By: Prabhakar Gopalan
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
Firms 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.
By: Prabhakar Gopalan