Recent events such as the Microsoft and Yahoo search deal, Facebook’s efforts to move from a private network to one that is public, and AOL’s imminent spin-off illustrate the challenging nature of consumer digital businesses. The constantly evolving nature of Web businesses continues to challenge most business leaders and corporations. The lack of “rules of the road” make it difficult for many managers to deliver predictable long-term financial performance. As a result, with the exception of a few businesses (e.g., Google), most digital media businesses have struggled at one time or another to deliver continued revenue and profit growth. One way to avoid this seemingly unavoidable fate is to establish a long-term “strategic framework” rather than simply putting in place a traditional annual strategic plan. “Strategic frameworks” enable businesses to leverage evolving market conditions to continuously delivered financial growth. Traditional strategic plans mainly focus businesses on extracting growth from existing businesses operations.
Establishing a sound “strategic framework” inside a digital organization is a complex process. Start ups are advantaged in doing so, as these nascent organizations are designed to embrace change. They operate under the guidance of a strategic framework put in place and shaped by their founder(s). More developed organizations find it more difficult to set a long-term “strategic frameworks” as they tend to focus on the preservation and growth of existing models.
Having said that, there are a couple of key tactics/initiatives which can help any digital business to sow the seeds for the emergence of a long-lasting strategic framework:
1. Create mechanisms to continuously assess the implications of disruptive innovation
This first element seems plainly self-evident at a quick glance. This task, however, can be difficult to achieve in digital environments. When I started my career as a media consultant, identifying consumer behavior trends for traditional media businesses was rather simple. The main reason for that was that traditional media businesses (cable, magazines, broadcasting) were already mature and there were robust syndicated data/research sources to help strategists identify new market opportunities. This is not the case with digital businesses. Given the nascent stage of the digital industry relative to its traditional peers, identifying changes in consumer behavior requires a deep understanding of the changing dynamics of a particular business segment (search, content production, publishing, social media). Acquiring this deep understanding is relatively difficult as only the principals in each of the business segments have access to the data needed to monitor how their corresponding segment is shaping up. Given the speed of change in the digital marketplace, this is also a critical advantage for the principals as data rapidly becomes obsolete on the Web.
Having said that, one can overcome this challenging dynamic by focusing on “fine-tuning” one’s business instincts to be able to readily identify the key data points (public and private) that prove the emergence of new consumer/business trends. Traditional business instincts do not translate to the digital media world because these businesses are designed to disrupt existing business rules. Thus, a new set of instincts are needed to anticipate and prepare for business disruption. While experience plays a key role in fine-tuning one’s instincts for digital businesses, one way to start the process is to pay close attention to how consumers and or businesses react to new disruptive business models. For example, one of the first signs of “audience fragmentation” was the emergence of professional blogs in the 2001-2003 time period. Even though Comscore did not show the change in numbers for the portals, growth in usage numbers for both blogs and search suggested that audiences were using search to find blogs and thus they were likely to fragment going forward. Search was becoming the ultimate remote control for users to access content and blogs signaled that thousands of new “content channels” were going to be created. This meant that audiences looking for consumer content on the Web were going to be increasingly fragmented for many years to come.
Google’s affiliate search business offers another example. In 2004, Google’s affiliate search revenues started to show significant more momentum compared to Yahoo’s. The two main drivers of this momentum were Yahoo’s decision not to go after the long-tail of publishers and Google’s focus on “ad relevancy”. This allowed Google to grow its publisher network much faster than Yahoo while providing superior performance. As a result, Google had put in place a much more robust marketplace by having a greater supply of clicks to offer to advertisers. Given marketplace dynamics, at that moment in time, it became a safe bet to say that Google’s monetization engine was going to be much more powerful for many years to come. This was one of the main reasons why, while at AOL, we decided not to enter the search business and focused on a different advertising product (performance display) via the acquisition of Ad.com. Google’s market dynamics were too strong for AOL to mount effective competition in paid search.
Organizations can accomplish this by establishing formal mechanisms to monitor market disruuptions. These mechanisms include the creation of product and business innovation teams, strategic advisory boards and a formal strategy development process. These mechanisms should be treated as part of the core of the organization rather than as entities on the fringe.
2. Adopt a flexible but clear “set of beliefs” to guide decision-making across the organization
This second element addresses the need for digital businesses to continuously be able to re-invent themselves in an effort to maintain or even reignite their revenue and profit performance. The need for reinvention has been primarily driven by the fact that digital technologies have empowered customers in ways not seen before. Free pricing, low switching costs, and convenience are at the core of consumer/customer empowerment. Moreover, new technologies are increasingly reducing friction for consumers/customers to move from one product experience to another product experience. This implies that digital businesses can be victims of the ephemeral nature of consumers/customers more so than most businesses have been in the past. With their “apparent” rapid ascent and descent, it is tempting to label many digital businesses as “fads. I believe thinking of them more as “hits”, much like a movie franchise or a TV series, is more apt because success relies on continued evolution of the product. Digital businesses need to constantly strive to reinvent themselves in an effort to remain fresh in the eyes of consumers.
Instilling the capability to reinvent the business in an organization is not easy. As companies become successful, their organizations get married to a particular “set of beliefs.” While having a clear “set of beliefs” is critical to success, the issue is that winning beliefs sets are constantly changing in the digital Web. This means that companies need to either create a set of beliefs that is flexible enough to adjust to market changes or they create the mechanisms to periodically change that set of beliefs. Companies must create an environment where their internal cultures/religion can quickly evolve to embrace emerging consumer trends.
While establishing this context for continuous change may sound difficult to implement, it really is not. One can focus around beliefs that are likely to survive changes in the marketplace. For example, a long-lasting belief can be: “aggressively leveraging technologies and new business models to stay on the cutting edge of cost-efficiency is critical for long-term success.” Leading the organization to the point that it can embrace this belief is not easy but it focuses the organization around creating a tech infrastructure that allows for easy integration of new technologies and capable of quick upgrade cycles. Another approach is to use acquisitions as a way to introduce new belief sets into an organization. Acquisitions can help an existing organization understand and appreciated the benefits and viability of new operational models. Succeeding in using acquisitions for this purpose requires carefully balancing the need for continued independence of the acquired business and desire for integration into the core business.
Ultimately, the organization needs to be able to recognize when their business is significantly challenged and have the capability and wherewithal to re-invent itself. Even if in some cases this means entering completely new businesses.
Developing strategies have always been an art and the results tend to ultimately be felt many years later. For digital businesses, however, the key consideration is the ability to develop a strategy that assumes and anticipates changes in market conditions and provides a window of time long enough to successfully execute against it.
Continuously monitoring the implications of disruptive models and establishing a clear but flexible set of organizational beliefs provide a good foundation for doing so.