The Blog

  • January 29, 2013
  • Reading My Own Clippings

    Like any sane person operating in the wilds of the Internet, I keep a weather eye out for what others might be saying about me.  In other words, I have a vanity search crawling the web to find what there is to find.  Just the other day, someone else’s vanity search (The Blue Ocean Strategy Institute) collided with mine to produce a virtuous result.

    W. Chan Kim, a smart guy out of HBS who wrote “Blue Ocean Strategy” a few years ago, heads the Blue Ocean Strategy (BOS) Institute.  If you aren’t familiar with its precepts, they are like many valuable things in life that boil down to common sense.  The website offers this wisdom,

    “Stop benchmarking the competition.

    The more you benchmark your competitors, the more

    you tend to look like them.”

    Amen to that.

    The point, which I borrowed from Kim and have endorsed for a long time, is that really successful companies sail out on the blue waters of the deepest ocean to find novel ideas that they turn into products and services to delight their customers and make a ton of money.  After all, once you look like your competition, what do you compete on, price?  Be still my heart.

    I think of Apple and iPods, iMacs, iPhones, iTunes and the Apple Store when I think about Blue Ocean Strategy.  I also think about Salesforce.com, the leading enterprise software vendor with a Blue Ocean Strategy to incorporate social ideas in everything it does and more.  It’s also the company leading the charge on platform dominated cloud computing and you can see the results all around you though not necessarily in the financial press.

    The collision I mentioned is how their vanity search found an article I wrote on Salesforce and Blue Ocean Strategy, “Salesforce Opens New Channels with Chatter,” in SearchCRM (May, 2012).  They’ve posted a link from their site to this one.  Not bad, I say.

    On to Zuora

    To show you just how long it takes to get the conventional thinkers out there to adopt a new idea, we can turn to Tien Tzuo, CEO of Zuora the billing and payments company dedicated to subscription business.  You might remember Tzuo from his Salesforce days as CMO and Chief Strategy Officer.  Tzuo’s recent article on All Things D was background for an interview he gave to CNBC discussing Netflix’s very good financial results.

     

    Original AllThingsD article referenced http://allthingsd.com/20121128/wall-street-loves-workday-but-doesnt-understand-subscription-businesses/

    It seems that despite all the success of cloud computing and subscription business, Wall Street still has a hard time when it comes to evaluating the success and financial soundness of subscription companies.  The basic issue from what I see is the old saw, “A bird in the hand is worth two in the bush.”  Wall Street analysts would rather have that bird tucked away in hand than the two or more fluttering in the bush even if they had a big net.

    Perhaps that’s just human nature handed down to us from our ancestors in the savannah.  Nobel laureate Daniel Kahneman tells us all about it in his recent book “Thinking Fast and Slow”.  It’s part of our nature.  But we also have big brains and now and then we are supposed to let those brains out for a walk, to make progress, to evaluate the safe bromides of inherited wisdom to see if they really tell us the truth about reality.  On Wall Street that’s a pretty short walk.

    Our big brains have come up with mathematical models and metrics that describe how subscription businesses are different and how they should therefore be evaluated.  According to Tzuo’s article, there are four really important metrics, Annual Recurring Revenue (ARR), which is self evident, and

    “Growth Efficiency Index (GEI – the sales and marketing expense needed to acquire new dollars of ARR), retention rate, and recurring profit margin (how much non-sales and marketing dollars are spent on servicing existing ARR)…”

    But caring more about that bird in hand means not using these metrics yet and instead it awards a company like Salesforce with a PE ratio normally reserved for startups with little revenue.

    But getting back to the whole Blue Ocean Strategy, it’s those companies competing in the beauty pageant punctuated by quality earnings calls and metrics from the manufacturing era (roughly steam, rails, oil and cars) that get the ink and become obsessed over by the cognoscenti of the concrete canyons on lower Manhattan.

    It’s a shame, really.  W. Chan Kim and Daniel Kahneman would not approve, I think.

    Published: 2 years ago


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