Tag Archives: business model

Can Twitter’s business model be monetized?

twitter users.001

Twitter’s online growth has exploded last year. It is becoming more popularized with news organizations, celebrities, businesses and users. With the increase of users can Twitter’s existing business model be sustainable? Can it be monetized? This article from Wharton explained how the Twitter website increased its user base from 475,000 in February 2008 to over 7 million in February 2009.

Has this venture been monetizable?  It has not been so far.  Some of Wharton’s professors have argued that the service can be replicated by rivals such as Facebook, and question whether it is simply a fad (e.g. ICQ, Friendster and MySpace).

Part of its draw for marketers and celebrities is the ability to tap into conversations real-time, providing instant online commentary for an offline event and to join in conversations with consumers.  From a user standpoint, it is easy to track like-minded people, friends and celebrities.  Can data mining be used as a revenue model?  The social networks on twitter tend to be less meaningful than on Facebook or even MySpace, and thus, the information would be less value to marketers.  Facebook is a platform that contains more personal information about the user such as the conversations that surround the user’s offline and online activities (e.g. photo albums, interactive quizzes, etc.).

With the large increase in users, could Twitter charge for premium services such as being able to input more than 140 characters or even charging for advanced search options for twitter search?  There needs to be a balance between growth and earning profits.  Currently, the demographics for twitter are mostly with Generation X (people born between 1964 and 1979).  Compare that to Facebook, where much of the growth was with Generation Y (people born between 1980 to 1995), and it expanded to other age groups.  This clearly illustrates that Twitter’s growth maybe stunted.

I think there is money to be made with the development of the APIs.  As Twitter’s base expands, more developers will want to develop more applications for it.  As this occurs, the additional features will attract more users.  Once a critical mass is reached, Twitter can start to charge developers for making APIs on their platform.

What do you think?  Can you think of possible areas that Twitter can be monetizable?  Or do you think it is simply a fad?

Designing Innovation

There is an alarming number of preventable deaths in US hospitals each year according to this article from McKinsey Quarterly, and thus, there was an initiative by a non-profit organization called the Institute of Healthcare Improvement (IHI) that set a mandate to reduce the number of preventable deaths by 100,000 in one year.  It succeeded after one year, and it was able to enroll 75% of all US hospitals.   

As a non-profit, it neither wielded authority nor influence on hospital board of governors, it also faced the unyielding attitudes towards change, differing stakeholder goals, shortness of resources and time  and as such it already faced an uphill battle for this initiative to be implemented.  

How was IHI able to reach its target despite these enormous setbacks? It had to make its initiatives easy to understand and to remember for all stakeholders (nurses, doctors, etc.).   In peer-reviewed medical journals, there is a plethora of information that aids in the amelioration of hospital operations.  IHI took the time consuming part of disseminating this information and presenting and selecting six key criteria that can help with its mission.  

This program was flexible in that not all six criteria needed to be followed and adhered to.  Still, it was crucial some of it required stakeholders to be aware of and adhere to.  Goals were clearly defined with a set timeline and set metrics.  The long term goals (lofty) and short term goals (concrete) were in sync.  Accountability was taken into account by having weekly conference calls and mass emails.

Hospitals that were pioneers of this program, could support and help other hospitals that are starting to implement this initiative.  To encourage additional hospitals to participate, a national network of IHI participants was formed.   Actually, an additional benefit of this alliance, included the motivating the current network of hospitals towards excellence.

I think that both individuals and businesses can learn from this IHI case study.  By defining a clear problem, and defining a clear long-term and smaller and reachable short term goals, using a network of like-minded participants, and thinking in the shoes of the party that one wants to influence.  Anticipating the client’s needs and making their lives/jobs easier by completing the tasks that maybe resource and time intensive and be flexible and understand that not all implementation steps maybe followed.  By combining all of the above should yield solid and sustainable results.

Why do companies rest on their laurels and not embrace change?

It is well-known that in order for companies to innovate and build sustainable businesses, they must adapt both their business model and products/services to match the marketplace and the consumer’s needs and wants.  But many businesses seem resistant to change, even ones that are/were dominant.  If this problem is widely-known, why does this exist?

Knowledge at Wharton examines a book by Black and Gregersen that examines this.  The article cites numerous examples that involve both companies and individuals.

In the case of mobile phones, Motorola was highly successful with analog phones.  Even though digital phone technology existed, it did not feel the need to invest in the future technology because their core competency was in analog technology, and digital technology was an expensive proposition for both the mobile phone producer and the carriers.  Nokia took an opportunity with digital technology, and became the largest mobile phone company in the world.   Samsung was for a while perceived to be a discount mobile phone producer.  It has made inroads in Asia where mobile phone penetration is amongst the highest in the world.  It also recognized the need for a camera in the handset, this was not to replace the digital camera, but rather used as a convenience instead.  Just as Motorola ignored Nokia, it paid dearly with respect to both earnings and market share.  By ignoring the emergence of Samsung as a competitor, Nokia also suffered from the same mistake as Motorola.  Will Motorola, Nokia and Samsung all suffer the same fate with the emergence of Apple and its iPhone? Only time will tell.

The historical example from the article mentioned a Spanish explorer named Cortes was commissioned to find the island of California.  Upon exploring the Gulf of Baja, he was convinced that California was an island.  Another explorer was sent to corroborate the findings of Cortes, and he too was convinced that California was an island.  Because the King of Spain believed this, and that there was difficulty to dispel this notion, it took more than 200 years to correct.

So, why did Motorola, Nokia, and Cortes rest on their laurels and did not effectively adapt to the changing ideas?  This was because both the companies and individuals did not fully understand the strength of new ideas and they did not take the time to fully understand them, and it has led to the downfall of these aforementioned companies and individuals.  More importantly, many companies or individuals are blinded by this missed opportunity because of their current successes in their present model or way of thinking.  Both people and companies develop mental maps on how certain procedures or ideas operate.  The longer these maps have been successful, the harder it is for people or companies to feel a need to switch.  These mental maps also guide both peoples’ and companies’ paradigms.  This trap can happen to any company and to anyone.

I also think that there are other reasons in addition to the ones stated in the article, in my opinion, these include: 1) The hardship and the difficulty that the businesses or individuals perceive as well as experience in order to fulfill the change;  2) Businesses or individuals believe that focusing on its core competency(ies) will minimize its potential failures;  3) From a cost perspective, being already invested in its core competency can reap both economies of scale and scope, and these would not be realized with focusing or investing in new technologies; 4) new and emerging technologies or ideas are unknown, and therefore risky.

Is increasing the marketing budget enough to increase sales?

On an annual basis, firms are confronted with multiple decisions.  One of them is regarding their marketing budgets.  Here are three scenarios:  1) Increase the marketing budget as a percentage of overall sales (Pushers); 2) Keep the marketing budget constant as a percentage of sales (Plodders); 3) Decrease the marketing budget as a percentage of overall sales (Pioneers).  Which scenario is most effective?

Knowledge at Wharton examines a book written by J.C. Larreche, called “The Momentum Effect,” that examines these scenarios.  According to Mr. Larreche, the third scenario is most effective.  It seems counterintuitive doesn’t? 

From the second scenario, where the company keeps its marketing to sales ration constant.  It does not differentiate itself from its competitors with respect to its spending, it is akin to being on cruise control.  This is the least effective method to increase sales for sustaining profits.  In fact, these firms underperformed vis-a-vis the Dow Jones index by 28%.

The first scenario, by increasing its marketing budget, both sales and profitability increase moderately.  Their shareholder value performance mirrored the Dow Jones index. These companies typically cut back on other expenses such as Manufacturing and R&D in order for them to increase their marketing to sales ratio. 

Surprisingly, the third scenario by decreasing its marketing budget as a percentage of overall sales is most effective because the company allocates its resources to other areas of the business that can help contribute to the overall sustainability of profits in areas such as R&D.  Overall, the marketing budget increases in real terms, but decreases as a percentage.  These companies outperformed the Dow Jones index by 80%.  

Companies need to understand that merely increasing the marketing expenditures is not nearly enough for sustainable and profitable growth, it needs to focus on other areas of its business that maintains current customers and eventually attract new ones such as logistics, product/service R&D and after sales.

I think that companies that understand and identify with current and prospective customers needs and wants in their advertising, product/service design, and after sales is prescient on future successes.  Merely focusing on one area (perhaps the business’s core competency) is not enough.

An example of this can be found in the auto industry. After 9/11, GM introduced an incentive called “Keep America Rolling,” this was to generate sales and to clear up built-up inventory.  Ever since that campaign, the Big 3 (GM, Ford and Chrysler) have constantly relied on expensive advertising campaigns, as well deep discounts and incentives.  This was an example of a Pusher.  The Japanese manufacturers were examples of the Pioneer, they relied less on incentives and were able to be more in tune with the customers needs and wants.

Emerging technological trends for businesses

 

 

 

  

 

What are some emerging technology trends that will change and reform businesses and the economy?

 

 

This article from McKinsey Quarterly discusses eight trends can be categorized into three subcategories: Managing Business Relationships; Managing Capital and Assets; and Leveraging information in new ways. 

 

 

The next four trends are categorized under the “Managing Business Relationships” heading.

  

 

The first is Distributing Cocreation – This is when suppliers, customers and contractors can aid in product/service development.  By shifting more power and ultimately more autonomy to outsiders that work together, costs and lead times can be reduced by getting different insights during the development process and forgoing some of the bottlenecks associated with having total control of the innovation process.  The notion of a open-source innovation was discussed in this earlier post. 

 

 

Companies will need to compete with each other in order to attract the best and most innovative contributors.

 

 

The second trend is “Using Consumers as Innovators,” and is facilitated by the growth of the web 2.0.  Customers are looking to be engaged with one another or with an organization.  Customers are increasingly being engaged by the their involvement in the development, testing and marketing (viral marketing) of products or services.  An example of is Wikipedia.  The accuracy of this online encyclopedia is almost as accurate as Britannica’s. 

 

 

With this trend, development cycles and costs can be reduced, while understanding the customer’s behavior and wants can be easier.  The cost to attract customers is lower, and retaining customer loyalty becomes easier. Companies also need to be aware that the customers that would be involved in the development of their product or service is a small segment of the overall market, therefore, the developers’ needs and wants maybe different than the overall market.  Often customers’ needs and wants are immediate and not long term. 

    

 

The third trend is “Tapping into a world of talent”, as the internet is becoming more interactive with new communication and collaborative tools, outsourcing some functions of a business to specialists, talent networks, and freelancers is increasingly more viable from a cost and functional aspect.  As I had alluded to in yesterday’s post, some advertising agencies have outsourced their creative, account management and media buying departments.  Many companies would focus on their core competencies and not have the burden of being tied down to those other functions. 

 

 

The main task is being able to harness the global talent pool, managing the existing workforce and being able to integrate the work in a cohesive manner. 

 

 

The fourth trend is “Extracting more value from interactions”, that is interactions between different types of work and enabling the workforce to function more effectively and efficiently. 

 

 

The first type of work is Transformational, usually work that is involved in the production of goods or in the extraction of raw materials; the second type of work is Transactional, usually work that is clerical or simple-rule based such as a call center operations or someone involved with data entry; finally, the last type of work is Tacit, which primarily deals with knowledge, judgment and collaboration with multiple interactions with multiple stakeholders.  For example, a sales person would engage in tacit work, by interacting with the marketing, product development, H/R, logistics and after sales departments to maximize sales, while engaging and interacting with multiple parties through collaboration. 

 

 

There are systems that can maximize the efficiency of both transformational and transactional work such as assembly line work.  However, with tacit work, there is no such a rule or process.  Maximizing the effectiveness of this work is accomplished by focusing them on interactions that create value.  Companies must enable these workers with greater decision making ability, bring down barriers, increase the availability of resources/information and facilitate collaboration.  New and current technology is facilitating this trend and enabling tacit workers to become more effective by having wikis, blogs, emails, text messages, and feeds to make communication and collaboration easier.

 

 

The next two trends are categorized under the “Managing Capital and Assets” heading.

 

 

The fifth trend is “Expanding the Frontiers of Automation,” companies will continue and expand their automation ability for tasks and processes that are repetitive.  For example, Fed-Ex and UPS have enabled users to track their packages online.  A major benefit would be to lower costs and help users get the information they need effortlessly in a timely manner.

 

 

The sixth trend is “Unbundling Production from Delivery,” uses existing business structures of large businesses (e.g. supply chain management, computing power, etc.) and rents this to other businesses.  From a supply side, this technology would attract asset-intensive businesses (e.g. factories, office buildings, etc.) to raise their utilization rates and therefore, their return on invested capital.  From a demand side, this technology would attract businesses that do not possess the economies of scale and scope to achieve competitive marginal costs. 

 

 

Unbundling also offers businesses quick and easy access to assets; that minimizes impact on their balance sheets; and makes their income statements more favorable.  For the businesses that offer unbundling, it decreases their marginal operational costs because of greater utilization of resources, and greater economies of scale and scope.  Companies need to manage possible supply and demand conflicts.  Examples have included the mobile phone networks and Amazon.com. 

 

 

Here is another example in this article that discusses the growth of APIs across many existing web platforms using existing computing power of large companies. (e.g. eBay, Amazon, etc.)

 

 

The last two trends are categorized under the “Leveraging information in new ways” heading. 

 

 

The seventh trend is “Putting more science into management,” companies are using statistics and other data to use internally and externally.  For an internal example, automotive companies will typically spend more on sales incentives and on advertising campaigns based on seasonality of sales and possible product lifecycle changes. For an external example, Listen.fm and Amazon.com both use customer segmentation systems that utilize recommendation engines that suggest certain items based on the user’s past history, and on other users’ preferences.

 

 

As mentioned in an earlier post, the costs for computing power and storage capacity will continue to fall; and the quality and quantity of information that will become available will rise. The increase in information will empower organizations, as it becomes becomes transparent to employees and suppliers, and the access to it becomes broadened. 

   

 

The eighth and final trend is “Making Business from information,” as now increasingly more data is captured by businesses and from varieties of sources; this could be beneficial for an information-based business opportunity.  Intermediary businesses that have access to greater quality and quantity of information can charge a premium for the aggregation and analysis of this data.  An example of this could be a security firm selling its video footage of a retail store to a market research firm studying retail consumer buying behavior. 

 

 

These aggregators need to be cautious, because they could be aggregated themselves. Their business model can continue to flourish in business to consumer shopping sites and business to business directories.

 

 

Companies need to be cognizant of these eight emerging trends.  Rather than reacting to it, companies can now use these trends to catalyze change and create opportunities as a result of this.

 

What is the future for ad agencies?

 

 

The above link was an insightful presentation on the future of the ad agency and its relationships with the client and the world, it was presented by Scott Goodson, who was the chair of the Global Marketing Summit in 2007 and is the founder and CEO of Strawberry Frog.

 

 

Some of the main points included:

 

 

Ad agencies should focus on their main strength, which is idea generation.  Often the agency is very preoccupied with the execution of an idea, and due to time constraints, it potentially stymies creativity.

 

 

As discussed in an earlier posting, there is a trend to outsource different departments in ad agencies.  Many traditional functions such as the creative department, media buying, and executing ideas now have outlets to which these services can be outsourced.

 

 

By bidding some processes to suppliers, Strawberry Frog’s lead time for innovations has diminished, and the quality of the new ideas has increased as a result of focusing on its core strength – idea generation.  Consequently, the agency is reinvigorated and rids itself of clutter.

 

 

The traditional model for monetary compensation is based on billable hours.  This structure encourages billing based on execution versus idea generation.  A revised model would include compensation that includes profit sharing (for the agency) as well as billable hours.  This encourages the agency to be cognizant of innovative money generating ideas

 

 

From a client perspective, also discussed in an earlier posting; booking, planning, and buying media is now available to bidding in an open auction on services such as Google.   This type of service is analogous to cherry-picking the preferred talent to work on an ad campaign.  Creative and Executing teams can also be found through a bidding process in an open auction.  This gives the client the power to select from a variety of sources. 

 

 

So, with this open style auction of media agencies, do they have a role in the future?  I do think that media agencies have a role, but it has diminished greatly due to Google’s business model, which can reap the benefits of the long tail.  Smaller customers and individuals now have unfettered access to purchase media through an auction-style portal to bid on multiple types of media, and most importantly, have pertinent metrics to measure their ROI.  Media agencies will continue to occupy the important advisory role, as their access to research and trends will enable them to do so.  Due to economies of scale, larger customers and institutions may still find it advantageous to buy their media through these agencies.  I think the Media agencies need to adapt their business model to cope with this.   

 

 

Also, the market is becoming culture-centric.  This can be broken down to three areas: User-generated content, ideas and products that are all subject to peer reviews.  As discussed in earlier post, the prevalence of social media enables the collaboration from various users.  Clients and agencies must adapt to center their approaches to incorporate these business behaviors.

 

 

Finally, the presentation also looked at how both the client and the agency is now becoming more socially conscious.  As noted in an earlier post about Transformational Design, the movement towards green marketing is an excellent example.

Capitalism in China

What is the future of capitalism in China? Unexpectedly, there is quite bit of decentralization in decision making in China, grassroots democracy is quite apparent, where municipal and provincial decision making powers are quite strong.  This is quite evident with increasing power for individuals to defend their rights (e.g. labor laws, property laws).  In fact, among all OECD countries, China is the most decentralized country.  For most matters that affect infrastructure and investment, the local and  governments have the decision making power.  They even compete with each other to attract Foreign Direct Investment.  At the same time, the central government has metrics to measure the successes of each municipality and province.  The article discusses how if China were to become a capitalist society, its system would mirror closest to South Korea’s system of the chaebol, which are conglomerates that are family controlled.  This is because of its Confucian influence and importance of family in business.  However, It won’t be the same system as South Korea for the following three reasons: 1) China’s size; 2) South Korea is a full democracy; 3) China’s lack of scientific innovation. 

One of the challenges China faces is being able to transform from a society that places great emphasis to personalized trust (a trust between people that know each other) to institutionalized trust (a trust in existing systems that ensures transactions among businesses, NGOs, governments and other parties will function).  In China, much business is done between people that know each other, rather than between strangers.  It does not have an existing system where information and laws are readily available and implemented, and therefore institutional trust is difficult to earn.  Companies that handle complex issues may experience difficulties resulting from a lack of institutional trust because without this, delegation is often difficult.

Another barrier would be China’s lack of scientific innovation resulting from its lack of commercialization of science, and lack of sharing this knowledge across business stakeholders (e.g. venture capitalists, capitalists, scientists, etc.).  In other economies such as Germany’s and Japan’s, there is a high level of societal coordination among various parties (business associations, labor unions, etc.) 

Despite all those barriers, will China’s economy hit a wall?  China’s economy is interdependent on a multitude of nations around the world and vice-versa.  As a low cost manufacturing and assembly center, China has a high dependence on external innovation.  To grow, China needs to be involved with a larger chunk of the value chain by utilizing its comparative advantage in low cost manufacturing and labor in medium to high tech sector. (e.g. building tools for high tech sector)  China could be in danger of being trapped in a low-cost commoditized manufacturer.

However, moving higher up the value chain would require more capital investments and more cooperation amongst firms.  China is addressing these deficiencies is by fostering FDI, as well as involving the ethnic Chinese people in the innovation process.   There is also a movement towards Chinese firms acquiring foreign firms to gain knowledge and innovation.  An example, was Lenovo acquiring IBM.  These trends need to continue in the near future, as well as addressing the deficiencies of innovation, cooperation and trust in order for the Chinese economy to thrive.