Clarintelligence | Discover What Drives Businesses into the Future

Discover What Drives Businesses into the Future

Martin Hoffmann

Free Labor, Bot Workers and the New Economics of Businesses

This article first appeared in my column on the investor magazine Equities.com.

According to figures from GEM Global Report, a staggering 100 million businesses are launched annually. Thanks to increasingly cheap and accessible digital development tools and advanced R&D labs and funding offered by corporate and independent accelerator programs, we are witnessing global technological advancement on a scale never seen before.

From at-home coders, to well-funded startups in Silicon Valley and further afield, technology and businesses in general are changing so rapidly, keeping up to date with new trends can become a full-time job. This poses an interesting conundrum for investors, who need to be able to take a bird’s eye view of what is going on around the world to make smart investments. However while it might be tough to keep your finger on every new pulse, you can keep track of important megatrends.

One of the most important megatrends of the last few years has been the reshuffling of the resources companies use to operate. The economics of a business are largely driven by the type of resources a company applies and these resources are currently changing rapidly across industries.

 

I recently attended the Re Publica convention in Germany, which illustrated patterns of how these resources are changing:

1. Free Labor

In the past, companies’ operations were based on tangible assets like ‘in house’ human resources and hard assets like raw materials. However in the internet age, intangible assets are becoming increasingly important. The first wave of internet businesses were based on e-commerce and software, but now industry leaders’ value is based primarily on new intangible resources like network effects, audience reach and advertising potential.

After scanning 8000 Facebook (FB) patents to dissect and visualize Facebook’s algorithms Vladan Jolerfrom the University of Novi Sad in Serbia exposed the raw resources that keep the “Facebook Factory” running. The numbers are fascinating.

Facebook had 1.6 billion active users in 2015, out of a world population of 7.5 billion. 1 billion people log in daily and share 4.6 billion items, upload 350 million photos and send 10 billion messages every day. Each of those activities drives users to use Facebook more, and in 2015 created an ad revenue of 17.93 billion dollars.

Let’s quickly put this into context: The best selling record albums ever reached 65 million copies. The PlayStation, one of the best selling products of all time sold 344 million units. Star Wars generated total sales of $4.6 billion. To simplify things, let’s assume that the average movie ticket costs $10 meaning 460 million people went to see Star Wars. That would be just a third of Facebook’s regular user base.

So why is this so important? While most people view Facebook as a social media platform, its revenue comes from being a marketing and content machine. However, instead of needing to hire content creators, and editors to curate the content, the Facebook users network does all of this for free. Supported by the power of Facebook’s algorithms, billions of users around the world not only provide the content to be shared, they also decide what is interesting, flag inappropriate content and share content which resonates with their own demographic.

Vladan Joler compared the average time, which users spend on Facebook each day — 20 minutes — to wages in his home country Serbia, and found that that amount of labor is worth 3.5 billion annual salaries of an average Serbian employee. Without realizing they are doing so Facebook users are creating content, sharing content, curating content, and Facebook gets all of this labor for free.

While Facebook is clearly the frontrunner, other companies such as Instagram, Slack and Evernote are benefiting from user generated content in similar ways. This includes developers and startups contributing slack bots to the Slack platform, effectively increasing its rich feature offering, to billions of Instagram users curating content through their ‘likes’. While this model is not new, the scale at which it is happening and the impact it has on the economics of how businesses are run will change how investors assess the strength of businesses in the future.

 

2. Data as a Resource

By harnessing the data from its huge user network, using algorithms to understand interests based on their online behavior, and then targeting them with the right paid advertising and content, Vladan Joler argues Facebook has made itself “the biggest marketing agency that exists in the world”.

But Facebook is just one example. In the modern landscape data has become a key resource and success factor for companies across a range of industries. From Netflix (NFLX), to Uber, to Amazon (AMZN), the world’s most successful companies are implementing ‘data driven’ systems where data is constantly being gathered, analyzed and tapped into for insights.

At current, many companies are gathering data, but few are using it correctly. A 2015 study showed that 43 percent of companies “obtain little tangible benefit” from their data — and 23 percent “derive no benefit whatsoever.” from the data collected. From bakers to brokers, in the near future success will be defined by those who can effectively use their existing data to improve processes, and lower outgoings.

For data to be useful, it needs to be operationalized. The company needs to know exactly what they are looking for in their data, and which areas they want to improve. The two main drivers towards data being used as a resource are access and analysis.

Thanks to increasingly affordable IoT sensors, there is more context data available than ever. Customer behaviour, production, inventories, logistics, can all now be monitored with telemetrics. Those who are able to access the available data will have an important source of competitive advantage at hand. Thanks to increasingly affordable data analysis tools, such as predictive analytics software, data visualizations, analysis capabilities are now available not only with incredible performance but also at low cost.

Whereas data analytics used to be stuck in the world of global tech giants, the future for businesses of all shapes and sizes lies in data driven decision making. Being able to use data to personalize and improve services, offering customers exactly what they want, without having to ask them, is becoming a driver for success. It no surprise therefore that the demand for data scientists is predicted to soar 28% by 2020.

3. Bot Workers

Another key driver for success in the modern landscape is automation. In their book The Second Machine Age, Erik Brynjolfsson and Andrew McAfee explain how in the last 20 years computers have moved from simple information processing tasks, to cognitive tasks that were once a domain of the human mind. This opens a whole range of new application areas for machines and artificial intelligence.

This transformation has endless social, legal or economic implications. Like with data analysis, the move towards automation is an issue of when not if.

In the future, success will be decided by the companies which can make the shift to a digital automated operation the quickest and train their human teams to efficiently co-exist with their technological co-workers in the most efficient manner. Bots and AI will be the new generation of outsourcing, and automated processes will lead to lower hiring and manufacture costs, thus offering an overall market advantage.

As an investor, it is important to understand which stage of the adoption cycle particular companies are in relation to other companies in their industry. The extend will vary from industry to industry. The media industry for example has already performed a large part of the hike up the digitalisation mountain. In the financial industry, the Big Four are now actively preparing their accounting and tax graduates for the realities of working with bot coworkers. As each industry applies its unique resources, the human-machine combination will take on different forms. But independent from these specifics, the current topics that are being discussed industry conferences will provide a quick and clear overview on whether an industry or company is still in the discovery or already in the implementation phase. A look at the job boards of companies will provide further evidence.

Take Away

What does all of this mean for us as investors? In this new world we can’t just look at revenues and cost any more. We need to look broader and assess the different input factors. Content production for FB for example, curation for Netflix, software development for Slack — offer a company an advantage over their competitors. Moreover, we need to keep our fingers on the pulse for changes and for how those changes affect either cost structure of revenues. Vladan Joler talks of “invisible infrastructures”, and this pretty much sums up how our investor perspective needs to change.

This is just a short outline of what’s to come. Put simply, we are in an era where not everything is as obvious as it used to be. In this new landscape, effective investing means looking below the surface at the hidden structures within.

Put Your Money Where Your Mouth Is: Power Speaking Truth to Power

This article first appeared in my column on Equities.com more than two years ago. The events have changed, but the patterns have remained the same. I decided to not update this article (except from the title), because this way it interestingly shows where we stood a few years ago and where we stand now. Up to you to decide how much has changed since. I hope you enjoy the read.

According to Oxford Dictionaries, “post-truth” was the word of the year in 2016. Thanks to the controversial “Brexit” referendum and the highly contested US presidential election, the use of the term increased 2000% last year. The phrase ‘post-truth’ is aptly described by Lahcen Haddad as the use of pseudo-facts to twist reality, so that it looks and sounds in line with the fears and anxieties of an already angry and frustrated population.

And it’s not just the integrity of politicians that is being questioned. Edelman, a global PR firm reports that public trust in all four key institutions — business, government, NGOs, and media — has broadly declined. Over the last year, we have seen a public backlash against media outlets and social media platforms facilitating ‘fake news’, and also against public figures and brands that have been seen to align themselves with controversial politicians and their beliefs.

For modern investors and consumers alike, this poses an interesting dilemma. While it has always been important to ‘look behind the scenes’ at a brand’s backstory and values to make sure there are no ‘skeletons in the cupboard’ before investing, now more than ever the walls between business and politics have been broken down, and there are many more factors to consider.

So how much is brand integrity affecting business, and how can investors and consumers make safe investments in the ‘post-truth’ age?

The Sheep Have Become the Wolves

More so than ever, people are realizing that brands and media companies are only as strong as their customers and followers. Thanks to social media, today’s world has become more transparent and brands and public figures are expected to weigh in on current events and social issues. As Uber recently found out with the #Delete Uber campaign, staying neutral is not an option anymore, and lack of a clear stance can be misconceived as complicity.

As consumers take sides, they are using their buying power as a political weapon. The Grabyourwallet movement is encouraging consumers to boycott brands and retailers deemed to be supporting of the Trump family or endorsing president Trump’s administration. However, on the flipside, brands like Nike (NKE), Nordstrom (JWN), T.J. Maxx (TJX), Starbucks (SBUX) have found themselves losing custom from Trump fans, for voicing opinions against the president and his policies, or in the case of Nike for releasing a Nike Hijab, which has been deemed ‘Un-American”.

Corporate values have become a key motivator of customer purchase decisions, dramatically increasing volatility for brands. While this has placed some brands on the firing line, it has also boosted the popularity of brands seen to be taking a moral stance.

Over the last year, we have seen brands taking a stab at the ‘powers who be’ with advertising campaigns and company policies. In the midst of the Trump immigration ban fiasco, Airbnb won millions of hearts by offering free housing to those affected by the travel ban, and Google (GOOG) and Starbucks announced new employment policies aimed at welcoming foreign workers. Over the last year, Airbnb, Budweiser and Amazon also released adverts that tackled the issue of acceptance and integration of people from different backgrounds and cultures.

Smart brands are realizing that their values offer a strong playing card, and while it might be viewed by some as opportunistic, by weighing in publicly on political and social issues whenever the opportunity rises, brands can see likes, shares, followers and sales come rolling in.

Public Take a Stand Against ‘Fake News’

 

It is not just brands that have been affected by the political and social whirlwind in the US and Europe. The media and social media platforms have been forced to take sides too, and those viewed as being selective in their facts have come under fire.

In January 2017, after the Grindeanu Cabinet was sworn into office in Romania, widespread protests erupted against controversial ordinance bills effectively legalizing government corruption. In response to the bills, the commission of Romanian advertising agencies organized a boycott of “Romania TV” & “Antena 3”, which spread government propaganda. The media boycott successfully led to a withdrawal of advertising from multiple major brands from those TV channels.

In the US, President Trump’s administration was recently forced to apologize after retweeting a Fox News report based on a Breitbart news story. Both Fox News and Breitbart have been publicly slammed for publicizing factually incorrect and inflammatory right-wing content, and politicians, brands and advertisers have begun giving them a wide berth in fear of being caught up in the controversy.

In response to accusations that Facebook was responsible for spreading fake news during the US presidential election — which founder Mark Zuckerberg initially denied– Facebook publicly backtracked in December 2016, announcing the launch of measures to combat fake news. Other media and social media companies such as Medium and Snapchat, have also returned to their core mission and values, and controlling external content from paid advertisers, in an attempt to better control the content which reaches their users.

Be Careful Where You Place Your Chips

We are entering a new era of brand volatility in which consumer trust and loyalty — and in turn custom — are linked to much more than products, but instead the values and perceived allegiances of brands and their stakeholders including founders, investors, employees and media partners.

A recent Fast Company article offers some tips for how brands can protect themselves from unwanted heat during the Trump administration, but for investors and consumers, who want to place their chips on the right bets, and to avoid any nasty surprises, this means researching brands and their stakeholders extensively.

Here are some guidelines to bear in mind:

  • Find Out if a Brand Practices What it Preaches

The Delete Uber campaign is great example of how important this is. Uber wasn’t boycotted because the CEO is a Trump advisor, but due to the snowball effect of multiple scandals including the CEOs spats with Uber drivers, allegations of spying on customers and downplaying sexual assault risks. With consumer trust at a low, the JFK airport surge ban was enough to tip consumers over the edge.

  • Find Out if the Brand Looks After All of its Stakeholders

Motivational speaker and author Simon Sinek said, “Customers will never love a company until the employees love it first.” A good way to get a grasp of how well a company sticks to it’s core values is by looking at how happy it’s key stakeholders are: its employees. Millennials are value driven and want to work for companies which ‘make a difference’. Use resources such as Glassdoor to assess what current and former employees have to say about what goes on behind closed doors.

  • Listen to What Customers are Saying

Check social media channels and review websites such as trust pilot and Yelp to see what customers are saying. Look at how brands respond to clients and deal with complaints and issues. Do they try to minimize damage or do they try to listen to customers and implement changes?

  • Look at a Brand’s Loudspeakers

As seen in Romania, and with respected media organizations turning their backs on Fox News and other right wing news outlets, it is important to look at where brands are advertising and any media partners or celebrity endorsers they may have. In a recent article Jeff Jarvis argues brands should be judged by the company they keep, citing how the Guardian, Havas, the UK government, the BBC, and now AT&T have pulled their advertising from Google and YouTube, complaining about placement next to “inappropriate” and “offensive” content.

Companies have always been vulnerable to scandals. Even in monopolized industries, the power has shifted towards consumers. Who could serve better as an example than United Airlines (UAL), who seems to have learned only little from past experiences. The 2009 song “United Breaks Guitars” has over 16 million views on YouTube until today, and it allegedly sent the airline’s stock price down by $ 180m when released in protest to poor customer treatment on their flights. The Facebook (FB) video of the company’s most recent scandal of the physical assault of a customer due to overbooking has already generated 19 million views, and the company’s stock price has fallen by $ 800m.

However nowadays brands have to worry about much more than their employees behavior, and customer service, instead making sure that their wide network of stakeholders stay true to their values and aims. Gone are the days when brands can bury their heads in the sand about current affairs. Modern consumers are becoming increasingly motivated to stand behind the causes and brands which represent their views and values, and are placing their money, and trust, exactly where their mouths are.

Can you tell which will be the Next Google? Neither can Google.

This article first appeared in my column on Equities.com more than two years ago. Some topics remain evergreen topics though. Here I explore how to focus on the specifics of Business Models instead of following tempting narratives

Around the world, tough socio-economic conditions have provoked a number of knee-jerk reactions from the public. Voters are making extreme decisions based on media hype rather than hard facts. We are seeing the rising popularity of far right parties in Europe, there is negative sentiment towards immigrants in the U.S., and, of course, we have Brexit. People are turning to simple solutions for complex problems that run far deeper than meets the eye.

Interestingly, the same pattern continues in business. The lifespans of Fortune 500 companies have fallen drastically from 61 years in the late ’50s to only 18 years today, on the other side of the coin previously unheard of tech startups are regularly being valued at upwards of a billion dollars. As rapid change replaces predictability, the world is becoming more complex both in politics and business, and easy solutions appear more tempting.

At the same time, startups are heralded as the next Facebook (FB), Uber or Apple (AAPL) – regardless of revenues or business models. This fanfare is purely based on appearances and, though it may be more easily digestible for the public, the reality is far more complex.

If we don’t take the bigger picture into account, and look deep into the operations of each company, we miss out on essential information and the potential it has to truly succeed.

Look Under the Hood

In The Black Swan, Nassim Taleb argues that as a society we far too often create narratives that do not exist, especially when those narratives support our argument or opinions. In the same way, when assessing companies, we need to be aware of oversimplifications.

Veteran investors and entrepreneurs find themselves in an ecosystem where spotting the next big hit is based on a whole new set of value drivers. For ease of understanding, emerging tech companies are often compared to Silicon Valley giants. On the surface this might seem like a straightforward solution, but once you look under the hood, the similarities end.

Many will have raised eyebrows when Dollar Shave Club — a subscription razor service — was valued at more than $600M and then acquired for $1B. Because it is not a tech company, doesn’t spend millions on R&D, and doesn’t follow the patterns of other unicorns people may have assumed it would not be powerful. However, if you delve a bit deeper, the term ‘razorblade business model’ exists for a reason.

Dollar Shave Club excelled because when you look under the surface it has its ducks in a row. The founders might not be shiny Silicon Valley Tech visionaries, but they have a solid business model that is likely to stand the test of time. While the unit economics for razor-blades might be low, people will always need them, providing recurring revenues, and Dollar Shave Club offers a user-focused, easy to access, affordable service. The consumers don’t care whether Dollar Shave Club has a patent or innovative products. But they like the convenience, the brand, and prices and that’s why they stick with it.

When we hear a tempting narrative or comparison to a massive success story, we should question which key element of the company’s story is being focused on, and whether this is the element which really drives success.

While two companies may be superficially similar, they may well have entirely different success factors and different unit economics altogether. Facebook, which is often confused as a social media platform, is another great example of this. Investors and consumers are constantly on the lookout for the next Facebook, without really understanding the true strength of the company itself.

Facebook is a leader in all things social. This is because Facebook is good at mastering the algorithms, analyzing user data and understanding what users want to see. Even more, it is eminently successful when it comes to helping marketers reach their users.

In reality, the platform has developed into an effective marketing lab, with a social media veneer.

The company’s biggest asset, of course, is its massive customer base. Changes within this base — such as younger users swaying towards chat apps like Snapchat and Whatsapp — have forced it to evolve away from its core business into the ‘next hot space’. Facebook’s acquisition of Whatsapp was a defensive move, which added new customers to its core business and turned it into a conglomerate.

This lesson extends beyond assessing a company’s skill set. There are lots of advice to copy Warren Buffett’s investment style or Steve Job’s product development skill set. Yet, there are few investors who match Buffett’s performance or Steve Jobs determination and work ethic.

Focusing on the Business Model

We need to determine what makes a particular business model tick. The only way to do this is by going back to the start and beginning from scratch. Instead of thinking in terms of companies, industries or sectors, we need to think in terms of business models and their success factors.

To determine what is the core skill and activity of the company we need to work out what they are focusing on behind the scenes. A great way to do this is by looking at the type of people they are looking to hire on their website, or sites such as AngelList.

For example, if we look at Dollar Shave Club, they are not looking for razorblade experts, their key activity is building a loyal customer base in an efficient way through excellent marketing and branding. Dollar Shave Club spends a lot of time away from the desk interacting with customers, finding out exactly what they need and want, and work out why they make purchases. The product itself is fairly unimportant.

In the modern business landscape, there is no point trying to compare businesses on face value with previous unicorns and tech giants. While human instincts push us to create narratives and make comparisons, examples like Dollar Shave Club show us that it is the internal workings and business model of a company that defines its chances of success, not its flash, flair and hype in the media.

Just as Warren Buffett and Steve Jobs were formed by unique experiences, skill sets and personal characteristics, which fitted perfectly into the wider picture of what was going on in their industry at that time, it is important to take a step back and assess the real strengths of companies. In politics and business alike, we need to stop hunting for the simple solution and look past the first page, and read the whole story.

 

Refining the Business Toolkit for the Modern World of Business

This article first appeared in my column on Equities.com and has been updated since. It was written more than two years ago for investors, but equally applies to executives and founders today.

 

In the last 10 years, software applications have moved from desktop, to mobile apps, to bots that we can speak to. Taxis have gone from being cars we have to whistle at in the street, to something that will come to your location at the touch of a button. This evolution of the tech and business landscape that led to an era of dynamic change, has also caused a loss of predictability and stability. At 15 years, the average lifespan of a company in the S&P 500 Index is roughly a third of what it was in the 1950s.

The issue is, while the business landscape is changing rapidly, the investor toolkit has not adjusted. Investors still focus on the quarterly earnings season, which by nature is backwards-focused and thus unsuitable for rapidly evolving companies. Investors still lean on schools of thought from the 1950s and 60s championed by experts such as Benjamin Graham – a former professor of Warren Buffett – which were tailored to pre-information age companies.

At the same time early stage tech startups, with exciting business models and products, but lacking established customer bases, are being given huge valuations based on potential rather than real profit. This is an ecosystem where GrabTaxi, Southeast Asia’s answer to Uber, received a $1.6 billion valuation – and $890 million in equity funding, despite only having 620,000 monthly active users. Therefore it doesn’t come as a surprise that established corporates are also increasingly investing in early stage ventures, which changes the risk structure of their business as well. A recent study found that 38% of the world’s top 200 companies have set up innovation centers — accelerators and innovation labs– to work hand in hand with innovative early stage companies.

So how can investors upgrade their toolkit to accurately assess the strength of companies and products based on potential, not past performance?

Adapting to the Era of Instability

The rules of business and investing have evolved, thanks to changes to entry barriers and sources of competitive advantage. In the late Industrial age until the early ’90s, developing a new product required R&D grants, access to hi-tech laboratories and equipment, and funding. Now, anyone can potentially develop great products and services from the comfort of their own homes, using only a computer, the internet, and a range of D.I.Y.development tools. Similarly, production and distribution of products has been democratized thanks to Foxconn, Amazon (AMZN) and the likes.

In addition, products themselves have increasingly become intangible. Some of the most successful ‘unicorns’ like AirBnB, Uber, or Snapchat don’t actually have a unit product to sell. Amazon is no longer solely reliant on product sales, but has launched Amazon Destinations–a marketplace for booking local hotel getaways and Amazon Home Services, allowing users to book services like plumbers for their homes.

 

Where once there was predictability, there is instability. Established companies live in constant fear of being disrupted ,illustrated by the skyrocketing of accelerators, innovation labs, corporate ventures and defensive acquisitions. But even the best funded startups can crumble and fall as quickly as they grew. At this year’s World Economic Forum, SalesForce founder Marc Benioff predicted that 2016 will see ‘lots of dead unicorns’.

For the 21st century business, soft factors such as innovation capabilities can offer a competitive advantage, and provide more security for investors. But so can marketing. Like never before, the brand and community which a company creates around a product can be more valuable than the product itself.

Take the example of GoPro (GPRO). The camera component of the GoPro product was not particularly innovative in itself, and could have been reproduced, but what made GoPro a multi-billion dollar company was its creation of a community. GoPro doesn’t only sell the camera but also the experience of capturing and sharing adventures. The company built a community around the sharing of those experiences by pushing hard on social media channels and developing a strong presence on YouTube. GoPro’s main YouTube Channel has close to three million subscribers, placing it on par with media stalwart the BBC and ahead of established tech giants like Apple (AAPL).

Competitive advantages are now increasingly based on ‘soft power’ concepts such as customer relationships, social media impact, brand, innovation capabilities and design.

The tricky part is that these areas do not include capital assets and may require time to yield profits. As such, they cannot be easily tracked in the financials of a business, making it difficult to use the past as a predictor for the future. Understanding this change, and developing an efficient system to assess companies based on metrics other than previous sales and profit has become ‘the great need of our time’.

Like a software application may need an upgrade when the operating system changes, the investor toolkit needs a makeover.

Finding the Right Metrics

With so many changes, decision making for investors has become more complex. The modern investor needs to look at new metrics and profit alone may not be the best indicator of future success.

When trying to predict future performance, forward looking investors need to consider many factors, such as a company’s sales efficiency, whether the company is a middle man or sells directly to clients and whether the company will be able to ‘integrate’ their product with a larger platform or service. With changing unit economics, profitability has become a lot more complex.

In the same way that market leaders are pivoting to adapt to the current market, investors need to do so too, becoming change assessors rather than simply profitability hunters.

A starting point is to develop a solid understanding of the specific business model and its unit economics. Investors who want to understand a hardware company like GoPro also need to understand media economics. If they want to understand Amazon’s new home service, then they should get acquainted not only with retail but also with platform economics.

With this understanding they can see through which channels and at what cost the company acquires its customers. They will also understand why the customers stick with the company and whether this is sustainable. Understanding how the business model translates into customer acquisition cost and customer lifetime value is a good starting point to make intangible businesses tangible. Having the creativity to find additional metrics and indicators enables forward thinking investors to further upgrade their toolkit. Product reviews as well as interviews with customers can provide insights on a company’s innovation capabilities. Employee reviews provide valuable evidence on the culture that drives these innovation capabilities.

21st century investing isn’t as black and white as it was before the internet. As the variety of businesses has increased, so have our information sources. The key part of the toolbox has become the ability to combine analytic and intuitive thinking to determine the real hue of a business.

The Reverse Tesla Ban. What it Tells Us About Company Lifecycles

This is an older post. Yet I have left it here, since it fits within the broader context of industry lifecylces and technology adoption lifecylces that we explore for example in the Article “Industry Transformation is not about Disruption”.

Here is the original article:

Now here is something interesting happening. The company that has been banned by regulators from selling their cars, now has banned a customer from purchasing a car from them. Yes, Elon Musk personally has cancelled the order of a customer. And this cancellation has made its way into mainstream media.

What has happened? As reported by FastCompany, a venture capitalist, who is an early customer of the soon-to-be-launched Model X felt mistreated by the company. In response to this mistreatment he has written a blog post with the attention grabbing title“Dear @ElonMusk: You should be ashamed of yourself”. In that post he criticized the company and Elon Musk for being “ insensitive” and with “poor judgement” when organizing a customer event. Together with around 3,000 other early customers, he attended a Model X launch event. At this event, the customers had to wait for 30 minutes outside the building and then for more than an hour inside the building. In his post he criticized this mistreatment, as well as other factors that disappointed his expectations in the event. But he not only criticized the event. The bad management of this event made him ask, “Should I wonder if there are other problems in managing Tesla as a company?”

In response to his post, Elon Musk personally cancelled his order of a Model X Tesla. The author then followed up with a second post, describing how he was banned by Tesla. Once his posts was picked up by mainstream media, Elon Musk tweeted:

 

So why are we discussing this? Is this another slow news day?

In analyzing companies, I follow the philosophy that any analysis should start from the perspective of a customer. Only the customer’s perspective will tell us to what extent and why a company’s products differentiate. The customer perspective also helps detect changes in a marketplace early. While the crunching of market research figures or past financial data builds the basic analysis toolkit, using a company’s product and immersing ourselves in the world of the customer truly can put us ahead of the crowd of investors.

So this philosophy leads us to answer the author’s question of whether a mismanaged event is an indication of “other problems in managing Tesla as a company”.

Does the event and the ban mean that Tesla will become the next United Airlines of customer service? Clearly not! However, on FastCompany and the original post, some commenters worried whether Tesla is trying to prevent negative reviews and whether this causes worries about the company’s customer service. And let’s face it. Who hasn’t experienced the bad aftertaste of being mistreated or disapointed as a customer? To some extent we may resonate with the author’s anger about bad customer service. And why is Elon Musk facing the risk of the negative PR that such a ban may cause?

First, if this event leads the author to conclude that there may be other problems in managing Tesla, then the logical conclusion would be that he does not want to drive a car from such a company. In fact, instead of writing the article, the logical step for the author would have been to withdraw the order himself. But instead he is  “disappointed” about the cancellation. This makes it safe to assume that Elon Musk does not have to be too “ashamed” of himself. Actually, the company seems to be doing quite alright if even customers who feel mistreated still want its products.

But there is more to this. Possibly Tesla’ event management cannot compare to that of traditional car companies. Traditional car companies like Audi excel at conducting customer events and sponsoring major sports events. As a student, I was fortunate to have had a part time job that got me to the heart of Audi’s engagement in the LeMans racing series. This left me deeply impressed with the skill set of Audi’s event teams and its brand. It’s hard to imagine Tesla running such events at this point of time. In contrast, Tesla doesn’t even seem to offer print brochures of the Model X. Does that put Tesla at a disadvantage? No. Because Tesla is not in the event business, it is in the tech business.

Let me elaborate: yes, Tesla operates in the same industry as Audi. But then it operates in a different business:

  • Classic car companies operate in a mature industry, with well developed and rather undifferentiated products. How big is the difference between an Audi and a BMW in terms of technology? Let’s face it, what are your purchase criteria when you choose one over the other? In this stage of the lifecycle, companies largely compete based on the perception of their brand. Customer events are core to building the brand experience in this stage of the lifecycle.
  • Tesla on the other hand operates at the beginning of the lifecycle. It offers a new and differentiated product. Where is the other electric car company that excels at the safety ratings? The success factors that apply to Tesla’s business differ greatly from the success factors of legacy car manufacturing. And it’s no secret on what Tesla focuses. On building revolutionary cars.

So we have established that Tesla is not in the event business. As a result, an event that may have been managed badly does not tell us much about its success as a business. But then, was it a smart move to ban the author from purchasing a Tesla, or was it a PR failure?

This question leads us back to the lifecycle. In its earlier stage of the product lifecycle, Tesla targets other customer groups than legacy car companies. These early customers have different purchase criteria when compared to legacy car company customers. Customers of an Audi may be used to being pampered at customer events. Tesla’s early customers have not even seen the car in real life at the time they order. The attendance of 3,000 customers may overwhelm their event team. But here is the thing. Early adopters may not care for customer events. Their aim is to drive a car that is cutting edge.

Apple’s first first Mac was underpowered compared to traditional PC’s. However, its focus on the user interface transformed personal computing. Customers spend their nights in front of Apple stores in order to get the new iPhones. Compare this to the time the author had to wait. Early adopters are aware that new product will not be able to deliver on all requirements at the same time. They expect only the core of the product to impress. Which both Apple and Tesla managed to achieve.

In that sense, if the author concludes from a failed event that the company faces bigger problems, he just may not be the right early customer for Tesla. If he would buy a Tesla in the expectation of perfectly stage-managed customer events, he might feel mistreated on a regular basis.

Dealing with unhappy customers, who have the reach to make themselves publicly heard in the media (the author similarly criticized BMW) can require significant resources of a company. Tesla may decide to rather allocate resources to the task of building and launching better cars for the core customers whose expectations better match with the focus of Tesla. And at it’s core, this is what is commonly called branding. What unites strong brands is that they know that they cannot please everybody. Instead they focus on those areas where they can impress their core customers.  

It’s certainly not common practice to ban a customer. And it’s hard to tell from the outside what motivates Elon Musk to ban a customer. May be the simple message was that there are no Tesla’s for Trolls. But it seems there may be a deeper strategic rationale of focusing on those customers whose expectations are aligned with what Tesla stands for.

 

For us, there is a lesson learned for analyzing companies. Yes, the satisfaction of customers is a strong indicator of how successful the company will be in the long term. But that doesn’t mean that every unhappy customer is a sign that a company faces problems. We need to consider

  • which customers the company targets
  • the purchase criteria of those customers
  • the change of those customers, as well as their purchase criteria along the lifecycle of the products.

Maybe one day, when our roads are crowded with undifferentiated electric, self-driving cars, then Telsa will have to rely on its event management skills to sell its cars. However, today that’s not the core of their business.

The Process Sweetspot

Processes are the structures of a working economy. Processes make us efficient. They enable us to work together within and across organisations, and with people from various disciplines. But they also make us mediocre. And mediocre may just not be enough in today’s crowded economy.

I was boarding a flight the other day and I couldn’t help but  notice how processes have invaded our lives. It’s no news that processes are the lifeblood of aviation. Processes ensures that our luggage magically finds its way to our final destination. Well, most of the times at least. Processes enable the boarding of hundreds of people into small flying metal containers. This is no trivial task. The complexity is possibly best illustrated by the people from later boarding groups who block the entrance as they anxiously bring themselves into launch position during pre-boarding. They must have some reasons for thinking “what if the plane leaves without me”. Processes also tell the captain what to do before take off. Very comforting indeed.

But it’s not only the aviation. Have you also noticed how business travelers spend time discussing the processes they had to carry out, to complete their projects?

To be fair, processes are important, even for simple tasks. One maintenance person tried to pass the queue of waiting passengers in the small jetway. He passed on the left side. To let him pass, the herd of passengers moved to the right. He made it in a short time. A few minutes later, his colleague faced the same endeavour. She tried the right side where the herd had now settled. It required significantly more time to pass. That happens when no processes are at work.

Processes do have advantages. The more critical the task the more we want processes to work.

It’s just that every now and again they are not beneficial, they are not sufficient.

 

The plane was fully packed. No more space for luggage. A tall passenger asked the flight attendant for help. His legs were too long to staple both his hand luggage and legs under the seat in front of him. The flight attendant stuck with the processes, referring to the filled overhead bins and the narrow space under the seat. The passenger clearly didn’t feel comfortable with the thought of being stuck in a sardine box for the next hours.

At the same time I had a problem too. My aisle seat left me plenty of leg space. However I did not leave any space for my bigger trolley. My legs though were not as long as the gentleman’s. The solution. We switched seats, trading the leg space in the aisle, for trolley space. While it doesn’t need an Einstein to come up with the idea, we had some creativity at work. This was creativity overcoming process thinking.

The fellow passenger was happy, I was happy. The airline might not be. Two rows of passengers were discussing the inflexibility of the airline.

Why didn’t the flight assistant bother? Because he was primarily in the logistics business, not in the customer service business. His was trained to make the standard processes work and ensure our safety on board. And nothing wrong with that. In many industries, like airlines, processes are a success factor. Their implementation ensures the high quality standards that customers look for. However, there is a problem.

 

Most airlines manage to make us feel safe today. Making us feel safe is not sufficient anymore. Today, we also want to feel comfortable. The more we have to travel, the more we care for a comforting experience. This reduces the stress of traveling. Processes are an enabler. They are not a differentiator though. Going beyond processes is the magic.

Companies pass the process sweet spot when they move up on Maslow’s Pyramid of human needs. They do it when they start catering to our emotional needs.

 

You’d think that it’s easy to provide processes and good services. Yet, finding the balance seems to be particularly difficult in some industries such as airlines. If you look at the customer reviews, there is a huge difference between companies that customers love and those that are less in favor. Only very few airlines manage to fulfill these needs. Those that do so manage to knock our socks off.

Could you imagine the CEO of United Airlines dressing as a female flight attendant and serving customers? Virgin’s Richard Branson did.

All airlines run the safety instructions. This is standard procedure. They have to do it, even if nobody listens to them anymore. Air New Zealand managed to make people listen again. They did this by going off-process. Their safety instructions are now demonstrated by the New Zealand Rugby Team. In the style of Men in Black!

One major Airline once refunded me hotel costs that arose due to a flight rescheduling. The interesting thing. The flight was rescheduled by their partner airline. And they refunded the cost after a quick phone call without even asking for any receipts. You can imagine, next time they are a bit more expensive than other airlines I will still chose them. Because they care for customers beyond processes. And this is how they earn back their spending on hotel cost.

 

So why is there such a wide spread between those airlines that make us wow and those that make us look forward to being home again?

It is because processes are a critical success factor in this industry. Aviation is built on processes to ensure our safety. And the more an industry depends on processes, the more difficult it is to have a culture that goes beyond the processes. Art doesn’t have a difficult time to impress us. Yet, if there were safety regulations in art, this might be more difficult.

 

When you assess a company, ask:

  • to what extend are processes a success factor in this industry?
  • how good does the company fulfill these processes?
  • does it enable them to play?

But then continue with the more challenging questions:

  • how does it manage to stand out?
  • did it build a culture of flexibility that enables it to cater to the those needs in the top of the pyramid?