Dealing_with_Darwin

Dateline Davos: Technology Pioneers

My favorite thing to do at Davos is to help facilitate the Technology Pioneers program.  Each year the Forum invites two to three dozen technology entrepreneurs to come to the Davos meeting, to share their visions and participate in the dialog.

This year we held a workshop where 20 of these pioneers pitched their company and technology to a table full of Forum participants, after which the room voted out their top choices for most warranting additional investment.  The five companies voted to have the most investment-worthy technologies were:

1. Amyris Biotechnologies Inc, enginnering microbes to cost-effectively produce high volumes of high-value complex molecules--essentially bugs as factories.

2. ThereVitae Ltd, developing cardiac tissue from adult stem cells for use in heart attack therapies.

3. Energy Innovations, halving the cost of solar power through photo-concentrator systems.

4. EnOcean GmbH, producing battery-less sensors that harvest the energy they need from sources in their immediate local environment.

5. MBA Polymers, a lowest-cost producer of plastic leveraging next-generation recyling technology.

Check 'em out!

Dateline Davos: The Future of the Technology Sector

Yesterday I had the good fortune to moderate a Davos session on the future of technology where the panelists were Bill Gates, John Chambers, Eric Schmidt, and Niklas Zennstrom.  For those interested in the full record, there is a podcast on the World Economic Forum website.

The premise of the dialog was that we needed a new framework for thinking about the future of technology for two reasons.  FIrst, technology issues are no longer confined to technology companies--they have equal or even greater inpact on the technology-enabled sectors.  It's not just about IT anymore; it's also about telco, financial services, media, advertising, retail, pharmaceuticals, supply chain and logistics, with many more in the queue.  So we need a broader understanding that shares a common vocabulary across these sectors.

Second, Moore's Law--the model that for twenty-five years was the most effective at explaining how technology evolves-- is losing its explanatory power.  Up until about 2000, you could pretty much explain the state of every element in the technology sector by pointing to how semiconductor capabilities would increase 10X every few years, thereby obsoleting all the design assumptions underlying the current generation of systems, and driving wholesale replacements.  But now we have so much legacy from past waves of innovation, infrastrucutre displacement is no longer in the cards.  At the same time, the impact of the Internet has shifted a lot of our focus from product models to service models, which only indirectly correlate to core technology advances.  In short, Moore's Law still applies, but it no longer explains the full range of what is happening in tech.

So what would?  After 45 minutes of very enlightening discussion, we generated three principles that, taken together, I will offer as Release 0.8 of a new explanatory model.  They are:

1. The core enabling resources of IT--computing, memory, bandwidth--are asymptotically apporaching zero.  For scenario planning purposes, assume they are free.  (This is where Moore's Law continues to have its impact.)

2. Expect the digitization of everything.  Either digital format will substitute for a prior analog reality, as in media, or it will serve as a proxy for the underlying reality, be that a natural resource, a customer order in transit, or a physical meeting.  This allows for the full repertoire of computing to be applied to value creating metamorphoses, whether it be enhancing sensory impact, improving consumer experience, detecting change triggers, or the like.

3. Expect the value proposition of IT to migrate from enabling transactions to enabling interactions, whether it be in customer service applications, design collaborations, or self-calibrating sensor-enabled systems.  This allows for iterative processes to have shorter and shorter cycle times, resulting in better understanding, faster time to market, more reliable operations, and the like.

The test to apply to these principles is to ask to what degree they explain the changing impact of IT on business and consumer processes in your sector.  If they don't do a good job, I'd be interested in hearing why not; and if they do, I'd like your feedback on how they can be made even better.

Dateline Davos: Dealing with Darwin—or Not

One of the things I love about coming to Davos is that the perspective is Euro-centric, not US-centic, and everything looks different when you change the lens.  This time I had not even got to the hotel before I had my first Davos moment.

Taking the shuttle from the train station I met a European executive and his wife who commented to me about how odd America's denial of evolution and preference for intelligent design seems to a European sensibility.  How could so international and cosmopolitan a power be so backward in its thinking?

I think there are actually a number of good answers to this question, most of which center on a loss of moral confidence brought on by a post-modern culture, the remedy (for some) being a return to fundamental—and fundamentalist—values.  But set that aside for a moment.  Today, as I participated in a series of economic workshops, I was struck by an ironic reversal:  In the world of economics, it is the U.S. that believes in natural selection, and it is Europe, specifically the EU and its leading countries, which clings to an outmoded ideology of intelligent design. 

Specifically, a key theme of the conference is one that is central to Dealing with Darwin, namely the commoditizing impact of global competition driving the need for a more innovative enterprise.  Surprisingly to me, this appears to be a predominantly American idea.  Europeans tend either to deny the need for a radical response or shirk the issue because they know their country cannot mount the political and social will to embrace such change.  Meanwhile, the Americans are scared witless, don’t mind saying so, and are casting about for more effective alternatives.

This bodes well for us and ill for Europe.  As someone remarked today, in Europe the safety net has become a hammock.  Still, let's be fair: entitlements are sweet to those that have them.  Unfortunately, Darwin doesn't care.  France has 12% unemployment, largely held in place by the entitlements of the current and prior generation of workers—how high does it have to get before policy makers say enough is enough?  Alitalia is bankrupt in all but name, yet still its workers go on strike to protect their current entitlements and indeed to try to extend them, with the prime minister tacitly supporting the action by refusing to let the airline go into bankruptcy.  Alitalia, he argues, is a symbol of national pride—how long before he and his colleagues acknowledge this is not a performance to be proud of? 

Now, when you directly ask policy ministers talk about how to address these problems, their answer is, by introducing more intelligent policies.  Unfortunately, the last set of policies were also presumed to be intelligent, as were the set before them.  The problem with intelligent design is that it is rarely intelligent enough to out-perform self-organizing systems shaped by natural selection.  Consider the recent example of the Katrina hurricane in the US, where our intelligently designed FEMA agency could not mount a response in less than a week, whereas a self-organizing Internet-enabled volunteer community was at work within hours.

To be sure, embracing the risk and uncertainty of natural selection is painful, and entitlement-rich constituencies will always work powerfully to defeat reform.  It is enough to discourage even the most passionate reformers.  But we before we simply give up in despair, we should recall Peter Dricker’s famous remark, made when he was asked if the kind of changes he advocated were really necessary.  His answer was, “No, change is not required—because survival is not mandatory.” 

There is a secular change under way in the world economy that will devastate those who do not realign their values and priorities to meet it.  This is one battle where the U.S. is positioning itself reasonably well.  I wish I could same the same about the E.U. 

Business Analytics: Friend or Foe?

Ever since I got involved in the information technology sector back in the 1970s, the promise of business analytics has been a siren song.  Mine the transaction data under your management to detect trends and extract insights that will give you competitive advantage.  Who would not want to do this?

And it only becomes more compelling with every year’s exponential expansion of the universe of accessible transaction data (we’ll leave the discussion of access and privacy rights to another forum).  Internet enablement of IT systems has driven this resource to unimaginable dimensions from just a few years ago.

Of course, sorting through all the hay to find the needles is non-trivial.  But God bless the math geeks and their indomitable imaginations (see BusinessWeek’s cover article of its January 23 edition for an overview of some of their recent accomplishments).  From the relational calculus that brought us report-writers and spreadsheets to the correlation algorithms of regression analysis to the neo-geometries of semantic space mapping, there are tools that are adequate to task—or promise to be so shortly.

So why is business analytics always a bridesmaid and never a bride?  For that has been its status ever since I can remember.  It is never a bad business, but it has never come close to fulfilling the potential that everyone involved in it believes is latent.  What is the problem?

The problem is closing the loop.  To complete the journey from generating the insights to using them to drive operating procedures that can systematically capitalize upon them in time and at scale has been the exception rather than the rule.  Mind you, when the exception happens, as it has with programmed trading on Wall Street, and as it must and will in anti-terrorism intelligence, the results are transforming.  But for the most part we see a landscape of intermittent connections, flashes of insight, but no systemic gain.

Despite the fact that some of these tools are way too hard to use, this is not in the main the vendors’ fault.  It is the customers.  In most companies, business analytics represent a highly evolved form of corporate entertainment.  Its core practitioners generate insights without accountability.  They communicate those insights to business managers, who do have accountability and who are moved to act, but who are unable to do so in time.  As a result the insights become part of a growing library of great but lost opportunities, supporting a culture eroding into passive aggressive despair.

What is the right answer here?  It is to grow business analytics in closed-loop systems where operationalizing the insight, making the bet, and keeping track of wins and losses, is inseparable from the generating the insight.  Deny yourself the guilty pleasure of insight without accountability: it will only delude you and your colleagues into thinking you are smarter than you really are.  Force yourself instead to contain the scope of the system and let it take you places you had not idea were even there.  Then and only then will you generate the economic miracles of which the sirens have always sung.

Intel: From Product to Platform Innovation

Intel’s shift from product focus to platform focus has been well chronicled, both in the cover article of the January 9 BusinessWeek and elsewhere.  As described, it is completely consistent with the innovation models set forth in Dealing with Darwin and in our view is absolutely the correct strategy to pursue.  That said, executing it will be no picnic.

First of all, most of Intel’s revenues for the foreseeable future will come from PC microprocessors.  By any lights this makes the category mission-critical.  But in a platform-oriented strategy targeting the hyper-growth markets enabled by mobile devices, game machines, set-top boxes, and the like, the PC market is no longer, in our parlance, core.  That is, it is no longer the source of future gains in competitive advantage.  Screw it up, and Intel is in deep trouble.  Perform brilliantly, however, and there is no net gain in advantage.  No upside, only downside--that's what defines mission-critical context--and it makes for challenging dynamics indeed.

What classically happens in such cases is that revenue commitments are able to extract resource commitments to support them, even when those resources come at the expense of core.  That is, mission-critical trumps core in the battle over resource allocation.  It shouldn’t.  It’s bad when it does.  But it is the normal way of things.  Why?

Well, for starters, mission-critical is what makes the quarter.  Core, by contrast, is mostly about making future quarters.  At the margin, most executive teams shy away from making and keeping the full commitment needed, choosing instead to compromise on critical resources, and ending up jerking around the core project just enough to throw it off its tracks.  And why is this?  Because the executives in charge of the mission-critical outcomes are the most execution-oriented people in the company, and such people excel in securing the resources they need (and then some).  When inspired core executives meet hard-boiled mission-critical counterparts, trench warfare ensues, and it is the latter who control the trenches.

By the way, it doesn't help that what has now become Intel's context is still AMD's core.  They aren't trying to convert to a platform strategy.  They are going to go full bore continuing to attack the PC.  And this will hurt Intel to some degree.  How much pain Intel is willing to take remains to be seen.  But if they redirect too many guns back on AMD, they defeat their own plans.

But let us supposes that Otellini and team solve this conundrum.  It is solvable, by the way, it just takes alignment, courage, and commitment to actually execute the solution.  Well, Intel has done that sort of thing in the past, so I wouldn’t put it past them to do it again.  We’re still not out of the woods.

The key to the platform play is to leverage a ubiquitous product into a market-making platform.  Intel has ubiquity in PCs, but not elsewhere.  It needs to invade new spaces where it is not ubiquitous.  It needs to recruit new partners who have not been part of the PC whole product team.  It needs to develop relationships of trust with service providers who have been loath to allow the PC pair of Wintel near their franchises (although, to be fair, this has probably been more due to fear of Microsoft than Intel). 

Finally, Intel needs to convert from a competition culture where only the paranoid survive to a collaboration culture which trusts first and plays tit-for-tat later.  That's the only way to engender partnership dynamics.  This is a tough transition for any gorilla company who rose to power as a fierce competitor, as the folks at Cisco, Microsoft, and SAP are all willing to testify.  It is even harder when a traditional competitor like AMD is nipping at your heels.  But transition it must if it is to make the platform strategy a success.

VC Money, Yes or No?

Greg Gianforte, CEO of RightNow Technologies, wrote a piece for Tom Foremski’s Silicon Valley Watcher called “Most startups should avoid venture funding, not pursue it.”  At Tom’s request, here is my rebuttal, heavily influenced, to be sure, by my ongoing experience as a venture partner at Mohr Davidow Ventures. 

GG: If you start by selling your concept to potential prospects (rather than stock to VCs), you will either end up with initial customers or a conviction that your idea won't work. Why raise money and then find out which one it will be?

GM: If the offer lends itself to being delivered as a project, this approach is fine, assuming you can assemble the necessary back-up band for a pick-up gig.  But if you need infrastructure, inventory, or employees, this is not an option.

GG: Raising money takes time away from understanding your market and potential customers. Often more time than it would take to just go sell something to a customer. Let your customers fund your business through product orders.

GM: My experience is that raising money actually forces you to think more deeply about your market and potential customers than you otherwise would because investors won’t fund you unless you come up with genuinely new insights.  And since investors are selected by Darwin to be effective crap detectors, you can actually learn a lot from the fund-raising process. 

GG: Adding VCs to the mix early gives you an additional set of masters you must serve in addition to your customers. It is always hard to serve two masters, especially in a startup.

GM: Yes, investors represent a constituency that is different from customers, but each has a key role in a start-up.  The customer helps you build a better offer, the investor, a better company.  If that has not been your experience of VCs—and I know for many it has not—it just means you’re working with the wrong ones. 

GG: With no money you can't make a fatal mistake. This is a blessing. Without VC money, you are forced to figure out how to extract funds from your customers for value you deliver. Ultimately that is the only thing that really matters.

GM: Oh, please.  Without the risk of making a fatal mistake, what makes you think you are going to generate a venture-like return?  If that is not your intention, why would you talk to a VC under a false pretense?  Let’s be clear here: Extracting funds from customers may be deferred by funding, but only in the interests of creating a greater extraction down the road.  Never mistake capital for income.

GG: Money removes spending discipline. If you have the money you will spend it - whether you have figured out your business model and market or not.

GM: This is what I mean about mistaking capital for income.  If you think that by accepting capital from an investor, you can reduce your life risk by transferring some portion of it to them, you sadly misunderstand the nature and obligations of business management.  This is how “family and friends” funding can turn sour, not only for the life of a company but for the company of a life.

GG: Raising VC money determines your exit strategy. You will either sell the business or take it public. What if you end up with a very profitable, modest sized business that you want to just run? That is no longer an option once you raise VC money.

GM: True.  If your intent is not to create venture returns, you should not talk to a venture capitalist.  Not all start-ups have to be venture-backed, as, for example, The Chasm Group, The Chasm Institute, and TCG Advisors can bear witness.  Understand, though, we chose our path to produce income with life-style freedom, not to create equity.

GG: You sell your precious equity very dearly before you have a proven business model. This is the worst time to raise money from a valuation perspective.

GM: Precious indeed, but to whom?  How valuable can equity be in a firm that has no proven business model?  How could you tell?  It is indeed the worst time to raise money from a valuation perspective, but that’s true for investors even more than it is for you—as hence the so-called “low valuations.”  Don’t kid yourself: market effects rule pricing in all financial transactions including this one.

Home Depot: New Innovation Vector Required

The last Sudnay paper of 2005 ran a nice piece by Renee DeGross of Cox News, “Home Depot Improves Under Nardelli.”  Basically, she reports that ex-GE executive Bob Darnelli has successfully applied organizational discipline and six-sigma methods to right a listing ship.  No small feat.  That said, it’s the subtitle of her article that calls out for attention: Stock price hasn’t shown much growth.

This is basic issue that Dealing with Darwin is intended to address.  Major brand names like Home Depot, Intel, Microsoft, Cisco, Southwest, and Dell have persistently resisted increases in market valuation, despite superior competitive performance within their respective categories.  What’s going on?

The answer, as we have previously discussed, is that while investors appreciate Home Depot’s exceptional market performance to date, they do not see its competitive advantage increasing much from here on out.  That is, the U.S. market is relatively saturated, and while there are clearly tweaks that can generate additional revenues and profits, there is nothing on the horizon that would substantially change the game.  In our parlance, Home Depot’s core business is no longer core.   It has instead become context.

To be sure the base business is as mission-critical as it ever was—screw it up even mildly, and the stock will tank.  But perform brilliantly, and the stock will not soar.  As one investor queries, “Where do we go from here?  Nardelli has to communicate a vision.”  For shareholder value to appreciate, a new innovation vector is required. 

Let’s see if we can’t figure out what that vector has to be.  Home Depot’s sector is mature, so none of the growth innovation vectors—disruptive, application, product, or platform—are appropriate.  On the other hand the sector is not losing its value, so a major focus on category renewal, be home grown or via acquisition, is also not required.  That leaves eight innovation types to choose from.

Since the company’s business model is volume operations, it has to take value engineering and process innovation vectors as table stakes (the six-sigma fix-up was necessary but not differentiating).  Moreover, Home Depot’s category killer approach to retail rules out micro-niche strategies around line extension or enhancement innovation—they won’t provide enough scale.  That leaves four to look into more deeply: marketing, experiential, integration, and value chain migration.

I’d put my money on a combination of the latter two, both of which imply entering new businesses focused on volume operations services to complement its existing market-leading position in volume operations products.  These operations would be likely be downstream from the retail purchase decision., and many customers for them are likely to be a service providers themselves.  As a result, the company will have to tread carefully not to compete with its own customers.  The key will be to identify the low-margin context work these customers have to do and take that work off their plates so they can focus on the high-margin work that really pays the bills.  While this boundary is never obvious, it is always present and can be exploited if the company takes enough care to gain the advice and counsel of its most valued customers.