THE NETWORK MULTIPLIER 4 Steps to Driving More Value & Better Performance

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Executi ve Module 1: Module 2: SUMMARY ORIENTATION ASSESSMENT This workbook is about the power of networks – social, There are four business models, some older than others, Inventory all your intangible assets, paying specifi c attention business and fi nancial – and how they can help you some more valuable than others. Read this chapter and to your dormant customer, employee, partner and investor create more value and better performance. learn which business model is yours. networks for untapped sources of value.

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4 The Network Multiplier • 4 Steps to Driving More Value and Better Performance Table of Contents

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Module 3: Module 4: Executi ve INVESTMENT MEASUREMENT CONCLUSION Reallocate your capital to networks in order to benefi t from Add network and other intangible key performance indicators Digital networks and software are eating the world. Use this lower marginal costs, more growth and higher investor to your fi nancial measures to insure that you are measuring work book to insure that you are leveraging your digital and valuations in today’s hyper connected world. everything that matters. network assets to prosper.

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Executive Summary

1 Executi ve Summary

“ In the network economy, success is self-reinforcing; it obeys the law of increasing returns” Kevin Kelley, Co-Founder, Wired Magazine

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In the spring of 2014, the media, from the Twitterverse to Bloomberg to CNBC and the WSJ, was buzzing about the $19B acquisition of WhatsApp by Facebook. The topic of discussion was, does the messaging service that generated approximately $20M in revenues in 2013 really merit a valuation of almost 1000 times revenues? Bloomberg put it well with its article called: Facebook Values WhatsApp Like Miracle Drug: Real M&A, making the point that the companies most valued by the marketplace are usually developing new treatments for cancer or Diabetes, not sending LOLs and OMGs. The question on all our minds was, WhatsApp with this valuation?

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10 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Summary

According to our research, WhatsApp is not a once-in-a-decade outlier. Personal Notes: Cloud-based file sharing service Dropbox made news as well, receiving ______

venture capital funding at a valuation of $10B, or 40x current revenues. ______

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Airbnb.com recently raised funding at a valuation of $10B, which would To better understand this phenomenon, we turned to the data and ______make it worth more that Hyatt Hotels or Wyndham Worldwide and worth examined 40 years of financial data for the S&P 500 companies to nearly 20x revenues. Taxi-replacement service Uber was recent ly valued see how valuations trends have evolved. Our research led us to ______at $18B, estimated to be 10x revenues. Most recently Alibaba’s IPO three key learnings: ______raised funds of approximately 10x revenues. And this is not the entire list of members to the multi-billion dollar startup club who tout innovative, 1. There are four business models ______new business models. 2. Network Orchestrators outperform other companies ______Indeed, there appears to be an emerging trend in the types of businesses that investors prefer, and today’s most preferred businesses are receiv- 3. Most companies are missing this opportunity ______ing the highest valuations of all times! Companies with more traditional ______businesses are left wondering why these upstarts merit such exuberant Let’s look at each of these findings in more detail. valuations. Are they more profitable? Do they see faster growth? Do they ______have higher return on assets? Our answer is yes, to all of the above. ______

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1. There are four business models: To begin, we searched for a simple way to characterize the different types

Case Study: of business that were winning and losing value in the market. Because the Hilton Worldwide Holdings just invested $550M in its information technol- businesses earning outstanding valuations today represent a variety of in- ogy to meet its customers where they most often are: on their mobile devic- dustries (real estate, transportation, financial services and manufacturing) es. Hilton is allowing guests to check in and out, select rooms, and even unlock we quickly moved past the standard industrial classifications and developed doors with their cell phones – a change that is most likely convenient for both a new framework based on business model, or “the rationale of how an or- guests and for hotel staff. As a bonus, ganization creates, delivers, and captures value.” We found that there are Hilton is able to connect valuable data about their guests and their preferenc- four foundational ways that companies create and deliver value to their cus- es in the process. http://blogs.wsj.com/cio/2014/08/04/ tomers. Companies may operate with a number of these models, but most hilton-cio-says-it-is-out-from-the-back- room/?mod=wsj_ciohome_cioreport have a dominant preference. The four business models are:

Asset Builders: Technology Creators: These companies use capital to make, market, distribute, and sell These companies use capital to develop and sell intellectual property physical things. Examples include Ford, Walmart, and FedEx. This such as software, analytics, pharmaceuticals, and biotechnology. business model has the highest marginal cost because the cost of Examples include Microsoft, Oracle, and Amgen. producing or moving additional units requires essentially the same amount of input or effort. Network Orchestrators. These companies use capital to create a network of peers in which Service Providers: participants interact or transact with the many other members of the These companies use capital to hire employees who provide services network. They may sell products, build relationships, share advice, give to customers or produce billable hours for which they charge. Examples reviews, collaborate, and more. Examples include eBay, Red Hat, and include United Healthcare, Accenture, and JP Morgan. Visa. This business model has the lowest marginal cost because the network itself creates value through member participation. For example, users of TripAdvisor create value for the company when they write reviews.

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12 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Summary

Personal Notes:

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We applied this framework to our dataset, the S&P 500 Index companies over the past 40 years, in order to see how the four business models have Case Study: Bringing technology to baseball. Base- performed over time. Two different researchers categorized each company ball’s league technology group, Major into its dominant business model, giving consideration to several factors: League Baseball Advanced Media, Is using cameras and radar, plus a slow of data crunching capabilities, to bring new insights to evaluate the skills of • The company’s description of itself in annual reports fielders, and possibly offer tips for success. http://blogs.wsj.com/cio/2014/08/05/ • The revenue generated by different business units now-warming-up-big-data-poised-to- give-baseball-a-boost/?mod=wsj_cio- • Capital allocation patterns such as R&D or COGS expenditure home_cioreport • Market perceptions including news articles and analyst reports

Although most companies operate in several business models categories, we assigned to each company the most advanced business model that it uses for a significant portion of its business, or that it is making strong efforts to develop. For example, although most of Nike’s business is manufacturing and selling shoes, which we classify as Asset Building, Nike has also invested in the Nike+ ecosystem which allows users to track their activities and share progress and challenges with their friends. For this reason, we classified Nike as a Network Orchestrator.

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14 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Summary

2. Network Orchestrators outperform other companies: Personal Notes: ______

The business model classification yielded some surprising results. First, our ______analysis based on the most recent year of data indicates that Technology ______Creators and Network Orchestrators currently receive valuations 2-4x higher, ______on average, than the other two business models. Further, trend data over 40 ______

years indicates that this gap is widening over time. We call this observation ______

‘the Multiplier Effect’. ______

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Personal Notes:

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16 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Summary

Why are we focused on Multiplier? Personal Notes: ______

First of all, a company’s Multiplier is calculated from market price and rev- ______enue – two numbers that are very difficult to manipulate. Using Multiplier ______helps correct for accounting manipulations. Second, it is generally accepted ______that market valuations reflect investor expectations for future cash flows, ______

and thus we believe it is a good indicator of a company’s trajectory and abil- ______

ity to generate returns. Indeed, our own research on Multiplier found that ______companies with the highest multipliers outperform their peers on revenue ______growth, profitability, and Return on Assets for over a decade. For these rea- ______sons, we think that all business leaders should consider the Multiplier Effect ______of business models when allocating capital to assets and developing strate- ______

gies for their firms. ______

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Personal Notes: Moving beyond Multiplier, we also found that Network Orchestrators ______outperform companies with other business models in terms of revenue ______

______growth and profit margin.

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18 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Summary

Personal Notes:

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Personal Notes: 3. Most companies are missing this opportunity: ______

______Despite the many advantages of Network Orchestration over the other ______business models, very few companies capitalize on this business model. ______Our research found that fewer than 5% of companies are Network Orches- ______trators and a recent survey by Deloitte of CFOs revealed that less than 10% ______

______of companies generate more than 10% of revenues from network develop-

______ment such as consumer, business, or investor networks.

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20 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Summary

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Personal Notes: This dearth of Network Orchestrators probably drives the fact that very few ______companies are able to achieve the higher multipliers. In 2013, only 5% of the ______

______S&P 500 had value multipliers higher than 6x. There are several reasons why

______most companies are failing to capitalize on the value of networks:

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______• Business models have evolved over time as new technologies have • Traditional industry designations and organizational mindsets are less enabled new ways for companies to create value for customers. Initial useful in a world where technology companies and network orchestra- ______business models focused on manufacturing, distribution and retailing tors are organized across industry boundaries – focused on aggregating ______(think Ford Model T Cars), the second major business model was ser- customers and their organizing their interests and while more traditional vices companies that sought to service what manufacturers made and organizations are focused internally on their processes. ______help organizations improve operations (Edward Deming), the third are technology companies (including software and big data like Microsoft and • GAAP accounting categorizes some assets as assets (plant property ______Google) and finally, today’s Network Orchestration have emerged, taking and equipment), others as expenses (people and intellectual property) ______off only a decade ago with the likes of Facebook. and ignores others (customers and networks). This commonly results in over allocation to tangible assets, and under allocation to intangible ______• Most executives and board members arrive at their leadership roles assets in more traditional organizations not use to investing in assets that with decades of experience, usually focused on building and managing are expenses. ______physical assets or services organizations. Network Orchestrators, on the other hand, require leaders to manage intangible assets that they don’t • Business models are tightly integrated into all parts of a company, and ______own like experts (Gerson Lehrman Group), personal relationships (Face- are difficult to change as a result. ______book) or other people’s assets (Uber). This shift requires new skill sets and wholly new mental models for leaders These factors put executives and board members in a difficult position ______and it will clearly take work for established companies to start cashing in on the value offered by new business models. ______

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22 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Summary

4. The implications for leaders and their mental models of value: Personal Notes: ______

Most of us are fully aware that the ground is shifting beneath our feet as ______new business models, enabled by today’s digital technologies and new views ______of value by young leaders, consume companies and industries across the ______board. Identifying the right course of action, however, is much more difficult. ______

The research presented in this workbook, along the specific tactics, case ______

studies and exercise, will hopefully give you the impetus to make changes – ______including the tools and techniques – to create your own network based ______business model opportunities. ______

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Personal Notes: To get you started on your journey, this work book is organized into four ______acti onable secti ons: ______

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______1 2 3 4

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______1: Orientati on 2: Assessment 3: Investment 4: Measurement

______Understand your business model Assess all your intangible assets In this third step, we will focus on Although your fi rm probably has a and mental model of your orga- available to and residing within how and where to allocate your good handle on fi nancial data, we ______nization, and its impact on the your company, including both tan- capital to create a network centric will focus on new key performance Network Effect. During this fi rst gible and intangible assets (intel- business model. Central to this indicators based on your networks ______step, we will guide you through an lectual property and customer, em- process is selecting technolo- activity along with other intangible ______examination of how your mental ployee and supplier networks, as gies essential to connecting your asset measures here and how to and business models are con- well as big and small data). We will networks (customers, employees, integrate them with your fi nancial ______nected as such, together, directly help you take an Inventory of all partners) to each other so that data to see how your actions and impact your company’s valuation your relationships – their number, they can fulfi ll their own needs those of your network are creating ______and performance. sentiment, capabilities, and their and yours. value for your organization. ______levels of engagement -- as well as the physical and virtual assets ______they own to insure that you can see how to connect them so that ______you can benefi t from the Multiplier discussed in this work book. ______

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24 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Summary

Each module begins by clearly defining the: who, what, when, where, and Personal Notes: why of each step. The bulk of this workbook is devoted to explaining why ______

each step generates value and how to successfully implement it. A variety of ______

case studies are also included to help you see how other organizations and ______their leaders have navigated each step. Finally, there are exercises where ______you can immediately apply the insights to your own firm. ______

______Below is our four-step process will help you and your team: By the way, if you want some extra help along the way, you will find the following resources at the end of this workbook: ______1. Take time to think critically about the evolution of business models, as a result of ongoing technological innovation, and what these 1. The DigitalGrader.com website that contains all the tools and videos ______changes mean for your company. ______2. FAQ’s that include many of the questions that have been asked and 2. Understand your own historical biases about what creates value and answered ______how to share it with your stakeholders. It will also enable you to begin to incorporate new facts and insights based on the latest business 3. Links to other resources and other articles to help you on your way. ______research and understanding. ______In keeping with our style of work today, feel free to move around the book 3. Begin to pivot your business model towards the areas of greatest and our website starting anywhere you like. Remember, this is all about ______value and actively reallocate your capital using our best practices you and helping you achieve your full potential, both as a leader and process guide and case study method. member of many networks! ______Let’s get started! ______

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Personal Notes: Digital Businesses Are The Most Valuable ______Find out how Digital You Are – Take the Survey Online ______

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______www.digitalgrader.com

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26 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Summary

Personal Notes:

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Module 1: Orientation Understand your business and leadership mental models and their impact on the Multiplier Effect.

1 Module 1: Orientati on

“ If you are not leveraging the power of today’s networks, you are missing the power of today’s multi plier eff ect.” Dr. Jerry Wind, The Lauder Professor The Wharton School

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...... Who: What: When: Where: Why: ...... Leadership Team Learn about your business One or two days At an off-site or workshop To create a common models and their performance understanding and align the team for change

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32 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 1 Module 1: Orientation

If you think back in time, you can see that business models evolve along Personal Notes: with changes in technologies. For instance, Agrarian business models once ______ruled this land (literally) with more than 97% of Americans once working as ______farmers plowing the land (often their own) and selling their produce. Over ______time, with the advent of the industrial age, a major shift took place, and a ______new, more dominant business model emerged – called the industrial business ______model. These models focused on making and selling things – all types of ______things – from cars to shoes. Following that, large services firms emerged, ______including financial services, healthcare services and management consulting ______services firms emerging to meet the needs of customers that were becoming ______part of the middle class and wanted what they had accumulated serviced – ______be it their families wealth or health. After that, the semi-conductor was ______created (1957) and software was created that leveraged the intellect of ______people, not just the labor of individuals or the materials of the earth. ______

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Case Study: Amazon shakes up Publishing. Ama- zon.com started by changing the way customers purchased books, but has now created a much broader change. Then it began delivering books elec- tronically, and E-books now make up about 30% of all book sales (of which Amazon has a majority of market share). This shift to electronic format has created confusion and bickering about the appropriate pricing for books delivered in bits rather than on paper. Publishers, such as Hachette, find themselves in a difficult negotiat- ing position since Amazon has a firm lock on customers and the market, with over 50% market share for online books. http://www.digitalbookworld. com/2013/is-amazon-invincible/

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34 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 1 Module 1: Orientation

Today, the newest business model has come into the foreground, gaining Personal Notes: traction at accelerating speeds across multiple industries. And it is based on ______

today’s newest technologies – digital – including cloud, social, mobile, big ______

data and the Internet of everything. ______

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What makes each of these business models so unique is their approach ______to creating value. In the initial business models, the focus is on mak- ______ing one thing and selling that one thing. They do not scale without the addition of either physical assets or people. In the third business model, ______scaling is easier and less costly, because software and bio-technology for example – can be created once and sold many, millions of times (think ______Salesforce.com and any great drug). ______And once again, today’s newest business model – the network orches- ______trator – scales most effectively and efficiently because it relies on the ex- pertise, relationships and knowledge of others – think Uber, AirBnB and ______Alibaba. Lastly, these asset – less companies have the lowest marginal cost of new products and services – they are all based on the network ______offering up their capabilities (including products and services) to others ______and the Orchestrator building the platform for that exchange. ______

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Case Study: Airbnb changes the way people travel. This online startup allows people to rent out space in their home through by using Airbnb’s online network to connect with a broad market of potential travelers. This market segment within the travel industry was essentially created by Airbnb, and now competes with hotels and other more standard accommodations. It now has over 600,000 listings and raised money at estimated 40x revenue. This rapid growth has raised the hackles of the hotel industry whose lobbyists are now working to restrict this type of hospi- tality arrangement.

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36 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 1 Module 1: Orientation – EXERCISE

Which business model are you? Personal Notes: ______

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Take the online survey at www.DigitalGrader.com ______

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DigitalGrader ______

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A business model is “the rati onale of how an organizati on creates, delivers, and captures value.” Essenti ally, a business model forms the foundati on of Case Study: The navigati on market. Consider the how a company operates… but business models are changing! New technol- threat that Google maps and other ogies have enabled new ways for companies to create, deliver, and capture navigati on applicati ons for smartphones have posed to GPS makers, value. This module explores business models, how they have changed over such as Garmin, Magellan, and Tom Tom. Not only are the apps less expen- ti me, and why some business models perform bett er than others. As noted sive than stand-alone, single-functi on devices, or oft enti mes free, they are in our executi ve summary, we found that all companies (regardless of indus- bett er. Networked navigati on tools create a web of user data points that try) fi t into one of four business models, depending on the assets that they send back traffi c and other informa- ti on, improving the experience for leverage and the value that they create. The four business models are: other users.

1. Asset Builders: 3. Technology Creators: Companies use physical capital to make, market, distribute and sell phys- Companies use capital to develop and sell intellectual property, such ical products. The fundamental approach for these companies is ‘make as software and biotechnology. They hire employees who write code or one, sell one.’ Examples include manufacturers, distributors and retailers. create other IP-based assets that can then be sold multiple times. The fundamental approach for these types of companies is ‘make one, sell 2. Service Providers: many.’ Examples include software and pharmaceuticals companies. Companies hire people who offer services for which they charge. The fundamental approach for these types of companies is ‘hire one, sell 4. Network Orchestrators: one.’ This model is similar to the Industrial model, but it substitutes an in- Companies use networks of businesses or consumers to make, market dividual’s output (an hour of billable time or work) for a machine’s output and sell their wares with the company acting as the organizer. The fun- (unit of production or delivery). Examples include consulting fi rms and damental approach for these types of companies is to ‘make, market and fi nancial institutions. sell many to many.’ Examples include fi nancial trading markets, on-line social networks and credit card processing companies.

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38 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 1 Module 1: Orientation

Personal Notes:

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The last two business models, Technology Creators and Network Orchestra- tors, are relatively new entrants to the world of businesses. Their core value propositions depend on advancements in digital technology, which facilitate Case Study: Nest Labs reinvigorates the Thermo- sharing and replicating information, processing large amounts of data, and stat industry. The nest thermome- ter brought a new user experience connecting people and devices. There are five key technologies that have including remote connectivity and some smart, big data analytics to a enabled these new ways of operating: less-than-exciting home product and simultaneously gathering data of value to utilities and customers. When the “iPod” of thermostats hit the market it sold out within weeks. A few years later, Google purchased Nest Labs for $3.2 billion, estimated to be 10x revenue. Meanwhile, Honeywell has launched multiple patent infringement lawsuits in a late-game effort to protect their market position.

Cloud Analytics Social The Mobile & Big Data Internet of Things

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40 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 1 Module 1: Orientation

Here are just a few examples of the explosive growth of these Personal Notes: technologies that are core to new, highly scalable, business ______

models. ______

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Cloud: Internet of Everything: ______• Hundreds of millions of people store personal and financial data in • 26 billion devices are anticipated to be connected by 2020 ______the cloud. Gartner - http://www.gartner.com/newsroom/id/2636073 • 27% use Apple’s iCloud, 17% Dropbox, 15% the Amazon’s Cloud • Intel, Cisco, GE, and IBM all have teams working on Internet of Things ______Drive, and 10% Google Play. applications already. ______• Smart electricity grids alone could create savings of $200 billion to Analytics & Big Data: $500 billion per year by 2025 according to the McKinsey Global ______• 2.5 quintillion bytes of new data are created every day. Institute. ______• Google processes 1 million gigabytes of data every day. Mobile Devices: ______• The number of messages on Twitter now exceeds 400 million per day. • 5 billion people use mobile phones and smart devices to transact and ______• If all the digitally stored data in the world were printed in books, they interact – that means that more people have mobile devices than would cover the United States in a layer fifty-two feet thick. electricity or drinking water. ______• 67 percent of 2,500 respondents in 24 industries reported that big-data • People now spend more time on mobile apps than the Internet. analytics gave them a competitive advantage. ______• The number of people accessing Facebook via mobile devices increased from 30 percent to 60 percent in the 12 months ending ______Social Media: in March 2013. • 1.5 billion people are using social media to communicate and ______collaborate. • Mobile advertising revenue doubled in 2012. ______• Thirty billion pieces of content are shared on Facebook each month. • Mobile phones will overwhelm PCs as the most widespread Internet-access device on the planet this year. By 2015, over 80 • Eighty percent of online users interact with social media each day. ______percent of the handsets purchased in mature markets will be • Facebook boasted 1.11 billion active monthly users as of March 2013, smartphones. ______a number equal to the population of the United States and Europe combined. ______• People spend nearly 20 percent of their online hours on social ______networks. ______• Fewer than 30 percent of CEOs themselves use social media to connect to their constituents. ______

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Personal Notes: Collectively, we call these new digital technologies “CASIM” technologies, and ______they are changing the face of business. Throughout this workbook will examine ______

______how companies are “going digital” and using CASIM technologies to create new

______ways of doing business.

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______Why does CASIM matter to you? 1. Asset Builders are already well understood. Edward Deming and Because companies with digitally-enabled business models outperform Alfred P. Sloan created standards of excellence for manufacturing, distri- ______their peers. Technology Creators and Network Orchestrators grow faster, bution and retailing business models. Retreading those grounds doesn’t ______produce higher profit margins, and generate enterprise value premiums make much sense and there are lots of resources in this arena if you with Network Orchestrators receiving the most significant financial advan- need them (https://en.wikipedia.org/wiki/Edward_Deming); ______tages. The goal of this workbook is to help your company reach the level of a network business model. We focus exclusively on network business 2. Services businesses have been around for more than 100 years. ______models first because they are the most valuable, but also because we Although there is no well known name in this field, there is no shortage believe the following: of both domestic and international firms that have mastered this business ______model (https://en.wikipedia.org/wiki/Service_excellence); and ______3. Technology firms were created with the advent of the semi conductor ______in 1957. Since then we have seen large and very successful software firms be created that according to Marc Andreessen of Internet fame are ______now eating the world. ______http://online.wsj.com/news/articles/SB1000142405311190348090457651 2250915629460 ______4. The network revolution was best defined the co-founder of Wired ______Magazine and built upon Robert Metcalf’s law of networks. In short, it ______suggests that a network becomes more valuable as people or faxes (e.g. technologies) are added to it. ______

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42 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 1 Module 1: Orientation

Personal Notes:

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Personal Notes: One of the most notable differences between the between the business is the value they ______create in the market. Looking across many different datasets, the average price-to-revenue ______ratios follow an exponential pattern of 1x, 2x, 4x, and 8x for Asset Builders, Service Provid- ______ers, Technology Creators, and Network Orchestrators, respectively. We therefor refer to the ______price-to-revenue advantage of Network Orchestrators as the Network Multiplier. ______

______The introduction of CASIM technologies and the corresponding evolution of business models are disrupting industries new and old with a surge of network ______capability – allowing new avenues of connectivity and value creation between companies, employees, partners, and customers.

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44 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 1 Module 1: Orientation

Further to this point, we found that business models apply across all indus- Personal Notes: tries – e.g. they are longitudinal, not vertical, in their application. The result ______

of this is monumental in that they are breaking down traditional industry ______

boundaries and creating new horizontal competitors in the process. ______

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Personal Notes: Lets pause for a moment and do an exercise. ______To start, we want to you to ask yourself the following questions: ______

______1. How are today’s digital technologies disrupting your company’s economics and your industry overall? ______

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______2. What steps is your company taking to respond to these new threats and sources of value? ______

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______3. How are you creating your own, digital initiative’s like GE and Mckinsey (add hyperlinks to the article in Harvard Business Review)?

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46 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 1 Module 1: Orientation

Its time again to talk about some hard stuff – we call it mental models. Personal Notes: First, ask yourself, what determines how your company is allocating its ______

capital including what projects it invests in and why? ______

______Our answer, based on years of working with boards, institutional investors ______and corporate leaders, may surprise you! It is your leadership team’s ______attitudes, behaviors and beliefs about sources of value (and risk). ______

______If your leaders and board members believe that tangible assets (like The question is: what is your mental model? plant, property and equipment like GM’s leaders believe) is a good What are you core, and often, unstated, attitudes, behaviors and beliefs ______investment, that is where they place their bet. If they think it is networks about what creates value – use the space below to write them down. ______(like Facebook’s board and founders believe), than that is where they invest. In short, a company’s leadership team allocates its capital (financial Adapting a company’s business model requires first adapting the mental ______and human capital) based its core assumptions about what drives risk model of the leadership team. and rewards. We call this the organization’s mental model. ______Let’s look at each of these characteristics individually: ______As background, The Fifth Discipline8, Peter Senge defines mental mod- • Focus els as “deeply ingrained attitudes, behaviors and believes, that influence ______how we understand the world and how we take action.” In the business • Information context, a mental model defines what a leader believes drives value, and • Investment ______as a result, what they focus on, measure, and invest in. • Strategy ______http://en.wikipedia.org/wiki/The_Fifth_Discipline ______

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Personal Notes: Gather your team and fill out the following form. ______Think of this form as a Myers Briggs profile for your business personality and think – what are your preferences, biases, and attitudes. Once complete, ______you have should have 4 letters that together represent your focus (inside or out), information preferences (financial or non-financial), investment bias (tangible or intangible) and strategy (known or new). Together, they give you a real sense of where you place your time and attention. ______

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48 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 1 Module 1: Orientation

Regardless of your profile score, remember, mental models are elastic – they Personal Notes: can change, but change takes effect. ______

______For example, let’s look at Starbucks. In 2009, Starbucks brought on Starbucks has shown its commitment to going digital by bringing on the ______Adam Brotman to lead the digital ventures group and eventually brought right talent and allocating capital to digital projects, and is being rewarded him onto the leadership team as Chief Digital Officer. Brotman notes with new and high-potential product lines and revenue streams. ______that Starbucks has always had a broad view about what was possible with digital technology, saying, “digital for Starbucks was not just about Now that you have examined your leadership team’s mental model, let’s ______a website or a point-of-sale system, but about an ability to connect with take a closer look at how this mental model has manifested in a business ______customers and transform their experience and drive the company.” model for your company. You probably already have some thoughts on http://sloanreview.mit.edu/article/how-starbucks-has-gone-digital/ which business model best describes your firm, but begin by taking the ______Digital Grader Assessment located online at www.digitalgrader.com. Since joining, Brotman has led initiatives to create the Starbucks Digital ______Network (which delivers content to browsers in their shops) and develop the highly popular Starbucks App, which appears to be evolving into a ______new mobile payment platform. CEO Howard Schultz recently said, “We ______believe we have an opportunity to try to create a value-added service outside of the Starbucks ecosystem that eventually could compete with ______PayPal.” ______http://www.computerworld.com/s/article/9247025/Evan_Schuman_Can______Starbucks_get_people_to_use_its_app_to_pay_for_dry_cleaning______

______

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Personal Notes: To conduct this exercise, use the space that is provided below to answer ______the following questions: ______

______1. Which category best describes your company? 6. How and where do you interact with customers? ______

______

______2. Where does most of your capital get allocated? 7. What is an important competitive differentiator?

______

______3. What are the most important KPIs for your company? 8. Which assets do you prefer and think are least risky?

______

______4. What is the most important risk to your company? 9. What is your business model according to the survey? ______

______

______5. Where does the top talent tend to go in your company? ______

______

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50 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 1 Module 1: Orientation

To put your responses in context, let’s return to our research. In fact, what Personal Notes: 40 years of data tells us, is that today’s newer business models are better ______

performing on a variety of dimensions including -- faster growth, higher ______

profit margins, and lower marginal cost of expansion. Put this all together, ______and these newer business models generate higher enterprise value for all ______who are involved. ______

______

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Personal Notes:

______

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52 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 1 Module 1: Orientation – EXERCISE

Its time to review your results from the digitalgrader.com survey. Personal Notes: In particular, use the space below to answer the following questions ______

about your business model: ______

______

1. Concept: What type of business model did you set out to create? 5. Metrics: What do you measure – some or all your sources of value? ______

______

______2. Capital: How do you currently allocate your capital? 6. Customers: Do you satisfy all their needs or just a portion? ______

______

______3. Risk: What risks are you primarily concerned about given your assets? 7. Competition: What are your competitive differentiators? ______

______

4. Talent: Where do today’s top performers go – your industry or startups? ______

______

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Personal Notes: Think about your industry at a very broad level and answer the questions below in ______the space provided below. ______

______1. What would a Network Orchestrator look like within your industry or domain? (Note: Keep in mind that you will need to take a wider perspective than normal) ______

______

______2. What are the names of some of the network orchestrator startups in your industry? How successful have these companies been? Are they threatening your core business yet? ______

______

______3. Consider the various ways that your company could leverage your own networks or the networks of others to augment your existing business model ______and value proposition and jot those ideas down below

______

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54 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 1 Module 1: Orientation

On which dimensions is your company most and least digital? Now take Personal Notes: a look at your price-to-revenue ratio, or Multiplier. Does it align with the ______average for your business model? Is it competitive with your peers? ______

______Now that you understand the four types of business models and the differ- ______ent types of mental models that leaders use to allocate their capital, we are ______going to spend the rest of this workbook helping you shift your business ______model towards the higher Multiplier and better market performance. This ______can be achieved by adding new digital network assets (networks and tech- ______nology) internally or by partnering with other companies that have them ______(even your customers). Often both routes can be followed in parallel. Either ______way, success will depend on an aligned leadership team with a willingness to ______adapt its mental model to today’s sources of value. ______

______

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Personal Notes: KEY CHAPTER TAKE-AWAYS: ______

______1. There are four business models ______2. Mental models drive the four business models ______3. Different business models have different valuations ______

______

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56 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 1 Module 1: Orientation

Personal Notes:

DigitalGrader ______

______

______http://digitalgrader.com/research/ ______

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Module 2: Assessment Inventory all your intangible assets with a clear focus on your dormant network assets.

2 Module 2: Assessment

“ To break a mental model (and business model) is harder than splitting the atom.” Albert Einstein Theoretical Physicist

......

...... Who: What: When: Where: Why: ...... Distributed task force Inventory the company’s Over the course of In meetings with your To build a complete picture with connection to all network assets – both tangible three to six months company’s leaders and of your company’s latent business units (BUs) and intangible subject matter experts network assets

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62 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 2 Module 2: Assessment

Now that you understand the starting point for your firm, both in terms of mental and Personal Notes: business models based on our first chapter of this workbook and now how Maslow’s hierarchy ______of needs creates value for your firm, you are ready to take the next steps towards creating ______a more valuable and profitable Network centric business. ______

To do this, you need to begin cultivating network assets (relationships ______and their ability to serve themselves), using CASIM digital technologies. The first step is to do a complete inventory of all your network assets that ______exist within or around the company with as much detail and descriptive information as possible. This will help you and your peers understand ______what networks are available to your company, and what value you could ______provide to them. ______As background, lets review some historical thinking about sources of value and how they might translate into business value. In 1943, Abraham ______Maslow developed his formative work on the hierarchy and progression ______of human needs, “a theory of psychological health predicated on fulfilling innate human needs in priority, culminating in self-actualization.” Maslow ______insightfully noted that the human hierarchy of needs span from the tangible, such as food and water, to the intangible, such as self-esteem and ______creativity. ______

______

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Case Study: These smartphone, car-hailing services allow individuals to use personal cars to make money by giving rides to others. Although Uber and Lyft do not directly compete with auto manufacturers, they are clearly change the overall auto industry and the ways that consumers need and interact with cars. Rather than retrenching and trying to protect its turf, Ford Motor Company has indicated its openness to the disruption in their industry. Chair- man Bill Ford Junior recently said in an interview with the Wall Street Journal, “Whether it’s Uber or Lyft, or another (auto company), we are open to working with them. Rather than turning our back on them, or ignoring them, we are both saying we would like to get to know them and, where it makes sense, work together.”

Maslow’s Hierarchy of Needs

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64 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 2 Module 2: Assessment

Personal Notes:

______

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Maslow would probably be surprised today to discover that a similar progression can also be observed in the business world. Many firms today, enabled by new, digital technologies, are making the shift from providing Case Study: goods and services – physical things, to providing information and connec- Nike has a great job levering their close relationship with their customer tivity – intangible things. This shift is already creating ripples of change in base to tap into new sports related markets. In 2006 Nike broke ground finance and financial markets. by creating the Nike+Ipod Sports kit, which allowed runners to track their runs and also share them with other runners. Quite a bold move for an athletic wear manufacturer with little tech experience! In 2012, Nike developed another – the FuelBand that logs activity throughout the day and allows you to share your achievements and create friendly competition with friends and family. Clearly hitting a sweet spot with customers, the Fuel- Band sold out twice in pre-order and Nike’s sports equipment division saw an 18% rise in profits in the fiscal year it was released.

Abraham Maslow Psychologist

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66 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 2 Module 2: Assessment

The bottom two levels of Maslow’s hierarchy relate quite closely to the Personal Notes: agrarian and industrial revolutions in which large organizations were con- ______

structed to fulfill the physiological and safety needs of people. These in- ______

dustries include farming, water, utilities, irrigation, real estate, and energy ______(physiological needs), as well as fire, police and the military (safety needs). ______More recently, however, businesses, enabled by a host of new technologies, ______

such as Cloud, Social, and Mobile, have begun to serve the intangible needs ______

of human beings which sit at the top levels of Maslow’s hierarchy. ______

______

Belonging: Self Esteem: ______Many companies now exist to facilitate communities. Facebook connects There are also many new ways for people to demonstrate, and be rec- people with their friends, LinkedIn with their colleagues, and Match.com ognized, for their achievements. From the slightly frivolous, “How many ______with potential mates. There are also many highly specific communities likes did my new profile picture get?” to the utilitarian, “How many stars ______for people dealing with unusual circumstances, such as rare diseases did my most recent Airbnb guest give my apartment?,” we are now able (e.g. RareConnect.org) or unusual hobbies (e.g. ArcheryTalk.com). Many to measure our quality and impact in myriad ways. ______of these communities had not been able to gather and communicate previously. Self-Actualization: ______Finally, new organizations are enabling people to express themselves ______creatively and/or make a living in innovative ways. Instagram allows creative expression through photographs. Etsy gives artisans a forum ______to share and sell their handiwork. Uber and Airbnb allow people to take control of their careers and to make a living using their resources in a ______new way. ______

______

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In order to accomplish this inventory, you will need to put in place a task force team of individuals who are respected and well connected within the Case Study: This Stamford, Connecticut-based company that can interface with leaders and subject matter experts within owner of such iconic hotel brands as the company’s business units. St. Regis and Sheraton, is planning to sell $2 billion to $3 billion of hotel properties in the next few years. Star- wood doesn’t want to own properties This inventory will take the form of an iterative series of interviews, starting with business unit leaders, and continuing with content experts anymore; it just wants to manage as needed to understand the different networks that exist within each them, leaving the problems associated business unit and around the company, and the characteristics of those with periodic economic slumps to oth- networks. Depending on the size and complexity of the company, this ers. That’s something it knows quite a process may take one to three months. bit about, having recently salvaged a credit rating that was cut to junk in the 2009 downturn.

How will Starwood make money? It will earn fees for managing the properties it is selling to hotel own- ers in places like Dubai, which boasts fourteen Starwood hotels. The company aims to increase its revenue from management to 80 percent of its annual total, up from 60 percent. This stands in stark contrast to 2008, when management fees accounted for just 25 percent of revenue.

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68 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 2 Module 2: Assessment - EXERCISE

Let’s do a simple exercise. Think about all your networks – be they customer, Personal Notes: employee, partner, supplier or investor. And rank them from 1-5 based on ______

how much value they currently contribute to your organization. Is the number ______

higher than 15, 25, 35? Anybody get to 50? If not, the question is why not. ______

______

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As you think about the reality of Maslow and its impact on your business, here is tidbit worth considering when you think about allocating your cap- Case Study: This retailer has been able put its ital to either tangible or intangible assets. Banks are shutting their doors, intangible data assets to good use. and opening their apps. Last year, 2,267 banks and thrift branches shuttered Like many companies, target collects a great deal of information on its their windows, according to Charlottesville, Virginia-based SNL Financial. shoppers. Each Target shopper has a unique identification number which By 2023, the bank-branch count in the United States is expected to drop to enables target to keep track of his or her personal purchases. A few years 80,000 from 93,000. Why the race to close branches? ago, Target’s statisticians combed through their data and identified some purchase patterns that were highly More and more customers are switching to online and mobile banking. A Asset Builder: correlated with pregnancy. With this Bank of America spokesman says “tens of thousands” of its customers do The risks of physical assets include depreciation, obsolescence, theft, information, Target is able to send their banking on mobile devices each week. Property assets are becom- and damage (for example, due to natural disasters). highly target advertisements and cou- ing much less important to banks as their customers shift to intangible pons to women likely to be pregnant, channels like software. Service Provider: and begin capturing new customers at The risks of people assets include attrition and turnover, sourcing difficul- a time when significant change means So, what is your view of value and how it is created, managed and de- ties, and HR concerns such as lawsuits. that their “shopping patterns and ployed? brand loyalties are up for grabs.” Technology Creator: This is a hard question for many, but for some, very simple, based on The risks of intellectual capital assets include obsolescence, high upfront http://www.nytimes.com/2012/02/19/ what their value of value is. Remember, that our research says that each development costs, patent infringement and defense, and loss of essen- magazine/shopping-habits.html?page- business model has its own multiplier effect with today’s intangible assets tial talent. wanted=1&_r=2&hp& producing more value with less financial capital. But that is not the whole story. Consider your risk profile for allocating your firm’s capital given the Network Orchestrator: following insights: The risks of network assets include loss of customers or reduced participation and reputation risk.

So let’s ask the question again… What is your company’s current risk profile? Do your leaders believe that physical assets are more or less valuable and risky than peer-to-peer relationships with customers where the customers create and share their own value with others? Do they prefer to own the demand or supply chain?

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70 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 2 Module 2: Assessment - EXERCISE

Its time to ask the question – how does your company allocate its capital? Personal Notes: ______To answer this question, gather your team with color stickies and have each member of your management team place your stickies on the 4 quadrants of the four different business models signifying where you allocate your firms’ human and financial capital. . ______

______

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Now that you have seen how companies of all types are transitioning their business models to leverage intangible assets including their intellectual property and dormant networks, please complete the following exercise. Case Study: GE has noticed the rapid innovation-taking place in home automation today, and wants to be a player. To 1. What current networks does your company already have or 5. What are sentiment, number, and levels of engagement and shared that end, GE has opened up thousands participate in? economics of these relationships? of patents to the “crowd” and has partnered with Quirky, a startup which crowd-sources invention ideas and helps makes those inventions a reality. Together, GE and Quirky will source and create appliance and other home devices that can be controlled remote- 2. With which groups are the relationships strongest? 6. How are you using technologies to engage with each network? ly through the free Wink app.

3. With which are the relationships weakest? 7. What value could you offer to these networks?

4. How well are you capitalizing on the skills, value and assets owned by members of your networks – including your employees, competitors, suppliers, customers, and other stakeholders?

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72 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 2 Module 2: Assessment

Personal Notes:

______

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KEY CHAPTER TAKE-AWAYS: 1. Every company has dormant networks

Case Study: AT&T has begun using their employees 2. Most companies have under-allocated capital to their networks to generate value in a novel way: by crowdsourcing innovative ideas. Partic- 3. Every company has the opportunity to activate their networks for value ipants in TIP submit and discuss ideas, and “vote” on the best ideas with virtual currency. Approximately once a quarter the top ideas as selected to pitch to leadership, which can then lead to real dollar investment, production, and commercialization. Thus far, the program has seen participation from over 130,000 employees, over $38 million has been invested, and nu- merous patents have been [submitted. Begun in 2009, the TIP program is still going strong. http://www.forbes.com/sites/larrymy- ler/2013/12/05/atts-innovation-pipeline-engages-130000-employees/

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74 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 2 Module 2: Assessment - EXERCISE

Personal Notes:

DigitalGrader ______

______

______http://digitalgrader.com/step-2/ ______

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Module 3: Investment Invest in network assets in your organization.

3 Module 3: Investment

“The usefulness, or uti lity, of a network equals the square of the number of users.” Robert Metcalf Electrical Engineer

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...... Who: What: When: Where: Why: ...... Leadership team with Allocate at least 10% of your Over the course Throughout your organization To drive better performance recommendation from capital to your network assets of 6-18 months and higher value from task force team the assets of others

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80 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 3 Module 3: Investment

Once your task force completes the relationship inventory for your firm, you Personal Notes: will have a complete picture of your current portfolio of tangible and, even ______

more important, intangible and network assets. During the inventory pro- ______

cess, this team should also begin assessing which networks have the poten- ______tial contribute to or develop into scaling edges. As a reminder, a scaling edge ______is “a new customer segment, geographic market, or product which has the ______potential to eventually transform a company’s core business.” ______

______The task force team and the leadership team should work together to identify promising opportunities for the development of a network business model asset. ______This asset will have two components: ______1. The network 2. The value that your company can provide ______

______When it comes to the network, a high-potential network will have several of the following characteristics: ______• Large number of potential members ______• The members are underserved/have an unmet need • Many members already have a relationship with your company ______• Your company uniquely understands the group ______

• The members could provide value to each other ______

______

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The second component is the value you that your network-based business can provide for the target network – why they will want to engage with your Case Study: Walmart is trying to co-opt disrupt- company (and each other) on the platform you are creating. This is where ers by enlisting people outside the your other intangible assets come into play. organization to help it innovate. The retailer recently ran a crowdsourcing contest, offering distinctive new products a chance to “Get on the Shelf at For example your assets my include… We recommend that the leadership team set aside a week’s worth of time Walmart.” The competition drew more to devote to this important exercise. During the first two or three days • Subject matter experts among your employees who could provide of the week, the task force should present the asset inventory business than 4,000 inventors, entrepreneurs, knowledge needed by the network unit by business unit, with a focus on the network assets and potential and small businesses from across the sources of value for each. The last half of the week should be devoted to • Data on a particular topic of interest to the network United States, and more than 1 million prioritizing the opportunities and picking or one or two to focus on. votes were cast. The winners were: • Relationships with members of the community that the network would like access too HumanKind Water, A bottled water company that gives When considering the potential networks you could serve, and the 100 percent of its net profits to help opportunities where you could create value, the best options will be provide clean drinking water for under- those that: developed communities worldwide, • Have a relatively quick path to generating value took first prize. • Have the potential to transform the company (over time) PlateTopper, • Create new pools of value without cannibalizing existing ones A kitchen product that transforms • Tap into the value of a broad ecosystem including customers, dinner plates into airtight food-storage containers, came in second. partners, etc. • Require low capital investment to begin SnapIt Eyeglass Repair Kit, A screw kit to tighten loose glasses in thirty seconds, was third.

All three products will be available on Walmart.com, and HumanKind Water will also be on shelves in some Walmart stores.

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82 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 3 Module 3: Investment

Here are the four steps for augmenting your organization’s existing business Personal Notes: model with network value. ______

______1. Select a network. 3. The most difficult time for network assets is when they are ______We’ve discussed the characteristics of a good network opportunity growing to reach critical mass. above, so pick one or two here that you think would constitute an early In the early stages, you will need to provide the content or benefit for ______win for your organization if you allocated real capital to its growth and the network in order to encourage participants to join. This could take development. many forms, but here are a few examples: ______

a. Have employees create content ______2. Build or leverage a technological solution b. Bring in experts or specialists of interest to the network to connect that network. ______Essentially, create the platform on which your company and network c. Share data or information that the company has access to participants will communicate or share information. There are many ______low-cost preexisting options that you could use to “test the waters” with 4. Once participants begin joining the network, likely in order ______your network, such as Facebook, Twitter, or Yammer. Selecting a fast to access the benefits that you have provided, you should and cheap solution to begin with is recommended because the early incentivize them to participate in the value creation ______stages of asset development are very iterative. When you begin to themselves. have early successes with your network and better understand its You could, for example, create ways that the user can derive ______wants and needs, you can upgrade the platform in tailored ways. recognition and esteem from his/her participation. Here are ______some ways people derive esteem from existing networks: a. Twitter and Instagram: number of followers ______

b. Yelp: membership in the Elite Squad (for popular reviewers) ______c. Etsy: Favorite shops and trending product emails ______d. Uber: Positive reviews ______Sharing revenue is another common way to incentivize participation. ______Many networks offer participants the opportunity to earn money for the value they provide. Airbnb and Uber allow people to share and monetize ______assets they own. Taskrabbit and Care.com allow people to offer their services to a broad market. Etsy and ArtFire enable artists and artisans ______to market and sell their work. ______

______

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As we have seen, reallocating your capital to a different (and probably foreign) business model will require some adjustment in your leadership team’s and Case Study: Google is a company well known board member’s mental model. Many companies have difficulty shifting for capability with digital technolo- their mental model away from the biases of last year’s budget, or their gy and ability to innovate… so let’s look at how they manage their most previous attitudes, behaviors and beliefs about sources of value – especially innovative projects – the ones they call “moonshots”. In 2010, Google if they have built their entire career and organization around those developed a semi-secret lab known as Google [X] to work on the develop- assumptions. ment of a self-driving car. Since then, additional projects have been added such as Google Glass, a wearable com- puter with an optical head-mounted display, and Project Loon, which aims to bring the Internet to all with a network of high-altitude balloons. Google demonstrates several best practices for managing innovative projects within a large company. • Separation • Low Investment • The Right Talent • The External Network

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84 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 3 Module 3: Investment

However, given our research, it’s time for action and the chart below is Personal Notes: your map to success. ______

______

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Personal Notes: When you use this map correctly, it will help you allocate your capital to ______today’s sources of value. In addition, this framework for growth reflects ______

______what great investors already know about how to create value and minimize

______risks – that is to leverage the assets, relationships, and knowledge of others ______to drive value and performance. ______

______As you move forward, this network amplification process can become a ______quarterly ritual that actually inspires leaders to really innovate and invest in technologies that create employee and customer excitement and ______value, and free themselves from the historical bias that sets budget and capital allocation in most companies. Most importantly, your investors will ______love you for investing in what truly matters – today’s sources of value – ______and the enabling technologies that enhance them.

______

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86 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 3 Module 3: Investment

So how should you set up your team up for this capital reallocation process Personal Notes: and future processes like this? Our recommendations: ______

______• Staff your team with passionate individuals who are excited by the To accomplish the above tasks, you will need to answer the following ______project – and make sure they are connect to the external market you questions (this is not an exercise, although feel free to create notes in are tapping into. the margin where we have left space for you) ______

• Insulate the project team from the rest of the business. Don’t siphon • Who will comprise the team? ______off their time, resources, and attention but expecting the same output • Are there capabilities that must be sourced externally? ______and results you would of a developed business unit. • How will the team report upward? At what cadence? ______• Give the project team freedom to operate, and even change the plan, • How much authorities will the team have to be self-directed? without the bureaucratic oversight. This will increase their level of ______• How can the team provide value quickly? ownership and ability to hone in on value. • What results do you expect and in what timeframe? ______• Expect iteration. Rapid response to new learning’s should be a part • What resources will the team need immediately and ______of the creation of digital assets and will be important in projects that how will those be supplied? connect with an external network. ______

• Limit the capital invested up front. The goal of digital business models ______is to become a part of, or create, an external network with high growth ______potential. If you have found an opportunity that is resonating, the market will amplify your investment with participation from the network. ______

• “Give” in order to “get”. In the early stages of network development, ______your team may need to spend a lot of time developing the value – for ______example, creating the content. Over time, expect the network to start giving back more. ______

______

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Personal Notes: KEY CHAPTER TAKE-AWAYS: ______

______1. Companies are capital allocators ______2. The most valuable company companies allocate their capital to networks ______3. Every company should allocate at least 10% of their capital to networks ______

______

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88 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 3 Module 3: Investment

Personal Notes:

DigitalGrader ______

______

______http://digitalgrader.com/step-3/ ______

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Module 4: Measurement Monitor your performance – integrating fi nancial data with new network centered data

4 Module 4: Measurement

“ If you change the way you look at things, the things you look at change.” Wayne Dyer Author & Moti vati onal Speaker

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...... Who: What: When: Where: Why: ...... Leadership and finance team Measure what matters – Ongoing During the course To help keep your company all your sources of value of daily activities and board and on course with today’s realities

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94 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 4 Module 4: Measurement

There is an old saying, ‘you can only manage what you measure’. In our re- Personal Notes: search, we are going one step further. We are saying that leaders’ mental ______

models about what is valuable determines where they allocate their capital. ______

Given that Assets are properly categorized as assets, what does that mean ______to intangible assets – such as people (which are categorized as expenses), ______R&D (which is sometimes capitalized) and customers (which is overlooked ______completely). Our argument based on years of research is that it means a lot ______

– suggesting that leaders will overallocate to what they know and is valued ______

by today’s measurement system (even if it is 1000 ore more years old) and ______under allocate to intangible assets – such as today’s networks of customers ______or intellectual property. ______But in so doing, leaders are missing the point. And that is too bad, because ______

investors have taken notice. In fact, they are allocating their investable dol- ______

lars at increasing speed in intangible based organizations. ______

______

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Indeed these intangible assets now make up a majority of the market value of the S&P 500 companies! However, traditional accounting has not evolved as quickly as the market, and still focuses on measuring and evaluating phys- Case Study: ical resources such as property, plant, and equipment. Even more troubling, We’ve already discussed Nike’s innovative move into digital network prod- in terms of our perspective, is the fact that generally accepted accounting ucts with their Nike+ product line. Nike has also adapted quickly to new trends principles (GAAP) classifies some sources of value, such as employees, as ex- in product marketing. By 2012, Nike’s print and TV advertising had dropped penses. These market norms often lead management teams to mismanage 40%, while the overall marketing budget climbed steadily upwards. Where or under-manage import intangible assets. has the remainder of the marketing budget gone? Nontraditional digital media such as social networks, online communities, and online campaigns. Nike noted that its core customer has moved away TV viewership and towards online presence and community. Nike has responded quickly to align it’s marketing to that trend, while many companies have had trouble shifting away from the budget allocations of decades past. As Nike CEO Mark Parker said, “connecting today is a dialog”. http://fortune.com/2012/02/13/ni- kes-new-marketing-mojo/

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96 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 4 Module 4: Measurement

Personal Notes:

______

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Case Study: In 2011, Cisco re-evaluated all of its business units and decided to re-focus the entire business around five network-centric key priorities – core routing, switching and services; collab- oration; architectures; and video. As a part of this restructuring, Cisco shut down the Flip video camera division, which it had acquired only two years previously. Unfortunately, this acquisition was quickly followed by a market shift to all-in-one smartphones, rather than single purpose devices. Cisco was able to note the trend, and to adapt.

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98 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 4 Module 4: Measurement

Given this fact, let’s start what this means to your board and leaders by con- Personal Notes: sidering that businesses are nothing more than asset allocators to assets – be ______

they tangible or intangible. In fact, corporate leaders are like investors who ______

create portfolios of stocks and bonds, only business leaders instead build a ______portfolio of tangible and or intangible assets that enable them to create and ______share value. For most people, this is a new point of view on business, but ______consider that great business leaders are in fact great asset allocators. ______

______In fact, they are also highly prolific asset allocators! According to research, businesses leaders invest more capital each year than investors do. http://www.mckinsey.com/insights/strategy/how_to_put_your_money_where_your_strategy_is ______

______

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Personal Notes: Further, those organizations that are active reallocators, those that regularly ______rebalance their portfolios of assets to align with the market, are usually the ______

______best performers.

______The importance of rebalancing assets is sensible considering the pace of ______change. Although most companies have historically served our tangible ______needs, the bottom of the asset pyramid is now being commoditized, while ______

______the intangible needs at the top are emerging as the most growing and

______valuable parts of the economy.

______

______But, before we proceed, let’s return to our original point about the sources of value for both customers (the hierarchy of value according to Maslow ______is the hierarchy of customer value) and investors (what is easily scalable and extensible without large infusions of capital – e.g. intangible assets ______of others. In fact, to put both of these statements in context, according ______to the International Integrated Recording Committee, fully 81 percent of business assets today consist of intangibles. The 81 percent goes largely ______unmeasured in favor of a fine-grain focus on the other 19 percent.That’s the equivalent of seeing just ten of the cards in a fifty-two-card deck. ______What poker player would get into a game where he or she could only see ______one card in a hand of five-card-stud? Should leaders and their boards of directors be worried? Absolutely. The financial implications are frightening. ______

______

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100 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 4 Module 4: Measurement

Most leaders and managers, of course, are aware that this sea change has Personal Notes: been happening. But they don’t have the tools to measure and make the ______

most of the new reality. Employees and suppliers enter the books only as ______

an expense; intellectual property may appear as goodwill, but only in the ______context of an acquisition; and customers appear only in the income column ______when they open their wallets. ______

______These misperceptions distort judgments, breeding false assumptions, bad investment (which is to say strategic) decisions, and leave leaders, ______boards, and the organizations they run open to profound risks. And where there is mis-measuring, mismanaging inevitably follows. Leaders who ______play by outmoded rules and rely on retroactive, rather than prospective, ______data are putting their companies and careers in peril. ______We are only beginning to understand the growing influence of networks in our business and personal life, and even more importantly, how to mea- ______sure and track this influence. New assets and new sources of value cre- ______ation mean new Key Performance Indicators (KPIs) for leadership teams. Few businesses, however, have dramatically updated their tracking and ______reporting systems to keep up with the dramatic changes in relationships, interactions, and sources of value. ______

______

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Personal Notes: For a moment, think of the sheer number of past, present and prospective ______customers that your organization has and is about to interact with and ask ______

______yourself – do you have a data base of them? Do you know how they relate

______to each other? Do you track their cadence and frequency of interaction with ______you and each other? How well do you understand their lifetime value? Keep ______going and ask the same questions about your past, present and prospective ______employees, your suppliers and partners, and, finally, your investors and ______

______lenders. If you can, that is great news – and you are among the very few

______organizations that can. If not, you’re in need of some new metrics and KPIs!

______

______Understanding the sheer size of your network, where many companies stop, is only part of the journey. With social media ever at our fingertips, ______one very happy or very upset contact, whether employee, customer, supplier, or investor, can have a surprisingly large impact. Consider the ______PR firestorm that Comcast recently endured after unhappy customers ______recorded and shared comically bad support phone calls. For this reason, you also need to chart the number of their connections (as noted in the ______points above), but also the number of their interactions (or lack thereof), the quality of their interactions (e.g. what was your last sale, your last ______communication. their last interaction, etc.) and the sentiment of their ______interactions (e.g. positive, negative, neutral). The weakest link in relationships could cause the chain to break, creating risks for your enterprise ______and its potential growth potential.

______

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102 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 4 Module 4: Measurement

So how and where do you get started generating this information? Personal Notes: Simply, use the measurement framework below to see what you need to ______

measure and report to insure your organization’s future success. However, ______

to help you get started, here are some simple steps that you can take to ______begin developing your network KPI’s. ______

______1. Map Your Network 4. Regularly Rebalance Your Capital Allocation That is first chart your customer network including your first, second and The final step for managing profit and value in your business is to create ______third degree of separation against past, present and prospective custom- KPI’s that you and your board use to run your organization and each of ers. Next, do the same for employees, partners and investors. your business models that are contained in your overall organization. For ______example, here are some KPI’s that you can use for starters by business ______2. Chart Their Interactions model; That is once you see all your networks links (only do first, second and ______third degree of separations) – determine the amount of times that you • Asset builders: Inventory turnover, cost of goods sold, have interacted with them and them with you. Hopefully, like for the point manufacturing capability ______above, you are using some of today’s technologies – like CRM, ERM or • Service providers: Hours billed, average employee utilization ERP – so that you can gather the right information you need from this ______assignment from your heads of Marketing, HR and Supply Chain and Fi- • Technology Creators: Patents and other IP generated, number of ______nance. If not – time to contact your local technology for a solution to learn licenses sold what you need to get started. • Network Orchestrators: Network participants, activity of each ______participant, number of transactions 3. Plot Their Overlaps ______Understanding the true power of your network is also determining what ______customers could also be potential investors because they love your product. The same is true for suppliers, partners and employees. But be ______careful. In today’s social, mobile and cloud world – you need to make the connections before your stakeholders do where you have not treated ______them well. Once they see the connections, they might just gather togeth- ______er, connect and create strategic risks for your stock price, employment picture and sales pipeline. ______

______

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Personal Notes: Each business must also be considered with regards to its growth and value ______potential, keeping in mind the value and performance differential between ______

______the different business models. So start calculating the size of your networks

______as soon as possible to understand what you need to do to harness their ______collective power and wisdom or risk that they will tap into their own and ______unseat your company and its future growth potential. ______

______Remember, as noted at the beginning of this chapter, you can only man- In the services age, it was based on how many people the company ______age what you measure so measure all the sources of value – especially employed and how to maximize their billable hours. Industries that flour- those created by your networks as well as the size and interactions of ished during this time included insurance, financial services, information ______your networks just like you manage and measure all the SKU’s of your technology, and telecommunications. ______products and services or equipment in your building. For example, in the industrial age, strategy was based on the size of a company’s plant. The Today, when it comes to strategy in the world of the digital corporation, ______key industries in this era were manufacturing, transportation, and energy. leaders and managers must see themselves as investors and under- Perhaps the key example is the railroad empire built by Cornelius Van- stand all sources of value. Recent research by the McKinsey Global ______derbilt in the late nineteenth century, which included the New York and Institute proves that investing in social technologies creates consider- Harlem railroad and the New York Central and Hudson River railroad. able value today. In retail banking, particularly when applied to sales and ______marketing, smart investing yields a revenue increase between 4 and 7 ______percent. In the professional-services field, the research shows, similar investments in operations, distribution, and business support functions ______generate a boost in revenues between 8 and 11 percent. ______

______

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104 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 4 Module 4: Measurement

The bottom line of this chapter: Personal Notes: Its time to create new KPI’s for each of the four business models for your or- ______

ganization. Specifically, our intent here is to help you measure what matters ______

so that you can track the performance of all of your assets. To do that, the ______list provided below is the just the tip of the iceberg. ______

______Feel free to expand in any of the four quadrants to insure that you have created a balance scorecard of new measures (and old) for your ______organization. In seeing the whole, you will begin to the see the parts more clearly. Best of luck with this exercise, we have saved the best for ______last, helping you keep track of what has previously been overlooked, mis-measured or over emphasized. We know the insights that this exer- ______cise will bring will be helpful on your way to realizing your full multiplier ______effect. ______

______

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Personal Notes:

______

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106 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 4 Module 4: Measurement - EXERCISE

One last time, gather your team and use the space below to list your new Personal Notes: KPI’s by business model. Pay particular attention to the new KPI’s you are ______

creating – insuring that you list them all, given that they are new for most ______

organizations and have probably not been measured or managed (let alone ______reported to your board or shareholders) before. ______If you need further help, go to digitalgrader.com and use our new KPI tool to help you measure what matters. ______

______

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Personal Notes: Measure all your sources of value ______

______

______http://inventorytool.digitalgrader.com/ ______

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108 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 4 Module 4: Measurement

Personal Notes:

______

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Personal Notes: KEY CHAPTER TAKE-AWAYS: ______

______1. Existing measurement systems (GAAP) misallocate intangible assets ______2. Mis-measurement leads to under allocation of capital to intangibles ______3. Measure what matters – all the sources of value ______

______

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110 The Network Multiplier • 4 Steps to Driving More Value and Better Performance 4 Module 4: Measurement

Personal Notes:

DigitalGrader ______

______

______http://digitalgrader.com/step-4/ ______

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Executive Conclusion

H Executive Conclusion

“ Move fast and break things. Unless you are breaking stuff, you’re not moving fast enough.” Mark Zuckerberg Co-Founder Facebook

......

Personal Notes: ______Congratulations! ______

______

______By investing this time in yourself and your company, you have made great

______strides towards creating more value by leveraging the dormant power and ______value of your customer, employee, partner, and supplier and investor net- ______works. Hopefully, by this point, you and your leadership team have aligned ______on plan for the future that has the potential to shift your business to take ______

______advantage of the value of digital networks, and have even begun imple-

______mentation of this plan. The road ahead is long – indeed, adaptation will be ______required for the life of your company – but the process is worthwhile. But ______we are not done. To help you on your way, we have included below a list of ______FAQ’s that are commonly asked as part of any organization’s desire to add ______network value to their existing asset, services or technology businesses. We ______

______hope that they are helpful you as well on your journey.

______Best of luck! ______

______

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116 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Conclusion

Key workbook takeaways… Personal Notes: ______

______

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Personal Notes: Question: Question: Research shows that tangible assets now constitute 20% or less of total If a shift to digitally enabled business models is necessary, shouldn’t that ______corporate value in the S&P 500, compared to more than 80% in 1975. fall to the CEO or the entire leadership team, not the CFO? What does this finding mean for companies and their CFOs? ______Answer: ______Answer: Not necessarily. There are reasons why this is very much a CFO issue Our research indicates that investors are paying more for companies and opportunity. First, CFOs are the stewards of corporate value. Sec- ______with business models that embrace today’s technologies and emphasize ond, they have the finance background and understanding of market val- intangible assets—social, business and financial networks, big data and uation of business models that are needed to comprehend the long-term ______intellectual property (e.g., bio-tech, clean tech and fin tech)—and that financial implications of different business models. Third, they have that ______co-create products and services with their customers. Meanwhile, orga- broad perspective needed to bring this picture together for the executive nizations with more traditional business models that focus on tangible team and board, to explain how shifting business models to digitally cen- ______assets as well as older manufacturing and distribution technologies are tric can increase enterprise value, and then catalyze the required change. viewed as less valuable. ______Finally, this critical issue provides CFOs with a significant opportunity to ______Our research identified four types of assets that companies invest their be leaders and strategists by rebalancing their company’s investment capital in: physical, human, intellectual and customer networks. These portfolio and reallocating some capital to assets and projects that may ______assets, in combination with enabling technologies, produce distinctly develop into more valuable business models. Our research with Open- different business models. We also found that three of the asset types― Matters suggests that companies that allocate capital to creating scalable ______human, intellectual and customer networks―are mis-categorized or and extensible intellectual property (IP) and business, consumer and ignored by GAAP―that is human, intellectual and customer networks. commercial/financial networks, regardless of industry, can create addi- ______This suggests that CFOs may under-invest in these types of assets and/ tional value for their organizations. ______or under-manage and under-report them to investors and their boards. Our research also indicates that investors are valuing the Technology ______Companies (regardless of industry) and Network Orchestrators of social, business or commercial relationships between two and four times more ______than manufacturers, distributors, retailers or service providers, regardless ______of industry. Underlying this valuation gap is the fact that asset and service-centric businesses typically scale by investing in more assets and/ ______or more people (both of which don’t scale well). The implication of our findings is that CFOs who do not embrace digital technologies, intangible ______assets and emerging networks could be creating strategic, operational ______and financial risks for their company, their board and their shareholders.

______

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118 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Conclusion: Q&A

Question: Question: Personal Notes: Can you offer an example that illustrates how CFOs can create value in How can CFOs help their organization take advantage of digital opportu- this way? nities and reshape their business model? ______Answer: Answer: Consider the information companies have about their customers, includ- Even if CFOs are convinced by the research’s findings, it’s not realistic ______ing number of interactions, level of sentiment and potential for product for them to say to their board or other members of the executive team, and service co-creation. This treasure trove of customer data is an enor- “We should pivot our existing business model and become a technology ______mous and often-untapped asset, and to our point, it’s not measured nor or network organization overnight.” An important part of our message ______reported on the balance sheet ―unless the company is involved in an is that you don’t have to, or even want to, reinvent your core business acquisition – and only then categorized as goodwill. If you think about this overnight. CFOs can formulate a strategy for helping the organization ______asset and other intangibles in this way, and then inventor them, CFOs incrementally transition from an Asset Centric Organization or Service get a better handle on their organization’s latent sources of value, which Provider to becoming a Technology Business or Network Orchestrator. To ______we’ve noted are often viewed by investors as the most valuable assets. be successful, this transition has to be looked at as a long-term process, From there, they can create a plan for reallocating capital to their most a shift that occurs over the course of years, beginning with smaller initia- ______valuable assets, whether they’re measured or not by GAAP, and power tives outside the core. As these initiatives show potential, they are scaled ______them with today’s technologies, such as the cloud and mobile. to become more impactful over time. John Hagel and John Seely Brown of the Deloitte Center for the Edge have developed a framework for ______making major institutional change via “edge opportunities.” Applying that framework means identifying and leveraging an organization’s existing ______intangible assets such as IP and relationships. ______

______

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Personal Notes: Question: Question: What are the first steps that a CFO of organization with a traditional busi- What other challenges can CFOs expect as they try to pivot their organi- ______ness model might deploy? zation’s business model? ______Answer: Answer: ______The initiative has to start at the top with strong and innovative leadership. A company’s current business model is shaped by the attitudes, be- There’s nothing more important than getting the CEO, board and man- haviors and beliefs of the leadership team, which we call their “mental ______agement team aligned with the idea that digital technologies are critical to model.” CFOs should expect to invest significant time and attention to driving value. helping other leaders examine and shift their mental models so that ______they are willing to get behind the shift and adjust their capital allocations ______From there, CFOs can employ a four-step process, starting by assem- accordingly. Getting everyone on board and creating a new budget could bling the leadership team to create a vision for new business model take up to 18 months. The organization will also need to train and recruit ______opportunity for the organization. The CFO has to provide the sponsorship new talent with the necessary digital knowhow to implement today’s new, to drive that vision throughout the organization. The CFO will also need more scalable and extensible business models which have lower margin- ______team members who understand today’s valuable technologies and how al costs of expansion. ______they can drive value in new ways for the organization. For the first few years the network-based businesses will be nurturing ______Second, take a complete inventory of the company’s assets, tangible and “seeds,” and they can’t be expected to produce immediately dramatic bot- intangible, and identify which assets have the potential to generate reve- tom-line results for the company. That means leaders and boards will need ______nues that resonate with customers and investors. That inventory includes to be patient and supportive, while providing the necessary funding and the people, processes and technologies essential to support the moneti- strategic direction so the seed business has a clear path to profitability. ______zation of those assets. ______Third, formulate a detailed plan (include converting traditional advertis- ______ing and transaction revenue models to subscription and membership) to develop previously underutilized assets into a new business model that ______helps transform the company over time. As part of this step, CFOs will ______need to align the finance functions’ actions and communications with the new strategies they will be championing. ______Fourth, introduce new and real-time metrics so that management, the ______board and shareholders have a full view of the organization’s health and ______growth prospects. Measuring all sources of value—and not just financial results—is essential to nurturing fledgling business models. The finance ______function will have to implement real-time sensing of customer and employee engagement, sentiment and related measures to track the data ______and benefits created by these networks and add them to the data already ______being captured and reported.

______

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120 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Conclusion: Endnotes

Endnotes: Personal Notes: 1. Ocean Tomo, 2010. ______2. “Why Software Is Eating the World,” WSJ online, August 20, 2011. ______

______Related Resources: • CFOs: Embrace Digital or Put Your Company’s Future at Risk ______• Scaling Edges - A Pragmatic Pathway to Broad Internal Change ______• Tomorrow’s CFO: Moving ‘Up and to the Right’ as Strategist and Innovator ______• Adding Innovation to the CFO’s Agenda ______

• Realigning Your Organization’s Portfolio for Growth ______

• Shifting Out of First Gear in Social Business: How to Drive Adoption ______

______• How CFOs Can Make Social Software Work for Their Companies ______

This documernt is private property of OpenMatters LLC. ______It contains confidential information intended for specific individuals and purpose, and is protected by law. If you are not the intended recipient ______of this document, you should delete this booklet immediately and any ______disclosure, copying, or distribution or the taking of any action based on it, by you is strictly prohibited. ______

______

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Personal Notes:

______

______Barry Libert Jerry Wind William Ribaudo

______www.linkedin.com/in/barrylibert www.linkedin.com/in/jerrywind www.linkedin.com/in/williamribaudo ______

______

______Vivian Polikar Megan Beck Fenley Scott Gieske ______br.linkedin.com/pub/vivian-polikar/10/648/a85 www.linkedin.com/pub/mgan-beck-fenley/4/673/289 www.linkedin.com/in/scottgieske ______

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122 The Network Multiplier • 4 Steps to Driving More Value and Better Performance H Executive Conclusion

Personal Notes:

DigitalGrader ______

______

______http://digitalgrader.com/contact/ ______

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H Executive Conclusion

Thank You!

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We Help Leaders and Boards Build Great Digital Companies.

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