Cultural Competence

What is Cultural Competence?

Core competence is a factor that cannot be easily replicated and gives the business a competitive advantage in delivering their product or service to customers. Core competencies are how a business does something.

Cultural Competence is the lens through which opportunities are identified and evaluated. Cultural competencies are how a business figures out what to do. [1]

Implications

Every business, no matter the size, has cultural competencies.

• Cultural competencies are a reflection of the founders’ personalities. It’s no coincidence that Google was started and led by Ph.Ds, Apple by a designer-perfectionist, and Amazon by a quant from a hedge fund.
• Cultural competencies are directionally set as you go from 0-20 people. If you achieve product-market fit, you will only deepen your cultural competencies. You can inject new culture via new (strong) leadership, but the existing leadership has to be receptive. The larger the organization, the harder this is.
• Product market fit is easier to achieve if you work with your cultural competencies, not against them. Often times when a company builds the wrong product, the market they are pursuing does not align with their cultural competencies.
• If you understand your cultural competencies, filtering potential opportunities becomes much easier. Be honest about whether or not the market you are pursuing can be won given your cultural competencies.
• Don’t emulate another company’s cultural competencies, as many do against Apple. Pursue a market through your own cultural competencies to create a differentiated (and more successful) offering, as Amazon has done with Kindle Fire.

How do Cultural Competencies develop?

Cultural competencies are an emergent property of people in an organization. It starts with founders who pursue ideas and markets they understand. If they get traction, they hire a team that thinks about the opportunity similarly (belief in the vision). If they achieve product market fit, they hire more people. These people then pursue scaling a business in the way that has worked best thus far, reinforcing the cultural competencies and world view. This yields more revenue, which results in more people hired to support that core business. At each iteration, the new hires cause a deepening of existing cultural competencies.

An example: Amazon vs. Google

Amazon and Google share core competencies. They’re focused on large data problems, machine learning, exploiting massive infrastructure, experiment driven monetization, and more. They have non-overlapping core competencies, as well. Amazon has phenomenal customer support and logistics, while Google has deep expertise in search and performance-based advertising.

Given their similar core competencies, no one should be surprised that Google and Amazon both pursue the smartphone and tablet markets. However, their approaches are dramatically different because of their different cultural competencies.

Google’s cultural competence sees the world as signal and noise that must be filtered. A minority of the signal is commercially useful, and Google monetizes the shit out of it. This is how they manage to make money on search, email, and maps when few others can.

Amazon’s cultural competence sees the world as a series of transactions on which it can build a platform. Amazon pursues opportunities that will facilitate repeated transactions and then builds the platform to own all of these transactions. The Kindle was made to drive the sale of digital books. Free Shipping and Amazon Prime are levers to drive more sales on Amazon. It’s all about increasing and owning transactions.

How Cultural Competence Skews Perspective

For Google, Android is the key to owning mobile search and ads. Google’s cultural competence perceives Android as a moat for Google’s castle — search and ads. For Amazon, Android is about selling more video content, pushing Amazon Prime (which results in more sales on Amazon.com), and the Amazon Android Market (a digital goods store). Amazon’s cultural competence sees Android as a platform to enable more commerce and monetize directly.

Same platform, yet dramatically different perspectives, and ultimately different ways to extract value out of the ecosystem.

How Cultural Competence Impacts Product Success

It is not a surprise that Google makes a small amount of money directly from Android. Google’s cultural competence does not align with what the market demands from a direct monetization product — Google Wallet, Checkout, and the Play Market are examples of how Google fails because their cultural competence prevents them from building the right product.

For example, Google has rich analytics in the Android Developer Console and has search baked into the core Android experience. Given their cultural competence, it makes sense Google would prioritize these features. At the same time, the platform has no subscription billing and has yet to create a seamless integration of apps and content, 9 years after iTunes revolutionized digital content delivery. Google’s cultural lens has led them to either build the wrong product or be unable to come to a decision about what the right product is for a direct monetization market.

Meanwhile, Amazon has had no problem defining a transaction platform because of their cultural competence, and they execute on this market opportunity efficiently because their core competence is building transaction based products. Amazon has demonstrated this in multiple markets.[2]

Google’s lack of direct monetization from Android is not a surprise. Apple’s lack of monetization via iAds is not a surprise. Amazon’s lack of monetization through auctions is not a surprise. [3]

Credits

Thanks to Elad Gil, Curtis Spencer, Aditya Koolwal, Dan Siroker and Yin Yin Wu for reading drafts and providing input.

Appendix

1 – I just created the term “cultural competence” to apply to something that people have talked about informally for a long time, so the definition will likely evolve. The concept itself has been floating around in lots of brains for a long time. Edit: Turns out it’s been used in the HR world to mean something different (see comments below). So the definition in this post is more of a “secondary definition” than an “invention”

2 – Another Amazon vs Google example
Hosting platforms are another great example of how cultural competence skews outcomes. Amazon looked at Amazon Web Services the way they look at their retail site. Find the simplest set of things people will buy, then broadening out to related offerings. They manage inventory, demand, and have efficient pricing. Amazon figured out what developers wanted (S3 and EC2), sold it to them, and then expanded the offerings.

Google’s cultural lens skewed their perspective towards thinking that what developers want is the most efficient way to manage large amounts of data and not worry about scaling. Most businesses don’t have Google scale problems and don’t want Google’s internal platform approach to manage their non-Google problems. They need something that works with existing (open source) systems and leaves them the freedom to customize infrastructure. Google tried to apply it’s cultural lens to a market, rather than find a market where it’s cultural competence would give it a competitive advantage.

Hosting is fundamentally a retail problem, not a signal vs. noise problem. Amazon Web Services does $1 Billion in revenue and Google has been tweaking App Engine for years. This is a prime example of how to filter opportunities and pursue ones that align with your cultural competence.

3 – Examples of Cultural Competence Failure
Companies that have a strong cultural lens will stay focused and thrive. Those that dilute their cultural competence die because they lose a very important filter for which ideas to pursue and how. Companies that try to build outside their cultural competence tend to fail as well.

• Apple - Apple’s cultural competence is finding large industries full of geeky products and Apple’s core competence is building simple, cool status symbols in their place. Laptops, desktops, phones, and music players are all examples. Ping (their music social network), MobileMe, Pages/Keynote/Numbers, and iTunes are great examples of where if the product succeeds by piggybacking on their hardware business, not because it’s a great in its own right.
• Facebook – Facebook’s cultural competencies lie in identifying opportunities to enable sharing. Every software, app, or platform upgrade is about fostering more connections and data flow between people. Facebook sees markets as an opportunity to get users to share more, find out more about their friends/connections, and elicit relationships (family, friends, worked with, who likes whom) that were previously unknown. When they try to extend this into another area, like daily deals, they don’t do well. Daily deals are not about the relationships between peers, they’re mostly about Facebook’s relationships with merchants.
• eBay – has core competencies in peer-to-peer transactions (sometimes with goods changing hands). eBay’s cultural competence is around bringing groups of people together into a marketplace and getting them to trust each other and the marketplace. When they diverged from this (Skype, StumbleUpon) they failed. When Skype and StumbleUpon spun out from this cultural lens, they thrived. When eBay applied their cultural competence to Paypal, it worked beautifully because Paypal is fundamentally a trust network.
• HP - has core competencies in manufacturing, distribution, and enterprise sales. What is their cultural lens? How does HP decide what opportunities to pursue and how to leverage its core competencies? They’ve floundered on this for quite some time.
• Microsoft – has core competencies around desktop software, business applications, and selling through enterprise distribution channels. Their cultural competence has always been finding ways to make businesses more efficient with their PCs. They make a healthy profit in their servers and tools division since this aligns nicely with their cultural lens. Every time they stray away from this cultural competence, they struggle. Signal vs Noise businesses (Bing) burn cash and Entertainment (Zune, Xbox) operates at break even.

Amazon owning app distribution is irrelevant

Some people are writing about how Amazon is going to steal Android app market distribution away from Google. Not only is this statement incorrect, but it is a clear misunderstanding of how Google and Amazon think about Android. I’ve worked at both Google and Amazon, and have written apps for both iOS and Android, so I’m going to chime in.

Amazon won’t own the app market

Amazon is going to be one tablet manufacturer and maybe one phone manufacturer. Even if Amazon owns 20% of all Android devices, they will have the same share as Samsung and less share than HTC and Motorola have in phones (see below). Or, let’s be generous and assume that Amazon manages to sell the same number of total tablets as the iPad — 40 million by Apple’s count for both iPad + iPad2. That total number of Amazon tablets is as many Android phones as are currently being activated every quarter. Let’s get real: Amazon will not have the leverage to do any serious damage to Google’s hold on the pre-installed App Market bundled with Android (which powers both tablets and phones).

Google does not care about app sales

Even if Amazon does own the app store, thinking about app sales is a failed attempt to apply Apple’s iOS model to a totally different ecosystem. Android does not work like iOS because Google has different priorities than Apple. Google is a search company. Owning the platform is Google’s way of making sure they own search — both on the web and for apps. Google makes over $30 billion in revenue from search. The revenue that flows through the app market to Apple is about $1 billion ($3B in sales, $1B flows to Apple). Google does not care about facilitating app sales because they can make 15-30x the money from search.

Furthermore, Google clearly believes that the web will win out in the long term and native apps are a stop-gap, so they are skating to where the puck will be — open and web based. Google saw this with AOL and hand curated directories like Yahoo in Internet 1.0 and is betting history will repeat itself. Even if apps stick around, Google wants to own search on top of the apps just like they do on the web and they’ll monetize the hell out of that. Google does not care about owning Android or the app market for app sales. They want to own search.

Amazon does not care about app sales

Kindle Fire is about selling more digital content and facilitating e-commerce. Apps happen to be one type of digital content, but they’re far from the focal point for Amazon. Amazon is the world’s biggest online retailer. They want you to buy stuff on Amazon.com. From free shipping, to Amazon Prime, to Kindle 1.0 it’s always been about getting you to spend more money on Amazon. Tablet users love to buy stuff online. The Kindle Fire is about facilitating old school e-commerce. Owning 20% of app sales is lame. Owning 20% of e-commerce on tablets is what Amazon is salivating over. Instant Video and having an App Market are nice secondary revenue streams, but a drop in the bucket to what Amazon does in it’s core commerce business. Amazon would make the Kindle Fire if they were guaranteed to make $0 on app sales because they will make billions on increased commerce.

Amazon “owning” app distribution is not only wrong, it’s irrelevant. It misses the point of Android and is a fundamental misunderstanding of Google and Amazon.