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Graying

Businesses need to see the trends that will affect their performance, whether they be technical trends, business model trends, or economic trends. One trend which I haven’t seen as many companies factor in (although you see many governments talking about it) is age demographics.

Here is a very cool graph on how US population demographics will evolve over time as taken from the Calculated Risk blog (HT: Jeff L). In particular, I find the “Baby Boom” bulge (the wave of youngsters that came of age beginning from 1950-1970) moving towards the right to be very illuminating:

population

It highlights a trend which Japan is only beginning to grapple with – the “graying” of the American population that comes with the Baby Boomers becoming older. If Japan is any indication, that means the US will see a few things:

  • Rise in pension/Social Security costs and payments for care for the elderly
  • Decline in average wages as fewer lower-paid and younger workers replace more retiring higher-paid workers
  • Socio-economic changes that come from a smaller working-class population which needs to support a larger elderly population
  • Change in the political system as a balance will be sought between a growing importance in the elderly vote and the need for governments/companies to change the pension/healthcare payment balance and the ability of medical science to extend the workable years for elderly individuals
  • Change in business world as the elderly become more tech-savvy and become a more significant piece of the consumer population

If I were a business-owner looking at the long-term, I’d be looking long and hard at this list, and making investments into understanding how to convert these broad social/economic/political trends into insights which I can use to create a competitive advantage. For instance, if I were working in corporate strategy at Facebook, I’d be thinking of:

  • ways to make the site more attractive for the new generation of tech-savvy elderly
  • how to make my social network asset more valuable for elderly users (e.g. ways to make it easier to connect with old friends or family, ways to create mentoring relationships between older, more experience users and younger, less experienced ones, etc)
  • how to get useful ads that the elderly are more likely to pay attention to

(Image credit)

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Innovator’s Delight

imageKnowing 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.”

image 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.

image 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

(Image credit: hard disk drive) (Image credit: David and Goliath)

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HotChips 101

image This post is almost a week overdue thanks to a hectic work week. In any event, I spent last Monday and Tuesday immersed in the high performance chip world at the 2009 HotChips conference.

Now, full disclosure: I am not electrical engineer, nor was I even formally trained in computer science. At best, I can “understand” a technical presentation in a manner akin to how my high school biology teacher explained his “understanding” of the Chinese language: “I know enough to get in trouble.”
But despite all of that, I was given a rare look at a world that few non-engineers ever get to see, and yet it is one which has a dramatic impact on the technology sector given the importance of these cutting-edge chip technologies in computers, mobile phones, and consumer electronics.

And, here’s my business strategy/non-expert enthusiast view of six of the big highlights I took away from the conference and which best inform technology strategy:

  1. image We are 5-10 years behind on the software development technology needed to truly get performance power out of our new chips. Over the last decade, computer chip companies discovered that simply ramping up clock speeds (the Megahertz/Gigahertz number that everyone talks about when describing how fast a chip is) was not going to cut it as a way of improving computer performance (because of power consumption and heat issues). As a result, instead of making the cores (the processing engines) on a chip faster, chip companies like Intel resorted to adding more cores to each chip. The problem with this approach is that performance becomes highly dependent on software developers being able to create software which can figure out how to separate tasks across multiple cores and share resources effectively between them – something which is “one of the hardest if not the hardest systems challenge that we as an industry have ever face” (courtesy of UC Berkeley professor Dave Patterson). The result? Chip designers like Intel may innovate to the moon, but unless software techniques catch up, we won’t get to see any of that. Is it no wonder, then, that Intel bought multi-core software technology company RapidMind or that other chip designers like IBM and Sun are so heavily committed to creating software products to help developers make use of their chips? (Note: the image to the right is an Apple ad of an Intel bunny suit smoked by the PowerPC chip technology that they used to use)
  2. Computer performance may become more dependent on chip accelerator technologies. The traditional performance “engine” of a computer was the CPU, a product which has made the likes of Intel and IBM fabulously wealthy. But, the CPU is a general-purpose “engine” – a jack of all trades, but a master of none. In response to this, companies like NVIDIA, led by HotChips keynote speaker Jen-Hsun Huang, have begun pushing graphics chips (GPUs), traditionally used for gaming or editing movies, as specialized engines for computing power. I’ve discussed this a number of times over at the Bench Press blog, but the basic idea is that instead of using the jack-of-all-trades-and-master-of-none CPU, a system should use specialized chips to address specialized needs. Because a lot of computing power is burnt doing work that is heavy on the mathematical tasks that a GPU is suited to do, or the signal processing work that a digital signal processor might be better at, or the cryptography work that a cryptography accelerator is better suited for, this opens the doorway to the use of other chip technologies in our computers. NVIDIA’s GPU solution is one of the most mature, as they’ve spent a number of years developing a solution they call CUDA, but there was definitely a clear message: as the performance that we care about becomes more and more specialized (like graphics or number crunching or security), special chip accelerators will become more and more important.
    image
  3. Designing high-speed chips is now less and less about “chip speed” and more and more about memory and input/output. An interesting blog post by Gustavo Duarte highlighted something very fascinating to me: your CPU spends most of its time waiting for things to do. So much time, in fact, that the best way to speed up your chip is not to speed up your processing engine, but to speed up getting tasks into your chip’s processing cores. The biological analogy to this is something called a perfect enzyme – an enzyme that works so fast that its speed is limited by how quickly it can get ahold of things to work on. As a result, every chip presentation spent ~2/3 of the time talking about managing memory (where the chip stores the instructions it will work on) and managing how quickly instructions from the outside (like from your keyboard) get to the chip’s processing cores. In fact, one of the IBM POWER7 presentations spent almost the entire time discussing the POWER7’s use and management of embedded DRAM technology to speed up how quickly tasks can get to the processing cores.
  4. Moore’s Law may no longer be as generous as it used to be. I mentioned before that one of the big “facts of life” in the technology space is the ability of the next product to be cheaper, faster, and better than the last – something I attributed to Moore’s Law (an observation that chip technology doubles in capability every ~2 years). At HotChips, there was a imagefascinating panel discussing the future of Moore’s Law, mainly asking the question of (a) will Moore’s Law continue to deliver benefits and (b) what happens if it stops? The answers were not very uplifting. While there was a wide range of opinions on how much we’d be able to squeeze out of Moore’s Law going forward, there was broad consensus that the days of just letting Moore’s Law lower your costs, reduce your energy bill, and increase your performance simultaneously were over. The amount of money it costs to design next-generation chips has grown exponentially (one panelist cited a cost of $60 million just to start a new custom project), and the amount of money it costs to operate a semiconductor factory have skyrocketed into the billions. And, as one panelist put it, constantly riding the Moore’s Law technology wave has forced the industry to rely on “tricks” which reduced the delivery of all the benefits that Moore’s Law was typically able to bring about. The panelists warned that future chip innovations were going to be driven more and more by design and software rather than blindly following Moore’s Law and that unless new ways to develop chips emerged, the chip industry itself could find itself slowing its progress.
  5. Power management is top of mind. The second keynote speaker, EA Chief Creative Officer Richard Hilleman noted something which gave me significant pause. He said that in 2009, China will probably produce more electric cars in one year than have ever been produced in all of history. The impact to the electronics industry? It will soon be very hard to find and imagevery expensive to buy batteries. This, coupled with the desires of consumers everywhere to have longer battery lives for their computers, phones, and devices means that managing power consumption is critical for chip designers. In each presentation I watched, I saw the designers roll out a number of power management techniques – the most amusing of which was employed by IBM’s new POWER7 uber-chip. The POWER7 could implement four different low-power modes (so that the system could tune its power consumption), which were humorously named: doze, nap, sleep, and “Rip van Winkle”.
  6. Chip designers can no longer just build “the latest and greatest”. There used to be one playbook in the Silicon Valley – build what you did a year ago, but make it faster. That playbook is fast becoming irrelevant. No longer can Silicon Valley just count on people to buy bigger and faster computers to run the latest and greatest applications. Instead, people are choosing to buy cheaper computers to run Facebook and Gmail, which, while interesting and useful, no longer need the CPU or monitor with the greatest “digital horsepower.” EA’s Richard Hilleman noted that this trend was especially important in the gaming indimageustry. Where before, the gaming industry focused on hardcore gamers who spent hours and hours building their systems and playing immersive games, today, the industry is keen on building games with clever mechanics (e.g. a Guitar Hero or a game for the Nintendo Wii) for people with short attention spans who aren’t willing to spend hours holed up in front of their televisions. Instead of focusing on pure graphical horsepower, gaming companies today want to build games which can be social experiences (like World of Warcraft) or which can be played across many devices (like smartphones or over social networks). With stores like Gamestop on the rise, gaming companies can no longer count on just selling games, they need to think up how to sell “virtual goods” (like upgrades to your character/weapons) or in-game advertising (a Coke billboard in your game?) or encourage users to subscribe. What this all means is that, to stay relevant, technology companies can no longer just gamble on their ability to make yesterday’s product faster, they have to make them better too.

There was a lot more that happened at HotChips than I can describe here (and I skipped over a lot of the more techy details), but those were six of the most interesting messages that I left the conference with, and I am wondering if I can get my firm to pay for another trip next year!

Oh, and just to brag, while at HotChips, I got to check out a demo of the potential blockbuster game Batman: Arkham Asylum while checking out NVIDIA’s 3D Vision product! And I have to say, I’m very impressed by both products – and am now very tempted by NVIDIA’s Buy a GeForce card, get Batman: Arkham Asylum free offer.

(Image credit: Intel bunny smoked ad) (Image credit: GPU computing power) (Image Credit: brick wall) (Image – Rip Van Winkle) (Image – World of Warcraft box art)

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Recruiting lessons

image If the sudden increase in emails from my company’s recruiting staff are any indication, the recruiting season is back in full gear! For many, this will bring enormous amounts of stress, but it doesn’t have to be that way. For starters, I’ve posted a number of tips in the past about:

But, while I’ve focused a great deal in the past on advice for how to land a job you want, I’ve spent relatively little time talking about how to select a job. On that front, I have four tips:

  1. Reputation matters. A lot.
  2. Find out what people actually do. Including the bad parts.
  3. Determine what sort of training and mentorship is available.
  4. Understand the working environment.

The practical minded out there (this blogger has been guilty of this many times) will say, “I’ll worry about that after I get a few offers.” And, on some level, especially in college/business school, that is true. But, the fact of the matter is that recruiting is a very time consuming and tiring process. The cycle of going to company presentations, chatting up people who are constantly sizing you up, preparing resumes and cover-letters, and interviewing took up valuable time which I would have preferred to spend with my friends or on things of greater interest to me. Worse than the opportunity cost of spending all your time applying for jobs you’re not interested in, it can leave you in a position where you, at best, are apathetic towards an offer and, at worse, leave you in a place which can actually be detrimental to your professional development. Instead, I would advise that you focus very early on in narrowing your search so that you can tailor your resume’s, cover letter’s, and conversations to fit the firms you’d actually like working for.

image 1. Reputation matters. A lot: If there is one thing that I learned during my two years in consulting, it is that the reputation of a company is everything. While this may seem a bit obvious, I think what most people don’t understand is the magnitude of the impact that reputation can have. It dictates things ranging from the money that a firm can make for a particular engagement or project to what sorts of engagements a firm will get to handle. Some informal conversations that I’ve had revealed that firms with stronger reputations will not only land more interesting, longer-term engagements (e.g. multi-month strategy projects vs. 2-week fact-finding projects), but that for the same project, a firm with a strong reputation can charge significantly more (I’ve heard gues-timates of pricing varying by over 50% between top-tier/specialist firms and second-tier shops). When you also consider the weight that the reputation of your previous employers has when you’re looking for new jobs (there are quite a few private equity/venture capital firms that require applicants to be from top-tier banks/consulting firms), it should become pretty clear that the reputation should be a very important consideration.

To be 100% clear, this doesn’t mean that you should only focus your time on “big name” companies. After all, while McKinsey is a great consulting firm, they may not get you where you want to go if you’re interested in PR or marketing or even in a specific type of consulting, like IT, or a specific industry expertise. What it does mean is that you should figure out what you want to build credibility around and find companies which can help you do that. This will help you develop your own skills and capabilities and position you well for the next job.

2. Find out what people actually do. Especially the bad parts. The recruiting process is as much a process for companies to find out more about their applicants, as it is a process for prospective applicants to find out more about the firm. This means that you shouldn’t be the only one answering tricky questions.

While you can ask direct questions like “what do you do?”, “how much travel do you do?”, and “what sort of hours do you work?”, you should be aware that any firm with a half-decent recruiting process will have already prepped its people with answers to those questions. While those answers won’t be outright lies, they are oftentimes couched in “spin” to mask un-pleasantries about the job and are generally too unspecific to help you understand what you really need to know about a job to determine if you like it (or, perhaps more correctly, if the rewards outweigh the bad aspects of the job).

Instead, ask strategic questions, like:

  • What were you doing last week/month/yesterday at work? (More difficult to “apply spin” when you’re trying to recall something specific)
  • What do you do for fun outside of work? (Indirect way to get a sense of what sort of control people have over their work-life balance)
  • If you could change one or two things about your job, what would they be?
  • What was your best day at work? (Get a sense of what sort of on-the-job rewards, responsibilities, and recognition are possible)
  • What was your worst day at work? (High probability of “spin” in the answer, but still valuable to understand)
  • How many people stay at the firm for longer than 3 years? Why? Where do they go? (Good measure of whether or not people like the job and why)
  • Where do most of your non-college recruits come from? (A good way to assess what sort of person fits in and what sort of skills the firm can help you develop)

image 3. Determine what sort of training and mentorship is available. Success in your career is highly dependent on what sort of skills you can pick up over time and what sort of opportunities you choose to pursue. To that end, understanding what sort of formal training programs are available and how the firm’s more senior members think about mentoring is something that should be on top of every recruit’s mind.

I personally did not even think about mentorship when I did recruiting in college, so I am very lucky that I wound up at a firm with a wide range of training programs and where partners and managers place emphasis on providing advice and coaching to more junior folk. This sort of luck is not something you (or I) should ever count on, and I would highly advise you to find out:

  • Does the firm have ongoing training programs throughout an employee’s career? What sort of training? (Or are there just introductory programs at the start of employment and routine training on rules?)
  • Who conducts the training? (This can help establish whether or not the firm values training and mentorship enough to take senior staff away from their day jobs to do it, or whether or not training is an after-thought)
  • Who do individuals at the firm turn to for advice about their careers? (Is management willing and able to help their workers?)
  • Does the company let employees switch between different roles/divisions? (This is usually a good sign that the firm cares about developing its people by exposing them to more things)

4. Understand the working environment. There are a lot of little things which really can impact how you feel about a job. The challenge is identifying these things. Below, I’ve attached a list of things which I didn’t realize would matter to me so much:

  • Dress – Being required to wear a suit and a tie every day would be a nightmare for me, and so I am fairly grateful that my firm only requires me to dress semi-formally.
  • Location – I love the Bay Area. If you want me to work for you, you better be in the Bay Area.
  • Food – I strongly believe that offices should have breakfast cereal available. Some of my coworkers could pass on breakfast cereal, and complain that we don’t have enough in-office lunches. To each their own.
  • Face-time – Some people (like this blogger) would rather leave the office early to work from home, while some people want work to be only conducted in the office. And some people would rather not show up at all. Understanding where you lie on that spectrum and where the company you’re interested in working at lies on that spectrum is important.
  • Non-business Internet use – Consulting hours are very variable. Some days you’ll be in a rush all day. Some days you’ll have nice valleys of work intensity. As a result, at least at the firm I work at, nobody really minds if you’re on YouTube or Facebook or an RSS reader, as long as you get your work done on time. Some companies do mind. I don’t think I could work for one of those.
  • Socializing at work – Different firms have different approaches to socializing at work. And sometimes, within the same firm, different divisions and groups have different unofficial policies on socializing. If you are the type of person who can’t socialize at work (or stomach other people socializing while you’re working), then you definitely need to know these things.
  • Parties – Are company parties loud and crazy? Or soft and subdued? Are employees friends outside of work?
  • Start/End of day – Some companies have no set start time. Other companies expect you in by 8 AM. Other companies don’t mind as long as you’re in by 10 AM. Depending on how far you plan to live from the office and how late you wake up, this may be an important criteria.

These are just a few examples of things to ask about. What’s important is that you consider what sort of working environment you need to be productive, and find out whether or not the firm you’re talking to can deliver that environment. If they can’t, then it doesn’t really matter how much you like the company: if you’re unproductive, your career will suffer.

Hopefully these four tips help are helpful for people pursuing recruiting. Anyone else have any other tips on how to identify companies that fit you?

(Image credit – Freaking News) (Image credit – gossip) (Image Credit – Mentor)

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The Essays of the Oracle of Omaha

image I recently finished reading The Essays of Warren Buffett: Lessons for Corporate America, a great collection of some of multibillionaire Warren Buffett’s greatest writings on business as collected and introduced by Lawrence Cunningham, and would highly recommend it to anyone who wants to know a bit more about investing or business or both.

The book is organized into 8 “chapters”, with each chapter containing a series of excerpts from Warren Buffett’s writings, which as far as I can tell are mostly from the annual reports that Warren Buffett prepares for his company Berkshire Hathaway (I wonder if he writes personal financial reports…). The chapters discuss Buffett’s views on a number of topics, ranging from corporate governance to mergers and acquisitions to accounting to discussions of how investing should work.

Reading the book will give you an interesting look at the mind of one of the most successful investors of all time, but while I valued that insight, I think I was most impressed by three things:

  1. I was amazed at how approachable and “folksy” Buffett’s writings are. Instead of relying on complex jargon and consultant-speak, he speaks in plain English, oftentimes using funny analogies or stories (and sometimes even Biblical/literary parables) or extremely nerdy puns to make very simple points. Case in point, to explain the irrationality of some companies who seem to always pursue that “one magical acquisition” which will take them to success, Buffet writes:

    “In the past, I’ve observed that many acquisition-hungry managers were apparently mesmerized by their childhood reading of the story about the frog-kissing princess. Remembering her success, they pay dearly for the right to kiss corporate toads, expecting wondrous transfigurations. Initially, disappointing results only deepen their desire to round up new toads. Ultimately, even the most optimistic manager must face reality. Standing knee-deep in unresponsive toads, he then announces an enormous ‘restructuring charge’. In this corporate equivalent of a Head Start program, the CEO receives the education, but the stockholders pay the tuition.”

  2. It was interesting to see how consistent Buffett’s principles have been. It’s rare to find a politician, let alone a businessman, who has had the consistency of values and strategy that Buffett has had. You can take any essay from any chapter of this book, regardless of when it’s from, and, other than mentions of specific years or specific political/cultural references, you would not be able to tell what year that essay had been written. His core message and beliefs on corporate governance, mergers & acquisitions, and especially his investment philosophy have not changed.
  3. I was especially impressed at Buffett’s humility. Most executives seem to desperately crave the spotlight and credit for positive things which have little to do with them and to deflect blame for things which are. I can’t fault them for that, as their salaries and jobs are dependent on the perception that they are capable stewards. But, Buffett takes a markedly different approach. In many an essay about Berkshire Hathaway’s success, Buffett attributes the credit to the managers of the businesses Berkshire owns, oftentimes noting that his job is only to pick good businesses to own and that it is the managers and the businesses themselves that drive success. In essays about Buffett’s missteps, he freely owns up to them. In multiple essays, he has owned up to holding on to his textile business for too long or not exiting General Re’s derivatives business fast enough. Buffett even goes so far as to explain mistakes that he had made which nobody outside of Berkshire’s leadership team would know about (i.e. investment opportunities he could have made but passed on).

While I definitely learned a great deal about business and how Buffett thinks of the market, I think the most important learning that I took away from the book is what Buffett calls the “Noah principle”, and it is something I will aim to try to adhere to for the rest of my life:

“Predicting rain doesn’t count, building arks does.”

(Image credit – Book cover from Amazon)

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Seed the market

In my Introduction to Tech Strategy post, I mentioned that one of the most important aspects of the technology industry is the importance of ecosystem linkages. There are several ways to think about ecosystem linkages. The main linkages I mentioned in my previous post was influence over technology standards. But, there is another very important ecosystem effect for technology companies to think about: encouraging demand.

For Microsoft to be successful, for instance, they must make sure that consumers and businesses are buying new and more powerful computers. For Google to be successful, they must make sure that people are actively using the internet to find information. For Cisco to be successful, they must make sure that people are actively downloading and sharing information over networks.

Is it any wonder, then, that Microsoft develops business software (e.g. Microsoft Office) and games? Or that Google has pushed hard to encourage more widespread internet use by developing an easy-to-use web browser and two internet-centric operating systems (Android and ChromeOS)? Or that Cisco entered the set top box business (to encourage more network traffic) by acquiring Scientific Atlanta and is pushing for companies to adopt web conferencing systems (which consume a lot of networking capacity) like WebEx?

These examples hopefully illustrate that for leading tech companies, it is not sufficient just to develop a good product. It is also important that you move to make sure that customers will continue to demand your product, and a lot more of it.

This is something that Dogbert understands intuitively as this comic strip points out:

image

To be a leading executive recruiter, its not sufficient just to find great executives – you have to make sure there is demand for new executives. No wonder Dogbert is such a successful CEO. He grasps business strategy like no other.

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Surviving a consultant’s axe

imageGawker, who seems to really hate McKinsey and other management consulting firms, recently put out a “Complete McKinsey Survival Guide” in response to McKinsey recently being retained by magazine publisher Conde Nast where they lay out a couple of interesting thoughts on how to survive a consultant’s downsizing tendencies including:

Suck Up—Kiss ass, Kiss ass, Kiss ass. “Suck up to your own superiors, and their superiors, and theirs.” It’s just that simple. A brown nose could give you a minute edge on your fellow layoff-eligibles.

Practice Subtle Backstabbing—You don’t want to be seen as a desperate bastard ready to sell out any and all of your colleagues to save your own job (even though you are). You just want to plant the seed. Take it from someone who’s been there: ” Don’t talk shit about individuals, talk shit about DIVISIONS in a passive-aggressive way. Saying things like: ‘Those fellows that work in [blank] division are really nice guys, but I’ve worked here for five years and I still don’t know what they do’ is a winner.” Corporate espionage at its finest, ladies and gentlemen.”

And they even made a suggestion that you practice some form of sexual quid pro quo as a means to escape the hatchet…

While the read was entertaining, albeit a little ridiculous with some of the suggestions, this consultant wanted to clear the air and offer three thoughts:

  1. A consulting firm is not necessarily there to fire people. Yes, that is what they are often called on to do because many firms are staffed very inefficiently (too many people in some divisions, too many managers with no reports in other divisions, too many layers of management/bureaucracy) and management oftentimes lacks the competence or the courage to trim headcount on their own. That being said, management consulting firms are also frequently brought in to do other things like:
    • Business strategy – what markets or market strategies should the company or business unit pursue
    • Supply chain strategy – how can a business reduce its cost structure by re-negotiating its contracts with suppliers
    • Workforce re-deployment – how can a business re-organize its salesforce (not necessarily downsize) to optimize its results (e.g. move X people from West coast to Europe, etc)
    • Operations support – how can a business optimize its decision-making process (e.g. how many people need to approve a decision before its made) or operations (e.g. how can I make a factory process work more smoothly)
  2. If the consulting firm is here to help your company fire people, there’s probably not much you can do. Any consulting firm worth their salt will come to their final recommendation based on objective fact-finding and analysis where they poll many experts both from within the company and externally. It is relatively unlikely that Gawker’s suggestions that you subtly backstab another division or suck up to the consultants will change any of that, unless you have an amazing ability to prove the value of your division or group in such a way that even your senior management and external experts cannot (in which case you should have been doing that already…).
  3. You should see if you can join the joint-working sessions. Although this won’t change the outcome, regardless of if you’re going to be canned or not, it probably makes sense to join the consulting firm-internal team joint working group if you can, if only to help raise your awareness about (a) how senior managers think and rationalize large business decisions, something with which can help your career, and (b) come up with a sensible way for how to spin whatever decision the consulting firm comes up with.

(Image credit)

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Tech strategy 101

imageWorking on tech strategy 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 (which may itself turn into a series) 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:

I. Only the paranoid survive
image 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:

  • image 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.

  • image 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.
(Image credit – chess) (Image credit – iphone vs blackberry) (Image credit – plant)

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Maybe $100 isn’t so cheap after all

Anthony and I are in the business of bidding $100 for companies/divisions that we think we can turn around. But, despite our convictions, we are well aware of the skepticism out there.

“But, Ben, isn’t $100 far too cheap?”

I have to admit the doubts did get to me, but no longer. Apparently, large, recognizable magazine business are bought for far less! From the Financial Times (courtesy of my Bench Press partner Eric):

The $1 for which OpenGate bought TV Guide “is probably the kind of deal that would be obtainable for Business Week”, Mr Phillips said. Another banker said: “I think they’ll end up giving it away.”

Nope, definitely not too cheap anymore. After all, Dogbert has shown an uncanny ability to land deals worth far less than $100!

Sorry, BusinessWeek, are you feeling that sinking feeling?

image (Image credit)

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Have you tried?

image I had an interesting discussion the other day with a colleague about creating a growth strategy for Starbucks. The challenge for Starbucks is one of success – how do you continue to grow when you’ve:

  • saturated your home market (for the purposes of the conversation we ignored the very obvious “grow internationally” strategy which was too obvious to be worth discussing)
  • are already running a relatively lean operation
  • are now facing a new onslaught of competitors (e.g. McDonald’s) who are eyeing the profit you make

And, of course, the big one:

  • you’ve already tried DOZENS of new strategic initiatives (e.g. CDs, restaurant food, utensils/cups, branded credit card, etc), many of which have flopped

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(As Dilbert points out, “jargon” is not a very good answer)

After I fleshed out all the more interesting adjacencies as ideas (e.g. dessert food, franchising, coffee machines, online banking services, renewable energy credits, etc), my ideas turned to capability moves, and the most promising one that I came up with was supply chain services. I can’t think of many firms/stores that have the same distribution network that Starbucks has (~11,000 stores in the US). After all, in San Francisco, I know of corners where I can see 3 separate Starbucks stores – and I’m sure this happens in other big cities as well!

For Starbucks to function effectively, I would hazard a guess that they must have an efficient way to distribute supplies (e.g. coffee beans, baked goods, materials, machines, etc) to each of the ~11,000 locations in the US on a regular basis. I would also guess that such a system, if designed effectively, would probably see reasonable returns to scale, as I would expect a nationwide distribution network that had to distribute more products would be more efficient than one with less product (as you wouldn’t be sending trucks out on partial routes or with only some of their capacity filled).

That means:

  1. Starbucks may have a unique capability that others (e.g. other stores, restaurants, etc) might be willing to pay for
  2. Starbucks would benefit from developing that capability. If Starbucks does have such a distribution network, expanding the amount of materials it needs to distribute could, in theory, reduce the cost of distribution. This would help enhance its own ability to distribute supplies/goods to other firms as well as reduce the cost of distributing coffee/materials/baked goods to its own stores.

But this is a far cry from a sure thing. My colleague and I discussed just a few of the possible shortcomings of the strategy:

  1. Starbucks may not actually operate its own distribution network so it wouldn’t be in a good position to sell this service
  2. Starbuck’s distribution network may be well-suited for distributing coffee beans, but may not be well-suited for many other things (e.g. biological specimens, fresh produce, large equipment, etc)

Now, I just need to pitch this to Starbucks :-D.

Any thoughts from the peanut gallery?

(Image Credit)(Image Credit – Dilbert)

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Stuck between a big company and a startup place

imageI sometimes feel like I’m caught between two worlds.

On the one hand, I feel a strong tug towards the “Silicon Valley dream” of entrepreneurship. Friends of mine like Charles Ju, Founder and CEO of PlayMesh, the maker of one of the top iPhone games out there (iMafia) are living that dream – driven by one’s passions and one’s desire to engineer a product/service/technology to change the world – and heck, maybe get wealthy while you’re at it. It’s that drive which has pushed me to work with my buddies on projects like Xhibitr and Benchside.

On the other hand, I also feel a strong pull towards the corporate strategy world which I currently am involved in at my day job. The work is more stable (in the sense that I’m usually not dependent on the next round of funding for my livelihood), and the issues one explores are more strategic. It’s not desperately asking “will someone PLEASE buy my product?” or “how do I improve my product without spending any money because I’m out of cash?”. It’s literally answering “how do I shape an industry?” and “how do I change our business processes to be more responsive to customer needs?”

What makes the soul-searching all the more difficult is how different the two things are, and how different the people who work in each are. It makes it hard to just take the advice of friends like Charles or Serena who tell me to jump ship and head for startup-infested waters.

image For starters, I’ve noticed that there are very different skills involved in the two groups. Big corporate strategy guys are more likely to value things like analysis (e.g., do the models support the proposed strategy? do we have the right numbers? what does that do to our cash and margin position?) and gameboarding (e.g., how will Microsoft or Google or Intel or Cisco react? how do the tech trends affect us/get shaped by us? who are the strategic partners/enemies who will care most about this?). I’ve found startup guys to more value execution over strategy (e.g., can we ship on time? can we get it done?) and boldness over analysis (e.g. is our product cool enough? will people care?)

This is not to say that big business guys don’t value execution or boldness, or that startup guys have no sense for analysis or gameboarding. And this is not even to say that either side is unreasonable. After all, startups need to execute before they worry about a perfect strategy, and big companies need to defend their sizable profit pool before they bet on a new one.

But that dynamic oftentimes frustrates me. When I’m doing the corporate strategy stuff, I grow frustrated at the conservatism and lack of boldness and progress. I am bothered by the bureaucracy and the lack of value placed on my scientific/technical knowledge.

And yet, when I talk with startup guys, I am troubled by what I see as a lack of emphasis on analysis and strategic thinking. I’m concerned that the heavy focus on execution and boldness traps them into bad decision cycles. I see an almost callous disregard of things which all big companies do as a matter-of-practice (e.g. legal, business development, and HR issues). And, to be perfectly honest, the lack of resources to fund anything (let alone the pretty decent salary I’ve come to expect) is not an exciting proposition either.

And so here I am. Stuck between a big company and a startup place, and not quite sure how much longer before I get crushed.

(Image credit) (Image Credit)

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Forecasting

As I’ve mentioned before, a good businessperson makes contingency plans. But to make those plans, its necessary to have some insight into what the future will bring – which explains why agencies like Gartner, IDC, and Forrester make millions of dollars selling market research reports to companies who are seeking either:

  • insight into the future
  • a “market-tested” forecast that people are willing to trust
  • both

It also explains why many of the clients of my firm are very interested in contingency plans around the current economic downturn. As a result, my firm (and I’m sure many other consulting firms) is investing in producing a coherent point-of-view on the causes, duration, severity, and impact of the current recession, as well as quick perspectives on how companies in different industries may want to change their game to respond.

The trick behind forecasting, though, is to balance accuracy with believability and reasonable action-items… something that Dilbert’s company economist doesn’t seem to do very well at:

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Successful Consulting

… looks like this (courtesy of Dilbert):
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One of the tasks that any executive (or consultant for that matter) needs to be able to do is to take crazy assumptions and to test them to see what would happen if they were true. What if some upstart competitor develops a technology which makes our product outdated? What if the government decides to heavily regulate our industry? What if someone completely out-of-left-field enters our market by buying our largest competitor?

These scenarios may seem far-fetched, and the assumptions they rely on may seem extreme, but that’s exactly why this exercise needs to be done:

  1. It helps establish a list of test-able hypotheses to verify which of these scenario’s are plausible (What criteria would an out-of-left-field player need to fulfill to be interested in my market? What would cause the government to start regulating my industry?) and which are not. This then informs the executives which are credible threats (both in terms of likelihood of happening and in terms of damage) to actively manage and monitor and which can be put on the back-burner.
  2. It forces executive teams to formulate contingency plans. No firm can afford to be caught off guard. Look at the example of Polaroid or Blockbuster – caught completely off guard by the onslaught of the digital camera revolution and Netflix/broadband video respectively. The companies are now has-beens, as they were not only unready for the destruction of their market, they were slow to react and loss the opportunities to use their strong market positions to their benefit.
  3. It gives management a list of trigger points to monitor for and to move quickly on. If our competitor looks like its interested in acquiring supplier X, we need to take action quickly to make that deal a lot more painful to swallow, or make our own move to counter that threat.
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POWER trip

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I recently read The Race for a New Game Machine, a new book which details the trials and tribulations behind the creation of the chips (which run on the POWER architecture, hence the title of this post) which powered Microsoft’s Xbox360 and Sony’s Playstation 3 next-gen gaming consoles.

The interesting thing that the book reveals is that the same IBM team responsible for designing the Playstation 3 chip (the Cell) with support from partners Sony and Toshiba was asked halfway through the Cell design process to adapt the heart of the Playstation 3 chip for the chip which would go into Microsoft’s XBox360 (the Xenon)!

Ironically, even though work on the Xbox360 started way after work on the Playstation 3’s chip, due to manufacturing issues, Microsoft was able to actually have a test chip BEFORE Sony did.

As the book was written from the perspective of David Shippy and Mickie Phipps, two the engineering leads from IBM, the reader gets a first-hand account of what it was like to be on the engineering team. While the technical details are more watered down than I would have personally liked, the book dove a lot deeper into the business/organizational side of things than I thought IBM legal would allow.

Four big lessons stood out to me after reading this:

  • Organization is important. Although ex-IBM CEO Lou Gerstner engineered one of the most storied corporate turnarounds of all time, helping to transform IBM from a failing mainframe company into a successful and well-integrated “solutions” company, Shippy and Phipps’ account reveal a deeply dysfunctional organization. Corporate groups pursued more projects than the engineering teams could support, and rival product/engineering groups refused to work together in the name of marking territory. In my mind, the Cell chip failed in its vision of being used as the new architecture for all “smart electronic devices” in no small part because of this organizational dysfunction.
  • Know the competition. One thing which stood out to me as a good bestimage practice for competitive engineering projects was the effort described in an early chapter about IBM’s attempt to predict how Intel’s chips would perform during the timeframe of the product launch. I’m not sure if this is done often in engineering efforts, but the fact that IBM tried to understand (and not undersell) the capabilities of Intel’s chips during the launch window helped give the IBM team a clear goal and set of milestones for determining success. That their chip continues to have a remarkably high operating clock speed and computing performance is a testament to the success of that effort.
  • Morale is important. If there was one feeling that the authors were able to convey in the book, it was frustration. Frustration at the organizational dysfunction which plagued IBM. Frustration at not quite ethical shenanigans that IBM played in to deliver the same processing core to two competitors. Frustration at morale-shattering layoffs and hiring freezes. It’s no secret today that IBM’s chip-making division is not the most profitable division in IBM (although this is partly because IBM relies on the division not to make profits, but to give its server products a technology advantage). IBM is certainly not doing itself any favors, then, by working its engineers to the point of exhaustion. Seeing how both authors left IBM during or shortly after this project, I can only hope that IBM has changed things, or else the world may be short yet another talented chipmaker.
  • Move like a butterfly, sting like a bee. Why did Microsoft “get the jump” on Sony, despite the latter starting far far in advance? I trace it to two things. First, immediately upon seeing an excellent new chip technology (ironically, the core processor for the Playstation 3), they seized on the opportunity. They refused to take a different chip from what they wanted, they put their money where their mouth was, and they did it as fast as they could. Second, Microsoft set up a backup manufacturing line in Singapore (at a contract chip manufacturer called Chartered). This was expensive and risky, but Microsoft realized it would be good insurance against risk at IBM’s line and a good way to quickly ramp up production. This combination of betting big, but betting smart (with a way to cover their bet if it went wrong) is a hallmark of Microsoft’s business strategy. And, in this case, they made the right call. The Xbox 360, while not selling as well as Nintendo’s Wii (which incidentally runs an IBM chip as well), has been fairly successful for Microsoft (having the highest attach rate – games sold per machine – of any console), and they had the backup plan necessary to deal with the risk that IBM’s manufacturing process would run into problems (which it ultimately did).

If you’re interested in the tears and sweat that went into designing IBM’s “PB” processing core (it’s revealed in the book that PB stands for PlayBox – an in-joke by Shippy’s team about how the technology being designed was for both the PLAYstation 3 and the xBOX), some first-hand account of how difficult it is to design next-generation semiconductor products, or how IBM got away with designing the same product for two competitors, I’d highly recommend this book.

(Image credit – book cover) (Image – Cell chip)

Book: The Race for a New Game Machine (Amazonlink)

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Prime the pump

I knew that management consulting was a generalist calling, but I had no idea how generalist.

On Friday, I overheard one of my coworkers talking to his supervisor about the work he was doing. They were conducting some basic strategic diligence for a private equity client (translation: making sure the company the private equity firm is thinking about buying is strategically sound). They spoke of innovations in some sort of new plastic to prevent it from leeching into the liquid it contained. Thinking this was some sort of materials or chemicals company, I asked him what industry the target was in. I was surprised to discover it was breast pumps!

I later learned that, apparently, breast pumps are actually a very well-tracked industry as there are really only three drivers for it:

  • birth rate (the more births, the more breast pumps)
  • disposable income (the more income, the more breast pumps)
  • “innovation” (marketing? new “form factors”?)

And thus I learned what the recruiting team meant when they said that I would learn a lot on this job.

(Image source)

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Sovereign Wealth Matters

My friend Serena, who you may know as one of the co-founders of My Mom is a Fob and My Dad is a Fob, is currently trying to find a way out of Thailand, something which protests at Bangkok’s two airports has made much more difficult. I wish Serena and her family the best of luck and a safe trip back.

imageWhile a lot of press attention is dedicated to the direct why’s of the protests (demands that the current Prime Minister step down because of his ties to a previously deposed Prime Minister, his brother), less attention is paid to the role that Singaporean sovereign wealth fund Temasek Holdings played in the whole ordeal.

The Former Prime Minister made the mistake of selling his large 50% stake in Thai telecommunications company Shin corporation to Temasek, despite:

  • being accused of insider trading only a short while before
  • violating a law banning turning over majority control of telecommunications companies by foreign companies
  • making the sale without paying any capital gains taxes

The result of these accusations were widespread riots, the Prime Minister dissolving Parliament, and, eventually, him being removed by a military coup.

image And so, what have we learned here? Sovereign Wealth Funds are not just mere curiosities whereby oil-rich (Dubai, Mubadala, Norway, etc.) and Asian countries (China, Singapore) buy up HUGE stakes in companies (some of the research I did on these funds back in January put their total global size at about ~$3 trillion). They have serious political consequences, as the world is only beginning to discover:

Yes, we’re in the midst of a global recession right now, but think – what better time for a sovereign wealth fund to buy up companies then when the prices are low and when governments are least likely to raise a fuss about someone willing to inject capital into their struggling businesses?

(Image Source) (Image Source)

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What happens when you don’t accept our $100 bid

Circuit City, Anthony and I reached out to you and countless other troubled firms with our bid of $100. We presented some of our awesome strategy to revitalize your core business. Yet you turned us down. And what happened? You’re now seeking bankruptcy protection.

Circuit City Stores Inc. filed for bankruptcy amid rising competition from Best Buy Co., Wal-Mart Stores Inc. and online electronics retailers. The petition for Chapter 11 protection in U.S. Bankruptcy Court in Richmond, Virginia, listed $3.4 billion in assets and $2.32 billion in liabilities, driving the shares down 56 percent before the New York Stock Exchange halted trading. The company said it is entering court protection owing Hewlett-Packard Co. $119 million and Samsung Electronics Co. $116 million.

One can only hope that the court recognizes the error of Circuit City’s ways and take us up on our offer…

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A Hundred for Circuit City

A guest post (the first!) by my good buddy, Anthony , who after a couple of minutes of brainstorming with me on what companies to offer $100 for and what we’d do to save them came up with this little bit:

Hi everybody, I’m Anthony, Ben’s partner in low-ball offers to disastrous companies. A couple of weeks have gone by and unfortunately it appears that no one has been willing to accept our $100 offer to run the next failing bank or company division (Damn that Dogbert…).

Now Ben and I are realists, we understand that companies may be reluctant to take advantage of our offer, but when you change CEOs only to find yourself looking at a share price of $0.20 (down 95.24% in 2008) and scrambling for ways to avoid Chapter 11; it just might be time for a major change. Yes, we’re talking to you, Circuit City.

Circuit City’s financial situation has deteriorated steadily since 2006. Revenue gains have been marginal in comparison to Best Buy’s rapid growth. In 2007 Circuit City incurred a loss of $8 million in stark contrast to Best Buy’s $1.37 billion in profits. If that weren’t bad enough in the most recent quarter (ending Aug 2008) Circuit City racked up over $200 million in losses. Total debt has increased steadily over the past three quarters and same store sales (a number showing sales that don’t come from new stores, making it a good sign of how well Circuit City is managing sales growth) fell 7.7% in FY2008. Adding insult to injury Bernard Sands recently pulled its recommendation for vendors to sell goods to Circuit City over concerns the retailer would be unable to pay. On the other hand, their top competitor, Best Buy, is flourishing with its revenue growing by double digits over the past four years. Clearly, something needs to be done.

This is where Ben and I come in. For the low, low price of $100 (probably worth more than the company should be right now), the two of us propose nothing less than a complete revamp of Circuit City’s store format and business strategy.

Since “business as usual” is simply continuing to take on Best Buy on its own home turf, we believe the best method for reinvigorating sales is to provide consumers with a new consumer electronics store experience — one that acknowledges the rapid pace of development in consumer electronics and provides the consumer with a practical while flexible buying experience. This new store setup will differentiate Circuit City stores from the plethora of typical electronics retailers by emphasizing “platforms” rather than individual devices. The reason for this is that the rapid pace of technology makes it difficult for the typical consumer to always make fully informed purchasing decisions. This means that consumers may buy products which aren’t compatible with or don’t work well with one another (e.g. HDTVs and various speaker receivers). The wide range of electronics that these stores need to carry also make it very difficult for the store clerks to understand all the options that consumers may want.

What do we propose? Take a page straight out of IKEA’s playbook — instead of organizing the store by device (e.g. a TV section, a MP3 player section, etc.), organize the store into “platforms” — here is a hardcore gamer’s living room setup, here is a budget home office setup, here is a student setup, here is a always-on-the-go setup, etc. In each case, instead of highlighting specific devices, we would encourage Circuit City and its employees to highlight a particular electronics experience customized for a specific use. This would help Circuit City’s relations with its suppliers, as the suppliers already are attempting to target different products to different types of customers, and would serve as a useful service for customers who have no clear idea of which devices are tailored for them, nor how the devices can work together. Also, in much the same way that IKEA lets you customize specific pieces of the furniture, this store experience gives customers flexibility by presenting choices which don’t interfere with how the electronics work together (e.g. different colors, a slightly higher-end or cheaper device to substitute, etc.).

This new customer orientation also suggests a structure for a new, more useful website. Ben and I propose to integrate Circuit City’s website into its store business in a way that no store has ever done before. Whereas most companies operate their stores and websites separately, we would force Circuit City to not only organize the website in the same way that the store is (to help simplify things for customers), but to also tie them so closely together that a customer could quickly and easily use the website to schedule repairs and pickups, check on the availability of products in their local stores in real-time, download product information (e.g. manuals, flyers, drivers, etc.), and even check out ways to customize or replace specific pieces (e.g. a different color game controller, a slightly higher performance sub-woofer, etc.).

Neither of these initiatives are easy, nor do they represent all of the ideas that Ben and I have, but they are a good first step in how to save Circuit City’s sinking ship. As Circuit City spokesman Bill Cimino told the WSJ, “[t]he management team, board of directors, and its strategic financial advisers are conducting a comprehensive review of all aspects of our business to determine the best methods of accelerating our turnaround”.

They haven’t gotten back to us yet, but I’m sure, if they want their company to succeed, they’ll give it some thought.(Image source)
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