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Global The free business magazine featuring articles from the world's most prestigious business schools.

Also including articles from: OXFORD, COLUMBIA & HARVARD


Global The free business magazine featuring articles from the world's most prestigious business schools. Quarterly: March, June, September, December. All articles are authorized reproductions

June 2014 h t t p : / /www. G l o b a l B u s M a g . c o m / info@globalbusmag.com Papegaaistraat 76, 9000 Gent Belgium


INSIDE this issue The Internet of Things: How It Will Change the Way You Shop

5

Crowdsourcing Leadership

6

GE: A Brand in Motion

9

The right price, at the right moment, to the right customer

10

What Could Have Saved Nokia, and What Can Other Companies Learn?

16

The Transatlantic Trade and Investment Partnership: A critical perspective

19

Don't knock 'innovation,' create a framework for it

22

Apple’s Beats Buy: Desperation or Opportunity?

24


The Internet of Things: How It Will Change the Way You Shop Whether the concept excites you or scares you, the Internet of Things has the potential to change the way people make choices and go about their daily lives. The term refers to a new reality where everything from clothing to household appliances are interconnected and tech-enabled to send data back and forth. For example: A grocery store chain sends consumers some recipes based on the items they place in their carts; or an alarm clock turns on and begins warming up the car when someone hits the snooze button. It’s the sector where “real change is going to happen” for retailers, according to Doug Straton, who heads the North American E-commerce Center of Excellence at Unilever. For a company like Unilever, which sells 400 brands across multiple categories of consumer goods, the question becomes: How do you react? Should the company build its strategy around certain devices or interfaces, partner with a company that manufactures those devices, or build and market devices of its own? “It’s incredibly important in the grocery delivery space to get [your product] on the list first,” Straton said during a presentation at the Retail and Consumer Goods Growth Summit in New York organized by Knowledge@Wharton, Wharton’s Jay H. Baker Retailing Center and Momentum Event Group. “If they’re shopping [while using] a device, how do you interrupt to let somebody know there’s a special on a product? How do you deliver messages within those different contexts?” As

an

example,

Straton

cited

Soma,

a

biodegradable water filter company that operates using a subscription model for delivery of a replacement filter every two months. “If something like that can also tell you how much you consumed, or how much you should be consuming, is that a throttle on [the growth of a company like Unilever]?” Straton asked. “Or is that an accelerator of our growth for some reason?” “When you start to think about behavioral changes — what is that shopper’s journey throughout the day? — you begin to understand that this is a much more powerful concept than just knowing who somebody is.” The data that can be collected through such devices and by consumer goods companies themselves also changes the game for brands in terms of forming a picture of the different consumers they are marketing to and what types of information those people want to see, Straton said. “We’re not just collecting and analyzing; we’re looking at a shopper in a fundamentally different way. We’ve always said we want a 360-degree view of a shopper, but the one we typically talk about is relatively static,” he noted. “When you start to think about behavioral changes — what is that shopper’s journey throughout the day? — you begin to understand that this is a much more powerful concept than just knowing who somebody is.” It also allows the firm to create user experiences that are much more tailored to a single individual’s experience than they are today. “The future is personalization on a one-to-one scale,” Straton said. “Content on Dove skincare would be very different for a male who lives in New York City than it would be for a female in San Francisco. Literally, in four or five years, I think that type of interaction with a consumer will happen, and it can [only do that] with analytics on top of real-time data.”


“Content on Dove skincare would be very different for a male who lives in New York City than it would be for a female in San Francisco. In four or five years, I think that type of interaction with a consumer will happen.” Companies like Unilever have to find a way to interact with these shifts and figure out where their products fit. In some cases, that might mean abandoning marketing strategies or focuses that have worked well for decades, Straton noted. “The amount of learning we have to do, the adjustments we have to make to how things are now marketed, is fairly incredible. The hardest thing that keeps us up at night is just where it will end up and what will be the first move and the second move.”

CROWDSOURCING LEADERSHIP Four conditions for using collectivity to eliminate hierarchy By IMD Professor Maury Peiperl and Suzanne de Janasz - May 2014

Management gurus tell us what leadership is…and isn't. Years of research have taken us from employee-driven quality control, to empowerment, to "followership." By "turning the pyramid upside down," many of these approaches encourage employees to do what they think is best to serve customers, improve processes and innovate. Beyond these, however, in the age of The most mind-boggling aspect of the shift is how closer and closer connectedness we are seeing a quickly it is happening or has the potential to new organizational phenomenon. We call it happen, Straton added: “A real smartphone has crowdsourcing leadership. only been around for eight years, and tablets have only been around for five. So what’s next? We Much like composer Eric Whitacre, who uses have to radically rethink how we’re bringing crowdsourcing to splice together individual brands to market. It’s our biggest opportunity, but singers' voices to create masterful choral works it’s also our biggest threat.” (albeit with digital technology), business leaders are increasingly asking employees to lend their http://knowledge.wharton.upenn.edu/article/intern voices—and talents—to the chorus of direction et-things-will-change-way-shop/ and leadership. "Republished with permission from Knowledge@Wharton (http://knowledge.wharton.upenn.edu), the online research and business analysis journal of the Wharton School of the University of Pennsylvania."

A few cases in point. Four years ago, the ailing Nokia Corp hired Microsoft executive Stephen Elop, a Canadian, to turn around the company. Once the market leader, Nokia rested on its laurels and allowed rivals Blackberry, Apple, and Samsung to make significant inroads in the smartphone market. Elop could have issued a series of edicts and proclamations to assert his strategy and direction. Instead, humility and an inquisitive brand of intelligence led him to a different path. On his first day as CEO, Elop sent out an email to all Nokia employees asking them to respond to him individually with their answers to three questions: What do you think we need to change? What should we not miss? And What should stay the same?


Elop explained, "people know what the problems are…only they haven't been asked [in the past]. You have to listen to [them]." He received thousands of responses…which were then analysed by a team who presented the findings to all of Nokia including Elop. This collective input—a crowdsourced plan for the leadership of the company and its people—became Elop's plan. Is it working? In addition to the positive response from employees, who were suspicious at first (Nokia was not known for transparency), the market is slowly but steadily responding, with improved share prices and analysts' opinions. Elop offers "We're selling more phones this week than last week." George Hu, COO of Salesforce.com, shared his leadership approach in the New York Times. He credited his rise from intern to COO in ten years not to solving problems his boss asked him to solve, but to solving the problems "they know they have but nobody is solving." He further explained, "When we have an important decision we need to make, we put a presentation on our social network and let people comment on it. Or people will post ideas and we use a liking system, just like on Facebook, so that the best ideas bubble up." Just as in the better-known applications of crowdsourcing for funding (e.g., Kickstarter.com) and market research, crowdsourcing leadership is a process of connecting directly with a "crowd" of interested people and using their collective wisdom or opinions. It's open, it's fast, and if done well, it virtually eliminates hierarchical distance. It gives the leader near-immediate access to a diversity of viewpoints, values and experiences, and indeed to potential answers to the company's problems—though it is also likely to turn up more problems the leader may not have been aware of. In the best case, the humility implied by asking such basic questions of everyone in the firm drives a recognition that the leader knows he or

she doesn't know it all. The willingness to search for answers in a collectivity of others' ideas demonstrates an openness that can stand a leader in good stead, as long as it is seen as sincere and employees are willing to risk sharing new ideas as well as ones that are critical. Moreover, this approach facilitates implementation of the crowdsourced changes—because employees have a stake in seeing their ideas put into practice. This may sound simple, but it's not easy to do. Research tells us that power really does insulate leaders from others—that power and perspectivetaking are inversely related, and it takes very little time for a newly-appointed CEO to develop an inflated sense of his or her own "rightness" and become unwilling to consider divergent points of view from those lower in the hierarchy. It isn't just a question of power, it's also about the expectations of the leader from the board, other senior stakeholders, or from hopeful employees who look to the new leader as the savior—the one who can call the magic shots and save the company. Responding to such expectations with what could be seen as an abdication of decision making can be dangerous to a new leader's credibility. Could crowdsourcing help your organization navigate current challenges or set a course in a previously unknown but profitable direction? There are four conditions for successfully crowdsourcing leadership: Fit the culture. Popular as they are, democratic and empowering management philosophies are neither universally followed nor desirable. Asking employees' views on organizational strategy and direction in a paternalistic or strongly hierarchical culture may meet with resistance at best, and disbelief and mistrust of leadership at worst. Consider the culture—as well as previous organizational attempts—before adopting a crowdsourcing approach, and tailor it appropriately.


Manage expectations—down and up. Ask for employee input and demonstrate your sincerity by deciding and explaining how you will analyze what comes in, what information you will share and how, and how you will use the crowdsourced advice to make decisions‌and keep your word! Leaders also need to understand and manage the expectations of the board for a deliberate and decisive plan of action. If you're under the gun to have answers and the board sees that you don't, you need to be able to frame your approach to boost their confidence/patience. Stay humble and patient. Recent research suggests that leaders who demonstrate humility are considered by their followers to be especially credible. Similarly, leaders who are seen as curious and inquisitive have been shown to be more successful at spanning boundaries. But being open to ideas, and being patient with the process can be particularly difficult under pressure. Most leaders are more likely to hold tight to their decisions, even if early evidence suggests that perhaps the direction was wrong, whereas it seems easier (and quicker) to abandon an idea when it came from someone else. Recognize this tendency. Let others own and celebrate success. If employees' ideas are working, leaders should give credit, or better still, allow employees to decide how to celebrate the success of their ideas. This feedback loop is essential, as it recognizes the outcomes, and sets the stage for future crowdsourcing. While not without its challenges, crowdsourcing can help leaders revive an ailing organization, engage employees, and support a culture of continuous improvement‌but only if they do so with sincerity, humility and patience. Maury Peiperl is a Professor of Leadership and Strategic Change at IMD and teaches in IMD's Orchestrating Winning Performance program. Formerly IMD Professor of leadership, Suzanne de Janasz joins Seattle University this year as the Gleed Distinguished Professor of Business, where she continues her teaching and research on leadership, mentoring, negotiation, and balancing work/family. The article above is republished courtesy of http://www.imd.org/research/challenges/


GE: A Brand in Motion Successful companies change, evolve and innovate; this was the message Beth Comstock, chief marketing officer and senior vice president of GE, shared with Thunderbird students during her campus visit on April 8, 2014. Her talk, entitled GE: A Brand in Motion, sums up her message of how important advancement and perpetual change are for a brand. “To stand still is to die,” states Comstock. “Customers rely on brands to know what’s next,” she says. “Know thyself, know the customer and innovate.” The question brands must continually ask is: How can we make our brand matter? Comstock offers five mantras that help us answer that question: 1. Own the moments. Create moments that represent who or what you are as a brand. Know who you are as a company and embrace it. Don’t try to be something you are not. 2. Develop stories produced by content factory. 3. Bring data to life with stories. Your brand is defined by the stories you tell. 3. Convene the conversation. Bring people together to make things happen. Be one cohesive brand with one message. Advertising isn’t always the most effective outreach; get creative in utilizing social media and thought leadership to create opportunities to bring stakeholders together. 4. Mindshare before market share. Spend time developing your offer before you push it to market. Sometimes great ideas take time to nurture and draw support, especially if they are outside the box. 5. Invite others in. Form partnerships and engage

in open collaboration. You can’t solve problems on your own. You must be willing to look to others for help. Comstock also spoke about the use of technology in business and its ability to empower companies to stay current and adapt quickly. “We must blend the physical and digital worlds, using technology to help us determine what is going to happen before it happens. Then we must integrate those changes.” In line with these mantras, GE is constantly adapting and changing to solve their customer’s problems. Additionally, the company understands the importance of partnerships and relationships with organizations that can help them reach their mission; they know they cannot do it alone. “Change will only happen if you bring everyone together and rally behind it,” she says. The article above is republished courtesy of http://knowledgenetwork.thunderbird.edu/researc h/ http://magazine.thunderbird.edu/article/gebrand-motion


The right price, at the right moment, to the right customer

addition, we uncovered a number of barriers that prevent organisations from developing and implementing an effective price optimisation strategy. Here, we share some of the findings of that research and suggest how companies may be able to overcome their obstacles to improve firm performance. Why price optimisation? The benefits of price optimisation stem from a company’s ability to understand and take advantage of either of two variations:

Every company has to put a price on what it sells, but Tim Ham and Marco Bertini have found that most companies often fail at this important task in a manner that jeopardises long term value. And, there are surprisingly large rewards for those companies that invest in even the simplest of price optimisation techniques. The stunning growth in the quantity and quality of customer data has enhanced the ability of companies to create tailored marketing solutions and adjust prices to fit people’s budgets and preferences. Though some have succeeded in driving profits and expanding their market share as a result, many have not. Our research sought to find out why a more tailored approach to pricing has not worked for every company, despite the promise, and to lay out a plan by which companies can establish a better approach to price optimisation. We started our investigation by observing current beliefs and practices. We found that, while firms typically sense that they can improve price setting and benefit greatly from doing so, they also lack a well-developed and thorough plan. In

Price Elasticity Variations: The volume effect of a price change on a company’s customers is typically heterogeneous. For example, the ease and speed with which price comparisons can be made on the internet has driven fierce price competition in some markets, yielding high consumer price elasticities. This can be seen in the UK motor insurance market where a one per cent price reduction online can drive up to a 50 per cent increase in volume. Yet, that same one per cent price change offered on the telephone results in only an eight per cent variation in volume. This heterogeneity in elasticity leads to significantly different strategies for setting prices optimally. Care should be taken to ensure that the integrity of the consumer proposition is not undermined by apparently unjustifiable price variations. Margin Variations: Margins can vary to a similar degree to price elasticities. This is discussed in more detail later, but suffice it to say that ten-fold variations in customer contribution are common. Those customers with low margins and low price elasticities are prime candidates for price increases. Conversely those with high margins and high price elasticities should be considered for price reductions. Most companies know where their customers sit on the curve in aggregate. Price optimisation


allows a company to segment its customers and appreciate that it has groups sitting on very different places on that same curve. The opportunity for price optimisation stems from this. Approaching price optimisation

major factor in how price sensitive consumers are. People in the process of choosing between suppliers can be highly price sensitive, not least because of the way that providers market themselves. However, when customers are renewing a contract, they tend to be far less price sensitive.

When setting prices, a company must reflect on its consumers, competitors, product and customer economics, and broader strategy. Our study of companies in twelve sectors focused on four questions:

In food retail, shopping occasion proves to be a driver of price elasticity, as those on a standard weekly shopping trip tend to be more price sensitive than those stopping in for a few items on their way home after work.

• How sensitive is the consumer to the price of the product or service?

In sum, there are stark variations in how consumers respond to price changes that are highly quantifiable. Those companies that do this can achieve significant competitive advantage.

• How does your price proposition compare to that of the competition? • How well do you understand the economics of your product and customers? • Is the pricing coherent and aligned with the company’s competitive, product and consumer strategies? How sensitive is the consumer to the price of the product or service? Of the companies we surveyed, 41 per cent analysed the sensitivity of their customers to price changes. Of all the factors that should be considered when setting prices, price sensitivity is the most complex to assess. It requires organisations to establish relationships between price changes and shifts in customer purchasing behaviour. Asking customers about the effects of pricing can be problematic, as they have a tendency to overestimate their price sensitivity. Comparing the actual behaviour of customers with that predicted by market research can expose alarming variations. In the case of ongoing service providers, such as mobile or utility companies, life stage can be a

How does your price proposition compare to that of the competition? Among those in the retail and service sectors, competitor prices are often given greater prominence in the price decision than any other factor. This is partially because companies have a better understanding of competitor prices than they do of customer value and price sensitivities. It is also because managers assume that pricing is to a large extent “out of their hands” and “at the mercy of the market”. However, the importance of competitor prices varies markedly. When price sensitivity is measured by retail outlet, the variations in competitive intensity frequently prove to have the greatest import, ahead of other factors such as demographics and shopping occasion. Competitor reactions can either mitigate or accentuate the effects of a price change. Very often, one company’s price change will be quickly mimicked by the competition, reducing the impact of the change. This can occur for both price increases and decreases. In the case of decreases it can lead to destructive price wars. Conversely, competitors can exploit the


opportunity presented. If company A’s prices rise, company B could institute a sales drive. This can be observed in the utility energy markets. Following a rise by one competitor, other competitors may seek to capitalise on a sales opportunity in the short term, and then follow the price rise themselves later on. Thus, the competitor that led with the price rise will see a substantial impact on volumes in the short term but little impact in the medium term once the competition matches their move. There are often many alternatives for competitor reactions to a price move. Scenario modelling can be the best approach to modelling competitor reactions. Our research suggested relative infrequent use of scenario modelling in determining an optimal price move. How well do you understand the economics of your product and customers? Questions pertain not only to product profitability but also to the profitability of customers. Let’s focus on product considerations first. Crossproduct promotions and subsidies well predate the online marketplace. For instance, inkjet printer manufacturers see printers as enablers of a revenue stream associated with cartridge sales. Restaurants discount main courses to drive consumption of higher margin complementary food categories, such as alcohol and desserts. Builders submit competitive quotes for jobs with the knowledge that there will invariably be additions to the project for which they can charge a premium. Even with these practices so common across industries, 57 per cent of the companies we surveyed optimised prices for products independently of each other, despite recognising that the purchase decisions are interrelated. It would appear that though most companies understand the interrelationship of product purchase choices by consumers, the companies’

pricing decision-making processes do not reflect that insight. Customer factors must also be considered. Margins can vary substantially between groups of customers. These variations need to be understood and reflected in price decisions. Strangely, 75 per cent of companies surveyed did not have an established methodology for measuring differences in the value of customers to their companies, yet the same percentage perceived a greater than 50 per cent variation between the most and least valuable customers. Variations in customer value are often well understood by factors by which a company is organised (such as location). This reflects how financial reporting is done but does not correspond to the key differentiators of value such as product holding, purchase frequency, acquisition channel, tenure and payment method. Modelling customer lifetime values requires an understanding of many factors including financial discipline and market realities. Though data-driven, this field of study is often an inexact science that necessarily draws on the experience of the modellers and market experts. Typical predictors of lifetime value are unsurprising: product holding and usage, acquisition means, and payment method. More interesting is the way that the factors compound each other, which can result in dramatic variations in profitability. If done well, modelling will expose the variations in customer value that exist within a company’s customer base. Often, between 30 and 40 per cent of customers contribute close to 100 per cent of profits while another 30 per cent actually reduce profits. Is the pricing coherent and aligned with the company’s competitive, product and consumer strategies? Any company seeking to optimise profit must


provide customers with a set of prices that are coherent and aligned to the company’s competitive, product and consumer strategies. Prices are strong signals to the consumer above and beyond the cost of an item. Issues to consider are price levels, transparency, simplicity and price assurance. Variations in price elasticity by customer group can tempt an organisation to vary prices. However, this can interfere with a consumer’s perception of value. When it comes to a single product’s price strategy, it must be undertaken in light of the overall product portfolio strategy. A good example of this is the previously mentioned restaurant pricing strategy — restaurants seeking stronger margins overall should price particular products as part of that overall plan. Of course, prices set by one firm are seldom judged in the mind of the consumer without immediate comparison or contrast to the prices of the competitors’ offerings. Therefore, it is important for companies to articulate how their prices are likely to be perceived by consumers in comparison to its rivals. They must also consider the extent to which they wish to lead the competition and, accordingly, to provide signals to the marketplace and consumers alike. The importance of these matters can be seen any time a firm decides to attract new customers simply by cutting prices. We have found that, often, a discounting strategy is not in line with a broader business strategy. Short-term pursuit of volume can undermine the longer-term customer and brand strategies. This is most notable in markets in which the marginal cost of consumption is low, such as airline travel. Revenue management systems are excellent at optimising revenues for the short term, but the process of offering highly discounted prices can damage the long-term revenue potential of not only a single company but the industry overall. Sector variations

While the principles of price optimisation focus generally on the trade-off between unit margin and volume in a market, the opportunities and challenges for implementation can vary markedly across segments within the market. It is the nature (timing, frequency, and depth) of the interactions that a customer has with a company throughout that customer’s life cycle that best informs the optimal pricing approach. We illustrate some of those sector variations below: For firms in sectors such as utilities and insurance How to trade off prices between those that can attract highly price-sensitive new customers and those that will reaffirm loyalty at the point of contract renewal How to offer discounts to customers with multiple product holdings How to factor in payment type, acquisition channel and tenure as dimensions in any pricing segmentation For firms in sectors such as restaurants, hotels and airlines How to cope with the complexity of multiple dimensions that determine the ‘optimal price’ How to balance the short-term downward pressures on price against the long-term needs that drive value perception How to employ discounts, coupons and prices to drive repeat business For firms tied to the retail sector When and how to vary prices among multiple locations — and which dimensions to use to decide such variations


How to align pricing algorithms to the role of different product categories from footfall to direct margin drivers For firms in high value consumer goods How to optimise margins throughout the customer’s life cycle (the time period during which the customer actually uses the product) How to create an effective competitive price strategy at high-risk points in the customer journey For firms in the fast-moving consumer goods sector How to balance the conflicts between the use of discounts to drive engagement and the delivery of strong brand and value performance How to use price to drive appropriate incentives and alignment between channels while also recognizing the distributor and the end-consumer

These considerations are those that executives often assess intuitively; but we have found that utilising a rigorous price optimisation process helps managers to make more educated (and profitable) decisions. Obstacles to overcome Our research identified a range of impediments to price optimisation that explain why most organisations fail to reap the potential benefits. Indeed, it will be difficult for firms to see the extensive benefits of an optimised price strategy unless they can overcome a number of obstacles. Awareness of opportunity. The value of finding optimal price levels for goods and services only becomes clear when the customer value and price elasticity assessments have been made. Organisations that have not taken these crucial

steps do not appreciate what they are missing. Organisational structure. The team performing the pricing analysis generally does not have the power to make pricing decisions. In addition, the consequences of the work may turn out to be broader than the original stated objectives. For instance, while the pricing team may develop optimal pricing plans they are often overridden by others determined to discount prices to hit their personal volume targets. In 26 per cent of companies, those surveyed believed that their pricing structure was undermined to a great extent by discounting. Pricing plans must be close to the province of the one person who is responsible for both the short- and long-term profitability and market performance of the organisation, the CEO. Analytical capabilities. Pricing can require advanced analytical and statistical skills. Of the factors considered, this was believed to be the biggest constraint to developing a cohesive strategy by the companies we surveyed. Most companies are simply not staffed with people proficient in price optimisation. Therefore, a short-term strategy may involve hiring outside help with those skills, though it is important to develop an internal team to handle the analytical measures for long-term success. Useful data. It is common for us to encounter companies that are bathed in data but that data is of limited use in understanding price elasticities. Whilst the company may have examples of price changes, the volume effects are difficult to interpret. More often than not this is due to the volume effects occurring over a sustained period of time whilst other factors like the competitors’ prices are also changing – distinguishing between effects can be impossible. In this situation price experiments are required to derive price elasticities. In our research, issues of the quality, usefulness and availability of data varied by organisation; but, as a rule, larger organisations were more confident about their data capabilities, though most organisations can


make better use of the data they collect. Execution. Sometimes, corporate organisational structures simply do not allow prices to be varied in ways that thorough analysis suggests. For instance, a restaurant group identified that discounts would be more profitable in some restaurants than in others. However, the company was only able to advertise discounts effectively at a national level. Similarly, organisations may struggle with the complexity that a comprehensive analysis can create. Even using a few variations in customer models and structures can lead to excessive (running from thousands to billions) different price levels. It can be difficult to understand the consequences of a change to one price level when faced with such computational complexity How to start The long, but typically profitable, journey to adopt a price optimisation strategy that is right for your company starts with a few important steps. To define the optimal price structure and pricing levels, a company must have: • An empirical understanding of how price changes affect volume in aggregate and by customer segment • An understanding of the marginal profitability of its customers (on a multi-product and multiyear basis) and how customer characteristics drive variations therein • Scenarios for how consumers and competitors might react to price changes • Well-articulated consumer, competitor and product price strategies — which should be aligned with a coherent pricing plan • A model, however basic, that demonstrates the trade-off between the volume and value impacts of price changes

Then, the company should be sure that it adheres to these five precepts. 1. Don’t leave it purely to the pricing team. Given that the effects of price changes go beyond the pricing or marketing teams, it is essential that any price optimisation work have broad engagement and support throughout the company. 2. Set a challenging target for the benefits delivered. The benefits achievable from price optimisation can be surprisingly large. The analysts and statisticians involved may be best positioned to unearth additional opportunities and should be set challenging targets to encourage them to do so. 3. Audit your current performance. Companies should identify the areas in which the greatest opportunities for improvement lie through asking those same four questions that we asked in our research. They will help you establish where the opportunities for improvement may lie. 4. Identify barriers early. Considering the list of barriers that we have listed, it is essential that firms assess those that most apply to their organisations and systematically mitigate their impact. 5. Start simple. The simultaneous introduction of multiple factors into a company’s pricing structure would be unwise. Not only is it difficult to collect the necessary statistics, but coincidental changes are hard to measure and also result in greater risk. The article above is republished courtesy of London Business http://bsr.london.edu/lbsarticle/741/index.html


What Could Have Saved Nokia, and What Can Other Companies Learn? Quy Huy, INSEAD Associate Professor of Strategy and Timo Vuori, Assistant Professor of Strategic Management, Aalto University | March 13, 2014 Nokia lost the smartphone battle despite having half of the global market share in 2007. Some argue that it was down to software, others that it was complacency. We argue that collective emotions within the company were a big part of the story. Leaders who are able to identify and manage patterns of emotions in a collective are better able to make their ambitious strategies a reality. Our argument centres around the idea that the emotions felt by a large number of people within an organisation can determine the success of strategy implementation even when these feelings go unexpressed. We recently had the opportunity to speak with Olli-Pekka Kallasvuo, former CEO of Nokia, when he was keynote speaker at an INSEAD conference investigating why Nokia lost the smartphone battle. When we asked him to describe what it was like to face the competitive market of the mobile telecommunications industry during his tenure from 2006-2010, he responded that nowhere in business history has a competitive environment changed so much as it did with the converging of several industries – to the point that no-one knows what to call the industry anymore. Mobile telephony converged with the mobile computer, the internet industry, the media industry and the applications industry - to mention a few… and today they’re all rolled into one.

In such a fast-paced changing environment, it was unsurprising that Nokia’s top executives drew on the best practices of strategy implementation and Nokia’s famed strategic agility was certainly impressive in terms of acquisitions and mobile device development, but with the benefit of hindsight he would now acknowledge that the emotional climate within the organisation was overlooked during this turbulent period.

Pluralistic Silence Within Kallasvuo, who had been with Nokia since 1980 in various functions such as CFO and Executive Vice President and General Manager of Mobile Phones, replaced Jorma Ollila as CEO in 2006. Although a more integrative company was to be created to develop integrated software, hardware, and applications for the advanced smart phone, the keen entrepreneurial spirit for which Nokia had long been known, strongly prevailed and the key business units continued to compete for resources to develop products that would address various market needs. Kallasvuo now sees that the company did not pay sufficient attention to the emotional undercurrents caused by internal competition for resources to develop a vast array of phone models for various market segments worldwide. Optimising the interests of one department, when repeated across many different departments, inadvertently hurt the overall welfare of the company. The problem of Nokia, after all, seems frustratingly similar to those of many large companies such as Microsoft or Sony who could not develop high quality innovative products fast enough to match their rising competitors. As the companies grew larger and richer, each department became its own kingdom, each executive a little emperor, and people were more concerned about their status and internal promotion than cooperating actively with other departments to produce innovative products rapidly. This phenomenon is also known as silo politics, and spread naturally and quickly like bad weeds in the garden. In other words, the whole became less than the sum of the


parts. Kallasvuo’s opinion corroborates with the qualitative research that we have conducted where we spoke with over 50 key Nokia managers [including Kallasvuo] multiple times to get their inside stories on what it was like working for the company during his management. Essentially, the overriding emotion felt by top managers and middle managers within the organisation was one of fear. And yet, it wasn’t necessarily a fear of being fired which pervaded; it was more about fear of losing social status in the organisation. Together, these fears shaped a collective emotional climate which influenced what information was shared [or rather not shared] in meetings. Middle managers were happy to allow senior managers to believe that deadlines, which were unrealistic, would be met for developing the Symbian software platform – and they did this because of a fear of losing social status. It was simply a case of them not wanting to upset others for fear of social retaliation and not wanting to show they had limitations or weaknesses both on a personal level and also at a company level with the product they were all investing their energies in. As a result, a kind of pluralistic silence endured where no-one would speak up about the limitations of the Symbian platform and the slow progress of development of other more advanced software platforms. As a result of optimistic reporting, Nokia top managers kept believing the company was progressing well in matching Apple’s iPhone while it was not.

Reporting What You Think Your Boss Wants To Hear Of course, Nokia senior management had their own fears which came from what other companies like Apple and Google were planning to do—disrupt the industries – and they most certainly felt the pressure from shareholders to grow their quarterly earnings and sales revenues. Even though the top managers sometimes

acknowledged the threats publicly, fear of losing internal momentum and external sales in the short term prompted them to emphasise the quality of Nokia’s products and internal developments and, thus, downplay somewhat, at least in relative terms, the competitive threats to larger internal and external audiences. As a consequence, middle managers’ fears toward the competitors and concern over Nokia’s future were reduced. However, to ensure that Nokia would both match the short-term financial goals and succeed in the long-term against the rising competitors, top managers tended to put heavy pressure on subordinates to deliver more and faster, not accepting “no” for an answer, thereby increasing their subordinates’ fears of reporting honest feedback. The top managers also subconsciously alleviated their own fears of losing to rising competitors by accepting optimistic reports by middle managers and not questioning the validity of the good news. As a result, managers of various departments focused more on internal competition for resources and higher social status and were less fearful of competitors. CEO Kallasvuo noted that complacency had crept into the organisation and not enough importance was attached to what external competitors were doing; somehow the sense of urgency to innovate had waned and managers of the successful company were more intent on defending and preserving existing successes than attacking competitors by developing radically new products and incurring the risk of failure. He admits that the culture of “Not Invented Here” had become entrenched and no-one can assume a leading market position if a company is risk-averse. He spoke of being present at a panel in New York in 2007 when Google announced the launch of their Android operating system and he realised immediately the significance of Google’s strategy that made what used to be called “smartphone” a mere “window to the cloud.” He realised that Nokia’s Symbian software platform


would be outmatched if he did not take fast and urgent actions. But by increasing pressures to work faster and harder among various departments, he inadvertently created an unhealthy emotional climate of fear that led to optimistic reporting by managers of various departments, ultimately causing the fast decline of Nokia high end smartphones that relied on an increasingly constrained and underdeveloped platform.

Strategy is 5 percent thinking, 95 percent execution. Strategy execution is 5 percent technical, 95 percent peoplerelated. With the benefit of hindsight, what could Nokia have done differently? We believe that more careful management of emotional processes would have allowed top managers to get more accurate information of Nokia’s software capabilities and development speed. Elements of better management of emotional processes might have included top managers sharing honestly their fear of losing against the new competitors to a limited set of key middle managers, and engaging these middle managers to work with top managers to counter the rising threats might have created healthy external fear and reduced maladaptive internal fears, which made telling unpleasant things to one’s superior difficult. Another way of amplifying healthy external fear might have been to require middle managers to use the new competitors’ products extensively, like Samsung did, to ensure that the middle managers developed a sufficiently deep understanding of their strengths over Nokia’s products along specific dimensions, such as usability. Top managers could also have been more mindful of their own fears and how the fears influenced both the way they set demands for R&D and interpreted the embellished reports that followed. We would argue that adopting a culture where “telling bad news is a good thing” would have

overcome the collective fear that so seriously affected Nokia’s perception of their ability to develop new, leading products fast. Perhaps nowhere in the history of recent powerful business stories, has the lesson of the Emperor’s new clothes been more applicable. Just telling the truth could have saved Nokia’s fortunes. Nokia’s unfortunate decline again validates our affirmation that companies grew to greatness because they did something better than others. But they declined because they forgot to do common sense things, such as managing collective emotions and building organisational emotional capital during disruptive times (see Huy’s forthcoming book in Harvard Business Press). Managing a large business can be humbling because increasing complexity crowds out simplicity in action; to keep things from deteriorating, one needs to maintain a culture of honesty, humility, and cooperation inside the organisation. The lesson of Nokia applies to many successful and less successful organisations. The most important job for CEOs of successful firms is to inspire and mobilise various groups to honestly and genuinely cooperate with one another to do valuable and innovative things for their customers. Large and successful organisations tend to have many new ideas and resources, and can even afford to get cutting edge consulting advice and market intelligence. Oftentimes, the strategic goal is clear, but how to make it happen is much more complex. It is often said that strategy is 5 percent thinking, 95 percent execution. We extend this by suggesting that strategy execution is 5 percent technical, and 95 percent people-related. And managing collective emotions is a critical success factor in strategy execution.


Quy Huy is an Associate Professor of Strategy at INSEAD. He is also Programme Director of the Strategy Execution Programme, part of INSEAD’s suite of Executive Development Programmes. by Rainer Geiger*

The Transatlantic Trade and Investment Partnership: A critical perspective

Timo Vuori is an Assistant Professor of Strategic Management at Aalto University. Launched in July 2013 by the European Union and the United States, the Transatlantic Trade and Investment Partnership (TTIP) represents an Prof. Huy and Prof. Vuori welcome your important effort to reach a comprehensive comments via email. economic agreement between two major trading partners. As has been pointed out, the project Read more at http://knowledge.insead.edu/strategy/what-could- offers great opportunities for liberalizing trade and investment and regulatory convergence.[1] Its have-saved-nokia-and-what-can-otherlevel of ambition implies high risks, but despite companies-learnnegotiators’ initial optimism, its success is far 3220?nopaging=1#PGKCteHJKosXPp2I.99 from certain. The article above is republished courtesy of INSEAD Knowledge http://knowledge.insead.edu This Perspective focuses on the project’s investment chapter, drawing lessons from the failed negotiations on a Multilateral Agreement on Investment (MAI), which was meant to consolidate the results of liberalization in the OECD area, establish new disciplines and introduce protection and dispute settlement. As the TTIP’s starting basis on investment bears a strong resemblance to the MAI, an analysis of the achievements and pitfalls of those earlier negotiations can provide useful insights. Both the TTIP and the MAI cover the pre- and post-


establishment investment phases. The highest standards of treatment are envisaged in the TTIP, enforced by an effective investor-state dispute settlement (ISDS) mechanism. On the positive side, the draft MAI reflected state-of-the-art provisions on the treatment of investors and investments, drawn mostly from such previous agreements as NAFTA and the Energy Charter Treaty, as well as bilateral investment treaties concluded by OECD members. It also included protections for host countries, such as the right to regulate, environmental and social safeguards and responsible investor conduct. Negotiators expressly protected the regulatory sovereignty of the participating countries by providing that the MAI “would not inhibit the normal nondiscriminatory exercise of regulatory powers by governments and such exercise of regulatory powers would not amount to expropriation.”[2] MAI negotiators also agreed on the following to reflect societal interests: in the preamble, a strong reference to sustainable development, internationally recognized core labor standards and environmental protection; a prohibition on lowering health, safety, environmental, or labor standards to attract investment; annexing the OECD Guidelines for Multinational Enterprises, which provide expectations of governments relating to the regulation of multinational enterprises. At a minimum, these elements should be reflected in the TTIP’s investment chapter. On the negative side, the following unresolved issues contributed to the demise of the MAI: the absence of a clear concept of investment to be covered by the agreement and the broad definition of "investor" (for both liberalization and protection);

general exceptions, sector-specific exceptions and carve-outs were left open until the very last stage of the negotiations; permitting extensive arbitration.

use

of

investor-state

Moreover, negotiators underestimated the political dimension of the exercise and did not reach out to stakeholders—parliamentarians, NGOs, opinion makers—until it was too late to communicate a positive image of the MAI. How can such pitfalls be avoided in the TTIP? There is a need for a clear-cut definition of FDI for purposes of liberalization along the lines of the agreed OECD/IMF definition. Open-ended concepts that include non-FDI forms of investment should be precluded, and the definition of “investor” should require the identification of ultimate beneficial ownership and control. TTIP negotiators should seek an early understanding of how far parties are prepared to go in the area of liberalization, how any exceptions should be framed and whether carveouts for any sectors or categories of measures should be permitted. Pushing these issues to the last stage of negotiations could be a road to disaster. Although some commentators doubt that investment-protection provisions are best placed in trade and investment liberalization agreements,[3] there is a definite trend in favor of the comprehensive approach taken by the TTIP and previous FTAs. ISDS proved to be a major source of controversy in the MAI. Can the TTIP do better in achieving political acceptability? While some contentious issues, such as arbitrators’ conflicts of interest, consistency of outcomes, transparency, and cost, can be addressed, the fundamental issue of legitimacy remains. Is there value in privatizing justice for the sole benefit of foreign investors


when treaty partners have well-developed legal systems and independent judiciaries? There is a trade-off between substance and procedure. As the MAI experience has shown, parties are inclined to request sweeping exceptions or carveouts when ISDS is involved. European negotiators should also be mindful that legal integration is a key feature for the Union and that the European Court of Justice should make ultimate decisions on the interpretation of European law.

[2] See Report by the Chairperson of the MAI Negotiation Group, op. cit.

Further consideration should be given to domestic political processes. Setting a tight deadline for the conclusion of the deal would be counterproductive. Key issues like ISDS should be discussed in an open forum, and leaving room for an enlightened and comprehensive debate with a wide range of stakeholders would be beneficial to the success of the negotiations.[4]

“Rainer Geiger, ‘The Transatlantic Trade and Investment Partnership: A critical perspective,’ Columbia FDI Perspectives, No. 119, April 14, 2014. Reprinted with permission from the Vale Columbia Center on Sustainable International Investment (www.vcc.columbia.edu).”

* Rainer Geiger (rainer.geiger@hotmail.fr) is an attorney-at-law, senior lecturer of international economic law and former Deputy Director, Financial and Enterprise Affairs, OECD. The TTIP/MAI discussion in this Perspective was inspired by the Report by the Chairperson of the MAI Negotiating Group, May 4, 1998, DAFFE/MAI(98)17, available at http://www.oecd.org/daf/mai/pdf/ng/ng9817e.pdf, and the author’s experience with the MAI drafting process. See also Rainer Geiger, “Towards a Multilateral Agreement on Investment,” 31 Cornell International Law Journal 467 (1998). For the consolidated draft of the MAI, see http://www.oecd.org/daf/mai. The author is grateful to Marino Baldi, Howard Mann and Manfred Schekulin for their helpful peer reviews. The views expressed by the author of this Perspective do not necessarily reflect the opinions of Columbia University or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series. [1] Jonathan Kallmer, “The global significance of transatlantic investment rules,” Columbia FDI Perspectives, No. 99, July 15, 2013.

[3] Marino Baldi, “Are trade law inspired investment rules desirable?” Columbia FDI Perspectives, No. 105, September 30, 2013. [4] Karl P. Sauvant and Frederico Ortino, “The need for an international investment consensusbuilding process,” Columbia FDI Perspectives, No. 101, August 12, 2013.


Don't knock 'innovation,' create a framework for it

By Pradeep K. Chintagunta In the movie Apollo 13, the crew must deal with rising carbon-dioxide levels. To fix the problem, they need to install square canisters in—you guessed it—round holes. “I suggest you gentlemen invent a way to put a square peg in a round hole. Rapidly,” urged flight director Eugene Kranz, played by Ed Harris, to the engineers back on Earth. Companies today depend on innovation to survive, a characteristic displayed by the engineers on that fateful mission. But outside of the space program, the term is applied to some far less momentous moments. In earnings calls, Kellogg CEO John Bryant has referred to new Kellogg products, including its peanut-butterflavored Pop-Tarts—“Gone Nutty!”—as innovations. As the Wall Street Journal quickly pointed out, S&P 500 CEOs had also applied “innovation” to perfume, potash, and higheralcohol beer. Is the term being misused? It may be useful to step back and think about the tasks that are fulfilled by innovations. At a very basic level, the role of innovation in business is to create, sustain, and enhance the success of a company, product, or product line in the market.

This can be done in a variety of ways that are new to the company in question. If Kellogg’s wanted to increase its overall sales of the PopTarts line and prevent customers from defecting to rivals or to other breakfast and snack alternatives, and if the new product achieved that objective, the outcome was consistent with what the firm set off to accomplish with the “innovation.” However, innovations need not be restricted to the physical product. They could, for example, involve a change in how a firm prices its products. Think about the 99¢-per-track download on iTunes. Or think about Broadway’s move to dynamic pricing, which involves increasing or decreasing prices for certain seats based on week-to-week, or even day-to-day sales trends. Again, if the objective is to increase demand, or to better capitalize on differences in consumers’ willingness to pay, then it makes sense to categorize these tactics as innovative. A second task fulfilled by innovation is to enhance the brand. By brand I mean more than the physical product or the service. I mean the host of associations that consumers conjure up in their minds when faced with the name of a company or its products. Consider the Chevy Volt, GM’s plug-in electric car. In the first 10 months of 2013, 18,782 Volts were delivered. That was 2.7% less than 19,309 delivered in the first 10 months of 2012. Has the Chevy Volt generated large sales and profits for GM and Chevrolet? No. But has the Volt, along with the other new product introductions, improved the GM brand in general and the Chevrolet brand specifically? The answer appears to be yes. For example, Chevrolet entered Interbrand’s 14th-annual ranking of the best global brands at No. 89 last year. A third task fulfilled by innovation is to create a new category. Defining a category can be tricky,


so I choose to define it broadly as well as loosely. Consider, for example, Procter & Gamble’s Febreze. Prior to its introduction, eliminating odors from furniture was not a need that was easily fulfilled. And although the ultimately successful positioning of Febreze was not based on this specific benefit, consumers could meet the need with this product. The product is now used in diverse applications—for example, to deodorize the helmets of motorcyclists in Vietnam. When it was first introduced, P&G had to advertise where in the store one could find the product: “Now available in the detergent aisle.” Apple’s iPod also comes to mind. Was it the first product to meet the need of music portability? Of course not! Was it even the first hard drive–based music player? No, again. But it was the first product to tightly integrate the hardware and software experience that allowed consumers to easily and conveniently access a large selection of music while on the move. The benefit of a new category is that it can create its own product lines, spin-offs, and other enhancements. Witness the variations on Febreze now available at your local supermarket or the “i” line spawned by the iPod. There is a fourth task that innovations are sometimes called upon to fulfill—one that is beneficial for society at large. While not always central to a firm’s innovation machine, new products, services, packaging, and pricing have been created to meet the needs of “bottom of the pyramid” consumers. Examples of this include Dannon’s various projects around the world, including providing drinkable yogurt in Senegal (Dolima) and cheap yogurt in Bangladesh (Shokti Doi); Adidas’s attempt at providing €1 shoes to Bangladeshis; and Unilever’s low-cost water filtration system in India (Pureit). The success of these projects tends to be measured by different metrics than when a firm is looking to increase demand for their products in the short run. Note that the various objectives of innovation are

not mutually exclusive, along the lines of the roles of marketing articulated by Northwestern University’s Mohanbir Sawhney. Febreze was, and is, a very successful product line in the market and has a strong brand name. The iPod brought back to life a rather moribund Apple—and was successful both in the marketplace and as a brand builder. What is different across the various types of innovation above is sustainability with the passage of time. Specifically, the question is whether the introduction of Pop-Tarts with peanut butter will help sustain the sales of the product line in the same way as, say, the creation of a new category, as in the case of Febreze. This is where most of the disagreement about what innovation means seems to stem from. If one views innovation as always being of the more sustainable variety—enhancing brands and creating new categories—then applying the nomenclature to a flavor variation is not likely to be satisfactory. Yet one can argue that a firm requires innovation to fulfill a variety of the above objectives. Are “incremental” innovations required? Absolutely. Even the iPod became available as the Classic, the Nano, and the Touch in different colors, shapes, and sizes. But would it have been sufficient—for investors and consumers—for Apple to have stopped after creating those multiple versions? Perhaps not. Without evolving from the iPod to the iPhone to the iPad, Apple may not have been able to sustain its heady growth. This is where innovation has to move from being merely tactical to residing in the strategic realm of a firm. Organizations need to think of a portfolio of innovations—some incremental, some brand enhancing, some category creating or redefining, and perhaps even some societalwelfare enhancing. In the movie Moneyball, Brad Pitt’s Billy Beane exhorts his staff and players, “It’s a process. It’s a process. IT’S A PROCESS.” It is critical to establish the right culture,


environment, and rewards system within an organization to help it deliver the innovations needed for success. Ultimately it does not matter how companies use the term, or how often. It is what they set out to accomplish and manage to deliver that is most relevant.

Apple’s Beats Buy: Desperation or Opportunity?

This piece is adapted from the Kilts Center Faculty Blog.

Apple’s $3 billion purchase of Beats Electronics was an uncharacteristic move for a company that has typically limited its acquisitions to small startups. In fact, its last high-profile buy was in 1996, when Apple purchased computer company NeXT and in the process brought previously ousted founder Steve Jobs back to the firm. Announced last week, the purchase of Beats, which was founded by rapper Dr. Dre and music industry executive Jimmy Iovine, brings into the Apple fold an audio hardware business, including Beats’ popular headphones, and the company’s streaming music service.

The article above is republished courtesy of www.ChicagoBooth.edu/capideas. http://www.chicagobooth.edu/capideas/magazine/ spring-2014/dont-knock-innovation-create-aframework-for-it?cat=business&src=Magazine

As Apple’s Worldwide Developers Conference kicked off in San Francisco this week, Knowledge@Wharton spoke to Wharton marketing professor Peter Fader about how the company can successfully leverage Beats’ strengths and why the acquisition could prove to be a boost for the entire streaming music space. An edited transcript of the conversation appears below. Knowledge@Wharton: We’re here today with Wharton marketing professor Peter Fader to talk about Apple’s recent acquisition of Beats. The acquisition came with the purchase of the Beats streaming music service and its hardware business. Pete, thanks for being with us today. Peter Fader: Glad to talk to you. Knowledge@Wharton: What do you think was Apple’s strategy behind this acquisition? Fader: It’s a very unusual move for Apple to go out there and work with a different firm, something that’s going to require them to open up and actually accept other people’s standards and


lose some of the control that they insist upon. More than anything, I think it’s an acknowledgement that iTunes just hasn’t worked for them. I think the original business model — focusing on those 99-cent downloads — was really an utter failure for the music industry as a whole. They finally waved the white flag. They’re moving to the streaming subscription space, something Apple said it would never ever do before. Their own efforts to do that with iTunes Radio weren’t working very well, so it’s not clear that this is going to be any better. But it is a sign that they acknowledge some of their failings in this space.

“This acknowledgement that the download model is over and that it’s all about streaming [is] going to force the industry as a whole to embrace streaming in a bigger, more aggressive, more proactive way.” Knowledge@Wharton: Does this represent a change in Apple’s innovation strategy, i.e., that they’re now going to be innovating through acquisition as opposed to innovating internally? And what does that mean for the company? Fader: It’s a huge change in this regard. In fact, if we change the cast of characters a little bit — suppose we said that Microsoft was buying Beats instead — everyone would laugh at it. Everyone would say, “Uh-oh, here comes another Zune…. They’re buying a company because they can’t invent things on their own.” [Beats is] a company that has a very small base when it comes to the subscription side. So you know that people would call it desperation on the part of Microsoft and would declare the merger dead before it ever got off the ground. I think … we have to take into account who’s doing the acquiring more than what’s being acquired here. Because Apple’s doing it and because it is such an unusual move for them, there are a lot of people who are willing to give

them a lot more slack than they might if it were Microsoft or another company on the other side of [the deal]. Knowledge@Wharton: Apple also has its Worldwide Developers Conference this week — what is at stake for them there? What do they have to do, either as it relates to their current technology or around the Beats acquisition, for people to continue to feel optimistic about the company and about this particular acquisition? Fader: Well, of course it’s always hard to say. We never know exactly what’s going to come out of one of their developer conferences. I think that the news about Beats and the new iOS, all that stuff is nice and interesting and it will give people something to talk about. But all eyes are on the potential iPhone announcement. If they come up with [a phone that has] the big screen, that could be a game changer, at least for Apple, because we know that it’s been a game changer for everyone else. And once again, Apple wouldn’t admit it to the outside, but internally they’re probably saying, “Man, we should have come up with one of those big screens a long time ago.” One of the reasons why Samsung has caught up and in many ways surpassed them [in the smartphone sector] is simply because of the size of the screen, forgetting about anything else. If you can take the larger screen and combine it with some of the other still-unique aspects of the Apple phone experience, you might have a great device that will make these other stories really moot. No one will be paying attention to [the other stories] if they do make an announcement like that. Knowledge@Wharton: How important is it that the Beats acquisition includes that company’s streaming music service? Fader: I think that’s why they made the acquisition. The Beats product is a very nice


one. There is no question about it: [Apple] bought Beats because iTunes radio wasn’t working. No one is downloading music anymore. Beats is big enough that it’s a real brand name; it has some cachet. But it’s small enough that Apple can supposedly mold it into something that would be more of an Apple branded service than just Apple being tacked onto an existing brand. But the problem is that Beats is so small that Apple is going to have a really hard time competing with Pandora and Spotify and some of the other bigger players out there. It’s not clear whether they can take this small service and turn it into a giant one, whether the Apple name is enough to do that, when the Apple name wasn’t enough to make iTunes work. Knowledge@Wharton: You’ve been saying for a long time, as far as back as Knowledge@Wharton stories from 2002, that streaming was where the music industry was eventually going to end up. Do you feel like this acquisition is a sign that Apple has realized that the iTunes download model was really a transitional technology?

Fader: In that regard, this is the most wonderful “I told you so!” story that I’ve heard in a long time. I’ve been calling for this for truly over a decade and even went as far as saying that one day, when Apple announces that it’s getting into a streaming subscription model in a big way, not only will they do well with it, but it’s going to be a rising tide that’s going to lift all boats. It’s going to legitimize streaming in a way that it hasn’t been fully legitimized. A lot of people are waiting for Apple to give this kind of big blessing.

“It’s still unusual for [Apple] to work with outsiders, but this is about as good an outsider as they can find when it comes to hardware.” Now again, Apple has taken some steps in that direction with iTunes Radio, but no one really paid any attention to that. By doing it with a brand [like Beats], by having a more established

service, I think that’s actually going to help Spotify, Pandora, everybody else out there. And it might end up actually helping those other services more than it actually helps Apple itself. Knowledge@Wharton: Why do you feel that way? Fader: Because a lot of people have been waiting and seeing [and saying], “You know, I’m not quite sure I want to jump onto Spotify, because I own an iPhone and I want to do whatever the iPhone offers me.” More iPhone people are using Pandora or Spotify than they are using iTunes Radio. But there are still a lot of folks who are just holding out hope that Apple would have a world-class entry into the streaming music world. Beats might be that one. But again, it now gives a green light to these other [streaming services], and it’s also going to encourage the industry to be a little bit more accepting, a little bit more progressive. I don’t want to say that [Apple has] stood in the way of Spotify and Pandora, but they haven’t made life easy for those other services. I think this acknowledgement that the download model is over and that it’s all about streaming [is] going to force the industry as a whole to embrace streaming in a bigger, more aggressive, more proactive way than they ever did before. So it’s going to help everybody in the industry, but especially consumers. Consumers are much better off using these services. I don’t even care which one. We can nitpick about any of these big ones. They’re all good. And they’re all a much better consumer experience than a la carte downloading. Knowledge@Wharton: Apple had kind of a hohum product in iTunes Radio, at least based on the consumer response. And now they’ve acquired Beats, so they’re going to get access to subscribers or users of Beats Music. What do you think Apple needs to do to take these two services and really stand out in this market? Because they’re entering a market that has a lot of


established players with Pandora, Spotify, Rdio and others. Fader: It’s a very good question and a very difficult question, because usually, whenever Apple announces something it just turns to gold. There are just enough people out there — whether it’s because of true love for different Apple products and services or maybe out of inertia — [who say] … “I’m just going to go with the one that Apple endorses.” That’s usually the way it works. But it didn’t work with iTunes Radio, and it’s not clear that just moving to a different horse, that putting the Apple name on Beats instead, or in addition [to iTunes Radio], is going to lead to a dramatic difference. But it does signal that Apple is going to be investing a whole lot more in this space than they were before. It could be that some of the disappointments with iTunes Radio weren’t so much the service itself, but that it really wasn’t a major focus for Apple. Maybe this is a sign that they’re going to get serious about it. And whether it’s the Beats platform itself or just Apple’s increased seriousness, that might help them. They’re going to have to advertise heavily and do all kinds of things that don’t come naturally for Apple. We’ll see how well they do. But it is going to be a much tougher challenge for them than other areas where they’ve been successful to date.

“On one hand, you could say this is an admission of defeat and that Apple can’t innovate on its own and can’t develop best-in-class products and services. On the other hand, you might say the reason why they haven’t gone to the outside is a bit of arrogance.” Knowledge@Wharton: Is that because instead of being the market creator or the market buster, Apple is going to have to see what everyone else has done and follow on someone’s coattails, when they haven’t done that before?

Fader: That’s a big part of it. It’s a rapidly commoditizing business. It’s not clear that Apple can go in and truly shake it up in a disruptive way [like they were] able to do with the iPad and the iPhone. This is not something they’ve been very good at — that is to say, a service of this sort. But Apple is a smart company, and they’re a very resourceful company. And if they really do set their mind to it, then they need to be taken seriously. But it’s not clear that they’re going to be able to jump right to the top, and convince people to actually give up on Pandora or Spotify, or some unauthorized service that they might be currently using, and jump over to [the Apple product]. It is possible, but put it this way: I wouldn’t bet on it. Knowledge@Wharton: What about the hardware and talent sides of the Beats acquisition? How can Apple deploy those effectively? Fader: The Beats headphones are a fine product and, in many ways, it’s a very good fit with Apple. It is just a best-in-class product where price is no issue: If you want the best, this is going to be the thing that you buy. So there is a good fit in that regard. And even some of the design elements are aligned well with Apple. So I think that they can make Beats — the hardware side — fit quite well under their umbrella. It’s still unusual for them to work with outsiders, but this is about as good an outsider as they can find when it comes to hardware. But how much interplay there is between the hardware and the software — and there has been a lot of speculation about how much of their reasons for the acquisition was the hardware versus the software — that remains to be seen. Knowledge@Wharton: What about the talent side of this? Do you expect to see them using Dr. Dre or Jimmy Iovine in a particular way? Or are they mostly figureheads who lend street cred to Apple? Fader: I think that’s right. I think that it’s more to


show that [Apple is] cool and that it’s endorsed by folks who are respected within the music industry. But I don’t think that those particular folks are going to be game changers in any way. They’re respected; there’s no question about it. But I don’t think that consumers are going to say, “Now there’s a reason to be switching to the Beats service instead of other services.” Because let’s face it: Those guys and the whole Beats team have been associated with the company all along, and that wasn’t enough to get Beats even within an order of magnitude of Spotify or Pandora. So it’s not clear that attaching those names to Apple is going to really change anything. Knowledge@Wharton: How do you see this acquisition fitting into Tim Cook’s performance as Apple’s CEO overall? What does this say about the direction that his leadership is going in, and what do you think are going to be the challenges for him as this goes forward? Fader: It’s an interesting, historic moment because on one hand, you could say this is an admission of defeat and that Apple can’t innovate on its own and can’t develop best-in-class products and services. On the other hand, you might say the reason why they haven’t gone to the outside is a bit of arrogance, that they’ve always just felt they could do it better. But you know what? There are times when it makes sense to partner and to acquire. The fact that they’re open to [looking to the outside], does that represent desperation? Does that represent opportunity? I’m not really sure. But we’re going to look back at it within the next few years and say, “Oh, it’s real clear that it was one or the other.” It is a pivotal moment, and I think there is a lot riding on it. It might be a precedent that then gets followed in other unimaginable ways. But it’s a big step forward for Apple. "Republished with permission from Knowledge@Wharton (http://knowledge.wharton.upenn.edu), the online research and business analysis journal of the Wharton School of the University of Pennsylvania." http://knowledge.wharton.upenn.edu/article/apples-beats-buy-desperation-opportunity/


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