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.

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.

"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 start a movement!

Many startups rely on word of mouth and so on. Maybe it’s even too many; at least VC’s would have us believe that you should do something else too. Because, more often than not, others might not be as excited about your product or company as you are. This being said, if you are going to start a movement around your product or service, or around an issue that you care about, it’s not as easy as you think. Look at this goodie from the internets (sic), and watch a real life case study of a movement starting up and catching on. I wonder if entrepreneurs that rely on word of mouth, viral marketing and communities have something to learn from this!


Talk: Derek Sivers: How to start a movement at TED 2010

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.

Story-telling as a way to convey meaning

Visions, or mantras or values have no meaning to people. Ask a random person what their company’s vision is and most people are blank. Visions, in my view, are usually the product of forced group efforts in companies that do team building activities once every two years. A company’s vision (or mantra or values) should justify its existence. How does your company make a difference in people’s lives? How is it meaningful?

Meaning exists between humans. Only when a business has a reason for existence does it have potential for meaning. Let me give an example: to me it seems Universal Records have no purpose; they don’t add value to society, and because of this I don’t care about them, they have no meaning to me. Thus, i don't care to buy their products. But how do companies, brands, organizations or products become important to us?

Let me tell you a story. There once was an African American boy. At the age of two this boy’s father dies, and the boy is left with only his mother to take care of him. His mother moves away to remarry, so his grandmother raises him, spending her every moment with the boy. At an early age, this boy earns a scholarship that will change his life; he gets in to a expensive private school. His hard work and the help from his grandmother lead him to Columbia University and later Harvard Law. The boy later becomes the first African American President of the United States. When this man said he had come a long way to change America, people believed him. This is really an epic story about a boy, victim to society, left alone by his parents, raised by his loving grandmother (to whom he often referred), that traversed the challenges in his way and rose to become a modern day icon. This is an icon I can care about, because it has meaning to me. Barack Obama has a vision – he wants change. And he has the stories to back it up. He is a story teller. 

I often hear people tell me that Barack Obama became president because he was on facebook and twitter. Let me tell you right now; that’s a misunderstanding. He became president because he could convey meaning through stories. As a part of an organization, or a company ask yourself “What justifies our existence and how do we create meaning in peoples lives?”.Only when you know why you do something, beyond reward, can you create actual meaning, and that is when you gain followers; be it customers, voters, employees or fan groups.