Posts Tagged ‘model-driven business’

In our prior post we highlighted the comments of two well-known hedge fund investors as they describe the shift from a world often dominated by software to the new world of the model-driven business, wherein models power the key decisions in business processes, creating revenue streams and improved cost efficiencies.

The co-authors, hedge fund CEO Steven Cohen  and venture capitalist Matthew Granade, both of Point72 Ventures, and writing in August in The Wall Street Journal’s Opinion section, conclude their essay by pointing out five key implications of these models for business in the future, which we’ll summarize below.

First, businesses will be increasingly valued based on the completeness, not just the quantity, of the data they create.  Companies like Amazon and Tencent (cited in our prior post) don’t just collect massive reams of data about their customers, they know how to act on it.  It’s not just breadth of knowledge in other words, it’s also a ‘closed loop’ in which each recommendation a model makes, based on that user data, is captured and used to improve the model going forward.

Second, the goal is a ‘flywheel,’ they state, or a virtuous circle: Models improve products, products get used more, the new data improves the product (and the model) even more.  It’s a nearly frictionless process of continuous improvement.  Pretty close to a business holy grail if ever there was one.

Third, as incumbents (i.e., entrenched, major, competitive, winning companies) they will be “more potent competitors in this battle relative to their role in the software era,” insofar as they will have a meaningful advantage (operationally and profit-wise) this time around.   They have the trove of data competitors don’t, and they’ve learned how to monetize it.  And they keep getting better at it.

Fourth, just as the best companies have built deep organizational capabilities around managing people, tools, technology and capital, the same will now happen for models.  Just as software has become an ‘agile’ process in its delivery, the data-driven companies now on the rise are creating a new discipline of model management that affect the same domains: people, tools, technology and capital.  The models can now deliver, and that creates a critical competitive edge.

Fifth, companies will face new ethical and compliance challenges, according to Cohen and Granade.  With data becoming more comprehensive and important, consumer concerns over use and abuse are bound to rise – in fact, they already are.  Facebook lost over $100 billion in market cap in a couple of days in July because investors became concerned about its data assets in the face of increasing regulation.  That’s not likely to abate, and examples will only multiply.

Still, while software continues to “eat the world” (prior post), yesterday’s advantage becomes, in the authors’ words, “today’s table stakes.”  In the hunt for competitive advantage, the model-driven business will become ubiquitous.  For the average investor, software has been a great place to make money since Marc Andreessen’s famous “Why Software is Eating the World” essay seven year ago.  But in the next seven, the serious money is on the model-driven business.


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In a famous essay in 2011 Netscape founder and venture capitalist Marc Andreessen notoriously wrote about “Why Software is Eating the World.”  He was right.  Companies he identified including Amazon, Netflix, Spotify and others did just that – they used software to eat their industries.  Today, newer companies are repeating the feat, including Airbnb, Stripe, Uber and others.  All are digging in.

It is said that today, all companies are software companies.  Or they had better be.  Many have adopted software to maintain or extend their competitive dominance, even in industries as arcane as pizza to name just one, where Domino’s has achieved a dominant position thanks to its software focus.

A recent article co-written by hedge fund CEO Steven Cohen and venture capitalist Matthew Granade, both of Point72 Ventures, and writing in August in The Wall Street Journal’s Opinion section, begs the question: What’s next?  Their answer?  Models.

This new paradigm is defined as a shift from a world often dominated by software to one driven by ‘models,’ which power the key decisions in business processes, creating revenue streams and improved cost efficiencies.  It requires a mechanism (usually software-based) to collect data, processes to create the models from the data, the models themselves, and finally a mechanism to deliver or act upon the suggestions from those models.  To be specific, quoting the authors on the latest paradigm shift:

“These companies structure their business processes to put continuously learning models, built on ‘closed loop’ data, at the center of what they do.  When built right, they create a reinforcing cycle: Their products get better, allowing them to collect more data, which allows them to build better models, making their products better, and onward.  These are model-driven businesses… being created across a range of industries.”

While there is plenty of hype about big data and AI, the models, they state, “are the source of the real power behind these tools.”  They go on to say… “A model is a decision framework in which the logic is derived by algorithm from data, rather than explicitly programmed by a developer or implicitly conveyed via a person’s intuition.”

Get it?  It’s the data-driven model’s ability to learn from itself and its own mistakes – at a rate much faster than mere humans can do – that sets it apart as an increasingly rapid prototyping tool for building the better business.  Humans, it seems, need not apply.

A Chinese company called Tencent provides a brilliant example.  They have customer data across social media, payments, gaming, messaging, media and music, and information on hundreds of millions of people, all of which they put into the hands of thousands of data scientists in order to make their products better.

That unique data helps Tencent to power a model factory “that constantly improves user experience and increases profitability – attracting more users, further improving the models and profitability.”  That’s a model driven business.

Closer to home, Amazon used software to separate itself from physical competitors but it was their models that helped them pull away from other e-commerce companies, Cohen and Granade point out.  By 2013, over a third of Amazon’s online revenue came from its recommendations, the result of model-driven data usage, “and its models have never stopped improving,” as Bezos & Co. continue to find myriad ways to use machine-learning models.

The authors go on to extol the model-based leveraging changes now taking place across the business spectrum.  Key industries include agriculture, services and logistics.  The implications are vast, and Cohen and Granade sum it up by describing five key implications for the future of business … and we’ll cover those five in our concluding post.  Stay tuned…




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