Don't abuse numbers!

Last summer, on an inbound flight to NYC, I was seated next to an employee of a numbers-driven consultancy. His assignment was with a large grocery chain in the US, for which he had to come up with what else if not a strategy to turbo-charge stagnant revenues. The problem seemed to be that his numbers did not add up beyond the usual suspects, some improvement here, some scale there, or, in other words, more of the same albeit to a greater extent and at a larger scale.

My suggestion at that time was as simple as one word can bear it: organics! My word fell on deaf ears. Then, I tried to counter his skepticism with some off-the-cuff quantitative proxies: organics have higher margins, are the fastest growing segment, and so on. Perhaps, I continued, if the organic goods were to be eventually private-labeled the vendor would stand to make even more of a profit. He followed on with a whole line of argument that I could sum up as "organics are too risky."

Fast forward to a visit at Sam's Club this past week: 5-lb. bags of organic apples selling at the price of regular apples. First and foremost as a consumer, I hope this is just the beginning of a new stage in grocery retail, and vendors will come to understand that what is good for the consumers will be good for them, too. Secondly, I hope there will be enough independent groups to watch over the increasing number of 'organic' claims from vendors. Thirdly, I hope the days of that business, dear to some and known as whole-paycheck to others, are numbered; in the end, an apple is just an apple and should stay an apple, in price that is...

P.S. Sometimes the most numbers can reveal is the need for change.

Origamiun-folding

I like so much the idea of a device along the lines of the Origami project that I went as far as checking the opportunity of reinvesting in Microsoft and Intel. According to Reuters, Origami is

a paperback-book sized portable computer, which is a hybrid between a laptop PC and a host of mobile devices that the world's biggest software maker hopes will create an entirely new market.

Its characteristics are:

• Less than two pounds (0.972 kilograms);
• Seven-inch (17.78-centimeter) touch-screen;
• Powered by Intel processors;
• Runs a modified version of Microsoft's Windows XP Tablet PC edition;
• Will run on Windows Vista;
• Sell price between $599 and $999.

Its target market is gadget fans lured by an array of features at the intersection of productivity and entertainment (e.g. communications, TV & radio, cameras, music players, etc.). A company official claims that:

We believe that (ultra-mobile PCs) will eventually become as indispensable and ubiquitous as the mobile phone today.

Amidst all the predictions and hype, several questions about the scope and viability of the project, I am certain, will have an answer only as time goes by. Here are some of them, followed by my considerations:

1. Have Microsoft and Intel learned anything from the success of iPod? iPod set out to solve one problem, of portable music devices, from the perspective of several constituencies. The end user wanted style and portability, the music industry wanted copyright protection, and Apple wanted to get back in the game. Apple did this, most probably, by starting with those needs in mind, and only years later generating variations on a successful theme (camera, phones, solid state memory, size, eco-system of complementary products, photos, TV, etc.).
2. How much is Origami a bottom-up vs. top-down project? A bottom-up project would be one that starts with some unmet customer needs, selects or builds up the best technologies (operating system, applications, hardware), determines a price, and sells it to no end. A top-down project is one that, let us say, comes as top management's reaction to some competitor's market success. In answering this second question, let's ponder some facts: We are being told that Vista would be the next OS in the Origami project. Admitting the progress (applications performance and power consumption) of the Intel Core Duo processor, will it be diminished by supporting a heavier OS? How close is Intel from delivering a whole set of circuitry to support a mobile device the way Origami intends to unfold?
3. What has the lack of success in the current Tablet PC line taught Microsoft? Judging by current specs, it is as if Tablet PC was overwhelmed by price and size alone. I don't know about the price, while the size was surely not the reason I did not buy a Tablet PC. My decision was the result of: unimpressive hand-writing driven maneuverability; the cost of a huge OS on the resources; and the sense of haphazard symbiosis between the software and most hardware implementations.
   

Besides Tablet PC, the next closest Microsoft project that Origami comes to is Media Center. Let's just say that's another story altogether. In any case, I hope Origami will be more than a glorified PDA/etch-a-sketch, and Microsoft/us will get there in less than three iterations.

Follow up to: Is Redmond Adopting Win-Win Strategies?

Last May on this blog, I called readers' attention to a new Redmond strategy whereby Microsoft was ready to invest IP-capital into start-ups. Time has come for step #2 in the strategy implementation: Co-opting European and Asian governments as proxies for Microsoft strategy. According to Brad Smith, general counsel with the company, "By extending the reach of IP Ventures through government agencies, we believe new businesses will bring more technology to market, faster, and they'll also contribute back to local economies."

Probably, folks at Microsoft have understood that , outside the US, entrepreneurial culture, or lack thereof, ought to be complemented by government action. Not to mention the good deeds the company may be generating at a time when its redress from monopolist behavior is received with skepticism.

Original posting: Is Redmond Adopting Win-Win Strategies?

Can search follow the browser?

In early December 2005, Bill Gates said to an Indian audience that Microsoft would share some advertising revenue from its search engine with users. This would be a move aimed at Google and its search users. However, to succeed, Microsoft needs to come up with a search infrastructure whose results are deemed by users at least as good as Google's. Indeed, the few cents per search a search engine can share with its users are not enough to make one switch for a less satisfying set of results--unless fraud is involved. Speaking of fraud, any such revenue sharing mechanism should be built impervious to fraud.

So, if Microsoft can deliver:

• a search engine whose results are as good as Google's if not better;
• a search infrastructure to support searches beyond Google's span;
• an economic model enticing for all parties involved in a search;
• a mechanism to protect the above business model from abuse;

then Microsoft search will become a true Internet destination.

Moreover, if Google does not become more for its search users before Microsoft delivers on the above points, search may well follow the browser.


Addendum 2/9/06

Should Yahoo thank Microsoft for the hint? Have a look at this excerpt from TheStreet.com:

Yahoo wants to stop losing search market share to Google, and now it's asking users to do something about it.

"Yahoo! is considering launching a program to reward people who make Yahoo! their primary search engine," says a company-sponsored survey first posted on the Web site of CNet.com.

People would receive a monthly reward if they do most of their searching on Yahoo! through a specialized tool bar. Among the rewards being considered for the program are ad-free Yahoo! mail, unlimited email storage, frequent flier miles and discounts on Yahoo!'s personal and music services.

The strength of (low) numbers

Has it ever occurred to you why people like shopping so much at Costco that they even pay an annual fee to do so? The following comment

It's been estimated that there are 1,000,000 SKU’s (Standard Stocking Units) out there in America. An average supermarket has 40,000 SKU’s. Now for the stunner: An average family gets 80% to 85% of their needs from 150 SKU’s. That means there's a good chance they'll ignore 39,850 items in that store.

posted here, and some additional information I had about Costco explained the magic of paid shopping membership.

1. Costco mark up is up to 16% => One can hardly find products at the same quality cheaper elsewhere;
2. Costco carries only a very limited number of items/brands => scale economies and higher negotiating power with suppliers;
3. Costco has a refund/replacement policy for the life-time of a product => it costs you little if any to try out a new product from Costco.

From #2 & #3 above, one has the feeling Costco is pre-screening well the products competing for a place on its shelves; otherwise it could not have stayed in business for this long.

All in all, there is value in numbers, that is small numbers...

Job markets r-evolutions

Apparently, not much has happened in the online job-markets since Monster.com became the 800-lb. gorilla. Contenders have either been devoured by Monster.com, or stayed on life support due to the hopes Yahoo! and its likes have for this market. All this would have made for a boring landscape, in which the process of looking for a job on Monster is like asking your current HR person for a job with another company, had it not been for a new concept introduced by companies like LinkedIn or Doostang. These companies leverage the salient feature of job markets, that is networking. Your typical candidate, for once, becomes a multi-faceted entity, represented as such, that reveals a wealth of information before you even make a phone call. The job market is among the first to capitalize on concepts such as markets as conversations or social networks. There is so much more to happen before late.

Markets as conversations or December musings

*

Given the confusion generated by its intended $6.9Bn acquisition of Scientific-Atlanta, I wonder if CISCO is on its way to sharing the fate of a former undisputed leader of networking, Novell. Through this purchase, Cisco wants to become the leader in TV, telephone and Internet. At an operational level, CISCO and S-A have been as different as they come (markets, profit margins, support, pricing, etc.). At another level, it is interesting seeing there are still incumbents thinking of revolutions in terms the most successful application(s) of the prior medium. It could be argued that this is more a problem for Yahoo! and AOL than for the infrastructure provider itself, yet I am skeptical about this version of Nirvana consisting of 500 VOD channels. The relevance of the model's viability is clear to those who recall the many billions worth of infrastructure equipment CISCO had to write off after the last boom.

**

When did problems start showing up at Dell? When Michael Dell left the top position, when Mark Hurd succeeded Carly Fiorina, or when some Central-Texas star lost its shine? It could be all or any of the above and something more. Anyone recalls Dell's exiting the Chinese retail market? Somehow, Lenovo was able to do better in that market, despite all Dell's patented processes and such. And that was only punch #1 in the series. The second came shortly after, when Lenovo acquired IBM's PC business. Optimists still call this progress, however, when considering the success of Lenovo's first ThinkPad, progress is in the eye of the beholder. I would say, this was just the most recent punch...
The point of the whole story may well be that Dell, by deciding to put its money in processes, has been, by and large, about lower prices and little else. When a canny competitor, (e.g. Lenovo) that spends on R&D and somehow beats Dell's processes, shows up what's left to keep Dell in the customer's grace?

***

Will there be a time, in the enterprise software market, when Oracle and Microsoft are the only players? On the one hand, Oracle has to do prove it did not bite off more than it can chew. On the other, success at Oracle will push SAP and Microsoft in the same place. I should add that I cannot see how a third option, represented by online offerings (e.g. SalesForce.com), can resist the giants. Such option is limited by the need of enterprises for back end integration of their applications. By the time SalesForce.com is able to add one more enterprise application to its own offering, the big players will have developed their online versions as well.

****

In theory, the music and print industries are best suited to make the most and fastest out of the potential of markets as conversations. Here would be some of the reasons:

• Their contents are either digitizable or in digital form already;
• People often base their buying decisions on advice from others;
• The current cost structure is extremely inefficient;
• The costs of producing (digital) content have been lowered dramatically.

On the flip side, these same industries fear:

• The proliferation of pirated (digital) copies;
• Changing of their tested, however imperfect, revenue system with something uncertain at best, if not disastrous.

What are the driving forces?

• Digital piracy that cuts on the profit margins;
• Newcomers such as Amazon, Google;
• Decreasing revenues from the traditional channels;
• Perceived lack of fairness on the part of consumers who, say, have to pay up to $20 for a CD.

To illustrate the concept of markets as conversations, how many times have you checked product reviews with Amazon or Epinions before making an on/off-line purchase? What do you trust more, an advertisement or several reviews? Moreover, the reviewers are being rated themselves. Is this step, of checking online reviews, going to become part of your purchase making process? If so, why not make content producers out of what are still being perceived as channels by traditional content producers? Alternatively, given the reduced price of production, why wouldn't content makers bring their products to a place like Amazon.com?

To conclude, the challenge in the music and print industries is about finding the next business model. DRM or legal interventions can help the incumbents only dream a little longer. It is essential to stress out that, no matter how one looks at it, consumers must pay for content. However, supporting bloated industries cannot be anybody's goal. Question is: How much to pay? Hint: Follow the evolution of telephony pricing!

What do you think?

To Jim Heskett

Harvard professor Jim Heskett raises a monthly challenge at HBS Working Knowledge. This month's topic is "Is Less Becoming More?". Here's my take:


Complexity problems with producers are seldom encountered by first movers. Complexity tends to creep in either as result of the producers' need for differentiation, product complexity, or as "me-too's," choice complexity. Indeed, when producers want to differentiate themselves, up to a point, the safest and quickest way to achieve that goal is to add features or increase product complexity. Moreover, striking analytically (as opposed to heuristically) the right level of complexity may not even be doable. Thus, the first impulse of some producers is to err by doing more. When successful, product complexity is being subsidized either by scale economies, as in software, or by the consumers' wants, as in luxury products. Choice complexity is usually brought about by those "me-too" producers that want to capitalize on the first-movers' R&D. Less search-costs, its net effect is to drive down prices, being subsidized by producers. It is remarkable though how Apple manages to achieve product simplicity and choice complexity with its iPod line of products. Product simplicity endears iPod with the consumer, while choice complexity helps Apple segment its customer base. As a side note, products start simple, and then get copied and more complicated until another category starts anew.

Regardless of the type of complexity, product or choice related, the consumer is ultimately overwhelmed. Worse yet, consumers may even experience frustration due to unfulfilling complexity of choice. An example could be found on the shelves with cereal boxes at your health-food store. Cereals come in about two dozen offerings, but chances are that you'll find just one to contain organic cereals without sugar. Maybe the producers' problem is the lack of perceived innovation/differentiation in plain and sugarless cereals.



Additionally, you may want to consider: Minimalist vs. Baroque Categories