Search results for: “startup”

  • Web vs Native

    When Steve Jobs first launched the iPhone in 2007, Apple’s perception of where the smartphone application market would move was in the direction of web applications. The reasons for this are obvious: people are familiar with how to build web pages and applications, and it simplifies application delivery.

    Yet in under a year, Apple changed course, shifting the focus of iPhone development from web applications to building native applications custom-built (by definition) for the iPhone’s operating system and hardware. While I suspect part of the reason this was done was to lock-in developers, the main reason was certainly the inadequacy of available browser/web technology. While we can debate the former, the latter is just plain obvious. In 2007, the state of web development was relatively primitive relative to today. There was no credible HTML5 support. Javascript performance was paltry. There was no real way for web applications to access local resources/hardware capabilities. Simply put, it was probably too difficult for Apple to kludge together an application development platform based solely on open web technologies which would get the sort of performance and functionality Apple wanted.

    But, that was four years ago, and web technology has come a long way. Combine that with the tech commentator-sphere’s obsession with hyping up a rivalry between “native vs HTML5 app development”, and it begs the question: will the future of application development be HTML5 applications or native?

    There are a lot of “moving parts” in a question like this, but I believe the question itself is a red herring. Enhancements to browser performance and the new capabilities that HTML5 will bring like offline storage, a canvas for direct graphic manipulation, and tools to access the file system, mean, at least to this tech blogger, that “HTML5 applications” are not distinct from native applications at all, they are simply native applications that you access through the internet. Its not a different technology vector – it’s just a different form of delivery.

    Critics of this idea may cite that the performance and interface capabilities of browser-based applications lag far behind those of “traditional” native applications, and thus they will always be distinct. And, as of today, they are correct. However, this discounts a few things:

    • Browser performance and browser-based application design are improving at a rapid rate, in no small part because of the combination of competition between different browsers and the fact that much of the code for these browsers is open source. There will probably always be a gap between browser-based apps and native, but I believe this gap will continue to narrow to the point where, for many applications, it simply won’t be a deal-breaker anymore.
    • History shows that cross-platform portability and ease of development can trump performance gaps. Once upon a time, all developers worth their salt coded in low level machine language. But this was a nightmare – it was difficult to do simple things like showing text on a screen, and the code written only worked on specific chips and operating systems and hardware configurations. I learned C which helped to abstract a lot of that away, and, keeping with the trend of moving towards more portability and abstraction, the mobile/web developers of today develop with tools (Python, Objective C, Ruby, Java, Javascript, etc) which make C look pretty low-level and hard to work with. Each level of abstraction adds a performance penalty, but that has hardly stopped developers from embracing them, and I feel the same will be true of “HTML5”.
    • Huge platform economic advantages. There are three huge advantages today to HTML5 development over “traditional native app development”. The first is the ability to have essentially the same application run across any device which supports a browser. Granted, there are performance and user experience issues with this approach, but when you’re a startup or even a corporate project with limited resources, being able to get wide distribution for earlier products is a huge advantage. The second is that HTML5 as a platform lacks the control/economic baggage that iOS and even Android have where distribution is controlled and “taxed” (30% to Apple/Google for an app download, 30% cut of digital goods purchases). I mean, what other reason does Amazon have to move its Kindle application off of the iOS native path and into HTML5 territory? The third is that web applications do not require the latest and greatest hardware to perform amazing feats. Because these apps are fundamentally browser-based, using the internet to connect to a server-based/cloud-based application allows even “dumb devices” to do amazing things by outsourcing some of that work to another system. The combination of these three makes it easier to build new applications and services and make money off of them – which will ultimately lead to more and better applications and services for the “HTML5 ecosystem.”

    Given Google’s strategic interest in the web as an open development platform, its no small wonder that they have pushed this concept the furthest. Not only are they working on a project called Native Client to let users achieve “native performance” with the browser, they’ve built an entire operating system centered entirely around the browser, Chrome OS, and were the first to build a major web application store, the Chrome Web Store to help with application discovery.

    While it remains to be seen if any of these initiatives will end up successful, this is definitely a compelling view of how the technology ecosystem evolves, and, putting on my forward-thinking cap on, I would not be surprised if:

    1. The major operating systems became more ChromeOS-like over time. Mac OS’s dashboard widgets and Windows 7’s gadgets are already basically HTML5 mini-apps, and Microsoft has publicly stated that Windows 8 will support HTML5-based application development. I think this is a sign of things to come as the web platform evolves and matures.
    2. Continued focus on browser performance may lead to new devices/browsers focused on HTML5 applications. In the 1990s/2000s, there was a ton of attention focused on building Java accelerators in hardware/chips and software platforms who’s main function was to run Java. While Java did not take over the world the way its supporters had thought, I wouldn’t be surprised to see a similar explosion just over the horizon focused on HTML5/Javascript performance – maybe even HTML5 optimized chips/accelerators, additional ChromeOS-like platforms, and potentially browsers optimized to run just HTML5 games or enterprise applications?
    3. Web application discovery will become far more important. The one big weakness as it stands today for HTML5 is application discovery. Its still far easier to discover a native mobile app using the iTunes App Store or the Android Market than it is to find a good HTML5 app. But, as platform matures and the platform economics shift, new application stores/recommendation engines/syndication platforms will become increasingly critical.

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  • The Goal is Not Profitability

    I’ve blogged before about how the economics of the venture industry affect how venture capitalists evaluate potential investments, the main conclusion of which is that VCs are really only interested in companies that could potentially IPO or sell for at least several hundred million dollars.

    One variation on that line of logic which I think startups/entrepreneurs oftentimes fail to grasp is that profitability is not the number one goal.

    Now, don’t get me wrong. The reason for any business to exist is to ultimately make profit. And, all things being equal, investors certainly prefer more profitable companies to less/unprofitable ones. But, the truth of the matter is that things are rarely all equal and, at the end of the day, your venture capital investors aren’t necessarily looking for profit, they are looking for a large outcome.

    Before I get accused of being supportive of bubble companies (I’m not), let me explain what this seemingly crazy concept means in practice. First of all, short-term profitability can conflict with rapid growth. This will sound counter-intuitive, but its the very premise for venture capital investment. Think about it: Facebook could’ve tried much harder to make a profit in its early years by cutting salaries and not investing in R&D, but that would’ve killed Facebook’s ability to grow quickly. Instead, they raised venture capital and ignored short-term profitability to build out the product and aggressively market. This might seem simplistic, but I oftentimes receive pitches/plans from entrepreneurs who boast that they can achieve profitability quickly or that they don’t need to raise another round of investment because they will be making a profit soon, never giving any thought to what might happen with their growth rate if they ignored profitability for another quarter or year.

    Secondly, the promise of growth and future profitability can drive large outcomesPandora, Groupon, Enphase, TeslaA123, and Solazyme are among some of the hottest venture-backed IPOs in recent memory and do you know what they all also happen to share? They are very unprofitable and, to the best of my knowledge, have not yet had a single profitable year. However, the investment community has strong faith in the ability of these businesses to continue to grow rapidly and, eventually, deliver profitability. Whether or not that faith is well-placed is another question (and I have my doubts on some of the companies on that list), but as these examples illustrate, you don’t necessarily need to be profitable to be able to get a large venture-sized outcome.

    Of course, it’d be a mistake to take this logic and assume that you never need to achieve or think about profitability. After all, a company that is bleeding cash unnecessarily is not a good company by any definition, regardless of whether or not the person evaluating it is in venture capital. Furthermore, while the public market may forgive Pandora and Groupon’s money-losing, there’s also no guarantee that they will be so forgiving of another company’s or even of Pandora/Groupons a few months from now.

    But what I am saying is that entrepreneurs need to be more thoughtful when approaching a venture investor with a plan to achieve profitability/stop raising money more quickly, because the goal of that investor is not necessarily short-term profits.

    Thought this was interesting? Check out some of my other pieces on how VC works / thinks

  • I Know Enough to Get Myself in Trouble

    One of the dangers of a consultant looking at tech is that he can get lost in jargon. A few weeks ago, I did a little research on some of the most cutting-edge software startups in the cloud computing space (the idea that you can use a computer feature/service without actually knowing anything about what sort of technology infrastructure was used to provide you with that feature/service – i.e., Gmail and Yahoo Mail on the consumer side, services like Amazon Web Services and Microsoft Azure on the business side). As a result, I’ve looked at the product offerings from guys like NimbulaClouderaClustrixAppistryElastra, and MaxiScale, to name a few. And, while I know enough about cloud computing to understand, at a high level, what these companies do, the use of unclear terminology sometimes makes it very difficult to pierce the “fog of marketing” and really get a good understanding of the various product strengths and weaknesses.

    Is it any wonder that, at times, I feel like this:

    Source: Dilbert

    Yes, its all about that “integration layer” … My take? A great product should not need to hide behind jargon.

  • Why Smartphones are a Big Deal

    A cab driver the other day went off on me with a rant about how new smartphone users were all smug, arrogant gadget snobs for using phones that did more than just make phone calls. “Why you gotta need more than just the phone?”, he asked.

    While he was probably right on the money with the “smug”, “arrogant”, and “snob” part of the description of smartphone users (at least it accurately describes yours truly), I do think he’s ignoring a lot of the important changes which the smartphone revolution has made in the technology industry and, consequently, why so many of the industry’s venture capitalists and technology companies are investing so heavily in this direction. This post will be the first of two posts looking at what I think are the four big impacts of smartphones like the Blackberry and the iPhone on the broader technology landscape:

    1. It’s the software, stupid
    2. Look ma, no <insert other device here>
    3. Putting the carriers in their place
    4. Contextuality

    I. It’s the software, stupid!

    You can find possibly the greatest impact of the smartphone revolution in the very definition of smartphone: phones which can run rich operating systems and actual applications. As my belligerent cab-driver pointed out, the cellular phone revolution was originally about being able to talk to other people on the go. People bought phones based on network coverage, call quality, the weight of a phone, and other concerns primarily motivated by call usability.

    Smartphones, however, change that. Instead of just making phone calls, they also do plenty of other things. While a lot of consumers focus their attention on how their phones now have touchscreens, built-in cameras, GPS, and motion-sensors, the magic change that I see is the ability to actually run programs.

    Why do I say this software thing more significant than the other features which have made their ways on to the phone? There are a number of reasons for this, but the big idea is that the ability to run software makes smartphones look like mobile computers. We have seen this pan out in a number of ways:

    • The potential uses for a mobile phone have exploded overnight. Whereas previously, they were pretty much limited to making phone calls, sending text messages/emails, playing music, and taking pictures, now they can be used to do things like play games, look up information, and even be used by doctors to help treat and diagnose patients. In the same way that a computer’s usefulness extends beyond what a manufacturer like Dell or HP or Apple have built into the hardware because of software, software opens up new possibilities for mobile phones in ways which we are only beginning to see.
    • Phones can now be “updated”. Before, phones were simply replaced when they became outdated. Now, some users expect that a phone that they buy will be maintained even after new models are released. Case in point: Users threw a fit when Samsung decided not to allow users to update their Samsung Galaxy’s operating system to a new version of the Android operating system. Can you imagine 10 years ago users getting up in arms if Samsung didn’t ship a new 2 MP mini-camera to anyone who owned an earlier version of the phone which only had a 1 MP camera?
    • An entire new software industry has emerged with its own standards and idiosyncrasies. About four decades ago, the rise of the computer created a brand new industry almost out of thin air. After all, think of all the wealth and enabled productivity that companies like Oracle, Microsoft, and Adobe have created over the past thirty years. There are early signs that a similar revolution is happening because of the rise of the smartphone. Entire fortunes have been created “out of thin air” as enterprising individuals and companies move to capture the potential software profits from creating software for the legions of iPhones and Android phones out there. What remains to be seen is whether or not the mobile software industry will end up looking more like the PC software industry, or whether or not the new operating systems and screen sizes and technologies will create something that looks more like a distant cousin of the first software revolution.

    II. Look ma, no <insert other device here>

    One of the most amazing consequences of Moore’s Law is that devices can quickly take on a heckuva lot more functionality then they used to. The smartphone is a perfect example of this Swiss-army knife mentality. The typical high-end smartphone today can:

    • take pictures
    • use GPS
    • play movies
    • play songs
    • read articles/books
    • find what direction its being pointed in
    • sense motion
    • record sounds
    • run software

    … not to mention receive and make phone calls and texts like a phone.

    But, unlike cameras, GPS devices, portable media players, eReaders, compasses, Wii-motes, tape recorders, and computers, the phone is something you are likely to keep with you all day long. And, if you have a smartphone which can double as a camera, GPS, portable media player, eReaders, compass, Wii-mote, tape recorder, and computer all at once – tell me why you’re going to hold on to those other devices?

    That is, of course, a dramatic oversimplification. After all, I have yet to see a phone which can match a dedicated camera’s image quality or a computer’s speed, screen size, and range of software, so there are definitely reasons you’d pick one of these devices over a smartphone. The point, however, isn’t that smartphones will make these other devices irrelevant, it is that they will disrupt these markets in exactly the way that Clayton Christensen described in his book The Innovator’s Dilemma, making business a whole lot harder for companies who are heavily invested in these other device categories. And make no mistake: we’re already seeing this happen as GPS companies are seeing lower prices and demand as smartphones take on more and more sophisticated functionality (heck, GPS makers like Garmin are even trying to get into the mobile phone business!). I wouldn’t be surprised if we soon see similar declines in the market growth rates and profitability for all sorts of other devices.

    III. Putting the carriers in their place

    Throughout most of the history of the phone industry, the carriers were the dominant power. Sure, enormous phone companies like Nokia, Samsung, and Motorola had some clout, but at the end of the day, especially in the US, everybody felt the crushing influence of the major wireless carriers.

    In the US, the carriers regulated access to phones with subsidies. They controlled which functions were allowed. They controlled how many texts and phone calls you were able to make. When they did let you access the internet, they exerted strong influence on which websites you had access to and which ringtones/wallpapers/music you could download. In short, they managed the business to minimize costs and risks, and they did it because their government-granted monopolies (over the right to use wireless spectrum) and already-built networks made it impossible  for a new guy to enter the market.

    But this sorry state of affairs has already started to change with the advent of the smartphone. RIM’s Blackberry had started to affect the balance of power, but Apple’s iPhone really shook things up – precisely because users started demanding more than just a wireless service plan – they wanted a particular operating system with a particular internet experience and a particular set of applications – and, oh, it’s on AT&T? That’s not important, tell me more about the Apple part of it!

    What’s more, the iPhone’s commercial success accelerated the change in consumer appetites. Smartphone users were now picking a wireless service provider not because of coverage or the cost of service or the special carrier-branded applications  – that was all now secondary to the availability of the phone they wanted and what sort of applications and internet experience they could get over that phone. And much to the carriers’ dismay, the wireless carrier was becoming less like the gatekeeper who got to charge crazy prices because he/she controlled the keys to the walled garden and more like the dumb pipe that people connected to the web on their iPhone with.

    Now, it would be an exaggeration to say that the carriers will necessarily turn into the “dumb pipes” that today’s internet service providers are (remember when everyone in the US used AOL?) as these large carriers are still largely immune to competitors. But, there are signs that the carriers are adapting to their new role. The once ultra-closed Verizon now allows Palm WebOS and Google Android devices to roam free on its network as a consequence of AT&T and T-Mobile offering devices from Apple and Google’s partners, respectively, and has even agreed to allow VOIP applications like Skype access to its network, something which jeopardizes their former core voice revenue stream.

    As for the carriers, as they begin to see their influence slip over basic phone experience considerations, they will likely shift their focus to finding ways to better monetize all the traffic that is pouring through their networks. Whether this means finding a way to get a cut of the ad/virtual good/eCommerce revenue that’s flowing through or shifting how they charge for network access away from unlimited/“all you can eat” plans is unclear, but it will be interesting to see how this ecosystem evolves.

    IV. Contextuality

    There is no better price than the amazingly low price of free. And, in my humble opinion, it is that amazingly low price of free which has enabled web services to have such a high rate of adoption. Ask yourself, would services like Facebook and Google have grown nearly as fast without being free to use?

    How does one provide compelling value to users for free? Before the age of the internet, the answer to that age-old question was simple: you either got a nice government subsidy, or you just didn’t. Thankfully, the advent of the internet allowed for an entirely new business model: providing services for free and still making a decent profit by using ads. While over-hyping of this business model led to the dot com crash in 2001 as countless websites found it pretty difficult to monetize their sites purely with ads, services like Google survived because they found that they could actually increase the value of the advertising on their pages not only because they had a ton of traffic, but because they could use the content on the page to find ads which visitors had a significantly higher probability of caring about.

    The idea that context could be used to increase ad conversion rates (the percent of people who see an ad and actually end up buying) has spawned a whole new world of web startups and technologies which aim to find new ways to mine context to provide better ad targeting. Facebook is one such example of the use of social context (who your friends are, what your interests are, what your friends’ interests are) to serve more targeted ads.

    So, where do smartphones fit in? There are two ways in which smartphones completely change the context-to-advertising dynamic:

    • Location-based services: Your phone is a device which not only has a processor which can run software, but is also likely to have GPS built-in, and is something which you carry on your person at all hours of the day. What this means is that the phone not only know what apps/websites you’re using, it also knows where you are and if you’re on a vehicle (based on how fast you are moving) when you’re using them. If that doesn’t let a merchant figure out a way to send you a very relevant ad, I don’t know what will. The Yowza iPhone application is an example of how this might shape out in the future, where you can search for mobile coupons for local stores all on your phone.
    • Augmented reality: In the same way that the GPS lets mobile applications do location-based services, the camera, compass, and GPS in a mobile phone lets mobile applications do something called augmented reality. The concept behind augmented reality (AR) is that, in the real world, you and I are only limited by what our five senses can perceive. If I see an ad for a book, I can only perceive what is on the advertisement. I don’t necessarily know much about how much it costs on Amazon.com or what my friends on Facebook have said about it. Of course, with a mobile phone, I could look up those things on the internet, but AR takes this a step further. Instead of merely looking something up on the internet, AR will actually overlay content and information on top of what you are seeing on your phone screen. One example of this is the ShopSavvy application for Android which allows you to scan product barcodes to find product review information and even information on pricing from online and other local stores! Google has taken this a step further with Google Goggles which can recognize pictures of landmarks, books, and even bottles of wine! For an advertiser or a store, the ability to embed additional content through AR technology is the ultimate in providing context but only to those people who want it. Forget finding the right balance between putting too much or too little information on an ad, use AR so that only the people who are interested will get the extra information.

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  • Innovator’s Delight

    Source: the book

    Knowing my interest in tech strategy, a coworker recommended I pick up HBS professor Clayton Christensen’s “classic” book on disruptive innovation: The Innovator’s Dilemma. And, I have to say I was very impressed.

    The book tries to answer a very interesting question: why do otherwise successful companies sometimes fail to keep up on innovation? Christensen’s answer is counter-intuitive but deep: the very factors that make a company successful, like listening to customer needs, make it difficult for successful companies to adopt disruptive innovations which create new markets and new capabilities.

    This sounds completely irrational, and I was skeptical when I first heard it, but Christensen makes a very compelling case for it. He begins the book by considering the hard disk drive (HDD) industry. The reason for this is, as Christensen puts it (and this is merely page one of chapter one!):

    “Those who study genetics avoid studying humans, because new generations come along only every thirty years or so, and so it takes a long time to understand the cause and effect of any changes. Instead, they study fruit flies, because fruit flies are conceived, born, mature, and die all within a single day. If you want to understand why something happens in business, study the disk drive industry. Those companies are the closest things to fruit flies that the business world will ever see.”

    From that oddly compelling start, Christensen applies multiple techniques to establish the grounds for his theory. He begins by admitting that his initial hypothesis for why some HDD companies successfully innovated had nothing to do with his current explanation and was something he called “the technology mudslide”: that because technology is constantly evolving and shifting (like a mudslide), companies which could not keep moving to stay afloat (i.e. by innovating) would slip and fall.

    But, when he investigated the different types of technological innovations which hit the HDD industry, he found that the large companies were actually constantly innovating, developing new techniques and technologies to improve their products. Contrary to the opinion of many in the startup community, big companies did not lack innovative agility – in fact, they were the leaders in developing and acquiring the successful technologies which allowed them to make better and better products.
    But, every now and then, when the basis of competition changed, like the shift to a smaller hard disk size to accommodate a new product category like minicomputers versus mainframes or laptops versus desktops, the big companies faltered.

    From that profound yet seemingly innocuous observation grew a series of studies across a number of industries (the book covers industries ranging from hardcore technology like hard disk drives and computers to industries that you normally wouldn’t associate with rapid technological innovation like mechanical excavators, off-road motorbikes, and even discount retailing) which helped Christensen come to a basic logical story involving six distinct steps:

    1. Three things dictate a company’s strategy: resources, processes, and values. Any strategy that a company wishes to embark on will fail if the company doesn’t have the necessary resources (e.g. factories, talent, etc.), processes (e.g. organizational structure, manufacturing process, etc.), and values (e.g. how a company decides between different choices). It doesn’t matter if you have two of the three.
    2. Large, successful companies value listening to their customers. Successful companies became successful because they were able to create and market products that customers were willing to pay for. Companies that didn’t do this wouldn’t survive, and resources and processes which didn’t “get with the program” were either downsized or re-oriented.
    3. Successful companies help create ecosystems which are responsive to customer needs. Successful companies need to have ways of supporting their customers. This means they need to have or build channels (e.g. through a store, or online), services (e.g. repair, installation), standards (e.g. how products are qualified and work with one another), and partners (e.g. suppliers, ecosystem partners) which are all dedicated towards the same goal. If this weren’t true, the companies would all either fail or be replaced by companies which could “get with the program.”
    4. Large, successful companies value big opportunities. If you’re a $10 million company, you only need to generate an extra $1 million in sales to grow 10%. If you’re a $10 billion company, you need to find an extra $1 billion in sales to grow an equivalent amount. Is it any wonder, then, that large companies will look to large opportunities? After all, if companies started throwing significant resources or management effort on small opportunities, the company would quickly be passed up by its competitors.
    5. Successful companies don’t have the values or processes to push innovations aimed at unproven markets, which serve new customers and needs. Because successful companies value big opportunities which meet the needs of their customers and are embedded in ecosystems which help them do that, they will mobilize their resources and processes in the best way possible to fulfill and market those needs. And, in fact, that is what Christensen saw – in almost every market he studied, when the customers of successful companies needed a new feature or level of quality, successful companies were almost always successful at either leading or acquiring the innovation necessary to do that. But, when it came to experimental products offering slimmer profit margins and targeting new customers with new needs and new ecosystems in unproven markets, successful companies often failed, even if management made those new markets a priority, because those companies lacked the values and/or processes needed. After all, if you were working in IBM’s Mainframe division, why would you chase the lower-performance, lower-profit minicomputer industry and its unfamiliar set of customers and needs and distribution channels?
    6. Disruptive innovations tend to start as inferior products, but, over time improve and eventually displace older technologies. Using the previous example, while IBM’s mainframe division found it undesirable to enter the minicomputer market, the minicomputer players were very eager to “go North” and capture the higher performance and profitability that the mainframe players enjoyed. The result? Because of the values of the mainframe players as compared with the values of the minicomputer players, minicomputer companies focused on improving their technology to both service their customer’s needs and capture the mainframe business, resulting in one disruptive innovation replacing an older one.

    The most interesting thing that Christensen pointed out was that, in many cases, established companies actually beat new players to a disruptive innovation (as happened several times in the HDD and mechanical excavator industries)! But, because these companies lacked the necessary values, processes, and ecosystem, they were unable to successfully market them. Their success actually doomed them to failure!

    But Christensen doesn’t stop with this multi-faceted and thorough look at why successful companies fail at disruptive innovation. He spends a sizable portion of the book explaining how companies can fight the “trappings” of success (i.e. by creating semi-independent organizations that can chase new markets and be excited about smaller opportunities), and even closes the book with an interesting “ahead-of-his-time” look (remember, this book was written over a decade ago!) at how to bring about electric cars.

    I highly recommend this book to anyone interested in the technology industry or even, more broadly speaking, on understanding how to think about corporate strategy. While most business books on this subject use high-flying generalizations and poorly evaluated case studies, Christensen approaches each problem with a level of rigor and thoroughness that you rarely see in corporate boardrooms. His structured approach to explaining how disruptive innovations work, who tends to succeed at them, why, and how to conquer/adapt to them makes for a fascinating read, and, in my humble opinion, is a great example of how corporate strategy should be done – by combining well-researched data and structured thinking. To top it all, I can think of no higher praise than to say that this book, despite being written over a decade ago, has many parallels to strategic issues that companies face today (i.e. what will determine if cloud computing on netbooks can replace the traditional PC model? Will cleantech successfully replace coal and oil?), and has a number of deep insights into how venture capital firms and startups can succeed, as well as some insights into how to create organizations which can be innovative on more than just one level.

    Book: The Innovator’s Dilemma by Clayton Christensen

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  • Tech Strategy 101

    Working on tech strategy consulting case for 18 months ingrains a thing or two in your head about strategy for tech companies, so I thought I’d lay out, in one blog post the major lessons I’ve learned about how strategy in the technology sector works.

    To understand that, it’s important to first understand what makes technology special? From that perspective, there are three main things which drive tech strategy:

    1. Low cost of innovation – Technology companies need to be innovative to be successful, duh. But, the challenge with handling tech strategy is not innovation but that innovation in technology is cheap. Your product can be as easily outdone by a giant with billions of dollars like Google as it can be outdone by a couple of bright guys in a garage who still live with their parents.
    2. Moore’s Law – When most technologists think of Moore’s Law, they think of its academic consequences (mainly that chip technology doubles every two years). This is true (and has been for over 50 years), but the strategic consequence of Moore’s Law can be summed up in six words: “Tomorrow will be better, faster, cheaper.” Can you think of any other industry which has so quickly and consistently increased quality while lowering cost?
    3. Ecosystem linkages – No technology company stands alone. They are all inter-related and inter-dependent. Facebook may be a giant in the Web world, but it’s success depends on a wide range of relationships: it depends on browser makers adhering to web standards, on Facebook application developers wanting to use the Facebook platform, on hardware providers selling the right hardware to let Facebook handle the millions of users who want to use it, on CDNs/telecom companies providing the right level of network connectivity, on internet advertising standards, etc. This complex web of relationships is referred to by many in the industry as the ecosystem. A technology company must learn to understand and shape its ecosystem in order to succeed.

    Put it all together, what does it all mean? Four things:

    Source: the book

    I. Only the paranoid survive
    This phrase, popularized by ex-Intel CEO Andy Grove, is very apt for describing the tech industry. The low cost of innovation means that your competition could come from anywhere: well-established companies, medium-sized companies, hot new startups, enterprising university students, or a legion of open source developers. The importance of ecosystem linkages means that your profitability is dependent not only on what’s going on with your competitors, but also about the broader ecosystem. If you’re Microsoft, you don’t only have to think about what competitors like Apple and Linux are doing, you also need to think about the health of the overall PC market, about how to connect your software to new smartphones, and many other ecosystem concerns which affect your profitability. And the power of Moore’s Law means that new products need to be rolled out quickly, as old products rapidly turn into antiques from the advance of technology. The result of all of this is that only the technology companies which are constantly fearful of emerging threats will succeed.

    II. To win big, you need to change the rules
    The need to be constantly innovative (Moore’s Law and low cost of innovation) and the importance of ecosystem linkages favors large, incumbent companies, because they have the resources/manpower to invest in marketing, support, and R&D and they are the ones with the existing ecosystem relationships. As a result, the only way for a little startup to win big, or for a large company to attack another large company is to change the rules of competition. For Apple, to win in a smartphone market dominated by Nokia and RIM required changing the rules of the “traditional” smartphone competition by:

    • Building a new type of user-interface driven by accelerometer and touchscreen unlike anything seen before
    • Designing in a smartphone web browser actually comparable to what you’d expect on a PC as opposed to a pale imitation
    • Building an application store to help establish a new definition of smartphone – one that runs a wide range of software rather than one that runs only software from the carrier/phone manufacturer
    • Bringing the competition back to Apple’s home turf of making complete hardware and software solutions which tie together well, rather than just competing on one or the other

    Apple’s iPhone not only provided a tidy profit for Apple, it completely took RIM, which had been betting on taking its enterprise features into the consumer smartphone market, and Nokia, which had been betting on its services strategy, by surprise. Now, Nokia and every other phone manufacturer is desperately trying to compete in a game designed by Apple – no wonder Nokia recently forecasted that it expected its market share to continue to drop.

    But it’s not just Apple that does this. Some large companies like Microsoft and Cisco are masters at this game, routinely disrupting new markets with products and services which tie back to their other product offerings – forcing incumbents to compete not only with a new product, but with an entire “platform”. Small up-and-comers can also play this game. MySQL is a great example of a startup which turned the database market on its head by providing access to its software and source code for free (to encourage adoption) in return for a chance to sell services.

    III. Be a good ecosystem citizen
    Successful tech companies cannot solely focus on their specific markets and product lines. The importance of ecosystem linkages forces tech companies to look outward.

    • They must influence industry standards, oftentimes working with their competitors (case in point: look at the corporate membership in the Khronos Group which controls the OpenGL graphics standard), to make sure their products are supported by the broader industry.
    • They oftentimes have to give away technology and services for free to encourage the ecosystem to work with them. Even mighty Microsoft, who’s CEO had once called Linux “a cancer”, has had to open source 20,000 lines of operating system code in an attempt to increase the attractiveness of the Microsoft server platform to Linux technology. Is anyone surprised that Google and Nokia have open sourced the software for their Android and Symbian mobile phone operating systems and have gone to great lengths to make it easy for software developers to design software for them?
    • They have to work collaboratively with a wide range of partners and providers. Intel and Microsoft work actively with PC manufacturers to help with marketing and product targeting. Mobile phone chip manufacturers invest millions in helping mobile phone makers and mobile software developers build phones with their chip technology. Even “simple” activities like outsourcing manufacturing requires a strong partnership in order to get things done properly.
    • The largest of companies (e.g. Cisco, Intel, Qualcomm, etc) takes this whole influence thing a whole step further by creating corporate venture groups to invest in startups, oftentimes for the purpose of influencing the ecosystem in their favor.

    The technology company that chooses not to play nice with the rest of the ecosystem will rapidly find itself alone and unprofitable.

    IV. Never stop overachieving
    There are many ways to screw up in the technology industry. You might not be paranoid enough and watch as a new competitor or Moore’s Law eats away at your profits. You might not present a compelling enough product and watch as your partners and the industry as a whole shuns your product. But the terrifying thing is that this is true regardless of how well you were doing a few months ago — it could just as easily happen to a market leader as a market follower (i.e. Polaroid watching its profits disappear when digital cameras entered the scene).
    As a result, it’s important for every technology company to keep their eye on the ball in two key areas, so as to reduce the chance of misstep and increase the chance that you recover when you eventually do:

    • Stay lean – I am amazed at how many observers of the technology industry (most often the marketing types) seem to think that things like keeping costs low, setting up a good IT system, and maintaining a nimble yet deliberate decision process are unimportant as long as you have an innovative design or technology. This is very short-sighted especially when you consider how easy it is for a company to take a wrong step. Only the lean and nimble companies will survive the inevitable hard times, and, in good times, it is the lean and nimble companies which can afford to cut prices and offer more services better than their competitors.
    • Invest in innovation – At the end of the day, technology is about innovation, and the companies which consistently grow and turn a profit are the ones who invest in that. If your engineers and scientists aren’t getting the resources it needs, no amount of marketing or “business development” will save you from oblivion. And, if your engineers/scientists are cranking out top notch research and development, then even if you make a mistake, there’s a decent chance you’ll be ready to bounce right back.

    Obviously, each of these four “conclusions” needs to be fleshed out further with details and concrete analyses before they can be truly called a “strategy”. But, I think they are a very useful framework for understanding how to make a tech company successful (although they don’t give any magic answers), and any exec who doesn’t understand these will eventually learn them the hard way.

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