals.

Note: This link is to an expanded version of this infographic from Visualcapitalist.com

 

Amazon must have the internal processes that enable it to punch out new businesses, and business models that way a factory stamping machine pumps out widgets.

The biggest impediment to efficiency on a widget machine is the changeover times between widget sizes and internal specifications.

Quick changeover is a hallmark capability sought by manufacturing companies employing Lean thinking, and is a challenging proposition, even in a small, tightly run factory. So how does Amazon achieve it at scale in businesses as complex as it routinely disrupts.

Amazon started by flogging books, or as CEO Jeff Bezos  (apparently) liked to say in the early days, ‘we do not sell books, we make books easy to buy’

The hallmark of a successful lean implementation in a factory is that there are processes that take a prospective order through the whole ‘sales funnel’ to production, delivery, and ongoing relationship building. Lean practitioners call it the ‘Value Stream,’ the set of activities required to deliver value to the customer. These are all done the same way, every time.

The paradox is that this process stability is the foundation of innovation, you need a stable base in order to trial ideas at speed, then scale the ones that work. This is an idea sometimes hard to communicate but as fundamental as it gets to successful innovation and continuous improvement.

Amazon appears to have achieved this at scale, in a service business, typically harder than a manufacturing business to get traction.

How?

Amazon is organised just like a whole collection of independent business units, all cross fertilising, and cross pollinating each other, using (I suspect) what Ray Dalio would term ‘Radical Transparency‘.

The secret seems twofold:

  • The internal technology that Amazon uses across all its activities, is modular and scaleable.  It is in effect the machine enabling the manufacturing of Amazon widgets. This enables new businesses to be added the way you would add another coloured widget to the sales inventory of a manufacturing business. I suspect the scalability will be the source of the next round of disruptions coming to the fast moving goods retailers.
  • Each part of the business multiplies the customer impact of the ones next door, a ‘flywheel’ effect. Digital technology enables the network or ‘Flywheel’ effect to build momentum. The more eyeballs you have on one side of the network equation, the greater the value to the other side. This effect builds scale very efficiently once you have reached a tipping point, reflecting Metcalf’s law which states that the value of a network increases with the number of nodes in the network.  Amazon has created their own version of Metcalfe’s law amongst their own offerings, one product or service leading to the one next door.

Bezos has achieved something that I think will be studied for decades, and it is clear he is not stopping any time soon. The only thing that appears likely to slow the momentum is regulatory intervention. Amazon has 44% of  on line retail sales in the US, 35% of global cloud services, a market growing at 40% a year,  where AWS is bigger than the next 5 biggest combined. The list goes on. The point is, Amazon is chewing up competition everywhere, yet pays very little tax, $1.4 billion since 2008, while Wal-Mart has paid $64 billion over the same period, so in effect, Wal-mart is subsidising its greatest threat to eat its lunch. Outcomes and numbers like that will have to prod regulators into some sort of action, before Amazon (and to be fair, Facebook and Google are very similar, even more dominating in their markets)  is in a position of power so dominant that regulators cannot stop them.

Amazon, a product of the 21st century is simply outrunning the capacity of the institutions and public mind set of the 20th century by reshaping our world around us, and with our consent by unthinking compliance. They are being joined in this exercise by Google, Facebook,  Alibaba Tencent, and a few other aspirants like Netfliks, to dominate the way we think, behave and work.

Header photo Jeff Bezos circa 1998

Australia Day 2018

Australia Day 2018

It is Australia day down under.

A day we celebrate…… what?

The landing at Sydney Cove of the first fleet of convicts and their equally corrupted gaolers?,

The invasion that ended a way of life that had existed for how many thousands of years?

The beginning of the  vibrant successful multi-cultural community that is modern Australia, with all its faults and problems, still the best place on earth?

Depending on your perspective it can be any or all of the three.

The current debate about the meaning of Australia day is probably useful, but let’s focus on some facts rather than allowing it to be another example of our ability to bellow a personal view  at each other and treat it as a fact.

Mark Kenny’s insightful article advocates for May 9, for some very good reasons. It is the date Australia formally became a self-governing federation in 1901, the date the parliament formally shifted from Melbourne to Canberra in 1927, and the date in Bicentennial 1988 that the current parliament house was opened.

Oh joy, some facts and solid argument why the change should  be made, and for the first time I find myself agreeing.

However, perhaps we should also be considering some of the stuff that will make the future of our children a successful one, rather than squabbling about the trappings of position today.

  • How is Australia to compete in the modern world of digital everything without the industries based on original science? History suggests that commercialisation of this sort of research takes 30 years, way beyond the electoral cycle that seems to determine the funding. The choice of professor Michelle Simmons as Australian of the year is a wonderful choice. A scientist at the cutting edge of research into the stuff that will reshape our society, leading a great team, and, a woman in a mans world. That is how we will compete into the future. (thank heavens the Aussie of the year is not a sports star, again)
  • How is our education system going to accommodate the demands of a society radically different from the one that the teachers grew up in? The choice of Eddie Woo, a local maths teacher who has conquered teaching maths on line is inspired and well deserved, and I am sure his students will represent the new generation of contributors to Professor Simmons work.
  • How are our institutions, designed to accommodate the world of the 20th century going to evolve to give us the confidence and ability to continue to be a success in the 21st. Our governments and their politicians, churches, educational processes, and pretty much all others are on the nose, despite them being inhabited by a vast majority who work hard to do the right thing.
  • How are we going to retain the successful human melting pot we have been in the face of the apparently increasing levels of xenophobia domestically and the pressures externally to be more open and accepting of differences?

 

Enough of that, I am going to fire up the barbie and have a coldie, or two. Isn’t that what Australia Day really is, a day to kid ourselves that the future will look very like  the past, and all we have to do is turn up?

Happy Australia day.

 

Image credit : City of Geralton WA RIC1383.jpg

How do you measure the scalability of your business?

How do you measure the scalability of your business?

Almost every business I know  seeks to grow, as there is a recognition that growth brings benefits beyond simply the size of revenues and profits. It  brings credibility, attracts good employees, enables negotiation from a stronger position, and much more.

It seems to me that there are four macro measures that can be applied, each with a few key sub measures that can be used as appropriate.

‘Stickiness’.

This is a term I use to describe a combination of factors vital to the health of every business.

  • Customer retention rates. How much customer ‘churn’ do you get, how long is the average ‘ ‘lifetime’ of a customer, and what is the subsequent lifetime value of a customer. Associated with customer retention is the cost of customer acquisition. At some point, investment in further customer retention will start to deliver diminished returns. It is therefore sensible to have a parallel process in place that delivers a steady flow of new customers coming in to replace those that do move on, and build the spread of customers and the penetration of your preferred markets.
  • Share of Wallet. Regular readers will be aware of my attraction to this measure. In effect, how much of a customers purchases that you could service, do you actually attract. Calculation becomes an important strategic exercise as it forces you to consider which types of business you can and want to service, which markets you are able to compete in effectively, and the relative power of your value proposition in any market segment.

 

Referrals.

How likely are your customers to refer you to others? When an existing customer values the services you provide sufficiently to recommend you to their own networks, that is marketing gold. One of the formal measures that has gained a lot of traction is the Net Promoter Score. This is a very binary system, which has its merits, but I like to see some qualitative evidence as well, gained by customer stories, feedback, and various answers to the question ‘where did you hear about us’?

How likely are those in your value chain to recommend you, these referrals are as useful and relevant as those from your customers, as they have a commercial relationship with you, and are in a great position to judge.

Margins.

The simple word ‘Margin’ can have different meanings to different people, particularly accountants, but in its simplest form, is the profitability divided by revenue. However, you do not bank percentages, just dollars, so you also need to consider the absolute amounts of money that can be made from a market. Generally the higher the margin, the better, but generally, higher margins attract competition, so over time margins become eroded. The key is  to make the margins sustainable, which requires appropriate strategic investments to be made.  Measurement  of margin can take many forms:

  • Customer margins can be measured both individually and by group, depending on the nature of the business.
  • Product margins similarly can be measured by product and product group.
  • Both the customer and product margins can then be further measured by geography, market segment, and any other sensible parameter. The absence of margin management is a sign of poor or at least lacking management, and the mixing of marginal costs, particularly in the case of a manufacturing business, with overheads is a significant drain on management ability to make informed price and cost management decisions.

Investments.

Effective financial management captures all investments of cash irrespective of the nature of that investment. It makes no distinction between operational and regulatory investments necessary to keep a business functioning, and those that have some risk associated with shoring up future revenues and margins. Investment in marketing, innovation, staff capability, process optimisation and others do not routinely turn up in financial statements, but without them any business is doomed, so seek them out in any due diligence exercise.

Good businesses make the investments in line with their strategic priorities, and track the outcomes of those investments over time.

Need help thinking about these issues, give me a call.

 

Einstein’s formula to calculate business value

Einstein’s formula to calculate business value

Our world is being broken into bits, powered by algorithms, few things appear to be immune to the pervasive intrusion. One that has been largely immune is strategy development, a subjective hold-out in a world of programmatic automation.

Einstein told us that ‘defining the problem is the greatest challenge, the rest is just maths’. This applies as much to strategy as it does to any sort of problem, and it seems even possible to adapt Einstein’s simple beauty of E=MC2 to the creation of business value, albeit there may be some ‘stretching’ involved.

Back in 1937 as a graduate student at MIT, Claude Shannon demonstrated that complex problems could be broken into a series of minute, sequential steps with a binary answer that delivered an outcome. This break-through created the foundation of all modern computers. Shannon then went on to demonstrate in 1948 that digital systems could not only perform logic, but also enabled transmission of information. Another technical challenge addressed that can be reasonably translated to most strategic challenges.

The problem with strategy development is not the creation of strategies,  as much as the definition of the problems to be solved, as Einstein so aptly observed.

When you have the problem defined, it is suddenly easier to break it into its constituent parts, to see the granular detail, and at least partially quantify the cause and effect chains that exist to enable informed  testing, followed by adjustments based on the outcomes.

This is starting to look like Game theory: ‘if this, then that‘ mixed in with a dose of options theory, ‘do not commit to an option amongst all those available, until you absolutely have to‘.

I think it is only right to finish where this thought started, with Albert.

His theories of relativity that famous formula we all know, but have no idea what it means, explains the workings of the universe. Perhaps it can also give us an insight into the value we can add to an enterprise, which is after all, what we are setting out to do by strategic planning.

The internet has changed everything about the business models that will be successful in the future, because of the transparency and connectivity it delivers. Therefore we need to find a way to recognise the power of digital access and the compounding that is possible by leveraging networks in our planning processes.

I like E=MC2 as a strategic metaphor, because it can explicitly compound the value of our digital networks, something not done in any model I have seen.

Here is how it works.

E is the enterprise value.   This is not the stock market valuation, which is only a financial calculation based on expected future earnings, but the total value that is created by the enterprise, which has many forms. Value can be time, services, transparency, design, everyone sees value as being different, and is subject to the context in  which it is seen. The obvious challenge is to put a number on these usually subjective items, which evolves from the other side of  the equation.

M is the mass of the enterprise.  This is the sum of the physical assets and processes of the business, the stuff that enables the work to be done.

C is Capital of the enterprise.  It includes financial capital, but the greater part is the capital contributed  by  the people who populate the place, those who are in the value chains, including existing and potential customers, and the context in which the business competes.  This comes in many forms:

  • Intellectual capital, what is between peoples ears, what they know, and how they extract and leverage that knowledge
  • Relational capital of the individuals in the enterprise, as well as those assets, both tangible and intangible, the enterprise owns such as brands, patents, and defensible market assets such as franchises.
  • Cultural capital, the way in which there is collaboration and alignment of activity towards the creation of value by the enterprise throughout the value chain, and the manner in which the enterprise, which is just a collection of people, conducts itself, both internally and externally.
  • The competitive, strategic and regulatory environment in which the enterprise competes.

This number is squared, simply because of the geometric nature of relationships, and the network effect, the more you have the greater the sum of the value that can be created.

As noted earlier, there may be some ‘stretching’ involved to apply Einstein’s formula, but on the other hand, the logic is there. This thought process came about as a result of an acquaintance seeking to sell his business.  The business brokers and accountants he spoke to all had variations of a similar formula which focussed on multiples of profitability that would be applicable, with only passing attention given to many of the intangible assets he had built up over a 30 year period. Knowing his business quite well, it was my view that the profitability multiples method substantially undervalued the business, so we set about putting numbers to some of the intangibles as a means to increase the sale price, by demonstrating that the profitability was not just robust in a challenging environment, but would be increasing over time.

The eventual sale price convinced me that Albert may have been onto something, and it just cemented my view that he was in reality, the most under-valued strategic guru in history, as well as being a pretty smart physicist.

 

 

Reflections on my 2017 observations.

Reflections on my 2017 observations.

 

Each year for the past few, I have looked at my prognostications for the coming year and given myself a score. It is now 2018, so time to do it all again, before I rub the crystals to see what might be coming down the track this year.

As a lead in, I find it difficult to improve on last years recitation of J. M. Keynes, it still seems absolutely right.

Never have JM Keynes’s words been more relevant: “The difficulty lies not so much in developing new ideas as in escaping from old ones

He said this in relation to economics, but it seems to me that it is now ubiquitous across everything we do personally and as communities and countries.

Working as I do with medium sized businesses, particularly those who actually manufacture stuff rather than flogging intangibles,  all are hugely challenged to compete in a globalised and commoditised world. Some common themes that underpin,  define, and are redefining the path to commercial sustainability appear to be largely ignored.

What is old is not new again.

It seems to me that this old truism is now redundant, as the pace and scale of change is so vast that the old stuff no longer gets recycled, and while by not understanding history we are doomed to repeat it remains true, the new versions are radically different to the old ones.

The ‘old’ ways of doing things are not  being changed, which implies that there is a progression of some sort, they are being disrupted, by which I mean thrown out the window. Uber and Airbnb are the poster boys, but look at what is happening with artificial intelligence, machine learning, virtual and augmented reality, and it is hard to conclude anything other than the old is dead, and the most relevant question has become ‘how will we cope with the new?

How did I do? 4/5. The year past just seems to confirm the view that the old is just old, and should be ditched. However, the lessons that can be learnt from the old should not be missed. The foundations of success over the last 200 years remain the same. Uber disrupted the taxi industry, not because there was any really new customer  value to be found, but because the taxi industry around the world had dropped the ball entirely, and Uber leveraged some tech to pick it up. People still need transport, so in that sense Uber is not new. We also learnt from them that success has its own dangers

 

The fight for attention.

The tsunami of stuff coming at us in a myriad of ways, increasingly mobile, is overwhelming, and most are seeking ways to aggressively filter out the stuff they do not  want, but there are industries out there finding ways around the filters. The old notions of privacy are out the window, and so the tsunami just grows geometrically. So called digital helpers, might claim to make life easier by anticipating what you might need and want based on previous behaviour, but they are really just ways of gaining and holding attention in order to create a transaction favourable to them. Mobility is an absolute requirement of attention. Not just do we require our data to be immediate on demand and mobile, we do our searching and thinking while mobile.

How did I do? 4/5 again, the fight has just got harder and harder, and that will continue. However, it must happen that quality will win out over quantity at some point, so the notion of an overnight success after 10 years of effort still holds.

 

Immediacy is currency.

The world is immediate, we want it now, on demand, and will not be satisfied with less. However, it is hard to get immediacy from legacy systems. Why should it take Telstra a week to connect a new mobile phone, interspersed with bullshit from an off shore call centre, when obviously it takes a few seconds on a keyboard. Not good  enough anymore. With the immediacy is mobility, a sort of coinage from the currency of immediacy. Everything in life is on demand, from cabs to grocery deliveries, and not meeting the demand has become a harbinger of failure. If you are  not mobile you will be missing out.

How did I do? 4/5 again, doing OK so far, except that if anything, I underestimated the impact of immediacy, and again, expectations are becoming more demanding by the day.

 

Creativity delivers attention.

Amongst the tsunami of stuff, the few that stand out will be different, and in some way strike a chord in an individual. It is ironic that the notion of ‘big data’ is really geared to ‘little data,’ picking through the masses of data-garbage to find the few bits that are focussed on the individual. The customer journey, so easy to map over the past few years, has had its day in the sun. No longer can we rely on the standardised generic journey from which, while we know there will be deviation, remains in general sufficiently true to use as a base for decision-making. No longer. There are simply so many ways to travel the road, that the only way to get them to stop is too be creative, arresting, or as Steve Martin says, ‘so good they cannot ignore you’

How did I do? 3/5. I still think the idea is right, but the creative drivers have become more about immediacy than creativity, so the creativity has suffered. In a contest between the ‘big idea’ and reach/ frequency equations, creativity is losing out due to the demands for immediacy, and creativity takes time. It is just as hard to come up with that great idea as it has ever been, and 10 mediocre ideas do not add up to 1 great one. We have a long way to go.

 

Business is personal.

Peter Drucker is famous for observing amongst other things that the sole purpose of a business was to create customers, and never has that been so right. However, in order to create a customer, being different is essential, which requires continuous innovation and more importantly the ability to deploy innovation almost in real time. Marketing is now all about the personal, therefore the ability to create  automated personalisation, or perhaps personalised automation, will define the parameters of success.

How did I do? 5/5? Never has anything been more true, and if possible it is getting truer every day as we ‘communicate’ via digital platforms, we are inundated with likes and connection requests that are covers for a sales pitch. No end to this in sight.

 

Success is dependent on attention.

This is getting harder and harder as the access to organic social feeds is increasingly limited by those with their feet on the choke point, the digital platforms through which this all flows. In order to be successful the need to own your own digital platform is getting greater by the day, just as it is getting harder to achieve it, simply because the task of gaining attention has become geometrically harder.

How did I do? 3/5. TI think I got this one right, but seriously underestimated the challenge of attracting people to your own digital real estate. The challenge has multiplied as we have gone mobile, up substantially from just a year ago. As the volume of information increases, it is getting progressively harder to attract people to our digital platforms, away from the social ones.  In the long term however, the value of owning your own digital property will not go down, and the value of those you can attract, and keep, will multiply.

 

Trust requires transparency, and transparency requires trust.

The world is a way less trusting place than ever, nobody leaves their front doors open any more, and we are wary of public gatherings. Even in a place like Sydney, where last night’s New Years fireworks on Sydney harbour brought an unprecedented level of security, which really serves mainly to get in the way of most, as the really determined would simply plan their way around the cops on the beat. The most concerning danger is the one we do not see and understand, and by over-reacting we are just making things worse for most while offering solace to those who trade in mistrust.

How did I do? 4/5. Hard to get this one wrong, as it has always been so, even if we did  not recognise the importance. I think the turmoil in US politics over 2017, reflected for different reasons in Australia, has just made us more cynical and less inclined to trust anyone we do not know personally.

 

Are we educating for the future, or reflecting the past?

I am no expert in education, but between my 4 grown kids there is 6 undergraduate degrees and a masters, so I claim to have rubbed up against the system a bit. My education goes back a long time, but  the best teacher I ever had was an old Harvard professor, Jim Hagler who was somewhat ostracised even by that august institution because of his ideas about the value of rote learning Vs creative thinking. That was in the 70’s, and I do not see much progress, he would still be outside the mainstream of bureaucratic education implementation. It seems to me that we are setting about the process of education by reflecting the past, and assuming the future will be pretty much the same,  when even the most blinkered thinker will concede this is not  the case. Our universities need to be funded, but the economic rationalists seem to be in control, and are screwing the pooch. The environment of thought, learning and education in its broadest sense is bastardised by the requirement to flog bits of paper to whomever is willing and able to pay for them. Somehow It seems to be a road to perdition, a place where a degree can be bought, and is therefore worth little as a mark of true education. At the same time we have been telling our kids that they are second rate if they do not have a degree. The trades have become dirty, and the skills that built cathedrals, bridges, machines, and the water systems that enable us to be civilised are rapidly being lost to generations who think that manipulating digital currency is useful work.

How did I do? 5/5, and if anything this has become more important than ever, and it certainly has cemented its place in my corral of hobby-horses.

 

I am 65 in a few days, so perhaps I am just a dinosaur, but from the perch of all those years in and around businesses, education and the public sector, I am becoming seriously concerned with the world my grandchildren will inherit.

Anyway, I hope that 2017 turns out to be a great year, one that marks a turning point in our capacity to see ourselves as others see us, and understand that as communities we simply have to live and work together, as the alternative is pretty ugly.

Happy 2017 to you all.

 

And, now on to 2018, (and my 66th birthday…. do not feel 66) the year in which if we believe the bullshit emanating from Canberra, all will be well. We have made same sex marriage legal, and established that the provisions in the constitution, arcane as they may be in relation to citizenship, need to be followed. Now to get on with the stuff that really matters, like shaping a community for our children and grandchildren. (Always the optimist, I expect to be, again, disappointed)

Optimising does not always deliver results: Re-frame.

Optimising does not always deliver results: Re-frame.

Lean thinking, and the lean toolkit have changed the manufacturing landscape around the world. The elimination of waste in processes is now standard practice in every successful business, and the tools of Lean, 5 why, 5S, and all the rest play a key role, and have been successfully migrated into functional areas outside operational ones.

However, like any tool, you have to have the right one in your hand to effectively address the situation in front of you, and lean tools are not always the best ones.

Lean is largely about optimising the existing processes by elimination of steps that add  no value, the elimination of waste.

However, when applied to strategy development they are not useful in many circumstances.

Had the Taxi industry applied a 5 why analysis to their industry, they would not have come up with something like Uber. They would have cleaner taxis, drivers who know their way around, quicker response times, and a way to address the shift changeover lag. To come up with an Uber required the industry to reframe the source of value they create for customers, who want to get from point A to Point B in the least possible time, at the least possible cost, while being kept fully informed. A 5 why or alternative popular tools like a SWOT would not have given them the answers that led to Uber, they needed to reframe the industry entirely from the perspective of the customer.

The problems of the taxi industry were not solved by Uber, they entirely reframed the value proposition to customers.

Innovation is a particular challenge for lean thinkers, as it is always messy, risky, ambiguous, and a long way from optimised. However, it is an essential part of commercial evolution, without which we would end up in a homogenised world.

How boring would that be?

Photo credit Jon Swansan Via Flikr