Lessons for gaming and tech companies from the Peter Drucker Forum

by Lloyd MelnickFebruary 17, 2021February 28, 2021

Last year, I had the opportunity to attend (virtually) the The Peter Drucker Institute’s Forum on Leadership. What I found particularly compelling (and why I attended) was that the majority of the speakers were successful business leaders, rather than people whose primary calling was providing advice. I always prefer proven actions to theories.

Below, I am highlighting some of the key highlights and takeaways for companies in the gaming space, particularly tied to innovation, leadership, remote work and leading during a crisis.

The kryptonite of innovation: Excel

One of the most interesting lessons from the seminar was a story from Scott Cook, founder and CEO of Intuit, recalling one of Clayton Christensen’s (the guru of innovation) experience with innovation at Intel. According to Cook, Christensen identified spreadsheets as the root cause of Intel’s inability to innovate. He had been brought in by Andy Grove to help Intel and was given access to all new businesses that Intel had created. At the time, Intel had launched 60 new business initiatives, and every single one failed.

As Intel was a huge company, there was robust documentation for all the initiatives. Christensen reviewed the documents and found that the common flaw was the spreadsheet. Whatever the company’s required IRR (internal rate of return) in the proposal, the P&L always showed you would get that IRR. Yet, in the end, all 60 had failed. The spreadsheets actually focused the teams on manipulating the numbers rather than finding product/market fit. This lesson resonated strongly with me, as I have seen many companies in the gaming space try to use robust analysis to greenlight new game projects and the reality never came close to the spreadsheet (in fact, the performance of the projects seemed uncorrelated to the projections).

Key takeaway: Using spreadsheets to analyze a new business venture is worthless or even creates negative value. It is impossible to predict accurately the new ventures performance and takes away from testing businesses in the wild.

The opposite of spreadsheets, tools to generate innovation

While spreadsheets are not the solution to innovating, several speakers provided excellent guidance. One speaker provided a clear alternative to Intel’s failed strategy of innovating by financial analysis. Rather than try to pick winners, admit you do not know what projects will succeed. In stark contrast to Intel, Bosch invested in 200 projects in two years. It gave each a small amount of seed investment. After three months, the teams had to prove the project had traction, using predetermined KPIs. After three more months, the team again had to prove it had promise; at this stage Bosch kills 70 percent of projects, with the others receiving additional investment. After another three months, it kills another seventy percent of projects, adding to the investment in the survivors.

Howard Yu, the LEGO professor of Innovation at IMD Business School explained that companies have no trouble trying disruptive innovation but scaling it. This problem is one I experienced in multiple large companies that were trying to expand into new areas.

These projects turn into side hobbies and never impact the core business, moreover, they leave the company vulnerable to disruption. I once joked that an effort I led at a big company had the promise of being a footnote on its financial statements after five years if we continuously outperformed our plan.

Even when buying companies for innovation, companies often fail to scale this disruption. To overcome this situation, the leadership team must have a shared vision of the future. They and their Board needs to have difficult conversations, including firing and hiring. Most importantly, the CEO has to have a curious mind and recognize what kind of world we live in to capitalize on opportunities and mitigate the biggest risks. A great example of a “curious” executive is Bill Gates, who reads over 50 books a year.

Key takeaways: The best way to grow innovation is testing multiple initiatives, evaluating them critically, stopping the majority of projects and then increasing investment in those showing traction. For a company to innovate and not simply play at innovation, it also needs a curious leader who builds a shared vision of the future.

The value of micro-businesses

Another great insight came from Kevin Nolan, the CEO of GE Appliances. GE Appliances is the fastest growing appliance business in North America and owned by Haier, the Chinese conglomerate known for innovation. Nolan discussed his experience at GE Appliances, where the company was originally built on efficiency and productivity but had been dying slowly due to slow moving ideas and bureaucracy. In the fast evolving consumer appliance environment, GE needed to be creative and nimble but instead had become bureaucratic. Ideas were based on the weight of PowerPoint presentations rather than product/market fit. Success was measured on getting into next year’s budget. GE was slow moving and not responsive to the market, unable to compete in a fast paced, short cycle business. Thus, GE sold the unit to Haier, though Nolan expected more of the same from the new Chinese owners.

Instead, Haier realized that employees want to be entrepreneurs. It broke the business into small pieces so it could focus on agility and competition. Haier preached that the only person employees should listen to is the users, they pay the salary, not the company. The philosophy being that your boss is not inside your company but outside, your consumer. Nolan said, “burn your org charts, they represent hierarchy, bureaucracy.”

It broke company down from 4 to 14 product lines and shifted to micro-enterprises. By micro-enterprises, business lines or products that had full P&L responsibility and autonomy. Effectively, GE created a collection of CEOs. The idea behind the micro-businesses is that the team needs to live in a zero distance world from its customer. Every micro-enterprise looks at their individual customers, not the aggregate customers of the company.

The goal for Nolan and Haier was to get zero distance between the customer and employees, perpetually getting the gap smaller and smaller. It was also critical for every micro-business to get tight with its commercial team. That is where got actionable feedback, not one of the staff functions. As Nolan said, “finance can’t tell you what you need to do in the future.”

With this strategy of micro-businesses, GE Appliances is now the fastest growing company in the very competitive North American market and the number one smart home company. It also has the highest employee satisfaction rating in the industry.

Key takeaways: In the gaming space, you can set up every product as a micro-business, with P&L responsibility. Give the team autonomy and allow them to focus on the specific customers of their game, rather than the entire company.

Inverted pyramid of leadership

Any strong management conference will include interesting ideas about leadership, and this one did not fail to deliver in that area. One of the speakers, John Ferriola, the former CEO of Nucor (a company with over 26,000 employees), explained the concept of the inverted pyramid. According to Ferriola, command and control only works where safety and compliance are critical. Otherwise, a business in the 21st century need to invert the pyramid, based on meritocracy and freedom for the employees.

At Nucor, the CEO (at the time, Ferriola) works for the employees, not the other way around. Nucor believes every leader at every level must lead with a servant’s heart; their job is to take care of their team. The leader’s job is to create an environment where others can succeed and then trust that once they create that environment, the team will do the best thing. No leader can have all the knowledge to make always the right decision, instead leverage the cumulative resources of your team to take the best path of action.

As part of the inverted pyramid, every employee can bring ideas or complaints to the CEO, with the caveat that they need to discuss the idea first with their immediate supervision. Then employee can speak directly to the CEO without any fear of reprisal. All employees had the CEO’s office number, home number and cell phone.

Key takeaways: Rather than building a strict hierarchy, structure your company so the leaders can serve their teams and create an environment where employees are empowered to take the best action.

Empowering the top of your pyramid

Once you accept the concept of the inverted pyramid, there are many techniques to empower your employees, who are now at the top of the pyramid. Tracey Davidson, the Deputy CEO of Handelsbanken explains it comes down to fundamentally trusting your colleagues. To achieve this trust, you need to align around a common set of core values; at Handelsbanken they have had the same goal and core values for 50 years. For these goals to be successful, they must be:

Simple
Easy to remember
Shared focus
Focused on satisfying customers, not costs or profit

Ms. Davidson explained that when people have a clear mandate, they do their best work. At a structural level, trusting employees allowed them to decentralize their organization and treat each branch treated as a mini-business supported by the central business (consistent to the conversation about micro-businesses above).

It was interesting how empowering employees converged with creating micro-businesses. In Handelsbanken’s case, by turning each branch into a micro-business, they did not have to change policies or decisions for people to make decisions in new parts of the bank. Each branch controls its own P&L. The branch decides where it is going to spend, where expenditures are pitched on a peer basis. Branches see that if they control costs well, then every new customer has a bigger impact.

Handelsbanken also gives each branch details on costs so they can set their own pricing. The central branch provides all the costs of capital as well as other costs and the local branch then decides pricing and whether or not to loan to a local customer.

As part of empowering the branches, they have to live with consequences of their decisions. If capital exposure cost goes up with a bad customer, it impacts the branch. Branch performance reflects customer performance, not kicked into a group KPI. This philosophy has helped Handelsbanken consistently outperform its peers.

Another example of empowering your team is from the CEO of Michelin, Florentino Menegaux. Menegaux points out that as the leader you need to suck the stress from the organization and your team and return the energy. Michelin started as a command and control culture but he realized it was contradictory to trying to focus on customers. He needed to realign processes to tap into the collective intelligence and understanding of customer, rather than relying on processes. To make this change, and put employees at the top of the pyramid, he identified three keys:

Trust. Empowerment and performance begins with trust. Never underestimate the casual genius of every human being.
Freedom. If you want people to think outside of the box, you need to give employees ability to do so.
Culture. If you want to transform people on the front lines to be empowered, you have to transform the culture and work with everyone to address challenging behaviors.

Menegaux concluded by pointing out that humans collectively are more powerful than a computer but computers allow people to be more human. He suggested we use technology to unleash human potential, rather than measuring 1,000 KPIs.

Key takeaways: To empower your team and move to an inverted pyramid, you need to provide clear and simple goals and allow your employees to figure out the best way to achieve them.

How to lead in a remote environment

The conference explored another element of leadership, particularly important now, leading in a remote or work from home environment. What made someone a great leader even two years ago may not work now, where you can no longer meet informally with your team or easily observe their day-to-day activities.

Donna Flynn, the VP of Global Talent at Steelcase focused on the emphatic traits leaders now need to develop. She identified three keys to leading successfully in a remote environment:

Be intentional and clear with your team.
Develop a “third eye” for emotional intelligence, as you need to view your team through an emotional lens.
Help your team manage both their energy collectively and individually. Well-being is a top line issue for leaders to always consider.

Flynn also provided some useful, more tactical advice:

Large group discussions are not as interactive, so it is good to follow them up or even precede them with small group discussions.
You need to connect with your team, not only your direct reports, one-to-one. Focus on frequent touch points across your team and show vulnerability so they open up to you.
Work from home will be a node in the ecosystem and the office another node. Some will chose to go to the office daily. Others will chose to go for specific activities. Design your processes and team for this cadence of interactions and build the conditions to achieve desired outcomes.

Guy Ben-Ishai of Google added additional insights into effectively leading in a work-from-home or remote environment. According to Ben-Ishai, successful remote leadership comes down to maintaining your presence. If you are not present, you cannot really lead. You can achieve this presence with frequent interactions with a broad number of people, even when working remotely. You should insist on taking the time and having periodic check-ins with employees, colleagues and other leaders.

Key takeaways: In a work-from-home or remote work environment, great leaders need to maintain their presence. You can do this with frequent, personal interactions with teammates, employees and other colleagues.

Using a crisis to improve

Covid has not only provided a challenge in leading remote workers but it also has presented opportunities for many companies. Great leaders can turn a crisis into an opportunity. To lead effectively through a crisis, you need to think outside the box and focus on your customers.

Sara Mathew the Chair of the Board at Freddie Mac recounted the story of one of her greatest professional successes. She joined Dun & Bradstreet as CFO a week before 9/11, which almost put the company out of business. To deal with the crisis, Ms. Mathew brought in the consulting group McKinsey, who proposed a very draconian process to survive. She was tasked with changing Europe to break even. Customers had lost trust in the brand because of data quality. The team was worn out with the issue, it was all they heard day in and day out. Yet there was still a sense of optimism as employees maintained pride in D&B.

Ms. Mathews tried something revolutionary, collaborating with their top competitor. Her goal was to give access to their technology platform and data and convert it into franchise model. In 18 months, she created franchises around the world for every market except three where they were already number one. Europe moved from a loss to a $100 million profit. Customer satisfaction improved 30 points. D&B’s stock price went from $20 to $80 and Ms. Mathews became CEO.

Ms. Mathews explained that this success, driven by a crisis, was not genius but the result of trying a radical idea. She also highlighted that the idea did not come from the top, it came from a customer.

In addition to the example of Ms. Mathew, Jorgen Vig Knudstorp, LEGO’s Executive Chairman explained how LEGO used the crisis as an opportunity to reinforce its mission. LEGO annually spends about $300 million to promote children with challenges to learn through play. LEGO increased its investment another $100 million during the pandemic for similar initiatives, as the non-profits they work with were facing extraordinary challenges to continue their work. Knudstorp explains that when you are under pressure, it is a good opportunity to put your money where you mouth is.

Key takeaways: To navigate your way out of a crisis, listen to your customers to come up with novel solutions.

Key takeaways:

The best way to grow innovation is testing multiple initiatives, evaluating them critically, killing the majority and then increasing investment in those showing traction in a regular cycle. For a company to innovate and not simply play at innovation, it also needs a curious leader who builds a shared vision of the future.
Rather than building a strict hierarchy, structure your company so the leaders can serve their teams and create an environment where employees are empowered to take the best action.
To navigate your way out of a crisis, listen to your customers to come up with novel solutions.

Chaos Theory, the Butterfly Effect, and Gaming

by Lloyd MelnickFebruary 10, 2021February 8, 2021

I have written several times recently about the need for resiliency and managing in a complex environment, given how unpredictable the world is and referencing Chaos Theory. Given the importance of the Butterfly Effect, the impact of Chaos Theory, it is worth expounding on the theory and consequences. An article in the MIT Technology Review, When the Butterfly Effect Took Flight by Peter Dizikes, does a great job of explaining the theory and impact.

What is the Butterfly Effect?

In the 1960s, Edward Lorenz, a meteorology professor at MIT, entered data into a computer program simulating weather patterns and then took a break while the computer processed the information. Upon reviewing the results, he noticed an outcome that led to what is now known as the Butterfly Effect.

Lorenz’s computer model inputted twelve KPIs, such as temperature and wind speed. During this particular simulation (one that he had run previously), he rounded off one variable from .506127 to .506. Dizikies writes, “to his surprise, that tiny alteration drastically transformed the whole pattern his program produced, over two months of simulated weather. The unexpected result led Lorenz to a powerful insight about the way nature works: small changes can have large consequences. The idea came to be known as the ‘butterfly effect’ after Lorenz suggested that the flap of a butterfly’s wings might ultimately cause a tornado. And the butterfly effect, also known as ‘sensitive dependence on initial conditions,’ has a profound corollary: forecasting the future can be nearly impossible.”

This seemingly innocuous finding challenged some core scientific principles. Isaac Newton published “laws” in 1687 that suggested a tidily predictable mechanical system, known as the “ clockwork universe.” Mathematician Pierre-Simon Laplace whose work was important to the development of engineering, mathematics, statistics, physics, astronomy, and philosophy, wrote that if we knew everything about the universe currently, then “nothing would be uncertain and the future, as the past, would be present to [our] eyes.”

Lorenz’s findings challenged both Newton and Laplace, as unpredictability does not impact how they explain the world. Dizikies explains, “the tiny change in [Lorenz’s] simulation mattered so much showed, by extension, that the imprecision inherent in any human measurement could become magnified into wildly incorrect forecasts…. After Lorenz, we came to see that determinism might give you short-term predictability, but in the long run, things could be unpredictable. That’s what we associate with the word ‘chaos’.”

This concept of chaos amplifies how the world is nonlinear. “The principle of chaos drove home the importance of non¬linearity, a characteristic of many natural systems. If a group of 100 lions has a net gain of 10 members a year, that increase in population size can be plotted on a graph as a straight line. A group of mice that doubles annually, on the other hand, has a nonlinear growth pattern; on a graph, the population size will curve upward. After a decade, the difference between a group that started with 22 mice and one that started with 20 mice will have ballooned to more than 2,000. Given that type of growth pattern, the real-life pressures on species — normal death rates, epidemics, limited resources — will often cause their population sizes to rise and fall chaotically. While not all nonlinear systems are chaotic, all chaotic systems are nonlinear,” explains Dizikies.

Butterflies are not random

A critical element of Chaos Theory is that it does not imply randomness. Dizikies writes, “One way that he demonstrated this was through the equations representing the motion of a gas. When he plotted their solutions on a graph, the result — a pair of linked oval-like figures — vaguely resembled a butterfly. Known as a “Lorenz attractor,” the shape illustrated the point that almost all chaotic phenomena can vary only within limits.” The key here is that the butterfly is a range of possible results, but there are boundaries.

While the effect is not random, it is also not predictable. Nature’s interdependent chains of cause and effect are too complex to disentangle. Thus, you do not which butterfly, or gnat, may have created a given storm.

The Butterfly Effect and gaming companies

The value of understanding the Butterfly Effect for gaming companies goes beyond knowing if you need to bring an umbrella to the office. Just as weather patterns are unpredictable due to the myriad of factors that can cause a storm, the business environment is equally unpredictable. A new law in a market you are not engaged or a product launch in a different industry can end up changing the dynamics of your business. The most obvious recent example is how bats in Wuhan, China ended up driving catastrophic effects on the travel (and many other) businesses, while driving online gaming revenue to unprecedented levels.

The Butterfly Effect is why you need a resilient business

As the future is not predictable, it is critical that you build a resilient business that can quickly adjust to major changes in your ecosystem. To be resilient and deal with change, you need to move from a hierarchical, command and control structure, to one that empowers your company to react quickly to butterflies half a world away.

Key takeaways

In the 1960s, Edward Lorenz identified the Butterfly Effect when inputting multiple KPIs into a weather program, rounding one number, and seeing that the seemingly insignificant rounding change led to a momentously different outcome.
The importance of small changes on outcomes shows that activity is not predictable, and this challenge extends to the business environment.
To manage effectively and overcome the unpredictability of the world, you need to build a resilient business and move away from a hierarchical, command and control structure.

How to give help without micromanaging

by Lloyd MelnickFebruary 3, 2021March 6, 2021

A perpetual challenge leaders face is helping their employees without crossing over into micromanaging them. There are many areas that a leader can help his or her team members; they have become a leader because of experience and expertise. This assistance, however, can be counter-productive when it becomes micromanagement and inhibits the employee’s efforts. People have strong negative emotional and physiological reactions to unnecessary or unwanted help and it also can erode working relationships. More importantly, it prevents your team members from displaying their ingenuity.

A recent article in the Harvard Business Review, How to Help (Without Micromanaging) by Colin Fisher, Teresa Amabile and Julianna Pillemer, provides useful advice and techniques to assist in helping your team members while minimizing the negative consequences. The authors point out that this assistance is more important in our Covid-19 environment, especially with complex work that often needs more than just superficial advice or encouragement.

Timing

Just as a great athlete waits for the play to develop rather than forcing the action, a great leader watches and listens for when their subordinates see the need for help and are prepared to heed the assistance. This approach is different than the traditional model of trying to anticipate and prevent problems before they develop. As they say in the article, “[Strong leaders] understand that people are more willing to welcome assistance when they’re already engaged in a task or a project and have experienced its challenges firsthand.”

A good approach is to start by listening. Talk to your team about the situation. Ask what is happening and get to the root of the problem. There are multiple benefits to this approach:

You will understand the problem. Rather than rushing in and fixing the wrong thing, you will know what needs to be addressed.
They will have a chance to explore the situation and potentially come up with a better solution.
If there is no identifiable solution, the team is more likely to be open to or even ask for assistance.

Fischer, Amabile and Pillemer worked on this approach with multiple organizations and found substantial benefits. According to them, “we found that when advice was given in the course of teams’ work, after problems had emerged rather than beforehand, members understood and valued it more. This led them to actually use the help, improve their processes, share more information, and make objectively better decisions than did groups that received more instruction at the start of their discussions….[W]e’d counsel managers not to provide input without first allowing those they supervise to gain knowledge of the task and express their views on it. In many cases, a well-timed cure may be better than that ounce of prevention.”

Stress you are there to help

The second key to helping is to clarify your role is to help, not to judge. Many employees will believe that asking for (and getting) advice and help makes them appear vulnerable and weak, potentially putting them in a bad position. They also might believe that having their boss help will lead to them being judged, potentially negatively.

Good leaders will create an environment of psychological safety that encourages interpersonal risks. You should explain that your role is to help, not to judge or take over the work. You need to emphasize continually that the employee is still in charge of the project and that your role is to help make them more effective.

You also need to state clearly that you are not intervening to assess the employee. Fischer, Amabile and Pillemer write, “when managers clarified their intentions … employees were more candid about the problems they faced and more willing to accept help and work collaboratively to solve them. Don’t assume that employees concerned about performance reviews and pay can accurately discern your intentions. No matter how supportive you are as a boss, they won’t forget that part of your job is to monitor and assess them. So when you start taking a stronger hand in their work, assure them that you’re there as an adviser, not an evaluator. Be explicit about what you are trying to accomplish with your intervention.”

Match the cadence of help to the type of need

Just as you do not want to rush into giving assistance, you also want the situation to drive the cadence and structure of the help you provide. If you jump in and provide help without fully assessing the situation, you are likely to provide sub-optimal guidance. You need to devote sufficient time to understand your employees’ problems. If the issue is complex or creative, you will need to engage deeply. Fischer, et.al. explain, “it … means allocating time and attention in a pattern that works for receivers. We call this the rhythm of involvement, and it will vary depending on whether employees need intensive guidance in the short term or intermittent path clearing over a prolonged period.”

In complex situations, you need to provide concentrated guidance. This help entails working closely with your employees in long sessions tightly clustered over a few days. Given the depth of involvement, you can easily drift into micromanagement. To avoid micromanaging, you need to clarify your role as a helper and ensure your team is ready for the assistance. By taking these steps, your assistance should be welcomed.

If the situation does not require concentrated guidance, your role should be that of a path clearer. In this situation, you offer assistance in shorter, sporadic intervals when employees face ongoing problems. The authors write, “path clearers maintain enough general knowledge about the project to understand emerging needs but seldom dig into the core work. Rather, they look for smaller ways to give relief to their subordinates…. Leaders trying this approach shouldn’t underestimate the importance of staying informed about the work. Those who fail to do so can provide only shallow criticism or vague advice when they drop in.”

Being a good helper makes everyone a winner

By following the three steps above when assisting your employees, your team resolves issues faster while still unleashing their creativity. It also helps you improve your team’s health as they see you as a leader who helps, rather than another problem they need to deal with.

Key takeaways

Leaders have the experience and skills to help their employees deal with difficult problems, but they must ensure they do not end up micromanaging, thus inhibiting their employees motivation and creativity.
To provide effective help, wait for your employees to realize they need assistance and take the time to understand the situation fully. When you help, use this knowledge to match your assistance to their needs.
Stress your role is to provide assistance and that your focus is on helping rather than judging.

Measure yourself by your worst day

by Lloyd MelnickJanuary 27, 2021January 10, 2021

I once wrote that the true measurement of someone you work with (supplier, investor, etc.) is not how they normally act but how they behave in trying situations. The underlying principle is that it is easy to do the right thing when all is going well but you can understand a person’s true character in how they act in difficult times. Many people seem great when they do not have cash flow issues, when their company is hitting or exceeding its targets, etc. They will often talk about win-win relationships and seem fantastic to work with. Then when they have to make hard decisions, they may show they cannot be trusted or relied upon.

I recently came across an article that shows the same analysis can help you assess and improve yourself, You’re Only As Good As Your Worst Day on the Farnam Street blog. The post points out that assessing your performance when challenged is most instructive. They write, “it’s easy to look good when everything goes according to plan and circumstances are calm. Anyone can succeed for a while, even if it’s just out of pure luck. It’s no great feat to do well if you’re not being challenged or tested. Watching what happens during a downswing is far more instructive.”

How do you react to uncertainty and fear

For leaders, look at how you behave when faced with uncertainty and fear. A weak leader might retreat into their office or become defensive. A strong leader will deal with a difficult situation by bringing everyone together and being a reassuring, sympathetic presence.

People also remember how you act in a difficult situation. They will not focus on how you behaved when you exceeded your numbers or were given a promotion. Instead, what will be most telling is what you did when your product went down for the day or you had a falling out with the CEO. Those are the times when you show them what to model in the future. It is also the time when your team will make decisions whether they are committed long-term.

You can’t fake it

Behavior on challenging days will tell you (and others) about yourself because it is virtually impossible to fake. As they say in the article, “[i]t’s honest signaling. There’s little time for posturing or stalling. On your worst day, you reveal whether you’ve been planning for the possibility of disaster or just coasting along enjoying the good times. Your plans and preparation (or lack thereof) show how much you really care about the people who depend on you. You get to build and strengthen bonds in ways that will last a lifetime, or you risk destroying relationships in moments. You get to build trust and respect or you might break what you have irreparably.”

Awful days are invaluable

Your worst days are priceless. They represent a way to show the people around you your true nature. Most importantly, though, they are a window into yourself. Look back at some of your most challenging times, assess how you reacted, how you treated your colleagues and employees and the choices you made. Learn from these decisions so you can become the leader you want to be.

Key takeaways

Assessing your performance when challenged is powerful, as it is easy to look good when everything goes according to plan and circumstances are calm.
Look at whether you retreat in the face of difficulty or are reassuring and bring everyone together.
Gaze back at your worst days and assess how you responded, how you acted towards your teammates and staff and the picks you made. Learn from these decisions so you can become the leader you want to be.

The keys to building a resilient business

by Lloyd MelnickJanuary 20, 2021January 24, 2021

Last year, the most valuable book I read was General Stanley McChrystal’s Team of Teams and I found his discussion of building an organization to deal with a complex environment particularly useful. The world today is very complex, with events everywhere impacting severely your business, yet most companies are built for a less inter-connected, albeit complicated, world. McChrystal showed that being complex is different from being complicated. Things that are complicated may have many parts, but those parts are joined, one to the next, in straightforward and simple ways. A complicated machine like an internal combustion engine might be confusing to many people but it can be broken down into a series of neat and tidy deterministic relationships. Conversely, things that are complex, such as insurgencies or the mobile gaming ecosystem, have a diverse range of connected parts that interact regularly. Due to this complexity, you need to build a resilient organization that can adapt to changes in the external environment.

Given the importance of resiliency, I then read a book referenced in Team of Teams, Resilience Thinking by Brian Walker. While the book is primarily about resilience in the environment, it lays the groundwork for managing resources in a business and navigating a complex environment.

At its core, resilience thinking is based on the concept that things change and to ignore or resist this change is to increase your vulnerability and forego emerging opportunities. If you do not implement a resiliency strategy, you limit your options. Additionally, Walker points out that business is characterized by dynamic change and it is as critical to manage systems to enhance their resilience, as it is to manage the supply of specific products.

Resiliency versus optimization

One of the ways that resilience thinking prompts you to take a different approach is by helping you understand the costs of optimization. I have been trained, especially in the gaming space, that the key to success is perpetual optimization (even used that phrase to help sell a company once). We always look for ways to create the most output with the fewest resources, optimize every event in a game based on ABn tests and reduce any “wasted” effort by employees, customers and other stakeholders. Walker says, “humans are great optimizers. We look at everything around us, whether a cow, a house, or a share portfolio and ask ourselves how we can manage it to get the best return. Our modus operandi is to break the thing we’re managing down into its component parts and understand how each part functions and what inputs will yield the greatest outputs.”

An optimization approach aims to get your business into an optimal state and maintain it. Walker explains, “to achieve this outcome, management builds models that generally assume (among other unrecognized assumptions) that changes will be incremental and linear (cause-and-effect changes)…. Ecological systems are extremely dynamic, their behavior much more like the analogy of a boat at sea. They are constantly confronted with ‘surprise’ events such as storms, pest outbreaks, or droughts. What is optimal for one year is unlikely to be optimal the next.” Resilience thinking shows that optimization is not a best-practice as the business ecosystem is usually configured and reconfigured by extreme events, not average conditions.

Walker uses several examples to show how these extreme events actually drive business. Sometimes a competitive product only has a minor impact and at other times it can destroy your business. In some cases a change in interest rate does not impact growth, other times it causes a crash. Resilience thinking is the capacity of a business to absorb disturbances like these and still retain its basic function and structure. Being efficient, by definition, leads to elimination of redundancies as you only keep those activities that are directly and immediately beneficial. Walker writes, “the more you optimize elements of a complex system of humans and nature for some specific goal, the more you diminish that system’s resilience. A drive for an efficient client optimal state outcome has the effect of making the total system more vulnerable to shocks and disturbances.”

Thresholds versus linearity

The most important takeaway from Walker’s book, and resiliency theory in general, is the importance of thresholds. To understand the need for resilient thinking, the first step is learning about thresholds. In non-business terms, systems can exist in more than one kind of stable state. If a system changes too much it crosses a threshold and begins behaving in a different way, with different feedbacks between its component parts and a different structure. This is not a gradual, linear progression but almost a jump between realities. Think of an airline operating in January 2020 versus their situation in April 2020.

Walker explains how systems, including business systems, shift between thresholds. He uses the analogy of a ball and basin.

System as a Ball in a Basin. The important variables you use to describe a system are known as the system’s “state” variables….

We can envisage the system as a number of basins in two-, or four-, or n-dimensional space…. The ball is the particular combination of the amounts of each of the n variables the system currently has-that is, the current state of the system. The state space of a system is therefore defined by the variables that you are particularly interested in, encompassing the full array of possible states the system can be in.

And it’s not just the state of the system (the position of the ball) in relation to the threshold that’s important. If conditions cause the basin to get smaller, resilience declines, and the potential of the system to cross into a different basin of attraction becomes easier. It takes a progressively smaller disturbance to nudge the system over the threshold. Figures 3 and 4 shows this using the ball in the basin analogy.

If you think of a system as a ball moving around in a basin of attraction, then managing for resilience is about understanding how the ball is moving and what forces shape the basin. The threshold is the lip of the basin leading into an alternate basin where the rules change.

I have seen many examples of this ball and basin philosophy in the business world:

A mobile game company progressively tightens its economy. Product managers increase monetization by worsening the exchange rate or limiting the amount of free play. Each of these changes has a positive impact when AB tested but after six months or a year, they have to sunset the product.
A slots developer has a successful slot machine. They keep making small changes to the math and one year later nobody is playing the machine.
A company hires a new COO who cuts costs by reducing the customer service team by 10 percent. Customers only have to wait an extra 45 seconds to get their request dealt with. Initially, KPIs are unchanged but six months later they find they lost 25 percent of their most valuable customers.
A new CTO optimizes load time of slot machines in a mobile casino by 0.5 seconds. When surveyed, players did not even see a difference. KPIs, however, improve 30 percent.
A product is growing 10-20 percent annually for 5 years. They then make a series of small improvements to the way they work with customers and the flow within the product. Growth goes from low double digits to triple digits but nobody can point to one improvement.

These are all examples where small changes by themselves had negligible impact or even an opposite initial impact, but over time combined they moved the product from one basin to another, causing a tremendous shift in KPIs. Resilience thinking is about looking at the entire ecosystem rather than optimizing one or two events.

This threshold approach shows different ways to approach traditional situations. If the business is stuck in an undesirable “basin”, then it might be impossible or too expensive to manage the threshold or the system’s trajectory. In this situation you may consider transforming the very nature of the system by introducing new state variables (e.g. a subscription model).

You should also consider thresholds when making changes. Walker asks, “how much disturbance and change can a system take before it loses the ability to stay in the same basin?….Along each of these key variables are thresholds; if the system moves beyond a threshold it behaves in a different way, often with undesirable and unforeseen surprises.
Once a threshold has been crossed it is usually difficult (in some cases impossible) to cross back.”

Thresholds also suggest a different way to look at your data and products. You need to understand what thresholds lie along your variables, and knowing how much disturbance it will take to push the system across these thresholds. As Walker says, “to ignore these variables and their thresholds, to simply focus on getting better at business as usual, is to diminish the resilience of the system, increase vulnerability to future shocks and reduce future options…. A system’s resilience can be measured by its distance from these thresholds. The closer you are to a threshold, the less it takes to be pushed….There is a much higher likelihood of crossing a threshold into a new regime if you are unaware of its existence.”

You can’t neglect the environment

One of the driving forces making resiliency increasingly important compared to efficiency is the complexity of the global business ecosystem, particularly in the gaming space. Walker explains, “we all live and operate in social systems that are inextricably linked with the systems in which they are embedded; we exist within social-ecological systems. Whether in Manhattan or Baghdad, people depend on ecosystems somewhere where for their continued existence. Changes in one domain of the system, social or ecological, inevitably have impacts on the other domain. It is not possible to meaningfully understand the dynamics of one of the domains in isolation from the other.”

2020 drove home the impact of the external environment on many businesses. It is a major component of resilience thinking and an important point of difference with traditional science that has modeled the world based on the assumption that change is incremental and predictable.

Resiliency is managing shocks

Resilience is the capacity of a system to absorb disturbance; to undergo change and still retain essentially the same function, structure, and feedbacks. In cases where you have a particularly successful product or business, this resiliency even more important as you do not want to lose what you have achieved (and success is not easy in the gaming space). Walker writes, “it’s the capacity to undergo some change without crossing a threshold to a different system regime, that is a system with a different identity. A resilient social-ecological system in a ‘desirable’ state (such as a productive agricultural region or industrial region) has a greater capacity to continue providing us with the goods and services that support our quality of life while being subjected to a variety of shocks.“

Resilience thinking is about understanding and engaging with a changing world. By understanding how and why the system as a whole is changing, you can build a capacity to work with change, rather than being at its mercy.

An understanding of what is happening above and below your specific business is critically important. You should ask yourself what effect do these changes exert over the scale in which you are operating. It is also important to identify the key slow controlling variables that may move you between thresholds. While I focused previously on a combination of internal factors that could cause your company to change “basins,” it could also be due to a combination of external factors (e.g. a virus and trade war) or a few of each. Look for, and understand the drivers of slowly changing variables in your ecosystem. Also, simplifying or optimizing the system for increased efficiency reduces diversity of possible responses to disturbance and you become more vulnerable to stresses and shocks.

Recovery is key

Given all the variables that impact your business, rather than anticipating each of them, resilience thinking prepares you to recover quickly from shocks. The key to a sustainable business is capacity to recover after a disturbance. While Walker’s book was published in 2006, Covid proved how important it is to be able to recover from existential disturbances.

It is also critical that the ecosystem and the social system are viewed together rather than analyzed independently, and that both went through cycles of adaptation to their changing environments as adaptive cycles happen everywhere.

By adaptive cycles, Walker is referring to two modes, Fore Loops and Back Loops. Walker writes, “a development loop (or ‘fore’ loop), and a release and reorganization loop (or ‘back’ loop) (see figures 9 and 10). The fore loop (sometimes called the front loop or forward loop) is characterized by the accumulation of capital, by stability and conservation, a mode that is essential for system (and therefore human) well-being and …the back loop is characterized by uncertainty, novelty, and experimentation. The back loop is the time of greatest potential for the initiation of either destructive or creative change in the system. It is the time when human actions-intentional and thoughtful, or spontaneous and reckless-can have the biggest impact.”

Resilience is the capacity of the business to absorb change and disturbances and still retain its basic structure and function, maintaining its identity.

How to manage for resiliency

The first key to building a company that can navigate the complex and inter-connected world is looking outward, not simply focusing on doing what you are doing now but better. Realize that the future has a habit of throwing up surprises, a product of the complex nature of social-ecological systems.

Rather than try to simulate the future, explore different potential scenarios. Walker writes, “scenarios are not predictions of what will happen. They are an exploration ration of what might happen….Scenarios help organize information, and they are easy to understand. Scenario planning is also a good way to open discussion among different groups of people who might not otherwise interact….For this reason the scenarios should be considered together, not separately. They should be thought of as a set that provides us with a range of insights on what makes a region vulnerable and what confers resilience.”

Second, you should also put resilience thinking into practice. It represents a different way of looking at the world. It’s about seeing systems, linkages, thresholds, and cycles in both what is directly important to your business and in what that drive them. It is about understanding and embracing change, as opposed to striving for constancy.

Third, keep thresholds top of mind. Understand what are the key slow variables that drive your business’ ecosystem and although a small change might not have a negative impact, know that a series of them could push you into another state. Ask whether these variables are changing and what are the thresholds beyond which the ecosystem will behave differently. Thresholds are defined by changes in feedbacks, so understand which important feedbacks in the system are likely to change under certain conditions.

Finally, understand that resilience comes at a cost. It comes down to a trade-off between foregone extra profits in the short term, and long-term persistence and reduced costs from crisis management. Managing for specified resilience is important, but so too is maintaining the general capacities that allow your company to absorb unforeseen disturbances.

Key takeaways

Resilience thinking is based on the concept that things change (both within and externally to your business) and to ignore or resist this change is to increase your vulnerability and forego emerging opportunities.
The world is not linear, instead we operate in thresholds. Like a basin, small changes keep you in a certain range but then combine to pass over a threshold and move you into a completely different business situation. You need to understand what are the key slow variables that could end up moving you into a much worse (or better) position.
Resilience thinking represents a different way of looking at the world. It’s about seeing systems, linkages, thresholds, and cycles in both what is directly important to your business and in what drives them. It is about understanding and embracing change, as opposed to striving for constancy.

Interview with Jay Powell on trends from 2020 and expectations for 2021

by Lloyd MelnickJanuary 13, 2021December 31, 2020

While I hate making annual predictions, it does not keep me from asking others what they expect. I recently had the opportunity to speak with Jay Powell, arguably the most connected person in the game industry, on the key trends he saw in 2020 and what he expects this year. Jay was one of the first employees I ever hired (1998) and since then he has built relationships with thousands of game developers, publishers and tool providers. Below is my conversation with

Jay:

Lloyd: You are probably the most connected person in the industry so I wanted to start by asking you what major trends or changes you saw in 2020, what were people talking about and interested in?

Jay: That question can go one of two ways. There’s what we see at the AAA level with the Activision, Take Two, etc, then there’s the rest of the world.

Lloyd: Let’s start with the big money companies, then we’ll come back to the rest of the world.

Jay: At the AAA level we’re seeing companies (aside from Take Two) approach the streaming and subscription services with some seriousness. Stadia has stuck around, Apple has been paying guarantees for Arcade, and Microsoft has gone a fantastic job with Game Pass. These platforms are the new consoles in many ways and they can be approached for funding and distribution just like a traditional publisher. Plus, when the exclusivity ends, with some of these deals, you can still pursue more funding and distribution.

Lloyd: Google, MS and Apple are all huge, will one of them win?

Jay: My bet is on Microsoft. The probability is still too high that Google just packs it in if they don’t get the traction they want. That’s been the primary concern with them from the beginning. Aside from the fact that they still don’t seem to understand who their customer is. Apple is under assault from multiple angles right now and Arcade is great for people with Apple devices but iOS isn’t the dominant platform in mobile.

Microsoft has built a real value with Game Pass and they’re finally out there acquiring world class studios to make it even better. Buying Bethesda was huge and I’m very interested to see who they pick up next.

Lloyd: Are the AAA devs/publishers also coming around to streaming/subscriptions?

Jay: Yes, with the exception of Take Two. Activision hasn’t fully embraced it yet, but they will. EA signed on with Microsoft (and Ubi Soft is rumored to be adding their Uplay as well) to make their subscription service part of Game Pass and the next tier of publishers (Paradox for example) already see the value in it as well.

Take Two said they don’t see streaming as a major player in 2021 but let’s face it, with GTA 5 Online, Red Dead Online and the general power of those two IPs, they don’t need it.

Lloyd: Before we leave the world of AAA, you mentioned this being the new world of consoles. What about the old world of consoles, it felt like there was more buzz with the PS5 and Series S/X than there has been for a while with a new console generation, is it a dead man’s bump or a true resurgence?

Jay: I don’t think it’s either. It’s business as usual. The pandemic has been fantastic for Nintendo and the Switch, the early adopters are still buying up XBox Series X and PS5 because that’s what they do, and Microsoft’s Series S (plus Game Pass) is a great option in the middle. We’ve got a shortage now because of the usual holiday release rush and the world went through a global pandemic, which caused supply to be even lower than usual.

Lloyd: So you don’t see the console market increasing, it’s real, it’s here but it is not entering a new growth era?

Jay: I don’t think we’re going to see Microsoft and Sony enter a new growth era with their consoles, but Nintendo’s certainly seeing one.

Animal Crossing New Horizons has sold over 26 million units this year, largely because people were home with the pandemic. All of those players now have a Switch, they’re going to be looking for new games.

Lloyd: Jumping back to the online subs/streaming, what does it mean for the non-AAA companies, how are they seeing it?

Jay: Streaming for the non-AAA companies is a mixed bag. It’s not going to be a money tree for the majority of companies for the same reason every music artist doesn’t bring in tens of millions on Spotify. The big names are always going to make more money on stream/sub services because that’s what people usually gravitate to.

That said, with Apple, Microsoft, and other companies paying guarantees to get exclusives there is a new option for a lot of developers.

Back to streaming for everyone else… Paradox has said that much of the success of Crusader Kings 3 comes from the fact that they added it to Game Pass. We’re seeing these streaming options become marketing pieces for games and many times developers and publishers are paid up front to include them.

We’re also seeing the first wave of Apple Arcade’s exclusivity agreements expire. Now we have teams who’s game (plus live content) have been fully funded but now they are free to pursue other revenue streams for those games as well.

The entire ecosystem opens up opportunities for teams that are positioned (and interested) in taking them.

Lloyd: What about Steam? That’s become the major distribution channel for non-AAA, how is this competition impacting them and thus their ability to get Indie games out?

Jay: Steam’s problem isn’t getting indie games out, it’s getting visibility for the games. More than 200 games launch every week on Steam, they aren’t having any issues releasing games.

The competition from Microsoft and Epic in particular is forcing their hand and making them change their terms for the first time in over a decade though.

Lloyd: For the better? At least better for devs?

Jay: Somewhat. Steam’s changed their terms back in 2018 but it was to the benefit of the AAA crowd, not indies.

Apple changed their’s recently to create better terms for the indies versus the AAA. It’s two reactions to two different problems. In 2018 Steam was getting pressure from Epic but their move was to try to regain the AAA releases that had left their platform. Ubi Soft have UPlay, EA had their Origin launcher, Bethesda announced they would be skipping Steam for Fallout 76, Take Two built their own launcher. Steam was losing the blockbuster games that make the bulk of their revenue.

Apple’s change came from Epic’s pressure on their revenue share and Epic’s framed their entire legal campaign as a fight for the “little guys”

Lloyd: I was always a little amused about Epic fighting for the little guy.

Jay: Epic had a hand in forcing both changes though and I don’t think they get the credit they deserve for what they’ve done.

Lloyd: I agree but not don’t think they are purely altruistic, IMHO

Outside of what we just discussed, what else were people talking about in 2020. What were the big changes (outside Covid) that grabbed their attention or worried them?

Jay:

”I was always a little amused about Epic fighting for the little guy”

– Yea, me too. But with the revenue Fortnite brings in they are the only one’s who have had the nerve (and bankroll) to do it.

and no, it’s not completely altruistic but the indie teams will take all the support they can get.

I’m not sure you can frame 2020 without Covid. It’s been a huge driving force in so many areas of our industry. Before we dive into that we need to recognize that we (as the video game industry) have been VERY fortunate this year. Covid has ransacked so many industries, companies, and families but our world has profited greatly from it. Though we may speak about the pandemic and the “good” it brought to games, it’s not a good thing and a lot of people have suffered and died. I just wanted to make that clear.

Lloyd: So true.

Jay: The big change this year was everything moving online. For the non-AAA world it has allowed developers who have never had the chance to pitch their game to publishers at GDC get the chance due to digital events. (and yes, full disclosure, I run the longest running digital conference series in the industry).

Lloyd: Has that worked?

Jay: YES.

Have people gotten deals from online conferences?

Jay: The change has forced new ways of communicating for business and marketing, as well as internal studio communication. We’ve seen new tools pop up and new opportunities as a result.

We just got the survey stats in from our most recent event and our attendees alone are forecasting millions of dollars in revenue from deals as a result of one event.

And that wasn’t even our biggest event this year. Opening communication channels with no geographic barrier of entry opens up options to developers, publishers, and tech companies across the board.

The problem is, we were flooded with these events this year and we have had a lot of “Zoom Fatigue”. Like any market, that’s going to correct itself in 2021. The traditional conference companies are learning you can’t force the same model (and revenue) from an onsite event to an online event. The smaller companies are realizing it’s harder than it looks to run these events successfully.

The advantage we’ve had with our IndieGameBusiness I events is that we got to figure out all those problems back in 2019 when we were the only one’s doing these events.

Lloyd:

The change has forced new ways of communicating for business and marketing, as well as internal studio communication. We’ve seen new tools pop up and new opportunities as a result.

What are some of the new tools that have gained traction, that devs are really using (as opposed to VC backed and just getting hype)?

Jay: Zoom got the lion’s share of the spotlight because that’s what people were using pre-Covid. Now we’re seeing more video chat options opening up and the ones that existed previously such as Hangouts, Microsoft Teams, WebEx, and GoToMeeting have been forced to improve.

Slack has grown but not nearly like Discord has and both have pushed the other to innovate. Our native app at our conferences is 8×8 which isn’t nearly as popular but works amazingly well across all sorts of systems.

Now you’re seeing a growth in virtual conference software with Hopin.to, EventCombo, and others. They’re going to push companies like EventBrite to evolve.

We’re seeing new solutions pop up in VR conferences (which I’m still not sold on).

In the game industry specifically Xsolla has launched “Unconventional” which had a good test run earlier this year. Our partner MeetToMatch will be unveiling their integrated solution at our March event and we have developers coming together to create things like IWOCon.

This is IWOCon, very cool and ambitious if they pull it off – IWOCon

Lloyd: Enough of 2020 (I’m sure others would agree), what are you expecting in 2021?

Jay: I think we’ll see the fruits of a lot of the innovation that was forced on 2020 emerge next year.

In the game industry, in particular, we’re going to see online events mature as people learn how to manage them. We’ll see some (not all) of our favorite in-person events return in a hybrid form as well.

We’re going to see more attention paid to the subscription services as each platform starts acquiring high quality exclusive content.

We’re going to see a growth in markets like South America, the Middle East, and Africa because the companies there have a much easier path to the core industry. We’re going to see more of the western markets get involved with these territories for the same reason.

Lloyd: What do you mean by hybrid?

Jay: Hybrid events will be merging the on-site conferences with online versions. We’ve done this with our event that happens alongside GDC and other conferences have tested it as well. At the most basic level you allow your attendees that are physically at an event to schedule online meetings with registered attendees who aren’t. I imagine we’ll see virtual lectures and sessions as well.

Lloyd: In the emerging territories you mention, will the growth be subscription based or more traditional game sales?

Jay: Both, each market has it’s own nuances, advantages, and limitations. The most successful companies will be the ones who know what products and games fit the right audiences.

Lloyd: What else do you expect?

Jay: We’re going to have to see a better way for developers and small to mid tier publishers to boost their discoverability (which is still the biggest hurdle for the indie market).

We’re also going to see a lot of growth in online education both through traditional colleges and universities as well as specialized segments for markets like games.

Lloyd: Hasn’t discoverability been an issue for devs since when we first met in the 1990s at Octagon Entertainment and Merscom?

Jay: If we go all the way back to our Octagon days, we dealt with 75-150 publishers globally. Now my team tracks over 700 publishers across PC, console, and mobile.

When we were running Merscom the discoverability issue came from the casual space where companies like Big Fish were launching a new game every day (and taking 70% of the revenue). Now we see far more games launched on multiple platforms. The days of “A good game will always sell” are dead and gone.

Lloyd: How do 700 publishers make money, I can’t believe 700 devs could make money, and publishers need a suite of titles?

Jay: Well we track over 4,000 developers and I’m sure there are at least 1,000 more that haven’t hit our radar yet.

The reality is that 700 publishers don’t make money, We release our publisher list every year (new one arriving in early January) and it’s a major undertaking to keep our internal database accurate. Publishers come and go quickly but you don’t need as many hits to stay in business now if you run a streamlined company.

Lloyd: I’ve already kept you longer than I was supposed to, so thanks for the great conversation. Any parting thoughts you wanted to share?

Jay: I can do this all day.

2021 is going to see a continuation of the changes we saw in 2020. The companies that survive and prosper are going to be the ones paying attention to the market around them and can adapt as needed.

Now more than ever you need to know your audience, know how to reach them, understand their pain points, and deliver them an innovative solution. That’s going to be true for everything from the games we play, to where we play them, and the tech that runs them.

Thank you Lloyd, this was fun

Summary of posts September to December 2020

by Lloyd MelnickJanuary 6, 2021December 26, 2020

People Analytics for Online Gaming

You need to align performance evaluations with the underlying factors that create success; deconstruct what leads to the outcomes you want and then assess people on those factors.
Some common problems when evaluating people include context (attributing results to a person when the environment drove success or failure), interdependence (assessing on an individual level a result that was driven by a team), self-fulfilling prophecies (people perform consistent with expectations) and reverse causality (we attribute causality to correlation, even though the factors may not be related or may be in the other direction).
You should assess how your team or company works as a network, looking at the relationships, and then encourage and grow ones that lead to desired outcomes.

Interview with the Queen of Research, Maria Cipollone

How to manage your customer service to have the biggest impact on your profits

Data shows that trying to create an exceptional customer experience has virtually no impact on loyalty and engagement, however, reducing the effort the customer must exert does improve loyalty.
The best way to measure this effort is CES score, which is based on a statement, “the company made it easy for me to handle my issue,” after which the customer is asked to answer (on a 1–7) whether they agree or disagree with that statement.
The keys to implementing successfully an effortless experience program are minimizing channel switching, avoiding repeat contacts, engineering the customer service interaction experience, building the control quotient, creating the right culture and optimizing the purchase experience.

The difference between great executives and everyone else

There are many similarities between what separates a professional athlete from an amateur and what separates a great business executive from everyone else.
The best executives focus on getting the best outcome, not being right.
The best executives accept responsibility and do not blame others.

3 Words I Hate

Game companies should avoid the phrase gamification, as their product is already a game and should be entertaining.
Whales is an insidious phrase as it describes your best customers in a derogatory way, potentially leading to treating them in a way that destroys long-term value.
It is misleading to use data that is directional, without statistical significance as relying on this data is like not using data at all.

Leading in a complex world: building a team of teams

The difference between complexity and complicated is central to building an organization that works in the 21st century. Things that are complicated may have many parts, but those parts are joined, one to the next, in straightforward and simple ways and are like an equation that needs to be solved. Things that are complex, such as insurgencies or the mobile gaming ecosystem, have a diverse range of connected parts that interact regularly.
Accept that you will have to deal with unpredicted challenges and threats. You then build an organization and systems that can adapt rather than erecting strong, specialized defenses.
Teams, while not always optimally efficient, are extremely adaptable. Teams overcome challenges that could never be foreseen by a single manager, their solutions often emerge as the bottom-up result of interactions, rather than from top-down orders. Your teams must then interconnect into a team of teams, rather than siloed organizations. Create an organization within which the relationships between teams resembled those between individuals on a single team.

Adjacent User Theory Shows How to Supercharge Your Game’s Growth

Adjacent users represent a great opportunity for growth. These are potential players (adjacent users) are aware of the product, maybe tried it, but are not engaged customers.
You solve for these players by looking at different states of your product (i.e. registration, play, purchase) and seeing who drops off at each of these states, then understand why these potential customers are dropping off.
You can make your product attractive by putting yourself in the place of the adjacent user, watching them use your game or product and talking to them.

What really went wrong at Quibi

Quibi’s failure was very predictable and these predictors provide a framework of what companies need to do to succeed in the entertainment space.
Quibi relied on a unique technology, the ability to watch content seamlessly in portrait or landscape mode, rather than relying on creating content people wanted. You cannot succeed in entertainment by relying on technology.
Other key lessons are that great entertainment companies need to deliver a overabundance of content, much more than you expect even your heaviest users to consume, and some flagship products that forces people to try your offering.

Building a strategy around doing the opposite

A powerful way to find a competitive advantage is to do the opposite of what other companies in the industry are doing. Mature industries tend to converge, creating an opportunity to appeal to customers who do not like the homogenous offerings.
To uncover the opportunity, first list the primary characteristics and elements currently in the category and then ask yourself what would an offering look like if we did the exact opposite.
This strategy represents a particularly appealing opportunity in the social casino and real money gaming spaces, where the offering has largely converged.

How to become successful CEO

Being a great CEO or leader is very hard. CEOs and others leading business units are responsible not only for their fate but the fate of their company, having to make potentially life or death decisions.
To meet The Struggle of leading a company, you need to rely on teamwork, think outside the box for solutions and continuously self-reflect.
Great leaders must learn to be comfortable doing inherently uncomfortable things. Great CEOs have to make their unnatural job feel natural.

Ways to improve your game (or product) using neuroscience

Neuromarketing, using brain imaging, scanning, or other brain activity measurement technology to measure a subject’s response, shows you can price more effectively by minimizing the customers pain, by not forcing them to make multiple purchase decisions, spreading out the cost or bundling items.
Neuromarketing also shows you can improve customers’ trust by trusting them and specifically telling them you are trustworthy.
It also shows that branding forms an emotional attachment you’re your customer and prompts them to recommend you enthusiastically to their friends.

Up-skillOR vs Up-skillEE

Recruiting candidates with the expectation you will train (upskill) them to do the target job well shows an arrogance that you think you can train them better than anyone else has.
Upskilling people ensures your team does not go to the next level, you set your current skillset as the ceiling.
You also miss the opportunity to bring new skills and experiences to your team, where the new hire can make everyone else more valuable.

Word-of-machine effect with recommendation engines

- AI driven recommendation engines, popularized on Amazon and Netflix, have gone from being a competitive advantage in online and mobile apps to part of the cost of doing business.
- While AI recommendations are often closer to what customers want, people trust human recommendations more when it is based on hedonic or experiential factors, and trust machines more when it is based on utilitarian factors; this is referred to as word-of-machine effect.
- When presenting recommendations, you must be cognizant of word-of-machine effect; for recommendations around hedonistic properties try to bring in a human element (augmented intelligence) or explain that these are better recommendations.

Turn Your Company Around

Less than 50 percent of people are satisfied with that job, and Covid has made the situation more dire.
The key to improving employee satisfaction, and growing productivity, is evolving from a leader-follower approach (where you tell people what to do) to a leader-leader approach (where people control their decision-making.
To move to a leader-leader organization, you need to empower your team (including asking them how to empower them better) and encourage deliberate action where they vocalize what they are doing rather than ask what to do.

The Power of Content

Disney has enjoyed phenomenal growth with Disney+ and last week announced it’s plans to accelerate this growth, showing what is critical to the success of an entertainment brand.
The first pillar of this strategy is to release a plethora of new content in 2021, more than 25 new television series plus multiple movies, showing how critical new content is (especially telling as Disney has the strongest back catalog of content in the world).
The second pillar is to rely on its franchises (Star Wars, Marvel, Disney characters) for this new content, showing the value of Forever Franchises in the entertainment space.

2021 Pre-Mortem: What went wrong in 2021

Rather than trying to guess (predict) the future, conduct a pre-mortem, where you put yourself in December 2021 and look back at what went terribly wrong for your business. The exercise will help you identify the biggest risks you face.
Some of the areas you should look at include the impact of Covid, spread of Real Money gaming in the US, challenges to RMG in Europe, the new gaming consoles and how work from home is changing the workplace.
You also need to realize that risks come in many forms and some are impossible to anticipate. You need to detect these quickly and respond with improvisation, speed and an iterative approach, since not every action taken will work as intended.

2021 Pre-Mortem: What went wrong in 2021

by Lloyd MelnickDecember 22, 2020April 5, 2021

While it is impossible to predict the future — Chaos Theory shows that even very small events can have a huge impact — you can still prepare for likely scenarios. The uncertainty principle, a key tenet of quantum mechanics (as popularized by Stephen Hawking), postulates that perfect predictions are impossible if the universe itself is random. Thus, I do not believe in predictions (outside of State Fairs), but I am a strong advocate of pre-mortems and thought a pre-mortem on 2021 for the game industry would be useful. A pre-mortem is a meeting held before a major decision where all those involved in making the decision imagine themselves six or twelve months after the decision was taken, assume it turned into a debacle, and then explore why it was a disaster. The value is not predicting exactly how 2021 will turn out but preparing for events that could have a major impact.

For 2021, I want to take a similar approach and put my readers in December 2021 looking back at the year and understanding what went wrong. I have put together several ideas to consider for your pre-mortem but as every company has a different risk profile, you should focus on those that could most impact your business.

We underestimated the headwinds created by Covid-19

At the end of 2021, we may look back and regret not seeing the disruption Covid would cause to our industry. With many people unemployed or seeing lower earnings, spending in iGaming and social gaming could deteriorate sharply. If you made investments or acquisitions based on continued growth, you may find yourself in a difficult position.

We overestimated how quickly revenue would revert to pre-Covid levels

There is also a possibility that when 2021 is over, you may regret anticipating that the impact of Covid would be short lived. Instead, the phenomenal growth many social and iGaming companies experienced could continue or even accelerate, as more people see the value of online gaming. Thus, you may have underinvested in growth expecting a weaker market.

We missed the impact of the new consoles on social gaming

Generally, it has been mobile and free-to-play games that have impacted the console gaming space (see THQ and Acclaim) but in a year we may look back and realize that the launch of the PS5 and Xbox Series X/M significantly impacted the mobile and gaming businesses. With the strength of the new console launches, particularly Sony’s, there is a possibility that these consoles pull users from other forms of gaming. I have always said you should not look at your direct competitors but consider the entire entertainment space (gaming, streaming media, television, etc.) as potential competitors, so discounting console gaming is something you may regret.

Real Money Gaming happens faster than expected in the US

The last year has seen the move to online accelerate (just ask most brick and mortar retailers) and this acceleration may spread to the US real money gaming industry. While the valuation of several iGaming companies have exploded because of the US opportunity (Draftkings anybody), most companies still assume the majority of the US will not legalize real money gaming in the short term. While the process has been slow, often disruption manifests itself initially slower than expected only to hit an inflection point that surprises people with the speed of the transformation (ask a movie theater owner). Changes in the US market would not only impact real money gaming operators but could change the playing field for social casino companies (for better or for worse).

The European Real Money market shrinks significantly

While the US real money market is the opportunity everyone is looking at, the industry could experience very material changes in the markets that generate virtually all of the current profits. Evolving legislation in many European markets is impacting companies’ ability to compete and to maintain profitability. Changes always create challenges and opportunities and that is likely to be the situation in Europe’s real money market.

IDFA has a major impact on acquisition ROI

While there has been much hand-wringing and chatter about Apple’s planned IDFA change, most companies are operating under the assumption that Apple will not make a change that causes apocalyptic destruction. While that is likely the case, there is the possibility that the change will be as damaging as some warn, making it unprofitable for many game companies to acquire players. You may regret not building up a strategy that reduces your dependency on performance marketing and instead increase your competence in cross-sell and monetization (if players cost more, you need to make more from them). You also may regret what genres you pursued, as some will be more resilient to an IDFA change than others.

M&A market drives non-profitable behavior

In the last year, the M&A market in both social gaming and iGaming has heated up, with 9 and 10 figure deals commonplace. You often see in a strong M&A market that companies focus more on positioning for a sale than profitability, which cascades across the entire industry. If valuations are driven by new user growth (say the US sportsbook market), companies will bid up prices for new players and give incentives to attract customers from competitors (sometimes with a negative ROI). For businesses focused on profitability, you may find that your previously sound approach did not work in 2021.

Your “supply” lines are disrupted

Over the past five or ten years, most game companies have shifted to a model where various functions are outsourced. You may have moved your game design to India or your art to Nebraska or your sound/music to Kuala Lumpur, which has allowed you to harness the best talent in the world and potentially reduce costs. While these changes have increased elements of your resiliency, they also provide new risks. In 2020, Covid made it harder (and in some cases impossible) to travel, Brexit creates questions in how the UK will collaborate with other European countries and new trade wars potentially impact the ability to work across borders. You may find that critical functions turn into bottlenecks that slow or halt your content stream or new products.

Work from home changes the nature of the workforce

Many people have forecast how the workforce will change in a post-Covid world but, as I said earlier, predictions are not my business. Instead, you should be aware of potential shifts that could have a dramatic impact on your business in 2021:

Major tech companies move to a permanent part online model, thus increasing their recruiting reach worldwide. While in the past you may have considered your employees safe if you were in Belarus or Sri Lanka, you may now be competing with the world’s best companies to keep these employees.
People might want to return to an office. If you have moved to a pure or primarily WFH situation, you may lose employees who want to be back in an office.
Work from home has a negative impact on your team’s mental health.

There are many ways that work from home can evolve and you should anticipate changes in the macro-environment impacting your business.

Something happens that you never saw coming

You also need to realize that risks come in many forms. While you can anticipate some, there will be risks that come out of the blue from complex combinations of typical events or from unprecedented massive events (i.e. Covid). You need to detect these quickly and respond based on the event, rather than trying to fit it into your anticipated risk bucket. This response should be improvisational, rapid, iterative, and humble, since not every action taken will work as intended.

What to do

While I can’t (and, really, neither can you) predict the future, you need to look at possible outcomes and build up a risk adjusted strategy to optimize your growth. Do not rely on the ones listed above, but look at your business and understand what external factors could have a significant impact next year. Keep in mind, a pre-mortem is meant to look at and avoid potential disasters so while many of the above scenarios are negative, hopefully most (if not all) will never materialize. If they do not, great, it’s better to have an insurance policy you never use than needing one you do not have. You also need to be ready to react quickly to unanticipated challenges.

Key takeaways

Rather than trying to guess (predict) the future, conduct a pre-mortem, where you put yourself in December 2021 and look back at what went terribly wrong for your business. The exercise will help you identify the biggest risks you face.
Some of the areas you should look at include the impact of Covid, spread of Real Money gaming in the US, challenges to RMG in Europe, the new gaming consoles and how work from home is changing the workplace.
You also need to realize that risks come in many forms and some are impossible to anticipate. You need to detect these quickly and respond with improvisation, speed and an iterative approach, since not every action taken will work as intended.

The Power of Content

by Lloyd MelnickDecember 16, 2020December 13, 2020

While even I take what I say with a grain of salt, Disney’s announcement last week about their 2021 strategy puts an exclamation point on the overriding supremacy of content (both quality and quantity) over every other variable in the entertainment industry. In April, shortly after the launch of Disney+, I expressed concerns with its lack of new content once customers got past the Star Wars/Marvel/Disney back catalog. These concerns did not impact Disney+ in the short term, as it announced 86.8 million subscribers as of 2 December (effectively the populations of Italy, the Netherlands and Switzerland combined).

The announcement

The most insightful announcement, though, was Disney’s plans for 2021. Disney announced “a blitz of new projects” including ten series from the Star Wars universe, fifteen Disney branded movies, a ”cluster” of shows from Pixar and ten Marvel series, all for Disney+. The power of this announcement is the voice behind it, Disney is the largest and most successful media company (brand) in the world and it is folly to argue that anyone knows entertainment better than how they understand it. Unpacking Disney’s strategy shows two keys to success in the entertainment space.

You cannot avoid the content treadmill

To become dominant in streaming, Disney’s move showed that a pillar of their strategy needed to be a constant stream of fresh content. Rather than relying on the best back catalog in the entertainment industry, or a few popular new series, Disney move showed you need a constant and robust stream of quality content. Launching 25 or 50 new series is neither easy nor inexpensive, yet Disney feels the need to devote these resources.

Many companies in the gaming and entertainment space have looked at various tactics to avoid the need to create fresh content regularly, what is often referred to as a content treadmill. Companies try to add new features, roadblocks to slow content consumption, incentives to reuse existing content and cloning of existing IP to avoid creating new content. A company with Disney’s resources and sophistication would not commit to such a large content stream, however, if there were less costly alternatives to creating new content.

The power of Forever Franchises

The second lesson from Disney’s strategy is the power of powerful franchises. Zynga has reinvigorated its business, becoming the largest mobile game publisher, based on a strategy it refers to as “Forever Franchises.” In Zynga’s case, they have grown internal franchises (Zynga Poker and Words with Friends) and also acquired additional games (CSR, Toon Blast, Toy Blacks, Empires & Puzzles and Merge Dragons) to build a stable of Forever Franchises that each generates over $100 million/year, which they can then leverage into future growth. The strategy of coupling internally built franchises with the acquisition of new franchises has resulted in Zynga’s share price nearly tripling over the last four years.

Disney’s announcement confirms this strategy as the way to become and remain a leader the entertainment industry. Disney was never shy about acquiring franchises, the acquisitions of Pixar, LucasFilm and Marvel, were some of the biggest achievements of Disney. Disney’s plans for Disney+ further confirm the importance of Forever Franchises.

With Disney+ the most important component of its future strategy (there was very little talk about Disney’s parks, cruise or even film business during the 2021 discussion), it was telling that the strategy to add rocket fuel to its subscriber growth centered on Forever Franchises. Virtually all of the new content coming to Disney+ builds on its core franchises, Star Wars, the Marvel Universe, the Disney characters and Pixar. While it is not easy, or cheap, to develop or buy Forever Franchises, they are critical to building a leading position in the entertainment space.

What it means

Even if you are not Disney (or Zynga), these two lessons are critical for any gaming or entertainment company. To maintain and grow your business, you need a constant stream of strong content. You also should focus on trying to build franchises, these are critical if you hope to dominate your space.

Key takeaways

Disney has enjoyed phenomenal growth with Disney+ and last week announced it’s plans to accelerate this growth, showing what is critical to the success of an entertainment brand.
The first pillar of this strategy is to release a plethora of new content in 2021, more than 25 new television series plus multiple movies, showing how critical new content is (especially telling as Disney has the strongest back catalog of content in the world).
The second pillar is to rely on its franchises (Star Wars, Marvel, Disney characters) for this new content, showing the value of Forever Franchises in the entertainment space.

Turn Your Company Around

by Lloyd MelnickDecember 9, 2020December 6, 2020

During these chaotic times, many companies that have previously enjoyed high employee satisfaction are now finding themselves in an unfamiliar situation, dealing with an increase in employee churn and employee dissatisfaction. Some leaders who prided themselves on building great and collaborative teams are finding that team health issues are becoming their primary focus. A colleague recently recommended David Marquet’s Turn the Ship Around, a book about Marquet’s experience as a US nuclear submarine Captain, where he turned around the performance and morale about the USS Sante Fe.

Although the book was written several years before the pandemic, Marquet highlighted that team health and job satisfaction were already critical issues facing business. He writes that from 2004 to 2012, less than half of US workers were satisfied with their jobs; while a 2009 survey showed worker satisfaction to be at its lowest rate ever. Dissatisfaction is also very costly, as he shows that it led to lost productivity of up to $300 billion in the US alone.

The crux of the problem

One of the strongest drivers of workplace dissatisfaction is that most organizations are built for workflows that made sense 50, or 500, years ago but have not kept up with the time. I found this insight particularly strong coming from Marquet, as the military has traditionally embraced very hierarchical leadership structures (though it echoes what General Stanley McChrystal describes in Team of Teams).

Marquet explains that most companies are structured on a leader-follower approach, where decisions are made by a boss and carried out by the workers. This design works great if you are trying to build a Pyramid, or even during the Industrial Revolution, but not for jobs that are dominated by cognitive tasks and decision-making. While the leader-follower approach creates great Pyramids, it does not lead to efficient attack submarines or gaming companies.

Moving to a leader-leader organization design

At the root of Captain Marquet’s success turning around the USS Sante Fe was empowering workers and overhauling the idea of leadership. Marquet argues that to create a satisfied, empowered workforce, you need to move to a different leadership structure, a leader-leader system.

The difference between a leader-leader and leader-follower approach is exposed by the way decisions are made. In a leader-follower structure, information is sent up the chain of command, and a decision is made only once the information has reached and been digested by those at the top. In a leader-leader system, the power to make decisions is distributed throughout the chain of command, allowing individuals to act even on newly arrived information.

Marquet uses an example from his navy career to highlight the difference in approaches. “A navigator realizes his submarine is off course and in very shallow water. Instead of alerting his commander first, he jumps into action, rectifying the problem safely and effectively. “

Building a leader-leader system by giving up power

To move to a leader-leader system, and thus improve both productivity and team health, you need to recreate the building blocks of your organization. The first step is to ensure that decision-making involves employees and is sustainable. To do this, however, you may need to give up some of your perceived power.

There are several ways to empower better your team;

Talk to everyone and ask them how you could better empower them.
Encourage deliberate action. By deliberate action, ask your team to pause, vocalize and gesture toward what they were doing before they did it. In the case of the Sante Fe, Marquet used a simple three-word phrase to involve actively the entire crew in the running of the submarine. The phrase was: “I intend to…”
Change your emphasis from briefing to certifying. When briefing, you can only ensure the competence of the person giving the brief. Those being briefed often daydream or stop listening halfway through, as the task is a familiar one, and they’ve heard it before. Rather than just giving information, certifying makes your team members answer questions about the task you assign to them.

Develop and communicate core values

I wrote several months ago about best book I read this year, General Stanley McChrystal’s Team of Teams, not coincidentally also by a military leader and he and Marquet share a very important common learning. Both Marquet and McChrystal saw the need for core values to keep your organization united and productive. When you are empowering your team, you set them up for success by conveying the company’s values and strategy. This information helps everyone make decisions that drive your company forward.

It is also important to align the culture, with your words and rewards, towards these values. Marquet understood that praise had the greatest impact when good performance was recognized immediately. He also believes that the way rewards are structured can have an impact on an organization’s productivity. Man-versus-man rewards, where employees are encouraged to compete against each other, are unproductive. Man-versus-nature rewards, though, pit employees against an external enemy, which helps build camaraderie and a stronger work either among workers.

Turning your ship around

To improve your team’s culture, as well as productivity, Marquet shows that a traditional leader-follower approach to leadership is ineffective and does not tap the natural leadership abilities everyone has. Changing to a leader-leader structure entails a reassessment of the way you lead but the benefits of such a switch will benefit both your team health and your productivity.

Key takeaways

Less than 50 percent of people are satisfied with that job, and Covid has made the situation more dire.
The key to improving employee satisfaction, and growing productivity, is evolving from a leader-follower approach (where you tell people what to do) to a leader-leader approach (where people control their decision-making.
To move to a leader-leader organization, you need to empower your team (including asking them how to empower them better) and encourage deliberate action where they vocalize what they are doing rather than ask what to do.

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What is the Butterfly Effect?

Butterflies are not random

The Butterfly Effect and gaming companies

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Timing

Stress you are there to help

Match the cadence of help to the type of need

Being a good helper makes everyone a winner

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How do you react to uncertainty and fear

You can’t fake it

Awful days are invaluable

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Resiliency versus optimization

Thresholds versus linearity

You can’t neglect the environment

Resiliency is managing shocks

Recovery is key

How to manage for resiliency

Key takeaways

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We underestimated the headwinds created by Covid-19

We overestimated how quickly revenue would revert to pre-Covid levels

We missed the impact of the new consoles on social gaming

Real Money Gaming happens faster than expected in the US

The European Real Money market shrinks significantly

IDFA has a major impact on acquisition ROI

M&A market drives non-profitable behavior

Your “supply” lines are disrupted

Work from home changes the nature of the workforce

Something happens that you never saw coming

What to do

Key takeaways

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The announcement

You cannot avoid the content treadmill

The power of Forever Franchises

What it means

Key takeaways

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Like this:

The crux of the problem

Moving to a leader-leader organization design

Building a leader-leader system by giving up power

Develop and communicate core values

Turning your ship around

Key takeaways

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Like this: