SOPHISTICATED FINANCE

The Answer is Easy

The Good blog has a video posted (below) of Peter Norvig talking about online learning at this year's Google I/O conference. Norvig is well known for his online course in computer science that attracted 160,000 students. He is also an AI expert who heads Google's search quality unit and a professor at Stanford.

About 13 minutes into the video, Norvig makes the comment that "the answer is easy" (...search on Google), "the interesting part is what was the question". My own variation on this is "the answer is easy, understanding the problem is the hard part". Many people define science as the determination of what we do not know. The pursuit of science is to answer the unanswered questions.

With the continuing increase in information and access to it, answers become less important. As I try to teach my students, what is interesting is what is currently outside the scope of human knowledge. Unfortunately most of us have been trained to focus on what is already known.

Norvig also has interesting comments on how to make online courses more effective and how to improve learning in general (minute 18). Norvig also comments on Nobel Prize winner Herb Simon and his thoughts on learning.  

 

Related articles

Google research director and AI expert Peter Norvig elected into AAAS [GigaOM]

The future, according to Google

Competence and Comprehension

What Happens After All the Productivity Gains Are Gone

Since the 1960s and the advent of computers, productivity gains have been a major driver in the growth of business profits. However, with little new computer technology on the horizon (see this post), the benefits of computing have probably been optimized by the large corporations that drive the economy. What choices do the large corporations have to drive profitability:

1. Focus on reducing government regulations, which is a considerable cost of doing business; however, with the growing concern about the morality of capitalism (see this post), this strategy may not be successful.
2. Commit significant capital to developing markets; this strategy only works if all the major competitors follow the same strategy and products are suitable for the bottom of the pyramid (see this post).
3. Focus on innovation as opposed to the safer line extension strategies; large corporations have had limited success with developing innovative new products and have some difficulty in recognizing the value of their innovations (Intel divesting their "ARM" chip business might be an example.)
4. More corporations could become lead investors in venture capital investments, following the example of companies such as Intel and Google; acquisition of the startups could become a source of future growth as Cisco demonstrates (a list of Cisco acquisitions is here). 

None of these strategies are easy to execute, although number 4 may appear comparatively easier. A focus on innovation (3) is probably the best strategy, but few companies have a culture of true innovation and even fewer executives who have the risk profile and experience to successfully manage a business built on innovation. 

More likely, we will have a 1960s like period of mega-mergers to hide the slowing growth of large corporations. Everybody knows how to do acquisitions :)

 

The Real Reason Google Should Not Cancel Google Reader

Much has been written about Google's decision to cancel Google Reader, their RSS feed reader. This decision troubled me for several reasons, not the least of which was that I had been using this free product for several years. However, something else troubled me about this as a strategic decision by Google but I could not figure out what it was. This morning Fast Company provided the answer in an article "The Danger of Free Google Software".

Google is one of the best examples of what Clayton Christensen calls disruptive innovation. Christensen correctly argues that a more limited feature set product at a lower price point can disrupt an incumbent market leader. For example, Gmail disrupted Microsoft Outlook. The power of Google's disruption strategy is in part that they have lowered the price to zero or free.

Google has used the same strategy with the new Google Drive, which is their competing product for online storage and backup. A certain amount of storage for free, which is perhaps a better price than market leader Dropbox, might encourage people to leave Dropbox...until now. Who wants to backup their whole life on Google Drive and in 3-5 years find out that Google is canceling the product like they did Google Reader.

For Google to make a decision that potentially undermines their whole disruptive innovation strategy strikes me as a very poor decision. No matter how bad the profitability of Google Reader, such a prominent product should not be cancelled when it it risks customer confidence in Google's other free products.

 

Related articles

Is Google Dying?

9 Google Reader Alternatives Now That Google Reader Is Dead

Thoughts on CES 2013

I have just returned from a week at the CES show in Las Vegas. I think it was ReadWriteWeb who first caught my attention by saying this year's show would be a "me too" show--not much new! I agree. I did not see much in the way of breakthrough ideas. Much the same as last year, which I described in this post from a year ago. 

Most popular attraction at the show was about eight helicopters flying around a booth, all controlled by tablets. Brookstone, among others, sell the helicopters.

Car manufacturers and their accessory providers took a huge amount of the space at the show. Connectivity in the car for devices was a big theme. Ho hum for me.

The show was tablet mania with everybody showing 7" tablets running Android. Almost nobody had any new thinking on tablets. Most companies focused on price and a few focused on better performance due to better specs. Starting to see licensed tablets, such as Hello Kitty, Flintstones, etc. Seeing some evidence that people are giving up their iPads for Android devices. Better integration with Google, longer battery life, ease of sharing and flexibility in storage/backup might be the reasons. Also, Apple has done nothing noteworthy in the last iPad or mini-iPad release. 

Two statistics caught my attention:

1. From my friend Michele Borba (@micheleborba), 37% of 2-4 year olds in the U.S. have used a tablet
2. Children are giving up physical toys (e.g. blocks) at an earlier age due to tablet usage

Implications for the U.S. school system are noteworthy. Maybe schools will have a BYOD policy for kindergarten. 

 

 

 

 

Docomo and Samsung Collaborate on Smartphone OS

In August 2011 Google acquired Motorola for $12.5 billion. As reported here and by others, many speculated that the acquisition would cause many handset manufacturers to consider developing their own operating systems. There has been little news on the development of alternative operating systems until today's announcement in the Yomiuri Shimbun, Japan's leading business newspaper. Yomiuri Daily reports that Docomo and Samsung are partnering to develop an operating system for cell phones. Docomo is the largest cell phone operator in Japan.

In addition to competing with Apple and Google in the smart phone market, the new OS will make it easier for carriers to offer their own services to subscribers. This feature of the OS may be attractive to cell phone carriers as they fight to avoid becoming just low value-added networks. However, an operating system built for the carriers rather than customers looks like a questionable strategy.

This article from IP Carrier describes the issues facing carriers.

Related articles

Google Motorola Makes No Sense

Samsung And DoCoMo Reportedly Team Up To Offer Tizen Smartphones In 2013

Observations on Mary Meeker's Presentation

Forbes has a story today on Mary Meeker's annual report (link to slide deck) on trends in the Internet. Meeker is a former star equity analyst at Morgan Stanley and now at the renown venture capital firm Kleiner Perkins. Three slides prompted some thoughts.

The increase in student loans in the last ten years is staggering. The increase in loans is in part explained by increased costs for higher education and increased enrollment. However, the shear scale of this debt concerns me and a marked contraction in such borrowing would have significant negative consequences for institutions of higher learning.

The growth in digital information will accelerate which reinforces the point that curation of data is a huge, unheralded business opportunity. I have talked about this point many times but there is still little effort to exploit it. LinkedIn News is a simple example but this approach just scratches the surface of the opportunity.

Tablets have caught on very quickly with children, as shown below, but the key question remains. Will parents pay the iPad/mini-iPad prices, especially for younger children. A rugged tablet built for a child at a better price point still looks like an undeveloped market.

 

 

 

Related articles

Apple iPad--What's the Big Deal

Here's Mary Meeker's Big Year-End Presentation On The State Of The Internet

A Better Approach to Design

Over the years I have been involved in several design projects for retail stores, shopping centers and merchandise. Mostly, I participated because skilled professionals were not available. I have no formal training in design or related disciplines.

Recently I joined a team of both design professionals and corporate executives to develop a new product. In three months this team produced a totally new product in the category and initial reactions are very positive. The team consisted of only 4-5 people who had a strong vision of what the product needed to be, relied on their experience rather than exhaustive research and aimed to produce a working concept rather than a completed design. Also, the product significantly evolved in terms of 1-3 key features throughout the design process.

What I find interesting about our approach is that it mirrors the advice of UX Magazine in an article yesterday-Lean Strategy for UX Design. UX Magazine advice:

1. Have a clear strategic vision for the product
2. Have a working theory of what the product should be
3. Target to deliver the product in its simplest form
4. Planning should be ongoing rather than carved in stone at the beginning of the project

The full article is worth a read.

Another Look at ROI

I have done finance for almost 40 years and I have done it in almost all its forms--capital raising, trading securities and funding operations. Whenever I am involved in an operating company people always ask me what ROI do we need to reach to justify an investment. In routine, repetitive investments (such as opening another retail store) I almost always have a quantatative target and it tends to be much, much higher than the cost of capital. I have seen several CFOs who use the same technique of setting very high ROI targets. If you use such a technique in routine, repetitive investments you generally get people focused on the efficiency of capital, which is a good thing. Given the high hurdle rate for ROI you also get people focused on customers and revenue. These are equally good results.

However, in other situations I never use ROI. These investments are for strategic reasons or to build comparative advantage against the competition. Until today I had never found anybody who shared this view--ignore ROI for strategic investments that build the foundation for the company future.

In a post today on company sustainability, the AVC blog shared the same view.

"ROI is not the right framework for companies to evaluate investments. ROI is for the wall street folks. They will use it to decide if they want to invest in your company. But when you make investment decisions in your company, don't use the tools that wall street uses. Use the tools that animals use. Survival instincts. What will it take to ensure that your company is around in ten years, fifty years, 100 years? That's how to think if you want to stay in business."

I always say that I specialize at the intersection of finance and strategy and almost always strategy is more important than finance!

Apple Retail Store Statistics

Some amazing statistics on the Apple retail stores courtesy of Onlinemba.com.

September Miami Workshop--Business Concept Development

On September 7 I will be giving a workshop for the Pino Entrepreneurship Center at FIU. The theme of the workshop is "business concept development". The workshop closely follows my book (link above) and details how to think through a business model.

The workshop is open to the community. Registration details are here . Proceeds from the 4 hour workshop go to Pino.

A Simple Definition of Business Strategy

Have you ever asked someone to define a common business term such as marketing. The answers are almost always long winded rambling responses. Good thinkers, however, provide simple and elegant definitions.

HBS Professor Cynthia A. Montgomery provides a simple and elegant definition of strategy in a short article in HBS Working Knowledge. She poses four questions that every strategy must answer:

1. What does my organization bring to the world? 
2. Does that difference matter? 
3. Is something about it scarce and difficult to imitate? 
4. Are we doing today what we need to do in order to matter tomorrow?

Professor Montgomery also makes an important point about formulating strategy. The rigorous analytical approaches to strategy pioneered by Michael Porter and other HBS faculty have placed too much emphasis on the process and perhaps inadequate emphasis on answering the four fundamental questions.

Note: Marketing--customer acquisition and customer retention--from another HBS faculty whose name I cannot remember.

 

Business Model Innovation

Silicon Alley Insider has a nice post this morning called "The 7 Principles of Successful Entrepreneurship". What caught my attention was principle 5 "Remember that business model innovation is often as important as tech innovation". They explained this point as follows:

"We’ve never seen any statistics or studies in this regard, but it sure seems that the majority of shareholder value created over the last half century had a lot more to do with companies innovating around their business model than around technology. Think of eBay with online auctions. Store brands and generic drugs. Amazon cutting out the retail middleman. Manufacturers asking suppliers to co-locate. Dell building PCs to order. Social networking typified by sites such as MySpace and Facebook. The way HMOs and PPOs fused insurance and healthcare delivery. Sure, in many cases, technology was involved, but technology was not the strategic driver that created shareholder value. Instead, it was creativity applied to the business model (product/service mix, value proposition, channels, pricing) that made the difference. This kind of thinking needs to be applied not only by entrepreneurs but by corporate new-business professionals as well."

In my classes and workshops on business concept development one of the main themes is the opportunity to improve the value proposition through innovation in pricing, sales and distribution. I think too many entrepreneurs gloss over these decisions and miss the opportunity to build better customer relationships.

Teaming, Pioneer in Crowd Funding, Enters the U.S.

In March 2011 I spoke in Barcelona at the "Do Good Do Well" conference and met Jil Van Eyle.  Back in 1998 Jil was one of the early developers of what is now commonly called crowd funding. Jil founded Teaming, which he explains as follows:

"Teaming is a simple, but powerful story of how leveraging individuals’ consciousness and creative thinking through teamwork can generate great positive impacts and results for people, business and society."

After its start in Europe, Teaming now has a U.S. website here.

My original post on Teaming, which explains how and why Teaming started, is here. Teaming is a great example of how passion and entrepreneurship can combine for social benefit. 

Emotional Engagement = Product/Market Fit

Successful salespeople understand the principle of emotional engagement. Product features, pricing, delivery schedules do not motivate people to buy a product. People have to have an emotional attachment to a product in order to purchase. This quote from Paoloa Antonelli sums up the idea perfectly:

"The bond between people and things has always been filled with powerful and unspoken sentiments going well beyond functional expectations and including attachment, love, possessiveness, jealousy, pride, curiosity, anger, even friendship and partnership."

As you try to sell a new product to find product/market fit do not focus so much on product features. Rather, listen to the customers reactions to the product and try to determine where the emotional engagement exists and how to foster more engagement with the product.

Paola Antonelli is the Senior Curator of Architecture and Design at the Museum of Modern Art in NYC. I found the quote in an article on Brain Pickings.

StoryTech--A Tool for the Future

StoryTech is an innovative project based at the University of Minnesota. It's purpose is:

"to [introduce] a very old process that enhances your strategic ability to 

deal with change and opportunity"

The process is stories.

"Stories are truly software of the mind. They operate simultaneously at
many levels of intricacy and simplicity. Stories are also multifaceted and
holographic. They function at multiple levels across human consciousness
to collapse complexity into creative simplicities."

StoryTech is based on the premise that:

"A new economy based on ideas, knowledge, and innovation is underway. This rapidly emerging idea-knowledge-innovation economy has largely overtaken societies by surprise. Both its swiftness and the depth of its impacts were largely unforeseen only a few brief years ago. This new economy is heavily premised on strategic‘intentional processes’ rather than ‘pre-conditioned responses."

Nice statement of the problem.

The StoryTech link is here.

A related article, "How to Survive the End of the Industrial Age", is here. Another article, "The Digital Age is Not a Solution", is here.

 

Some Good Articles on Innovation and Strategy

Two themes that interest me are strategy and innovation and how they are applied to economic development, entrepreneurship and social ventures. Two articles this weekend on these themes were noteworthy.

In "The Hardest Question Any Leader Can Ask" there is a particularly good point on strategy as it relates to business model:

"Business model innovation must be a strategic objective or it won’t happen.

One of my biggest pet peeves is setting strategy one tactic at a time. It drives me crazy to be surrounded by people and organizations that think if they just work hard enough and do more things that a strategic direction and destination will emerge. It seems that most of the world works this way. It is terribly inefficient. How many people and organizations do you know that pedal the bicycle like crazy but never seem to arrive anywhere. They just keep pedaling harder hoping that something will eventually stick. It is exhausting watching them. Why not establish business model innovation as a strategic objective, a specific destination, and work hard on those things that help you get there. It seems so simple. Setting a strategic direction provides a way to know which tactics are aligned and contribute to reaching the destination. The destination may change along the way requiring different tactics, and that is OK, but not having a destination at all is a ticket to nowhere."

In "A 5-point checklist to create lucrative opportunities with disruptive technologies" the author list five ways to disrupt a market and gets it absolutely correct:

1. Destroy your product
2. Make your product solve meaningful problems
3. Make your product insanely simple
4. Make your product smart
5. Give your product away

Read the article to understand the logic of each method.

A Deeper Understanding of Social Entrepreneurship

I have been engaged in a discussion with Mark Hecker on the blog Unsectored. Mark is the founder and Executive Director of Reach Incorporated. Mark's article which prompted the exchange in the comments is titled "Falling for the New Language of Social Good".

Mark advocates in the story and comments for a role for non-profits in social ventures. I, on the other hand, believe that commercial activities can address most social issues. There are certain risks too big for the for-profit sector, but all other projects should be the domain of entrepreneurs. Mark's concern is that many social sectors will be ignored by for-profit organizations. My response to this concern is below:

"When you consider risk, which is where this discussion began, one must also consider economic return. To address the unserved sectors, where the risk is perceived as too high, we must look for agents who will accept lower returns. Social entrepreneurs, by definition, fit this risk-return profile and should be the agents identifying and serving these unserved sectors. With their success economically and socially they will demonstrate that the risks were not as high as perceived and thereby attract traditional capitalists to what will then be considered markets. At that point, the unserved sectors will start to disappear."

Similar to the Becker Posner blog on economics, I think Mark and I should start a blog called Hacker-Hecker to discuss the two sides of social issues. If we could find a Mr. Hocker, then we would add the government view. Hacker-Hecker-Hocker. I think it has a real ring to it.

Note: While Mark and I have philosophical differences, I really like the Reach focus on education in urban settings.

Other posts on social entrepreneurship are here.

 

Pricing Strategies

In my theory of business model, I propose three key concepts that need to be considered in each new business concept:

1. the growth driver
2. pricing model
3. distribution

Today's post is on pricing. There are sixteen pricing alternatives, as outlined in my book. Each alternative represents a different way to monetize a transaction or capture the value. The reason that there are so many alternatives for pricing is that there are so many ways to share value with a customer.

As Marco Bertini and John T. Gourville, professors at London Business School and HBS respectively, make clear in their excellent new article, "Pricing to Create Shared Value", pricing is not a zero sum game. "Companies have traditionally treated value in the marketplace as a fixed pie and have reasoned that they must compete with their customers to appropriate as much of it as those customers will relinquish." Thinking of the customer as merely a pocketbook robs the company of the opportunity to understand the customer need, build a better relationship and share the value created. 

The notion of "shared value" presented by Bertini and Gourville is attributed to Michael Porter and this article by Porter. Personally I think they have a different notion of shared value from Porter or perhaps they have explained the idea better than Porter did. Bertini and Gourville's notion of shared value is consistent with my view of social entrepreneurship, wherein the company shares as much value with the recipient as possible while still achieving cash flow breakeven.

 

Management Tip--Figure Out the Ending

On the io9 blog Emma Coats lists the 22 lessons she has learned about storytelling while working at Pixar, the animation film studio. Rule 7, "figure out the ending" because "endings are hard, get yours working up front" prompts today's management tip.

Most "experts" say that you should first write the business plan and then write the executive summary. I do it just the opposite. I write the executive summary first where I am forced by space limitations to cogently and concisely layout the key factors that will be compelling to an investor. If I write a full business plan I then know which key points require amplification and substantiation. I am basically following Ms. Coats recommendation. (Hint: With a good 2-3 page summary you do not need a business plan.)

Maybe another business problem will help to explain. Suppose revenue is lower than plan and you conclude that you need to raise prices. You could do an exhaustive analysis of product pricing and competition, but the better thinking should be devoted to the question "how do we increase the perceived value of the product by the customer". In the end price increases only work if the customer perceives an increase in value. Therefore, by forcing ourselves to think about the end result we are better able to solve the problem and execute a solution.

Obviously it takes some experience and discipline to use a "figure out the ending approach" but you should produce a better quality result.

Image credit: smallbiztrends.com

Everett Rogers on Successful Product Development

John Gourville answered the question "Five Ways to Make Your Company More Innovative" with this response in HBS Working Knowledge:

"For the last 50 years, innovation theorist Everett Rogers told us that the difference between a successful product and an unsuccessful product has to do with how the product is designed-the physical attributes of the product. And he came up with five factors:

1. Relative advantage: Is it better than what it's replacing?
2. Compatibility: Is it compatible with the way people currently do things?
3. Complexity: Is it too complex to use?
4. Trialability: Can you try it in small doses?
5. Observability: Can you watch other people use it?

All of those things are inherent in the product itself. Rogers's research found that 75 percent of the variance between products that succeed and products that don't succeed has to do with those five factors. Once you have those things, if they are all pointing in the right direction, it's a lot easier to market the product."