Alexander Hold

April 4, 2016

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.

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.

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.

March 30, 2016March 30, 2016

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.

March 7, 2016March 7, 2016

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

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.