Designing a simple business part I: Working that idea

This is the first in a series of posts I plan on the topic of designing a simple business. The idea for the series started when I realized simplicity is a common feature of many of the great startups that are out there. If you can visualize a business it’s easier to evaluate it, and improve the individual parts. This first post deals with the initial idea, and the main message about your initial idea is to get you to simplify your idea - don’t bite off more than you can chew.

What is a business idea? - The three components.
A business starts off with an idea. The idea should be something that creates value for someone, said value must be deliverable to whomever it creates value for, and there should be some way of capturing this value (including protecting it). If this process seems simple for a particular idea, it’s easier to think of it as good.

A good idea exemplified
Imagine you’re the inventor of corrective eyewear (i.e. glasses). Until now there has been no product which deals with bad sight. You can probably pretty quickly see roughly how you could go about making money on this idea. Corrective eyewear creates value for people that have poor eyesight, it can be delivered through for example pharmacies, and you can capture the value through charging money on the spot. Additionally it is likely that you could protect the idea with patent, for instance the use of optical lenses for correcting eyesight should be patentable if you are the first to think of it.

The simplicity that makes this idea good comes from three aspects. Firstly, the idea deals with a specific need. Secondly, there is a clear path to market which may not cost you too much (i.e. it’s “doable”), and lastly there is a clear way to make money, as well as a clear model of how you can protect the idea (patent) while you build a strong market position.

Simplify your idea!
Too often entrepreneurs pitch ideas that are just too complex, and it comes from the typical business/engineering school instinct of wanting to cover everything. Every customer, every need that customer have/will come across in the foreseeable future. Every possible product that can cover these needs, and every application of said product. The reason we do this is that we think there’s more money in more customers, and more products. Which of course there is. However, very few companies end up where they thought they were going. Starting a business is all about adaptation. And to be successful, you need an idea that you can test systematically and improve upon.

Note that it’s not always that complex ideas are bad. They’re just hard to test objectively, because you cannot separate the issues. For this reason I propose that the first thing to do when starting a business is to simplify the business idea.

A complex idea
The other day I met a young aspiring entrepreneur. He was full of life, and eager to tell me his idea. I paraphrase:

“So what I was thinking was to automate grocery stores, so customers can just make a shopping list online, say when they want to pick their goods up, and just appear at the store. Also there would be no one working in this store, so you would check out everything yourself. Furthermore all inventories would be updated at the suppliers, so everything would always be in stock, but just enough to handle the daily demand”.

Ok, I thought, as he continued:

“Now I’m into automation, so I would make a system where deliveries would be made at the back and everything would be tagged with RFID-chips,( there’s so many cool things you can do with those), robots would then sort the goods and pick out what people order into bags. So everything’s ready when the customers appear!”

So what’s the need anyway?
This idea is so complex, and includes so many different aspects, that it's really hard to understand even what the actual need is. At first it seems the need is for a simpler shopping experience. But is it really simpler to go to a website and pick everything you need? How would you pay, do you need to enter your credit card number or would you pay on pick up? Do you need an account? How do you verify that the person that picks it up is the right person? What if someone else picks up your groceries after you paid for them? It could be a simpler shopping experience, but maybe it’s really just a faster shopping experience? Maybe removing the need for staff is a significant cost reduction for a store? Or is it just a cooler shopping experience?

In any case simpler and faster in this context are secondary needs. The consumer’s primary need is for groceries. Imagine the complexity of creating a grocery chain in and of itself. Imagine to then try to make it simpler and faster! Indeed you would have to compete on a lot of other factors as well. Would you for example be equipped to keep the salad green? And I'm not even going to attempt to comment on the capital needs to make this happen.

Let’s simplify!
Creating a new grocery store is very complex, and I think we can agree that doing so is probably not something you'd want to do. And if you are not deterred yet, let me assure you that you will not have an easy time raising funds for such a venture.

But there's a silver lining, because surely there are great ideas within this idea. From the idea, we can find many smaller ideas. The point is to start with something simple, something that you can easily test against the market. One way we can go about extracting ideas from his idea, is by looking at the needs, and finding solutions to service them. Let’s look at the need for lower costs for grocery stores, and see if we can extract something simpler. Now I’m not claiming that this is a good (or new) idea - just that it’s simpler, and therefore easier to understand and test in a structured way. Let us then ask the question, "how can we use automation to cut costs in a grocery store?"

A simpler idea to lower costs for grocery stores
One of the main drivers of costs for grocery stores is the staff. The main bulk of people working at grocery stores are those that scan items and receive payment. So if we could automate checkout it would represent a clear cost reduction. One way to do this is by allowing customers to do this job themselves. Self-checkout would be presented in stations, each station consisting of 5 registers, each with a scanner and a system for payment. At each station one clerk would be stationed to help customers that need help, to receive cash payments (if this is important to incorporate of course), and to make sure everyone is using it correctly (e.g. so they don’t leave without paying). The solution could be delivered on a store-by-store basis, so that a chain of stores would try it out at some locations first, and then scale it up when they were comfortable using the system. Value could be captured through a leasing based plan, and the idea would be protected by moving quickly to gain a first mover advantage (for those that believe in that sort of thing).

Evaluating the idea
Regardless of whether the idea above is good or not, we certainly understand better what it’s all about now. If we decided to start a company commercializing this technology we could write down hundreds of clear and testable hypotheses about the market, which we could then proceed to test, for instance:
-    Grocery chains wish to reduce costs by replacing staff
-    Customers are willing to check out their own goods
-    Cash payments are important for customers
-    Customers will generally be honest when scanning their merchandise

Some things would be confirmed, and some things would be completely different from expected. These things would have to be sorted out. This is where the real innovation lies. For example, if customers are dis-honest, how can you make the check-out desks verify that all goods was scanned, and that the correct goods was scanned?

Of course it’s not that straight forward in real life, you still need to consider your competitors, make a strategy to avoid being copied too soon, facilitate production, consider your costs and pricing structure, and so on. However, you can now visualize how the business might look. This is a necessary first step to formulating the hypothesis that needs to be true in order for your business to flourish. The next step would then be to start testing these

The next post will look more closely on evaluating your idea, and deals with the 10 questions you should spend 15 minutes asking yourself before you move ahead to more advanced and time consuming analysis' of your idea.

Lessons learned:
-    Ideas should ideally include how your business might create, capture and deliver value.
-    When you see how an idea might work, it’s easier to formulate testable hypotheses about the product.
-    Complex ideas, that are hard to visualize can and should be simplified.

What do you sell? A new view on brand based products

What do you sell? I guess there’s already many ways of classifying this, nevertheless I would like to add one more. Do you sell a product or a commodity? Our economy grew out of what were largely commodities; agricultural products were traded in markets, often at market prices. Cotton is cotton, the only differences between vendors are price, quality and quantity.

As our society closed in on the industrial revolution we made a leap forward, we started making products. Pants are not equal to each other, even if they are made from the same material. The reason is that when we add some sort of processing to our commodities, we make them into products, but a side effect is that products vary more in terms of (perceived) quality than commodities do. Sure there’s good cotton and bad cotton, but nothing that justifies the kind of price differences we see in for example clothing.

This insight is something that is often overlooked, especially in economic theory. After all, consumer’s perceptions are hard to measure in numbers and models, and are thus often let out of the equation altogether – just represented by the demand function. The solution for this is usually to assume perfect markets, which, if they exist at all, mainly describe commodity markets. This is the source of our propensity to think that price is the only thing that matters. If the market leader in an industry is about to launch a product that competes with mine, the instinct is to lower price or increase quantity. This is often the wrong thing to do.

Economic theory has however also created useful tools. One of the best ideas, in my opinion, is the concept of utility. In all simplicity utility is a measure of the relative satisfaction from, or desirability of the consumption of various goods and services, and can as such contain whatever criteria consumers (or businesses) use to decide on which product to buy. In this view utility is the only reason people buy products, and the explanation why people buy something is simply that it yielded the best utility for the price.

Though many would disagree with me, utility is in my mind what sets commodities apart from products. By this I’m not saying that commodities don’t have utility, of course they do, or people wouldn’t buy them. What I’m saying is that it’s the very nature of the utility that sets them apart. For commodities the utility is given, there’s no added value, just “real” value. For products utility is made up, it’s socially constructed; it’s whatever you think it is. This is where you can charge more for your products than they cost to produce.

So what do you sell? Do you sell a product or a commodity? If you sell a commodity you would want to switch to a product at once. Cotton can be de-commoditized by adding socially constructed value, “It’s organic!”  The same applies to other commodities. If, on the other hand, you sell a product then you should understand what “utility” constitutes in your marketplace. The utility of clothing is certainly not only that they cover up parts of our bodies we don’t want others to see, or keeping us warm – if that was true, clothes would be commodities and priced close to production price.

So ask yourself - and don’t settle for the first answer – "What do I sell, and what should I do about it?" It may be the first step to really understanding branding at it’s core.

Killer apps and USP’s – find them, use them!

New products need to provide value. We all know that. But further than that it needs to be clear what the product does and why people should care. This will let your product escape the trap Google Buzz, New Coke (or even better Crystal Pepsi), Cosmopolitan Yogurt, Palm, other PDA’s, and countless other products that no one in the world could understand what were good for went right into. Products need to have a clear intrinsic purpose, and they need a company around them that clearly explains externally what the product is, what it does, and why we should care.

New products should have a killer application. For example Twitter’s killer app was status messages that fit into a text message. Now it’s important to note that a killer app isn’t necessarily what you will end up doing. The killer app is what you start out doing! Today I don’t care if Twitter updates fit into a text, now I use it because I already am. Killer apps allow you to find a niche that’s big enough for you to start growing your business. For example I think that in [insert random number here] years there will be a big company that deals in robots, kind of like a Microsoft of robots. If I wanted to start that company today, I wouldn’t care what robots would be in 20 years, I would find a small niche in which to start making robots today that could provide me a basis for new niches and eventually a world leadership in robots. Maybe I would start with toy robots? Certainly I could make a lot of fun stuff without requiring too much AI at the offset? Nevertheless a killer application is something more specific. It’s something that makes my robots intrinsically better than other robots. Maybe my toy robots could play board games? Certainly the technology to allow robots to play the games already exist, the only technological challenge left would be to get the robot to recognize the game, the location of the pieces and give it the ability to move the pieces autonomously.

USP’s are something else, they’re extrinsic, but they are very much related to killer apps. A USP is a Unique Selling Proposition, to understand it fully you should go to your local supermarket, locate the aisle that has toothpaste and read the tag lines. Every brand will have toothpaste for whiter teeth, cleaner teeth, anti-bacterial, anti-bad breath and a few that attempt to do it all. Think about it, do you really think there’s a lot of difference? Most of the toothpaste is just filler anyway, the parts that differentiate the products are measured in parts per million, so it likely wouldn’t be all that difficult to put all the good stuff in a single ultimate toothpaste. Continuing the robot example above, we could for example use “A friend for life”, or “Playmates forever” as a USP. This is how people understand your product. Notice that the USP don’t only separate the product from other robots, but other toys as well.

The difference between the two is that the killer application is the use of your product; the USP is what separates your product from all those others in the mind of the consumer. For start-ups however you often find yourself being so original that your product will be mentally sorted in a new category. In these cases, it pays to use the killer app to create a USP because you fortify your position as the one that provides that application. Combining a clear view of killer apps, niche markets, product positioning and business strategy will align different interests in your company so that product designers, business strategists, marketers, finance people, sales people and so on all understand what the company is setting out to do, and can agree on it.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

What Facebook is missing out on...

It strikes me as somewhat absurd that Facebook don’t see the opportunity they are presented with in face of the recent criticism. The criticism, as you are probably well aware off, is in my view best summed up in Leif Harmsen’s words “It is not ‘your’ Facebook profile. It is Facebook’s profile about you”, he considers it a repressive regime akin to North Korea, and he’s not alone. Yet this isn’t anything new. It’s more a case of the “commoners” starting to question what the more tech savvy ones of us have questioned for quite some time, and thus the topic has gained some momentum in the mainstream press as well.

The problem is obvious, as problems often are, but the solutions keep escaping the minds of clever people. Or does it really? A related debate I have followed since I first heard a discussion about social networking 3.0 at Stanford in 2007, is about how we can transfer ownership, and more importantly control over user information to the users. The simplest solution is of course just to pressure sites like Facebook to change their terms of use, but a more lasting solution would include the possibility for users to bring their friends, pictures and other information with them between social networking sites. Undoubtedly there are many design issues for such a system, for example I certainly have multiple online identities; my Facebook content isn’t really suitable for my LinkedIn page and so on. And where would my information be hosted? Would I have to buy server space in case someone wanted to view my profile while I was online? Would the standard allow new networking sites to add slots for specific information that were only suitable for that site (like favorite recipes for a cooking site, or where I’ve been for a scuba diving site), and how would I controll what and how much  information is sent to each site I visit?

This however isn’t the biggest problem; the reason why such systems haven’t been implemented is that no one with the leverage to create this system has done it yet. This system has to be made by the right people, people that can reach critical mass. At present, only geeks and idealists would bother to learn how to use a totally new system, especially because something like that sounds very complicated. The average user doesn’t want complicated stuff, they want simplicity, and they just want to use the product. So to reach critical mass for such a system you would have to have some way of gaining a lot of users for it fast. Like a big already existing user base, like Facebook has, but wait - why should Facebook make this system? Facebook like it the way it is, they own your content (or their content about you to be accurate), and can use it for pretty much whatever they want. In addition to this Facebook enjoys users that have extremely high switching costs, something which might be their biggest competitive advantage. It seems that Facebook is in a perfect place.

So why should Facebook do it?
The first reason why Facebook should create a system for sharing information is that it would buy them credit. It would buy them credit with the tech community for being open and with the media for listening to them. It would buy them credit with normal users because they would feel safer and because they have the option to leave. Remember why some people escaped the Matrix? It turned out that given an unconscious choice nearly 99 % of test subjects would accept the program anyway. I see no reason why this shouldn’t hold true for Facebook as well, as the primary reason people leave is because they are malcontent by Facebook’s closed systems and strict privacy policy (at least if we believe random Internet chatter - which we do).

Secondly, and maybe more importantly, I believe that if Facebook don’t do this, others will. Services such as Google Accounts and Open ID don’t have a long way to go to allow users to store information that at their request can used by third party sites. Right now Facebook can deny Open ID and other such services to provide login to their site, but can they still do that in 3 years? Right now they can delay the inevitable move to such services, but as I wrote in a blog post some time ago, change happens when change is due. Change isn’t always created willingly, it’s just there and those that catch the wave gain momentum, furthermore no surfer ever caught the back of a wave. If people gets used to logging in to their favorite sites through a third party provider, I’m not sure Facebook can withhold the pressure.

The third reason Facebook should use their user base to create an open, user owned system that can transfer information easily from site to site is that whatever disadvantage Facebook sees in having users logging in to their site via a third party provider will be Facebook’s advantage against new social sites. If users are used to using their Facebook login when they log into pages on the net, they will expect new sites to follow this convention, thus granting Facebook some limited power to monitor and control new services.

The fourth reason Facebook should do this is because there’s bound to be a business model in it. What this model is, I’m not sure, but it could for example be that commercial sites would have to pay a small fee to use the service, or that when you log in you get redirected through Facebook’s ad page.

The fifth and final reason is that this would be a good first step towards extending into new forms of web services. When users already have a login, it should be easier to gain momentum for new and exciting products. Google has already realized this when they launched both Wave and Buzz (though this seems to be bad examples, as both services are virtual ghost towns). Having a customer base like Facebook’s is an incredible asset, in the case of Facebook an asset that remains close to unexploited. Surely marketing new web services through Facebook would ensure enough users to create critical mass for many services?

Maybe Facebook as we know it today is just a stepping stone? I certainly think that they should consider expanding their services, and specifically they should start making a product that they could easily gain market leadership with almost immediately, namely an open profile service that provides an API for other services to let users log in with their Facebook profiles. With the share number of users Facebook has it shouldn’t be a problem becoming the market leader in this "sort of related" market.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

"It’s all about making each other good"

When I was a kid I followed football (or soccer as some would have us believe it’s called), and as any kid I was cheering for my local team - Rosenborg. As faith would have it Rosenborg was by far the best team in Norway, and I’m not saying that just because it was my team, they actually won the Premier Division every year from 1992 – 2004, exactly when I was growing up. They were world class, yet they were comprised of mainly local heroes. It would almost be an exaggeration to say they were a professional team, I mean Norway is small and the town I’m from even smaller, so that the pool of players that could be recruited locally were limited. In fact it’s said that when Rosenborg played Milan (a game which they won 2-1) in the 1996-97 season of the Champions League, that the captain of Rosenborg were so psyched to meet these “real” players that he asked them all for their autographs before the game started. So how could this little team of local heroes win against teams such as AC Milan, Olympiacos or Borussia Dortmund?

The coach of this particular team was another local hero that had in his days been a pretty good player and had played for Rosenborg and Vålerenga in the 1960’s. To this day I’m convinced that it was he that made Rosenborg so great and that it to a large part was two things that he firmly believed. Firstly he believed in always being offensive, under his reign Rosenborg consequently followed a 4-3-3 formation, which for those of you who don’t know the sport that well is a fairly offensive set-up. Secondly, and maybe more importantly he believed in having each individual tone down for the good of the team, he meant that if everyone tried to get the team better the team would be better than the sum of the talent. I remember hearing him speak once, I must have been about 10 years old, and he said this, he said “It’s all about making each other good”. And that’s a sentence that has resonated with me ever since. A week or so later I saw a game they played and I noticed that two of their players had played their way past the goal keeper, which had given up about 10 meters or so behind them. They were both at the goal line and one of them has the ball and could easily have put it in, but he didn’t, he passed it to his friend and let him score the goal. This so drove home the idea that it’s all about the team and not about individual glory.

I think we all have something to learn from this, if you make those around you shine they might shine on you next. In fact it’s inevitable. I try to make this my philosophy to, when we have exams at school I don’t mind sharing my thoughts on how to read or how to write assignments, when I work somewhere I don’t mind sharing my expertise with others and when I have a business idea I tell everyone I know about it. And if someone asks if they can have it, or use it, or even just tell someone else about it, I say “of course – go crazy”. Why do I do this? Well, firstly I don’t think anybody will steal my ideas without my permission (they’re honestly not -that- great), but more importantly I wouldn’t mind it if they did. How could that be bad for me?

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

How to deal with uncertainty - the maximize options approach

In a recent blog post I wrote that it is becoming increasingly difficult to forecast the future. As I imply, the problem is choice: Lower distances between people increases the ripple effect of individual choices, and technology together with consumerism increase the sets of choices, and options available to each choice to create an exponentially growing possible futures.

"Difficult to see. Always in motion is the future.” (Yoda)

Simply put I would claim that the uncertainty of the future is a function of the number of people that make choices, times the number of choices available, times the number of options available in each choice, times a coefficient for the impact of each choice. As all the factors that go in to the function have higher values now than they did earlier the uncertainty increases. What I don’t mention is how to cope with the increasing uncertainty; this is what I will address here.

Economists love choices, because they apply math to find the “right” choice. Consider that you’re in a TV game show, you get presented with two choices, a) 100% chance of $ 10 000 or b) 50 % chance of either $0 or $50 000. Any economist will tell you that the options are worth respectively $10 000 and $25 000, so you should choose b) (this is because given enough similar choices the average outcome would be those numbers). Now, if however, you chose b) and you lost and had to go home with $ 0, did you make the wrong choice? Many will say yes, because you lost all the money. These people think that a good choice is a choice that you would not change after you see the outcome; this seems to me like it is a bad definition. I think that you always have to judge a choice based on the information that was available at the time, thus it was still the right choice! If you are presented with a choice of this type, you should follow this procedure.

The problem, as the clever reader has already deduced, is that you rarely know the numbers. And this is exactly what forecasting has been occupied with since the beginning of the industrial era; how can we put numbers on stuff that we know very little about? There are tons of books on this subject, so I won’t go in to it, but rather utter my proposition on how to deal with uncertainty in choices in these days, and especially in the years to come. First, let me repeat myself, in instances where numbers are available or could be attained, follow the above procedure. This is for all those other instances.

I already professed my love for platform technologies, but I haven't explained why, so here goes. The more malleable a technology is, the more uses it can have, thus the more ways it can be successful should it fail in its intentional use. The more adaptable a technology is (Cēterīs paribus), the higher is the probability that its owners will find an application that is profitable. Consider a hypothetical example, two companies are specializing in medical technology, both companies have a development cycle of 15 years, and neither has any information about what its competitors are doing. One company is certain that it can make a cure for let’s say AIDS, and the other is certain that it can make a platform that will cure every bacterial infection known to man, but would only be able to market it for one use at a time. Assume that the technical challenge is equal, and that the main risk is that competitors beat them to market. Which company would you invest in? Since neither has any information about what their competitors are doing (the premise of uncertainty), I would invest in the bacterial platform company. The AIDS company has one chance to succeed, if someone else beats them to market they are dead, finito. If someone else makes the bacterial technology, the company can just change its marketing to target another disease, because the drug can target all diseases, but just market towards one at a time.

By the same principle, even if I don’t believe in global warming I believe in environmentalism, because an earth with rainforests have more options that an earth without them. A country with a highly educated workforce has more options than one without it. A company with several paths to market has more options than one with only one path to market. A technology with many uses has more options than one with limited use. A user friendly computer has more options than one that’s not. A diverse education gives more opportunities than one that’s specific. This principle is universal.

But, you may ask, how does this relate to forecasting the future? Well, the concept I’m trying to explain has two implications for you. Firstly, it means that if there are high uncertainty go with the option that leaves more options open. Secondly, when creating something, try to leave as many options open for as long as possible. If you don’t know how things are going to turn out right now, maybe you will have a better understanding in the future, thus closing doors prematurely is extremely dangerous and will become even more so in the future.

To wrap it up, here are some simple predictions made following this principle:

• Mobile phones that allows anyone to create uses will have more uses than a mobile phone that don’t, thus cell phone producers that have open platforms will outlive those that don’t.
• Countries that have an adaptable workforce will be less affected by upheaval, because they can shift the workforce over in other industries temporarily or permanently should disaster strike in a specific industry.
• Renewable energy producers that use existing infrastructure, such as oil from algae, will be more successful than those that gamble on technologies like hydrogen that requires major rebuilds of gas stations etc, because they have more potential customers, quicker.
• On demand television will outcompete fixed programming, because people will have more options on when and where to watch. On demand television also have more options on how to make money - the business model.
• The deck of cards will survive Monopoly, because you can play many more games with a deck of cards. Also you can do magic, tell someone’s fortune or even use them for a raffle.

The point is that the more adaptable you are, the more likely are you to survive turbulence or achieve your goals in an uncertain world. Forecasting is great, but when that fails, you should try to keep your options open. Even when traditional forecasting is a possibility you should consider looking at what has more options that are favorable to your goal. It’s always better to have two ways to success than just one, especially when the probabilities of each way actually leading to success is unkown.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

Why the iPhone succeeded, a case of recognizing complex unmet needs, not technology revolution!

It’s hard not to notice that the players that were dominant in the cell phone market a few years ago have been marginalized by players such as Apple and Blackberry. It’s easy to attribute this to technology saying that the iPhone was so technologically superior to the phones of the time that it was inevitable, or that iPhone redefined the cell phone industry. However, it is important to note, I think, that the iPhone wasn’t mainly a technological innovation, in fact the technology to do most of what the iPhone does had been available for years, what happened was non-technology based disruption that largely was due to the incumbent industries inability to meet a very complex user need. Let’s look at the case of the iPhone to see what really happened.

Consumers were screaming for increased use of their cell phones, yet there was no solution in sight, but let’s for the purpose of limiting this post look at music as an example, keep in mind though that music is just one example and that you can replace “music” with “content” or “applications” in most places where I use the word. So, the consumers were screaming to use their cell phones for music, yet there was no good solution in sight. There were three parts of the infrastructure that needed to come into place, the content, the device and the network capacity, these were controlled by three types of actors with differing interests that would have to come together to put music on phones in a user friendly way: cell phone manufacturers, record labels (content providers) and phone carriers.

The manufacturers was happy with the way things were, incremental innovation, mostly in design, lowered the product life cycle so that new phones was bought all the time, they didn’t have to spend much on marketing, because consumers often bought what they were recommended in the (carrier owned) stores, so the best marketing was to have good relations with carriers, making sure both players made good money on selling that particular phone. The market mechanisms seemed to have stabilized, leaving no reason to think there was any change around the next corner. The manufacturers were largely dependent on the carriers. Since the stores where cell phones were bought generally belonged to the carriers, people chose their phone on the basis of what carriers offered them, the best thing a manufacturer could do was to be present in as many stores as possible, and just make sure they didn’t fall behind the other brands in innovation. Indeed a comfortable place to be for a large firm.

The record labels viewed cell phones as a treat, this seems to be their strategy with most new technology, so consumers were pirating music and putting it on their phones, with little revenue finding its way to labels. The labels would have preferred a pipeline of music that went through carriers, for example you would by a song for a few dollars through SMS or WAP. For consumers this took too long and was too expensive, for them it was easier to just use their pirated/ripped media library on their computer and use a cable or whatnot to transfer the songs to their cell phones. The phones didn’t have any storage capacity anyway to support buying a media library that would just work on your phone. In an effort to limit pirating, the music industry didn’t even make an effort to expand their market by finding a viable business model in cell phones or mp3-players.

The carriers on their part had a wholly different agenda, music didn’t really interest them. When a carrier imagined a future where wireless high speed internet access, together with technologies such as Skype was dominant, they got sick to their stomach, because that was a world where they were redundant. The carriers have been selling subscriptions that has a monthly fee and fixed prices on for example calls and texts, by adding free or cheap cell phones to the mix they could confuse buyers into buying subscriptions with crazy margins. If phones become internet based (with for example Skype as the carrier), they will at most be able to maintain the monthly fees, a prospect that will allow consumers to better understand what they are paying in relation to other carriers, this will lead to a lowering of the carriers margins, and force them to compete on price.

Needless to say, the phone carriers wanted to postpone the introduction of high-speed internet to phones and thus didn’t want music consumption to go through the high-speed connectivity that the consumers needed to effectively use their phones for music, because this connectivity could also facilitate other uses. For them the “pirate music on your computer then transfer to phone” model was sufficient, and no one bought a lot of music from the crappy stores they had anyway, why go into a market that clearly can’t be solved in their best interest? This stifled the innovation among the manufacturers, because, as noted above, they didn’t want to upset the carriers that they were so dependent on. And besides, they didn’t own any content that could be sold anyway, how would they make more money from adding functionality which someone else would get the revenue from (if anyone would get any revenue at all), and that their most important partners didn’t even want or push for? They settled for having the capacity to play music, in their crappy homemade players, and consumers would have to take it or leave it.

Enter Apple. Apple had three resources that allowed them to enter, they already had a deal with the record labels; the labels acting on their fear of becoming obsolete had agreed to sell music through iTunes for use in mp3-players, given that all effort would be made to limit the ability to copy the music, which suited Apple well. Apple also had the expertise to create ways for consumers to interact with the technology, this is really the only expertise Apple had that separated them, the technology, which is the third resource, was widely available, and Apple had a large engineering division that could make the phone. What happens is that Apple enters as a cell phone manufacturer and has a deal with the record labels. The high speed connectivity that carriers didn’t want and that the other manufacturers didn’t see any point in providing was pivotal to Apples plan, they wanted to make money not only on their phones, but on the extras as well, like iTunes. Apple also had a plan to sell other content, but let’s keep with the music for this post.

Apple had an advantage over the other manufacturers; they had a congregation that would buy their product no matter what. The iPhone was also perceived as an iPod with phone capability; to consumers this was just as good as phone with mp3 capability would have been. In addition consumers already knew how to consume music on mp3-players, they didn’t to the same degree know how to do this on their phones. Thus the iPhone was perceived as a better music player than the other phones, but not as inferior when it came to the phone capability. The incumbents in their infinite wisdom had their core competency in making phones, however this wasn’t perceived as important, because any technology company can make the phone part of a phone. These reasons add up to the fact that consumers wanted the iPhone, whether their carrier recommended them or not, this represented a shift in power, from the carrier’s power over the manufacturers, to Apples power over carriers. Even if the smart phone, here exemplified as the iPhone, likely will be the death of the carriers current business model (as noted above) in the not so distant future, the carriers needed to scramble to make sure they would be the one that had a monopoly on marketing the iPhone, because now the consumers would buy the carrier that had the iPhone, not the phone that carrier recommended.

Though I limited this post to apply to music it could just as easily apply to other content, such as movies or games. The point is that Apple sees an opening where the increasing needs of consumers are not reflected in the market offerings, and where the players that are necessary to fulfill this market need are looking the other way. If the three types of actors above had put their heads together, they likely would have seen this path to profit, and would have acted on it, but they were busy following different agendas. The genius of Apple lies in realizing that more sophisticated phones wasn’t the need at all, the actual need was made up of at least two different needs, the need for better phones and the need for some way to use the better phones. Apple set about to provide both at the same time, and it was this that gave them the ability to enter the market for cell phones with such a success.


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Familiarize yourself with the market in 3 steps!

Starting something new often requires you to read up on an industry and do those tedious swots, pestels and other analysis. The problem with these is often that the assumptions you take into the process are also the ones that comes out. If you think many small companies in the industry is an opportunity for intruders, well than that’s where you place it in the analysis, and that’s what you’re going to base your recommendations on. Only now it’s no longer just intuition, it’s derived from a model. Anyone else see the problem here? This framework doesn’t solve this, but helps you ground your understanding of an industry’s players in reality, and that’s a good start for a market analysis. The purpose of this analysis is the give you, the analyst, a tacit understanding of the industry as well as some models that describe it. So let’s dive in!

1. Define area, get lists
In my thesis I needed to understand “biotech companies in Norway”, I went to the business register and looked through the classifications that companies could choose from when they register the company. From this I chose (by using my preconceived notions) some classifications that may or may not contain biotech firms. The classifications included everything from "Research and development activities within biotechnology" to "Production of medical and tooth-technical instruments", as you can imagine some categories proved more relevant than others, but I’ll get back to that. Now I had a list of about 2000 companies, most probably not relevant since I included most categories that could be biotechnology.

This list of course can be anything; maybe you don’t want to look into a specific industry, but maybe a geographical area. If you want to start a company in your town, you could get a list of all companies in that town (however your dataset may be too big to actually get through) to understand what the major industries are and so forth.

2. Google, classify, sort, iterate
When I had the list, the next part was easy, I picked a category that I really believed in, "Research and development activities within biotechnology", started at the top and typed in each name in Google. The companies that have websites was easy, I just found somewhere it said in simple terms what they were doing and pasted it in next to the company name. For example the company Biosergen in Trondheim claims they are “a biotech company developing new drugs based on cutting edge biosynthetic engineering of natural products, combined with chemical synthesis”. Next to the “what we do” column I start making categories. This is where you should leave your assumptions at the door. Take the first two companies, and ask yourself “if I had to place both companies in a category what would that be”, for me it was “Biomaterials”, the third company then either fit’s in the category or needs a new category. After a few companies I realized this was not a good classification system, but by then I started understanding better, so I changed the categories. This is the iterate part of the process, change the categories.

The companies that do not have a website you can call and ask politely what it is they do, “Hey, I noticed you were classified as a --- company, but I can’t find your website. I was just wondering what field your company is in”. I noticed that I could do about 200 companies a day, and trust me, after a day or two you know the categories by heart and really gain an understanding of the industry that no SWOT or PESTEL analysis can give you. And if going through 2000 companies sounds like a lot, well, you are right, but over half of them were removed from the analysis because after 10 companies in the category I realized that I probably wouldn’t get any biotech companies from there. This of course depends on how thorough you need to be. If you have little time the try to spend a day, start with the most relevant category and just sample the rest, you still get a pretty good understanding of it all.

3. Model it
When you have worked for a while and are comfortable with your categories you should take a brake and define the categories you have come up with, then you start to see that some categories are overlapping or for some other reason should be better defined. For example for a while I operated with a category “Drugs” and a category “Therapy”, the distinction was really useless and I merged them, together with another category into “Treatment”. Other categories I ended up with was “diagnostics”, “research institution”, “services” and “supplements”. You should take the categories, define them properly, for instance “Treatment: Companies in this category are companies that a) at present or in the future will have as a core competency to treat ailment or b) facilitate that caregivers (such as doctors) use their products in order to give treatment or c) in any other way be a service provider based on their product that treats patients”. It is worth noting here that for my purpose I removed companies that weren’t based on biotechnology, because I was only really interested in that sector, not in for example hospitals.

Once you have the excel sheet with all the companies, sorted by category and with a short description of the company you can start modeling it. Make a box for each category, write down how many are in it, what they typically do, how big is this category, who are the biggest actors. Draw arrows and new boxes; try to make a model of the industry or area based on your analysis.

Extra tips and tricks:

• You can use several categories for each company, but from different sets. For example a company can be "Treatment" in one column and "Oslo" in another. But in each set of categories you need to be mutually exclusive, if one category is "Treatment" and one is "diagnostics", you don't want a company to be in both. Have mutually exclusive categories in each category "set", but feel free to use more sets based on different criteria.
• The initial list should be made thinking it's better to include companies that's not what I'm looking for, than to exclude companies that I am looking for.
• Many lists that you can get also contains more information that the name of the company that can be useful when modeling, such as location, revenue, year founded an d so on.
• If you are more people, try spending a few hours on your own classifying the first 100 companies, meet and see what categories you have come up with. Why do you have different categories? Which are best? Try then to classify the next 100 together using a system you have agreed on. If you still have companies to classify separate and do different companies, you now have a common understanding of the industry.
• Use this analysis before the swot or pestel or whatnot, the findings here can be valuable in understanding what it is you will do, and what topics you should look into in the other analysis.
• After modeling try to talk to people who work in the industry, how do they perceive it, do they agree with your understanding of the industry? Did you miss anything?

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Do I launch my product or do I develop it further?

As a start-up you will eventually end up in a situation where you have to make a choice; do you spend your last money on improving the product, or do you spend it on launching your product and marketing it? Most marketers will tell you that you should always have a perfect product (you see the “product” is one of the four P’s in marketing). But I disagree.

Imagine that you have $1000, but you are afraid it will get stolen, the only way to avoid this, it seems, is to buy a safe. Unfortunately the safe cost $1000. Would you buy the safe? The same concept applies here, do you make a fantastic product that no one will hear about or do you make a mediocre product that many hear about? I would chose the latter and then use the money I make to improve the product later. This will grow your company quicker. And let’s face it, you have no idea what the consumer want in a product anyway. Just face it.

This is of course assuming this is a new product to some extent, you probably don’t know what people want, even if you think you do. Edison started rolling out electricity at an alarming rate, the killer application, was of course electric light. This meant that when people first got electricity, the outlet was a socket that matched the light bulb, not the socket we know today. Little did Edison know that washing machines and electrical irons would come along and that a socket where you had to screw in the cord would become dangerous. Everything, as we know now, worked out well for Edison, but he had no idea what electricity was going to be, or how big it was going to be. Start rolling out your product, make money and adapt your product to the feedback you get, who knows, maybe the technical improvement you have in mind isn’t what you should improve at all?

I also talked to a former product developer at Phillips once, he now runs his own company. He explained that Phillips, and the other big ones, never launch with their best product. Launch with your number two, price it in the stars, and then when your sales decline, introduce the next generation at the same price and lower the price of the last generation. And never launch a new generation until the next is in a drawer somewhere ready to launch

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Crowdfunding: An Idea for a Business

I recently came across a guy named Gijsbert Koren from Netherlands, which introduced this idea of “crowdfunding” to me. He explains:

“Crowdfunding, inspired by crowdsourcing, describes the collective cooperation, attention and trust by people who network and pool their money together (via internet) in order to support efforts initiated by other people or organizations.”

Though his question was more in the direction of what could go wrong, I started thinking about it, and realized this could be made in to a lucrative business.

Mission: To bring together people that want to invest small amounts of money in entrepreneurial firms and entrepreneurs that need early stage funding.

Concept: A webpage with an auction-like system that allows entrepreneurs to post their business together with funding needs, and let small time investors “bid” on pieces of a company. For example an entrepreneur would say what his company was doing, at what stage it was, how much funds it needed, how much of the company it would be willing to give away for that amount and other relevant information. Let’s say he needed $50k and would be willing to give away 30 % of the company, an investor willing to invest $100 would then be able to post a bid for 0,06 % of the company. When and if the entrepreneur reached $50k, the bid (along with the other bids) would get accepted.

Business model
There are many ways to make money on this, some alternatives are:
- 1 % of the money invested or the of ownership of the start-up could be retained by the site
- 1 % of the returns could be retained by the site
- The site could provide services, like board members, to help develop the firms that are invested in
- Books and other relevant material could be sold in a related webshop (it is likely that not only those that use actual the services of the site would visit the site)
- Posting a firm could cost a small amount
- Placing bids could cost let’s say 0,1 % (so $10 out of $10 000 should be bearable)
- If you receive funding it cost 0,1 % of the funds received ($ 50 in the case above)
- Public support?

Marketing
Would you need investors or entrepreneurs first? And how would you reach and recruit them? This is of course a difficult issue, maybe you need some funds? (Can it be crowdfunded?) I’m sure that getting in touch with entrepreneurs should be easy enough, you can use personal contacts with incubators and such, most entrepreneurial districts have emerging technology funds, technology transfer offices and incubators that can point you in the right direction. Investors would maybe have to be reached through some sort of viral marketing? Or would ads in newspapers do for this kind of service?


Problems:
Some issues deserve some attention here, even if I don’t like to consider the problems the first day of a new idea.

How would you avoid scams?
In a small country like Norway it would be possible to only allow entrepreneurs to post after meeting them, and talking to them, a sort of due diligence light. In larger countries, like the US, this would of course be difficult, but maybe you would have to send in some paperwork or letters of recommendation?

How would investors get their returns?
A bid could be posted in a number of ways, the entrepreneur could say that he accepted that people would bid for the company, and get a share of it. That way, the investors would get dividends and profit from a potential exit. The entrepreneur could also chose to look for loans, that way the investors would get their money back at a certain date with the interest that was agreed upon. If there are 500 investors that has invested $100 each and they all have different terms, this could obviously offer some difficulties, this could be solved by the site acting as a proxy. Meaning, the site creates a fund for each entrepreneurial venture that gets funded and the site technically owns the small-investors part of the start-up. The dividends and money from the exit is then paid to the site, which forwards each parties money back to them.

How would the investors get a voice in the company?
If, as suggested in the previous part, the investors are represented by the company, board decisions could be done through a proxy that is the site. By investing through the site you agree that the site, as the technical owner, has a representative on board whose job is to represent the small investors.

But what about taxes?
These laws probably are different between countries, and I’m not an expert. I would however imagine that this would be double taxed, first a tax when the site collects dividends, and then a tax when each investor receives their money.

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Which products should you push first?

Walking past my local grocery store today I noticed a sign that that said “Ice cream. On sale.” Now for those of you from the warmer parts of the world let me underline the fact that I am from Norway and in Norway only a very special segment of the populations yearns for ice cream in December. It came to my mind that this grocery store probably had left over ice cream from the recently concluded ice cream season, which they were afraid would go bad if they didn’t sell it soon.  But was this really a good idea?

It occurred to me that if they advertised packets of instant hot chocolate instead they would sell much more extra units than if they sold boxes of ice cream. So I thought to myself, let’s assume that a packet of instant hot chocolate cost about the same and have approximately the same margins as ice cream, should they advertise for ice cream or hot chocolate? It is important to underline that if they sell one extra hot chocolate they would have to buy an extra one from the grocer while in the case of the ice cream they would have to throw away that which is not sold. Given that the price and margins for both goods are, well let’s say $5 and 20 %, we can see that only if the sign sells five times as many boxes of hot chocolate than ice cream the store should focus on selling hot chocolate. Let me explain that again.

Since the alternative to selling the ice cream is to throw them away, both the 20 % margin and the already spent 80 % purchase price counts as profit for the ice cream. If the store can sell 1 additional box of ice cream it makes $5, since the alternative is to throw away the box. If the store sells one additional carton of instant hot chocolate it only makes $1, because the alternative was to order less hot chocolate next week, and thus avoiding the $4 expense it would mean to buy an extra unit. Because of this the store should keep selling the ice cream if it is more than 20 % as effective as advertising for the instant hot chocolate. Also you shouldn’t throw food away.

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Google vs. Newspapers: Why Murdoch is right and why he will fail

Murdoch is right. By taking stories of Google, his customers will have to come to his site to read the news there. It has worked for Schibsted in Norway, but then again, they have a virtual monopoly on country wide news (at least a very high share). If more newspapers follow Murdoch, it will work for them to, but it is unlikely that it will work if only News Corp. Newspapers follow this practice. This may be viewed as a prisoner’s dilemma game. If no newspapers choose to have their news on Google, then the entire newspaper sector will benefit, because consumers will be forced to go directly to the sites they wish to read news from, and thus watch the ads, or pay for the content. However, in such a scenario each individual newspaper will benefit relative to the others should they choose to index their sites, because they might up their share of readers. Therefore it is likely that Murdoch will be alone outside of Google Search and Google News, and loose readers due to it.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

How to decide the size of your marketing budget? or Viewing marketing as an investment instead of cost let you make a better decision

I, and I suppose most of us, have often heard people asking questions along the line of “What is a reasonable marketing cost as a percentage of revenue?”, which is an interesting angle to determining marketing spending. I would argue that if marketing only represents a cost for you then you might as well cut it out. The purpose of marketing, as I am sure most people would agree, is to make more money. Thus, marketing should be viewed as an investment. Marketing as an investment is difficult to understand, partly because the long term effects are hard to measure.

I would pose that if you knew exactly how much you would have to spend in marketing to get one extra sale then you would be able to determine your marketing budget quite easily and logically. This however, to the dismay of many marketers, is a difficult and often impossible task. But if we stick to the economic assumption that the first marketing activity you buy is the one that gets you the highest yield/cost ratio, and when that resource is exhausted you move to the next best, then the marginal returns of marketing does decline. In this case the marginal ROI (the derivative of ROI)  will eventually reach a point in which adding extra money to marketing, is equal to adding that extra money to the second best investment (let’s say new production facilities, or a better webpage or whatever). Identifying this point is of course impossible for most businesses.

One way to approach logical thinking is to ask, if I add x money to the budget, how many more customers will that buy me? And if so, what happens if I add 2x, and so forth. Correspondingly, you should ask, if I don’t add x, what else could I use that money on, and how would that effect the value of my business? What if I remove x? The problem with this approach is that it may to some extent be based on a gut feeling rather than on actual performance metrics, in a scientific sense, but still this may be a better way to think about marketing. I would also like to note that the practice of assigning a given percentage of revenue, or budget or whatever to marketing is one that is widely criticized, because it does not look at what your business actually needs. The main lesson here is to think “what does that next dollar buy me?” and “what else could I have bought for that dollar?”.

Change happens when change is due

In April 3, 1984 the Norwegian police raid a man’s home in Gjøvik, near Oslo. The reason is that the man has admitted openly to watching foreign television channels through his satellite dish. In the years that followed a number of laws were lifted due to the realization that it was impossible to isolate Norway from the rest of the world.

In 2001 a program called Napster changed the way we consume music, In a major lawsuit effort, the record companies was able to take down Napster, but the damage had already been done. Hundreds of sharing applications was introduced, technologies that was supposed to make it difficult to track and get the file sharers. In our time the main target of the copyright industry has been the thepiratebay.org, and maybe they have succeeded, but it seems each time they cut of the head of this “monster” that is copyright infringement, two new grow out.

The Napster incident was nevertheless not the first move from the copyright industry to take down technology. In 1976, following Sony’s invention of the Betamax (later overtaken by VCR), there was an upheaval in Disney and Universal Studios that led to a lawsuit to shut down the technology. The argument was that this new technology could be used to copy movies and store them for later use, and this would surely be the end of the movie industry. Bear in mind that back then the major income sources of these companies was from theatres and from television, you couldn’t simply buy the movies. The US Supreme Court found that the technology could not be banned, because it could also have legal uses, and that copying a film to watch it later was “fair use”. Today this seems obvious, but the Supreme Court judges disagreed on the matter, and it was only by one vote that the lawsuit was rejected (the majority changed from 6-3 for the act to 5-4 against in the last minute). Today the largest single source of income from the movie industry is sales of video for home use (through DVD/Blue-ray), something that the movie industry couldn’t possibly have predicted.

In the cases listed above, new technology is viewed by the existing power structure as a source of social change, something that can make the old actors irrelevant. In all of the cases progress occurs without the support of those in power, but by the power of the people. Technological change is a wave moving across society, it has force, and powerful change cannot be stopped. Technological change will happen when the time is right. Instead of fighting change, business should embrace it, and try to think how they can be their best in the new environment. How do change in technology, in society, in consumers represent opportunities for your company?