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Summary:

Prabhakar Gopalan looks at how the skill sets and mindsets of corporate strategists need to change in the cloud computing era. This means everything from learning to accept new revenue models to being technologically savvy enough to actually build new products.

Cloud computing changes everything, including corporate strategy as a practice. I have listed five reasons why, although I’m sure there are many more. Long story short: Corporate strategists need to get out of their 20th century mindset and into the 21st century.

1. Emergent strategy rules

For years, the practice of strategy has been about analyzing value chains, applying frameworks like Porter’s five forces or newer strategic-intent-driven ideas like Blue Ocean Strategy. The problem with those framework-driven ideas is they assume a very static, deterministic model of the world. They work when the variables required to solve a problem are already well known, few in number and change at a slow pace.

Cloud computing doesn’t operate in the intentional strategy space. There are a lot of unknowns, many of which can change rapidly. A small firm could develop something valuable very quickly, scale it to millions of users in a very short time and all equations about competitor reaction, supply and demand forecasts become irrelevant (hey, that’s why we have auto scaling!). The frameworks have to be discarded for more agile ways of solving problems.

2. Subject matter expertise in technology matters

As traditional growth frameworks and models are rendered useless (see No. 1 above), so too are the operators of those models.  There’s very little a consultant with an MBA and no subject matter expertise in the cloud or its underlying technologies can advise your firm on what it means to design or develop a product for the future.

Want strategists? Hire technologists and entrepreneurs who can talk real subject matter, produce prototypes and demos, and delight your customers. Who wants another boring PowerPoint that debates whether the next big widget market is going to be $5 billion or $500 billion next year? Hire makers, and go make it.

Traditional corporate strategy teams staffed with ex-big consulting firm consultants should find the exit door as soon as they can if they are in a meeting to discuss growth plans incorporating the cloud. Move them to areas of business strategy that don’t have a large impact due to cloud computing (are there still some?) or retrain them. Even the billionaire mayor of New York City wants to retrain himself and learn coding!

3. Product teams inform corporate growth in the cloud, not corporate strategy teams

If you are reaching out to your corporate strategy team to figure out what the next wave of innovation is, you have already missed the boat. Ask your product strategy team that is in front of your customer every day. They can tell you where the next pocket of growth is going to be. They are spending the time with the customer and know what to make while the corporate drones are still analyzing the spreadsheets and profit pools of a business that is past its prime or analyzing a market entry problem when you are already locked out of the market.

GrubHub CEO Matt Maloney was right on when he said, “The take-away was that a strategy may play out on paper, but the only way to truly test the validity of your product is to put it in front of customers.”

4. Long tail + subscription economy = Granular growth

Corporate strategyFirms that are used to billion-dollar businesses built largely through lock-in, slow incremental-feature-driven innovation after years of squeezing the customers, and near monopoly in market segments are finally seeing how the cloud’s production, distribution and pricing channel are changing the economics of growth. A large software firm used to getting thousands of dollars on licensed software now has to compete with a nimble software firm that can deliver the same or better software for just a few dollars a month. Production, distribution and pricing have all changed the basis of competition.

To compete in this space, corporate strategy has to reset expectations of what growth means –can larger firms deal with the smaller doses of revenues? It took Amazon Web Services almost eight years to get to top a billion dollars in revenue (see How Big is AWS) while the closest competitor, Rackspace, has taken almost the same time to get to $188 million in annual revenue.

So, the road to large revenues and profits is going to be much longer and more measured. For example, the average revenue per user (ARPU) for Evernote, a popular SaaS note-taking application, is less than $2 for most versions of its product.

5. Revisiting growth via M&A

Large incumbents of non-cloud technologies have resorted to M&A as a growth path. The business cases for these M&A projects are based on synergy, acquiring intellectual property and distributing it through existing channels that were developed over many years.

The problem is that the synergy component depends on cutting costs by a lot. And when you welcome the cost cutters, they don’t know what inspires and spurs innovation and experimentation. They go with their chopping block and cut costs across the board.  R&D budgets get tossed out and what you get is an innovative cloud startup squeezed in a non-cloud firm that doesn’t understand the factors for generating continuous innovation.

The next is IP acquisition. Here again, the IP that many of the innovative firms have developed is in design — user interface and user experience — which means discarding the old and making something really simple and easy to use. It is hard to measure that IP in traditional terms. Further, most of the development is based on open source and crowd sourced technologies, so there’s not a whole lot of proprietary technology to own when you buy a cloud computing startup.

Lastly, the distribution channel of the incumbents is of very little use because cloud services aren’t delivered in the same way previous services are delivered. Thousands of firms are developing applications over weekend hackathons using open source technologies and uploading them to app stores or their own sites accessible to anyone with an Internet connection. Few incumbents have significant investments in the value chain of these developers.

What to look for in your strategy leadership?

Companies need strategic decision makers and executives with the ability to overcome their own cognitive biases against radical new methods of delivering services to customers. In other words, they need executives that view the world through the lens of modern computing and business paradigms, can take delight in looking at the latest app and getting curious about its AAARR metrics, and can take a startup approach to market size and traction. These things will significantly effect their ability to experiment and grow corporate strategy practice in the brave, new cloudy world.

Prabhakar Gopalan is an entrepreneur and a product guy. Opinions expressed here do not reflect those of his employers.  You can follow Prabhakar on Twitter: @PGopalan. Prabhakar is the founder of Simple Idea Labs, and kanban2go.com is one of their first experiments. Prabhakar writes and talks about products, strategy and chaos.

Feature image courtesy of Shutterstock user Dmitriy Shirononsov.

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  1. Great post, I fully agree with especially with you 2nd point ‘Subject matter expertise in technology matters’ and I hope a lot of people will read and learn from it.

    Thomas

  2. Very well written article. However, I have the following comments

    1. Not mentioned that the Cloud is struggling for adoption – real usage
    2. Porter’s model is still applicable – it is just that its application strategy that needs reviewing

    1. This article is lacking in any real data and is conjecture on technology trends and its implications on strategy. For example, the point on learning to code being essential in the future is rubbish – as was well debated by Jeff Atwood here: http://www.codinghorror.com/blog/2012/05/please-dont-learn-to-code.html

      As an ex-strategy consultant I humbly admit that anyone with “strategy” in their title seldom knows what that word means and even less how to execute on it.

      1. Arun,

        Thanks for your critique. Let me address your concern regarding lack of data for each of the items listed in the post.

        For #5 on M&A above:
        In 2008, a group of McKinsey consultants published a book Granularity of Growth identifying three cylinders of corporate growth – Portfolio Momentum, Market Share Gain and M&A. In analyzing 416 companies between 1999 and 2006, they found M&A to contribute only for 3.1 percent of revenue gain. Even in hyper growth firms within the study group, the gain from M&A was only 5 percent. What that means is, if you have $20B revenues today, only $100M of it is M&A driven. And all that research was done in a period of time when cloud wasn’t even pervasive. In the cloudy world, revenues are far less and valuations are far more. So in most cases M&A isn’t nearly the promised route to success as one could wish. Microsoft recently had to write off its $6.3B acquisition of aQuantive and HP did the same with its $8B write off of EDS acquisition. We haven’t seen the last of HP with goodwill accounting nearly two-thirds ($6.6B) of its $10.1B purchase of Autonomy. Yes, aQauntive, EDS and Autonomy may not be pure cloud computing firms, but the point I’m trying to make is large technology acquisitions don’t necessarily pay off in even established categories. If we extend that argument to much less understood/less developed areas as cloud and think they could somehow change the growth trajectory quickly we might not have the desired outcome.

        For #4 on granular growth and subscription economy, allow me to point you to this post at OnStartups about HubSpot’s lessons of growing a SaaS business. http://onstartups.com/tabid/3339/bid/13320/SaaS-101-7-Simple-Lessons-From-Inside-HubSpot.aspx
        That illustrates the ideas of a cloud business in my point above – it takes longer time, smaller growth increments (in revenues) and potentially higher/front loaded sales and marketing costs in cloud.

        For #3 above, I would use startups as a proxy for product teams and argue that a number of successful cloud computing businesses are startups and large incumbent firms have mostly had follower strategies. Look around – what data of company names would you want me to provide on this? AWS or Salesforce all started as product teams. I don’t know if Marc Benihoff hired a corporate strategy team to go discover growth in SaaS CRM. I’d be curious about that data.

        For #2 above, for every Jeff Atwood that makes a case for people not to learn code, there is potentially a Bloomberg wanting to learn and a Steve Jobs recommending everyone have a programming course in high school. We do not expect everyone to go and code the next great application just as everyone that learns to read and write isn’t expected to produce the next Shakespeare. I suggest checking out the Steve Jobs Lost Interview video rental on iTunes where he pointedly makes the assertion that everyone (not just tech people) should have a programming course in school for a full year! Now that’s wisdom from someone who has changed the computing industry a few times.

        For #1 above, I would again use startups as a proxy for the emergent strategy practitioners and large tech firms as captive clients of big consulting firms. Startups by definition have to discover their strategy and don’t have the $ to pay retainers for strategy “studies”. A good illustration of this process is the following. A recent McKinsey “study” published July 2012 claims social media could unlock up to $1.3 trillion in productivity gains and encourages firms to use social media tools like Chatter for enterprise productivity. Agreed. If I were to make a Chatter like application today, I think I’m too late in the game. There are probably many opportunities (or cloud applications) like Chatter that we are yet to know. But I don’t see a big consulting firm coming up with the idea and recommending it to their clients. Innovation isn’t their objective or capability. The discontinuity we see now, is more and such applications and their use come from experimenting and not from a spreadsheet model that a consultant can confidently recommend to their clients. Which is why ideas like A/B testing, agile methodologies work. They are emergent strategies. Not intentional.

        The kind of disruption that is happening even in the consulting industry is best learned through a firm like TakeOut: http://betabeat.com/2011/08/introducing-the-anti-mckinsey-why-hire-career-consultants-when-you-can-ask-an-entrepreneur/

        Of course, this could all be conjecture and rubbish, but we’ll wait a few years and know through yet another consulting firm study whether any of the above had sufficient data to convince the disbelievers.

        Prabhakar

  3. You allude to it in your second point, but one of the biggest impacts on corporate strategy driven by cloud is the need to re-scope how we view and measure risk. The current approaches stifle innovation requiring every idea to be tripled baked before brought to market. However today a half-baked idea put into the hands of advisers or end users often has a greater chance of success. Why? Because consumers and commercial users want to be involved in how a new idea takes shape. Involvement generates buy-in at an emotional level. Cloud, leveraging an agile methodology, enables companies to test and try new ideas at the lowest cost possible to see what works. Google doesn’t use a similar model by accident. I have a blog post coming soon on this topic.

  4. Prabhakar: I think your bullet point #4 is a good one to ponder. Many SaaS companies may grow fast and hit the vc returns necessary over a 5-year timeframe, but many excellent cloud companies may not because of your point about growth being “longer and more measured”. So, will venture capitalists adjust their strategies and funds to be more in tune with this dynamic or will there be enough fast growing companies to keep them hitting their returns?

    My fund can invest with a long-term time horizon and has invested in two SaaS companies with those dynamics. You can ready more at greybullstewardship.com and masonmyers.com.

    Mason

  5. Prabhakar: I think your bullet point #4 is a good one to ponder. Many SaaS companies may grow fast and hit the vc returns necessary over a 5-year timeframe, but many excellent cloud companies may not because of your point about growth being “longer and more measured”. So, will venture capitalists adjust their strategies and funds to be more in tune with this dynamic or will there be enough fast growing companies to keep them hitting their returns?

    My fund can invest with a long-term time horizon and has invested in two SaaS companies with those dynamics. You can read more about me and my investment fund at http://greybullstewardship.com and http://masonmyers.com.

    Mason

  6. Grace,
    A very interesting article, we shall see how quickly the market adopts this solution.
    Tom

  7. Hi Prabhakar – thank you for taking the time to thoughtfully reply to my comment. Honestly, I felt bad about my comment as soon as I posted it (but couldn’t edit it); it was rather flippant and I apologize for that. It takes effort to write a good blog post and I’m sorry to have criticized it as so.

    You and I are in agreement that consulting firms, and corp. strategy teams, are unlikely to advise on strategy today and product teams are better suited for that. However, where we differ is that I don’t think “cloud” is the major reason for this.

    Businesses today are far more complex than in the past with so many exogenous and endogenous variables governing the outcome that a company can only control a fraction of the story. Global supply chains, rapidly changing consumer behaviour, mobile ubiquity, globalization (falling trade barriers, lowered shipping costs), lower costs to start companies (part of this is “cloud”), living in a globally connected financial world etc are all reasons why a company can not predict perfectly if a product line will be a hit, or where their competition will come from. Indeed, luck is a larger factor in outcomes than most anyone wants to admit. (not saying you can bank of luck, just pointing out the truth).

    This is why I think consultants and corp. strategy teams can’t advise on long term strategy…because they don’t really understand the industry and customers there from their 6 week case studies or even a few years in a strategy role. But even more because they have no skin in the game and until you screw up strategy (as I’ve done) you never really realize the importance of this. (Almost every day I remember my operational strategy mistakes years later. Not brooding over it; just never forgetting it because it was an error that was hard for the company to recover from). Hence, I believe the only person who really does strategy in a firm is the CEO and everyone else plays a supporting role at best.

    I won’t go through point by point as you painstakingly did (thanks again) but perhaps one quick thought:

    The M&A McKinsey study likely is a pure financial statement analysis which seldom captures the value of good M&A. Sure, the CFO, bankers and consultants talk about synergies… sometimes this pays off, but more often good M&A buys smart talent and technology… which isn’t easy to see the impacts of in the financial statements. So the point on 3.1% of revenue gains from M&A I think is incomplete to say the least.

    You go on to say that M&A in less-understood categories works even less often. Intuitively that sounds right but there are several examples that run counter to that… just look at Google’s acquisition of Keyhole (driving maps and the ad stream there), Facebook’s acquisition of Friendfeed (the heart of its engagement model) etc. The CEOs of Google/FB had an idea of where they needed to take their company and what made their customers happy and they moved fast and sometimes far more expensively than any banker/corp-strategy person would have advised. So M&A can work… if you are the one who cares most about the outcome and not a short-term financial gain, fancy deck that leads to a promotion etc.

    Oh, on SaaS requiring time to pay off… also not always true. Honestly, I feel that this is an excuse for not knowing how to really acquire customers cheaply enough and praying that your churn stays low enough to pay off. I don’t know that we have any examples of 20-yr successes here that I’d vouch for the model just yet.

    Thanks again,
    arjun

  8. Byron M. G. Sanford, Esq. Tuesday, September 4, 2012

    Reblogged this on Briskin, Cross & Sanford, LLC and commented:
    An interesting article on corporate IT strategy. Particularly when read in context with come of the comments and responses from the Author.
    Clearly effective use of cloud computing resources by corporations requires some very careful thought (and re-examination of its IT risks).

  9. I agree with Byron, this article is very well-thought out and very well written. Companies need to re-evaluate their strategy when utilizing cloud computing for their operations. Most IT organizations have specialized, experienced professionals who have an in-depth understanding of a specific area of IT such as virtualization, applications, or servers and backup. The cloud blends all of these skill sets.

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