The Academic and The Professional

Business strategies are just like opinions, and opinions are just like you know what. Everybody has one. If you Google around, or read this blog, you will find a lot of conflicting advice that people give to companies. As with any advice, some of it is good, some bad, and some downright comical. You can categorize this advice into two umbrella categories: Academia and Experience.

Academia

Business strategies from the world of academia are distinctly different from strategies given by an experienced professional (I use the term experienced professional because it fits rather nicely, but you can substitute it for any word that implies real world knowledge). Academic strategies are often from PhD's and business school professors who attempt to explain the world with models. These models are imprecise, but they are general templates of how a business should operate to be successful. Probably the best known model is Michael Porter's Five Forces Analysis, which seeks to develop a framework to understand how intense competition in some industries is. This is a gross simplification of the Porter's model, but I bet if you asked him to pitch it to you in an elevator, that's precisely what he would say. The problem with this model, and any model really, is that it encourages you to fit a business into it even when it doesn't fit.

To illustrate the weaknesses of models, let us take Twitter and try to explain it through the Five Forces Model.

The Threat from New Entrants

This one is relatively simple to explain. It is easy to create a new social media startup, because the barriers to entry are so low. That said, this threat is mitigated somewhat by the difficulty of starting a successful startup that effectively competes with Twitter. Many other factors are present for this threat, such as economies of scale, customer loyalty, government policy, and a slew of others.

Threat of Substitute Services

This force is also simple to explain, and the model accurately reflects the realities of Twitter's business. How easy is it to create a substitute for Twitter? Well, creating the substitute is relatively simple. All you need to make is a service that lets you share 140 characters with the world. Many mimicking services have launched in the past few years, but literally all have failed. The switching costs to a new service are fairly low for Twitter users, since it's free and few people care about their past tweets being transferred to a new service.

Bargaining Power of Customers

This is where the model starts to break down quite a bit. Who are Twitter's customers? Are they the users of the service, or the customers the people who purchase ads on Twitter? The answer isn't clear and can be argued both ways. Incorrect use of the model can get a business in a lot of trouble, which you can say is the failing of the business and not the model. While this is probably true, business models are not like scientific models. People are must more open to accepting a business model such as Porter's Analysis when compared to a scientific model that sets forth a hypothesis. This results in business models that are often treated as gospel.

Bargaining Power of Suppliers

Traditionally, suppliers provided raw materials or some other basic ingredient/service to your company. You can see why Porter factored this into the model, since a powerful supplier could seriously undermine your business. But in the age of the internet, suppliers aren’t nearly as important to web companies like Twitter. This isn’t to say that Twitter doesn’t rely on any suppliers, because they probably rely on dozens of companies. It’s just that this factor is of such minuscule importance that it’s a nuisance to even include when evaluating most web companies.

Intensity of Competitive Rivalry

The problem with this factor is that it’s so comprehensive that a whole model can be built just to understand it. Surely Facebook is a rival of Twitter, since both are popular social networks. But than what about Path, Pinterest, LinkedIn, Yelp, Foursquare, Snapchat, and Tumblr? Isn’t the ultimate competition for the users time? If so, these companies (and many more) would be a competitor to Twitter. It’s worth noting that some are closer competitors (Facebook) and some farther (Foursquare), but my point remains: this factor is totally open-ended.

The goal of this exercise wasn’t to display my Porter Analysis prowess, but to walk you through its strengths and weaknesses. The greater goal, however, was to exemplify how models are used in the world of academia. Porter’s analysis is just one of many academic models, which are all somewhat similar to each other. That is, the world of academia attempts to create models that are comprehensive and general. They seek to explain whole market segments and industries, by citing common trends within these areas.

In a way, these models are naive. Human nature is such that it wants explanations for things, even when the explanation isn’t totally correct. While Porter’s model is extraordinarily helpful in understanding the rivalry within an industry, it suffers from being overly academic. His Five Forces fits for the industries he studied, but as we have seen, they don’t entirely fit Twitter. To try and wedge a web company like Twitter into his model would be to grind coffee with a knife. It might seem like I’m picking on Porter, but almost all of the academic models I have studied suffer from the same broad-stroke failings. The tech community has fully embraced Clayton Christensen’s disruptive innovation, but it is also too comprehensive for its own good. Academia follows the same thinking pattern that it teaches to its students. It would be silly to teach business school students specific strategies applicable in particular industries for distinct companies, so instead, professors focus on high-level theory. Unfortunately, the very same theory they teach becomes the strategic model they attempt to apply to a real-world company, and it simply won’t fit.

Experience

The second general category of business advice comes from the experienced professional. This is a person who has worked in an industry, or has specifically followed an industry, for years. Examples that come to mind are consultants, analysts, and C-suite executives who have held important roles within a company. These people usually take a different stance on business strategy - one that is much more nuanced and specific. Consequently, the experienced manager will give advice that is highly specific to one company, and this advice is usually never applicable to other companies. An experienced professional who works for Twitter might argue that keeping their API closed to third parties, effectively limiting the amount of complement products, to Twitter is a good idea. This would obviously be bad advice if applied to another company such as Dropbox, since they want to have their cloud storage available everywhere. The experienced manager does not build models, and instead circumvents them in order to get right to the problem. Business is a touchy-feely and free-flowing animal, while academia models are more rigid.

The experienced professional has his own failings too. Experience is usually narrow and applies to niches. Experience in one company might not apply to the next company the manager joins. It can lead to the overconfidence bias, which may actually hurt performance.

The Academic Professional

After everything I have written above, you could ask why doesn't the experienced professional just read some academia books to embrace the best of both worlds? And you would be right, since that is exactly what any business minded person should do. Both categories of business strategy have failings and biases, which can be circumvented by not fully buying into one way of thinking. Academics shouldn't be so confident about their models, because nothing in business is so black and white. A model that works during this decade might not work the next decade, and you often see businesses have trouble letting go of their old strategies that are no longer applicable. Similarly, the experienced professional should educate himself in the general trends some industries follow, but at the same time he must realize these models are just oversimplifications. Being able to maneuver and shape a model to the realities of the real-world is key to applying it right.

Recommendations for Twitter

Preface: The following essay was written for my Business Policy and Strategy class, so excuse the formal language - it's supposed to mirror a report a consultant would normally produce for a client. The report details some of the problems I see at Twitter, and well as recommendations to fix those issues. The essay is divided into three main sections: a company overview, the issues, and my advice to fix them. 

Overview

Twitter is a social networking service that launched in 2006, which was around the same time smartphones began to penetrate the U.S. consumer market. Unlike other social networking sites at the time, Twitter restricted users to sending short 140-character messages, called “tweets”, using SMS or the internet. Initially catering to technology enthusiasts and pundits, Twitter’s popularity rose when the founders advertised the service at SXSWi, a film and music conference filled with celebrities and prominent journalists. Explosive growth followed, leading the company to go public in 2013. As of July 2014, Twitter has approximately 275 million users and is competing with other social media companies for user attention. The company’s growth, however, has dramatically slowed in recent times, and it is no longer virally spreading. In addition, excessive administrative, infrastructure, and sales costs have cut deep into Twitter’s pockets, making the company post continuous net losses. The last, and perhaps most fundamental issue is the company’s unfocused executive team - one which does not understand its own service. 

Issues at Twitter

Slowing Growth

The business model for social media companies is entirely immature. Strategies to increase user growth, for example, will not be found in MBA textbooks or undergraduate business school classes. Thus, social media companies must improvise, research, and develop strategies as they go. Thus far, successful social networks such as Facebook, LinkedIn, Instagram, Tumblr, and Twitter have spread and engulfed the world only through one strategy - growth. For each of these services, growth is achieved by signing up as many new users as possible. By definition, a social network requires users to provide any value to those same users, since a social network is nothing without its community. 

Consequently, every social media company loves to brag about its growth statistics, and Twitter has not been able to do so recently. While the service reported 271 million monthly active users (MAU’s) in Q2 2014, year-over-year growth has been slowing for the past few years. For social media companies, this is anathema, and leads to eventual extinction because their business is entirely predicted on its users. The results of Twitter’s declining growth are twofold. First, Twitter will not be able to generate as much revenue, because advertisers are less likely to purchase ads on declining services. Continued slow growth will also necessitate Twitter to charge lower ad prices from these advertisers, further lowering revenues, in order to keep them from flocking to more successful, growing social networks such as Instagram and Snapchat. Second, less and less users are likely to join Twitter when they see that their friends are not on the service, which leads to a vicious cycle of continuously shrinking growth, followed by decline. Growth was how Twitter became successful in the first place, and how it continues to be a viable social network. The slowed growth in recent times is a dangerous red flag that may lead to the demise of the social media company, just as many other companies have faded before it.

Excessive Costs 

While it is true that profitability is an industry problem, Twitter is now a public company and must return value to investors. Those investors, however, have never seen Twitter post a profitable quarter since its IPO. Being a young company that only went public in 2013, many investors give Twitter the benefit of the doubt and expect profitability later. But as an industry analyst who follows the technology industry closely, I can assuredly say something is amiss at Twitter - and one must only look at their income statement. The company spent $1 billion in SG&A on a sales revenue of $665 million in 2013, losing more money on one line item than the total of its revenues. This is not at all surprising, as the company has been on a hiring spree, leaching designers and engineers from tech giants like Apple, Google, and Microsoft. Although this new talent is great, it’s extremely costly, as the company undoubtedly pays employees more than the tech giants to get them to leave for Twitter. It is normal for a company to increase SG&A spending as it grows, but costs should be scaled with revenues, which is simply not the case at Twitter.

Executive Team

Since inception, Twitter had a rocky road with its management team. Management turnover in the past four years is one for the books: the company started with Jack Dorsey in 2007, replaced him with Evan Williams in 2008, and again replaced him with the current CEO, Dick Costolo, in 2010. Besides the CEO position, most other executive positions similarly go through a lot of shuffling at Twitter. This butting of heads is not a good sign, implying that top leadership cannot agree on where to focus the company. Indeed, the company spent a record breaking $594 million on R&D, a 400% increase YoY, likely to find better ways to monetize the service and gain more users. As an outsider looking in, it appears that the executive team is not sure where to take the service, and is thus investing in R&D to find new outlets. This is hurting the company’s profitability, but also employee morale, which further increases employee turnover.

Advice for Twitter

Increasing Growth

The service that Twitter offers is truly exceptional, and is like no other social media service out there. Political revolutions have been platformed on Twitter. Whenever an earthquake strikes, you can be sure to hear about it on Twitter before any television news network. Musicians, politicians, and statisticians equally make use of Twitter, talking with their supporters and communicating their ideas in a public forum. The issue for Twitter is stuttering growth, which is the result of a confusing onboarding experience and a lackluster design. 

When a new user wants to sign up for Twitter, they are presented with an awkward homepage that doesn’t clearly communicate the value proposition of the service. Once the user is registered, Twitter recommends he follow some popular accounts, from categories like music, sports, and technology. The result for the user is a timeline of tweets that does not actually fit the needs of the user well. This approach is fundamentally broken, and it is no wonder growth has been slowing, as the late-adopters cannot understand this ambiguous sign up process.

First of all, Twitter should redesign its homepage to better communicate its truly phenomenal service. The homepage background pictures should be removed, and replaced with a simple background, similar to the one Facebook uses. This will remove the clutter and bring focus to the site. Next, instead of three obscure sentences that describe Twitter, the designers should use bullet points; they are more succinct and easier to digest. Most importantly, the content of those bullet points should be the value proposition. Something along the lines of: “Twitter is where you get the latest news first. Twitter is where you talk to your favorite celebrities. Twitter is how share your experiences”. The goal of these simple phrases to create a tangible idea of how Twitter can be used by regular people, rather than the abstractions Twitter uses currently. 

Twitter should also redesign its mobile applications for straightforwardness. Even as an experienced Twitter user, I find the current apps impenetrable in their design. Replies to other users should be designed to look like text messages, since that is what people are familiar with. In other words, replies should be viewed in a sequential manner and flow by time stamps. Most people use social networks on their smartphones, which is why applications are most the important element Twitter should get right. Redesigned applications, coupled with a simplified homepage will improve the onboarding experience and strengthen user growth.

Managing Costs

Twitter is a publicly held corporation, which means that shareholders expect to be paid back for their investments through company profits. These profits can also be reinvested into the business in order to build stronger competitive advantages like service uptime. As previously mentioned, Twitter spends disproportional amounts on SG&A expenses relative to its revenues, which results in a significant net loss every quarter. This is not a viable business strategy and must be quickly remedied. 

While layoffs are never a popular option, that is what Twitter must do to manage costs. The company employs 3,300 employees, which translates to roughly 83,300 users per employee. For reference, Facebook, which is Twitter’s closest competitor, employs 6,800 employees, which comes out to about 184,000 users per employee. In the most basic terms, Facebook employees are roughly 220% more productive than their Twitter counterparts, which is a sign that Twitter needs to reduce its workforce. Just recently, Microsoft laid off 15,000 employees as part of a restructuring plan whilst growing revenues, so this method is not as drastic as it sounds. In addition to SG&A expenses, Twitter must also manage its cost of goods sold. This can be done by better scaling its infrastructure in order to reduce per-user costs. While this is an extremely technical undertaking, it is one that Twitter must commit to. As Twitter rolls out new features and gains more users, infrastructure costs will only increase, and the company must be able to scale its costscheaply. 

Executive Overhaul

Dick Costolo has been the CEO of Twitter since 2010, and YoY growth and profitability have been declining with each year. Many industry analysts have been extremely critical of Costolo and his executive team, mostly because management is unfocused and unsure of where to take the product next. The most alarming sign of this executive myopia is the lack of dogfooding by leadership. I went through the Twitter account of each person on the executive team, and nearly all are rarely active on the service. This lack of dogfooding in top management indicates that they have little idea of what the service is and where to take it. 

Consequently, the executive team should be replaced with leadership who actually uses the service on a constant basis, similar to how a normal user would. I would recommend the board of directors to begin this executive reshuffle by searching for a new CEO from within the company first, before looking for outside talent. Twitter has many extremely capable employees at the midlevel, some of which could easily assume the CEO position. Whoever this new CEO is, they must be an active user of Twitter and have a vision for the company. This new CEO must also choose new executive talent to replace the old, in order to help steer the company in the right direction. Again, inspiration for this kind of corporate overhaul can be found at another company, Apple. After assuming reins of Apple in 2011, CEO Tim Cook made major changes in the executive team, replacing the SVP’s of iOS, retail, and other major departments with leadership he saw fit. Apple has had record-breaking quarters since. Once Twitter’s management begins dogfooding its own service, they will learn what it’s like to be a normal user. This will allow them to better evolve the product according to user needs.

Coda

Twitter is a phenomenal service with an amazing potential that is mired by slowed growth, excessive costs, and a lackluster executive team. Fortunately, all of these issues can be fixed. Slowing growth can be reinvigorated by an improved onboarding experience as well as simplified applications that can communicate the Twitter value proposition better. Layoffs will be necessary to reduce SG&A costs and normalize the company workforce to benchmark levels. In addition, per-user cost of goods sold should be brought down through improved scalability, which is of key importance as the service attracts more users. Finally, an executive housecleaning should be made, instituting new leadership that is not only a user of the service, but also has a vision for its future. A company has little chance for success without a leader who can steer a company toward a specific goal. 

These recommendations will turn Twitter into a profitable and successful social network. With a clear value proposition and redesigned applications, growth will rise again and may finally compete with that of Facebook. This will generate higher revenues, as Twitter will be able to charge higher prices from advertisers. In combination with a lower cost structure as a result of layoffs and scale, the company will finally be able to earn profits that can be reinvested into the business. This will only be possible with a new CEO and his handpicked management team, who will provide the company with a vision for the future. 

The Intelligent VC

If you read this blog, you’re either well-versed in consumer technology, or you accidentally stumbled into it, in which case please stay. This post was spurred as I was reading a classical investing book, the very same that taught Warren Buffet how to make his $58 billion. I’m referring to The Intelligent Investor. As history has taught us, we’re not very good at remembering history. What this book does is point out, in retrospect, poor investment decisions made during the last century, and how to avoid, or at least mitigate, further bad decisions. As the title of the book suggests, it’s aimed at investors (even unintelligent ones). This post is aimed at VC’s and technology stock speculators. 

Below is a direct quote from the book (emphasis mine):

Air-transport stocks, of course, generated as much excitement in the late 1940s and early 1950s as Internet stocks did a half century later. Among the hottest mutual funds of that era were Aeronautical Securities and the Missiles-Rockets-Jets & Automation Fund. They, like the stocks they owned, turned out to be an investing disaster. It is commonly accepted today that the cumulative earnings of the airline industry over its entire history have been negative. The lesson Graham is driving at is not that you should avoid buying airline stocks, but that you should never succumb to the “certainty” that any industry will outperform all others in the future. 

The pitfalls have proved particularly dangerous in the industry we mentioned. It was, of course, easy to forecast that the volume of air traffic would grow spectacularly over the years. Because of this factor their shares became a favorite choice of the investment funds. But despite the expansion of revenues—at a pace even greater than in the computer industry—a combination of techno- logical problems and overexpansion of capacity made for fluctuating and even disastrous profit figures. In the year 1970, despite a new high in traffic figures, the airlines sustained a loss of some $200 million for their shareholders. (They had shown losses also in 1945 and 1961.) The stocks of these companies once again showed a greater decline in 1969–70 than did the general market. The record shows that even the highly paid full-time experts of the mutual funds were completely wrong about the fairly short-term future of a major and nonesoteric industry.

Growth, expansion, disruption - these are words that VC’s throw around to describe blossoming companies that will take over the world. Not now, but in the future. Google, Facebook, Twitter, and Yahoo are just some of the largest tech companies that are built upon this growth factor. They need it to thrive, since revenues are predominately built upon advertising.

Another quote, from Maciej Cegłowsk, the creator of Pinboard:

Advertising is like the flu. If it’s not constantly changing, people develop immunity.

Keep the above quotes in your head as you read the things below. 

VC’s invest in tech startups for one reason, and one reason only: to get a return on their investment. They invest a few million into a startup for a certain percentage of the company > if the company is lucky it goes public > VC firm profits and reinvests in a new startup. Rinse and repeat. Guess how most of these companies get paid? That’s right. It’s internet advertising. Sponsored search results, promoted tweets, trending topics, you’ve seen all these things before. 

Companies that are dependent on advertising make revenues and profits only if their user base grows. Their stock price is directly correlated to growth as well. Once growth levels off, reality kicks in, and Wall Street penalizes low performers. Twitter knows this problem all too well. Their growth has halted (with no doubt due to that bewilderingly mystifying homepage). And look what has happened to their stock (spoiler: you wouldn’t want to have your life savings invested in $TWTR). 

Twitter Stock Price

Google and Facebook are still managing to grow their user base, but believe me, it won’t last forever. Facebook is already trying to diversify its sources of income, first with the comically huge purchase of Whatsapp for $19 billion, and then Oculus Rift for $2 billion. Whatsapp is dependent entirely on advertising. Oculus Rift is an investment for the future, and currently unprofitable. Neither acquisition brings with it tangible resources (equipment, land, inventory, accounts receivable), only potential growth. There’s that word again, growth. 

These companies are doing the only thing that they know how to do, which is to grow their users. More eyeballs, more advertising revenue. From early in the companies life, VC’s have always pushed for growth, and then after becoming public companies, Wall Street urges for the same thing. This investment mentality won’t end well.

Growth isn’t bad, but when the business model is advertising, there is an inherent limit. It might takes years to reach, but it will be reached. VC’s should stop preaching growth and start encouraging profitability early in the startups life. Not that your startup needs a VC to begin with. There are plenty of successful startups that did it all alone without advertising, unnatural growth, and rather, just by a desirable product and hard sweaty work (for example, Basecamp).

Business School Curriculum Must Get Updated

Lately I've been fascinated by the characteristics that make a company succeed or fail. I'm not the first, and certainly not the last student of business strategies. As a business school student, I'm forced to read about many traditional business strategies used in the last century. You know what I'm talking about. Product Differentiation, Cost Leadership, Michael Porter's Generic Strategies, Lean Supply Chains...I can go on and on. The books they make us read then go on to give examples of successful companies that implemented, and continue to implement such strategies. Hewlett-Packard, Dell, and Motorola are just some of the companies that most often get mentioned. And every damn time I read these textbooks, I think to myself: "These companies lost. They are caricatures of their former self". Why are we learning this again?

Very few people buy HP computers anymore, and the few that do are probably enterprise customers stuck in a contract. Dell, after years of faltering revenues, struck a leveraged buyout in order to go private. And Motorola, oh the beloved Motorola, the company that supplied the U.S. Military, NASA, competed with AT&T during the cellular revolution, and brought to the world a mobile phone that actually had some semblance of design (remember the RAZR?) was recently sold off to Lenovo for a paltry $2.91 billion. The theme here is that none of these textbook business strategies kept these companies alive when faced with modern competitors.

Which makes me raise the question: are these strategies worth teaching anymore? Yes, they are, but only as a historical record. Business school graduates should know what worked in the past in order for them to avoid repeating the same mistakes in the future. 

More importantly though, business schools should embrace new business strategies that work for successful companies today. But before we do anything else, let me try to predict what you might say. You'll counter my idea by saying that these new strategies aren't tried and tested, that they aren't guaranteed to work, that they may be simple, dumb luck. My answer to all of those questions is maybe, but that doesn't mean they shouldn't be taught at universities. If there is one thing I learned about business strategies, it's that they are constantly disrupted by new strategies. The truth is that there is no single, true strategy that will eternally propel a business into success. The times change, the environment changes, the people change, and the strategies change with them. Business strategy isn't like math, it's malleable and constantly adjusts. Therefore, you must be on top of the latest ideas in order to compete successfully. 

With that out of the way, let me list out a few modern business strategies that work (note the word work, not worked) today (not yesterday) for successful companies. I will list one influential book (just one, or else this post would quickly turn into a business encyclopedia) that outlines some of these strategies, and then I will give two examples of companies that use them successfully. 

The Innovator's Dilemma
This is probably the most popular business book in the modern age because it reads very simply and states exactly what you need to know. It's also laced with examples, which always makes ideas more relatable. There are many strategies presented in it, but here is a tease of my personal favorites (paraphrased in my own words).

- Companies must disrupt and cannibalize themselves. Don't let a competitor get there first.
- The customer is NOT always right. The problem they want fixed, however, is.
- Research and Development will lead to innovation. Innovation keeps you successful.

The Innovator's Dilemma is not a perfect book. No book is. But it's a great reading for business school students since many companies today use similar strategies successfully.

Case-Study: Apple
- The iPod was an extremely successful product for Apple. It sold millions of units every quarter, and analysts predicted sales would only go up. What did Apple do? It released an iPhone that cannibalized its iPod sales, which today make up only a small portion of Apple's revenue. That couldn't have been an easy decision, especially since it was so risky, but nonetheless it worked, making Apple one of the most profitable companies in the world. In other words, Apple disrupted its existing, and very successful product, in favor of a product that would be profitable in the future. 
- Apple is almost notorious for refusing to budge to customer demands. It's not because Apple is stubborn (although sometimes, it certainly is), but because the company truly believes it knows what the customer wants better than the customer thinks he wants. This keeps their products simple and easy for people to understand. 

Case-Study: Google
- There has never been a company that lives and breathes R&D as much as Google. Nearly every product and service Google offers is a test to see if it sticks. You may not realize it, but Google has been testing hundreds of different products throughout the years, discontinuing many, and further improving those that work. Remember Google Buzz? Gone. Discontinued in 2011. Picnik? Shuttered in 2012. May you rest in peace iGoogle (2013). You get my point. Google has been pouring money into the development of new products throughout the years. It's like rollling a die, eventually you'll land on a six and win. But most of the time, expect failure. 

The Times Change, And The Education Should Follow
Computer Science students often complain that they are learning programming languages from the 1970's, and would rather learn something modern. The thing about Computer Science is that although the syntax changes, the fundamentals of programming haven't changed at all. Once you learn to think like a programmer, you can learn any other programming language. The same applies to Mathematics. Both subjects remain essentially the same from the time you learned them to the present. Business is nothing like that. Sure, a profit is always a profit, and revenues must always exceed expenses, but the strategy for earning revenues constantly changes. It would be foolish to use old business tactics when new, innovative ones exist, especially considering that traditional tactics are likely to fail. There is very little logic in business strategy. After all, who would think that disrupting your own product is the right business move?