Hunches for 2016

(8 minute read by Steve Beshara)

There are signals everywhere of our improving economy. Unemployment is around 5%, which is close to what economics consider full employment. Gas prices have come down to almost $2 per gallon. The Federal Reserve raised interest rates for the first time in nearly a decade. Corporate earnings are generally up. The "innovation" market is at an all-time high. 

With all these favorable economic indicators, will growth continue in 2016? And what will the growth drivers be? 

Here are my predictions - more like hunches - for 2016. These are certain fundamentals that I believe make a difference and accentuate growth.

1. Innovation hits a rough spot.

Since the economy has regained its strength, innovation gets a lot of attention. Innovative companies in the Valley have been blowing up like a balloon. In 2010, there were 8 unicorns (companies valued over $1 billion). By July 2015, the number of unicorns has expanded to 118. A fantastical reap of 1,475% in 5 years!

With valuations rocketing, there are signs of corrections coming.

When I read about some of the Valley insiders and leaders making big moves, I think of the Hype Cycle and see where they are. Investor Marc Andressen (who WIRED referred to as “the man who makes the future”) recently divested the majority of his Facebook stock. What is this insider seeing that the general market does not? He knows this chart well, and its cycles of maturity are predictable. Every investor wants to sell high, so what does this signal?

Marc Benioff the billionaire founder of salesforce.com hosts a gathering of Valley entrepreneurs periodically. Recently, he stated that he thinks more Valley companies should go public because they need to learn how to listen. Entrepreneurs aren't listening and becoming intoxicated by their valuations? But entrepreneurs don’t set their valuations necessarily, the market does. One key driver for valuations is “potential future earnings”, which is a subjective calculation. It seems the market and entrepreneurs who sell their story are overly optimistic about values.

Translation: Unicorn bubble bursts. A correction coming. How big and how much will it affect the overall market is to be seen. Smart companies are roadmapping beyond the bubble as not to be caught flatfooted.

2. The Hype Cycle is generally true, but with exceptions.

Gartner has a nice graph called the Hype Cycle. Essentially, it illustrates the “general” progression of disruptive brands over time. The rise. The fall. The plateau. Specific and common events appear along the way, by phase. The visibility and maturity of brands are plotted on the curve, and people use the Hype Cycle as a predictive analytical tool. 

I believe the Cycle applies to many brands and their journeys - with an emphasis on hype. Once a novel technology is introduced to the market, we tend to envision its final destination. Early expectations of the technology become inflated, which sets up the fall. They rarely live up to the initial hype. 

Like all generalizations, it applies to many disruptive technologies, but there are exceptions. Books like “BOLD” by Peter Diamondis have been written about exponentially advancing technologies. Future potential for networks and sensors, artificial intelligence, robotics, synthetic biology and infinite computing to name a few, are exceptions to the Cycle. 

Today’s market spends a significant amount of time boosting expectations about promising technologies. However, as the red hot innovation market starts to cool, we will see a lot of companies in the "trough of disillusionment". But there are some interesting exceptions.

Translation: The Hype Cycle is an analytical tool for planning. It’s smart to be aware of these events and forces. However, they do not predetermine your destiny. Plan for all scenarios.

3. Hype “Exceptions” battle Hype Cycle. 

In 1975, Steven Sasson was a young electrical engineer working for Kodak. He created the world’s first digital camera. It was crude, large and cumbersome - but it took digital pictures. Kodak executives asked “why would anybody want to look at their pictures on an electronic screen?” Kodak buried it.

Twenty years later, Kodak enjoyed monopoly status - 140,000 employees with a $28 billion market cap owning over 80% of the film market. But they failed to look at the broad opportunity of technology and how their products needed to transform and adapt to the market that was starting to digitize. Rapidly. People were still taking photos, so Kodak arrogantly felt that their monopoly position was so strong that these new forces couldn't “disrupt” them. They thought it was all “hype”. 

Slowly but surely, out of business they went. They spiraled downward until it was too late. Kodak stopped making a profit in 2007, then filed for Chapter 11 in January of 2012.

During this time, in 2010, two Stanford grads started a company called Instagram. They married their easy-to-use photo editing app with the exploding smartphone camera capability, and a new Kodak moment was realized. After 16 months of founding the company, Instagram was valued at $25 million. Sound like a Hype Cycle candidate?

Hardly, they were an exception. With a singular vision, easy-to-use interface, discipline to avoid “feature creep”, and exploding technology Instagram continued to accelerate. Facebook, a disruptor itself, realized Instagram photo making was better, and in branding: if you cant beat them, buy them. On April 9, 2012 - just three months after Kodak filed for bankruptcy - Instagram (with a dozen employees) was acquired by Facebook for over $1 billion. 

Translation: Kodak could have been, should have been Instagram. Disrupt yourself or someone else will. It can payoff handsomely in many things happen correctly. 

4. Vision is mandatory.

Psychologist Edwin Locke nails the core mental attributes of great business leaders in his book “The Prime Movers”. Among them are Steve Jobs, Sam Walton, Bill Gates, Walt Disney, and JP Morgan. They all share one common trait: vision.

“It’s the ability to see ahead that truly set each of these men apart. The data shows that companies consistently fail when they rest on their laurels and think that what worked yesterday will work today and tomorrow. Great leaders all have the ability to see farther and the confidence to drag their organization toward that vision. Look at Steve Jobs. He wasn't very nice about it, but if you told Jobs something was impossible, all he would do was disagree and walk away. He had no time for impossible. He had a vision of the future and would not be swayed.”

Translation: Great leaders and winning companies are driven by their inspired vision of the future. And it takes a disciplined culture to realize the vision day in and day out.

5. Marketing will continue to become more scientific.

Data continues to add up, exponentially. Marketing now functions on immediate responses from their audiences via their digital communications. As the years go by, data science is getting sophisticated. Leveraging audience feedback, brands are making smarter mid-course corrections - quickly and with greater certainty. “Science” and the measurement of data are starting to eclipse the “art” of marketing. Yet, tremendous power still lies in the “art”, especially in content creation, storytelling and value architecting. It's the science of marketing that allows for greater precision in matching up value with your audiences, communities and crowds with your “art”.

We believe it boils down to 1) story and 2) system. An oversimplified way to look at this is: “story” is the art of crafting and telling your narrative in a compelling, credible way; and “system” is the channels to the market that transport and amplify your story. Story = art of marketing. System = science of marketing. It takes both - in harmony - to grow.

Translation: Leverage and integrate both science and art of marketing to grow your brand. In 2016, there will be more sophisticated, scientific systems to help you make your art more precise and more valuable.

6. Winning branding requires commitment to being better, different and special.

If you don’t have a strong brand you risk sliding down the scale toward commodity. Philip Kotler, professor at Kellogg School of Management at Northwestern, stated: “the art of marketing is the art of brand building. If you are not a brand, you are a commodity. Then price is everything and the low-cost producer is the only winner.”

To win the low-cost production game alone, it generally requires major scale. Unless you have a Walmart or Amazon model, its a challenging place to be. 

Commodities are also more vulnerable than brands. Recently, Chipotle has experienced some major problems with food safety that has set back the company in many potentially perilous ways. The Chipotle brand has been benefiting from major brand investments over time, so many would consider them a power brand in their sector. Patrons of brands, not commodities, are more likely to forgive the brand for misdeeds. With commodities, misdeeds can be perilous. As a Chipotle fan, I assume they will fix their problems. If they were a commodity, consumers wouldn't be as willing to forgive them.

One of our key recommendations for brand building is to distinguish with greatness. Challenge yourself to define where you are better, different and special. As Jim Collins says, discover what your hedgehog concept is. It's a little dated but still very relevant: what are you deeply passionate about? what you can be the best in the world at? what drives your economic engine?

We have many brand recommendations to come. We see tremendous value in achieving growth by leveraging the machinery of branding. For today’s post, I believe these are the key drivers for growth:

•  Use branding as a powerful vehicle to create and bolster a valuable position in the marketplace. Don’t be a commodity unless you want to play in the low-cost game.
• Time and manage the Hype Cycle, then build something great so you can explode off the chart.
• Because most companies are “inside their tornado” leverage the outside counsel to gain objectivity (about road maps of success and growth plans).

Undoubtedly, I believe 2016 will continue to show growth. As usual, there will be winners and losers in different places and with different concepts. Instagrams are rare. Visions are hard to realize. High value content is challenging to create. Building brands takes time. 

Happy New Years. Good growth to you.

What do you think? Let me know your thoughts.