The Marlins sell tickets to businesses to use with their corporate clients. The Marlins have taken it one step further. The Marlins organize and manage networking events where all the season ticket holder companies can meet each other several times throughout the season. Very nice example of adding value to a product that has historically not been the subject of much innovation.
A friend is an event planner, one of the best in Miami. She mentioned today she is planning a destination wedding for a couple from Australia. I wonder how many event/hospitality operators in Miami consider Australia their target market. I suggested to my friend that maybe she should promote herself as the event planner for destination weddings in Miami. Remember your customer and market is where you define it and get traction.
Several people today commented on the challenges of transitioning a business from one generation to the next. Lots of "baby boomer" businesses being passed on to the next generation. Here is an excellent article on the subject that I saw today. If anyone needs help implementing the article's recommendations, let me know.
I have become something of a collector of different models of social entrepreneurship. For the purposes of being accepted as an example of a different model of social entrepreneurship, the company must be for-profit and have a unique way of delivering measurable social impact. The examples I have collected are not necessarily the first such companies. The only distinction I make is I do not accept CSR projects.
Two examples recently caught my eye:
The Miami Heraldreports that Carnival Cruise Lines is forming a new division/company where the onshore excursions will be to work with local people on socially beneficial projects (instead of going off to see sharks or polar bears). If Carnival were to develop multiple ships and cruises for this purpose I would applaud them for their social impact. If they need a local social entrepreneurship professor to help them plan their impact and projects, please let me know.
Norton Sound Corporation is one of many native-owned corporations established for the benefit of indigenous people at the time of Alaska statehood. Norton Sound operates Norton Sound Seafood and Norton Sound Seafood Restaurants. All of the seafood is caught by members of a particular indigenous group near Nome, Alaska. Sale of the seafood to the corporation provides much of the livelihood for the natives. The creation of a branded product and metropolitan outlets for a product provided by indigenous people is a model I like.
Wonder how much seafood, if any, Carnival buys from Norton Sound or any other native corporation in Alaska. The new division should consider such questions.
I have just returned from vacation in Alaska. Most majestic landscape I have seen anywhere in the world. As is my custom, I read some books about Alaska and the indigenous population. The indigenous people have been in Alaska for 16,000 years and have survived two ice ages. After 16,000 years in the same place a people develop a comparatively advanced culture very suited to the surroundings. All was bliss and comparative harmony until the Russian explorers arrived in the 1700s.
These early explorers were charged with determining whether a colony should be established. With the abundance of furs, Alaska was a natural location for a colony. In keeping with the "business model" of the time, to establish a successful colony one maximized financial return with complete disregard (exploitation) of the local population. The Russians improved on run of the mill exploitation by kidnapping the natives' wives and children until a ransom was paid in pelts. As the fur trade grew in monetary terms the Russians looked to change the business model from exploitive to sustainable. The Russians were never able to achieve sustainable colonies in Alaska, which prompted them to sell Alaska to the U.S. government for a mere $15 million. The Russians failed because they never engaged the self-interest of the locals and the local market forces to support the colony.
The errors by the Russians are the mistakes I see frequently in social entrepreneurship:
They committed to a strategy (kidnapping) which made it difficult to execute a second or iterative approach to strategy
Their arrogance blinded them to understand the self-interest of the local people
They did not make use of the local market forces, which in the case of Alaska had been developing (albeit primitive) for thousands of years
BCG.Perspectives has a very interesting new article, "Navigating a World of Digital Disruption". The article focuses on how the BCG clients (F500) can be disrupted and how they can position strategically and tactically to improve their performance. However, I found the more valuable parts to the article to be:
A new perspective on why Amazon has succeeded
A new way to look at the business model for digital companies
I really liked the graphic below. One point to note, I think you can only strategically focus on one "architecture" at a time for an line of business. For example Amazon uses communities to do book reviews, but the Amazon strategy is a platform strategy for its original business. I THINK A LOT OF STARTUPS TRY TO COMBINE PLATFORM AND COMMUNITY AND THAT IS WHY THEY DO NOT GET FUNDED. YOU CAN ONLY BE ONE.
The article also has an interesting proposal for how NGOs and multi-laterals could re-organize agriculture to be more sustainable and effective through big data.
This is an article worth reading slowly and not speed reading. Thanks to @John_Menenzes for the heads up.
Based on my experience in Indonesia growing a billion dollar company in seven years, I thought there was a fourth strategy--access to capital. More capital (than the competition) offers two important benefits:
Faster growth
Better economies of scale
Together these benefits are sufficient to formulate a sustainable strategy, provided product/market fit is well documented.
Yesterday a friend was telling me that Blue Bottle Coffee had raised $45 million in venture investment with only six stores in New York and San Francisco. Subsequent to the investment the company was on a tear to make acquisitions and grow quickly. Looks like a relatively small company planning to grow fast and big through its access to capital. This "strategy" is common in today's market of high valuations and plentiful capital. Appears I may have been right when I said that Porter missed an alternative strategy.
Today Nancy Dahlberg has a nice recap at Starting Gate of the Miami Herald Business Plan Challenge, which I judged. Noteworthy was this year's winner in the high school category, Teenography. I very much like the idea of teaching entrepreneurship to high school and junior high school students--not checkbook management or accounting, but real business concept development and go to market strategies.
Teenography operates an exchange/marketplace/platform (pick the word you like) that enables young (high school) photographers to offer their services to clients in need of photos for events, marketing materials, etc. Average charge rate is $40/hour compared to professionals who charge $100/ hour in South Florida. Why the difference of $60/hour. You might say professionals versus amateurs but the real reason is what economists call asymmetry of information. Information on photographers used to be difficult to find and incomplete, the asymmetry, because there was no easy way to find out about amateur photographers. When information on amateurs becomes available through Teenography and more complete information is the norm, the price per hour of photographic services drops by $60/hour. Reducing the premium created by the asymmetry represents the business opportunity.
In markets where there is an asymmetry of information, there are two new business development strategies:
Exploit the asymmetry and earn abnormal returns (hospitals), or
Eliminate the asymmetry, e.g. Teenography, Etsy, CarFax
As is obvious, the Internet and ubiquitous information make it possible to profitably eliminate the asymmetry. A trend I see emerging is for such exchanges to bridge service providers in developing countries with clients in developed countries. One example of this is Behance, which enables third world graphic artists, web developers and designers to showcase their work to the world. The site allows for the service provider to be contacted but not for a contract to be consummated...yet. Customer service from India is not so far from the exchange model nor is artesans in Africa posting their wares on a web-based exchange where socially motivated buyers can pick what they want to purchase.
This business model of the exchange that bridges the developed and developing world ('bridging marketplaces") I think will become very common. The timing is excellent because low skill jobs for immigrants in the U.S. are being taken over by robots. Fruit picking and nursery work is now done by robots, according to this post in Marginal Revolution. If there are no jobs in the U.S. to attract immigrants, then I hope these workers find bridging marketplaces that provide local employment.
If someone had good open source exchange software, one group of socially motivated people could focus to organize the local service providers and another socially motivated group could focus on marketing the exchange products or services. A little imagination and we crowd source to fund the marketing.
For more on the relationship between developed and developing markets, read this excellent article from the Washington Post, The Great Unraveling of Globalization.
In the period 1950-1980 U.S. companies built an infrastructure to provide the consumer lifestyle we all know and appreciate. With the advent of computers and globalization, in the period 1981-2010 financiers de-constructed the infrastructure through leveraged buyouts, arbitrage, derivatives and specialized finance to realize vast amounts of untapped or dormant value. As the opportunities became more scarce, leverage was used to improve returns.
A poster child for this second period of "financial engineering" was GE Capital, who dominated many financial services for businesses. Not only did they provide financing at better terms than commercial banks to finance purchases from other GE divisions, but they also pioneered "new" products such as private label credit cards for large retailers.
The NY Times reported today that GE Capital is completing the tasks to basically wind down this division of GE. Many blame the financial crisis of 2007-2008 for the demise of GE Capital. Others would point the finger at increased regulation post crisis. I think GE Capital got swept up in the craziness of the ten years preceding the crisis and lacked the financial controls to properly manage the business. Of course, this is the same reason AIG, Lehman Brothers, Merrill Lynch....all failed in one way or another. Financial controls for financial operations appears to be an area where we still have much to learn. To just write the errors off to greed is to miss the opportunity to learn.
Marginal Revolution has an interesting post today, "The Demand for R&D is Increasing". In it they discuss the potential market for cancer drugs in China, which they estimate is 8X larger than the U.S. Based on this potential market size, the Chinese government is funding pharmaceutical research for the first time.
The takeaways:
Clayton Christensen was correct when he stated that the market size is determined by the number of unserved customers.
China, India, Russia or any other large country should offer incentives to move pharmaceutical research to their country, assuming development costs would be a fraction of the cost in the U.S. (The post estimates that development cost in China is 10 percent of the cost in the U.S.). Such an approach would likely lower healthcare costs for the government, encourage a pharma industrial cluster in the country and raise research standards in local universities, to name a few benefits.
Pharmaceutical prices in the U.S. are outrageously high given the number of worldwide patients for any given drug at an "affordable" price. Given the tiny marginal cost to produce an additional pharmaceutical unit, liability cost cannot explain the high prices given that R&D costs are spread over large unit volumes.
"Bankrupt RadioShack wants to sell off user data", reports The Switch today. As you may know RadioShack filed for bankruptcy and appears headed toward a liquidation. One asset proposed for sale is the company's years and years of data on its customers and their contact information. Should make for an interesting case in the Bankruptcy Court as many have come out to challenge RadioShack's (trustee) right to sell the data or to dispute the ownership of certain data.
The takeaway from this story--data has value. Every operating company should have a policy to review the sale of data every five years (or shorter) as a part of a new business development or business model innovation program. A directory of the different types of data collected and the years captured might be an easy way to start. Every company collects data, but I think few have a sufficient understanding of that data to evaluate the use in a new business opportunity or as a new revenue source for an existing business. Sounds like a whole new branch of consulting may be born.
Every year I write a few posts on leadership. Much of my thinking on leadership is influenced by the writings of the U.S. military. This morning I am lecturing to the ROTC student body at FIU. This is a summary of what I plan to say.
The three functions of leadership are:
Determine the mission
Provide resources necessary to accomplish the mission
Motivate people to perform effectively and efficiently
I plan to illustrate each point by an example from military history. Napoleon, Wedemeyer and Cortez respectively illustrate the three points. The common theme in each of their approaches is that they "redefined the problem" in order to properly perform one of the three functions of leadership.
My opinion of the best book on leadership is in this post from 2009, Team.
This January, teaching at MIT, I think I had an important realization about social entrepreneurship. In simple terms I think of social entrepreneurship as entrepreneurship directed at solving a social problem. (The sophisticated, academic definition I like is here.) "Social" is just a comment on the type of problem one selects to solve. Nothing more.
So, if social entrepreneurship is just entrepreneurship then why cannot we just use Osterwalder or Bill Aulet or BCG or my own concept of business model to think through scaling a social entrepreneurship venture. (That was the realization.) So, why do we need a special business model for social entrepreneurship. There are three reasons:
The market conditions in much of the developing world are so tough that almost everybody needs partners to handle distribution, sales and marketing.
To get the proper resources, one frequently has to find private sector partners where there is a match between market forces and social objectives
If you can satisfy 1. by 2. then you can avoid the shortfall likely in qualified staff to pursue the social objective; if not revisit 1 and 2.
When one starts a new company in the U.S. one chooses the distribution channel(s), but one hardly worries about how to get product to Des Moines. In Honduras, for example, the complexity of distribution to remote cities can not be described. The best hope is to find an existing distributor knowledgeable in your product category who has the capital to finance more inventory of your product. Should one fail to secure this distributor (lack of matching between market forces and social objective), the alternative may be a donkey train at best. Repeat story for sales channels, marketing, customer education, after sales service.....
In conclusion, the difference between business models for entrepreneurship and social entrepreneurship is that one needs to find the partners and construct the matching between market forces and social objective in social entrepreneurship. In entrepreneurship, particularly in advanced countries, it is more a matching of market forces at all times and markets are efficient about allocating the necessary resources
Note (1): In determining 1 and 2, please pay attention that the business model can be replicated from country to country to continent.
Note (2): Some would argue that "becoming a movement" is a requirement of a scaleable business model in social entrepreneurship. I would agree it makes it much easier, but one needs a very special set of circumstances to pull it off.
This is an excerpt from an article on AVC about enterprise-oriented networks:
“C2FO is a network of businesses and their suppliers that solves a working capital problem for the suppliers and provides a better return on capital to large enterprises. Here is how it works: C2FO has a sales force that calls on large enterprises and shows them how they can use their capital to earn a better return while solving a working capital problem for their suppliers. They bring these large enterprises onto their platform and, using C2FO, they recruit their supplier base onto the platform. They also bring all the accounts payable for the large enterprise onto the platform. Once the network and the payables are on the platform, the suppliers can bid for accelerated payment of their receivables. When these bids are accepted by the large enterprise, the suppliers get their cash more quickly and the large enterprise earns a return on the form of a discount on their accounts payable. C2FO takes a small transaction fee for facilitating this market.”
What caught my eye is that the C2F0 model is an excellent way for F500 companies to share value with smaller suppliers in less developed countries where capital is scarce. If a F500 company were to adopt the C2FO model worldwide for small suppliers, I think that would be a major social program consistent with social entrepreneurship. In fact, maybe it should be a requirement for all companies applying for B Corp status (above a certain size).
A shortage of capital is a major issue in the developing world and the C2FO model helps to organize capital to solve the problem. Perhaps World Bank or Inter-American Development Bank could provide a similar service discounting F500 accounts receivables for small suppliers or partner with C2FO to expand internationally.
I think if I was the CEO of C2FO I would build my brand and value proposition around helping small businesses around the world solve their capital problems and not around "delivering efficient cash flow and bold returns". Package the pitch to F500companies around social responsibility with a return. I might also consider changing the strategy and provide technical infrastructure for a fee to organizations like World Bank or Qatar Foundation (and no longer need a direct sales force).
Innovation has become such a buzzword that I almost do not want to write this post.
Daniel Isenberg at Babson has a quote that is helpful:
"The true enemy of growth for firms is stagnation, and the reality is that most small businesses are stagnant....
One way to combat stagnation is through innovation. What many do not realize is that there are at least three types of innovation, that each type has a specific use and that different levels of management have responsibility for each one.
Grounded Ideas provide the incremental improvements that bring about best practices and excellence in operations. These responsibilities can be delegated to managers.
Blue Sky Ideas are insights that bring about revenue growth through tactical and strategic insights. They are a C-level responsibility.
Spaced Out Ideas are insights that create new business concepts by re-framing a problem. They are a C-level responsibility, but after you have found product/market fit the C-level execs are better served to focus on blue sky ideas. (Christensen's disruptive innovation is in this category.)
More of the over 20 posts on innovation and disruptive innovation:
Perhaps because Google won a big contract to provide Office apps to PwC (the large international accounting firm), they have recently launched a PR campaign all over the web for "Google Apps for Work". An example of the PR is this Silicon Alley Insider story, "Google shares its plan to nab 80% of Microsoft's Office business". A sentence in the article caught my attention:
"Google is constantly looking at how people are using Apps and trying to entice them to use it more."
Google is renown for using data in its product analysis, which perhaps makes the above quote mundane. However, I think it points out the problem with Google's approach to software. Data only describes current usage. If we examine saving a file in Google Docs, Google sees it saved online, perhaps Google sees it downloaded to the computing device...but Google never sees it then saved in Dropbox. You might ask why someone would prepare a document in Google Docs and save it in Dropbox. There are probably ten good reasons, none of which show up in Google's user data.
Microsoft recently launched a new Outlook app for iOS 8, which I tweeted :
Nine days later, I think that Outlook is probably the best mail iPhone app ever...and it includes a good calendar app. If the Outlook calendar app had appointment multiple alerts I would stop using a calendar app. What I particularly like about the app is the seamless integration with Dropbox and Google Drive, both of which I use daily. (Dropbox holds the docs I produce and Google Drive holds third party documents.) It also seamlessly integrates Gmail and other mail providers.
I am not a Microsoft fan boy. For many years I competed with them and I intentionally avoided their products. The only nice thing I could say about Microsoft was to my entrepreneurship students--"Microsoft is an excellent example of monopoly, which economists tout as an attractive business model". With the passing of time I have mellowed on Microsoft. (A tweet rather than a full blog post shows that I am still conflicted.) I tried the new iOS Outlook partly because in 25 years of using email, I have never found an email app on any device that I really liked until the new Outlook. However, let's get back to Google.
How was Microsoft able to develop such a great new mail app, while Google is still constrained by its data. The answer is quite simple. Most of the design and code for the new Outlook came through an acquisition, where the previous company was not constrained by the corporate mindset of a Google or Microsoft or F500.
I imagine when the Microsoft execs saw the other company's mail app, they just thought OMG and quickly bought the company. I commend Microsoft for admitting somebody understood the customer better and did a beautiful design. I wish Google would make some app acquisitions, get a better understanding of the user and perhaps learn more about UI design. BTW I use a lot more apps from Google than Microsoft, but I hope that Microsoft's new acquisition has some new ideas for other apps. Today I am less hopeful about Google.
I just completed my fifth year teaching an IAP course at MIT Sloan on social entrepreneurship. The first two years the course focused on telling the One Laptop per Child story, the third year focused on better defining social entrepreneurship and year four and this year (5) focused on "scaling" social entrepreneurship. To some degree these courses have documented the evolution of my thinking on social entrepreneurship.
The approach to social entrepreneurship that I prefer is to ignore all of the normative hype and merely focus on solving the "social" problems. My cocktail party definition of social entrepreneurship is now:
"A commercially sustainable, scalable solution to a social problem"
In this definition, the selection of the problem the entrepreneur addresses will define them as a social entrepreneur or a traditional entrepreneur. I define sustainability simply in terms of cashflow and not in the alternative usage that includes social, economic and environmental benefits. I am not against a wider range of benefits, but I believe many social ventures fail because they define their mission too broadly to achieve all three types of benefits. Such a broader mission is more difficult to manage, more expensive to execute and more expensive to the disadvantaged person one is trying to help.
In one economist's definition, social entrepreneurship can be defined using the value creation-value capture model of resource-based theory. In this model social entrepreneurship "maximizes value creation and satisfices for value capture" (sufficient to stay in business). Value is defined as "utility". Originally I thought of this transfer of value as exclusively between the provider of product/service and the customer or user of a product or service. This limited definition of "value creation" has bothered me for awhile now because I think it ruled out organizations that are social entrepreneurs. The issue came up in class at MIT and a vigorous debate ensued.
I now believe that the social entrepreneur could transfer value to other stakeholders in addition to the customer. For example, selecting to work with new indigenous people to become suppliers would be a value transfer to the indigenous farmers. Paying above market wages would be value creation for local workers. Providing stock ownership to employees might be creating value for employees. Effectively, value creation can benefit any stakeholder of an organization provided enough value is transferred to the customer or end user to have an exchange (purchase). The exchange is required to meet the requirement for entrepreneurship.
Two additional themes were stressed for the last two years:
Social entrepreneurship offers the opportunity to redefine the role of government
Value proposition is just as important, or more important, in social entrepreneurship because the disadvantaged person may need more assistance to recognize and use a solution to a problem.
My lecture slides from MIT 2015 are available through this link. Download SCALING SE MIT 2015. I very much like the Scaler Model for scaling social entrepreneurship, which is explained in the slides.
Note: The original definition of social entrepreneurship using value creation and value capture was developed by Felipe Santos in an INSEAD Working Paper. He did not consider value transfer to all possible stakeholders in the article, "A Positive Theory of Social Entrepreneurship".
Friday morning I attended an event on how large companies can use innovation in business model to generate revenue growth. A previous post on this theme is "Innovation in Large Corporations". Much of the discussion focused on alternatives for partnering between startups and the Fortune 500 as a means to foster innovation. Some alternatives include
Venture capital investment
Joint ventures
Spinning off skunk works projects
Sharing problems
I particularly like problem sharing where the Fortune 500 brings a problem to a startup, design firm or university and the resultant solution is commercialized through a new business.
However, sharing problems brings up a new problem in innovation for the Fortune 500--they need to be much more transparent. Christensen has written extensively about why large companies lack innovation, but I have not seen mention of transparency. An example illustrates the point. Electronic medical records (EMR) are not shared between competing medical service providers because they feel such records aid competitors to steal patients (according to a pioneer in defining the format for EMR). To safe guard information at the expense of patient care I would classify as extreme lack of transparency.
Why do companies opt for a lack of transparency, hide behind government licenses and, in general, use contrived barriers. The answer is that it is much easier and lower cost to use contrived restrictions rather than create value for customers. However, the day is not far off when customers are going to break down artificial barriers to transparency in areas such as patient medical information. The balance of power is changing in favor of the customer for transparency and corporations need to recognize this change. One way for corporations to start being more transparent is with their partners, where it might foster more innovation.
After we move large corporations to transparency, we can work on the government.
To paraphrase William Faulkner, I do not know what I think until I read what I wrote. Reading yesterday's post got me thinking about Google. In yesterday's post I wrote:
"I have been using Feedly as my RSS feed reader since Google shutdown Reader (which prompted me to use single product companies for all my important apps, e.g. Dropbox, Evernote, etc.)."
There are two exceptions to my use of apps from single product companies:
Microsoft Office
GMail from Google
However, maybe these companies are single product companies or should be.
As the market has evolved Microsoft has become a two product company--Microsoft Office and gaming. Office is reportedly the largest profit generator and gaming is in many ways the product new users see. I do not believe there are any real synergies between the two product lines except that both products require excellent programmers. Therefore, logically they could be separated into two separate companies and some say more value would be created for investors.
The Google case is a bit more complicated. Google has two major products in my opinion:
Search
GMail
I think the jury is still out on Google Drive. If I did not use GMail on my phone, I would see no benefit to Google Drive over Dropbox or Evernote or 20 other products. (Opening a doc attached to a GMail and storing it for retrieval from the iPhone is easiest with Google Drive.)
I would love to ditch GMail in favor of a standalone mail app, but the ten new mail apps I try each year always have problems that bring me back to GMail. Would I give up Google search? Yes, in a minute. Google works and it is a little bit better than Bing and all the others, but I am nervous about how much Google knows about me, the search still lacks a lot of features I would like to see (e.g. academic articles showing up as preferred results based on my profile), and the ability to restrict sites from showing up in the results (e.g. Entrepreneur magazine).
Search and GMail probably have more compelling common characteristics than Office and gaming. The common characteristic is the use of artificial intelligence (AI) where GMail offers comparatively better search because of Google's expertise. However, I suspect that search is not a sustainable advantage in mail apps. I suspect that Amazon could duplicate high quality mail search in a year or less given their own work on search. Also, I suspect the mail search would improve faster if that was the sole objective in improving the AI. What this logic argues for is that Google should spin out GMail as a separate company, leaving Google as an AI/search company. (The spinoff agreement could still give Google certain exclusivity for a pre-determined amount of time.) Given the increasing popularity of notifications and messaging apps, GMail may be at its highest possible valuation today. Driverless cars and 100 other products based on AI could all be spun out. A more narrow focus to the continued development of the specific AI would probably produce better results (which Google could license back in the spinoff agreements).
If Google and Microsoft were to follow my advice and each spinoff one of their two major businesses, then almost every major software applications company would be a single product company. Hmmm, interesting.
Note: One could argue that both search and GMail rely on expertise in distributed processing, cloud computing. Therefore, they should not be separated. Were this to be the strategic insight to explain Google's development of both products, then Google has a much bigger issue because abnormal returns, even with scale, are quickly disappearing from the cloud space.
I think it is debatable whether the best management thinkers today are at Santa Fe Institute (SFI) or the U.S. Army. Both groups share at least one common interest—complexity--as contrasted with the complicated. SFI's approach to complexity tends to focus on advanced mathematics. The U.S. Army's approach involves design thinking and is comparatively more understandable. Today's post comes from The U.S. Army Marine Corps Counterinsurgency Field Manual via the Farnam Street blog.
When should one plan? Much less often than you think. I am not advocating one go mindlessly through life, although it may be less stressful, but rather that one use alternatives to planning. A quote from the Field Manual:
"Planning applies established procedures to solve a largely understood problem within an accepted framework. Design inquires into the nature of a problem to conceive a framework for solving that problem. In general, planning is problem solving, while design is problem setting.Where planning focuses on generating a plan—a series of executable actions—design focuses on learning about the nature of an unfamiliar problem." (My emphasis)
Planning, a series of executable actions, applies in situations that are deterministic and likely to be expressible in numbers. Sales forecasting, architecture, engineering are some disciplines that are largely deterministic. Much larger are the domains that do not lend themselves to mathematical approaches, such as most things that involve politics, emotion and the arts. In these areas, design thinking is one peferred approach.
If we consider managing a business, perhaps the startup effort to find product/market fit lends itself more to design thinking. Maybe growing a business from $30-100 million in annual revenue is more of a planning exercise, until you need to revamp a product, react to a monster competitor entering the market or adjust for a law change (think Uber). Actually most of the events affecting customers or products are not handled by planning. This type of event is not deterministic in nature. Design thinking and framing the problem correctly are a better approach, which is why you can plan less.
"A Scaling Playbook for Entrepreneurs: Hiring for Growth" is a good article on the different stages of building a company and the type of people that are required at each stage to be successful. The important point in the article is that companies go through stages based on annual revenue and a different type of executive is needed for each stage. What the article does not discuss is how the CEO needs to change at each stage.
Stage 1, $0-10 million. The CEO needs to learn to trust people. In order to do this, one needs to learn to accept the smaller mistakes that don't put you out of business. Sales/traction, customer service and product development are important. In everything else mistakes are inconsequential. Also, learn to use control systems to monitor projects, deadlines and deliverables. (Capital raising is a CEO responsibility.)
Stage 2, $10-99 million. The CEO needs to learn to successfully delegate to managers. He should also be leading the development of more sophisticated KPI and reporting systems to understand the business at the level of individual managers.
Stage 3 $100+. The CEO needs to led the transition of the company to a plan driven organization. Hopefully you had some plan(s) before the company reached $100 million, but now the detailed plan is a necessity in order to communicate objectives, detail timing and properly estimate the capital required. A budget and a 3-year plan are advisable.
Note: I believe the stages based on revenue are:
$0-1 million (proof of concept)
$1-3 million (commercialization)
$3-10 million (scaling)
$10-30 million (delegating)
$30-100 million (management process)
$100-300 million (planning)
>$300 million
I used the other author's stages to match the referenced article.
Last December I wrote a post, "Good Question: What Good is Wall Street". The post generated quite a lot of discussion but not in the comments. The theme of the post was:
"Banks went astray when they diverted so much capital to support trading schemes in the new derivatives....., which was not part of their original mandate as utilities."
Much discussion circulated around the use of the word "utility" and their "mandate to distribute capital".
Now it is one year later, December 2014. What has Washington learned? Maybe the better question is how should Washington be thinking about banking regulation or perhaps how do we better regulate derivatives. This quote from political economist William Tabb is insightful.
“Technological revolutions and political upheavals condition economic possibilities, which then become the givens for sustained periods of seeming stability in which regulatory regimes designed for the conditions of the social structure of accumulation of the era lend a semblance of orderly progress. These institutional forms, appropriate to one stage of development, become a drag on the development of new forces and emergent relations of production. The vitality of market forces create in their wake social problems which, when they become severe enough need to be addressed through spirited struggle out of which new rules, regulations, and institutions form. [My bold emphasis]
A bit of a leap, but I think the crisis of 2008 shows us that in finance we can no longer regulate institutions and must instead regulate financial instruments such as derivatives. Regulation of banks proved inadequate in part because so many of the key market participants were not banks or regulated by the federal government. Now if we no longer regulate banks as the means to control the financial system, why cannot anybody offer deposits, loans, insurance etc. Put $100 million on deposit with a depository, pass a background check and you can be a "bank", an "insurance" company or a mortgage lender. We could use the Bitcoin infrastructure to record transactions, document margin deposits, etc. Loan to equity ratios, derivatives outstanding to equity ratios, return on equity calculations and similar financial reports would serve as the control mechanism. Such an approach to regulation, based on assets, equity capital and profitability would provide the regulatory control, except Bitcoin would be calculating daily ratios and temporarily shutting down businesses that exceeded their permitted ratios. All transactions would be required to be done on Bitcoin or a similar system exclusively. Regulations would have to be simple enough that computers could calculate ratios, a big improvement over the current system. Asset quality would not be regulated but rather would be "managed" by the market.
The big debate would become how much capital does one have to reserve for a particular financial instrument. Maybe we just say, if it is not a debt or equity instrument, then it is a derivative/insurance product and use three reserve requirements. For example when you strip a mortgage, the principal would be classed as a debt but the interest stream would not be a loan and therefore subject to derivative/insurance reserve requirements.
This scenario might appear fanciful. As soon as the market players start trading outside the system of government regulation my scenario looks more attractive. IT technology is transforming how financial markets work and it is time to take a completely new look at regulation.
Note: The Tabb quotation is from Complexity and the Economy by Brian Arthur. Excellent book.
