Business Models, New Blog and Missing Links

It's been a few weeks since I've posted any updates here, but for good reason. I'll tackle the title of this post in reverse order, so bear with me on where this is going.

Missing Links - For a while, I was using Fridays to post a set of links that I thought pointed to interesting topics that had relevance back to topics we covered in the MBA program, or pointed out future trends I thought my classmates would benefit from.  I've gotten behind on the weekly posts for a couple of reasons: [1] work has kept me busier than normal (not a good excuse, everyone is busy), [2] I'm finding that between Twitter and RSS feeds (mostly blogs) that I am starting to read and consume content in much different ways than just a few months ago and it's not as convenient to aggregate links. Too many concepts and ideas build off the other. I'll do my best to keep the links coming at least bi-weekly.

New Blog - While courses like Organizational Behavior and Leading Change were some of my least favorites during the program because they felt very theory-centric and terminology-centric, I'm finding their applicability to be some of the most important in my current business.  For example, in the IT industry there is a significant interest in a new paradigm called "Cloud Computing". Cloud Computing allows companies to continue to utilize computing and application resources to service their business needs, but it offers the ability to migrate IT from a CAPEX burden to a OPEX cost model that better aligns usage with needs. While most of the IT industry is debating the technologies to enable Cloud Computing, very few people are diving into the organizational changes that will be required to make this model a reality. So for that reason, I've decided to start a new blog called "Clouds of Change" to focus on the people and organizational elements required to make Cloud Computing successful for businesses. If you're interested in the discussion, or how it may impact your business, I invite you to visit the site.

Business Models - As I've mentioned before, one of my entrepreneurial projects is a new business called Gracely Girl Designs.  This is a business that my wife leads, focused on fun, unique, handmade clothing for children aged 1-10 years. The business is still only 6 months old and is a hybrid between an online eCommerce store and a physical store.  30 years from now, after I've retired, I will remember two distinct things from B-School: (1) In the long-run, it's very difficult to sustainably make $1 in profit (or any amount), (2) There is a HUGE difference between creating a great product and creating (and executing) a great business model.

The reason I bring this up is that we tend to get three types of comments from people at shows we attend. From shoppers we get lots of, "those are so cute, we love your designs". We also get plenty of, "do you think you could make me a ?"  From other vendors we often get, "hmm, do you make those yourself?" (wondering if they could make similar items).  We love the compliments and do create custom orders for unique sizes and color combinations, but we often find ourselves having to refer customers to other sources (eg. Etsy) for items that are outside of our target market. Those orders don't fit into our business model (for various reasons). And for other vendors we simply say "yes". Being a hybrid (online/physical) may or may not be the optimum business model in the long run, but we're using it today to allow us to build up the customer base in our local market. Our customers are often mother's of small children, a social network that lives to make recommendations to friends and accept new ideas. We also hope to leverage that to expand our footprint over time, which should drive the online portion of our business. We'll see, it may or may not work out as planned, but the size of the business allows us to rapidly experiment and adjust the model as customer demand changes.

Weekly Links (Week of Jan.4, 2010)

During our program, I used to annoy my classmates by constantly sending emails pointing to various links, stories and other content that related to the topics being discussed in class. In hopefully a less annoying manner, I plan to bring that content to this blog on a weekly basis.

One of the things Ram Baliga told us was that analytics would become one of the cornerstone technologies that MBA's should master in the 21st century. Here is a good write-up on the proliferation of data that is now available for analysis and how it will shape the future of business.

With Chet Miller we evaluated various employee evaluation models, including GE's A-B-C player model. This link explores NetFlix model of trying to hire, retain and compensate almost all "A" players and whether or not that is a good thing.

Following up from our case discussion about NetFlix and their eventual migration to a streaming model. Many elements at play here: short-term vs. long-term profits; customer input vs. decisions that lead to eventual business model changes; decisions that could lead to loses due to digital piracy or alternative models solving a customer demand.

This article explore the Nexus One phone from Google, in the context of how it will impact Google's overall strategy. VC Brian Gurley does an excellent job of looking at the broader impact of this device, but more importantly the strategic impact of the new business model. The Nexus One was an area of highlight in the final Global Strategy paper that I wrote with Ric Freeman and Wendy Perry.

Here's another Nexus One link that follows-up some of the cases we analyzed, including strategic challenges for HTC, Taiwan Semi-Conductor and Google. At least within the technology world, the spread of coopetition and partner/rival scenarios will continue to expand as the value chain is twisted in all sorts of new ways.

Stan Mandel taught us the underlying structures for funding and operating and entrepreneurial venture, but more so he focus on the mindset needed to be a successful entrepreneur. VC/Entrepreneur Mark Suster explorers his views of the characteristics of successful entrepreneurs.

Open Technology

Recently, Google posted a blog where they provided Google's definition of "open". In that post, there was an interesting section about how open systems can be viewed by people with traditional MBA training.

"To understand our position in more detail, it helps to start with the assertion that open systems win. This is counter-intuitive to the traditionally trained MBA who is taught to generate a sustainable competitive advantage by creating a closed system, making it popular, then milking it through the product life cycle. The conventional wisdom goes that companies should lock in customers to lock out competitors...."

Most of my working career has been centered around an "Internet DNA", so maybe I'm overly biased, but this is a comment that I made to my classmates time and time again as we studied different scenarios and cases during our program. The numbers are fine, and thorough analysis is necessary, but too many times it leads to decisions that don't result in driving new customer value. It results in decisions that create short-term advantages, or temporary "wins", but it often misrepresents whether or not a company is truly prepared to be competitive in the market, and how they can position themselves for the next opportunity.

The 21st century is not going to be about long-term sustainable advantages. Advantages will be short-lived, and the companies that survive and succeed will be those with a open mindset that encourages competition. Competition drives innovation.

Competition also makes some people &/or companies uncomfortable because they were built around an inflexible model, or one that doesn't allow for radical changes in the market structure. Google is an excellent example of a company that is constantly trying to change the dynamics of markets. They are not always right, and actually fail quite often, but their culture and business are built on the foundation of competition. Many companies would do themselves a favor by studying Google and adopting their mindset to open systems.

Free'er than Freemium, "hmm....BUT...."

I've written about Freemium several times before, discussing it's impact on existing markets and incumbent companies in several industries. Brian Gurley (Partner, Benchmark Capital) does an excellent job explaining how Google is further leveraging their mobile services like StreetView to further move into Mobile Advertising.

As an MBA student, Google is an interesting company to study and analyze. On one hand, so many of their projects are difficult to apply typical MBA skills to (NPV, Cash Flow analysis, etc.) because they are fundamentally experiments, and they make not drive direct revenues. On the other hand, their ability to expand upon their core strategy of "organize all the world's information" is incredibly interesting to follow. It is a massive concept that has so many possibilities, but I suspect it only works within a culture that allows large amounts of freedom to explore "crazy" ideas.

Having a cash cow like AdSense or AdWords obviously makes it a little easier to fund and maintain the Google culture, but it still requires employees and managers to take huge risks. Personal risks, technology risks, strategy risks.

I'm trying to imagine what a conversation at Google a few years ago might have gone like:

Employee: Mobile devices are going to take off and people will consume huge amounts of data on them someday.

Manager: Agreed. We should figure out ways to accelerate this, as we could drive ads to their mobile devices.

Employee: My kid was reading about Lewis & Clark the other day. We should try and be the world's source for mapping information.

Manager: But what can we do interesting with maps?

Employee: Eliminate paper maps. Make maps that move with the touch of a finger. Show live traffic overlaid on a map. Street-level views. Open it up to any location-based service (voting, gatherings, flu outbreaks, restaurant listing, etc..)

Manager: How might we do that, besides buying mapping data?

Employee: What if we had a fleet of cars that drove around the country with a camera on the back? We could pay high-school kids, college kids, starving artists, or anyone willing to drive around?

What would your manager have said at that point in the conversation? Would it have started with something like, "Hmm, interesting.....BUT....". I suspect that in most companies it would. At Google, I doubt there are many "hmm....BUT...." moments when ideas are being formulated.

Imagine the possibilities at your company if you had the ability to hire really smart people and not feel like you had to "hmm..BUT..." them all day long.

Entering New Markets - Gathering Ground Level Information

One of the areas that we've been focused on in our International Business course has been the challenges that many companies have when they attempt to move into foreign markets, often assuming that knowledge from their home country will translate into the new market.

As companies send people forward into a country to start doing market research, this is a simple way to get very raw reactions to your concept. The beauty of this is that it's incredibly simple, incredibly inexpensive, and doesn't hide the human element behind a bunch of summarized numbers (or biases). This could be collected and frequently sent back to the product or strategy teams to give them data points to make adjustments to their original plans.

It's Difficult to Focus on Multiple Things at the Same Time

As the Germans learned in WWII, after bombing Pearl Harbor, it is very difficult to fight a competitive battle on multiple fronts. Valuable resources get spread too thin. The best people aren't all aligned to a common strategy. Communications becomes more difficult.

The recent Google Chrome OS announcement is going to create an interesting battle for a number of reasons:

• Technology innovation (Desktop OS vs. an Internet OS)
• Freemium vs. Premium Pricing Models
• How many battles can either company sustain and still be successful in their core businesses?
• How much is Google willing to put into their non-search businesses in order to keep Microsoft from gaining traction in search?
• How much is Microsoft willing to put into Core OS (Windows) or the Internet version (lower margins) to maintain those cash flows?

And of course the most important question for MBA students - do each of these projects create a positive NPV? (ok, being sarcastic)

It must be fun to sit in the war rooms of either Google or Microsoft and plot how to block or take the other guys market (on a huge scale). Of course we do need to continually ask ourselves, are any of these actions add real value to their customers, or are they potentially opening themselves up to new competition?

Freemium Marketing Strategy (and Business Model)

Our assignment for this week's StratMktg class was to define one of our favorite marketing strategies, which would then be aggregated by Dr.Narus and put into a single "book" for us to take away from class. I selected "Freemium", which is sort of a hybrid between a Business model and a Marketing strategy. Below is a copy of the paper I submitted.

I used Google's various free applications (Search, GMail, Maps, News, Reader) as an example of using "free" to drive other aspects of their business (AdWords). Perfectly valid example that people can easily understand. If I had this project 6-12 months from now, I probably would have used a Twitter example.

Freemium

Contributor: Brian Gracely

Source of Strategy: Chris Anderson, Free: The Future of a Radical Price, (Hyperion; July 2009). ISBN-10: 1401322905

Type of Strategy: Market Growth

Description of Strategy: With the growth of Internet devices and users, the demand for online services continues to rapidly expand. Due to the relatively low cost of entry into the marketplace, online services must growth their customer acquisition counts at tremendous rates to avoid users switching to another service. Initially offering the service free ensures that the user does not have to make an initial value decision before joining. Once a large population of users become active and perceives value, the opportunity to offer premium (paid) services becomes a possibility. In addition to user-paid revenues, additional partnership opportunities are available to online companies that provide a service that allow adjunct services (advertising) to be created around the user community.

When to Use This Strategy: Freemium is a marketing strategy that has been deployed by Internet-based companies since 2004, and is synonymous with the term “Web 2.0”. The primary concepts of Freemium are:

• Extremely low customer acquisition and transaction costs due to web-only assets. These low costs allow the strategy to address both mass markets and niche markets under the same cost structure.

• Basic services are provided free to customers.

• The company allows numerous opportunities for the services to be expanded by the users, allowing viral growth through user-centric marketing.

• The company allows numerous opportunities for the services to be interlinked with partners to create “mashed up” new services that can be co-branded and cross-promoted.

• Revenues can be generated through premium versions of the basic service, through online advertising, or through various types of partnership programs.

In most successful Freemium models, only 2-3% of the users need to engage in revenue services in order to break-even or become profitable.

Example(s): In 2009, Twitter has become the poster child for Freemium. Having grown it’s user count 1900% over the past year to 10M, with a staff of just 35 people, it is now beginning to introduce revenue models targeted at advertisers, business users and local media. A private company, Twitter has gotten buyout offers of $500M from Facebook and $1B from Google.

From 2006-2009, Google was the best example of a Freemium and Reverse-Freemium model. Google initially offered their search without ads (free to users, no revenues), but soon added AdWords to generate tremendous revenues. They then added free services (GMail, Maps, News, Reader) to generate more content that could be monetized through advertising revenues.

Positive NPV vs. "The Best use of Corporate Capital"..?

Fred Wilson's recent post about Google's VC business highlights a discussion we been having in our FinMgmt course, which overlapped discussions in both ITMgmt and StratMktg. It's one thing for Venture Capital firms to take on the risk associated with start-ups, but well does that risk-management and strategic-planning work for corporations that are trying to identify positive NPV projects to create value? Should you measure activities that attempt to drive Disruptive Technologies in the same way that you measure Sustaining Technologies?

One of the comments highlights an interesting paper from Michael Porter (HBS), who is frequently referenced in our FinMgmt readings:

"A study of the diversification records of 33 large U.S. companies from 1950 to 1986 shows that diversification--whether through acquisition, joint venture, or start-up--generally has not brought the competitive advantages or profitability expected. Portfolio management, restructuring, transferring skills, and sharing activities are four concepts of corporate strategy that companies most commonly use. Portfolio management no longer works very well in the United States because of its highly developed capital market. Restructuring is merely a stopgap measure that will not build shareholder value over the long term because it usually produces an unwieldy conglomerate. Companies have the best chance of being successful at diversification if they capitalize on the existing relationships between business units by having them transfer skills and share activities."

"Everything in Moderation...Including Moderation"

I've got to apologize in advance for this one, because it has no business being a blog post. It has the potentially to be long, confusing, and maybe not terribly well thought out. I try not to let this blog be a diary, but this one could turn out to be like a notepad capturing a bunch of ideas that I'm trying to piece together in my head.

Before I get started, I should explain the title of this post. I have a family friend that uses the phrase every time we talk about something that goes out of control. I like it because it's simple to remember, and it forces me to take a long-term view on things. It enforces the value of strong fundamentals and being well-rounded, but also encourages risk-taking and exploration within the framework of moderation.

One of the things that I've been thinking about frequently this semester is the idea of value creation, and how to sustain that over long periods of time in the face of growing short-term pressures (profitability, competition, etc.). When the world collapses upon itself because people and companies create artificial value, it becomes an interesting time to look for examples of companies that didn't get crushed and what discipline they used to avoid the mess.

Amazon is a great example of a company that takes very long views of their business, and allows those goals to drive their strategy and decision-making. Back in 2002-2005, Amazon's stock price took a beating after the DotCom bubble burst. They were widely criticized for making major investments that wouldn't pay off for years, and even then were considered very risky. But CEO Jeff Bezos continued to state that his strategy of innovation would allow them to grow in the long-run, and that he would essentially ignore short-term shareholder sentiment in order to execute his plans and go after new market-share.

But what about the shareholders? Aren't they supposed to come first in the outputs of a leader's decision making? How do you measure the patience they should have for curiosity around innovations? How do you get approval for those project which only have positive NPV's if the 100:1 scenario succeeds, and it's success depends on a market, business-model or technology that doesn't exist yet?

Amazon got through the mid-2000's and is now executing very well, and has expanded into several new markets which were not on anyone's radar screen in 2002. And even now, Bezos' need for continued exploration is driving a new phase of innovation.

By employing the philosophy and methods of kaizen across the organization, as Bezos does at Amazon, does this imply that we're going to hit more singles and doubles that home-runs? Home-runs get on ESPN SportsCenter, but they also are frequently associated with strike-outs. Do home-runs and strike-outs give us a better chance of long-term survival and success, or does a high on-base-percentage of singles and doubles lead to greater long-term success?

It's a difficult question to answer. Managers and Entrepreneurs get caught up in the spotlight of IPO's, big bonuses and buy-outs. But is it truly creating value? Andy Grove, former CEO of Intel, recently commented on today's Silicon Valley entrepreneurs and their lack of long-term thinking on building companies and value creation.

As I stated at the top of the post, I knew this wasn't going to be well organized or come to clear conclusions. It's just a set of examples and ramblings as I try and pull together my thoughts on the mindset needed to come out of these challenging economic times. It's the tradeoffs between Shareholders and Stakeholders. Between investing in innovation and investing in concepts that are believed to have positive NPV (in some known time period, using known business models). Between the agency conflict of long-term company values and near-term manager goals.

OK, I'll end it here for tonight. Lots of other work to get done. I'm sure I'll come back to these notes and thought-process at a later time, when I've got more examples from both sides.

"Google devalues everything it touches"

One of my classmates, Domingo Isasi, runs Que Pasa Media.  Que Pasa operates for hispanic customers in North Carolina.  Domingo and I have had several conversations about news media and how the Internet is changing its form and economics around the world.  One of the great things about the MBA program is getting first hand experience from classmates.

Charlie Rose recently hosted a discussion of online value for newspapers, which touches on a number of the challenges they are facing, including:

1. How to get people to pay for content once they can get similar content (or reblogged content) online for free.
2. The challenge of trying to convey value to customers that probably didn't truly think about value before, since there weren't easy alternative options to get news before the internet (that's simplified, I know).
3. How all of these news creating sources (newspapers, magazines, blogs, video-blogs, microblogs) will be able to survive with only advertising revenues, especially given how Google is driving down CPMs.
4. Is it a good thing that Google seems to be one of the few companies making money around news, while the newspapers fail?   Or is this just the next phase of Darwinian evolution and new models will emerge?
   
5. What role do local newspapers (or local media outlets) play in the bigger picture?  Are people willing to pay for that local content in order to feel connected with communities? (this is Que Pasa's business).

There are many more aspects of this, and it will be interesting to see how it plays out over the next 3-5 years.  While maybe not as economically impacting as the banking challenges, I think it's equally important to see some controlled survival.  I'm pulling for the local newspapers, both because of my past employment and for the experiences of my children, whom I hope enjoy reading for pleasure and knowledge just as much as I do.  

As an aside, maybe this is a good excuse to teach myself (and my children) Spanish, so we can follow the local news via Que Pasa, and I can help support a classmate!  

5 Ideas for Facebook to make money - Part I

As an avid Facebook user, and following the recent trend to make lists, I thought it would be fun to come up with some ideas to help Facebook make money in 2009. Their user-base is seeing rapid growth again, but they are still struggling to monetize all that user data. For the sake of time, I thought I'd condense this list down to 5 things.

Many of these ideas are based on the growing number of 30-40 somethings that are joining. These folks use it as a distraction from their existing lives, or as a way to keep in touch with old friends, or to remember happier times.

Idea #1 - Charge for usage. $9.99/year. Millions of people pay that much for a month of NetFlix, or a day's worth of Starbucks. There's $1.6B in revenue (at 160M users).

Plenty of people will say that violates the spirit of what allowed Facebook to grow, which was the Freemium business model that gained popularity in 2005-2008, with the rise of many Web 2.0 companies. Fair enough, but how many of those companies are going to survive the latest economy crisis? And by survive, I'm really talking about being a long-term business entity, not selling out to Google, Yahoo, Microsoft or some other large internet company. Let's think in terms of truly building a business, not an exit strategy.

At some point, Facebook needs to be able to ask their users (directly or hypothetically), "if we were gone tomorrow, would you miss the service?" If the answer is "No", then charging a usage fee is dead. If the answer is "Yes", then you have a very viable starting point to explore a fee.

I have some ideas about how they would create the inflection point for making the change from Freemium / Ad-Supported to Fee-Supported, but I'll hold off on those for another post. I think 2009 is going to be an interesting year to see how some of these models survive and also how create they get with revenue models.

[NOTE - As I mentioned before, it's good to put large numbers in perspective.  Facebooks existing user base (160M) is equivalent to 52% of the US population; is equivalent to 73% of US broadband users; is equivalent to 10% of worldwide broadband users.  Needless to say, there is a lot of growth potential for Facebook worldwide.]

Plagarism or Open Information?

One of the great things about today's Internet is the free flow of information.  Combined with things like Google search and various mashable technologies, companies are finding new ways to utilize the vast amounts of information that exists freely on the Internet.  

This evening, I had an interesting experience.  While surfing to cnn.com, I was greeted by this cover story.  I appreciated them trying to bring attention to something that seemed to be slipping past people.  I agreed with the concept so much, that I wrote about it the day before.

Maybe it was a complete coincidence.  Maybe we both had the same thought while riding the bike in the gym, and their publishing process took longer than mine did.  Or maybe they got inspired by my viewpoint.  Who knows.  It doesn't matter.  What I need to realize (and remember) is that we're all better off because information is free flowing.  Ideas can get created anywhere, get modified anywhere, and hopefully become something bigger and better somewhere down the road.  

It also means that you better have a plan in place (and wheels in motion) if you ever want to make any money off those ideas.  

How would Google change Detroit?

In this week's BusinessWeek, they ran an article that looked at how Google might approach the challenges of the Big 3 automotive companies in Detroit.  It was based on an excerpt from a new booked called "What Would Google Do?", by Jeff Jarvis.  I have written about this book before, but hadn't had a chance to read any of it prior to this article.  

After looking through the article, I was glad that many of the concepts aligned with some of the ideas I had written about in a previous Decision of the Week.

At first blush, the idea of open collaboration for product design probably sounds completely foreign to most people that work in industries where that information is closely guarded.  But as we're beginning to see with many industries, the pace of change is forcing them to look for more ways to solve problems.  I'd be interested to hear how my classmates think their companies could benefit from open collaboration with their customers, partners or even competitors  to solve their most critical challenges.  

Connect the Dots - Unlimited Inventory

In a previous post, I wrote about the struggles I've had in trying to grasp some of the production concepts in my OpsMgmt class.  It's not that the idea of building something in a factory was foreign to me, but there was just something that wasn't clicking.  And I couldn't figure out what it was.

This afternoon, I came across this Hal Varian video.  Dr. Varian is the Chief Economist at Google, and a Professor of IT at Cal Berkeley.  In one of the segments, he talked about the production of "goods" in a digital economy.  His explanation of how these goods were made up of bits flipped a switch in my head.  That was it, that was the thing that had been my mental block for the last couple of weeks. I've become so ingrained with the thinking of everything being online and digitized, I've become somewhat immune to the realities of creating physical goods.  I live in a digital world, and so I've adapted my way of thinking to center around bits. And as he states below, "..there is no shortage....and there is no inventory" 

"The great thing about the current period is that component parts are all bits. That means you never run out of them. You can reproduce them, you can duplicate them, you can spread them around the world, and you can have thousands and tens of thousands of innovators combining or recombining the same component parts to create new innovation. So there’s no shortage. There are no inventory delays."

One of the things I constantly have to remind myself about the MBA program is that it's not just to make me think about my current environment.  It's to also make me think about different or unknown environments.  This is one of those areas.  I just need to keep reminding myself that these two worlds run in parallel, and finding interesting and productive ways to have them intersect is the challenge.  

Connect the Dots - Activity Based Costing (ABC) and Web Computing

Wow, this Obama guy really is promoting change....2 posts about accounting in less than 2 weeks!!  

This article shows how a software developer created a model that leverages cloud computing (Google AppsEngine, Amazon S3, Twitter), which is driving new computing and business models, and embedded Activity Based Costing (ABC).  ABC is one of the early focus areas of our MgmtAcct class this semester.

So instead of having silos between the production groups and the accounting groups, it's tightly integrated via software that is open to all developers and all customers.  

While this is a small example, it does create an interesting blurring between IT, Ops/Production and  Accounting, especially when you start thinking about the business opportunities that happen when companies leverage the cloud and open development environments.