Starbucks has announced that they are fielding two applications, in test, that help users find their stores, explore the menu and nutritional information.  They are have an application which allows customers to recharge their Starbucks card, and enables the phone to display a bar code — which acts as a payment mechanism.  Both were created due to the feedback they got from their site: My Starbucks Idea, a crowdsourcing location for the firm.

As helpful as these ideas are — aren’t they obvious?  Is there ANY retailer who should not have an iPhone application that allows people to find their stores, and get information about their products and services.  Given the value of stored value cards to the merchant, where the store gets the money up front, customers often “lose” them — which is pure profit, and there are often charges to use the card — all of which create profit for the vendor, on top of the things that the customer purchases in the store — shouldn’t every store create these applications right away?  In addition, we know from behavioral economics that people are much, much more likely to spend money that has been already allocated to a category — like Starbucks — then they are to spend undifferentiated money from their wallet.  My friend Dan Ariely calls this “mental accounting”, and its a powerful incentive to use.

In short, there are some things on the iPhone that are becoming as obvious today, as certain web-site features were in the late 1990s.  It’s time for every retailer to get on the bandwagon.

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At $2.75 billion and 405 million users, Silver Lake Partners, Andreessen and company are paying $6.79 per registered user, and a little over five times 2008 revenue of $511 million.  Skype had grown by 44% in 2008.  Cheap or dear? 

My guess is that the buyers got a good deal because human voice is the most fundamental and global average revenue per user (ARPU) used to be in the range of $50-80, so Skype is paying about 1/10th the ARPU for the registered user.  So what?  Well, given that the phone and data over the phone is unquestionably the fastest growing part of the consumer electronics market, and will be so for the foreseeable future, it seems to me the investors are buying a cheap option on the most disruptive, and fastest growing part of the entire telecommunications market.  Communications is the killer app of almost every technology – from telegraphy to email!

Furthermore, because Skype terminates on phones – and people are accustom to paying for phone calls – especially international ones, and due to the fact that international phone call pricing is a still a ridiculous patchwork of usually outrageous tariffs, Skype will continue to grow not only because of lower costs – but also due to simpler pricing. 

If you think of Skype more abstractly, they are a company with a great peer to peer infrastructure, a robust database of people and their communication devices, and a global footprint.  In addition to voice, they are already sending video.  They can be the first global multi-media, person to person communications, and file sharing company.  That’s worth at least $6.79 per user.  From this point of view, perhaps Facebook should have bought them because the phone revenue could be the razor blade to fill the giant social razor that Facebook has built. 

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In his brilliant book, Notes on the Synthesis of Form, Christopher Alexander asks, why can an illiterate builder create a dwelling that is cool in the summer, warm in the winter, and withstands hurricanes, but most modern designers create buildings that are too hot, or too cold, too difficult to maintain, or just don’t work?  Even Frank Gehry, whose work I find spectacular, is less than optimal.  If you don’t believe me, just ask a janitor at the new Stada Center at MIT (a $100,000,000 plus building by Frank Gehry) “how’s it goin” and the janitor will rant on how un-maintainable the building is.  (Ironically, the Stada Center replaced the famous Building 20, which was the most utilitarian building on the MIT campus, which would have put it in the running for the most utilitarian building on the planet.)  Between budget and building materials, Gehry had virtually no constraints in his design choices, and he misses the mark along important dimensions.

Alexander says that the primitive architect is engaged in “unselfconscious design” — where the design forms have been passed from builder to builder and whittled into place with the passing of time yielding an artifact that works in ways far beyond the conscious intent of person “designing” it.  Contrariwise, the modern architect has structural steel, heating and ventilation systems which can move tons of air, plate glass, elevators, and thousands of other solutions that remove traditional limitations of building.  Yet, how often have you or I been sweltering inside a “modern” building whose windows should have been designed to open, but weren’t?  Alexander argues it is the very plethora of choices and capabilities in the realm of self-conscious design which overwhelms the modern designer.  It is only the genius of geniuses like Louie Kahn, whose buildings are new, beautiful, functional, and delightful to experience, who can navigate the unconstrained waters of modern building design process.  (If want to experience a Kahn building and you live in the Boston area drive up to Phillips Exeter Academy, in Exeter, NH.  Kahn designed the library there, and it is spectacular to behold, to be in, and is a functional gem to boot.)  Put another way, lack of constraints creates a problem. 

Why, you might ask, am I ranting about architecture?  Well, I believe businesses face a dilemma similar to the modern architect, because the digital description of reality is to CEO what structural steel is to the architect — it allows for the reinvention of every core assumption.  If you believe as I do that we are living in an ever expanding reality bubble begun with a big bang at the “beginning”, and the universe is delimited by an event horizon skin, you might also embrace the idea that our “digital reality” had its own big bang when Alan Turing showed that it was possible to create a logical machine which could mimic every other logical machine every conceived.  Every computer is a Turing Machine, and this Turing Reality is expanding faster and more expansively than any virus the world has ever known.  The implications of this change are multifaceted, and multifarious, for they are hard to figure out.  Let me lay out just a few implications…

Digital reality means that the understanding of interaction with customers can be designed differently.  The analysis of customer data can be radically improved as I wrote about in my blog the day before yesterday.  The improvement to business through better models of the business in a digital form is well documented, and 7-Eleven Japan and Harrah’s Entertainment both lead their markets through superior scientific understanding of their world — where they can take data about what happened, analyze it, and create new insights, that then turn into actions, that they then drive through their organizations to extract the value.  7-Eleven Japan trades at a multiple to sales of six to eight, whereas Wal-Mart trades at one times sales.  Again, design matters.

Digital reality means that new business models are now possible that were previously unthinkable, and great new designs harvest extraordinary value because financial returns are not normally distributed; they are hugely skewed, both at the individual and the organizational level.  For example, Google has a market capitalization that is eight times that of the WPP Group, or Omnicom, two huge advertising conglomerates.  Better business design enables radically different returns for businesses that are providing similar services to the end customer.  I have argued in an earlier blog that iTunes is a new animal — with a better design.  So too with the Corporate Executive Board, which is a research company that has created a core of “best practice” sharing, where their customer base is both a subscriber to content, and part of the network of content creation.  They are trading at a price to sales ratio of ten versus Gartner which has a price to sales ration of 1.7.  The Corporate Executive Board has a superior business design.

It has often been said that the pioneers do not win the lion’s share of the profits, but the fast followers do.  This type of analysis has been done many times over the years, with a recent example being the fact that Amazon was not the first on line book seller.  However, I think that if we were to look at those firms who created a new business model, they often do dominate their markets and for a long time.  Historically, one of the ways GE pulled ahead of Westinghouse in the fight to electrify the towns and cities of the USA, was that GE allowed the towns to lease the lighting equipment, whereas Westinghouse made them buy it.  This meant that the towns could easily add GE to their operating budget, but in order to get Westinghouse, the town or city needed to launch a referendum to raise debt, to pay for the new equipment.  Needless to say, GE pulled ahead due to their business design.  Arthur Andersen created the systems integration business when they realized that someone needed to install and integrate all those computers that IBM was selling.  They piggybacked on the existing accounting relationship, and created a training method and system to drive large pyramids of talent into the buyer’s organization — creating an entirely new model of consulting which now survives as Accenture — still the market leader in system integration.  Amazon too had a different and more comprehensive business design than the online bookseller they blew away. 

Most organizations have no ability or interest in creating a new business model — they are too busy executing.  But, I’m reminded of something my friend Alan Kay often says at our board meetings.  “If you are really interested in making money, then you need to think about inventing something completely new.”  It is important to remember that this advice comes from a guy who pioneered the largest and fastest growing industry in the past two generations, the personal computer business. 

Given the obvious returns of better business design, why do so few people attempt it?  Well, first there is risk.  Second, it makes most people’s heads hurt — because there are too many design choices.  Third, it take an enormous amount of leadership and managerial courage to convince an organization to attempt something that has not been done before.  Fourth, it is just plain hard to do.  As I noted in Architecture, there are only a few geniuses who can pull off building a “modern” building.  I bet there are even fewer who can do it for business because with a building, at least you have some parts that are “static”.  In business all constituencies — from the investors, to the customers, to the employees are a dynamic, organic systems — ever changing and interacting. 

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Following on yesterday’s blog, I wanted to reflect on a more specific Wiki innovation.  My dear friend, and software genius, and wonderful human being, Dan Bricklin, in his understated way has launched wikiCalc, which allows the user to run a spreadsheet on a distributed basis, and enables the tracking of all versions, and changes to the spreadsheet over time.  In addition, you can populate a “cell” with anything from a number to an active web link, and beautifully it has both a server side, and independent client side application, which can be run independently.  Put another way, you can make a change when sitting on a plane and publish it to the common spread sheet when you land. 

Why do I think this is such a big deal?  Well, spreadsheets are the key, interdependent control system used by large organizations.  GE, BP, American Express, and all large organizations have thousands and thousands of financial models in Excel, which are the basis for budgeting, and day to day management of the company.  One of the big challenges of this situation is that there is no “compare” function for spreadsheets, the way that there is for word documents.  If you want to understand what the nature of the changes are you need to have some fantastic annotation, or you are just out of luck, and figuring out what is “going on” in a spreadsheet is an exercise that is akin to figuring out the workings of a LISP program.

These financial models are very important to the running of large organizations, as they serve a role to both articulate what the given function or division will do (e.g. what sales are you projecting at what margins), but they are also often the control system by which senior management reviews progress, or lack of progress and uses it to guide the business on a day to day basis. 

The mental fragmentation that occurs in today’s spreadsheets is huge, and creates a compartmentalized version of “what is, is” as former President Clinton famously remarked.  Many meetings are about what the facts are, not just what to do about the facts.  Much of this fragmentation comes from the fragmentation of the numbers, and the expectations and definitions in spreadsheets – large and small.

Enter wikiCalc.  If a large organization could use wikiCalc to allow each relevant party to update their part of the spreadsheet, and track the changes that each has made, it would make the job of documentation (which is automatic) and integration much, much easier.  Now, according to Dan, the current calculation engine can handle a few thousand cells of data, but if it is used for models of that size, it should only be a matter of time before a larger, more robust calculation engine is built, and the large spreadsheets could be done as well.

Susan Leigh Star, created a theory of mental objects in large organizations that sit at the nexus of two or more social worlds.  She called them “boundary objects”, because they exist at the boundary of two mental models of the work.  Medical databases are one example of a boundary object that sits at the nexus of doctors, nurses, hospitals, insurance companies and patients.   She documented that before medical databases were in place, there were an infinite number of diseases.  Medical databases classified diseases into categories and thereby helped all parties make “decisions” in the very process classification.  All together, these classifications created a database, which became a boundary object.  Computer Aided Design/Computer Aided Manufacturing (CAD/CAM) systems serve a similar translation function between engineering, manufacturing and marketing. 

In large social organizations, boundary objects serve a number of vital functions, they are a repository for extant decisions that have been made, and they provide a translation function across social worlds.  So, if we imagine wikiCalc as a boundary object (which I think it will be, and which the financial models Excel often are already), then it can help “translate” the needs of the sales department into the needs of the human resources department, into the needs of the financial department.  All these departments don’t need to understand all the decisions and rules, and data at the same level of detail, they simply need to understand “their part” and believe that the model does a good job of translating across the different social worlds. 

Who cares?  Well, given the tremendous amount of time that organizations spend creating, maintaining and managing against spreadsheets, I think that the creation of a distributed, self-organized, easy to edit spreadsheet that can track all versions across all time would finally give organizations a tool to meet the interdependent needs of budgeting and control in a robust way.  The problem with doing this with something like SAP or other enterprise requirements planning tools is that they are so rigid, and centrally controlled.  This is why Excel continues to be the planning tool of choice, despite the almost universal adoption of ERP by large companies (even at MIT!).  But, Excel’s problem is that it is too decentralized, and has no easy way to allow for the “publishing” of a new version as part of a common model, or common “space”. 

Imagine that a financial model in an organization should be more like the WikiPedia, than like a set of independent, free floating models that then get shoehorned into a centralized control system like SAP.  It would be much more efficient, accurate, and easy to use if it were self organized and decentralized.  It is for these reasons that I think wikiCalc is a very big deal.

Furthermore, as is true of all beautifully designed, open tools, the unforeseen uses will be amazing, and probably swamp the expected ones.  Who knows what people will do when they have a spreadsheet representation to organize, calculate and distribute any type of local information, any data or news feed, and display it in the most universally understood of all computer-based representations, the spreadsheet.  It is cross language and global.  The mind reels.

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How to Save RFID Initiatives for the Department of Defense and Wal-Mart

When Wal-Mart and the Department of Defense (DoD) both push a new initiative it gets people’s attention, for together they represent roughly 5% of the US GDP. Today, they are both requiring suppliers to attach Radio Frequency Identification Devices (RFID) to pallets of products and eventually each individual item. Strangely, these two very different organizations face similar pressures to improve efficiency of assets while simultaneously managing radically increasing complexity of assets used or sold. Despite enormous pressure, suppliers are resisting, for RFID is simply the next incarnation of a very long-lived control logic aimed at governing the actions of organizations by relying on a smart monitoring network at the center tracking all the parts “at the ends”. I call this smart network, dumb ends or smart/dumb control. Given the smart/dumb approach RFID’s incremental value will not recapture its cost of creation for it will not deliver enough value if it is only used to extend existing control thinking.

However, within this potentially gigantic fool’s errand, there lies a potential breakthrough in how we manage networks of goods (and potentially services, too). If we combine a smart/dumb network to do what it is best suited for along with a dumb network with smart devices at the ends (its inverse — a dumb/smart network) we can design a system that effectively deals with exceptions, the bane of any complex logistics system, and thereby set the stage to deal with non-standard products with the same efficiency as standard products, and the exceptions they cause. The firm who first figures this out will have the efficiency of Costco, with the effectiveness of the corner store. I call this mix “The Control Alloy,” for like any alloy, the mixing of constituent parts makes a result stronger than either was before the blending.

A Thought Experiment

There is a mile long warehouse operated by a large retailer which was outfitted with the state of the art bar-coding equipment at a cost of over forty million dollars. Yet, the warehouse was plagued by many exceptions driving down efficiency. The retailer found only 3% of orders caused 80% of these problems: custom furniture, usually sets that had to be delivered together to the customer. Custom furniture was caught in a Catch-22; it could not be bar-coded until all the pieces were present, but when the later pieces arrived, the earlier pieces could not be found because they were not bar-coded.

One smart advisor suggested that they use a new technology called motes - tiny reusable computers costing $20 a piece or less –  which are programmable, have attachable sensors, and can communicate with each other and with other networks — on each piece of furniture as it came in. Then the piece parts could “wake up” every few hours, look for each other, and when they were all there - like a set of dining room chairs awaiting a table - they could tell the barcode system they were ready for processing.

By putting the smarts on the exception, the exception becomes self-tracking, and allows for it to be monitored with tiny amounts of overhead. It can let the rest of the network know when it is ready to be processed. Also, you can remove and reuse the motes once furniture is processed in the barcode system, and like all digital devices, motes will get much, much cheaper soon. This is an example of a dumb network with smart ends: dumb/smart control.

The importance of this approach is that in almost every system, it is the exceptions that drive up costs and drive down quality because they are exceptional, requiring non-standard procedures. Trying to extend the smart/dumb network for exceptions drives up complexity and cost because it is not only difficult to do, but one must imagine many more eventualities than will ever occur. Chasing that last bit of control costs a fortune - hence RFID is not being well welcomed.

If we change our thinking and add a layer of dumb/smart networks to “alloy” our smart/dumb networks, it will enable all sorts of variety at “the ends.” This approach would enable much easier handling of returns, which often have an unpredictable route. It would allow for more customization of parts, orders and services, for each order could have its own smart bill of lading that knew what to look for before getting ready to be shipped. It might even allow fewer manufacturing activities to migrate off-shore, because on-shore creation may be able to compete more effectively for differentiated demand if it is not reliant on supply networks optimized for regularity. Target might source more from the USA, if it could have the efficiency of a standard supply chain, with the differentiation of a local product delivered quickly.

 

Like many things, the right combination of approaches can yield something that neither could deliver on its own. The current efforts of the DoD and Wal-Mart will not yield value for the economy unless we begin to understand the need for a Control Alloy, not just another phase in a very old and rich tradition of centralized control.

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