Building an entrepreneurial society

Archive for the month “January, 2012”

The distorted market

There has been a backlash against the market or capitalism in general that has accelerated since 2008.  The perception is that a market system has built in mechanisms that cause large gaps in income and wealth.  The results of the recent past seem to bear this out as the disparity between the highest income earners and the rest of  the population has reached startling levels.  But should we be concerned about the market system and capitalism or the distortions that have corrupted them.

What we need to be clear on is what we are fighting against.  I propose that the market that is in place today is not a true market but one that has been distorted by people and institutions that have profited grossly from it.  We also have a shopping mentality that rewards flash over substance and creates a false sense of need.  These forces have continued to move the market farther from its true form and more towards this distorted form.  You don’t have to be a socialist, unemployed or impovershed to want this distorted market reformed.  There are many hard working entrepreneurs that are also hindered by this distortion and would welcome a return to a real market.

Markets should create value for all of society and not just for a few people.  An increase in value means that the size of the pie increases to the benefit of a large number of people.  If all someone is doing is diverting pieces of the existing value for their personal benefit they are not creating value they are corrupting the market.  This rent seeking activity is what we have seen from the financial services sector where most of the distortion has originated from.  Any efficiencies they are claiming to create do not exceed the massive cost they have inflicted.  Further, they have taken financial services away from facilitating value creation and attracted people whose talents could benefit society elsewhere.

There should be an ability for anyone to participate in the market at whatever level they choose to.  People with businesses that create value should have access to funding, customers and suppliers without having to know the right people.  If you have a good story that is about a business that generates real value for investors, society, employees and other stakeholders that story has be told and heard.  I distinguish this from stories that are nothing but PR and fluff where there is no underlying value creation.

We need to look at long term value creation and measures that go beyond just return on investment or financial profits.  Companies that will provide employment, look after non-investor stakeholders and build economies need to have a long term focus and real purpose.  We have to avoid the build to flip mentality where people are looking for get rich quick opportunities and don’t stand for anything.

Markets will have some inequality.  That is part of their functioning where people get rewarded for hard work and value creation greater than those that provide less value.  We will not and cannot eliminate all inequality in a market system.  But we have allowed the inequality to go too far and need to bring it into proper proportions.

Before we look at possible solutions we should also consider the alternatives to an open and strong market.  We could stay with the market but look to the government to intervene in a substantial way.  This is the solution I hear most often.  While its true that there are some regulatory and taxation alternatives that could help level the markets do we really believe governments have the capability to do this?  Do we want knee jerk, politically motivated band aids and quick fixes when what we need are long term, well thought out changes?  Finally, how do we eliminate the elitism that we all despise when governments are influenced by lobbyists and funded by special interests?

There are even people that are calling for direct government involvement in the private sector through government owned enterprises and even calls for the kind of socialism that exists in China.  Governments are having a difficult time effectively and efficiently running the services that are currently under their control.  How do we expect them to take on more and do it better than the private sector is doing now?  We also have to acknowledge that China is in a completely different stage of development where there may be some merit in the level of state involvement they have.  But we are starting to see some cracks in that system and I predict we will see that what lies below the surface is not as attractive as we have been led to believe.

So then, what do we do about this?  In the spirit of the entrepreneurial society we need people to build businesses that have a long term viewpoint, a mix of financial and non-financial objectives and that create sustained and real value.  Then we need investors and customers who will seek out these companies, buy their products and invest in their shares.  We need to punish short term thinking institutions by not buying their products or shares and by letting them know we don’t like the way they have been run.  As a population of investors and customers we have to stop pretending we haven’t contributed to the problem.

We can ask our financial institutions to provide the kinds of services that benefit their customers and are not just there to suck in fees in any way possible.  Get back to basic services where they fund and support businesses.  Manage stock portfolios in a way that demands performance from the companies they invest in and don’t stand by when executives take grossly inflated salaries and bonuses.

Our politicians need to provide us with long term plans on how they will support and nurture an entrepreneurial society built around fair markets.  We need limits on political contributions and lobbying.  Move away from negative attack ads and tell us what they will do not what is wrong with their opponent.

A truly functioning market system is how we have built the prosperity we enjoy.  It can’t remain stagnant and needs to evolve with the times.  It also can’t be hijacked by special interests whether they are the elites or those that would have us revert to government control.  We depend on well functioning markets and need to take it upon ourselves to protect them.  I have thrown out some discussion points but haven’t come close to covering every possible solution.  So as a society we need to stop talking about what we don’t like about how things are being run and start coming up with solutions.

Who needs process — let’s just get out there and do it. Right?

People, especially entepreneurs, don’t like to follow process if they can avoid it.  This fact is especially true when the process is not intuitive.  We are generally driven to just get started and build stuff.  My belief about how we assess someone’s contribution is based on their list of stuff.  The people with the longer list look like they accomplished more than the ones with the shorter list.  We don’t necessarily look to see if the stuff on the list added any value.  We also tend to consider stopping to think before we act as a waste of time.  Unfortunately this way of going about things has never been very productive and will be less so over time.

The problem we are starting to accept is that people don’t know in advance what will work and what won’t.  This reality is true for stock investments as well as for starting a business.  This reality is true despite having a number of experts trying to appear as if somehow they do.  We read in the press about all of the successful people who seem to have created a business from some grand plan in their head and executed it just right.  What we don’t read about are the thousands of people who did the same thing and failed.

If you have an idea for a business and just go for it you might succeed.  Then again you might not.  Just because we were successful this time doesn’t mean we will be successful next time.  Just because we failed doesn’t mean we will fail next time.  There are few successful serial entrepreneurs and many people who have followed multiple failures with a success.  By jumping in feet first we are throwing ourselves on the mercy of randomness.

We can’t do anything about the uncertainty that surrounds the start up and growth of a new venture.  But, we can manage this uncertainty and prevent alot of waste.  We can also discover our missteps in time to make corrections.  By using a process of continual learning we are building the product as we learn what the customer wants and doesn’t want.  An example of a process is the lean start up approach that starts with a minimal product and tests each new feature as it is built, letting the market drive the product configuration.

There is a similar train of thought described best as an option approach.  Build just enough to give us the option to take the next step.  The idea is to put enough into the product or service to see if there is acceptance before a lot of money is spent on a more permanent solution.  A cable company launched its movie on demand process by taking orders over the internet and then having people manually load the movie for the customer.  From the customer’s perspective they were getting an automated service.  The company wanted to make sure there enough demand before they spent money building this automated system.  In this process the product is executed as a series of options.

Regardless of which approach you take make sure that you have some process to manage the uncertainty that exists.  The swashbuckling entrepreneur that throws caution to the wind, takes huge risks and launches directly into a successful business is a myth.  Most of these types end up at the bottom of the ocean never to be heard from again.

Business model versus technology innovation

When you mention innovation people often jump straight to R&D and think about the development of technology breakthroughs.  The key measurement often used is the amount of R&D spending per employee or number of patents.  While these are interesting measures they don’t tell the whole story.  The true questions is how much money does the company make from products using these technology breakthroughs?  Does the company make money from new products and processes or are the usually extensions of existing products?  Clearly, just spending money on R&D and filing patents does not alone make a company innovative. 

A difficulty entrepreneurs have with technology innovation is that it often requires deep technical skills in science and engineering and large funding commitments.  Further, much of the R&D spending fails to produce successful breakthroughs or take years to do so.  However, there is another type of innovation that is available to anyone and that is business model innovation.  This type of innovation involves establishing a form of business structure that serves a market in a unique way.   To use some of the terms from prior posts, the business model helps customers with their jobs to be done in a way that is disruptive to the market.

Many people believe that the technology exists today to solve most of the jobs to be done in the world, both big and small.  Whether or not you believe this is true you, have to agree that there is more technology available than people are able to use to its full potential.  There is also more data being produced than we are able to process effectively.  Entrepreneurs can find ways to tie some of these technologies and information together in ways that have not been tried before through business model innovation.  This new business model might create the ability to offer a product or service at a cost new customers can afford, the creation of a distribution channel that opens up information or services to previously unreachable markets or the simplification of complex products for less sophisticated users.

Some ventures could use a combination of both technology and business model innovation.  The entrepreneur could find a job to be done that can be improved, determine how to deliver the service and then build some software or other technologies to suit the business model.  Another person could use an existing technology, develop a business model to utilize it and then customize the technology to fit the business.

The power of business model innovation, in combination with the jobs to be done and disruption, is that they are often hard to replicate.  Technology, on the other hand can be leapfrogged, making it instantly a commodity or obsolete.   A business model can be designed in a way to swap in advances in a technology further enhancing the model.  

The important takeaway from this post is that an entrepreneurial venture does not mean having to conduct R&D, take big risks and create a technology breakthrough.  The most efficient first step is to look at what technology already exists and determine how it could be used in a unique way to solve a customer’s job to be done.  Avoid the idea that you have to create your own technology all of the time.  Even if you succeed in building something that is better than what is out there it may not be worth the money invested or the delay in launching the product or service.     

Business planning — from analysis paralysis to active learning process

We are used to seeing business plans that are many pages thick and have taken the startup team many weeks to build.  That would probably be a good way to go if we knew exactly who the customer was, what they wanted and how we were going to build it.  We would also know what our organization structure would look like and exactly how much money we need.  Unfortunately in a startup we don’t really know any of these things with any certainty.  A major problem with this planning approach, aside from over analysis, is that we tend not to want to change it once we have put it on paper.  We are destined to ride this one right off the cliff if that is where it takes us.

We need a different way to plan our business that acknowledges what we know and don’t know and gives us direction but with the flexibility to adapt as we learn.  This post will layout a new approach to planning that builds in active learning.

We have started by looking at jobs to be done and the people who do them.  Our plan will have a model of who the person is, how they do the job now and how we believe they can improve on it.  This is the beginning of the planning process.  We will constantly add to this model as we learn more.  We may also add new user profiles as we find other potential users over time.  We should have a belief that there will eventually be enough users to build a sustainable business around.

We have also assessed whether there is any other provider of these services to determine if it is a disruptive innovation.  If it is not then we need to look at different jobs to be done, different target users or abandon the venture.  We need to be constantly aware of competitor responses and new introductions and adjust parts of the plan accordingly.

Out study of the potential  users will also give us some insight into where they might purchase the product, where they might use it, what assistance or training they may require.  This part of the plan helps us plan for the distribution channel and part of the organization structure (i.e. do we need people to train).  This part will also evolve as we learn more.

Now we are ready to create a model of the business that will pull together all of the pieces we have assembled so far.  We want to build a model in Excel that demonstrates what success will look like.  How much revenue we need, what our margins will be, what our costs structure has to be, etc.  It is essential that the whole team be involved in building this model since the degree of learning that falls out is significant.  I am always interested in how much the team does not know about how the business works or needs to work until we put the model together.  There are many instances where it is necessary to go back to the product, customer or channel and rethink it based on what the model is demonstrating.

The model is a representation of the business strategy and is the bridge that links our customer/product/channel/organization planning to the execution.  We will use the assumptions in the model to develop the product in a way that let us test them out and evolve the product.

Once the model is constructed the team then has to separate facts from assumptions and then rank the assumptions based on how critical to the success they are.  Having identified the key assumptions we will test them using a structured experimentation process.  As in a scientific process the experiment will have a purpose (i.e. we want to test the assumption that users will download the product from our website), a hypothesis (a prediction taken from the model on the user acceptance rates) and a procedure which is what we will include in our launch product.  We create features, A, B and C to determine if the users will find them useful and download them from our site.

In Lean Startup, Eric Ries identifies two types of hypotheses, a value hypothesis test whether the product or service actually delivers value that the customer is willing to pay for, and a growth hypothesis tests how new customers will discover the product.  We will need to make sure we are moving in both directions by making the product more valuable and growing the user base.

We will also decide on how we will measure the results and include that in our experiment description.  The plan will have a series of these experiments along with the results.  The results may support or refute our hypothesis.  If they support it we will then move on to subsequent assumptions creating experiments for each of them as we go.  In each instance we will build only enough into the product to test the specific assumption we want to learn about.  We will also be updating the earlier segments of the plan such as product and customer for what we have learned.  The model should remain fairly stable at this point unless some of our learning significantly changes one or more of our assumptions.

If the results fall short of what we expected or demonstrate an unexpected turn they should be followed up with users to understand why.  This is a deeper learning tool that will help us to get the product back onto a user acceptance path.  What we learn from these investigations will inform the earlier parts of the plan.

The company could reach a point where there is no significant traction from the product as it is being delivered.  The company then has to revisit whether there needs to be a shift in the strategy by making changes to the major assumptions and redrafting the model or whether they should abandon the project.  The results from the testing and discussions with potential users will provide direction for these decisions.  We will discuss these types of decisions in future posts.

We can see by looking at this approach that the planning phase was not some big investment of time up front but was built as the company progressed through strategy and execution.  Also, by incorporating learning early it was possible for the company to identify missteps and correct them before they has exhausted their resources.  If the business ended up not proceeding then this process will let the company fail early before they spend excessive time and resources trying to prop up something that isn’t working.

A reason why people use the old way of planning is that some investors expect to see things in that format.  Using the learning approach will often mean fewer resources are needed up front and investors will have better insight into how the product is progressing before any revenue or profits start to accrue.  If you find yourself being pushed into the old planning model by investors then it may suggest you have the wrong investors.  Having the wrong investors for your business is something you want to avoid at all costs but that is a topic for another day.

What kind of innovation is it? Increasing the chances of success.

There is a step we need to consider before we make a final decision on the product and the target customers.  We need to determine if the product will be a sustaining or a disruptive innovation.  I will once again use the concepts developed by Clay Christensen.  In future posts I will integrate concepts from multiple sources and my experience.  However the distinction between sustaining and disruptive innovations is the major breakthrough Christensen developed in his work and there is no other predictive theory that captures it as well.

A sustaining innovation is one that “targets demanding, high end customers with better performance than what was previously available.”  In this instance a company is adding features and functionality to an existing product that is being sold to its existing customers.  The jobs to be done for these customers are already being addressed.

Disruptive innovations are “simpler, more convenient, and less expensive products that appeal to new or less demanding customers.”  That is, customers whose jobs to be done are not currently being addressed by existing products in the marketplace.

The important things to note here is that the incumbents never lose in a sustaining innovation fight and almost never win a disruptive innovation fight.  In fact, the incumbents will often abandon a lower value market to a new entrant with a disruptive product so they can focus on their higher value customers.  If your job to be done is an improvement to an existing product that is serving an established customer base it is a sustaining innovation and you will fail.  You need to ensure that your product is a disruptive innovation.

There are two groups of disruptive innovations.  The first is low end disruption where a cheaper and less functional product is offered to a set of customers that don’t need the functionality of the existing product and will be happy to pay a lower price.  You need to determine if you are able to offer this product at a cost where you can make a profit.  Over time the disruptive product will improve its functionality until it will be attractive even for the incumbent’s customers.  However the disrupting company will be able to meet the needs of this market at a lower cost structure.  The incumbent will not have the ability to lower its cost base and will lose the customer base.

New market disruption is the second type of disruptive innovation.  This type of disruption targets customers that targets people that do not use any product or service for their job to do because they do not have the expertise to use the existing products in the market or cannot afford the cost.  They may also avoid the existing offerings if they are not convenient to use.

A disruption may also be a combination of the low and new market variety.  Low end customers of an existing product may move to the less expensive or complex product and a new group of customers will be brought into the market.

In the previous post we determined that the starting point was to find a customer job to done that we could address with a product or service.  In this post we qualify that selection by ensuring that the product or service is a disruptive innovation and does not try to take on an existing competitor in their area of dominance.  From there we can identify the initial customer and design the launch product.

What kind of society do we want and how do we create it?

The first step in deciding what an entrepreneurial society should look like or whether it is even feasible we need to decide what we want as a society.  While we like to blame others for things we don’t like such as offshoring of jobs, income inequality and environmental problems we as the people of society cause them to happen.  We do this by how we spend our money and time, who we vote for, who we work for and other activities.  Therefore we will need to align our activities with what will bring about the society we want for the future.

As a start, do we want to retain the shopping driven consumer culture we have been living for a good part of our lives.  There is a lot of evidence that this mode of living has not made us happier or has created a better place to live.  A lot of evidence points to the fact that it has the opposite impact.  We have also driven corporations to reduce costs by moving production to lower cost locations and automating away manual processes (i.e. jobs).  Further, it has created a lot of debt for people, companies and countries.  So even if we have a desire for a growth based society we need to do a better of job of it.

If we don’t have a growth driven economy we have something called steady state where things remain in a holding pattern.  This steady state economy is not the same as a failed or stalled growth based economy.  Instead it is one where the plan is not to grow but to live with what we have.  It is a more egalitarian society and has gained a lot of popularity in recent years with the economic and ecological concerns that exist.  I just wonder whether we know how to live in this type of steady state.  Unless we were able to somehow gain unanimous agreement there will always be some groups that will try to move ahead either economically or militarily.

So we need progress and we need markets but we need to do them better.  We can decide to do growth differently and to make sure we have real markets instead of the distorted ones we have today.  Shouldn’t people be able to look forward to having a job that enables them to live fulfilled lives and be connected to society?  You shouldn’t have to be elite or rich to enjoy life.  Whether or not you believe in global warming is it reasonable to believe we can continue to grow in the way we have and not overrun the resources of the planet?  This is especially true if developing countries also want to grow and enjoy prosperity.  Shouldn’t technological advances improve our lives in some way rather than being wasted on trivial applications?  How can we keep people as productive participants in society as they age?  Wouldn’t we prefer products and services that create value over ones that divert existing value towards selected segments of society?  As individuals we have to think about what is important and ask ourselves these and other questions.

I am not suggesting that everyone will get together and make some grand plan on the structure of society.  That would not be possible and there probably isn’t some homogeneous model that would work for everyone anyway.  We also can’t let governments decide since we have already seen what planned economies turn into.  It will be something that will evolve over time as we make the choices we make.  Society will evolve with the actions of its people.

So in effect it will be the mirror image of the entrepreneurial side of society.  Entrepreneurs will create organizations based on what they think people will want and what will make society better off.  As consumers, employees and voters we will determine which of these venture will succeed and which ones won’t.  This bi-directional action will help shape organizations as the organizations shape society and its citizens.  So we all need to start looking at our actions as an opportunity to shape society and not just as random acts.  That way we can get it right and create a society that is worth living in for everyone.

How the entreSociety could come about

We start from where are today with a number of large corporations and government employing the bulk of  the people and having significant influence over the economy and the pace of change.  We also have a large number of small companies and not-for-profit organizations.  We have seen a growth in enterprises built not just for profit but to bring about social change this trend will continue as people look for ways to solve society’s issues that fall between the boards.  Young people unable to find jobs will start companies as an alternative and will be an influence on other young people to do the same.  Boomers near the end of their careers and those that have been forced out of employment will also start new companies.  Some will do so out of necessity and others will be following a long held dream that wasn’t possible up until now.  New technologies and business models will also make it possible to start companies with fewer resources than were needed in the past.

As this trend gains momentum  people will start to select smaller, entrepreneurial companies over government and larger entities as employers.  They will be attracted by the ability to have some control over their lives and pursue things other than the latest quarterly earnings.  They will also see themselves accomplishing things that matter as opposed to just showing up and putting in eight hours.  Wealthy individuals will provide angel funding and use these entities to fund social causes that may not have been served effectively by traditional not-for-profits.

Large companies will have to fight to attract and retain talent.  This won’t be easy for them and many will fail at it.  Some will acquire some of these ventures in an effort to revitalize a fading product line.  If they don’t do this with a true entrepreneurial spirit these acquisitons will die on the vine and the people will shift back to the entrepreneurial sector.  The ones that get it will create pools of new venture within their organizations to give creative people the ability to start and grow new product lines and operations.  Large companies that can do this will have a good chance to grow these into large ventures that can join the global marketplace.  Others will build networks of small entities that link to their core operations providing resources and a channel for these ventures.

The vast multicultural population in North America will help to build global channels for new ventures as they link back to contacts in their countries of origin.  New markets and ideas will result further strengthening the entrepreneurial society.  We will find success in areas where we have world class strength and capabilities while importing goods and services where we don’t.

Financial insitutions will realize that they don’t exist for their own purposes or the need to enrich a select few.  They will relearn hwo to provide services that support people and entreprises that make things or do things for people.  This means a shift back to basis banking and financial services.  Smart people will no longer seek the riches of financial services and instead will use their talents to build businesses that create real value.

Governments will see the benefit of offloading some of their services to entrepreneurs that can perform them more effectively and efficiently.  This shift of services will reduce government expenses and let them focus on activities that can’t be effectively served by private enterprise.  Society will be surprised to find that there are not as many of these exclusions as they once might have thought.  Governments will also stop trying to pick winners and protecting old line businesses.  They will build an environment where new enterprises will flourish.  Regulation will evolve to provide boundaries that protect resources, the ecology and people while giving business room to build.

Unions will need to change with the times as well.  They will need to move away from a confrontational approach that impedes progress and prices government services and businesses out of reach.  Instead they will find a way to support entrepreneurs and their employees by facilitating supports that big companies and governments provided in the past such as training, pensions and health benefits.  They will do this in a cooperative way that works with entrepreneurs for the benefit of everyone.

We as a society will rethink our values after the near collapse of our economies and environments.  We will move from a shopping-driven culture to one that values things like people, equality and the environment.  Consumers will be driven to support those organizaitons that provide this type of services.  They will also demand more accountability from government for their tax dollars and make sure that politicians do more than just work on getting re-elected.

This is an example of a scenario that can be used to illustrate in a narrative form what might be.  It is not a prediction but a possible outcome that can guide people and also help them to adapt in the event that the scenario becomes a reality.  This particular one is slanted in an optimistic way and may be a bit broader than many scenarios would be but it is intended to give a possible view of what an entrepreneurial society could be.  It is also an example of what I call tools and resources that help entrepreneurs.

Future posts will describe other tools and resources that entrepreneurs and others may find useful.  I would be happy to have readers comment on these or add to them based on their own experiences.  I also want to talk about trends and realities that are taking place in the world that will impact the entrepreneurial society.  Finally I will tell stories that I have experienced or that I have read about and will also create other scenarios for consideration.  I hope you find these posts inspirational and helpful as you consider your path in the entrepreneurial society.

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