News Corp Split

This week, we heard the news that Rupert Murdoch will be splitting News Corp. into two separate entities: a publishing company and an entertainment firm.   I have several reactions:

1.  The News Corp split follows a familiar pattern.  In the 1990s, we saw a number of media companies engaging a great deal of both horizontal and vertical integration (Viacom merges with CBS, AOL mergers with Time Warner, Disney buys ABC, etc)   Now, we have seen the reversal of many of these strategies.  I'm not surprised.   Disney always had the strongest case for horizontal integration, because they leverage a highly valuable resource (the characters) across many business units.   Other entertainment firms had far less synergy across their businesses. 

2.  One might argue that the media conglomerate phase of the past was a case of herd behavior.  They all imitated one another in strategies of horizontal and vertical integration, without necessarily questioning the merits closely enough.

3.  News Corp may not have a great deal of difficulty breaking up into two firms because of how they manage the business units.  Murdoch always ran the units in a fairly decentralized manner.  That always puzzled me, because it meant that they really weren't pursuing major synergies.  On the other hand, that unit autonomy makes breaking up much easier, given the lack of strong interconnections. 

4.  One wonders how much cross-subsidization occurred in the past, with cash flow from the profitable, but mature publishing businesses to the higher growth entertainment businesses that needed cash to grow.  If a great deal occurred, then it will be interesting to see how the entertainment business funds its growth moving forward.  Meanwhile, investors may be very happy to see the cash flow from the publishing business returned directly to them (perhaps via strong dividends), for people to invest as they choose.

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Microsoft Surface: What's the Strategy?

Microsoft's decision to build its own tablet computer (called Surface) has raised some interesting questions about the firm's strategic intent.   Has the firm finally acknowledged that Steve Jobs was correct when he said that you had to be vertically integrated to produce something as terrific as the iPad?  In other words, did the same firm have to make the hardware and the software, because complex integration was needed to deliver a exceptional customer experience?   Jobs, of course, believed that Android devices could not match the iPad experience because they lacked such sophisticated integration (since the hardware makers were simply licensing the Android system). 

A recent New York Times story suggests an alternative hypothesis:  Has Microsoft decided to move temporarily into the tablet hardware business so as to drive the type of innovation that could lead to lucrative tablet operating system and software sales down the road?   Toward the end this New York Times article, MIT Professor Michael Cusumano offers his take on Microsoft's latest move.  Here is the excerpt from the article:

Some who study the technology industry still believe Microsoft will get out of the business of selling its own tablet computer as soon as it can persuade other hardware companies to build compelling devices of their own. “I think once they jump-start it, they plan to make money the way they always have — from licensing software,” said Michael A. Cusumano, a management professor at M.I.T. 

I found this hypothesis quite intriguing.  I can think of at least one other example of a company choosing to vertically integrate on a "temporary" basis.   Coke and Pepsi both chose to forward integrate into bottling and distribution some years ago, and then they divested those units.  Why the back-and-forth?  Some (including HBS Prof. David Yoffie) would argue that Coke and Pepsi forward integrated  so that they could acquire and consolidate their distribution network, driving economies of scale throughout the channel.  They also wanted control of the channel at times as their product strategies shifted.   However, the firms didn't want to have all those assets on their books for the long haul, given the returns in bottling and distribution are much lower than in concentrate production.   Of course, both chose to forward integrate once again more recently, and now we hear rumblings (particularly at Pepsi) of the possibility of another divestiture down the road.  Again, forward integration may have served a distinct strategic purpose, but the firms may find themselves questioning the returns on the distribution businesses. 

Similarly, Microsoft may not want to be in the hardware business long term, as the returns are likely to be lower than in the software business (at least if the tablet market operates in a manner consistent with returns in the personal computer market).   However, "temporary" vertical integration may be their way of shaping the industry in the way that will be positive for them in the long term.   We'll see which hypothesis turns out to be correct.  It should be fascinating, and of course, it will depend on how well customers receive the Surface product. 

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Defeating Boredom in Long Meetings

Claire Suddath has a funny column at Business Week on how to cope with boredom at long management meetings.   Among the best coping strategies listed, she provides this story from Marcy, a former employee of the federal government:

“The M&M game is designed for a large-scale, all-hands-on-deck type meeting where you’re not expected to participate,” she explains. She and her friend would each get a packet of peanut M&M’s and then sit on opposite ends of the conference room, but within eye contact of each other. “We’d pick a set of buzzwords ahead of time—like ‘mission-driven,’ ‘nonproliferation,’ ‘efficiency,’ or ‘the president’—and then whenever one was used, we’d eat an M&M. If you finished your bag of M&M’s, you won.” This, my friends, is the American government in action.

I think that I'll try this strategy with a few colleagues here at the university.  I'm sure that we can come up with some terrific academic buzzwords to fuel our M&M appetites!  

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Struggles at P&G

Apparently, the heat is on Proctor and Gamble CEO Bob McDonald.  McDonald reported some disappointing sales and profit news this week.  According to the Wall Street Journal, "He said the company's sales likely fell by 1% to 2% in the current quarter from a year earlier, compared with a previous forecast of 1% to 2% growth, and said core earnings would come in at 75 to 79 cents a share, down from a previously expected range of 79 cents to 85 cents."  Investors are becoming restless and asking increasingly tough questions.

P&G clearly needs to find a way to jump start organic growth.  However, I believe investors also will begin asking questions regarding the corporate portfolio.  Does the firm need to trim some operations that appear outside the core?  For instance, Iams is a billion dollar brand for P&G, yet pet food does not represent one of the company's main product lines.   P&G focuses primarily on health and beauty as well as household care.   The US pet food market is not as consolidated as the European market.  Therefore, perhaps there may be an opportunity to find a buyer for the business.   Investors may begin asking questions about other brands too, such as the Duracell battery brand.  Does it fit well with P&G's portfolio.  Whenever a company begins to struggle and investors become restless, these types of questions will begin to be asked.

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How Analytics Can Help You Improve Quality and Reduce Costs

I found a terrific example of the use of "Big Data" in Fast Company magazine this month.   The article by Farhad Manjoo describes a situation at Washington Hospital Center.   ER doctors became concerned that many patients returned to the hospital just a short time after being discharged.  A computer scientist at Microsoft Research began to investigate.  He wanted to identify some triggers that would predict whether a patient would be readmitted.  Specifically, he was looking to help doctors identify some predictors that might not otherwise receive much attention by ER physicians and nurses.  He analyzed more than 300,000 ER visits.    Among other things, he discovered that the length of a patient's stay in ER tended to be a good predictor of readmission.  If a patient stayed in the ER for more than 14 hours, they were likely to return to the hospital within a few weeks.  Similarly, if the patient's chart mentioned the word "fluid" at some point, that seemed to predict readmission quite well too.  

This story illustrates how companies can use analytics to help them understand how to improve the quality of customer service, as well as to reduce costs.  Take an automobile dealer.   They conduct repair and maintenance on thousands of cars per year.  A fair number of those cars return shortly after a repair or maintenance appointment, because something is not working correctly or hasn't been done to the customer's satisfaction.   An automobile dealer could analyze the data from thousands of those cases, and it could try to identify the predictors of return visits.  If they could identify a few solid predictors, then they could try to intervene to reduce those return visits.  Those interventions could improve quality and customer satisfaction, while reduce costs (since every return visit is costly).   Many service businesses could apply a similar logic and use analytics to achieve positive results.   Can your company benefit from such an approach?  

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Innovation: Working at the Boundaries

For years, we have known that successful innovations often come from people working in other disciplines. They bring deep knowledge in a related field, and just enough outside perspective, to solve a tough problem that individuals with years of experience in a particular field could not solve. Harvard Professor Karim Lakhani has studied crowdsourcing efforts and confirmed this result. He found that, "successful solvers solved problems at the boundary or outside of their fields of expertise, indicating a transfer of knowledge."

What does that mean for people trying to drive innovation within firms? I think it means finding ways to expose tough issues to people in different functional areas and silos. It means finding people working at those crucial boundaries. It means giving problem solvers access to the social networks of people working in related fields, thus expanding their perspectives.

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Is YouTube An Oppportunity For Terrific Advertising Experiments?

Alex Konrad has written an article for Fortune titled, "Pepsi, Brewing up viral magic."   The article describes how Pepsi debuted a new "Uncle Drew" ad for Pepsi Max on YouTube.   According to the article, "In the five-minute clip, 'Uncle Drew' amuses, then mesmerizes, a pick-up basketball game and its fans with crossovers and dunks unbecoming of a white-bearded, paunch-carrying old man, and only possible because the true identity of 'Uncle Drew' was a carefully disguised young basketball star, the clip's writer-director Kyrie Irving."  (Irving is the former Duke player and current NBA Rookie of the Year who plays for the Cleveland Cavaliers).   What's interesting is where the ad went next... it is now appearing on television as a 30-second spot during the first few games of the NBA Finals between the Miami Heat and the Oklahoma City Thunder (go Thunder!). 

That progression is somewhat unique, going from YouTube to television.   I find it very interesting though, and I think more firms should emulate this strategy.  This story proves that firms can and should use YouTube not just as part of a social media marketing strategy... They should think of YouTube as a land of experimentation.   YouTube offers an inexpensive way to experiment with new ad strategies.  The cost of failure is minimal, and even the ads that don't become viral sensations can be "useful failures" in that they may provide powerful learning opportunities.  

If firms are to use YouTube as a powerful mechanism for low cost, low risk, fast experimentation, then they need to have clear methods of evaluating these experiments.  Konrad's article explains that Pepsi had just such a method of evaluation:

"Pepsi Max brand team member Sam Duboff, who led creation and development of the piece, says 'Uncle Drew' had to satisfy three major metrics in order to justify its adaptation into a television segment. 'Uncle Drew' had to keep viewers engaged, hit the brand's target demographic, and generate its own legs through word of mouth. With 80% of viewers watching through the 4-minute mark, a 82.1% male viewer group that skewed towards the brand's core 25-44 age group, and over 5 million views from embedded YouTube players suggesting the viewer watched over a media site or Facebook, Duboff and his team hit all three." 

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