In July 2010 I wrote a very popular post titled "A Strategy for LinkedIn". In the post I recommended:
"The second feature I would add to LinkedIn is a Hacker News for business. Hacker News is a very simple site where people post the best posts on technology from a wide range of sources including blogs, corporate media (e.g. NYT) and white papers. The content is not moderated but the users create such rich content that I sometimes think that if I had only one RSS feed to read every day it would be Hacker News. A "Business News" on LinkedIn would bring readers to the website more often to post articles, would over time probably produce a better source of business information for the members than the automated sites such as Google News or Yahoo News and again could be a new revenue source for LinkedIn through ad revenue."
In mid-2011 LinkedIn started LinkedIn Today, member curated business news. I have been a reader every day since it launched and the quality of the articles is very high. I recommend it.
Probably just a coincidence that LinkedIn did what I said in a post, but if anyone needs a consultant to increase web traffic maybe I can help:)
I had to wait until after April Fools Day to make this post. Otherwise everybody would have thought it was a joke, but I am serious about this. I need to rent an alligator. This is not a variation on "time sharing dogs"--I promise. Here is the story.
A young woman approached me for advice on starting a new business. She wants to be a mammal trainer--dogs, cats, etc. She tells me that she has experience training whales, dolphins, lizards and alligators. I politely ask her if she has a video showing her training alligators. She says no and now you know why I need to rent an alligator. What better way to promote a new business than a video of a ferocious alligator being trained by a young blond woman.
For those of you have read SF for a long time, you should be asking yourself "where's the large market opportunity" in mammal training. The idea I gave her is that she should work toward developing a reality TV series where she trains a different, preferably ferocious animal each week. With all the tie ins such a series could grow into a significant media company.
If anybody wants to see the trainer, her picture is below with a killer whale. If anybody has an alligator to rent, please contact me.
Last week I met with a young engineer to discuss his early stage company. The company has about $1.5 million in revenue and provides a sophisticated telecom service using proprietary software to manage real time data. The company has one large customer and the entrepreneur wanted to discuss how to find the next customer(s).
In the course of the discussion, I realized that the company, as a by-product of providing its service, was capturing information about company operations that the client did not have. Making the engineer realize this point was a challenge because he thought he was in the telecom services business. Any company that is capturing a large amount of real time data should step back and see if there is a more valuable use of the data.
For example, a company that does processing of insurance claim collections for doctors has a huge data base on the different procedures and costs for a standard medical procedure--a broken leg. Every legitimate doctor bills the same services and procedures. Any doctor that consistently bills insurance companies differently is probably a crook. We could use this database to identify Medicare fraud by doctors. Yes, the company does medicall billing to insurance companies but using the data to prevent Medicare fraud may be a more valuable business for the company.
This story last week in the NYT about GT Nexus also illustrates my point. The company has a cloud-based service that integrates the supply chain logistics data of large international companies and their thousnds of suppliers. Effectively the status of a shipment can be traced from point of origin to the ultimate customer. Taking this data in its entirety and you have a detailed view into the world economy, a data base that few, if any, other organizations have. GT Nexus has the ability to forecast economic performance based on leading trade indicators, calculate the balance of payments for countries and identify new sources of products by country (e.g. formally China and shifting to Indonesia). The by-product data of supplying logistics tracking is perhaps more valuable than the underlying service.
I frequently write about the need to understand the customer and not get trapped in constantly focusing on product development (especially for engineers). In companies that capture large amounts of real time data, perhaps one should consider if there is a more valuable use of the data for a new customer.
One part of the business model that I stress more than most commentators is distribution strategy. This is probably because I came from the retail industry and partly because distribution and logistics are not taught much in business schools. Apple's iPhone experience in China illustrates the importance of distribution.
Apple is the worldwide leader in smartphones in every major market except China. There they are way behind the market leader--Samsung. Samsung has a 16.8 percentage point lead in market share and their lead is increasing, according to this story in Bloomberg. Part of Apple's problem is that they have not secured a distribution agreement with the largest Chinese cell carrier--China Mobile. The fact that the iPhone does not support the protocol for China Mobile's network is part of the reason, but one could ask who designs a product that does not work in the largest distribution network, 633 million subscribers, in the world.
I have written about a technique called "relax the assumption" here and here. Several people find this technique a powerful model to solve problems and innovate. When I do workshops on this technique, I always start by asking the question "why can't we timeshare dogs?" This question makes clear that you only relax the assumption about ownership and we have dog timeshares.
In a typical workshop I then ask how many new businesses can you create by relaxing one assumption about the original Model T Ford. Everybody thinks of customizing the car color and rental cars. I end the examples by pointing out that fast food restaurants is another example. Do not change just assumptions about the car but rather about people's lifestyles.
I have always considered "relax the assumption" to be a technique that I developed. This article from Big Think shows that my technique addresses what psychologists call "functional fixedness" or ingrained limitations in your thought about the function of something, such as a Model T. Now I have a scientific basis for my technique.
A friend (@john_menezes) wrote and asked me to talk about the important takeaway from last night's lecture to my entrepreneurship class. The lecture was on Clayton Christensen and his theory of disruptive innovation. Christensen is a professor at HBS and his most recent book on disruptive innovation is "The Innovator's Solution: Creating and Sustaining Successful Growth". This video is a presentation by Christensen on his work and an excellent summary for those who like videos.
Christensen's theory of disruptive innovation states that the size of a market is measured not by those who use a product but rather by those who are unserved. One disrupts the existing market leader by lowering the performance standards through a more limited feature set at a lower price. These changes make the product available to new customers who could not previously afford the technology. The computer industry demonstrates this logic, as shown below.
Mainframe computers
Mini-computers
Desktop computers
Laptop computers
Smart phones
In each case above the next technology disrupted the dominant technology by offering more limited features, lower performance and a lower price. This change in price-performance enabled a new group of users to adopt the product and this new group is usually larger than the previous user group.
When we observe the five cases above there is an interesting observation, which was the important takeaway from the class. In each case the new technology changed the physical location of the technology. Mainframes were rare, one to an organization. Mini-computers were available in many closer locations in an organization and smart phones are in our pocket. If you do not understand this point and its power as a new business idea, think about hard discs, USB flash sticks and cloud computing. Physical location of memory storage changed in each case and large markets were established. Convenience improved as a result of changing the performance standards and the location.
In my classes and workshops on entrepreneurship one of the goals is to provide a set of tools to build a large business. I am not very interested in self-employment or small businesses. Changing the physical location of a technology is one of those tools that creates the possibility to create a large business.
One of the students made the connection between Christensen's unserved market and Prahalad's concept of serving the "bottom of the pyramid". Very pleased that a student could make the connection between Prahalad and Christensen based on my lectures. This concept is discussed in my upcoming book on social entrepreneurship.
Knowledge@Wharton is reporting that this year Coca Cola will test the distribution of medicine through its normal channels as a means to help the poor in Zambia. Lack of available medicine is a major contributor to high fatality rates from diseases that no longer affect people in more developed countries.
In many developing countries physical distribution of goods is a real challenge. For example, in Peru it takes nine days for goods to reach remote areas. Coca Cola has solved this problem in many countries in order to make Coke available even in the most remote markets. In the Zambia test ColaLife, an unaffiliated UK non-profit, will pick up the medicine at the last Coke distribution point and use paid bicycle riders to carry the medicine to nearby clinics and hospitals. ColaLife initiated the program with Coca Cola.
Other organizations that distribute goods to the most remote parts of developing countries are the World Food Program (a UN agency), the local military and large local retailers. World Food Program distributes food to school children in many countries on a daily basis. In many developing countries the military is the only part of the government with physical distribution capabilities and they provide their own security. Security of high value products is an issue not to be overlooked. Large local retailers in Indonesia distributed foreign food aid during the Asian Financial Crisis in 1997.
One benefit of working in retail is an appreciation of the complexity of physical delivery of goods. This model in Zambia deserves to be duplicated.
Chris Zook, a Partner at Bain, had an interesting post on the HBR Blog Network. In part he discussed themes from the recent Davos Forum. One of the themes was:
"that while events are unfolding in the world at an accelerating pace, increasingly complex institutions are less and less able to deal with them."
This is a theme that I have written about frequently, including here and here. Events are unfolding at an accelerated pace because information about the events is being disseminated at a much faster pace over the Internet. Secondly, information about an event is being covered by more and more sources, both offical and recognized and informal. For example, Twitter probably breaks more top news stories than any news agency or television network. Large complex organizations such as governments and Fortune 500 companies are not currently designed for immediate reaction and response but rather prefer a deliberate, consensus oriented approach.
The question, of course, is why large organizations cannot respond more quickly. Zook proposes that companies need simpler strategies and more transparency. Simpler strategies presumably reduce the number of variables to consider in making a decision and transparency provides more people with the necessary and correct information. This is good advice but I would add one more concept.
If the strategy is clear (through simplicity) and people have good information, then authority can be delegated down to a much lower level. Lower level staff may not execute their authority but they have the option to do so. I always remember the story of the sniper in Afghanistan who had Bin Laden in his sights during the Clinton administration, but by the time Washington approved the shot Bin Laden had left the scene. Delegation of authority permits faster reaction times by the people on scene dealing directly with the problem.
All of these posts were referenced in a story by a large readership blog. The LinkedIn story was on the first page of Hacker News (no affiliation) for awhile. With this "fame" one pays a certain price. In the Rim story I was referred to as an "arm chair CEO". May have to dust off the arm chair to see if there are more corporate strategy posts.
An article on Brooks Review, "If I Were CEO", got me thinking about what the new CEO of Rim should propose as a go forward strategy. The task is daunting in part because the simple choice to sell the company is probably not viable. I seriously doubt anybody would buy an broken underperforming company in the most competitive tech markets--handsets and tablets. This chart from Google Finance of the RIM stock price may support my view.
In considering a new strategy the CEO needs to recognize three facts:
A large, attractive app store is a requirement to be a viable smart phone and/or tablet provider
The same or a very similar operating system must work across all devices including preferably laptops
RIM's strength in enterprise is a legacy and that more and more enterprise decisions are being driven by the need to integrate devices that executives pick as consumers
Setting out the market situation is the easy part. Finding a new strategy is the hard part. My thoughts on the new strategy:
Alternative A: Do a Nokia+ strategy
In addition to exchanging cash for exclusivity with Microsoft for their phone operating system, I would do the same deal with Intel. Intel is looking for a big splash for their new low energy chips and I think they would part with significant upfront cash in return for a RIM deal. I would use the cash to heavily promote the new Windows smartphones and tablets, put some money into building out the Windows app store and..drum roll...focus on the developing world where consumers like the free BB messenger and fewer consumers have chosen smart phones and tablets.
I do not particularly like this strategy because essentially all intellectual property is under the control of Microsoft and Intel, neither of whom play well with others. Also, the cost of this IP would be comparatively high, which would put pressure on margins. The advantage of the strategy would be a cash horde that provides time to try a new strategy.
Alternative B: Bet the Company
I think the Samsung Note demonstrates a new product category--the merging of the smartphone and the tablet. Except for Samsung nobody has a quality product in the space and most competitors are more focused on a 7" tablet similar to the Kindle Fire. With RIM's historic strength in enterprise, they could market the Blackberry Note (need to work on the name) to companies as a lower cost alternative to buying employees both smart phones and tablets. The device would run Android to solve the app store problem. All of RIM's encryption and interface know-how for corporate apps would also be attractive to enterprise buyers. Samsung tends to over price their products so RIM could probably establish a lower price point and still maintain good margins.
The advantage of this strategy is that corporate IT executives would like the opportunity to roll back the push for consumer devices to dictate corporate devices. Supporting only one device would also be attractive to these executives. If we opted for the Windows OS instead of Android, it might be a love fest with millions of redundant corporate IT execs pushing the product. (This situation might also happen in Alternative A.) The disadvantage to the strategy is that no one really knows whether the Note will be a successful product, but it is a new category where RIM could establish itself as a market leader. It also plays to RIM's strength in enterprise where they have internal supporters.
As discussed in my first book on business models, I believe that a business model can be defined in 3 concepts:
The revenue driver (subscribers, accounts, new locations, distribution and sales people)
Pricing (15 alternatives)
Sales and distribution strategy
Yesterday I heard a great example to illustrate point 3, distribution. Before Blockbuster a lady operated a large retail store that sold used videos. In a small corner of the store she sold used games. She noticed that on many days the sales of used games exceeded the sales of videos. Ever the alert entrepreneur, she approached K-Mart and offered to merchandise and supply games to the chain. Eventually this wholesale business went public.
A simple change from retail to wholesale distribution. Others would call this a "revenue pivot". I think it is easier to understand as a change in distribution.
The assertTrue blog has an interesting post on market share leaders in the physical and Internet worlds. The writer points out that in the physical world there are usually two to three companies that control the market as measured by market share. McKinsey made the same point in the 1980s. In the Internet world, to date, there is usually one dominant company and then a bunch of also rans. Examples include Google (search), Facebook (social networking) Amazon and Netflix.
If this change in market share dominance is correct, the question to ask is why does a sole Internet company in a market dominate? I think there is one principal reasons:
Comparatively low capital requirements to enter the market and to scale rapidly
Internet businesses are not as capital intensive as physical world companies and therefore can achieve dominant market positions faster. With the notable exception of Apple, Internet companies do not have to invest in stores. Few have warehouses or any significant sales forces. Little investment is required for logistics after the server farm is established. With Amazon Web Services such investment is turned into a marginal cost. In summary, low startup capital and limited capital requirements to scale characterize Internet companies and explain why a single company can dominate a market segment. First to find product/market fit combined with a limited capital constraint allow Internet companies to achieve dominant market positions faster that can not be displaced.
In a recent paper, "A conceptual overview of What We Know About Social Entrepreneurship", the authors (Brigitte Hoogendoorn, Enrico Pennings, Roy Thurik) describe four schools of thought on social entrepreneurship. These four schools demonstrate, in part, that there is no apparent academic consensus on the definition of social entrepreneurship. Given the lack of consensus, I will not bother to define each school of thought (read the paper), particularly given that I find all the definitions lacking.
Where I agree with the authors is in the following statement:
"The [four] approaches ... share one main commonality: their emphasis on the creation of social value. While it is a long-held belief that entrepreneurs contribute positively to society, it is motivation and the relative importance of social value creation (as opposed to economic value creation) that distinguishes social entrepreneurs from commercial entrepreneurs (Hoogendoorn, 2011)."
The social entrepreneur looks to maximize value creation (relative importance). In the value creation-value capture framework, if one maximizes value creation then one foregoes maximizing value capture. Effectively, in social entrepreneurship value is transferred from the shareholders (in the for-profit model) by foregoing maximum profit in favor of creating more social value. In the non-profit model of social entrepreneurship, the cash position is reduced in favor of creating more social value.
Much of my thinking on social entrepreneurship is based on a paper by Felipe Santos, "A Positive Theory of Social Entrepreneurship". Santos is a Professor at INSEAD. One might argue that Santos represents a fifth school of thought on social entrepreneurship. Santos basically says that social entrepreneurship is the maximizing of value creation and satisficing for value capture. One foregoes value capture up to the point where cash flow or profit is self-sustaining in favor of creating more social value.
I prefer Santos definition because I think it forms the basis for a management approach to social entrepreneurship. More on this idea in my upcoming book.
UX Magazine had an interesting post today,"Desire is a Universal Language". Take a ways from the article:
"Half of our waking cognition is purely unorganized, emotional thought". Desires play a much greater role than rationale in all activities including decision making.
"Dr. Steven Reiss, an Emeritus Professor of Psychology at The Ohio State University studying intrinsic motivation, has identified 16 basic desires that guide almost all of our meaningful behavior."
Brands that engage one of these basic desires make more powerful connections with customers, e.g. desire for knowledge explains the popularity of the Discovery Channel.
"We make decisions based on predictions of pleasure", the satisfaction of desire.
"Once we establish the pleasure–desire relationship ... create the symbolic language that helps people predict the pleasure of using a product or service".
"We can design in desire, forming powerful and often intangible connections between a brand and the people it serves.
The intrinsic motivation of desire(s) for the customer serves as the universal theme that may enable design, engineering and sales and marketing to share a universal product vision. Every business decision would revert back to whether it enhanced the motivation or desire of the customer. Such an approach would perhaps simplify the use of value creation-value capture framework.
I often wonder whether the CEO's of large Fortune 500 companies create much additional shareholder value or basically just benefit from the strategy they inherit. This story in the NYT discusses the ten year period in which Samuel Palmisano was CEO at IBM. During that period he added $40 billion to market value, an increase of approximately 29 percent.
Palmisano's success was achieved by recasting IBM's strategy in terms of four questions, according to the NYT:
Why would someone spend their money with you — so what is unique about you?
Why would somebody work for you?
Why would society allow you to operate in their defined geography — their country?
And why would somebody invest their money with you?
These four simple questions frame the key issues for any company and their strategy
Much press surrounds the possible takeover of Blackberry by a partnership between Nokia and Microsoft. As this article from Fierce Wireless makes clear, the three companies meet frequently to discuss ways to cooperate. I imagine the agenda for such meetings must be:
Apple's new product initiatives (which rumors should we believe)
Amazon's new tablet initiatives (and are they coming to market with a phone)
Google's new initiatives in smartphones, tablets and the Android operating system
If time permits, they read a chapter from one of Clayton Christensen's books on disruptive innovation and wonder how it happened that Blackberry, Microsoft and Nokia have been disrupted after being market leaders. The other topic that might be a discussion item is what Google will do with the acquired Motorola phone business.
I actually think that Blackberry may rise from the dust, provided that consumer buying behavior does not yet have too much affect on enterprise equipment decisions (a big "if"). Microsoft is toast (except as a gaming company) and Nokia was toast the day they agreed to use the Windows mobile OS on their phones and largely ceded control of the key features of the phones to Redmond.
Wonder if there is a record for most market capitalization lost to disruptive innovation. These three companies all have to be contenders for the record which is probably still to be determined.
At the end of every semester I give a lecture on what markets offer the best opportunities in entrepreneurship over the next fifty years (the working lifetime of a typical student). I will not bore you with the standard answers, such as education and healthcare. I think two opportunities that are under emphasized are:
Urbanization
Agriculture
In 2008 the percentage of the population living in cities passed 50% for the first time. As incomes increase in Africa and Asia over the next 20 years the percentage of urban population may approach 60-70%. Conservatively, that represents a migration of 700 million additional people into cities. Given the limited financial resources and antiquated infrastructure in most cities, cities face almost insurmountable challenges. Water, sewage and transportation will be big opportunities for innovation. Two interesting articles on urbanization are this report from the UNFPA, the UN group studying population, and this HBS Working Knowledgearticle by John Macomber, an HBS professor.
With increased population over the forseeable future and some estimates reaching a world population of 10 billion, the critical question is how to feed these people. Improved standards of living for those new urban dwellers will also exacerbate the situation. While just production may be an issue, where will the fuel come from to power machinery and provide fertilizer. The graphic below shows that energy efficiency in U.S. agriculture has improved significantly, but most of the improvement comes from the switch from gasoline to diesel fuel and provides no significant improvement in CO2 emissions. A .9 units of energy for each unit of food looks to me like a big opportunity for innovation.
I have been doing this workshop for about five years and I actually think it works best in the current short form. You get the really important concepts without the distractions of too much detail. If you would like to see a sample of my style of presentation, this lecture on social entrepreneurship on Vimeo is representative. Some participant feedback on another lecture is here.
Registration details are here. Proceeds go to the Pino Center where I am on the Board.
One of the most valuable things I learned in business school (over 30 years ago) was the "Smart Man" theory. The theory says that when you cannot figure out something, assume the other person is very smart. An application of the theory follows.
There are two trends that are increasingly shaping the future:
Non-government agencies are increasingly addressing the major social problems; NGOs, non-profits and social entrepreneurship ventures are all examples
Entrepreneurship and its little brother self-employment are increasingly being used as the means to develop and manage economic well being; entrepreneurship is now being taught in high schools and is one of the most popular subjects at many universities
What do these two trends have in common? Smart Man Answer: In each case the traditional role of the government is being supplanted by a more viable alternative.
In the case of social problems, private capital is being mobilized to address issues that can no longer be ignored. Porter's "shared value" is one example of this thinking. Another example is a foundation in Nicaragua that has undertaken the role of modernizing primary school education.
In the case of the popularity of entrepreneurship, what is recognized at the most fundamental level is that entrepreneurship allows one to control their life to the maximum allowed. One is no longer dependent on a government (or corporations) for their well being.
What do these thoughts suggest about the future? The role of government can be reduced because the people have recognized and started organizing for a world in which big governments do not solve every problem. On an international level this idea would suggest, as some have said, that cities will replace federal governments as the major political and social force. Every trip overseas, I see state and city governments taking on the role historically filled by a federal government.
The irony is that such a world closely approximates a Jeffersonian democracy of limited government. We are going back to an idea that was crafted and communicated over 200 years ago. Why do I insert the idea of democracy? Mobilizing private capital for social issues and entrepreneurship both rely on individual empowerment and the unencumbered freedom to act, which eventually will produce a democracy.
One of the strongest instincts of young entrepreneurs is to focus on their competitors new product features, messaging, pricing and sales techniques. In moderation, there are benefits to such an approach. When competitors become an obsession, there is a tendency for excessive focus on competitors to distract a company from developing and executing its own strategy.
I teach my students to not assume any part of their business model. For example, there are 15 alternatives to selling a product for cash. Perhaps we should not consider competitors only as an enemy and look for ways to cooperate for mutual benefit.
Opensource.com reports that the pharmaceutical industry is looking at cooperation models in R&D:
"So, in a bid to save time and money on the R&D process, the drug sector has taken a more serious look at the open source model of collaboration and transparency. The industry's biggest names are stepping into this new environment by experimenting with new ways to pool early-stage research."
A few weeks ago I met with some senior executives in the sugar growing industry. We were talking about how this industry cooperates worldwide and I asked them why. Their answer was:
We sell an undifferentiated commodity
Prices are set in a marketplace we do not control
By sharing new techniques and technology throughout the industry, we can lower the costs of these innovations and improve profitability.
I think that the cloud computing industry will look much like sugar growing in a few years. It will become an undifferentiated utility type service, available from many providers large and small. Last week I saw this story in Fast Company about how OfficeDrop, a back up cloud-based storage company, allows their customers to link to Dropbox. Dropbox is the market leader in cloud-based backup and was recently valued at reportedly $4 billion. Utility type industries, much like the sugar industry, tend towards industry cooperation. It may just be starting in cloud-based backup and storage, but I expect to see a lot more in the years to come.
