Category: Themes

Theme 3: Strategy is Numbers

(To read previous “themes”, click here:

Theme 1: It’s Not Data, It’s Decision Making

Theme 2: It’s Not Value Capture, It’s Value Creation)

Imagine an officer in the military addressing his troops. The time period doesn’t matter, be it the Peloponnesian War of ancient times or the Iraq War of the 2000s. I’ll give you two versions. Here’s version one:

“So we’re heading out to confront the enemy. Our goal is to bring decisive energy to the battlefield. We’re going to overwhelm them with superior firepower, ensuring we make decisive action. Once we defeat the enemy, we’re going to consolidate our gains, ensuring we have accounted for stable post-conflict efforts to capture our gains.”

That hurt me to write. If you’re a subordinate, what do you even do with that?

It’s pretty much the worst possible version of a mission you could give. It’s like the consultant or PR speak version of a mission statement: all buzz words with no actual meat or substance. (And yeah, I hear you. The mission statement for the Iraq invasion probably had a slide with that sort of non-speak on it.) 

What’s the better real world mission statement? Here:

“Our mission is to conduct an ambush on location WT 8940-4569 in order to destroy enemy patrols no later than 1700. We’re going to depart at 0700. We’re moving from this location…”

[point at a map]

“…to this location”

[point at another location on the map]

“and lay in an L-shaped ambush here. This will look like this…]

[Point to a sketch of the position with unit names.]

“First squad, your task is to lay a support by fire here in order to…”

Then the hypothetical officer would continue.

Though I’m a little rusty, that second briefing is pretty close to the text book version—technically Ranger Handbook version—an American officer would give his troops in today’s U.S. Army. (Maybe I would know.)

What’s the difference between the two briefings? Well, one is completely vague and the other is detailed. But the main difference is the second briefing has the locations on the map. 

In the military, you can’t have a strategy without a map. If you don’t have locations, you don’t have a strategy. Sure, you can talk about Hannibal conducting a pincer movement, but really without a map you can’t visualize it. Sure, you can “defeat Hitler”, but you can’t say that to your men. You have to tell them you are invading, and point out where and when with a specific unit (or tons of different divisions and brigades), moving along given routes. Even a counter-insurgency campaign is about controlling territory, winning elections and decreasing violence. A map helps explain all those things.

Another way of saying this is that to win wars, you need a strategy that understands the territory. That understands that you have to seize territory to win. Yes, lots of factors go into it, but controlling territory (with the people on it) is the point.

So what’s the business equivalent? Well, numbers. 

Strategy—in business—is numbers.

You can have a great company culture and be innovative or be disruptive. Those are all things. But what matters—the point in business—is how the numbers move. The vague version? Deliver customers a great product. The specific version is answering the questions: How much revenue will a new product generate? Is your company earning more money than it sends out? What is its return on investment on its assets? What is its profit? Those are the numbers. Hypothetically, they directly impact the stock price. (There is an argument about the efficient market hypothesis I don’t feel like getting into here.)

What aren’t numbers? Feelings. Strategic focus. Energy. Motivation. Even culture. 

(Those things are important, but at the end of the day they can’t be strategy on their own.)

A lot of other things could be quantified, but aren’t. Customer experience. Brand equity. Customer affection (or hatred). Investments into strategic priorities

(These are also important, but without quantification you can’t judge how well you’re doing. Or effectively build plans to improve them.)

Put at the end of the day, any business strategy is a business strategy with numbers. Usually, an income statement/pro forma/business model that explains how the company will make money. That model is the business equivalent of the army’s map. The numbers are the territory being fought over.

I bring this up, because I see this all the time. 

In business—and worse at business school—the powerpoint presentation is the easiest way to obscure the numbers. You use big fonts, shiny graphics, lots of stock photos with smiling Millennials (see above) and a few, purposefully selected charts/graphs. You have a lot of opinion without a lot of numbers. Or numbers that haven’t been interrogated properly. Consultants may be the experts in the field.



In journalism, I see even more of this. Journalists have pressures to get stories out. Building an income statement takes lots of time. So I don’t really blame them. They’re mostly trying to get news out quickly.

However, I do blame anyone who is providing an “opinion”. Opinions are easy; numbers backing those up are a lot tougher. It’s the the primary thing that takes up my time writing for this site. 

For example, I had a big article I wanted to publish last year, but I just hated it. It’s my titanic battle between three huge fantasy franchises on three (!) competing streaming services. HBO versus Amazon Prime/Video/Studios versus Netflix. Game of Thrones versus Lord of the Rings versus The Chronicles of Narnia. But the first few drafts were missing something. That something was numbers. I made a lot of predictions, but didn’t have the numbers to hold myself to. So I’ve been waiting until I could get numbers I feel better about it. (That and I realized I needed to explain a lot of accounting to get there.) 

It’s tough though. The problem with numbers is they put problems into sharp relief. They can also be wrong. Every time I put numbers into the world I stress and stress and stress that I got something wrong. That I’m missing some key detail. With numbers, it’s really easy to hold me accountable. Undoubtedly I’ve made some mistakes. That’s even truer for business. (Without the holding accountable part.)

I don’t want to gloss over, the numbers, though. I want to do strategy right, and that means giving the numbers. That’s why this is a theme of this website.

Theme 2: It’s not Value Capture, it’s Value Creation

Last time I wrote about the “themes” of this blog, I waxed poetically about making decisions. I loved this point I made near the end:

“Salary in an organization is determined by the value of the decisions you make. If you’re decision is, ‘Do I empty this trash can?’, you get paid the salary of the janitorial staff. If you’re decision is, ‘Should we enter China or India as our next market?’ you get paid like a CEO. One of those decisions is valued at cents (the trashcan) the other in millions or billions (entering new markets).”

In other words, decisions determine everything. The higher the stakes of the decisions, the higher the pay. But why or why do we make decisions in the first place?

To generate value.

The more value an individual creates for the organization, the more of that value they get to keep for themselves in terms of pay. (Or compensation in terms of people paid with equity. But you get the point.) And workers/employees/owners create that value via decisions, which is the first theme of this website.

“Value” is why businesses, governments and really any organization exists. But this website doesn’t exist to serve the needs of governments or academics or non-profits; today I’m going to clearly define how businesses create value. Then we can use that definition for years to come.

Value Creation: A definition with a chart

Put simply, a business creates value by charging a price less than a customer’s “willingness to pay” for a good or service but higher than the costs to make and deliver the good or service. That’s a bit confusing. Fortunately, I have a chart to simplify things.Value Creation ChartThat chart I learned in the core strategy class at my business school. So yes, this is Strategy 101 and I’m  summarizing that lecture. That said, I’ve never seen this chart used in an actual business context, which is a shame. It’s simple. It’s elegant. And useful.

This chart isn’t quite economics per se, though it summarizes a lot of micro-economics graphs that show where to price a good. The line between strategy and economics is super blurry.

So let’s explain that above chart. Starting on the right. The “willingness to pay” (WTP, one of only two acronyms I’ll use today, I promise) is the hypothetical maximum price a customer would pay for a good. That’s the upper limit. Above that they won’t buy a good, below that they will. The price is what they actually pay for it. And “cost of goods” (COGS) is the term from accounting that means how much it cost you to make something. I’ll mainly call it “costs” today

The key insight of this diagram is the two terms on the left. This is the “value”. The first one is “consumer surplus”. The gap between what you actually have to pay and how much you would pay is the benefit you receive. The customer’s surplus from the transaction. The gap between the price and what it cost to make (and all the costs to run the business) becomes a company’s profit or net profit. (Or “producer surplus”. Or for an individual item the “gross profit”.) This is the value for a company and its owner and shareholders.

An Example of Value Creation: Buying Beer

For my real life example, I’m going to use craft beer, to show I’m a stereotypical male of my generation (Millennial). Maybe I would pay up to $10 for a six pack of craft beer. This is my WTP for craft beer. That’s the top line. (Numbers from here on are approximations to illustrate the point.)

The store I go to happens to sell a six pack of Golden Road for $9. This is the price. We now have our first “math” problem of the chart. (I put math in quotes because a lot b-school students think business math is complicated. Most financial statements are just addition and subtraction problems. That’s easy!) My consumer surplus is therefore $1. Great!

To keep this example simple, let’s assume the store paid $8 for the beer. This is their cost. Now we have our second equation, price minus cost. This gives us the store’s profit. Unlike the consumer surplus, which isn’t actually exchanged or stored, but a psychological value, the company keeps the profits. (Or again accounts for it as “gross profits” then subtracts the fixed costs of running the store. But I’m keeping it simple for now.)

Here’s that math in chart form:Example 1And that’s it! That’s the whole three part equation in real life. But now we get to play with it and generate some cool insights, that will directly tie to the themes of this blog.

The Good Side of the Chart: Creating Value

In business, the key to gaining a competitive advantage (a term for a later post) is to change the lines on this chart. Literally, if someone tells you strategy is complicated just say, “No, I only need to move one of three lines.” So how do you do that?

First, you can keep your costs and price flat flat, but increase the WTP of the customer. This means, you make a more attractive product for the customer. Get the customer to want to pay more or to raise their WTP. So let’s say every so often my store carries the craft beer Stone IPA. I’d pay $12 for a Stone IPA. But my store sells it also for $9, like Golden Road. In this scenario, my consumer surplus has gone from $1 to $3. That is creating value. (Presumably, the store will sell more Stone beer overall to make up for the higher price they could charge.)Example 2There are lots of different ways to increase the willingness to pay. You can make the product higher quality, better functioning, longer lasting or with better features. In services, you can offer faster services, better services or different types of services. Again, you increase WTP by making things better, in general. Or creating a new product people didn’t know they needed (the rarest type).

(Here are some good examples of boosting WTP. The iPhone took how much people were willing to pay for a cell phone and blew it through the roof because it was such a technological masterpiece. Google offered the best search engine, so it took over search. In-and-Out costs about the same as McDonald’s but crushes it on quality.)

There is another way to increase value for customers: you lower the price, while keeping WTP flat. This increases the consumer surplus. This is also creating value. In the beer example, assume I walk into liquor store, intent on buying beer, and I see a sale for $7 per six pack. I’m used to paying $9, and would pay up to $10, so my consumer surplus went from $1 to $3. Yay me! Same surplus; different method.Example 3So how do you lower prices? Well, you either cut into your own margin or you figure out how to lower costs. Many companies enter a market because they figured out a way to make a core product cheaper than it is currently being sold. In the beer example, domestic light beers are the best example. By scaling up production, they can produce beer cheaper than craft beer makers. I could get a whole twelve or even eighteen pack for price of one craft beer six pack. If a beer company can identify a way to make beer cheaper, it can lower prices and increase consumer WTP (and market share).

(Here are some good examples here: McDonalds, Taco Bell, and Wal-Mart. Or generic drugs. Lowering prices isn’t as sexy as increasing WTP, often relying on supply chain improvements or offshoring/outsourcing, but can definitely create value for customers.)

So figure out how to offer more value and increase willingness to pay, or figure out how to lower costs and therefore lower prices. That’s how you create value. I’d summarize 90% of value creation like this:

Increase Quality —> Increases WTP
Increase Variety —> Increases WTP
Increase Speed —> Increases WTP
Decrease Costs —> Decreases Price

The Bad Side of the Chart: Capturing Value

If you’re sharp, you noticed that I showed how to move two lines on the chart, while keeping the others still. What if, as a company, instead of lowering prices, you raised them? While keeping your COGS and WTP steady? Well your profit would jump.

The term for this is “value capture”.

So let’s say—and this could never happen in America with its strong anti-trust regulations—a single company or say handful of companies captured a dominant market position and began to work together. (Again impossible, but conveniently most cell phone plans cost about the same and offer the same services. Again, coincidence.) Let’s use the beer example. Since customers are willing to pay $10 for the beer above, what if all the stores worked together to all charge exactly $10 for all craft beer? Well, now my consumer surplus is $0. But the company, whose costs haven’t changed is now making a profit of $2.Example 4Or, let’s say there were only two makers of alcoholic beverages in the entire world. And they conspired together to increase the prices they charge retailers. So they still sell the beer for $9.90 to stores, and stores have to sell it at $10. Well, now the beer producers have captured nearly 95% of the value and customers don’t have any.

That’s how monopolies work. Or oligopolies. They don’t create value for anyone per se, but figure out a way to capture value from someone else. In other word, they are “part of the cost of doing business”, which usually means they capture value without adding value.

To be clear, lowering prices as the result of innovation that lowers costs is NOT value capture. Even if the value isn’t passed to consumers, it’s still passed to shareholders. Instead, when prices move simply because a company has figured out how to raise prices without moving their costs or by increasing the customers willingness to pay, they have figured out a way to capture value, and passed the costs on to the rest of the people in the chain.

The Ugly Side of the Chart: Capturing Market Share by Destroying Value

There is an even darker version than just capturing value where a company charges a price below what it costs to make a good. At that point, the company is offering a tremendous consumer surplus to customers. But why would they do this? It seemingly destroys value for themselves. Well it could be used to gain market dominance, at which point the company can raise prices again, devastating consumer surplus. A company cannot survive indefinitely if it loses money overall on acquiring market share.

Here’s an example of that with the craft beer, showing a company pricing below costs. Moreover, overall value is destroyed because the previous surplus of a total $2 is down to $1 (consumer surplus plus producer surplus). Short term there could be reasons for this, but fundamentally it is unsustainable. Example 5In our current climate, a lot of companies have current pricing that causes them to lose money. Some who have lost money for years. There are also companies loading up on debt to fuel M&A that are regional and/or national oligopolies. The question I have for each of them is  this chart. What is your strategy? Are you creating value, capturing value or capturing market share?

In many cases, the end goal of the market share is to achieve market dominance, at which point the companies can charge whatever prices they want. That is indeed ugly, for consumers.

Every business conversation should strive to get back to this chart

I have a working theory that most good things in the economy come from value creation. Companies that create value have better future growth. Value creation grows the economy without inflating it into a bubble. I also believe that companies that learn to create value have better relationships and more success with their customers. Some of these beliefs economists have proven; others the evidence is mixed.

Yet, I have never seen this chart in a business context. I also rarely see it in a entertainment press context either. I hope to remedy that.

I thought about providing some examples of value creation versus capture in today’s article, but it would have been too long and, honestly, that’s the purpose of this website. MoviePass, Disney, Youtube, Amazon Studios/Prime/Video, Hulu, Comcast, AT&T and Apple. I’ll look at all their business models and pass judgement at some point.

In the meantime, ask yourself: is your company creating value, capturing it, or capturing market share?

Theme 1: It’s Not Data, It’s Decision-making

The big buzzword in business is still “data”. Or better yet, “big data”. Or more complicated sounding, “analytics”. Better than just analytics is “advanced analytics” which is like analytics but more advanced. With all that data, a bunch of “algorithms” are figuring everything out.

Take your pick. Sure other trends have picked up in the last few years—how about disruption anyone?—but since I started business school, data (or one of those words related to it) is everyone in business’s obsession. Companies launch whole businesses now who run off business models entirely related to collecting customer data. Facebook’s Cambridge Analytica revelations just brought this to the fore.

And this “data revolution”—another term—has come to entertainment.

Especially the streaming video services. They get so much data that was never there before, including the entire viewing history of a customer (and their shopping history on Amazon). So when I talk to MBA students—either at alumni events or recruiting events or in a classroom—I invariably get asked this question: “How did [your streaming platform] use data to pick which TV series and movies to make?”

I can’t help myself from sighing. And being slightly sarcastic. So instead of answering, I usually flip the tables.

I ask a simple question (if say I am in a classroom). Something like, “Let me ask you, when you decided to take this course, what data did you rely on to make the decision?” Usually, the answer is some stumbling around, ultimately ending on someone had recommended the course to them. I point out that this is data, a qualitative piece, but still a personal recommendation.

Notice that word I paired the word “data” with “decision”. So let’s use a real-world example. From my life, but anonymized to protect the innocent.

A group of Hollywood executives are sitting around a table. They only have the budget to renew one more TV show to release in the upcoming year. The decision is around two shows. The first I’ll call, “Cop Show”. It’s a show about police officers. Yeah, creative title. The other show is called, “Awards Show”. If you went into a laboratory to make a TV show to win awards, this was it.

Now, we have to be clear, there is no lack of data. The studio execs have reams of it. They know have how many customers watched each show. They know what shows customers rated highly. They know what critics thought. They have surveys of customers and have conducted focus groups. They think one show will probably stay more popular, but will never win awards. The other show will likely win awards, but customers didn’t watch the first season. But they have a ton of data to draw on at that table to make these conclusions.

Of course, in addition to all the data on the table, there is a lot of data off the table. Pieces of information influencing the executives, but that doesn’t make the strategy powerpoint that justifies the decision. For instance, some of the development execs have friends helping make one of the TV shows. Some development execs are considering whether a popular but uncritically acclaimed show will help their chances at getting their next jobs. And the marketing execs want the easiest show to market.

To top it off, some people just like one of the shows a lot. It’s their favorite show on television. That happens.

This is why I asked the students about the “decisions” they had to make. The execs have a ton of data…how do they use that data? Data doesn’t make decisions, the people do.

Big decisions, like what MBA school to attend, have a lot similarities with picking a TV show at a network, which is why I used it as an example. A prospective MBA student has tons of data to pour through. Though a lot of that data is qualitative. And some of it is on the table, and some is subconscious. And a lot of it has vague predictions about the future: which school will I enjoy the most? Which school will help me get the best job? And in what field? That’s making assumption about the future. Every MBA student had to decide where to go to business school; likely, they didn’t have a data-driven process. They picked the highest ranked school from a list of school rankings whose methodology they probably barely understood.

Because, honestly, people don’t really like using data to make decisions.

Let me say that again, because it is the biggest myth in our business world right now: people don’t like using data to make decisions.

Most huge corporations already have a well-worn, time-tested, established system to make decisions called: HIPPO. Highest Paid Person’s Opinion. (I’m not the first to write this.) Basically, you have a CEO making anywhere from $1 million to $50 million dollars. What if you gather a bunch of data that says they’re about to make a huge strategic mistake? Will they change their mind?

Of course not! They’re the boss.

To reverse course would admit that they were wrong. And this goes all the way down the chain. Say you are a middle manager who is convinced to make some key decision. You decide to change how your team processes something or other related to payments. But you also have a Business Intelligence team. A BI team that developed a sound forecasting methodology, with clean, reliable data and that team’s new methodology argues against your strategy. Whose opinion do you take, the data or you?

You pick you! And that’s what development executives not just at the streaming service I worked for, but for all of Hollywood, do on a daily basis. It’s what financial executives do when making investment decisions. It’s what corporate strategists do when determining their strategy. You can develop a data-driven approach to making decisions, and really think about what decisions you make, or you can go with your gut.

This isn’t to say business folks don’t use data. They have tons of data to read. Like those studio executives around the table. They make reports justifying strategic decisions that are loaded with data. And they may even listen to it a bit. Let it inform what they think, at some level. But the key is executives are the ones making the decisions, not methodologies. Not the data. And with tons of data, more data than ever, it is even easier than ever to construct a narrative that you’re making sound decisions.

This is why I return back to the core theme of this blog: it isn’t about data, it is about decision-making. The goal isn’t to just have data; it’s to use that data to make better decisions. Making decisions is about much more than regression analysis or random forests or neural networks or some other complicated algorithm. It is about asking the right questions, to even know what decisions you are making. Then you figure out your process, your methodology, your data and how you will measure success. Then you let the process make the decision, not your gut.

You cannot make wise decisions without data, but instead of focusing on the “data’ we need to focus on the “decisions”. This idea will come up so often, when I write about entertainment strategy, that I felt the need to make it my first “theme” of my writing, a point I will return to again and again.

As an undergraduate, I heard a description of hierarchy that has stayed with me Basically, the professor said, “salary in an organization is determined by the value of the decisions you make. If you’re decision is, ‘Do I empty this trash can?’, you get paid the salary of the janitorial staff. If you’re decision is, ‘Should we enter China or India as our next market?’ you get paid like a CEO. One of those decisions is valued at cents (the trashcan) the other in millions or billions (entering new markets).”

This site is concerned with those decisions as they relate to entertainment. And making them better.

Data isn’t the solution, better processes and decision-making are. And a lot of that better decision-making will say, ironically to this entire post, to use more data in places where it isn’t being used at all (lots of parts of entertainment) to help make better decisions. In the long run, we can even identify who is making the best decisions and reward them, instead of the executives at the top who likely aren’t making the best decisions, or ensuring they even have a good decision-making process.

Hopefully this website, over time, will help you and your company do that better.

Why Does Hollywood Make Bad Movies?

Before I start writing on a new project, I often feel compelled to explain myself. Why am I putting my words to paper (or coded into bits, since you’re reading this on the web)? Why are my words worthy of your time to read? Why do I want to get these thoughts out there?

On a really simple level, I think I can provide insightful analysis on a topic (entertainment strategy) that I haven’t really seen. I’ve seen good journalism on the goings-on of entertainment; I’ve read good writing on the statistics of entertainment; I’ve seen good articles on the future of entertainment in general; but I haven’t seen the one place that ties it all together.

That’s a gap in the market I think I can help fill. Still, what’s driving me to write to fill that gap?

Basically I want to answer the question in the headline, “Why does Hollywood make bad movies?”

This seems to be the du jour criticism of Hollywood. And it has been since I started reading the Los Angeles Times annual preview of upcoming movies as a child. Critics have consistently bemoaned the state of the US film industry and the quality of its movies. They’ve criticized the number of sequels, which in recent years has turned to criticizing blockbuster franchises and/or superhero movies. But it’s not limited to film. Those same critics have bemoaned the state of TV or video games, even as we entered a golden age of television and independent games studios thrive.

Those same critics who bemoan the state of Hollywood have also tried to offer explanations for why Hollywood makes bad movies: It’s studio executives trying to make more money off sequels. It’s studio executives trying to make movies to sell toys. Or happy meals in the 1990s. Or its studio executives who won’t give creative freedom to creative types. Or it’s studio executives who care about international box office.

So it’s the studio executives. Hmm. It’s like we could modify the NRA slogan: “Hollywood doesn’t make bad movies, studio executives make bad movies.”

The critics are onto something, but they just can’t explain why. Or I’ve never heard an explanation I love. After blaming bad movies on studio executives, they can’t answer the key logical fallacy they just exposed: why would these studio executives willingly make bad movies? They don’t want to make bad movies.

Instead, I’ve always felt the explanation for why Hollywood makes bad movies is fairly simple: it’s the decision-making.

But I feel a bit like Han Solo after Obi Wan Kenobi drops the “without Imperial involvement” line in the Mos Eisley Cantina. If you asked, “The decision-making. Hmm, can you explain that to me?” Well, that’s the rub, isn’t it? Which is how Han Solo responds.

Well, it isn’t just decision-making. Studio execs make these decisions because of how they perceive or understand the business of entertainment. So it’s decision-making in the pursuit of the business of entertainment.

Studio executives make decisions to further their interests and, ostensibly, the interests of their company. And these decisions are are influenced by winner-take-all economics with logarithmic returns. The winners tend to be blockbusters, with additional revenue streams, so from a portfolio perspective, executives decide to make more blockbusters. Yet, blockbusters are poorly correlated with awards success, which is highly correlated with critical acclaim. So that’s what many studio execs try to do, and why many critics criticize their movies.

But that paragraph feels woefully incomplete. Each of those sentences could be its own post explaining the decision-making and economics and business and organizational behavior of studio executives. All the things that influence the decisions they make on a daily basis. Basically, each part of the above paragraph could be one paragraph explaining how Hollywood does and doesn’t make good decisions.

That’ll bring us back to the question at the start of this post. All those ideas–and more–align on the same theme, “Bad movies get made because people make the decision to make bad movies.” That’s right, instead of wondering why this happens in confusion/befuddlement—a sort of throwing up our hands and saying, “Man where do these bad movies come from?”—I want to say, “Bad movies are made because studio heads, development execs, marketing execs, creative talent and others make bad decisions.” And they make these decisions because of how they understand the business of entertainment.

Honestly, I don’t see another website out there that is trying to explain how and why Hollywood works. I want to try to do that.

But it won’t just be movies. Or TV shows. I want to dig into the business of entertainment and media (and tech when they intersect) across all forms of entertainment. And that means studying and explaining and analyzing and critiquing the strategy of various entertainment, tech and media companies. By studying their strategy, we can learn more about the business decisions they make around everyone’s favorite product, content.

That’s why this website exists. I want to explain Hollywood and how it works from a business perspective, with side trips into economics and data. I want to explain Hollywood in the lens of the decisions people make, and how that affects what makes it into the marketplace. I think these explanations could help business people and creative types make better decisions. And hopefully help us all understand why Hollywood does what it does. (But really the people in Hollywood.)

If we know why we make bad decisions, well, maybe we can make fewer bad decisions and more good and great decisions.

Welcome and happy to have you.