"Note And Vote": How Google Ventures Avoids Groupthink In Meetings

By Jake Knapp
You know when a meeting turns into a complete waste of time? Maybe you’re trying to come up with ideas, or make a decision. Before anyone realizes it, the meeting starts to suck.

Meetings want to suck. Two of their favorite suckiness tactics are group brainstorming and group negotiation. Give them half a chance, and they’ll waste your time, sap your energy, and leave you with poor ideas and a watered-down decision. But meetings don't have to be that way.

On the Google Ventures design team, we dislike sucky meetings as much as anyone. We use a process hack that short-circuits the worst parts of groupthink while getting the most out of different perspectives. For lack of a better name, we call it the “note-and-vote.”

The next time you need to make a decision or come up with a new idea in a group, call timeout and give the note-and-vote a try.

HOW IT WORKS

1. Note

Distribute paper and pens to each person. Set a timer for five minutes to 10 minutes. Everyone writes down as many ideas as they can. Individually. Quietly. This list won’t be shared with the group, so nobody has to worry about writing down dumb ideas.

2. Self-edit

Set the timer for two minutes. Each person reviews his or her own list and picks one or two favorites. Individually. Quietly.

3. Share and capture

One at a time, each person shares his or her top idea(s). No sales pitch. Just say what you wrote and move on. As you go, one person writes everybody’s ideas on the whiteboard.

4. Vote

Set the timer for five minutes. Each person chooses a favorite from the ideas on the whiteboard. Individually. Quietly. You must commit your vote to paper.

5. Share and capture

One at a time, each person says their vote. A short sales pitch may be permissible, but no changing your vote! Say what you wrote. Write the votes on the whiteboard. Dots work well.

6. Decide

Who is the decider? She should make the final call--not the group. She can choose to respect the votes or not. This is less awkward than it sounds: instead of dancing around people’s opinions and feelings, you’ve made the mechanics plain. Everyone’s voice was heard.

7. Rejoice. That only took 15 minutes!

The note-and-vote isn’t perfect (remember, I said “pretty good decisions”). But it is fast. And it’s quite likely better than what you’d get with two hours of the old way.

You might want to adapt the specifics to suit the problem and your team. Sometimes multiple votes per person are helpful. Sometimes sales pitches give crucial insight. We often jump right to voting when there's a finite list of options. So long as you do most of the thinking individually, you’ll see a big efficiency boost.

WHY IT WORKS

Quiet time to think

Meetings rarely offer individuals time to focus and think. Group brainstorms--where everyone shouts out ideas and builds off one another--can be fun, but in my experience, the strongest ideas always come from individuals.

GROUP BRAINSTORMS CAN BE FUN, BUT THE STRONGEST IDEAS COME FROM INDIVIDUALS.

Parallel is better than serial

Normal meetings are serial. In other words, one person is talking at a time, and someone is always talking. That means there’s one thread of thought for the length of the meeting. Parallel work increases your bandwidth. More solutions are considered and evaluated.

Voting commitment

Writing down your vote ensures that you won’t be swayed when someone else you respect votes for something else. This is a social hack--we naturally want to make other people feel good and form consensus in meetings. Conflict is useful.

The Majority Of Today’s App Businesses Are Not Sustainable

By Sarah Perez

Though the app stores continue to fill up with ever more mobile applications, the reality is that most of these are not sustainable businesses. According to a new report out this morning, half (50%) of iOS developers and even more (64%) Android developers are operating below the “app poverty line” of $500 per app per month.

This detail was one of many released in VisionMobile’s latest Developer Economics report(for Q3 2014), which was based on a large-scale online developer survey and one-to-one interviews with mobile app developers. This report included the responses from over 10,000 developers from 137 countries worldwide, taking place over 5 weeks in April and May.

That mobile app developers are challenged in getting their apps discovered, downloaded and then actually used, is a well-known fact. But seeing the figures associated with exactly how tough it is out there is rather revealing. It seems the “1%” is not only a term applicable to the economy as a whole – it’s also taking place within the app store economy, too.

The report’s authors detail the specifics around the trend where a tiny fraction of developers – actually, it’s 1.6% to be exact – generate most of the app store revenue. Slyly referencing the “disappearing middle class of app developers,” the report’s analysis groups the estimated 2.9 million mobile app developers worldwide into a handful of different categories for easy reference: the “have-nothings,” the “poverty-stricken,” the “strugglers,” and the “haves.” And, as you can tell, most of these categories don’t sound too great.

info4

Have Nothings

Accounting for 47% of app developers, the “have nothings” include the 24% of app developers – who are interested in making money, it should be noted - who make nothing at all.

Meanwhile, 23% make something, but it’s under $100 per month. These developers are sometimes unable to cover the basic costs of development PCs, test devices, and an account to publish apps, the report states. However, in case you’re wondering why so many developers still go iOS first, it’s because those who prioritize iOS app development are less likely to find themselves in this group, with 35% earning $0-$100 per month, versus the 49% of Android developers.

There’s also a portion of the app developer population (35%), some of whom aren’t interested in making money. The report refers to these part-timers as “hobbyists” or “explorers,” who may be just testing the waters, or working on apps that have yet to launch. Still, more than half of this crowd is interested in making some money from their applications, while less than half make $0 per month.

Poverty Stricken & Strugglers

Meanwhile, 22% are “poverty stricken” developers whose apps make $100 to $1,000 per app per month. At this rate, the companies behind the apps couldn’t afford standard app developer salaries. 15% of developers make between $100-$500 per app per month and 7% make between $500-$1,000 per app per month.

When combined with the above “have nots,” that means 62% of developers are below the “app poverty line” of $500 per app per month, and some 69% can’t sustain full-time development.

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The “strugglers” are a bit more fortunate. 19% of developers earn $1,000 to $10,000 per app per month, which could either be a supplement to full-time work or even a something of a good living, if in the high-end of that band. But these apps also tend to be more complex, requiring more development effort, and possibly ongoing server costs which can cut into the developer’s bottom line.

Winner Takes All: The “Haves”

Finally, there are the “haves.” The top 12% make more than $10,000 per app per month. 17% of iOS-first developers are in this group versus 9% of Android-first developers. To give you a sense of this group’s members: a rank-100 grossing game on iOS in the U.S. would expect to make $10,000 per day.

However, states the report, only the top 1.6% of developers make more than $500,000 per app per month, but of those who do, some are earning tens of millions per month. The next 2% – those who make between $100,000 and $500,000 per month – are making more than 96.4% of the rest of the app developers out there.

“More than 50% of app businesses are not sustainable at current revenue levels, even if we exclude the part-time developers that don’t need to make any money to continue,” states the report. “A massive 60-70% may not be sustainable long-term, since developers with in-demand skills will move on to more promising opportunities.”

As Apps Disappear, Will They Be Seen As Disposable?

The interesting thing about these numbers, besides just indicating how hard it is to have an app really hit big, is that the market economics are actually encouraging developers and users alike to see most apps as disposable things, not businesses you remain committed to long-term.

These days, many mobile app startups look more like resumés for developers who will soon abandon their work following acqui-hire M&A deals. And the continuous exits and new launches – where some startups are even being scooped up pre-launch – are creating an app consumer user base which thinks of apps as things that will quickly disappear (if you’re not Facebook, I suppose).

That makes it harder for many users today to buy into claims that an app wants to be your go-to home for important, lasting communications – like messaging clients aimed at businesses or the apps that want to store all your precious photo memories. And of course, most games have limited life-spans, too.

But on the flip side, today’s younger consumers are wired differently from their Gen X or Y (and older) counterparts. They’re fine with impermanent messages, deleting their social media accounts at will, data loss be damned. This group of consumers is an ideal audience for the increasingly disposable nature of mobile apps – at least while the current consumer app gold rush continues.

NEA busiest VC firm in hottest market since 2001; Here's the rest of Top 20

Cromwell Schubar

Senior Technology Reporter-Silicon Valley Business Journal

New Enterprise Associates averaged a U.S. funding deal every three days in the first half of this year, the hottest six months for the industry since the end of the dotcom boom in 2001.

Not far behind NEA's 64 first half deals were Kleiner Perkins Caufield & Byers (54), Andreessen Horowitz (52) and Google Ventures (50), according to a report from investment database research firm CB Insights.

An interesting fact from the report is that NEA wasn't involved in any of the huge deals that went down in the most recent quarter, nearly all of which happened here in the Silicon Valley and San Francisco area. That includes Uber ($1.2 billion), AirBnB ($500 million), Lyft ($250 million), Pure Storage ($225 million) Intarcia Therapeutics ($200 million) and Pinterest ($200 million).

CB Insights only tracks deals that include venture firms, so it doesn't factor in any of the big late-stage fundings that came entirely from hedge fund and private equity investors.

The firm said that investors poured 39 percent more capital — nearly $24 billion — into 11 percent more deals than had been recorded in the first three months of the year, the hottest quarter since the second quarter of 2001.

After Q1’14 saw venture capital investment hit its highest quarterly mark since Q2’01, investors deployed 39 percent more capital across 11 percent more deals. In aggregate, H1’14 saw U.S. VC funding leap to $23.87B, a 71 percent increase versus H1’13.

Overall, there were more than 300 funding deals and more than $4 billion invested in each month in Q2.

Among Kleiner Perkins' 54 deals in the second quarter was the $40 million funding of Palo Alto-based Big Data company RelateIQ, which was acquired Friday by Salesforce.com for $350 million.

Here is CB Insights' full list of the most active venture investors in the first six months:

— 1. New Enterprise Associates: 64.

— 2. Kleiner Perkins Caufield & Byers: 54.

— 3. Andreessen Horowitz: 52.

— 4. Google Ventures: 50.

— 5. 500 Startups: 47.

— 6. Khosla Ventures: 40.

— 7. SV Angel: 35.

— 7. Accel Partners: 35.

— 9. Sequoia Capital: 33.

— 10. First Round Capital: 32.

— 11. Greylock Partners: 30.

— 12. Lerer Hippeau Ventures: 28.

— 12. Foundry Group: 28.

— 14. True Ventures: 25.

— 15. General Catalyst Partners: 25.

— 16. Battery Ventures: 24.

— 16. Atlas Venture: 24.

— 18. RRE Ventures: 23.

— 19. Lightspeed Venture Partners: 22.

— 19. Intel Capital: 22.

— 19. InterWest Partners: 22.

— 19. Bessemer Venture Partners: 22.

-- 

Melissa Welch

Director of Client Development

Growthink

melissa.welch@growthink.com

(310) 846-5015


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Beware the ‘Edifice Complex’ — and 9 Other Ways to Damage a High-Growth Startup

BY MARC ANDREESSEN

Here are 10 ways to damage your fast-growing tech startup – and hurt the perception of Silicon Valley in the process. None of these are specific to any one company; they’re general patterns we’ve observed across multiple cycles of tech startups.

#1 Only hiring — or training/motivating/incenting your managers to hire — without focusing on firing. Or on performance management and efficiency optimization.

#2 Selling too much of your own personal stock too quickly, which alienates employees and leads people to question your long-term commitment as a founder. On a related note, letting private stock sales by employees get out of hand creates a “hit-and-run culture” — and forces your company to take on the burdens of being public before actually going public.

#3 Diluting the crap out of the cap table by being sloppy and undisciplined with stock grants to early employees. This also plants hidden “morale landmines” for later employees.

#4 Maximizing absolute valuation of each growth round, which not only makes later rounds harder and harder to achieve but can trigger a disastrous down round.

#5 Letting investors (including, occasionally, private equity firms and hedge funds) suck you into terrible structural terms on growth rounds. You’re guaranteed massive trauma if anything goes even slightly wrong there.

#6 Going public too soon! Going public before you’re a fortress, before you can withstand all assaults leads to a stock-price death spiral and ends up in a train wreck for everyone.

#7 Pouring huge money into overly glorious new headquarters — “The Edifice Complex” — then repeating two years later. There’s also a danger in signaling to employees “we’ve made it, we’re amazing” (and while everyone hates the cramped but collaborative space when they’re in it, they miss it terribly after the move).

#8 Assuming more cash is always available at higher and higher valuations, forever. This one will actually kill your company outright.

#9 Confusing the conference circuit — and especially the party scene — with actual work. This also creates a toxic culture on multiple fronts by encouraging alcohol/drugs and valuing so-called “ballers” over other important, less “loud” contributors.

#10 Refusing to take HR seriously! This issue isn’t specific to just tech-heavy environments; it’s prevalent in any highly creative, highly skilled workplace. At a certain company size, you need both the ability to manage people and an effective HR person. (Even though it is absolutely worth training company leadership in good HR practices, most managers are dangerously amateur at doing actual HR). Without smart, effective HR, terrible internal managerial and employee behavior leads to a toxic culture that can catalyze into a catastrophic ethical — and legal — crisis.

This quarter had the most venture capital invested since Q1 2000

Venture's Q2 surge: Dollars, deals and dominant players

Cromwell Schubarth Senior Technology Reporter-Silicon Valley Business Journal

Valuations on venture-backed companies jumped again in the second quarter as the number of IPOs and the amount VCs invested in startups both hit post-dot-com highs, a new report from PitchBook Data shows.

The total amount invested has climbed steadily each quarter in the past year, jumping from $12.8 billion in Q2 of 2013 to $21.5 billion in the same period this year. The $13.9 billion raised in 76 new venture funds is also a recent high.

Sequoia Capital invested in the most companies in the quarter — participating in 35 deals — and tied with New Enterprise Associates for the most exits with eight.

The big deal for the Menlo Park firm was Facebook's $19 billion acquisition of WhatsApp, which was announced in the first quarter but closed in the second quarter.

That deal also skewed the total amount of capital exited, which jumped from between $16 billion and $19.2 billion in the previous three quarters to $37.9 billion in the second quarter.

The biggest deals Sequoia participated in were the $100 million round for South Korean e-commerce company Coupang, a $100 million round for Chinese content distributor Toutiao and a $75 million round for San Francisco identity management company Okta.

After Sequoia's 35 deals, Andreessen Horowitz was the second most active with 31 deals, followed by Accel Partners (29) and Kleiner Perkins Caufield & Byers (27).

Pre-money valuations were also up compared to last year's second quarter, ranging from a 34 percent jump to $6.2 million at the seed/angel stage to a 122.2 percent jump in Series D and later rounds.

The length of time between when a startup was founded and when it paid off in an acquisition (the vast majority of exits) was about 6.4 years. PitchBook reported 193 of those deals in the quarter.

The average time to exit for the 47 IPOs in the quarter was 10.8 years. That number has been hovering between about 10 and 11 years since 2009. That's up markedly from prior years when it was typically between seven and eight years between launch and going public.

The average time to exit for the 15 private equity buyouts in the quarter was 11.3 years.

Software companies had by far the most exits, with 107 of the 255 exits reported in the second quarter. That is double the 28 exits each reported in the two sectors that were next — commercial services and biotech/pharmaceuticals.

The software sector also had by far the most fundings in the quarter, accounting for 641 of the 1,590 deals reported.

-- 

Melissa Welch

Director of Client Development

Growthink

melissa.welch@growthink.com

(310) 846-5015


Follow me on Twitter: http://twitter.com/MelissaAWelch

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McKinsey Quarterly: Strategic Principles for Competing in the Digital Age

Digitization is rewriting the rules of competition, with incumbent companies most at risk of being left behind. Here are six critical decisions CEOs must make to address the strategic challenge posed by the digital revolution.

The board of a large European insurer was pressing management for answers. A company known mostly for its online channel had begun to undercut premiums in a number of markets and was doing so without agents, building on its dazzling brand reputation online and using new technologies to engage buyers. Some of the insurer’s senior managers were sure the threat would abate. Others pointed to serious downtrends in policy renewals among younger customers avidly using new web-based price-comparison tools. The board decided that the company needed to quicken its digital pace.

For many leaders, this story may sound familiar, harkening back to the scary days, 15 years ago, when they encountered the first wave of Internet competitors. Many incumbents responded effectively to these threats, some of which in any event dissipated with the dot-com crash. Today’s challenge is different. Robust attackers are scaling up with incredible speed, inserting themselves artfully between you and your customers and zeroing in on lucrative value-chain segments.

The digital technologies underlying these competitive thrusts may not be new, but they are being used to new effect. Staggering amounts of information are accessible as never before—from proprietary big data to new public sources of open data. Analytical and processing capabilities have made similar leaps with algorithms scattering intelligence across digital networks, themselves often lodged in the cloud. Smart mobile devices make that information and computing power accessible to users around the world.

As these technologies gain momentum, they are profoundly changing the strategic context: altering the structure of competition, the conduct of business, and, ultimately, performance across industries. One banking CEO, for instance, says the industry is in the midst of a transition that occurs once every 100 years. To stay ahead of the unfolding trends and disruptions, leaders across industries will need to challenge their assumptions and pressure-test their strategies.

Opportunities and threats

Digitization often lowers entry barriers, causing long-established boundaries between sectors to tumble. At the same time, the “plug and play” nature of digital assets causes value chains to disaggregate, creating openings for focused, fast-moving competitors. New market entrants often scale up rapidly at lower cost than legacy players can, and returns may grow rapidly as more customers join the network.1

Digital capabilities increasingly will determine which companies create or lose value. Those shifts take place in the context of industry evolution, which isn’t monolithic but can follow a well-worn path: new trends emerge and disruptive entrants appear, their products and services embraced by early adopters (exhibit). Advanced incumbents then begin to adjust to these changes, accelerating the rate of customer adoption until the industry’s level of digitization—among companies but, perhaps more critically, among consumers as well—reaches a tipping point. Eventually, what was once radical is normal, and unprepared incumbents run the risk of becoming the next Blockbuster. Others, which have successfully built new capabilities (as Burberry did in retailing), become powerful digital players. (See the accompanying article, “The seven habits of highly effective digital enterprises.”) The opportunities for the leaders include:

  • Enhancing interactions among customers, suppliers, stakeholders, and employees. For many transactions, consumers and businesses increasingly prefer digital channels, which make content universally accessible by mixing media (graphics and video, for example), tailoring messages for context (providing location or demographic information), and adding social connectivity (allowing communities to build around themes and needs, as well as ideas shared among friends). These channels lower the cost of transactions and record them transparently, which can help in resolving disputes.
  • Improving management decisions as algorithms crunch big data from social technologies or the Internet of Things. Better decision making helps improve performance across business functions—for example, providing for finer marketing allocations (down to the level of individual consumers) or mitigating operational risks by sensing wear and tear on equipment.
  • Enabling new business or operating models, such as peer-to-peer product innovation or customer service. China’s Xiaomi crowdsources features of its new mobile phones rather than investing heavily in R&D, and Telstra crowdsources customer service, so that users support each other to resolve problems without charge. New business or operating models can also disintermediate existing customer–supplier relations—for example, when board-game developers or one-person shops manufacture products using 3-D printers and sell directly to Amazon.

The upshot is that digitization will change industry landscapes as it gives life to new sets of competitors. Some players may consider your capabilities a threat even before you have identified them as competitors. Indeed, the forces at work today will bring immediate challenges, opportunities—or both—to literally all digitally connected businesses.

Seven forces at work

Our research and experience with leading companies point to seven trends that could redefine competition.

1. New pressure on prices and margins

Digital technologies create near-perfect transparency, making it easy to compare prices, service levels, and product performance: consumers can switch among digital retailers, brands, and services with just a few clicks or finger swipes. This dynamic can commoditize products and services as consumers demand comparable features and simple interactions. Some banks, for instance, now find that simplifying products for easy purchase on mobile phones inadvertently contributes to a convergence between their offerings and those of competitors that are also pursuing mobile-friendly simplicity.

Third parties have jumped into this fray, disintermediating relationships between companies and their customers. The rise of price-comparison sites that aggregate information across vendors and allow consumers to compare prices and service offerings easily is a testament to this trend. In Europe, chain retailers, which traditionally dominate fast-moving consumer goods, have seen their revenues fall as customers flock to discounters after comparing prices even for staples like milk and bread. In South Korea, online aggregator OK Cashbag has inserted itself into the consumer’s shopping behavior through a mobile app that pools product promotions and loyalty points for easy use across more than 50,000 merchants.

These dynamics create downward pressure on returns across consumer-facing industries, and the disruptive currents are now rippling out to B2B businesses.

2. Competitors emerge from unexpected places

Digital dynamics often undermine barriers to entry and long-standing sources of product differentiation. Web-based service providers in telecommunications or insurance, for example, can now tap markets without having to build distribution networks of offices and local agents. They can compete effectively by mining data on risks and on the incomes and preferences of customers.

At the same time, the expense of building brands online and the degree of consumer attention focused on a relatively small number of brands are redrawing battle lines in many markets. Singapore Post is investing in an e-commerce business that benefits from the company’s logistics and warehousing backbone. Japanese web retailer Rakuten is using its network to offer financial services. Web powerhouses like Google and Twitter eagerly test industry boundaries through products such as Google Wallet and Twitter’s retail offerings.

New competitors can often be smaller companies that will never reach scale but still do a lot of damage to incumbents. In the retailing industry, for instance, entrepreneurs are cherry-picking subcategories of products and severely undercutting pricing on small volumes, forcing bigger companies to do the same.

3. Winner-takes-all dynamics

Digital businesses reduce transaction and labor costs, increase returns to scale from aggregated data, and enjoy increases in the quality of digital talent and intellectual property as network effects kick in. The cost advantages can be significant: online retailers may generate three times the level of revenue per employee as even the top-performing discounters. Comparative advantage can materialize rapidly in these information-intensive models—not over the multiyear spans most companies expect.

Scale economies in data and talent often are decisive. In insurance, digital “natives” with large stores of consumer information may navigate risks better than traditional insurers do. Successful start-ups known for digital expertise and engineer-friendly cultures become magnets for the best digital talent, creating a virtuous cycle. These effects will accelerate consolidation in the industries where digital scale weighs most heavily, challenging more capital- and labor-intensive models. In our experience, banking, insurance, media, telecommunications, and travel are particularly vulnerable to these winner-takes-all market dynamics.

In France, for instance, the start-up Free has begun offering mobile service supported by a large and active digital community of “brand fans” and advocates. The company nurtures opinion-leader “alpha fans,” who interact with the rest of the base on the Internet via blogs, social networks, and other channels, building a wave of buzz that quickly spreads across the digital world. Spending only modestly on traditional marketing, Free nonetheless has achieved high levels of customer satisfaction through its social-media efforts—and has gained substantial market share.2

4. Plug-and-play business models

As digital forces reduce transaction costs, value chains disaggregate. Third-party products and services—digital Lego blocks, in effect—can be quickly integrated into the gaps. Amazon, for instance, offers services that let businesses “insource” logistics, IT services, and online retail “storefronts.” For many businesses, it may not pay to build out those functions at competitive levels of performance, so they simply plug an existing offering into their value chains. In the United States, registered investment advisers have been the fastest-growing segment3 of the investment-advisory business, for example. They are expanding so fast largely because the turnkey systems (including record keeping and operating infrastructure) they can purchase from Charles Schwab, Fidelity, and others give them all the capabilities they need. With a license, individuals or small groups can be up and running their own firms.

In the travel industry, new portals are assembling entire trips: flights, hotels, and car rentals. The stand-alone offerings of third parties, sometimes from small companies or even individuals, plug into such portals. These packages are put together in real time, with dynamic pricing that depends on supply and demand. As more niche providers gain access to the new platforms, competition is intensifying.

5. Growing talent mismatches

Software replaces labor in digital businesses. We estimate, for instance, that of the 700 end-to-end processes in banks (opening an account or getting a car loan, for example), about half can be fully automated. Computers increasingly are performing complex tasks as well. “Brilliant machines,” like IBM’s Watson, are poised to take on the work of many call-center workers. Even knowledge-intensive areas, such as oncology diagnostics, are susceptible to challenge by machines: thanks to the ability to scan and store massive amounts of medical research and patients’ MRI results, Watson diagnoses cancers with much higher levels of speed and accuracy than skilled physicians do. Digitization will encroach on a growing number of knowledge roles within companies as they automate many frontline and middle-management jobs based upon synthesizing information for C-level executives.

At the same time, companies are struggling to find the right talent in areas that can’t be automated. Such areas include digital skills like those of artificial-intelligence programmers or data scientists and of people who lead digital strategies and think creatively about new business designs. A key challenge for senior managers will be sensitively reallocating the savings from automation to the talent needed to forge digital businesses. One global company, for example, is simultaneously planning to cut more than 10,000 employees (some through digital economies) while adding 3,000 to its digital business. Moves like these, writ large, could have significant social repercussions, elevating the opportunities and challenges associated with digital advances to a public-policy issue, not just a strategic-business one.

6. Converging global supply and demand

Digital technologies know no borders, and the customer’s demand for a unified experience is raising pressure on global companies to standardize offerings. In the B2C domain, for example, many US consumers are accustomed to e-shopping in the United Kingdom for new fashions (see sidebar, “How digitization is reshaping global flows”). They have come to expect payment systems that work across borders, global distribution, and a uniform customer experience.

7. Relentlessly evolving business models—at higher velocity

In B2B markets from banking to telecommunications, corporate purchasers are raising pressure on their suppliers to offer services that are standardized across borders, integrate with other offerings, and can be plugged into the purchasing companies’ global business processes easily. One global bank has aligned its offerings with the borderless strategies of its major customers by creating a single website, across 20 countries, that integrates what had been an array of separate national or product touch points. A US technology company has given each of its larger customers a customized global portal that allows it to get better insights into their requirements, while giving them an integrated view of global prices and the availability of components.

Digitization isn’t a one-stop journey. A case in point is music, where the model has shifted from selling tapes and CDs (and then MP3s) to subscription models, like Spotify’s. In transportation, digitization (a combination of mobile apps, sensors in cars, and data in the cloud) has propagated a powerful nonownership model best exemplified by Zipcar, whose service members pay to use vehicles by the hour or day. Google’s ongoing tests of autonomous vehicles indicate even more radical possibilities to shift value. As the digital model expands, auto manufacturers will need to adapt to the swelling demand of car buyers for more automated, safer features. Related businesses, such as trucking and insurance, will be affected, too, as automation lowers the cost of transportation (driverless convoys) and “crash-less” cars rewrite the existing risk profiles of drivers.

Managing the strategic challenges: Six big decisions

Rethinking strategy in the face of these forces involves difficult decisions and trade-offs. Here are six of the thorniest.

Decision 1: Buy or sell businesses in your portfolio?

The growth and profitability of some businesses become less attractive in a digital world, and the capabilities needed to compete change as well. Consequently, the portfolio of businesses within a company may have to be altered if it is to achieve its desired financial profile or to assemble needed talent and systems.

Tesco has made a number of significant digital acquisitions over a two-year span to take on digital competition in consumer electronics. Beauty-product and fragrance retailer Sephora recently acquired Scentsa, a specialist in digital technologies that improve the in-store shopping experience. (Scentsa touch screens access product videos, link to databases on skin care and fragrance types, and make product recommendations.) Sephora officials said they bought the company to keep its technology out of competitors’ reach and to help develop in-store products more rapidly.4

Companies that lack sufficient scale or expect a significant digital downside should consider divesting businesses. Some insurers, for instance, may find themselves outmatched by digital players that can fine-tune risks. In media, DMGT doubled down on an investment in their digital consumer businesses, while making tough structural decisions on their legacy print assets, including the divestment of local publications and increases in their national cover price. Home Depot continues to shift its investment strategy away from new stores to massive new warehouses that serve growing online sales. This year it bought Blinds.com, adding to a string of website acquisitions.5

Decision 2: Lead your customers or follow them?

Incumbents too have opportunities for launching disruptive strategies. One European real-estate brokerage group, with a large, exclusively controlled share of the listings market, decided to act before digital rivals moved into its space. It set up a web-based platform open to all brokers (many of them competitors) and has now become the leading national marketplace, with a growing share. In other situations, the right decision may be to forego digital moves—particularly in industries with high barriers to entry, regulatory complexities, and patents that protect profit streams.

Between these extremes lies the all-too-common reality that digital efforts risk cannibalizing products and services and could erode margins. Yet inaction is equally risky. In-house data on existing buyers can help incumbents with large customer bases develop insights (for example, in pricing and channel management) that are keener than those of small attackers. Brand advantages too can help traditional players outflank digital newbies.

Decision 3: Cooperate or compete with new attackers?

A large incumbent in an industry that’s undergoing digital disruption can feel like a whale attacked by piranhas. While in the past, there may have been one or two new entrants entering your space, there may be dozens now—each causing pain, with none individually fatal. PayPal, for example, is taking slices of payment businesses, and Amazon is eating into small-business lending. Companies can neutralize attacks by rapidly building copycat propositions or even acquiring attackers. However, it’s not feasible to defend all fronts simultaneously, so cooperation with some attackers can make more sense than competing.

Santander, for instance, recently went into partnership with start-up Funding Circle. The bank recognized that a segment of its customer base wanted access to peer-to-peer lending and in effect acknowledged that it would be costly to build a world-class offering from scratch. A group of UK banks formed a consortium to build a mobile-payment utility (Paym) to defend against technology companies entering their markets. British high-end grocer Waitrose collaborated with start-up Ocado to establish a digital channel and home distribution before eventually creating its own digital offering.

Digital technologies themselves are opening pathways to collaborative forms of innovation. Capital One launched Capital One Labs, opening its software interfaces to multiple third parties, which can defend a range of spaces along their value chains by accessing Capital One’s risk- and credit-assessment capabilities without expending their own capital.

Decision 4: Diversify or double down on digital initiatives?

As digital opportunities and challenges proliferate, deciding where to place new bets is a growing headache for leaders. Diversification reduces risks, so many companies are tempted to let a thousand flowers bloom. But often these small initiatives, however innovative, don’t get enough funding to endure or are easily replicated by competitors. One answer is to think like a private-equity fund, seeding multiple initiatives but being disciplined enough to kill off those that don’t quickly gain momentum and to bankroll those with genuinely disruptive potential. Since 2010, Merck’s Global Health Innovation Fund, with $500 million under management, has invested in more than 20 start-ups with positions in health informatics, personalized medicine, and other areas—and it continues to search for new prospects. Other companies, such as BMW and Deutsche Telekom, have set up units to finance digital start-ups.

The alternative is to double down in one area, which may be the right strategy in industries with massive value at stake. A European bank refocused its digital investments on 12 customer decision journeys,6 such as buying a house, that account for less than 5 percent of its processes but nearly half of its cost base. A leading global pharmaceutical company has made significant investments in digital initiatives, pooling data with health insurers to improve rates of adherence to drug regimes. It is also using data to identify the right patients for clinical trials and thus to develop drugs more quickly, while investing in programs that encourage patients to use monitors and wearable devices to track treatment outcomes. Nordstrom has invested heavily to give its customers multichannel experiences. It focused initially on developing first-class shipping and inventory-management facilities and then extended its investments to mobile-shopping apps, kiosks, and capabilities for managing customer relationships across channels.

Decision 5: Keep digital businesses separate or integrate them with current nondigital ones?

Integrating digital operations directly into physical businesses can create additional value—for example, by providing multichannel capabilities for customers or by helping companies share infrastructure, such as supply-chain networks. However, it can be hard to attract and retain digital talent in a traditional culture, and turf wars between the leaders of the digital and the main business are commonplace. Moreover, different businesses may have clashing views on, say, how to design and implement a multichannel strategy.

One global bank addressed such tensions by creating a groupwide center of excellence populated by digital specialists who advise business units and help them build tools. The digital teams will be integrated with the units eventually, but not until the teams reach critical mass and notch a number of successes. The UK department-store chain John Lewis bought additional digital capabilities with its acquisition of the UK division of Buy.com,7 in 2001, ultimately combining it with the core business. Wal-Mart Stores established its digital business away from corporate headquarters to allow a new culture and new skills to grow. Hybrid approaches involving both stand-alone and well-integrated digital organizations are possible, of course, for companies with diverse business portfolios.

Decision 6: Delegate or own the digital agenda?

Advancing the digital agenda takes lots of senior-management time and attention. Customer behavior and competitive situations are evolving quickly, and an effective digital strategy calls for extensive cross-functional orchestration that may require CEO involvement. One global company, for example, attempted to digitize its processes to compete with a new entrant. The R&D function responsible for product design had little knowledge of how to create offerings that could be distributed effectively over digital channels. Meanwhile, a business unit under pricing pressure was leaning heavily on functional specialists for an outsize investment to redesign the back office. Eventually, the CEO stepped in and ordered a new approach, which organized the digitization effort around the decision journeys of clients.

Faced with the need to sort through functional and regional issues related to digitization, some companies are creating a new role: chief digital officer (or the equivalent), a common way to introduce outside talent with a digital mind-set to provide a focus for the digital agenda. Walgreens, a well-performing US pharmacy and retail chain, hired its president of digital and chief marketing officer (who reports directly to the CEO) from a top technology company six years ago. Her efforts have included leading the acquisition of drugstore.com, which still operates as a pure play. The acquisition upped Walgreens’ skill set, and drugstore.com increasingly shares its digital infrastructure with the company’s existing site: walgreens.com.

Relying on chief digital officers to drive the digital agenda carries some risk of balkanization. Some of them, lacking a CEO’s strategic breadth and depth, may sacrifice the big picture for a narrower focus—say, on marketing or social media. Others may serve as divisional heads, taking full P&L responsibility for businesses that have embarked on robust digital strategies but lacking the influence or authority to get support for execution from the functional units.

Alternatively, CEOs can choose to “own” and direct the digital agenda personally, top down. That may be necessary if digitization is a top-three agenda item for a company or group, if digital businesses need substantial resources from the organization as a whole, or if pursuing new digital priorities requires navigating political minefields in business units or functions.

Regardless of the organizational or leadership model a CEO and board choose, it’s important to keep in mind that digitization is a moving target. The emergent nature of digital forces means that harnessing them is a journey, not a destination—a relentless leadership experience and a rare opportunity to reposition companies for a new era of competition and growth.

http://www.mckinsey.com/insights/strategy/strategic_principles_for_competing_in_the_digital_age