SOPHISTICATED FINANCE

Problem Solving and Business Model Development

I learned early in my teaching career that students need dramatic images and sayings to help retain concepts. From this methodology came the idea that students should tattoo on their arm "don't run out of cash". Later I started using the question "why can't I timeshare a dog?" to reinforce the idea of relaxing an assumption to develop a new business concept. Recently in social venture workshops I have compared non-profit foundations to stockbrokers, which usually quiets the room and grabs everyone's attention.

The latest idea that I have introduced into my repetoire of teaching tricks is "functional fixedness". This concept basically shows that we have an inherent inability to deconstruct physical things in order to re-assemble them for new purposes. The famous example is you find a box with two rings, a candle and matches. How can you connect the two rings. Most people cannot come up with the solution because of functional fixedness.

Yesterday I heard about a great example of functional fixedness that has spawned a new business model. Most restaurants rent their space but have limited operating hours that match the meals they offer. The rest of the day the space is dormant. In a new business model for restaurants, restauranteurs are renting the unused time (and space) to launch totally different restaurants. For example, during the day the restaurant offers American cuisine for breakfast and lunch and closes at 4 pm. Now at 7 pm a new restaurant uses the space to offer nouvelle French cuisne dinner meals. Both restaurants have lower operating costs and the physical space (functional fixedness) is better utilized. Very clever.

Answer: melt the candle and use the candle wick to tie the two rings together.

Further Thoughts on Shared Value

Last week I spoke on a panel on shared value at HBS. I described Michael Porter's shared value in a previous post, "Social Entrepreneurship, Corporate Social Responsibility and Shared Value":

"Corporate strategies must be adapted to service social needs. By combining the creation of economic value and serving social needs "shared value" is created. "For profit" companies are well suited to solve social problems while at the same time serving their shareholder's interest to maximize investor returns."

I now believe that shared value is basically a trivial idea. To forego social responsibility in favor of maximizing shareholder return is really just an excuse to be socially insensitive. Maximizing shareholder return is not some sort of mathematical certainty but rather the more practical but vague notion that company earnings have to match stock analyst earnings estimates (as a surrogate for shareholder "expectations"). Spending could support social objectives or income generating activities as long as the shareholder expectations are met. For example, no one criticizes Wal-Mart for annual charitable contributions in excess of $600 million.

This post was inspired by this story on opensource.com, "Reimagining capitalism—as principled, patient, and truly social". I do not agree that "capitalism degenerates into narrow self-interest without a strong ethical foundation". Companies make many social contributions such as job creation and tax payments regardless of ethical foundations. The more constructive objective would be to make businesses more aware of the good "business" opportunities that exist in solving social problems or serving the underserved.

Knowmads

Education Futures advocates for an education system that trains students to be "knowmads". A Knowmads is a "creative, imaginative, and innovative person who can work with almost anybody, anytime, and anywhere".

Knowmads have nine characteristics:

1. Are not restricted to a specific age
2. Build their personal knowledge through explicit information gathering and tacit experiences, and leverage their personal knowledge to produce new ideas
3. Are able to apply their ideas and expertise contextually in various social and organizational configurations
4. Are highly motivated to collaborate, and are natural networkers, navigating new organizations, cultures, and societies
5. Purposively use new technologies to help them solve problems and transcend geographical limitations
6. Are open to sharing what they know, and invite the open access to information, knowledge and expertise from others
7. Develop habits of mind and practice to learn continuously, and can unlearn as quickly as they learn, adopting new ideas and practices as necessary
8. Thrive in non-hierarchical networks and organizations
9. Are not afraid of failure — and see their failures as learning opportunities

This concept of the skills or traits required of students and/or future workers is very consistent with my view, as described in this post "How to Survive the End of the Industrial Age".

More Big Data-Clear Story

My friend @John_Menezes sent me this link to Clear Story after yesterday's post on "Data-based New Business Ideas". Clear Story is working on tools to manipualte big data sets, analyze the data and draw meaningful insights. What is particularly noteworthy are the blue chip investors-Google Ventures, Andreessen Horowitz and Khosla Ventures. These three firms are all top tier VCs, which suggests that the opportunity in big data analytics is very large.

Killer Apps May be Confusing US

IP Carrier is an excellent blog that focuses on new business models in telecom and related areas such as data. A recent story, "Is there a Tablet Killer App?", raised an interesting point not just about tablets but all computing devices.

From the early days of computing, a new device succeeded if there was a "killer app". A killer app was a software application that had such high utility that people bought the device to get the app. The classic killer app was the spreadsheet running on the PC. The conventional wisdom is that VisiCalc, Lotus 1,2,3 and Quattro Pro, the early spreadsheet apps, made the PC market. However, we all know that Microsoft Office, which integrated several useful apps, is the most profitable Microsoft product. What Microsoft realized is that the suite of productivity apps, and not a single product (app) was the way to satisfy the customer need. Effectively, Microsoft looked beyond the product and looked at what was the customer need. (Perhaps Microsoft's last great insight until they became a game company.)

This issue of looking at product and not the real customer need may explain the decline of BlackBerry. The "killer app" for Blackberry is generally considered to be email. However, email was available on PCs and the real benefit to the customer was reliable, remote access... to email. Reliable, remote access explains the popularity of BB Messenger in many developing countries where network quality is not good. Many people in such countries buy their Blackberry just for BB Messenger as a chat device. If Blackberry had realized that the way the device was used and not the app was important they might have dominated chat worldwide and not have their current problems.

If we now turn to the tablet, we should not be considering killer apps but rather why do people use the device. Fortunately there is no "killer app" on the tablet to confuse the analysis. In talking to hundreds of people about their tablet, nobody singles out a particular app consistently to explain their tablet purchase. The manufacturers all highlight their app stores but nobody ever says they bought an iPad because they can easily add new apps. Maybe early adopters mention such "geek nonsense" but typical users never mention it. What people typically cite is the interface and how everybody in the family can use the device--even two year olds. Maybe tablets are "family" entertainment devices or maybe they will become "childrens' connectivity devices". 

When the tablet first emerged, Frog Design, the world renown design firm, said that the tablet was a new interface and not a new product (SF story, Frog Design article, both from March 2010). Frog focused on the customer and why they would use the device and not the device or its apps. This is the same point IP Carrier made in their story. It is a point that cannot be over emphasized. Understand the use case of the customer and not the product.

Data-based New Business Ideas

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.

 

My IT Experience(s) over 40 Years

Fred Wilson did a nice post on his personal history in computing, which inspired me to recall my own history.

I first used a computer in 1969. It was a time share service provided by NORAD to high school students. The free dial-in service prompted us to make long distance calls rather than program the computer. Missed the chance to invent VOIP.

In 1982 I invested in my first IT company, a provider of videotext. Learned the importance of not being ahead of the market when investing. The Internet came along about 10-12 years later. Went off to Japan for eight years instead of continuing to invest in IT companies.

In 1983 I had my first email account on Compuserve. Used the account to surf Compuserve content from hotels around the world on weekends. Licensed Compuserve in Japan, which lead to the first ISP there.

In 1995 I made my first Powerpoint presentation at a conference. Everybody else still used transparencies or slide dollies. 

In 1996 I established the first networked company in Indonesia for email. Also I built the first private voice network using satelite. Saw my first business card with just an email address for contact information.

I bought my first personal organizer in 1997, a Palm 1000. I bought my first BlackBerry in 1999 when it was an email only device. Wish they still made the email only version.

In 1999 I raised $35 million for an Internet-based company. The first Internet bubble burst shortly thereafter.

In 2000 I ran a telephone company and correctly called the growth in data services. Data service revenue grew to $18 million in one year. Experimented with private wireless networks for companies, which never caught on.

Started blogging in 2007. July will be five years. Great decision for me and hopefully the readers.

Started tweeting in 2008. Spanish language tweets give me great access to links and info I do not normally see. Have met some great people through Twitter (and blogging).

Joined OLPC in 2009 and began a serious education in operating systems and hardware components. 40 years after my first use of a computer I actually understand the engineering. 

 

 

The Importance of Distribution

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. 

Image credit: Wikipedia

Related articles

• Distribution in the Business Model (sophisticatedfinance.typepad.com)

Chomsky on Creativity and Innovation

Noam Chomsky is one of the legendary thinkers of the 20th century. Now an emeritus professor at MIT, he established his reputation in the fields of linguistics and philosophy. He is also well known as an activist for social causes.

A recent speech (with video) on the "Purpose of Education" is in this article from Fast Company. What caught my attention was this quote on creativity and innovation:

"It’s the way cultural progress takes place generally. Classical artists, for example, came out of a tradition of craftsmanship that was developed over long periods, with master artisans and others, and sometimes, you can rise on their shoulders and create new marvelous things. But it doesn’t come from nowhere. If there isn’t a lively cultural and educational system, which is geared towards encouraging creative exploration, independence of thought, willingness to cross frontiers, to challenge accepted beliefs… if you don’t have that, you’re not going to get the technology that could lead to economic gains.”

Great thinkers always explain complex ideas simply. Culture and education foster creativity and innovation.

 

Fixing What's Wrong with U.S. Politics

A recent article by HBS professor David Moss correctly identifies the problem in current U.S. politics as the inability of both political parties to put the country first. The HBS Working Knowledge abstract is below.

Fixing What's Wrong with U.S. Politics

Author:	David A. Moss
Publication:	Harvard Business Review 90, no. 3 (March 2012)

Abstract

In America today there's a growing sense that the political system is broken and that its ineffectiveness is a major threat to U.S. competitiveness. Why do so many think the political system is not working? Research shows that in Congress, Republicans and Democrats are more polarized than ever. They seem pulled apart by two starkly different conceptions of government: one viewing the government as inefficient, invasive, and easily corrupted, and another seeing it as a vehicle for solving people's problems. Yet the ideological divide may not be the true source of the breakdown. A look at U.S. history shows it's not new. Moreover, sharp ideological battles have often proved highly productive in policy terms, delivering the best ideas from both sides. In the 1840s, for instance, state politicians who were deeply skeptical of government pushed hard for balanced budget amendments while politicians at the other end of the spectrum demanded free public schools for all. In the end many states adopted both policies-a combination that proved enormously powerful. The problem today is that too many have come to view politics as war, where victory is paramount and "compromise" is a dirty word. This take-no-prisoners approach, which came into sharp relief during the debt-ceiling debate, threatens to cripple the best-of-both dynamic. Revitalizing America's culture of democracy-where the health of the nation comes first, above economic interest, party, and ideology-is essential. Business leaders must play a large role in this effort, because the implications for the economy are so great.

Read the article: http://hbr.org/2012/03/fixing-whats-wrong-with-us-politics/ar/1

 

New Republic Acquired

NPR is reporting that Chris Hughes, a Facebook founder, is acquiring the magazine New Republic. Hughes believes that there is a need for in-depth analysis of issues. I share this opinion and welcome the continuation of the liberal views traditionally associated with the magazine.

I have written frequently on public intellectualism here, here and here. In the end the dialogue is more important than the political views of the writers. 

One Year After Fukushima

Peter Kim sent me this video about Japan one year after the Fukushima nuclear disaster.

I worked in Japan for ten years. Makes me sad every time I see the destruction from the nuclear accident.

Related articles

• One year after Fukushima our nuclear industry remains ever vigilant (thehill.com)
• Japan's nuclear power plants all going offline by summer (theglobeandmail.com)

Brazil Auto Industry-Troubling Signals

Image via Wikipedia

Brazil is now the sixth largest economy in the world. Brazil is enjoying an economic boom, in part due to the reasons discussed in this presentation. The prosperity is flowing down to the middle class. AP reports that Brazilian tourists spent $5.9 billion in the U.S. in 2010. Many would say that the Brazilians, bolstered by a strong currency, saved the retail industry in Miami the last 2-3 years.

Despite the wide reaching economic prosperity in Brazil, there is one area that concerns me. Imports to Brazil have always been tightly controlled in order to protect local industries. This strategy may have been effective when Brazil was a struggling third world country, but today Brazil is emerging as an economic powerhouse with international political aspirations. 

Latin Business News reports that Brazil has requested that Mexico reduce auto exports to Brazil by 33% or $1.4 billion this year. If Brazil is going to aspire to a position of international leadership, it should be fostering more trade in LATAM. Such an approach to trade would increase its political clout.

If Brazil were to expand its political influence, especially in LATAM, such an approach would force the U.S. to pay more attention to LATAM. More attention from the U.S. would theoretically foster greater economic development in LATAM and benefit Brazilian exports.

Related articles

• Brasil -- O Futuro e Agora (tomglocer.com) English
• Brazil "overtakes UK's economy" (seeker401.wordpress.com)

Functional Fixedness and Problem Solving

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. 

Social Entrepreneurship as Portfolio Theory

Last week's lecture at the MIT Sloan School marked a significant change in my thinking about social entrepreneurship. I continue to believe that the word "social" and its normative connotations confuse the matter. Which has the greater social benefit:

• A non-profit feeding 10,000 children in Africa
• A company that creates 29,000 jobs
• A for-profit that sells a device that reduces AIDS transmission for 7.5 million people per year

All three of the organizations provide significant social benefit and the last two are for-profit. One should pursue social entrepreneurship only if it has an economic benefit. Otherwise, one should do traditional for-profit entrepreneurship. In the end, it is achieving the objective that benefits the customer and society and not the business model--social or for-profit entrepreneurship--that is important.

To understand social entrepreneurship, portfolio theory helps. An investor has two choices:

1. Make an investment in a for-profit company at a market rate of return and make a separate donation for a "social" purpose from the proceeds of the return, or
2. Invest in a social entrepreneurship venture, receive a below market return because the investor knowingly transfers the additional return available to a recipient to benefit them (the "donation") through lower cost, greater features, etc. and effectively maximizes the value creation (the "social" benefit)

The question is why would someone opt for the second alternative, social entrepreneurship? The only rational reason for the investor to opt for social entrepreneurship is that there is greater efficiency in the "donation" through economies of scale, better management, additional services, etc. Otherwise the investor would just make the donation themselves. For example, OLPC provides a wide range of project services at nominal charge or for free that the investor could not duplicate by merely donating laptops.

In summary, the economics and efficiency of the venture determine whether social entrepreneurship is the best alternative. Otherwise the investor could create the same "social" benefits through a direct donation.

Related articles

• Social Venture Checklist (sophisticatedfinance.typepad.com)
• Teaching at MIT Sloan School (sophisticatedfinance.typepad.com)

AutoTutor: AI Meets Education

Image via Wikipedia

PsychCentral has an interesting article about AutoTutor, a software application developed at the University of Notre Dame. The app use artificial intelligence to improve learning outcomes by identifying student misconceptions about a subject and proactively correcting them.

Sidney D’Mello, an assistant professor of computer science and engineering at Notre Dame, states:

“Most of the 20th-century systems required humans to communicate with computers through windows, icons, menus, and pointing devices.”...  “But humans have always communicated with each other through speech and a host of nonverbal cues, such as facial expressions, eye contact, posture, and gesture. In addition to enhancing the content of the message, the new technology provides information regarding the cognitive states, motivation levels, and social dynamics of the students.”

The riddle of educational software has perplexed educators and software developers since the advent of computers. This approach using AI is an interesting direction.

Thanks to Walter Bender for the heads up.

Related articles

• New Software Responds to Students' Emotions, Boredom (neurosciencenews.com)
• New computers respond to students' emotions, boredom (esciencenews.com)

Non-profit Mergers

Image via Wikipedia

I recently gave a talk on social ventures, which included some trends that I see in this increasingly competitive space.

1. The number of non-profits in the U.S. is too large, over 1.5 million, which results in many incremental approaches and too few large scale ventures
2. Competition in social services is increasing as for-profits enter the space, driven by large market opportunities, Michael Porter's shared value and the popularity of social entrepreneurship.
3. The concept of "social" is becoming very cloudy as more and more people realize that objectives can be achieved without any consideration of the "do good" tag

The discussion of my ideas was very vigorous as the attendees basically stopped the speech to discuss some of the ideas. First time that ever happened. One idea that got a fairly thorough debate was the idea that non-profits should merge in order to reduce overheads and achieve larger scale. M&A in the non-profit world...what is this world coming to.

If you think this idea is far fetched, this story in Concurring Opinions talks about a "hostile takeover" of a foundation. 

Of course, the best example of this merger concept may be that Warren Buffett put his billions in the Gates Foundation. Mr. Buffett understands capital efficiency and scale.

 

Related articles

• Another Look at Social Entrepreneurship (sophisticatedfinance.typepad.com)
• Teaching at MIT Sloan School (sophisticatedfinance.typepad.com)
• Aaron Hurst's View on Running a Non-profit (sophisticatedfinance.typepad.com)
• Social Venture Checklist (sophisticatedfinance.typepad.com)

Just-In-Time Mobile Apps

@espitia7 tweeted me an article from Frog Design, one of my favorite blogs. In the tweet he asked if I thought this new technology would be disruptive (as in Clayton Christensen's "disruptive innovation"). Thanks German.

Frog Design forecasts that most apps resident on a smartphone will disappear in favor of "just-in- time" cloud-based apps that provide information on the phone when you need it. For example, the cereal box in the supermarket sends a message to your smartphone and automatically nutrition information appears on an open browser page. Nice idea, but I can search that information in seconds on Google and see little value in an automated version. Where I do see value is in a scenario where I arrive at the airport, the airline recognizes I am there for a flight (like every other week) and sends the boarding pass automatically to my cell phone so I can proceed immediately through security. Or in my dreams, based on a statistical profile that shows I took fifty flights in the last two years, no planes blew up and I can go directly to the gate by showing a special pass delivered to my phone. These last two options would have value to me. This level of convenience would be disruptive.

Another benefit to just in time apps would be lower storage requirements on phones due to less software and updates. Phone manufacturers are looking to replace components through software as a means to lower phone cost in developing markets. These component replacement apps could use the space freed up from traditional resident apps.

Many thanks to all the people who have recently tweeted me interesting articles, including @miam_twopcharts, @john_menezes, @canningcollege, @siontele and @OLPC_Mexico.

Note: the Frog article includes a nice discussion of value creation and customer perception.

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OLPC and Microsoft

My friend and colleague Rodrigo Arboleda, the CEO of OLPC Association, is often troubled by the criticism Microsoft brings to attacking OLPC throughout Latin America. Most recently they put together apparently fallacious arguments with respect to OLPC's newest project in the state of Sonora, MX.

Rodrigo frames this Microsoft behavior perfectly in a question: "why does McDonald's not criticize the World Food Program", the UN's program to feed children in the neediest countries in the world. Presumably those poor children in Africa could be eating Big Macs. So, why is McDonalds quiet and Microsoft constantly criticizing?

McDonalds is a brand that embraces children, from Kid's Meals to Ronald McDonald and Ronald McDonald House--their principal charity for terminally ill children. McDonalds realizes that children are a major reason for their success and they reciprocate in a meaningful and genuine way. Commendable behavior.

What does Microsoft stand for? The silence is deafening. I do not think anyone could define Microsoft in any way that embraces their customers in a genuine and emotional way. Microsoft is just a colossal commercial venture. Microsoft is so hardened to their commercial ways that they cannot see the day when many of the OLPC children will trade in their XO computers for the Microsoft operating system and Office. So sad.

Educating Young Entrepreneurs

I have written frequently about the need to start entrepreneurship education at a much earlier age, perhaps as early as middle school. (Previous posts are here and here.) Two stories support this trend:

1. A prep school in Miami recently received an anonymous grant of $7 million to establish an entrepreneurship program
2. The Academy for Software Engineering, a new NYC public high school, is recruiting its first class. More detail in this post from AVC.

The related articles below talk about programs supported by the Kauffman Foundation and the University of Chicago. The quality of the people experimenting in this space and the exceptionally insightful early stage programs suggest that this trend should quickly become mainstream. 

Early takeaways from these programs:

• Focus on individual empowerment and student-centric learning approaches
• Make entrepreneurship an integral part of the curriculum or its own track
• Make real world mentors an important part of the program (VC and PE folks are probably better than small business owners or corporate types)
• Provide access to startup capital

If anyone needs an advisor on such a program or an easy to read book on developing a new business concept, you might look here.

Image credit: business.wsu.edu

Related articles on high school entrepreneurship programs

• The Ice House Entrepreneurship Program Facilitator Training (kauffman.org)
• Money Think (Moneythink.org)
• Good Maker Winner (Good.is)