Problem-Led Leadership

Vivienne Ming is blunt about her lack of traditional leadership skills:

I’m a pretty mediocre manager. I try to do the right things, but I’m much more focused on problems than I am on people. (HBR)

Ming is the co-founder of Socos, a machine learning company focused on helping people become better learners.

Ming is taking a different approach to leadership within Socos: leading by.. well not really leading. Ming focuses on solving problems, not playing CEO – an approach called “problem-led leadership.”

If I can get some people that are really good at the things that I’m not, then I can focus on my strengths. And my strengths are in creative problem solving — all the way down to writing the code myself.

The MIT Leadership Center is starting to research and codify this style. Problem-led leaders are distinct:

  • They choose challenge over trappings.
  • They let problems lead.
  • They choose collaboration.
  • They step up and step out.
  • They work the problem tirelessly.
  • They do what the data say.

This is a really different approach than we’re often encouraged to take. The obvious con to this approach is that if Ming’s team needs a leader and no one steps up, then the team goes without leadership and the whole project may fail.

But the pros are enormous too. Ming can focus on the big problem the company is trying to solve. And Ming always has the option to simply hire someone else to solve leadership challenges without forfeiting control of the company.

Finally, Ming is also sending a clear and consistent message about the company’s culture and values while also reminding employees that she’s not there to baby-sit anyone:

I get out there, and I solve problems. And I hope that motivates my colleagues to do the same.

Personally, I think problem-driven leadership is an interesting strategy. If more problem-centric individuals thought more about what leadership style would best fit their personality and strengths, we’d have a lot few bad bosses and a lot more successful companies.

What is Strategy? – A Presentation

This week I spoke twice at St. Mary’s College in Moraga, CA – 30 minutes east of San Francisco. I whipped together an hour long presentation for the students in a Strategy course in the Business school to answer the question: What is Strategy?

It was great to force myself to present some of my ideas – several of which were only half baked – and to get so much positive feedback and concrete recommendations for changes.

I haven’t had a chance to incorporate feedback into the deck yet so I just decided to publish it for you as-is. I plan to tweak things and give this talk again soon though.


One big note: I designed this deck to be presented by me so it’s not 100% ready for consumption without me. You’ll get the gist though.

I reference my piece last week about Puddles Pity Party and my research on Moneyball (the 2002 Oakland A’s season) – only some of which I’ve published so far. Check out those posts if you haven’t had a chance yet.

The students were excited that I was taking back the word “strategy” – not just using it sloppily like many of their course readings. They expressed a lot of interest in the etymologies that I shared too, which is surprising given how boring that sounds.

And, they really appreciated that I actually defined the word strategy.

What is Strategy?

Strategy is the process of creating a set of well-aligned activities with the aim of occupying a valuable position in a competitive landscape.

I really emphasized that strategy is a process, not a static outcome.


In case you missed some of my posts from the past few days, here they are:

PS: This is just for you.

PPS: If you’re not familiar with the trivium (slide 3), you’re missing out. I might write about it more next week.

New AI Report from McKinsey & Co

McKinsey & Co has a huge new report out about AI. It’s definitely worth a look if you need to get smart on AI in 20 minutes.

They looked at over 400 use cases across 19 industries and 9 business functions to create a detailed survey of how businesses are using Artificial Intelligence, in what industries, for what use-cases, what type of AI, and the “economic potential of advanced AI techniques across industries and business functions.”

AI, which for the purposes of this paper we characterize as “deep learning” techniques using artificial neural networks, can be used to solve a variety of problems. Techniques that address classification, estimation, and clustering problems are currently the most widely applicable in the use cases we have identified, reflecting the problems whose solutions drive value across the range of sectors.

I’m skeptical about the hype around AI right now and some of their findings support my stance. However, I did enjoy the first section where they draw the line between what they consider to be Artificial Intelligence and not, a brief description of each of the current techniques, and the problems that they’re good at solving.

Building on this educational foundation and the data they collected from their 400 use cases, the report shows heat maps of different techniques across both different business functions and industries.

McKinsey AI Technique and Business Function Heat Map April 2018

What’s interesting is that where Artificial Intelligence is making the most progress is in areas where pseudo-AI techniques are already working:

The greatest potential for AI we have found is to create value in use cases in which more established analytical techniques such as regression and classification techniques can already be used, but where neural network techniques could provide higher performance or generate additional insights and applications. This is true for 69 percent of the AI use cases identified in our study. In only 16 percent of use cases did we find a “greenfield” AI solution that was applicable where other analytics methods would not be effective.

Great report. Check it out – especially pages 2-6.

Oh, and there’s a cool history of Artificial Intelligence on page 3.

Metrics Fixation

Let’s talk about metrics fixation and unintended consequences.

Consider 3 ideas:

  1. Emphasize standardized measurements.
  2. Incentivize actors with rewards and punishments.
  3. Publish measurements in order to hold groups accountable.

They sound great. And they are great – sometimes.

However, when we let these three concepts mindlessly replace our judgement, we often end up with unintended consequences and dysfunction. Jerry Muller calls this fetishizing of metrics “Metrics Fixation” in his recent interview with Russ Roberts on EconTalk.

Where do things go wrong?

Tyranny of Metrics Jerry Muller

  • Oversimplification of organizations, their values, and their complex facets can lead to measuring and incentivizing the wrong things or an incomplete list of things.
  • Actors play games in order to attain the desired metrics, often at the expense of the organization’s vision. Creative energy is now being diverted into gaming the metrics instead of creating real value.
  • Measurements, incentives, and transparency all have costs too.
  • Unintended consequences are sometimes intended.

That’s all great, but let’s make this tangible. Muller gives a crazy example in his book.

The original situation: Emergency rooms in the UK (called A&E Departments for accident & emergency) had long wait times.

The solution: Incentives for reducing wait times to below 4 hours were introduced.

The unintended consequence: Patients were required “to wait in queues of ambulances outside A&E Departments until the hospital in question was confident that that patient could be seen within four hours.” To make matters worse, these ambulances were now unavailable for other patients who needed emergency services.

Take away: metrics, incentives, and transparency are all great when properly coordinated. But watch carefully for unintended consequences.

 

Niche Positioning Lessons From A Sad Clown Who Doesn’t Talk But Sings His Ass Off

Niche Positioning with Puddles Pity Party. Hit play.

 

That is Puddles Pity Party – a one man cover band. Puddles has nearly 400,000 followers on YouTube, many 20+ million view videos, 140,000 monthly listeners on Spotify, and he performs all around the world. Just last week he sold out the Palace of Fine Art Theatre, a 962 seat venue in San Francisco. Puddles was also an America’s Got Talent quarterfinalist in 2017.

How on earth did this happen? And how can you replicate Puddles’ odd but tremendous success?

This post will dissect how Puddles has positioned himself over time and identify lessons that might be applicable to your endeavors.

Be Remarkable

I love you – You’re unique, you’re interesting, you’re different, and people are going to remember [you]. – Howie Mandel

Puddles is remarkable – literally.

And that’s why during Puddles’ America’s Got Talent audition the judges had such high praise for his performance. Heidi Klum commented, “very unexpected, very original, very different, and I want to see more.” Even Simon Cowell had nice things to say.

Some call Puddles’ performance a gimmick. And yes, the juxtaposition is remarkable: a sad, mute clown who sings so beautifully that you can’t help but smile. But what may have started as a gimmick has turned into millions of people (and maybe you) falling in love with a fantastic performer and supporting his art.

Puddles differentiated himself so that he could stand out. Ironically, in order to be heard Puddles chooses to not speak, making his singing voice come off that much louder by further exaggerating the juxtaposition.

Hit play below and keep reading. This song should take you to the end of this article – just another 4 minutes.

 

Niche Down

Puddles wasn’t born Puddles.

Puddles Pity Party is Mike Geier – the 54 year old 6’ 8” baritone. He’s obviously a talented vocalist but that’s not enough to succeed these days.

Here’s Geier in 1994 performing Disney’s I Wan’na Be like You (The Jungle Book) with one of his previous bands, The Useless Playboys.

While entertaining, Geier’s performance isn’t unique. Geier hadn’t found his niche yet. So he kept experimenting – searching for what clicked with audiences.

Geier experimented with a lot of personas. He was Big Mike, Kingsized, Greasepaint, part of the Swing Noir band called the Useless Playboys, and a part of many other acts and groups along the way.

Puddles Pity Party Ancestor - 2009

From what I can tell, Puddles was a minor character in Geier’s repertoire for a long time before taking center stage. YouTube videos from 2009 and 2010 feature Puddles, but not our 2018 Puddles. Those videos feature a “missing link” Puddles, bridging a gap between Geier and the Puddles we know today.

Puddles’ evolution seemed to accelerate when Geier was performing at a cabaret in Seattle called Teatro ZinZanni. Geier could experiment in front of an audience every night and continuously make small improvements.

Feedback Loops

Tight and frequent feedback loops are undervalued. When done properly, tight and frequent feedback loops force you to 1) put your work out there, 2) listen to your audience’s response, and 3) to try new things in order to improve.

The problem, of course, with tight and frequent feedback loops is that you have to put your work out there, listen, and try new things – which requires a lot of motivation, time, energy, and persistance.

Iterate

When you’re just beginning, it’s important to start narrow – to do one thing well. You’ll get increasingly better at whatever it is you’re doing. But you also have to experiment and try new things.

To find the right niche, you may have to search and search and search. Hard work and persistence may pay off: You might discover your niche, your product-market fit, and become a ten-year “overnight” success like Puddles.

One obvious challenge here is balancing focus with experimentation. I think the best remedy is to be intentional – maybe even scientific – with your experiments. A “pivot” is holding most variables constant while changing others. Plant one foot while you find a better position for the other.

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The Anatomically Modern Puddles

A 2012 interview with Geier hints at a nearly modern Puddles. All of the Pagliacci hallmarks were there – white face paint with red accents and the baggy clown suit. But we also see Puddles’ trademark “P” crown and his operatic singing style.

Puddles Pity Party Artifacts - 2012Source

And by late 2012, there’s no doubt that Geier has found product-market fit for Puddles.

So we have some understanding of Puddles ancestry, but what makes a good niche?

Seek a Niche that’s Worthwhile

People want to be entertained. Puddles delivers because Geier understands entertainment. He understands fans, culture, originality, comedy, presence, and performance. And he studied and emulated one of the greats – Elvis – for years.

But your niche can’t just be worthwhile to your future customers. In order to compete long term, your niche has to be worthwhile to you too – financially and artistically.

Puddles’ niche may be focused but it’s not small.

Puddles has enormous appeal. His covers of pop songs cut cross both time and genre – attracting fans of David Bowie, Lorde, Elvis, R.E.M., Sia, Queen, Tears for Fears, Radiohead, Johnny Cash, Twenty One Pilots, Coldplay, and even a mashup of STYX + Disney’s Frozen.

Seek a Niche that’s Under-served

Niching down sends a signal to your customers that you’re dedicated to a specific thing that they care deeply about.

Go after a market that’s under-served. Your market will be thrilled that someone is finally paying attention to them and reward you with their time, attention, and money.

Going after an under-served market lets you deliver disproportionate value immediately. When you over-deliver, your fans will be evangelical, bringing others into the fold and reducing your customer acquisition costs.

Seek a Niche that’s Defensible

There’s no lack of great singers out there – in fact it’s a competitive, cut-throat market for up-start singers. Supply is much greater than demand for talented vocalists. That’s the core reason why Geier didn’t have Puddles-level success as Big Mike, Kingsized, Greasepaint, or the Useless Playboys.

But as Puddles, Geier is in a category of his own – a great position to defend from competition.

I dare you to copy Puddles. You will fail. You’ll fail because blatantly copying his ideas will make you look ridiculous. You can never be an exact clone of Puddles anyway because he’ll always be the original and you’ll always be the copy.

When considering a niche, think about defensibility. There are many ways to defend your position in a competitive landscape. Ideally, one feature of your position would be an element of self-defensibility.

Summary

When you’re starting something new, seek out a niche – a niche that’s remarkable, worthwhile, under-served, and defensible. Experiment and iterate, holding on to what works and leaving behind what doesn’t. Once you find a valuable position in your competitive landscape, ruthlessly exploit it, cautiously grow it, and begin to invest in your next move. Land and expand.

I agree with Simon Cowell. I think Puddles is “fantastically brilliant” and I think his strategy for finding and owning a niche has been a success that will continue to pay off for Geier, his team, and his fans.

PS: If you have another 4 minutes, I’ll leave you with one final video from 2014 (Dancing Queen by ABBA). I want you to note how many people are recording him in this tiny coffee shop in 2014. Puddles is safe, fun, and worthwhile – the formula for sharability – a concept I lifted straight from Ryan Holiday’s Perennial Seller.

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Your 2 Min Week in Review – March 19, 2018

Review of the week of March 19, 2018:

Dropbox has successfully IPO’d

Dropbox raised it’s expected price range mid week and ended up selling shares to institutional investors at $21. The shares (Nasdaq: DBX) JUST started trading now and the price immediately popped $9 to $30, a 44% increase.

I think Dropbox is a hot potato that you won’t want to be left holding but I’ll be keeping an eye on how things go. Personally, I’m more excited about the Spotify IPO in early April (more below).

Liquidating Toys”R”Us

The 70 year old brick and mortar toy retailer is liquidating its assets and hundreds of stores will close worldwide over the next few weeks. While Amazon is delivering the smiles these days, Toys”R”Us has one final gift for us grown-up kids: The story of their rise and fall.

Category Killer

A Category Killer is a sector specialist that leverages their narrow focus to gain a competitive edge over less focused firms through increased bargaining power, pricing tactics, large selection, and strong branding. It’s believed that Toys”R”Us was the very first category killer.

How Putin Protects His Power

Putin has been elected for another 6 year term as President of Russia. Key take away: In order to protect power, first focus on getting the right pieces to the right place at the right time. Then worry about covering your tracks and making things look legitimate.

Spotify IPO

Spotify plans to skip the most expensive and stressful parts of an IPO in early April by directly listing their stock on the market (DPO: Direct Public Offering) and letting current shareholders and would-be buyers do what markets do best: price discovery. I’m excited for this one!

The Facebook Freakout

I’ve learned that the vast, vast majority of people have no clue what the Facebook freakout is all about. Don’t be one of them – get the facts. A few hours after I published my piece on the situation, Zuck posted an adept statement – walking the tightrope of trying to please shareholders, employees, and user. This morning’s Exponent podcast has a fantastic recap and analysis.

IPO Meltdown

Speaking of IPOs and Facebook, I wrote about the crisis that happened during the Facebook IPO back in 2012 and a few tips for how to manage crisis. This pairs nicely with my post a few weeks back: The Anatomy of a Disaster.

Autonomous Car Killed Pedestrian

The first pedestrian fatality involving an autonomous car happened this week. More people are going to die because of self-driving cars. But these deaths are the cost of saving more lives.

Autonomous Cars Will Kill People

Earlier this week a woman was hit and killed by an autonomous car in Tempe, Arizona while she was crossing the road with her bike.

The accident is very sad and my heart goes out to the victim’s family and friends.

If you read my recent piece on the anatomy of disasters, you’ll recognize several of the common features here – although on a smaller scale.

The pedestrian was crossing a 5-lane, 45 MPH street in an area where drivers wouldn’t normally expect pedestrians. The autonomous car, operated by Uber, obviously failed to detect the pedestrian and stop in time. The “safety driver” wasn’t focused on the road or prepared to stop the vehicle.

And it didn’t help that it was very dark outside, this section of the road was unlit, and the pedestrian had no lighting or reflectors to make herself seen.

I’ve seen the video of the accident and it’s terrible. Unfortunately, I think that even an experienced driver would have hit the woman too.

More People Will Be Killed

In 2016, 37,461 people were killed in motor vehicle accidents. That’s over 100 people killed a day in the US. (National Highway Traffic Safety Administration)

Driving is an incredibly dangerous activity that we’ve made extremely safe through a lot of hard work over the past 5 decades. Currently the most accident-prone component of driving is us – humans.

We’re often slow, make poor choices, and drive when we’re tired, inebriated, and distracted. In theory, computers would make for much better drivers than humans.

If we are able to develop autonomous cars that are safer than human-driven cars, then I think we’ll be morally obligated to use them.

But that means that more people will die while we develop that capability. In the meantime, we need to have the courage, patience, and wisdom to get there – because it’ll be worth it when we do.

The Facebook Freakout

A new slice of Facebook users finally understand how much data they’ve been handing to Facebook over the years. By the way, if this piece gets you all riled up, leave a comment here.

Summary:

  • Facebook gave politically motivated parties access to user data.
  • This isn’t unusual. It’s what Facebook does and what users signed up for.
  • You are not Facebook’s customer. You are Facebook’s product.
  • The days of “click first and asks questions later” are over.
  • Facebook will most likely come out of this unscathed or stronger.

Time to Read: 2 Mins 58 Sec

What Actually Happened?

In short, Facebook did what Facebook has always done: sell access to its users to 3rd parties.

Cambridge Analytica, an organization that wanted to build “psychographic profiles” of US citizens in order to help politicians capture more votes, created a Facebook App. The app directly asked questions about “the issues” and stored user responses.

But the app also asked users to grant permission to Cambridge Analytica to access their Facebook data. Users accepted willingly. If a user didn’t grant permission, then Cambridge Analytica didn’t have access to that user’s data – yet.

There’s another way to get your Facebook data though: your friends.

This Is Too Abstract

Let’s get concrete. Let’s talk about Aaron and Betty – Facebook friends. Say Aaron is foolish enough to take this survey from Cambridge Analytica and agrees to give up a whole bunch of data about himself. Betty, who just happens to be “friends” with Aaron on Facebook, is part of Aaron’s network and data. So while Cambridge Analytica got explicit access to data about Aaron, Facebook also gave them some data about Betty.

To be clear, Cambridge Analytica didn’t get all of Betty’s data in this case – just a subset of her data.

Who Owns the Data?

In my mind, at least three parties own pieces of Betty’s data: Betty, Aaron, and Facebook. If Facebook chooses to sell their data (about you and your friends), then you’ve already given them permission to do so when you signed up. Further, Betty gave Aaron access to some of her data when she accepted his friend request.

(BTW, I’m using the word “sell” pretty loosely throughout this article. Facebook doesn’t really sell data anymore. But they do monetize their data in all sorts of ways that make it difficult to get network information without paying for something – usually an advertisement or promotion.)

What’s really confusing about all of this is that it feels like Facebook is selling Aaron’s access to Betty’s data. But they’re not. Facebook is selling their data.

You’re Not the Customer, You’re the Product.

But I wouldn’t be mad at Facebook. Facebook is in the data business.

Selling metadata about individual nodes isn’t very interesting anymore. What’s interesting is the edge data – information about how nodes are connected. But what’s most interesting is predictive edge data – information about how nodes might be connected now or in the future.

Said another way, Facebook’s business model is selling access to swaths of the social fabric. You are not the customer. You are the product.

So What Should Facebook Do?

Currently, their brand is a little more tarnished in the public eye and the stock has lost about 10% of it’s value. But honestly, I don’t see a probable scenario where Facebook loses much more here:

  • If Zuck and Facebook remain silent (or pander), then this whole thing may blow over in a few days/weeks as the media grasp for more salacious (and easier to consume) news.
  • If it doesn’t blow over, then government regulations will likely be passed in order to “crack down” on Facebook’s “misdeeds.” While this might not be ideal for TheZuckBook.com, Facebook will end up writing much of the regulations – regulations that will make creating competitors to Facebook very difficult.

The worst thing Zuck and Facebook can do is come out with some controversial statement that keeps them in the news cycle longer. Barring that or some other crazy revelations, I think Facebook will be just fine and that this is just another #FacebookFreakout.

One thing I can say very confidently though: we should all be grateful that Zuck is the CEO of Facebook instead of Theranos founder and fraudster, Elizabeth Holmes.

Let’s Have a Conversation!

Here.

PS

  • There are a lot of details that feel important about this story (ie: Cambridge Analytica said they were doing “research” – whatever that means; Facebook asked them to delete data and they lied about doing so; Cambridge Analytica paid some users to incentivize them to grant their Facebook permissions…etc). But these things aren’t the core issue and bad actors aren’t new or unexpected.
  • Also, there’s still a lot we don’t know about this situation. It’s very possible we’ll learn things that will change my thoughts and analysis. #disclaimer.
  • PS: Follow Straty on Facebook! (jk)

Sources & Further Reading

The Spotify IPO, an IPO Meltdown, and Melting Down Toys”R”Us

It’s Tuesday, March 20, 2018 and today we’re talking about: the Spotify IPO, an IPO Meltdown, and Melting Down Toys”R”Us. Avg read time: 4 min 45 sec. But you’re better than average.

ToysRUs Liquidation Bankruptcy

 

Spotify IPO

Dropbox isn’t the only company about to have its initial public offering. Spotify – the 11 year old music streaming service – is set to IPO in the next few weeks as well. But Spotify is doing things their own way. The Stockholm, Sweden company is doing a direct listing.

This means that Spotify isn’t spending millions to hire an investment bank, isn’t creating new shares to sell, isn’t doing a roadshow to woo potential institutional investors, isn’t setting an offering price, and isn’t selling newly issued shares to institutional investors the night before the IPO so they can then sell those shares on the public market the next day.

On April 3, 2018, current Spotify shareholders will be able to sell their shares directly on the New York Stock Exchange. This Direct Public Offering (DPO) is somewhat rare.

Maybe most importantly, Spotify won’t be raising money with this DPO since they’re not creating new shares and not actually selling any either. Only existing shareholders will be able to sell shares and only they will receive money for those shares. Finally – and this might be the coolest (and riskiest) part – buyers and sellers will have to discover prices without the guidance of an investment bank’s guesstimate. #priceDiscovery!

While both the Dropbox IPO and the Spotify DPO are worth paying attention to, only one is music to my ears. For more information, watch Spotify’s Investor Day for over 2 hours of details.

“Without deviation from the norm, progress is not possible.”
― Frank Zappa

This segment was inspired by The Indicator on March 19, 2018.

IPO Meltdown

Speaking of IPOs, I came across this great HBR story Monday that I’d never heard before about the Facebook IPO in 2012. Apparently the Nasdaq had a crisis while the stock was supposed to be trading live for the first time.

As the start of trading approached, hundreds of thousands of orders poured in. But when 11:05 arrived, nothing happened.

The computer code that was supposed to facilitate the exchange of billions of dollars for the IPO was reporting that something was wrong. Nasdaq managers decided to disable the check that was failing and move forward with the big day.

When the validation check was removed, trading started, but the workaround caused a series of failures. It turned out the check had initially picked up on something important: a bug that caused the system to ignore orders for more than 20 minutes, an eternity on Wall Street. Traders blamed Nasdaq for hundreds of millions of dollars of losses, and the mistake exposed the exchange to litigation, fines, and reputational costs.

The managers screwed up. They pushed forward when they should have stopped.

The Anatomy of a Disaster

A few weeks ago I wrote a long-form piece called The Anatomy of a Disaster where I dissected the worst industrial accident on US soil in 25 years. Nasdaq’s Facebook IPO crisis follows a similar pattern. While I focus more on causes and prevention in my piece, the HBR piece on the Facebook IPO touches more on what to do when you’re already in a disaster. Two great tips they give are:

  1. Learn to stop. When faced with a surprising event, we often want to push through and keep going. But sticking to a plan in the face of surprising new information can be a recipe for disaster.”
  2. Do, monitor, diagnose. Sometimes stopping isn’t an option. If we don’t keep going, things will fall apart right away. What can we do then?” If a patient has stopped breathing, start “with a task, such as intubating the patient. The next step is monitoring: you check if performing the task had the expected effect. If it didn’t, then you move onto the next step and come up with a new possible diagnosis. And then you go back to tasks because you need to do something — for example, administer medications or replace the bag — to test your new theory.”

(The HBR guest writers were András Tilcsik and Chris Clearfield, who recently published Meltdown: Why Our Systems Fail and What We Can Do About It)

Toys”R”Us, Part II

Yesterday I wrote about the Toys”R”Us liquidation. My prototyping, Neuroscientist brother, Tim, pointed out that the phrase category killer is a bit confusing. I wrote back:

Category killer doesn’t mean that a company killed the category.. it means that they dominated (or co-dominated) it due to their focus and scale.

Toys”R”Us was a category killer because they niched down on one thing and one thing only. So while 70 years ago the mom & pop corner stores or Macy’s or Sears may have had a toy section or toy aisle, they didn’t know toys well, their selection was bad, they couldn’t sell toys cheaply, they had no leverage with toy manufacturers, they weren’t known for selling toys, and they didn’t really care about toys to begin with.

There were other toy stores, but they were small operations, making toys in the back, or only able to buy from local toy manufacturers. They were focused but had no efficiency, no scale. There was a huge opportunity for the first chain toy store – a big-box toy store – that could bring together focus, scale, efficiency, and brand.

Toys”R”Us Becomes Category Killer

History.com published a nice piece Monday about the history of Toys”R”Us. Returning from WWII, Charles Lazarus’ intuition told him that America was about to have a lot more babies. After opening a baby furniture store in his father’s bike repair shop, customers started asking for toys. As parents kept returning to buy toys for their growing children, Lazarus got out of the children’s furniture business and went all in on toys.

Big-box stores like Toys ‘R’ Us astonished the era’s consumers, who had simply never seen stores that big and crammed with merchandise. “What Lazarus really captured was this sense of American abundance after the war and after all those years of depression,” says Richard Gottlieb, founder of Global Toy Experts and an authority on the toy business.

From Wikipedia: “At its peak, Toys “R” Us was considered a classic example of a category killer, a business that specializes so thoroughly and efficiently in one sector that it pushes out competition from both smaller specialty stores and larger general retailers.”

Sadly, after Lazarus retired, Toys”R”Us began to lose it’s way. In 2005, Bain Capital, KKR, and Vornado Realty Trust announced a leveraged buyout (LBO). And as is typical for these types of private equity plays, the cost cutting began.

But as Toys ‘R’ Us dialed back its offerings, it cut back on the magic, too. When Toys ‘R’ Us changed its focus from the toys themselves to undercutting the competition, “You didn’t get the elation anymore,” says Gottlieb. “They failed because they ceased to love toys.”

Had Toys”R”Us remained focused on their core values and competency, I think they could have adapted and weathered the back-to-back storms of Walmart (the biggest big-box store) and Amazon.

Toys”R”Us, Category Killers, Putin & Dropbox

It’s Monday, March 19, 2018 and today we’re talking about: Toys”R”Us to Liquidate All US & UK Assets, the Concept of Category Killers, Putin Preserving Power, and Dropbox to IPO on Friday.

Toys”R”Us Liquidation

Toys”R”Us filed to liquidate all of its US and UK assets last week after filing for bankruptcy last September. The 70-year-old retail toy store has 875 stores in North America, 100 stores in the UK, and 64,000 employees.

I was a Toys”R”Us Kid. My parents never took me there or bought me toys, but I sure loved their commercials growing up. I can hear the jingle now. But what happened to all of those happy snaggletoothed 80’s and 90’s kids with their beloved over-priced plastic? Apparently they grew up, had kids themselves, and then didn’t take them to Toys”R”Us either.

Customers have been choosing Walmart, Target, and Amazon over the past few decades, systematically demolishing several brick and mortar retail sectors: records, books, consumer electronics, office supplies, and now toys. That’s Tower Records (defunct), Virgin Records (defunct), Barnes & Noble (Feb 2018: layoffs), Borders (defunct), Best Buy (March 2018: shutting down 250 Best Buy Mobile stores), Staples (March 2014: closing 225 stores), and OfficeMax (May 2014: closing 400 stores).

Now, my childhood dream of simply stepping foot inside of a Toys”R”Us is crumbling before my eyes. It seems likely that all 1600 stores world wide will be closed, franchised, or liquidated. And I predict that any franchises will be doomed from the start without the ongoing support of the corporate brand.

I guess we’re all Amazon kids now..

Category Killers

Like the top dogs of each of the other industries above, Toys”R”Us was considered a “category killer.” Category Killers are deep specialists in a sector who leverage their narrow focus to gain a competitive edge over less focused firms through increased bargaining power, pricing tactics, large selection, and strong branding.

UPDATE: Category Killers came up again in detail here. and I’ve added the term to the Strategy Glossary.

76.6% of Votes For Putin

Vladimir Putin was re-elected Sunday as President of Russia for another 6 year term. He has been either President or Prime Minister of Russia since 1999 when Boris Yeltsin resigned and choose Putin as his successor.

It’s widely believed that – despite Putin’s popularity in Russia – the results are not what they seem. The 67.5% turnout is suspiciously high and reports of ballot-box stuffing and forced voting have already surfaced.

Alexei Navalny, Putin’s biggest political opponent, was barred from even running in the election after being convicted of embezzlement. The charges are believed to be politically motivated and retaliation for Navalny’s anti-corruption campaigns. The 7 other candidates in the race appealed only to niche populations and had no serious hopes of winning the election.

And while term limits (of 2 consecutive 6-year terms) prevent him from running for President again in 2024, Putin can just “sit out” for a term as Prime Minister – exactly like he did in 2008. Assuring that one of his puppets would become President and allow him to govern from the Prime Minister’s seat was easy in 2008 and could be just as easy in 2024.

But regardless of interference allegations, Putin was already assured victory before the election. I mean, he only held one campaign event. So why interfere with a race you’re supposed to win?

Mandate. Putin and his allies can now point to a 67.5% voter turnout and a 76.6% victory as a mandate from the Russian people to rule however he sees fit. Keep an eye out for new policies and announcements as Putin enters his 2nd “lame duck” term.

Putin consistently proves that in order to maintain power you must get the right pieces to the right place at the right time. Being secretive and covert is a nice-to-have.

Dropbox IPO

Dropbox is poised to IPO this Friday. Offering shares at a price of $16-18, the cloud-storage company is attempting to raise up to $650 million. On the high end, the company would be valued at $7.1 billion – 30% lower than it’s peak in 2014.

While I like Dropbox and am one of the 11 million paying customers (of 500 million), the competition is fierce in the cloud storage market and the company has really struggled to clearly differentiate itself from competitors and launch other high-value services for small and medium size businesses.

To me, Dropbox is yet another case of Silicon Valley Hot Potato… it’s fun to get your hands on stock for a bit, but if you want to make money after the first few rounds, you’d better not be left holding it when the music stops. The question for current and would-be investors is: Has the music already stopped?