Fleeting Competitive Advantage – Sustainable Innovation

30 September 2008

What does sustainable competitive advantage mean to you? Is it a competitive advantage that has a half-life longer than Uranium or do you use sustainable in the sense of a renewable resource?

I much prefer the later analog. Despite IP protection, despite trade secrets, there is nothing so fleeting as a competitive advantage. Sustaining the competitive advantage takes real work.

Innovation is the key, and not just product innovation. Last year, I attended a presentation from Larry Keeley from the Doblin Group as part of the Wisdom Exchange this spring.  His message was simple:  Innovation is a discipline – which means there is a process involved.  People commonly think of innovation in the narrow context of products. However, there are at least nine other areas commonly used to innovate a business in addition to product innovation. Product innovation alone has a 4% success rate.  Better innovation tackles change in at least six of the following ten areas:

  • Finance

    • Business Model – how the company makes money

    • Networking – enterprise structure, value chain and partnerships

  • Process

    • Enabling Processes – Assembled capabilities you typically buy from others

    • Core Processes – proprietary processes that add value

  • Offerings

    • Product performance – basic features, performance and functionality

    • Product systems – extended systems that surround the offering

    • Services – how you help the customers

  • Delivery

    • Channel – how you connect your offering to the customer

    • Brand – how you express your offerings ideas and benefits to the customers

    • Customer Experience

 As a small case study, consider Nescafé reacting to competitive entrants such as Starbucks. Here is a blog on the subject by Thomas Otter entitled Simplicity, elegance and the Java bean. In his post, Thomas describes his adoption of the Nespresso Cube – a coffee maker with a cartridge system that is very easy to use. The product highlights a brilliant piece of innovation in the face of competitive pressure.

Nescafé`s problem: as the dominant coffee company is the world, they missed the boat on speciality coffee shops which changed the way people view coffee and created a stigma around Nescafé`s dehydrated products as inferior.

The Challenge: Regain competitive advantage by getting people to drink coffee in their homes again.

The Solution: Convert an office coffee product originally invented in 1975 into a household device (Product Systems and Core Processes). Partner with a leading design firm and create an elegant and simple device that provides espresso quality coffee with little fuss and much faster than a regular espresso machine (Product Performance and Customer Experience). Change the distribution model from grocery store sales of a commodity product to a web-based subscription service with home delivery (Channel). Use advertising and an excellent web site to build a brand (Brand). Build a community around the machines and coffee (Networking).

The Result: 25% annual growth since its launch in 1988.

The key here was not the product – that existed since 1975.  It was the change in the channel.  This was innovative brillance.


No Strategy Survives Contact with the Market

29 September 2008

The recent collapses of the financial markets highlights the existence of change as a force of nature in the business world.  Change happens. All the time.  If stability doesn’t exist, it doesn’t make sense to plan strategy around stable business markets.

To paraphrase Helmuth von Moltke the Elder, the Chief of Staff of the German Army in the 1800’s: no strategy  survives contact with the market.  Rather than indicating that strategy is pointless, the comment is meant to show that strategy must react to changes in the market.  It must be fluid rather than fixed, open-minded rather than dogmatic.  It is a game of options and optimization.

The key, then, to effective strategy development is to ensure you have options and contingency plans and that you are continuously working to develop and optimize these plans.  To quote Moltke again, “Plans are nothing, Planning is everything”.  The essence of this thought is that the plan will invariably change before it is completed so don’t concentrate on the plan, concentrate on the processes of planning.  The plan will be obsolete as soon as you e-mail it.

MJM Consulting – Helping companies grow.

Tradeoffs in Desktop Virtualization: No Showstoppers.

27 September 2008

In a recent post on ZDNet.co.uk, Jason Hiner, says that the cloud is not ready for desktop virtualization.

I’m more confident in the success of virtualized desktops.  I have, along with many others, been using them for years as remote desktops.  First with GoToMyPC and later with Microsoft remote desktop.  I would leave my desktop computer running at work and then access the desktop remotely from home or on the road.  My primary access method was a laptop connected on my home’s wireless network or the hotel Internet.  Never needing to transfer a file or install software, after two years, my laptop was in the same condition it was when I bought it.

Yes there were limitations.  Editing a Power Point presentation was annoying and multimedia files were poorly displayed.  If the Internet was slow, the mouse and keyboard screen updates could be jerky.  If I didn’t have Internet, I couldn’t work.  But there were always work-arounds and compromises.  For Power Point, I learned to turn off the background graphics or use a different template altogether.  I spent more time on content than format.  For surfing, it was often better to do the surfing locally – but not always.  I read on the plane and worked in the airport terminal.

However, the benefits of a single working desktop, of not having to sync files, of always being able to get to the desktop no matter where I was or on what machine:  these things outweighed the reduction in the “user experience”.  I was willing to put up with less in order to get these benefits.  It was a classic cost-benefit trade-off that I think many people and companies will make in the cloud’s favor.

I’d also like to point out that many companies are not using state of the art multimedia machines as desktops.  A quick walk through some local offices shows 14″ monitors, e-mail and word processing, two-tone text based data entry screens that look like they were programmed in 1970, no multi-media capabilities – basically bare bones corporate only workstations.  These are also the targets for virtualization.

What I am looking forward to with the virtualized desktop approach is being able to get rid of the corporate desktop altogether.  Virtualization has been a key term in servers since it allows servers to be consolidated.  If I had 10 servers, I may be able to get away with five or three or even one with the appropriate virtualization technology.  If you can virtualize the desktop as well, consider the additional savings.  How many computers are there out there in total?  What is the ratio of desktop computers to servers?  Its a probably more than 2 to 1.  If employees have a desktop at work and a laptop for home or the road, the number of non-server computers is even higher.  Now consider that desktop virtualization can reduce the number of redundant computers by up to a 50:1 ratio (as claimed by Qumranet’s President Rami Tamir in April.)  Yes, there will still need to be terminals with screens and keyboards but these can be much cheaper than the multi-cpu, multi-core machine that currently sits on my desk.  In all, this means a dramatic reduction in the amount of desktop hardware out there with a concomitant reduction in the IT support requirements.  The savings are too hard to ignore.

I agree with Jason that the importance of latency in the network will be important.  But just as working with remote desktops in a hotel, it is still possible to do even with tardy connections.  In return, the bandwidth requirements are significantly reduced.  A terminal for a virtual desktop will only need a fraction of the Internet bandwidth since it handles no files, transfers no data and only displays updates to the graphics.  The server in the cloud, on the other hand, has access to the Internet backbone and can deal with files over a high-bandwidth link.  For many companies, the server may have access to more Internet bandwidth than their own servers.

Jason’s article also mentions a bridge approach from MokaFive.  I realize the appeal of MokaFive’s approach, but I have lost (and given away) more USB keys than I can count and would not want to be dependent on one in order to use my computer.  I want the freedom of the web even with its restrictions.

What would you be willing to sacrifice to implement virtual desktops in your company?

The Mechanics of Money: Building Business Plans

26 September 2008

Any business plan needs proforma financial statements regardless of whether it is boot strapped or VC funded. As the owner, founder CEO, your plan must show that you are going to make money and show it in a way that other people can easily understand it. Financial statements are the key method.

(Dear reader, if you are an accountant, please read no further, it will be a waste of your time. If not, I am assuming you have a basic understanding of accounting processes.)

Generating proforma statements is not a trivial undertaking. Fortunately, spreadsheet software was invented for just this purpose which makes the complexity much easier to handle. They key to designing a good set of proforma statements lies in understanding the mechanics of how value flows around the various accounts on the financial statements. Peter Kemball, CEO at Acorn Partners, likens this to a plumbing problem. Its is a good analogy with lots of fun clichés. Use your house as an example. Water (value or wealth) flows in and flows out. Within your house, you have reservoirs (accounts) where water can be stored and pipes (the rules) which govern the flow around the system. The goal of business is, simply put, to keep more water flowing in than flows out until the house floods (which, in the analogy, would be a good thing).

Note that in the analogy, water is equated to value not cash. Cash is just one “reservoir” of value but there are many reservoirs in the company where value is stored. So, as well as cash flow, think of value flow in the company. If you can keep increasing the value, you can likely find ways to manage the cash flow. Value can be monetized and converted to cash if need be. The clear default for startups is converting equity to cash by getting investors to join the company but it not the only choice. You can also convert the value in your accounts receivable to cash using Factors or speciality investors. Sell your future subscription income, trade on tax credits – it is all possible. This is one area of accounting where creativity pays.

In designing your financial plumbing, you need to select the accounts to use and the rules that govern how the money will flow around. These decisions will eventually drive the selection and setup of your accounting software. Are you, for example, running a product business which will require inventory with accounts for finished goods, work in progress and raw materials or is the business based on a service model with no inventory? It is important to define these at a rather low level but not so low that the account becomes trivial. The point of this exercise is not to create a Rube Goldberg contraption, but to manage the complexity of the whole by breaking it down into small and simple components that are controlled by your assumptions.

Some key assumptions include:

  • Growth rates and revenue
  • Cash conversion times
  • Fixed, variable and semi-variable costs
  • Fixed asset costs & depreciation
  • Interest rates
  • R&D, Marketing, Operations and Administration costs and time lines

Once you have the plumbing designed you need to translate the design to your financial spreadsheets. Here are my key time savers:

  • Don’t worry about format of the working sheets.
  • Keep all your assumptions on one sheet along with the key summary performance graphs and data generated by the other sheets.
  • Each account needs its own sheet. Columns are set up as weeks or months and rows are the elements of plan that affect that account.
  • Some costs are too complex to model within an account. Use separate sheets for these and then link the costs back to the relevant accounts.
  • The sheets used to display the summary financials should only have links and calculations on them – you should never have to enter values on them. The balance sheet should draw all its information from the subordinate accounts with the exception of cash and retained earnings which come from the cash flow and income statements respectively.
  • Get the model working before you try to make it presentable. By working, I mean the balance sheet should always balance as you change the assumptions.
  • Generate several sheets for the presentable financial summaries and tables that you can link to in your business plan documents. Spend the time to make these sheets look good.
  • Keep data in one place. Use DDE or ODB links to connect the spreadsheet model to your documents so that the documents are updated automatically. As much as possible, keep the text in your documents vague and refer to tables and graphs that you have linked to. This will save lots of time in revising the words as you modify your assumptions.

Once all of this is done, you will have a solid model on which to assess your assumptions and build what-if cases. While you may start out with good guess at what the critical assumptions are, the model will help you identify just how critical they really are. It will also help you determine how much cash you will require to succeed and the creative ways you can use to get it.

MJM Consulting – Helping Small Business Grow.

Visualizing Involvement.

25 September 2008

One of the coolest things I’ve seen on the Internet in the last few years is the Code Swarm software developed by Michael Ogawa at UC Davis.  Code Swarm is an open source software project aimed at visualizing the contributions (commits) of a team of developers.  It is fascinating to watch, especially for a large project such as Eclipse.

Now imagine being able to do the same thing for the contributions of the employees at your company.  E-mails, file edits, phone calls all displayed as everyone is working together to create value.   What would your company look like and how big would your star shine?

Where is your data? Changing attitudes about on-line storage.

25 September 2008

One issue that people often mention with off-site virtualized or cloud computing systems is the loss of control of their “data”. The adults in the crowd grew up with paper, floppy disks, local storage on hard drives, removeable hard drives, CD Roms and more recently DVDs and USB sticks. The data was always at hand. We could point to it and know it was safe and we’d protect it.

The new world of virtualization and cloud computing is changing this. Companies are outsourcing their IT needs and on-line services such as SalesForce are gaining traction. In both cases, the data is no longer in the direct control of the company that owns it. This requires a level of trust that the supplier will not abuse the data or allow it to be compromised. It has been a tough sell with the adults.

Not with the kids. Kids these days are growing up with web services and social media. All the data starts being “out there” and they have grow used to it to the point that it is normal. On-line E-mail services are common, FaceBook, MySpace, Twitter, Fickr, YouTube, are all about sharing data. Google docs, Zoho, Apple’s Mobile Me and other web 2.0 services like them provide on-line storage. Virtual desktops are gaining in popularity – and the young crowd is using them at an increasing rate. . Their digital stuff is out there – on the web, in someone else’s control – and that is just fine. They do not want a local copy because they use computers like terminals and they want to get at their stuff from where ever they are, on what ever device.

When the kids reach adulthood, I’m sure they will change the attitude in industry as well.

Local storage will become, well – so 2001.

Free for Profit: Why companies give things away.

24 September 2008

In a profit based business, “free” seems to be a strategic pricing mistake. However, there are situations when it makes sense. The key is in understanding what you are getting in return for “free” and ensuring that this has sufficient value for you.

Most business people have trouble giving stuff away at a discount, let alone for free. The thinking goes that to optimizing your profits requires that you optimize every part of the business, including every sale. Selling at a loss is not the way to do it. There is a cost to anything a business provides and that cost, at a minimum, should be recovered. By offering something for free or at a discount, you are devaluing it in the eyes of the customer. This makes it difficult, if not impossible to increase the prices later on. Furthermore, if customers want what you are selling, it has some value. That value should be recognized and paid for – it is business after all.

However, the theory of the loss leader suggests that for a bundle of products the overall profit is maximized when a portion of the bundle is sold at a loss and the rest of the bundle has a high margin. As a means of attracting customers who will pay more, it has proven to be effective. A common example is in the bundling of phone services. AT&T offers a bundled wireless/land-line service with “free” wireless calls to any other AT&T customer.

 The theory starts to get weaker when the bundle is not obvious or only weakly connected. If customers can get the “free” product without having to pay for the bundle, the risks in the free offer are increased. That doesn’t mean it isn’t a good idea. The loss leader product can be used to lock in the customer to a particular recurring purchase. In this case, “leader” refers to the sale of the discounted product before the higher margin product.  Some examples include:

  • Cheap printers with expensive ink cartridges;
  • Cheap razor handles with expensive replacement razors;
  • Cheap video game systems with expensive video games;

Weaker still is the loss leader that does not provide lock in. Grocery stores provide a good example. Discounted goods are often aimed at drawing in customers who will buy other none discounted goods but there is no guarantee that the customer will play along. The store is relying on other elements that the customer values, such as the time savings of having a one-stop shop, to increase the probability of increased sales. Statistical correlation studies are required to prove that the discount had any effect on the overall sales.

It is also interesting to note that the same principle can be applied to loss followers (I’m making this term up). A good example is the Apple iTunes store which is a barely profitable loss follower for the innovative and highly profitable iPod products. The 99 cents you pay for a song on the iTunes store is mostly used up to pay royalties and Visa. Apple hardly covers its costs. And 99 cents is about all any customer would pay for digital media these days in any case. For Apple, the trick was in providing the content in a format that locked people into the iPod and in such wide volume that using the service was easy. There has been an outcry against the protected formats but millions of people still ran out to buy iPods.

The loss leader or loss follower approach still requires the company to make a profit over all. Apple’s iTunes store would not work as a loss follower if it did not at least break even. If Apple ever sold music at a loss, any profit made on an iPod would be quickly consumed as customers purchased more and more music. So discounting is OK to a point. But what about “free”.

The key to understanding free pricing is to realize that nothing is really free. There is always a fee even if the fee is non-monetary. Here are some examples:

Free information, trials or samples in exchange for trust and the beginnings of a relationship. This is the main purpose of most corporate web sites and one of the biggest benefits of the Internet.  Business is based on trust. When a customer buys something, they trust that it will work, that they will not be disappointed or cheated. The provision of information about the company, its products and services – the marketing and advertising – costs the company money but is absolutely necessary to build that trust.  This is what Kelvin Davis calls the “freeline“.

Free information, trials or samples in exchange for customer leads. There are plenty of examples where customers are asked to provide contact info in return for access to information. The information request signals an higher level of interest in the product or services offered which is valuable information to the sales channel. It also furthers the development of the relationship between the customer and the company.

Free for feedback. This is a common approach for companies that are developing products and services that depend on customer feedback. Beta testing is an obvious example but the free service can be taken one step further. Take Mikogo for example. Mikogo provides a free desktop sharing software package that allows you to share your desktop with up to ten others. It is absolutely free. However, in the company blog, Andrew Donnelly describes why there is no free lunch. Mikogo is a product provided by BeamYourScreen, a web conferencing company with a very sophisticated subscription based service. The Mikogo product is designed to elicit customer feedback and the free price is aimed at getting that feed back in volume. It seems to be working. While BeamYourScreen has approximately 1400 paying customers, Mikogo has more than 50,000 non-paying but enthusiastic users. Mikogo has also recently partnered with Skype and released a Mikogo Skype extra that will combine desktop sharing with skype conferencing.

Free for referrals and future up-sales. Another common practise for companies that are developing a market that is driven by bottom up sales. Google Docs and Zoho are good examples of products where the main markets that pay – the corporations – are hard to sell to. However, for the future employees of the corporations, the current students, the sell is trivial and viral – especially if it is free. Both Google and Zoho are counting on students to take their love of the product with them and demand that it be used in their place of work.

Free for contributions. This is similar to the open source model in software. The software is free but contributions are encouraged be they bug reports or actual updates to the product itself.

Free for advertising. I recently received a free t-shirt sporting the Ottawa Senators logo. I was supposed to wear it around like a human bill board – a pet peeve of mine. Some lucky companies get people to pay for the privileged of representing the company. If you have ever worn a visible logo on a piece of clothing, I hope you got paid for your service.  If not, I hope you purchased the garment at a discount. I certainly hope you didn’t pay a premium for it.

Free for tax benefits. A common reason for charitable donations.

As a take-away then, think about the following questions and actions when you are setting your pricing strategies.

Will offering a product or service for free be good for you? Can you identify the value you will get in return for “free”? Do you have the systems in place to realize this value and make use of it? Can you identify the costs associated with providing something for free? Can you account for these costs and determine if you are getting a profitable return on investment?

Finally, write it down. Explicitly state the reasons and policies around your pricing strategies and decisions. You will then have something to assess as your business grows and things change.

Well, that’s my advice for today. It is free for you to use. All I ask in return is a little link love.