Why Microsoft and LinkedIn are the perfect Tinder match

Monday 14th of June the news of Microsoft acquiring LinkedIn was breaking all over the global media landscape. I vividly remember the moment, when I was dining at a restaurant in Vietnam and my phone alerted me of the US$26.2bn deal and I got pretty excited since it seemed like Microsoft had done the same assessment as I had in my earlier article about LinkedIn’s Strategy.

On April the 4th, I wrote: “LinkedIn has one of the world’s largest databases of professionals and LinkedIn has collected an unprecedented amount of data, which naturally can be utilized to offer a wide variety of professional service.  Among these services is the Sales Navigator tool that opens LinkedIn to a whole new segment of clients.”

“What investors should assess when valuing LinkedIn is LinkedIn’s move into new and more lucrative customer segments. My belief is that the general perception of LinkedIn as a career portal is heavily mistaken and valuing LinkedIn with that mindset is potentially myopic.”

What I argued in April was that investors were mistaking LinkedIn for a career portal where it really should be assessed as a cloud services company.

Why did LinkedIn swipe right on Microsoft?

LinkedIn is one of tech industry’s most successful executors of the popular freemium business model and has been banking on converting free users to paying premium users. However, the freemium model has limited growth opportunity. LinkedIn has in recent years been transforming its business to become more of a media company, in an attempt to boost ad revenues, which I mentioned as stage 2, in my April article. However, as I wrote, LinkedIn will first become truly profitable when it enters stage 3 and this is where Microsoft comes into the picture.

Microsoft is one the world’s largest providers of business software solutions and has an impressive global sales network and millions of clients. LinkedIn has been struggling with meeting its sales targets and is in great need to boost its sales. Furthermore, LinkedIn is sitting on one of the world’s most comprehensive databases of professionals, but hasn’t managed to build professional services around it, that can be monetized in a big scale. Microsoft is however, an expert in monetizing its services and could very well be the ideal partner for LinkedIn to make its business profitable.

Why did Microsoft woo LinkedIn?

At the announcement of the LinkedIn acquisition, both parties were stressing the many synergies related to Microsoft’s Office products. Microsoft Office suits has been a cash cow for many years, but has recently experienced intensive competition from Google and other open source office solutions. This movement comes as we are changing the way we are using our electronic devices, where more and more is running on the cloud.

The strategic advantage is however, not with Microsoft office, but rather with Microsoft’s cloud based CRM solution Dynamics. It is well known that the CRM space is a lucrative market and Microsoft is already a large player, however, not dominating the playground. Allegedly Microsoft made a US$55bn offer for the cloud based CRM provider Salesforce in the spring of 2015, but the offer was turned down. Had Microsoft successfully acquired Salesforce it would have had a clear market leading position in CRM space. But with Salesforce declining the offer, Microsoft has had to look for other avenues to step up its position in the CRM space.

If you can’t acquire them, beat them!

So, this is my theory: Microsoft has been looking for a deal that could ramp up its competitive edge in the CRM space. When LinkedIn was punished by its investors in February, due to lower earnings expectations; LinkedIn appeared on Microsoft’s radar. What Microsoft saw that investors couldn’t, was the tremendous opportunity to monetize LinkedIn’s database in a way that only Microsoft can do.

With LinkedIn’s database, Microsoft suddenly has the opportunity to give its CRM solution Dynamics a competitive edge. Leveraging LinkedIn’s comprehensive database and its force in social selling, and Microsoft Dynamics can suddenly become the preferred CRM solution in the market. Especially if it can keep other competitors from accessing the same data.

Microsoft payed US$196 per LinkedIn share, equal to a 50% premium, which many commentators has said to be expensive. However, I might argue that they got LinkedIn cheap considering that the stock was trading at US$220+ in January. In January, the market had not factored in the opportunities of LinkedIn becoming a business solutions provider (stage 3 of LinkedIn’s strategy). With this new reality LinkedIn should potentially be trading way above its current US$189,-

Married but sleeping in separate beds!

The announcement stated that LinkedIn would remain a separate entity and LinkedIn CEO Jeff Weiner would continue his work at LinkedIn. This is a strategic wise move by Microsoft CEO Satya Nadella, as the synergies of the deal are not found in optimization of operations, but in a strategic alliance between Microsoft’s portfolio and LinkedIn’s data.

What we are going to see is a wide variety of bundles between Microsoft and LinkedIn’s products. When opting in for Microsoft Dynamics, LinkedIn sales navigator will be an affordable add-on. New professional services powered by Microsoft are going to appear as part of the LinkedIn experience, making both product suits more powerful and lucrative.

Microsoft and LinkedIn could be the perfect match! But like any marriage it requires hard work. For Microsoft to secure a solid return on investment (ROI), it must prioritize 3 important tasks:

  1. Start selling bundled LinkedIn solutions with existing Microsoft products.
  2. Build a seamless integration of LinkedIn’s services into Microsoft Dynamics solution, to ramp up competition in the CRM cloud space.
  3. Finally, develop new and innovative business solutions on top of LinkedIn’s platform, executing on stage 3 of LinkedIn’s strategy, which will make LinkedIn truly profitable.

Should Salesforce and other CRM competitors be worried?

Potentially!  Microsoft’s acquisition of LinkedIn represents great opportunities and if Microsoft successfully integrates the two product portfolios, they can find themselves in a favorable competitive situation. Competitors should access the situation very carefully and prepare themselves to be competing against a formidable CRM solution.

Do you really understand LinkedIn’s business strategy?

LinkedIn is transitioning from a career portal to a professional network, enriching its members with industry relevant content and professional office solutions.

On February 5, 2016, LinkedIn experienced its worst day since its high profile IPO on the New York Stock Exchange in 2011. The stock plunged as much as 46.5 percent to a three year low of 102.89 and the market value dropped by $11 billion (Reuters).

Investors punished LinkedIn due to its weak net revenues of $2,991mm compared to the forecasted range $3,600mm to $3,650mm (Reuters). Furthermore, the percentage year on year revenue growth was down 10% points from 45% 2014 to 35% 2015 (Both US and International markets). In particular international Marketing Solutions dropped from %y/y revenue growth of 38% 2014 to 12% 2015. As well as Premium Subscriptions that was down 20%points from 42% 2014 to 22% 2015 (both US and International markets).

“Stock price represents the market value of the future stream of earnings”

What is LinkedIn’s business?

LinkedIn is organized in 3 main revenue streams:

  • Talent Solutions
    Talent Solutions is the most known of LinkedIn products, and potentially what most users associate LinkedIn with. Under Talent Solutions exist the opportunity for Companies to create career pages, post job ads and look for suitable candidates with LinkedIn’s recruiter software. Talent Solutions represent 63% of LinkedIn’s total revenue and can be defined as the Cash Cow.
  • Marketing Solutions
    Marketing Solutions is LinkedIn’s ad service where you can buy text, display, InMail, and sponsored updates. An ad product similar to Facebook ads that allow clients to customize a message and display it on the site. The challenge that LinkedIn is facing with Marketing Solutions is LinkedIn’s limited repetitive page views that in comparison to Facebook or Google are relative low. In 2014, American users spend on average 42 minutes a day on Facebook, whereas LinkedIn was just 9.8 minutes (eMarketer.com).
  • Sales Solutions
    Sales Navigator is the latest product in LinkedIn’s portfolio and to most people an unknown service. The product is utilizing data from LinkedIn’s 414 million members to generate valuable leads and assist sales staff prospecting. The product is still considered to be in its infancy stage and has received mixed reviews. However, there should be great potential for Sales Navigator being one of the key streams for revenue in the future.

LinkedIn_Revenue Streams

From Job Search to Publisher

LinkedIn started out as an online network for professionals and have become the world’s leading portal for job seekers and recruiters. Talent Solutions has very much defined people’s perception and LinkedIn is now working hard to change that mindset to suit a broader value proposition.

People who is active on LinkedIn would have noticed a recent explosion in publications on LinkedIn. LinkedIn allows every single member to publish posts on his/her profile and lately LinkedIn has been hiring professional journalist from papers like the Financial Times and Huffington Post to enrich LinkedIn Pulse with professional content. This is all a part of a strategy to increase time spend on LinkedIn and transform LinkedIn from being perceived as a career portal to become a professional platform providing value on several different levels.

Where is LinkedIn headed?

LinkedIn has one of the world’s largest databases of professionals and LinkedIn has collected an unprecedented amount of data, which naturally can be utilized to offer a wide variety of professional service.  Among these services is the Sales Navigator tool that opens LinkedIn to a whole new segment of clients.

What investors should assess when valuing LinkedIn is LinkedIn’s move into new and more lucrative customer segments. My belief is that the general perception of LinkedIn as a career portal is heavily mistaken and valuing LinkedIn with that mindset is potentially myopic.

Is LinkedIn overvalued or not?

LinkedIn closed at $114.35 equal to Earning Per Share (EPS) of $-1.29, which indicate that it might not be the most attractive investment available. However, considering that the stock was trading at $200+ last year and now is trading at half price, despite no operational changes at LinkedIn, might indicate that investors do not fully understand the strategic transition driven by LinkedIn CEO Jeff Weiner.

LinkedIn_process

From a strategic position LinkedIn is currently only executing stage 2 of a 3 stage plan.

  • Stage 1 was to establish a member base of critical mass and ensure network effect, which LinkedIn achieved with its Talent Solutions products.
  • Stage 2 is to make LinkedIn widely valuable to professionals outside of job seeking and hiring. LinkedIn must attract more traffic and is with its services Pulse and Lynda competing in totally new territory.
  • Stage 3 is where LinkedIn will become profitable. Through professional services like the Sales Navigator sold to companies and enterprises. For stage 3 to succeed, Stage 2 must be a success. Only then will LinkedIn fully benefit from its 414 million members.

How to scale $1.25 to a billion dollar business – Essilor’s disruptive strategy in India

Emerging markets present a tremendous opportunity for enterprises to grow their business. At last week’s “Emerging Markets” class at the Nanyang MBA, we studied how the French ophthalmic lens manufacturer Essilor has successfully managed to penetrate the Indian market and provide spectacles to millions of under-served citizens. Most interestingly, their strategy to partner with local providers has turned out to be an amazing CSR story.

Spectacles have for many years been reserved for consumers with stable incomes, thus excluding millions of people living in extreme poverty to the possibility of owning a pair. According to the United Nation’s Millennium Development Goal (MGD) programme, in 2012, 270 million or 21.9% of 1.2billion Indians lived below the poverty line of $1.25 a day. The total market for vision correction in India is estimated to be 500 million people, which makes it a very attractive market.

Corrected vision may not seem so important on the surface. However, let’s look at it from a economic perspective. Blurred vison affects productivity, which has a negative impact on one’s ability to work themselves out of poverty. This makes vision correction extremely important. One of the challenges facing the demographics at the bottom of the pyramid is that they depend on working every day to sustain their living. Because opticians most often are located in towns far away from the villages, it is simply not an option to miss even a day’s worth of income to go get an eyesight examination. Furthermore, the consultation as well as the price of the spectacles would not be affordable for people of the villages.

If the customer won’t come to you, you must go to the customer

In 2003, Essilor together with local partner Sankara Nethralaya, launched the Mobile Refraction Van initiative that provides affordable eye care in rural India. In a matter of hours, a patient would have undergone a full eye examination and been provided with a brand new pair of spectacles starting at merely $1.

Another initiative is the Eye Mitra, which is a training program aimed to train unemployed rural youth to become opticians and set up local micro enterprises which provide door to door eye care services and sell locally manufactured spectacles embedded with Essilor technology.

Doing business in Emerging Markets

One of the main challenges of doing business in Emerging Markets is to deal with local governments and regulators. Volatile governments can with no warning nationalize your business and/or freeze your assets in the country. Seeking a strong relationship with the local authorities is therefore an essential strategy for foreign investors.

Essilor’s Eye Mitra initiative is a local jobs creator and helps strengthen Essilors relationship with the local authorities.

Why pursue the bottom of the pyramid?

There are several strategic reasons for pursuing the bottom of the social economic pyramid:

  • Creating future customers
    By serving the bottom of the pyramid, Essilor is establishing a whole new market of customers. Before the Mobile Refraction Van initiative, rural citizens didn’t know that they needed vision correction. What Essilor has realized is that the poorest citizens are leapfrogging the pyramid and improving their economic situation rapidly to move up the social economic ladder. The belief is that these future powerful consumers will remember Essilor and show brand loyalty when purchasing their first $50 Spectacles.
  • Blue Ocean: A large under-served market
    Serving the bottom of the pyramid means that you must pursue an “economies of scale” strategy. The 500 million people that are estimated to need vision correction represent a billion dollar market. Entry into this market can be considered a blue ocean strategy, since no existing lens manufacturer is servicing this market. In other words it is totally under-served and available for Essilor to grab.
  • Strong CSR
    Naturally Essilor’s cash cow is in the developed markets, where they are charging upwards of $1000 for a pair of lenses. A strong CSR profile helps attract customers and help justify the steep price points. Essilor is heavily using its initiatives in India for branding purposes and have succeeded in creating a very strong CSR profile.
  • Disruptive innovation
    Serving a low end segment requires new innovation. Not in terms of features, but in terms of price. Essilor has invested in new manufacturing methods that allow them to manufacture lenses at a cheaper price point. This technology can as well be applied for production in the developed markets  to improve profit margins in those markets.

Valve: How to retain talent?

Last week I attended an intensive strategy course taught by Patrick Gibbons, Academic Director at Michael Smurfit Graduate School of Business UCD, where we discussed a series of Harvard Business cases among one was how Valve Software successfully had manged to attract and retain top talented game developers. I found the case study very interesting and super relevant for any leader aspiring candidates on LinkedIn.

Background:
Valve is the software company behind the gaming platform Steam and popular titles like Half-Life, Counter-Strike, Left 4 Dead and Dota 2. Valve was founded in 1996 on the notion that making video games was hard and that most titles would fail, but a few blockbusters would be remarkably profitable. The question was if blockbusters was randomly distributed and hitting that lucrative profitable success was just a matter of chance, in which you just wanted to bet on as many horses as possible.

The perception at Valve was that people who had created a blockbuster before would do it again. With other words blockbusters wasn’t just random chance, it was all about attracting and retaining the right talent that would give a predictable success.

If you want to read the Harvard Business School case study, you can find it at hbs.edu

Valve Software Talent Management Process
Valve Software Talent Management Process

Who to hire?
Valve was looking for T-shape profiles that could contribute across functions in different teams, but had a unique and specialized skill that could be the core of a project. Attracting entrepreneurial profiles that had created a successful game previously was at the core of Valves recruitment strategy, because previous success ensured a higher predictability of future success.

Attracting successful entrepreneurs
How do you attract game developers that have already made a successful game and potentially earned good money doing so? The challenge was that Valve was looking for entrepreneurs that had showcased that they could be stars on their own, and now Valve wanted them to take a job working for somebody else. What Valve came up with was a unique organizational structure that allowed people to work on exactly their preferred project. There would be no hierarchy and no one telling you what to do. Everyone would be involved in strategic decision making, ensuring that everyone had a saying in which projects Valve would be working on. Naturally everyone would be paid well, so there wouldn’t be a direct monetary incentive in leaving.

Retaining talent
Retaining talent is important for any organization. The nature of Valves flat organisational structure would allow for good utilization of peer evaluation and behaviour based compensation. Everyone would be rating each other’s contribution and success of the final project would be affecting compensation.

What made Valve really unique was the fact that Valve would increase every single employee’s chance of delivering the next big blockbuster. As an employee at Valve you would be working across multiple projects at the same time. If you did a good job on someone’s project it was more likely that you could attract talented employees to work on your own project. Remember everyone had the freedom to work on whatever project they liked. Furthermore, by working on several project at the same time you would be spreading your risk. One project might fail as another one would be a success. This way you would still make good money. Similar to managing an investment portfolio and spreading risk across different securities.

The secret source
The secret to Valves successful talent management strategy is how they manged to embed its employees:

  • It was extremely hard for the employees to monitor the size of their contribution to a project. There was no way for an employee to claim 100% ownership of a blockbuster, because so many talented people would have been involved in the project.
  • Every employee was almost guaranteed to be part of a success, working across multiple projects by that hedging their exposure to failure.
  • Every project group was unique, so the risk of a whole team leaving would be minimal, as each individual would have stakes in different projects.

All over Valve was successful in creating an organization that would attract the very best talent and ensure that no employee would be thinking about leaving.

Lessons learned from the LEGO turnaround

As part of my Strategic Management course at the Nanyang MBA, I did a strategy report on LEGO’s turnaround in 2004. I grew up building LEGO and I have been following LEGO’s business for many years. When it came to pick a topic for my strategy report LEGO seemed like the natural choice.

LEGO is a fantastic case study of a successful turnaround of a failing organisation, attributed to selecting the right strategy. The LEGO management took less than 5 years to almost bankrupt what had taken 3 generations 70 years to build. In 2014, the LEGO group announced record net profits of DKK 7 billion after having turned around a net loss of DKK 935m and DKK 1931m in 2003 and 2004 respectfully.

These are my main findings and the key lessons learned from studying the LEGO turnaround.

If you are not familiar with the background of the LEGO turnaround, Economist and expert in Corporate Strategy John Ashcroft has done a very nice case study which is free to download online. www.thelegocasestudy.com

  • Know your core competencies and keep perfecting them. You core competences should be your competitive advantage and you don’t want to forget that. In the late 1990s LEGO experienced stagnating sales and stated to divest into new areas outside of its core competencies. The new product lines generated short term sales {DKK8,379m in 2000 DKK10,116m in2002 DKK9,475m in 2001}. However, the massive divesting was followed by large costs {DKK(9,000m) in 2000, DKK(8,554m) in 2001, DKK(9,248m) in 2002}. When the short term sales eventually failed to DKK 7,196m in 2003 and DKK6,704m in 2004, LEGO was carrying costs that it couldn’t bear.
  • Stay focused on your core business and ensure that your core business will always be your main attention. In case of divesting, don’t lose track of your cash flow and what puts money in your pocket. LEGO didn’t lose because it divested, but because it lost track of its core business.
  • Ensure you have the right measures to manage your business. LEGO’s accounting standards deceived the management and didn’t provide them with the necessary information to make strategic decisions. Instead of tracking the performance of individual product lines, the management was deceived by tracking country specific performance, hereby hiding alarming performance results of new product lines.
  • Listen to your consumers, but keep retailers first. LEGO has experienced impressive growth by constantly being close with their consumers. However, they don’t forget to keep their retailers happy with good margins and a well-structured supply chain. By ensuring that you vendors have the right quantity at the right time, you save them money and they will be happier customers.
  • Control you value chain. The value chain is where you create value for your customers and your consumers. Keep improving and optimizing your value chain to stay ahead of the competition.
  • Keep your organisation transparent and encourage communication. LEGO’s management was acting on wrongful information, due to lack of communication. As Jorgen Vig Knudstorp says: “a CEO needs every avenue to the truth that he or she can find”.