Ricardo Semler deconstructing the organizations

Couple of days ago I watched this a video of a speech given by Ricardo Semler, the owner and CEO of Brazilian company Semco AS (they have a horrible website, perfect example of Mystery Meat Navigation). Semler has transformed Semco’s organization to something quite extraordinary, really creating a sort of democratic organization, which apparently seems to work pretty well.

In his speech Semler asks many very thought-provoking questions, such as if we are used to demand democracy and fairness in the civil world, and would not want to live in an undemocratic society, how are we so happy to accept lack of democracy and fairness in the business world.  According to Semler, structures of companies are based on military organizations, and as such they neglect the power of human intuition.

Semler also ridicules the long-term plans that companies are used to make, saying that they usually are only products of wishful thinking. Also, according to Semler, the radical changes into industries very rarely come from inside the industry itself.

It’s a very interesting speech, best to see it by yourself from here.

 

The Unified Theory of eBusiness

One of the most important explanatory principles behind online businesses is the Power Law, defined by Wikipedia as “any polynomial relationship that exhibits the property of scale invariance“. One more clear embodiment of the same law is the well-known “80-20 rule”, also known as Pareto principle - which Wikipedia clarifies by explaining that “80% of the effects comes from 20% of the causes”. The following graph probably looks familiar.

The shape differs sharply from bell curve a.k.a. normal distribution, which rules in the offline world. Most of the natural things are distributed “normally” - meaning that there are many average things, and few extremes.

However, because of the Internet’s linked nature and free distribution of information in Internet, many things in online business are not distributed by the bell curve, but instead according to the power law, where there is few extremely big things, sharply declining number of smaller things and a long tail of small things. You get the idea from the graph above.

When considering websites, this rule of thumb would mean that 20% of websites attract 80% of traffic. Sounds very beliveable, and I would even expect that the figures would be even more sharper - let’s say that 5% of websites attract 90% of traffic (the numbers don’t have to sum to 100, they measure different things). What might be Google’s share of all web traffic?

One consequence of the same law is that “rich will get richer” and “winner takes it all”. The big ones tend to grow even bigger. We can see this in effect in for example online auctions or social networks. It doesn’t make sense to sell something on a website in which there are only few other visitors - so every rational person should sell his stuff on the biggest possible site. On each market, there usually is one clearly leading online consumer marketplace.

The downside to this is that without specialization only the big online businesses will be viable. There are no viable middle-sized portals and there are no small generalist online marketplaces. Everyone has to try to get the network effect to work on their behalf - or lose the game. Unless you can find a niche.

This leads us to other use of the same graph, that of the long tail. Thanks to the lowering distribution (and inventory) costs made possible by Internet, “the endless choice is creating unlimited demand” (Chris Anderson). Internet has opened markets for such niche products that could not have existed earlier - and to those that existed, it has opened completely new markets and possibilities for growth. Some have even talked about slow death of mass media.

What is interesting about the long tail is that the volume of the tail can be as big, or even bigger than the volume of the head. So curiosities and niches combined create a considerable market.

But it’s the same law, which has created these two opposite phenomenons.  There is no market for middle-sized “department stores” on the web, because everyone will go for the huge ones - simply because they are the best. However, there is market for small specialized stores, concentrating on a chosen niche. And there is an endless market for all kinds of cultural products, which can find their audience through the web. But the networks they must use to find their audiences must be the big ones - because everyone is there.

To sum up: if you can’t be the biggest in your market, you must find a viable niche.

 

How hard can the last mile be? (DHL & deliveries)

As I am writing, DHL is holding a package belonging to me in their storage house some twenty kilometers from where I’m living. They’ve been holding it there now for five days - after bringing it in just 22 hours from Bradford, UK to their storage in Helsinki, Finland, but unable to deliver it to me during these five days. Courier companies are very efficient in carrying the packages from country to another, but for some strange reason the last mile is always very difficult.

The package briefly visited my home door five days ago, however no-one bothered to inform me in advance that there was a delivery coming, and no-one happened to be home just that moment. After this it took them 52 hours to send me an SMS informing me about failed delivery attempt, and requesting me to contact their customer service. I immediately called the number on their SMS, but it was Friday evening and I got answered only by a machine.

This morning I called them again, asking them to deliver the package to my office instead and they even promised to deliver it between noon and 2 pm - which never happened. After calling them again in the afternoon, they apologized that “the driver had forgotten to take my delivery with him” and told me that they can only deliver it to me the next day. We’ll see what will happen.

As I was quite annoyed by this kind of inaction, I asked to talk to someone to whom I could complain. The customer service officer connected me to her boss, who told me that I wasn’t really allowed to complain as I actually wasn’t their customer! Only the sender is their customer, she told me - and I should complain to them!

Courier services like DHL are seen as premier in compared to ordinary postal deliveries. However, I probably would have got my package days ago through traditional postal service - and for the sender it probably would have been considerably cheaper.

It would not be difficut for DHL to get their processes and attitude right. Here is what they should do:

• Get their attitude right. For each delivery there are two customers: the sender and receiver, and in many online shops the receiver is able to choose which service to use for delivery. If DHL doesn’t treat the receivers as their customers, why choose to use them?
• By sending the receiver SMS before trying to deliver the package would probably save DHL’s drivers thousands of useless visits behind closed doors every day. By receiving information about arriving delivery, the receiver would be able to make the needed changes in advance.
• If DHL would really like to serve their customers, they would send the SMS or email immediately when they take the package to be delivered. The receiver would then be able to change time and destination of delivery through DHL’s website, thereby making whole process much more efficient.

 

On the web, small is beautiful (acquiring and splitting)

Fred Wilson, whose blog I read daily, just appeared on Yahoo Tech Ticker talking about Microsoft-Yahoo-deal - a subject (too) much blogged about. However, he had good ideas about what has been wrong with Yahoo and how web businesses - and especially acquisitions - should be carried out. Check out the video yourself.

The main points he makes, are these:

• On the web, small is beautiful
• When big companies are aqcuiring smaller ones, they should either intergrate the acquired companies completely - or not integrate at all.
• The latter (not integrating) is usually much better, as it enables the acquired companies to keep their decision making fast and efficient. Usually they also remain much more innovative this way - while enjoying the financing a bigger company can provide them.

He also would recommend Yahoo to split the company into several smaller businesses, bringing “new focus and passion to the services”, as he wrote also in an earlier blog post.

I am currently working in a media company, which has based its digital growth largely on acquisitions. Acquiring companies doesn’t seem to be difficult, it is everyday work to an army of corporate professionals. What is challenging, however, is integrating the acquired company into the acquiring company. This requires such understanding and knowhow which very often is not available. In many cases integration just wouldn’t make sense, but it can still be required as it is supposed to create synergy.

I’ve seen many of these acquisitions (not only in my current company), and while integrating business support functions may be trivial, the real difficulty comes when trying to integrate the business and IT development and the actual IT. Anyone who has tried to do online business in a company which requires you to use corporate IT services, knows what kind of curseword “corporate IT” can be.

The problem with corporate IT is that usually it is built with an idea that one solution fits all, while online businesses may differ widely with their needs - and needs of offline businesses can be something completely different.

In last year’s Web 2.0 expo in Berlin I wrote down these words, unfortunately I have forgotten who spoke them:”IT is going through the biggest change since email or even pc. IT departments need to change and not all want to change. Put IT into hands of those who use it, not to hands of those who produce it (or manage it).” The same maybe applies also to business decisions, as also they can be best made by those who really are involved and interested with the outcomes - thus, those actually running the businesses. And this can be done most efficiently by keeping the actual businesses small.

 

Hotels and wireless (esp. Amsterdam American Hotel and Swisscom)

I am currently in Amsterdam, staying in Amsterdam American Hotel - pricey upmarket hotel which calls itself “Amsterdam’s premier modern lifestyle hotel”. What is it with “modern lifestyle” that I have got wrong? Ok, there is flat tv, telephone and bathroom in the hotel room (this probably is enough to satisfy both “modern” and “lifestyle”), but someone forgot that windows don’t have to let wind blow straight into the room through the frames and that using some sealing in windows would not only make the room less cold, but also leave the continuous noise from a huge water fountain in front of the hotel where it belongs - that is, outside my hotel room.

The radiators are hot, but my room keeps very cold. I was planning to ask for another room, but after chatting on breakfast with others staying in the hotel, found out that most of the people had exactly the same problems: wind, cold, and noise. I guess I’ll just bear this room for two more nights. Amsterdam American Hotel - not recommended.

However, the main point of my post isn’t these nuisances, but the horrible cost of wireless internet connection in most of the hotels. Right now I’m writing these words using internet connection which costs 22 EUR per 24 hours - for that money I could buy a decent connection to my home for a whole month. Not only is the connection expensive, it is also unreliable. For the whole morning all I got was this message:

And this isn’t the first time I have these problems with Swisscom’s wireless connections in hotels. For that kind of price you would except quite different level of reliability.

If I would stay in a room facing the street rather than room to the inner yard, there probably would be usable free wireless network somewhere, but now Swisscom is all that I can use. Hotels should understand that charging for wireless network has become almost as ridiculous idea as charging for shower or toilet use. Wireless network isn’t luxury or a special need for a business traveller - it is something you expect to have freely in your hotel room just as you except having electricity and water.

 

Facebook should not step on app developers’ toes

According to this post in Allfacebook blog (and as is well known), at the same time as Facebook is encouraging outside developers to develope applications using the Facebook platform, it is also developing new features and applications itself - these being possibly the same as what the outside developers have been working on. This happened to developers of Friendmates application when Facebook launched similar feature of its own - making Friendmates practically useless.

This kind of strategy may not be the wisest one for Facebook, as while trying to establish its position as the social network of the Internet, Facebook is dependend on co-operation of thousands of outside developers. If it keeps on stepping on application developers’ toes, they most certainly will feel disencouraged to dedicate their time and money on something their partner may at any time make worthless.

If Facebook wishes to become truly an infrastuctural web service, they should dedicate themselves on developing their platform and creating such services that will enable the application developers to develope, market and monetize their services more easily. They could look for an example at Google, which has helped the monetization of online services hugely with their AdSense/AdWords-product.

It is enough for Facebook to have the basic working social infrastructure (however, finding friends easily may well be essential part of the infrastucture). The rest can be developed by outside developers - thus benefiting both the network and the developer.

 

Services in Web Infrastructure

What comprises the infrastructure of the web? A very narrow-minded answer would probably refer just to the networks and the server hardware, but obviously they are not enough to provide the experience that we know as the web. We need at least web server software, with which browsers communicate using standardized protocols. But is there still more to the infrastructure of the web?

According to Wikipedia article, infrastructure is “generally structural elements that provide the framework supporting an entire structure”. Browsers, servers, protocols and hardware comprise big part of the infrastructure, but I don’t think that they are yet enough. Internet would be completely different if it would lack search engines – and for most of us this means Google.

Google has practically become part of the web infrastructure. For a long time we used to consider search engines as search services, serving the function of finding something we wish to find in the web– very useful, but replaceable in their function by portals, directories, home pages and link lists.

Not any more. Google has become essential part of the way web is used, even replacing using domain names (and thus DNS, essential part of the infrastructure). It is an infrastructural service into which each and every service operating on the Internet has to connect – without working with Google you practically don’t exist.

I sketched the layers of the web infrastructure to the picture below. Google started as a service among others, but it has become something between service and the infrastructure.

I don’t think there are many other infrastructural services currently in the web, but there is one very strong candidate. If you use Google to find information, you use social networking service to connect to your friends and acquaintances. Previously this was done using several different services, such as email and instant messaging - but Facebook and other social networking services have made their services into a platforms containing and enabling everything needed to communicate with people we know. Partly they have already replaced email as a connection and communication tool.

Facebook is obviously the strongest candidate to take the role of infrastructural service in this field. There are not yet many really useful applications utilizing the platform provided by Facebook, but most probably there will be. If Facebook is able to keep its service open and free to outside developers and keep the people networked through it not too irritated, it may well be able to take a role as part of web infrastructure - a service to which each and every service which has anything to do with something social, will have to connect to.

 

Observing a paradigm shift

According to well-known theory of scientific revolutions by Thomas Kuhn, science advances through scientific revolutions. During periods of normal science the majority of science community accepts the rules of the ruling paradigm, but when the amount of anomalies — evidence not in accordance with the ruling paradigm — grows high enough the science is led to a crisis, which later leads to scientific revolution. Scientific revolution leads to a new paradigm and a new normal science. Originally Kuhn intended his theory to explain just the progress of scientific theories, but his theory has later been used to explain developments in all kinds of realms of human experience.

Using Kuhn’s terminology we could say that business — and especially media business — is currently undergoing crisis caused by new means of communication and information distribution made possible by birth and growth of Internet. Economics used to be by definition about choice under scarcity, but internet and digitalization have made abundance a rule rather than an exception. The business models employed in the old paradigm are less and less usable,  but it isn’t yet quite clear what the future of media business will be. The rules of the new game however seem to be incompatible with the old ones: where is the need for intermediaries, how to set price to media products when crowds expect everything to be free, how to compete in local markets when information travels freely across borders?

As we are currently in the phase of crisis, we don’t yet know what the world will look like in ten-twenty years. We don’t even know how long it is going to take before we can say that the transition period is over — maybe we will be in the transition state still thirty years from now. The communication revolution brought by evolution of Internet has been compared to the revolution caused by invention of printing press by Johannes Gutenberg in 15th century. Gutenberg’s invention started a process which led to reformation, enlightenment and development of democracy — the consequences of Internet revolution are still to be seen.

Effects of Internet revolution are obviously not limited to business world, however in media business the effects are seen most rapidly. Though we don’t know the outcome of the current revolution, we know from the history what has happened when some other industries have been revolutionized – maybe on a smaller scale. One very well known example is the revolution that Henry Ford brought to transportation by creating T-Model Ford. T-Model Ford has been celebrated as a break-through in industrial production, but it not only revolutionized the production, but also created a completely new market: affordable cars for every household. From this viewpoint it wasn’t just a production innovation, but also value innovation. But as is well known, it at the same time practically destroyed the previous industry of custom-made cars as well as industries providing vehicles for other means of city travel. The landscape which emerged through this revolution looked completely different from the pre-revolution landscape. The same will be true also of Internet revolution: not all companies currently in media business will survive the convergence.

However, to understand this change and to try to be part of the change instead of victim of it, we should try to understand the forces behind the change. Through this blog I am trying to document my own process of making sense of all this.