# articles ## business model [Types of Co-ops - Iowa Institute for Coops](https://www.iowainstitute.coop/about-coops/types-of-coops) [Morgan Housel](http://www.collaborativefund.com/blog/simple-business-models-that-work/) (2017) The Best Simple Business Models > The three best business models: Make boring things exciting. Make complicated things simple. Make intimidating things painless. ## co-founder [You won't find a technical co-founder | Hacker News](https://news.ycombinator.com/item?id=39902372) [Why you won't find a technical co-founder](https://www.breakneck.dev/blog/no-tech-cofounder) [Female Founder Secrets: Men Clamming Up | Hacker News](https://news.ycombinator.com/item?id=26612918) [Men Clamming Up](https://femfosec.com/men-clamming-up/) [Reflections on Being a Female Founder | Hacker News](https://news.ycombinator.com/item?id=23602100) [Reflections on Being a Female Founder - Tracy writes](https://tracy.posthaven.com/reflections-on-being-a-female-founder) ## common mistakes [The 18 Mistakes That Kill Startups](https://paulgraham.com/startupmistakes.html) [The Hardest Lessons for Startups to Learn](https://paulgraham.com/startuplessons.html) ## dropshipping [GitHub - gabriel-kaam/dropshipping-websites: List of all DropShipping websites](https://github.com/gabriel-kaam/dropshipping-websites) ## MVP [Michael Lynch](https://www.indiehackers.com/@mtlynch/459e942096) (2017) The Perils of Outsourcing Your MVP ## return policy [Counterfeits, fraud, and theft: Why Silca changed its return policy | Hacker News](https://news.ycombinator.com/item?id=32362363) [Counterfeits, fraud, and theft: Why Silca changed its return policy - Velo](https://velo.outsideonline.com/2022/07/interview-silca-on-amazon-e-commerce-fraud-theft-returns/) ## setting prices [Andy Adams](http://andyadams.org/you-can-charge-more/) (2014) How to talk yourself into charging more # guides ## business model [Business model - Wikipedia](https://en.m.wikipedia.org/wiki/Business_model) [How to found a company in Germany: 14 "easy" steps and lots of pain | Hacker News](https://news.ycombinator.com/item?id=39959368) [How To Found a Company In Germany: 14 "Easy" Steps And Lots Of Pain - Oliver Eidel's Blog](https://eidel.io/how-to-found-a-company-in-germany-14-easy-steps-and-lots-of-pain/) [Startup Playbook (2015) | Hacker News](https://news.ycombinator.com/item?id=18917362) [Startup Playbook](https://playbook.samaltman.com/) [Startup School - The Best Resource for Founders](https://www.startupschool.org/) [Blaz Kos](https://agileleanlife.com/business-model-you/) Business Model You – Book Summary – Reinvent your career ## co-founder - CTO [Startup CTO's Handbook | Hacker News](https://news.ycombinator.com/item?id=37971795) [ZachGoldberg/Startup-CTO-Handbook: The Startup CTO's Handbook, a book covering leadership, management and technical topics for leaders of software engineering teams](https://github.com/ZachGoldberg/Startup-CTO-Handbook) [The Startup CTO's Handbook - Zach's Blog and Stuff](https://zachgoldberg.com/ctohandbook/) [Resources for chief technology officers, with the emphasis on startups | Hacker News](https://news.ycombinator.com/item?id=26284750) [kuchin/awesome-cto: A curated and opinionated list of resources for Chief Technology Officers, with the emphasis on startups](https://github.com/kuchin/awesome-cto) [GitHub - mateusz-brainhub/awesome-cto-resources: A community-curated list of awesome resources to help you grow as a CTO](https://github.com/mateusz-brainhub/awesome-cto-resources) ## company handbook [GitHub - hkdobrev/awesome-handbooks: A curated list of awesome company handbooks](https://github.com/hkdobrev/awesome-handbooks) ## financial models [Startup financial models - Templates compared for SaaS | Hacker News](https://news.ycombinator.com/item?id=23061796) [Startup financial models - 12 templates compared](https://openvc.app/blog/startup-financial-model) [Minimum Viable Product - How to Build an MVP for Your Project and Why You Should](https://www.freecodecamp.org/news/minimum-viable-product-between-an-idea-and-the-product) [A Standard and Clean Series A Term Sheet | Hacker News](https://news.ycombinator.com/item?id=19019017) [A Standard and Clean Series A Term Sheet | Y Combinator](https://www.ycombinator.com/blog/a-standard-and-clean-series-a-term-sheet/) ## product-market fit [The Arc Product-Market Fit Framework | Hacker News](https://news.ycombinator.com/item?id=40020601) [The Arc Product-Market Fit Framework | Sequoia Capital](https://www.sequoiacap.com/article/pmf-framework/) [The Real Product Market Fit : YC Startup Library | Y Combinator](https://www.ycombinator.com/library/5z-the-real-product-market-fit) [Kano model - Wikipedia](https://en.wikipedia.org/wiki/Kano_model) ## researching [Lean startup - Wikipedia](https://en.wikipedia.org/wiki/Lean_startup) [Product Lessons you need to learn now](https://www.productlessons.xyz/library) Actually pragmatic and easy to implement # text ## being prepared The business plan should come AFTER you have a legitimate dream in mind - The business plan is the easy part: it's just unpacking what already exists that you built in your mind Ray Ozzie: Before I start a company, I write a couple of founding documents: 1. outside-in : scenario-based describing the high-level challenge I'm trying to address and the end-user scenarios we're trying to solve 2. bottom-up : describing the different technologies that will have to be assembled to accomplish this mission Companies take their shape based on the personality characteristics and human interaction characteristics of the founders. Learn more about the kind of culture you want to create in your company. Tim Brady: Do as much thinking up-front about what your breaking points are. Why am I getting in? When do I leave? What gets me up in the morning? What could happen to make me stop getting up in the morning? Too many startup business plans look more like they are planning to launch a rocket ship than drive a car. They prescribe the steps to take and the results to expect in excruciating detail, and as in planning to launch a rocket, they are set up in such a way that even tiny errors in assumptions can lead to catastrophic outcomes. The customers failed to materialize, the company had committed itself so completely that they could not adapt in time. They had "achieved failure" - successfully, faithfully, and rigorously executing a plan that turned out to have been utterly flawed. Instead of making complex plans that are based on a lot of assumptions, you can make constant adjustments with a steering wheel called the Build-Measure-Learn feedback loop. Through this process of steering, we can learn when and if it's time to make a sharp turn called a pivot or whether we should persevere along our current path. There is no such thing as a great start-up, because every startup can be improved upon. And most of the improvement happens between the first incarnation of a company and the tenth. Maybe by then, the company might well be considered great. And that is precisely the moment by which all of the true entrepreneurs will have left the building. Project Mercury and Tripod are good. NASA and General Electric are great. Start-ups are no place for greatness; leave that to the large, established companies. If your idea is big enough, and crazy enough, all you have to do is survive. If you survive, you will succeed. ## borrow from elsewhere borrow as much as you can from others. Don't look for out-of-the-box solutions. Find other people who are either doing what you want to do or doing pieces of your plan. Nothing is so new that someone hasn't already mastered parts of it. Nine times out of ten, someone has already solved the puzzle you are flummoxed over. ## business model There's a very specific business model for dealerships and insurance 1. do [cust svc] load for multiple providers 2. Have a quota with those providers 3. Public-facing reputation shared between you and them 4. Back-end, you're still unrelated entities ## buying A product bought right is a product half sold ## cofounder Founders should share a prehistory before they start a company together. ## competitive advantage There are really only three sustainable competitive advantages: 1. Supply. A company has this edge when it controls an important resource: A company may have a proprietary technology that is protected by a patent. 2. Demand. A company can control a market because customers are loyal to it, either out of habit - to a brand name, for example - or because the cost of switching to a different product is too high. 3. Economies of scale. If your operating costs remain fixed while output increases, you can gain a significant edge because you can offer your product at lower cost without sacrificing profit margins. Having a superior competitive advantage of handsome retained earnings, a fine business selling in the market place for less than intrinsic value, should repurchase its shares at this lower market price. One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it. Say bread ingredients cost $1.95. The baker who charges $2 a loaf has to sell twenty-one loaves for every loaf the luxury baker sells at $3. Twenty-one times as many is the difference between a few customers an hour or a line out the door. "But our customers would prefer to pay the lower price."? Perhaps. But how do they value the sparkling clean shop, with plenty of well-paid and helpful staff, a new sign in the window, and a local baseball team with new jerseys with your logo on them? How do they value the handsome shopping bag that comes with every loaf, not to mention the free samples of the little butter cookies you call punitions? How does it make them feel to tell their friends that they're eating the same bread that's served at the fancy restaurant down the street? Better to apologize for the price once than to have to excuse a hundred small slights again and again. - this is only true SOMETIMES - other times, you want the product at scale, meaning you don't really care about a high-quality image - the advantage in THAT situation is that they tell their friends that it's the cheapest bread in town [How to compete with Patreon | Hacker News](https://news.ycombinator.com/item?id=37808115) [siderea | How to Compete with Patreon [New Media, Tech, Patreon]](https://siderea.dreamwidth.org/1824441.html) - indicate how its business model is NOT driven by profit, and that "goodwill" or "charity" is a great way to get public attention on it - it's the reason why groups like Airbnb, Uber, and others can signal "woke" and get away with terrible actions - Signaling, however, works because it dupes people into thinking you care about the community ## considering all stakeholders The offering MUST add value to EVERY stakeholder: customers, vendors/collaborators, the company's employees - Otherwise, you can't [market] it reliably The founding moment of a company: set the rules that will align people toward the creation of value in the future. "Company culture" doesn't exist apart from the company itself. A startup is a team of people on a mission. Recruiting is a core competency for any company. It should never be outsourced. - BOUNCES OVER TO [MGMT TEAMS] The seven questions that every business must answer: 1. The Engineering Question Can you create breakthrough technology instead of incremental improvements? 2. The Timing Question Is now the right time to start your particular business? 3. The Monopoly Question Are you starting with a big share of a small market? 4. The People Question Do you have the right team? 5. The Distribution Question Do you have a way to not just create but deliver your product? 6. The Durability Question Will your market position be defensible 10 and 20 years into the future? 7. The Secret Question Have you identified a unique opportunity that others don't see? Any great business plan must address every one of them. If you don't have good answers to these questions, you'll run into lots of "bad luck". Every good business design has at least one strategic control point. The best business designs have two or more. Intel, for example, has a 2-year lead, value chain control, and a brand. Coca-Cola has a brand, a low-cost logistics system, value chain management, and a string of superdominant positions. ## considering competitors Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival. The more we compete, the less we gain. The hazards of imitative competition may partially explain why individuals with an Asperger's-like social ineptitude seem to be at an advantage in Silicon Valley today. If you're less sensitive to social cues, you're less likely to do the same things as everyone else around you. Don't disrupt: avoid competition. You can obsess about serving your customers/audience/clients, or you can obsess about beating the competition. Both work, but of the two, obsessing about your customers will take you further. I have often given entrepreneurs fearful of this issue the following assignment: take one of your ideas (one of your lesser insights, perhaps), find the name of the relevant product manager at an established company who has responsibility for that area, and try to get that company to steal your idea. Call them up, write them a memo, send them a press release - go ahead, try it. The truth is that most managers in most companies are already overwhelmed with good ideas. Their challenge lies in prioritization and execution. If a competitor can outexecute a startup once the idea is known, the startup is doomed anyway. You believe you can accelerate through the Build-Measure-Learn feedback loop faster than anyone else can. If that's true, it makes no difference what the competition knows. If it's not true, a startup has much bigger problems, and secrecy won't fix them. Sooner or later, a successful startup will face competition from fast followers. The only way to win is to learn faster than anyone else. ## considering customers Choose a few consumers that you really feel are the early adopters, test it with them, see what they like about it and what they don't like about it … And, if it appeals to them, use them to optimize it [the idea] further and then the laggards will follow. always consider the customers' desires - Customers pay the entire organization - Consistency is often more valuable than quality - Customers care about fast and reliable results more than distributors, vendors, sellers or anyone else - Customers choose an expert because they appear to be more valuable than the competition ## defining the market Entrepreneurs understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition. Expand your repertoire of strategic and tactical moves. ## executive summary Mantra: 3 or 4 words that explain why your company should exist. The executive summary is the most important part. It must be fantastic, eyeball sucking, and pulse altering. Explain why your product is curve jumping, paradigm shifting, and revolutionary. ## financing If you do get investors, bear in mind that THEY'RE taking a risk on you - This means that since you believe in your product more than them, their risk tolerance will be lower and worth considering in your business decisions Securing financing is NOT a "must", but it is a tremendous timesaver - if it's small enough, 1 person can do it without financing ## finding profit The number one problem in business today is profitability. Where will you be allowed to make a profit in your industry? Where is the profit zone today? Where will it be tomorrow? The profit zone is the area of your economic neighborhood where you are allowed to earn a profit. To reach and operate in the profit zone is the goal of every company. Am I managing for market share, or for profit? Is the market share I own profitable and alive, or is it profitless and dead? Fast-growing industries such as PC manufacturing, consumer electronics, telecommunications, and software have each produced scores of terminally unprofitable companies. By contrast, no-growth or low-growth industries have produced some of the most successful companies in the world. Coca-Cola achieved significant value growth in the low-growth beverage industry, as did General Electric (GE) in a collection of low-growth manufacturing industries, and Swatch in the low-growth watchmaking industry. Contenders to match price reductions or lose customers to a lower-priced competitor. It creates no-profit zones. No-profit zones come in various forms. - value chain (distribution in computing or the grocery segment in carbonated beverages) - individual customers (Wal-Mart or other large, powerful buyers) - entire business models (hub-and-spoke airlines) Start with the profit question ("Where will I be allowed to make a profit?") and work your way back. 1. What's most important to the customer? 2. Where can we make a profit? 3. How can we gain market share in that space? If the business is to succeed, it must be designed in such a way that its key elements are aligned with customers' most important priorities. It must be designed for profitability. A more extensive repertoire of value capture mechanisms than they ever have before: financing, ancillary products, solutions, downstream participation in the value chain, value sharing, licensing, Which customers I choose depends on which customers will allow me to make a profit. IBM, GM, Sears, Kodak, US Steel, United Airlines. The actual list is quite long. Market share leaders? Yes. Profitable? No. In value migration, customers move from A to B, and the profit zone moves from A to B with them. The incumbent stays at A. The newcomer builds a business design to go to B. This value shift has occurred often: from IBM to Microsoft and Intel USX to Nucor United Airlines to Southwest Air Computer-vision to Parametric Technology Folgers to Starbuck's Kmart to Wal-Mart. Norman Augustine's First Law: The best way to make a silk purse from a sow's ear is to begin with a silk sow. The same is true of money. ## forming an organization Along with his keen instinct for turning a profit, a key ingredient in Perot's success was his ability to build an organization. He recruited self-starters like himself and let them operate with a minimum of bureaucratic rules. World's shortest procedural manual: "Do what makes sense." Adopting the motto "whatever it takes," they put in excruciatingly long hours on projects that sometimes kept them away from home for months at a time. His methods represent a veritable checklist of the techniques that can be culled from studying the careers of the most successful moneymakers. In most cases, he carried the concept far beyond limits that ordinary mortals would find reasonable. "What sets us apart," Walton said in explaining Wal-Mart's success, "is that we train people to be merchants. We let them see all the numbers so they know exactly how they're doing within the store and within the company; they know their cost, their markup, their overhead, and their profit." ## get a mentor Know you need a mentor. The more ambitious you are, the more help you'll require. Prioritize a mentoring relationship. Seek out a good mentor just as you'd seek out a great location, a favorable contract, or a business partner. Make a list of the qualities you'd like to find in a mentor, and don't settle for the first person who comes along. What can you do to return the favor? Your contribution may be something as simple as cleaning your mentor's office or doing errands-look for a need your mentor has and fill it. Always be on the lookout for mentors; they may be in unlikely places. Join a professional organization. The more you circulate in your chosen field, the more likely you are to bump into potential mentors. ## knowing your customer Imagine how your ideal customer feels when they arrive at your website: What do they want to find there? What will your product provide for them that they absolutely cannot live without? What is best way to convey this message to them? What will they respond to? What elements naturally draw them in? Audio? Video? Images? What is going to make them click a link? How should you introduce your product to your customer? What should your copy say on the first page they see? What is going to convince them to provide you with their email address? What is going to convince them to purchase your product? To help understand what motivates your ideal customer, think about the following questions: What keeps your customers awake at night? What are they afraid of? What are they angry about? What are their top three daily frustrations? What do they desire most? Is there a built-in bias to the way they make decisions? (example: engineers are exceptionally analytical) Do they have their own jargon? Who else has tried to sell them something similar? How have they failed or ## legal framework In April 2008, Vermont became the first U.S. state to allow a new type of business called the "low-profit limited liability corporation." Dubbed an L3C, this entity is a corporation - but not as we typically think of it. L3C operate like a for-profit business generating at least modest profits, but its primary aim is to offer significant social benefits. Three other U.S. states have followed Vermont's lead. ## msft lessons for startups As the largest tech company in the world, Microsoft may not appear to have lessons applicable to startups. But the re-acceleration of the company in the 2010s and the path to $10T tell us about the power of S-curves, compound products, M&A, and second-mover advantages. ### Market over execution Execution is critical, but riding an S curve is the path to win in tech. Steve Ballmer gets a lot of flack for Microsoft's underperformance in the 2010s. Undoubtedly, he wasn't as exceptional as Gates, and company culture stagnated. But the real challenge was category: PC sales were decelerating, while Microsoft was betting on their growth. Reorienting the company towards the growth of cloud infrastructure and business software (which Ballmer should get some credit for) gave Microsoft life again. Traditional wisdom tells us that founders are the only determinant of startup success. Great founders are necessary but not sufficient. Great product theses and fast-growing categories are increasingly the true bottleneck. Be acquisitive Be acquisitive when you have a lot of cash and equity. Nadella seems to appreciate this given his relatively aggressive M&A track record. The path to $10T will require an acceleration of acquisition pace: even the $68.7B Blizzard acquisition represents a mere 3% of Microsoft's market cap. As the surface area of new software markets plateaus, tech will transition towards a consolidation era. Startup M&A will become a core part of growth - think of the rollup eras for oil, telecom, and cable. Late-stage startups that are valuation-rich should be considering M&A much more aggressively. ### Compound products win In the 2010s, unbundling made sense because software adoption outpaced the ability for unified product companies like Microsoft to build software. If that pace is flipped, do we see rebundling? The classic consideration for VCs is whether incumbents can copy the startup's technology before the startup copies the incumbents' distribution. For the past 20 years, the answer was almost always no - startups achieved escape velocity across categories, seemingly immune from incumbents' distribution power. But don't let that fool you: there is a real bundling effect in software. See Parker Conrad's Compound Startup thesis, playing out in real-time via Rippling. Office 365 has its weaknesses but is a truly compound product - Microsoft Teams, for example, outpaced Silicon Valley darling Slack just 3 years after launch. The power of bundling may not have been obvious in the past 20 years because there was so much surface area - every point solution had a high ceiling before incumbents copied it. But the strength of bundling will become a lot more obvious going forward. Tool fatigue and bias towards simplicity are increasingly powerful forces. The power of cross-sell Microsoft already has distribution into every Fortune 1000 IT department. This makes it much easier to sell new products than from a cold start. A myriad product line suggests a lack of focus, yet Microsoft is more profitable than all of FAANG - that is the power of cross-sell. Marc Benioff already understands this deeply: Salesforce has more revenue today in customer service than in its core sales CRM product, and is now tackling marketing and analytics. Silicon Valley wisdom says to focus on a single product and market. Ballmer did the opposite and built products across categories. This was the right strategy, but in the wrong decade: cross-sell positions Microsoft uniquely well for the 2020s, when antitrust is more threatening than ever. I would rather command 30% market share across many categories than be regulated to death as a monopoly. Definitionally, cross-sell benefits incumbents more than startups. But it also informs startup strategy: if you have lower CAC on selling incremental products to your existing customer base, it is advantageous to build a deep product suite before selling horizontally. ### First mover advantage is overrated Azure is a real competitive threat to AWS, despite being four years behind. We've seen this in the startup context too: Facebook surpassed Myspace and Friendster, Ramp is now a real threat to Brex, Modern Health is a real threat to Lyra. Second movers short-circuit the learning curve of a new market. For first movers, the lesson is clear: don't rest on your laurels. But this should also be encouraging for second movers: there is probably more room for new entrants than you think. Think of the degree of competition in other industries like retail or finance - tech has lots of room for new companies before we reach a saturation point. Consumption-based pricing is a bet on yourself Consumption-based pricing is the business model that is most aligned with customers. The opposite is simply a poor customer experience: why pay for something before you receive it, or if you may not use it at all? Unsurprisingly, many of the fastest growing companies have some version of consumption-based pricing: AWS, Azure, GCP, Snowflake, Twilio, Scale. It may feel less "safe" than pure SaaS because the customers are not guaranteed to renew, but it lowers the barrier to adoption. Consumption-based pricing is the best way to bet on the quality of your own product: it perfectly aligns product, customer success, and sales. If customers are engaging with your product, it is a win-win. Capital: a true moat The tech industry doesn't talk about capital as a moat, probably because it benefits those that have already made it. But Azure proves that it works: it spent billions to achieve economies of scale, but the prize is a comparably massive profit center. In recent startup history, massive capital scale often has failed to change the trajectory of companies: think of the SoftBank mega-rounds that went sideways. Even in the case of Uber, a relatively good company with economies of scale, capital hardly helped: the equity has been roughly flat for the past seven years. Few companies have the competence to ingest truly scaled capital. When it works, it can really work. The $535m DoorDash Series C, one of the first Silicon Valley mega-rounds, was an extraordinary case study: it quickly won over 50% market share, and was poised to capture the food delivery market expansion during COVID. Megaproject success can be hard to see when it happens within large companies. Azure and AWS are two of the most successful megaprojects of this century, but were hidden from the public for years, nested inside much larger corporations. Starlink, the global satellite internet network, is only possible given the scale of SpaceX's core launch business, but could be one of the most successful megaprojects of our time. ## MVP Figure out your profit moment - This is when you will make a profit instead of a loss for that month - Find out how much time until the money runs out to see how much "fudge room" you have - You want to get to this point as fast as possible, or you have ZERO security that your business will stay open - While you may think you can raise money later after the first round, it won't go that easily later because the investors will have lost [faith] in you - What bites them the second time is a confluence of three forces: - The company is spending more now than it did the first time it raised money. - Investors have much higher standards for companies that have already raised money. - The company is now starting to read as a failure. The first time it raised money, it was neither a success nor a failure; it was too early to ask. Now it's possible to ask that question, and the default answer is failure, because at this point that is the default outcome. Venture capitalist Randy Komisar, whose book "Getting to Plan B" discussed the concept of leaps of faith in great detail, uses a framework of "analogs" and "antilogs" to plot strategy. What differentiates the success stories from the failures is that the successful entrepreneurs had the foresight, the ability, and the tools to discover which parts of their plans were working brilliantly and which were misguided, and adapt their strategies accordingly. Genchi gembutsu, which is one of the most important phrases in the lean manufacturing vocabulary. In English, it is usually translated as a directive to "go and see for yourself" so that business decisions can be based on deep firsthand knowledge. You cannot be sure you really understand any part of any business problem unless you go and see for yourself firsthand. It is unacceptable to take anything for granted or to rely on the reports of others. Craft a customer archetype, a brief document that seeks to humanize the proposed target customer. This archetype is an essential guide for product development and ensures that the daily prioritization decisions that every product team must make are aligned with the customer to whom the company aims to appeal. A minimum viable product (MVP) is simply the fastest way to get through the Build-Measure-Learn feedback loop with the minimum amount of effort. The goal of the MVP is to begin the process of learning, Its goal is to test fundamental business hypotheses. Most entrepreneurs and product development people dramatically overestimate how many features are needed in an MVP. When in doubt, simplify. Most entrepreneurs approach a question like this by building the product and then checking to see how customers react to it. I consider this to be exactly backward because it can lead to a lot of waste. First, if it turns out that we're building something nobody wants, the whole exercise will be an avoidable expense of time and money. If customers won't sign up for the free trial, they'll never get to experience the amazing features that await them. Even if they do sign up, there are many other opportunities for waste. For example, how many features do we really need to include to appeal to early adopters? Every extra feature is a form of waste, and if we delay the test for these extra features, it comes with a tremendous potential cost in terms of learning and cycle time. The lesson of the MVP is that any additional work beyond what was required to start learning is waste, no matter how important it might have seemed at the time. Always focused on scaling something that was working rather than trying to invent something that might work in the future. Contrast this with the case of a small business, in which it is routine to see the CEO, founder, president, and owner serving customers directly, one at a time. In a concierge MVP, this personalized service is not the product but a learning activity designed to test the leap-of-faith assumptions in the company's growth model. As you consider building your own minimum viable product, let this simple rule suffice: remove any feature, process, or effort that does not contribute directly to the learning you seek. The most common objection I have heard over the years to building an MVP is fear of competitors - especially large established companies - stealing a startup's ideas. MVP can seem like a dangerous branding risk. Easy solution: launch the MVP under a different brand name. Experiment under the radar and then do a public marketing launch once the product has proved itself with real customers. Prepare for the fact that MVPs often result in bad news. The solution to this dilemma is a commitment to iteration. You have to commit to a locked-in agreement - ahead of time - that no matter what comes of testing the MVP, you will not give up hope. Innovation accounting works in three steps: (1) Use a minimum viable product to establish real data on where the company is right now. (2) Startups must attempt to tune the engine from the baseline toward the ideal. This may take many attempts. After the startup has made all the micro changes and product optimizations it can to move its baseline toward the ideal, the company reaches a decision point. That is the third step: (3) Pivot or persevere. If the company is making good progress toward the ideal, that means it's learning appropriately and using that learning effectively, in which case it makes sense to continue. If not, the management team eventually must conclude that its current product strategy is flawed and needs a serious change. When a company pivots, it starts the process all over again, reestablishing a new baseline and then tuning the engine from there. The sign of a successful pivot is that these engine-tuning activities are more productive after the pivot than before. Smoke test with its marketing materials. This is an old direct marketing technique in which customers are given the opportunity to preorder a product that has not yet been built. A smoke test measures only one thing: whether customers are interested in trying a product. By itself, this is insufficient to validate an entire growth model. Nonetheless, it can be very useful to get feedback on this assumption. These MVPs provide the first example of a learning milestone. Remember that the rationale for building low-quality MVPs is that developing any features beyond what early adopters require is a form of waste. However, the logic of this takes you only so far. Once you have found success with early adopters, you want to sell to mainstream customers. Mainstream customers have different requirements and are much more demanding. The kind of pivot we needed is called a customer segment pivot. In this pivot, the company realizes that the product it's building solves a real problem for real customers but that they are not the customers it originally planned to serve. In other words, the product hypothesis is confirmed only partially. All the work that goes into designing the minimum viable product is - until the moment that product is shipped - just WIP inventory. Incomplete designs, not-yet-validated assumptions, and most business plans are WIP. Almost every Lean Startup technique we've discussed so far works its magic in two ways: by converting push methods to pull and reducing batch size. Both have the net effect of reducing WIP. Unless you are focused on profit when you design your business, it will probably fail. When you start a business, you need to focus on profit If you prioritize helping people, your attention won't be on making money, and your business will fail. pick a model where helping people is profitable. the education business, an industry where making a profit is notoriously difficult, ## not always necessary 60% of Inc. 500 CEOs had not even written business plans before launching their companies. - THIS IS FINE, BUT CAN BE VERY RISKY IF YOU DON'T DO IT RIGHT - HOWEVER, IT'S THE NATURE OF AN ENTREPRENEUR'S PERSONALITY TO LEAP BEFORE THEY LOOK, YIELDING SEVERE RISK/REWARD "I don't believe in market research. Somebody once told me that the only thing you need is a customer. Instead of asking all the questions, I'd try and make some sales." Bill Gross: Had an idea for selling cars online. He hired a CEO for 90 days and gave him a mission: Sell one car. This preference for testing, rather than planning, was one of the most striking differences between entrepreneurs and corporate executives. The ideal entrepreneur: In character a judicious fusion of the utopian and the practical, he or she would succeed not only in identifying an important need but also in mastering the challenges of bureaucracy and finance in order to give the resolution of that need an institutional form, and thereby affect others' lives in ways that theory alone could never do. Tappers estimated that listeners would identify the song correctly, on average, 50 percent of the time. In fact, listeners guessed correctly only 2.5 percent of the time. The lens problem affects anyone who has unique knowledge of anything: the boss who understands a proposal inside out and is trying to convey the ideas to new clients, the inventor who knows precisely why her invention is so important speaking to impatient venture capitalists, or the coworker who is "just teasing" a new hire who knows nothing of the teaser's friendly intentions. The expert's problem is assuming that what's so clear in his or her own mind is more obvious to others. He first asked a farmer to name a price for the drilling rights on his land. Then, Hunt hurried to town and offered the rights to an oil driller at a higher price. Once he had both sides of the trade in place, he would buy and sell nearly simultaneously, pocketing a profit without risking a nickel. ## paying the workers A company does better the less it pays the CEO. ## pricing Lawful Sources of Pricing Power 1. Brand identity 2. Patent protection 3. Dominant market share 4. Sustainable cost advantage Price is a signal. "Cheap" is another way to say "scared". When you're the cheapest, you're not promising change. You're promising the same, but cheaper. ## sourcing [What we learned making a plastic injection mold with a Chinese mold maker | Hacker News](https://news.ycombinator.com/item?id=37785513) [What we Learned Making a Plastic Injection Mold with a Chinese Mold Maker](https://www.airgradient.com/blog/lessons-learned-plastic-injection-mold-making/) - there are MAJOR problems with sourcing things overseas, especially when that country lies or is a dictatorship ## the innovator's solution THE INNOVATORS SOLUTION BOOK SUMMARY: Starting with a cost structure in which attractive profits can be earned at low price points and which can be carried up-market Being in a disruptive position relative to competitors so that they are motivated to flee rather than fight Starting with a set of customers who had been nonconsumers so that they are pleased with modest products Targeting a job that customers are trying to get done Skating to where the money will be, not to where it was Assigning managers who have taken the right courses in the school of experience and putting them to work within processes and organizational values that are attuned to what needs to be done Having the flexibility to respond as a viable strategy emerges Starting with capital that can be patient for growth CHAPTER 2 : HOW CAN WE BEAT OUR MOST POWERFUL COMPETITORS? The Innovators Dilemma identified two distinct categories - sustaining and disruptive - based on the circumstances of innovation. In sustaining circumstances - when the race entails making better products that can be sold for more money to attractive customers - we found that incumbents almost always prevail. In disruptive circumstances - when the challenge is to commercialize a simpler more convenient product for less money and appeals to a new or unattractive customer set - the entrants are likely to beat the incumbents. This is the phenomenon that so frequently defeats successful companies. It implies that the best way for upstarts to attack established competitors is to disrupt them. A sustaining innovation targets demanding high-end customers with better performance than what was previously available. Sometimes incremental improvements. Sometimes breakthrough leapfrog-over-competition. But the established competitors almost always win the battles of sustaining technology. Disruptive innovations introduce products and services that are not as good as currently available products. Other benefits, though : simpler, more convenient, less expensive - that appeal to new or less-demanding customers. Once the disruptive product gains a foothold in new or low-end markets, the improvement cycle begins. Because of the pace of technology is faster than customers' ability to use it, the previously not-good-enough technology improves enough to intersect with the path of the more demanding customers. Disrupting has a paralyzing effect on industry leaders. They are always motivated to go up-market, almost never motivated to defend the new or low-end markets that the disruptors find attractive. Leaders are so much easier to beat if the idea for a new product or business is shaped into a disruption. Shaping a business idea into a disruption is an effective strategy for beating an established competitor. It's much easier to beat competitors when they are motivated to flee rather than fight. Sustaining innovations are so attractive and important that the best sustaining companies systematically ignore disruptive threats and opportunities until the game is over. Entrepreneurs who have entered on a sustaining trajectory should turn around and sell out to one of the industry leaders behind them. If executed succesfully, getting ahead of the leaders on the sustaining curve and then selling quickly can be a straightforward way to make an attractive financial return. If you create and attempt to sell a better product into an established market to capture established competitors' best customers, the competitors will be motivated to fight rather than flee. If your idea might represent a sustaining improvement for others, then you should go back to the drawing board. You need to define an opportunity that is disruptive relative to ALL the established players. When a company tries to take a higher-cost business model down-market to sell products at lower price points, almost none of the incremental revenue will fall to its bottom line. Established firms that hope to capture the growth created by disruption need to do so from within an autonomous business with a cost structure that offers as much headroom as possible for subsequent profitable migration up-market. To create a new-growth business : target products and markets that the established companies are motivated to ignore or run away from. New customers who previously lacked the money or skills to buy and use the product. Enable a whole new population of people to begin owning and using the product. Low-end disruptions attack the least-profitable and most overserved customers. Incumbent leaders feel no pain and little threat until the disruption is in its final stages. When disruptors begin pulling customers out of the low end, it actually feels good to the leading firms. Wal-mart : Customers were overserved, did not need well-trained floor salespeople to help them get what they needed. Acceptable profit through a different formula. Many disruptions : Southwest Airlines appealed to people who couldn't afford to fly, and those that were overserved by other airlines. SHAPING IDEAS TO BECOME DISRUPTIVE: THREE LITMUS TESTS: Ideas that get shaped into sustaining innovations could just as easily be shaped into disruptive business plans, with far greater growth potential. Execs must answer three sets of questions, to determine whether an idea has disruptive potential. #1 - CAN IT BE A NEW-MARKET DISRUPTION? - Are there lots of people who have not had the money, equipment or skill to do this for themselves, and have gone without it altogether, or have needed to pay someone with more expertise to do it for them? - To use the product or service, do customers need to go to an inconvenient centralized location? #2 - CAN IT BE A LOW-END DISRUPTION? - Are there customers at the low-end of the market who would be happy to purchase a product with less, but good enough, performance if they could get it at a lower price? - Can we create a business model that enables us to earn attractive profits at the discount prices required to win the business of these overserved customers at the low end? #3 - DOES IT DISRUPT ALL? - Is the innovation disruptive to *all* of the significant incumbent firms? If it appears to be sustaining to one ore more significant players, the odds will be stacked in that firm's favor, and entrant is unlikely to win. Disruption is a theory : a conceptual model of cause and effect that makes it possible to better predict the outcomes of competitive battles in different circumstances. These forces almost always topple industry leaders when an attacker has harnessed them because disruptive strategies are predicated on competitors doing what is in their best and most urgent interest : satisfying their most important customers and investing where profits are most attractive. In a profit-seeking world, this is a safe bet. CHAPTER 3 : WHAT PRODUCTS WILL CUSTOMERS WANT TO BUY? Customers "hire" products to do specific "jobs". Segmenting markets according to the jobs the customers are trying to get done addresses other important marketing challenges such as brand management. Customers - people and companies - have "jobs" that arise regularly and need to get done. When customers become aware of a job that they need to get done in their lives, they look around for a product or service that they can "hire" to get the job done. Effectively, conveniently, inexpensively as possible. CHAPTER 4 : WHO ARE THE BEST CUSTOMERS FOR OUR PRODUCTS? Successful innovations will emerge from companies who carve disruptive footholds by targeting nonconsumption and moving up-market with better products only after they have started simple and small. #1 - The target customers are trying to get a job done, but because they lack the money or skill, a simple inexpensive solution has been beyond reach. #2 - These customers will compare the disruptive product to having nothing at all. As a result, they are delighted to buy it even though it may not be as good as other products available at high prices to current users with deeper expertise in the original value network. The performance hurdle required to delight such new-market customers is quite modest. #3 - The technology that enables the disruption might be quite sophisticated, but disruptors deploy it to make the purchase and use of the product simple, convenient, and foolproof. It's this foolproof aspect that creates new growth by enabling people with less money and training to begin consuming. #4 - The disruptive innovation creates a whole new value network. The new consumers typically purchase the product through new channels and use the product in new venues. Established competitors view the entrants into the emerging network as irrelevant. Incumbents have the wrong response : they invest massive sums trying to advance the technology enough to please the customers in the existing value network. If you frame a phenomenon as a threat, it gets a more intense and energetic response than if you frame it as an opportunity. Response to threat is "threat rigidity" : you cease being flexible, become "command and control" oriented, and focus everything on countering the threat in order to survive. Best way to use this to your advantage in corporate land : Get top-level commitment by framing something as a threat, then shift responsibility to an autonomous organization that can frame it as an opportunity. It is foolish to give salespeople a financial incentive to push disruptive products. Disruptive products require disruptive channels. CHAPTER 5 : GETTING THE SCOPE OF THE BUSINESS RIGHT The problem with making decisions based on your core competence : What might seem to be a noncore activity today might become an absolutely critical competence to have mastered in a proprietary way in the future, and vice-versa. IBM, for example : in the process of outsourcing what it didn't feel was its core (the O.S. and the CPU) : it put into business two companies (Microsoft and Intel) that captured a majority of the profits for years. Instead of asking what their company does best today, managers should ask, "What do we need to master today, and what will we need to master in the future, in order to excel on the trajectory of improvement that customers will define as important?" The standardization inherent in modularity takes too many degress of design freedom away from engineers. One sign that the functionality and reliability of a product have become too good is that employees say, "Why can't they see that our product is better than the competition? They're treating it like a commodity!" This is evidence of overshooting. Modular architectures help companies to compete on the dimensions that matter in the lower right portions of the disruption diagram. Companies can introduce new products faster because they can upgrade individual subsystems without having to redesign everything. In a modular world, you can prosper by outsourcing or by supplying just one element. Customers become less and less willing to reward further improvements in functionality and reliability with premium prices. People cannot efficiently resolve interdependent problems while working at arm's length across organizational boundary. CHAPTER 6 : HOW TO AVOID COMMODITIZATION Commoditization : whenever it is at work somewhere in a value chain, a reciprocal process of DE-commoditizatoion is at work somewhere else in the value chain. De-commoditization affords opportunities : the locus of the ability to differentiate shifts continuously in a value chain. Companies who position themselves at a spot in the value chain where performance is not yet good enough will capture the profit. Wayne Gretzky slogan : don't go where the money presently is, but to where the money will be. Companies that are the most successful are integrated companies that design and assemble the not-good-enough end-use products. Making highly differentiable products with strong cost advantages is a license to print money. Customers will not pay still-higher prices for products they already deem too good. Before long, modularity rules, and commoditization sets in. When the relevant dimensions of your product's performance are determined not by you but by the subsystems, it becomes difficult to earn anything more than substinence returns. When your world becomes modular, you'll need to look elsewhere in the value chain to make any serious money. A company that finds itself in a more-than-good-enough circumstance can't win. Either disruption will steal its markets or commoditiziation will steal its profits. De-commodoitization occurs in places where attractive profits were hard to attain in the past : in the formerly modular and undifferentiable processes, components or subsystems. Modular disruptors should carry their low-cost business models up-market as fast as possible, to keep competing at the margin against higher-cost markers of proprietary products. Find the best performance-defining components and subsystems, incorporating them in their products faster than anyone else. Profit accumulated where products that were not yet good enough. Architectures therefore tended to be interdependent and proprietary. What makes an industry appear to be attractively profitable is the circumstance in which its companies happen to be at a particular point in time. IBM hard drives : skate to where the money would be, by using modularity to decouple its head and disk operations from its disk drive design and assembly business. Sell its most advanced heads and disks to competing 2.5" drive makers, it could de-emphasize the assembly of drives and focus on the more profitable head and disk. On the more-than-good-enough side, a better strategy is to sell bullets to the combatants. It didn't occur to the company's management that the activities they were outsourcing weren't the other company's core competencies, either! Whether or not something is a core competence is not the determining factor of who can skate to where the money will be. For many suppliers, eating their way up the value chain creates opportunities to design subsystems with increasingly optimized internal architectures that become key performance drivers of the modular products that its customers assemble. Core competence, as it is used by many managers, is a dangerously inward-looking notion. Competitiveness is far more about doing what customers value than doing what you think you're good at. Staying competitive as the basis of competition shifts necessarily requires a willingness and ability to learn new things rather than clinging hopefully to the past sources of glory. The challenge for incumbent companies is to rebuild their ships while at sea. Knowing this is going to happen gives managers the opportunity to own or acquire and manage as separate growth-oriented businesses, the component or subsystem suppliers that are positioned to eat their way up the value chain. This is the essense of skating to where the money will be. Brands are most valuable where things aren't yet good enough. When customers aren't yet certain whether a product's performance will be satisfactory. A well-crafted brand can step in and close the gap between what customers need and what they fear they might get if they buy the product from a supplier of unknown reptuation. Good brands get price premium. The ability of brands to command premium prices dissolves when the performance of a class of products from multiple suppliers is manifestly more than adequate. Performance-defining subsystems within the product, or at the retail interface when it is the speed, simplicity, and convenience of getting exactly what you want that is not good enough. The power to capture attractive profits will shift to those activities in the value chain where the immediate customer is not yet satisfied with the performance of available products. The customer interface is the place in the value chain where the ability to excel on this new dimension of competition is determined. Companies that are integrated in a proprietary way across the interface to the customer can compete on these not-good-enough dimensions more effectively. CHAPTER 7 : IS YOUR ORGANIZATION CAPABLE OF DISRUPTIVE GROWTH? Three classes or sets of factors that define what an organization can and can not accomplish: RPV (1) - resources (2) - processes (3) - values Innumerable failed efforts - primarily caused by the wrong people chosen to lead the venture. Right-stuff thinking ("this guy has the right stuff!") gets the categories wrong. You encounter very different problems in starting up a new venture than in running a well-tuned one. Failure and bouncing back from failure can be critical courses in the school of experience. Look for people willing and able to learn, doing things wrong and recovering from mistakes. First step : predict the problems, challenges, situations that this new venture will be in. (A set of forseeable problems.) From this, list the "courses" (lessons) you would want the team of managers of the new venture to have already learned. Experiences through which they would have developed the intuition and skill to understand and manage this set of forseeable problems. This list of experiences should constitute a "hiring specification" for the senior management team. Rather than specifying a set of right-stuff attributes, specify the circumstances in which the new team will be asked to manage. Example: "we would want a CEO who in the past had launched a venture thinking he/she had the right strategy, realized it wasn't working, then iterated towards a strategy that did work. We'd want a marketing exec who had insightfully figured out how a just-emerging market was structured, had helped to shape a new product and service package that did an important job well for customers who had been nonconsumers." etc Organizations create value as employees transform inputs of resources (the work of people, equipment, technology, product designs, brands, information, energy, and cash) into products and services of greater worth. The patterns through which they make these transformations are called processes. Whether they are formal, informal, or cultural, processes define how an organization transforms inputs into things of greater value. When the same, seemingly efficient process is employed to tackle a very different task, it often seems bureaucratic and inefficient. Innovating managers often try to start new-growth businesses using processes that were designed to make the mainstream business run effectively. They succumb to this temptation because the new game begins before the old game ends. It seems simpler to have a one-size-fits-all process for doing things, but VERY often the cause of a new venture's failure is that the wrong processes were used to build it. Tough to judge whether the mainstream organization's processes will facilitate or impede a new-growth business. Ask whether the organization has faced simliar situations or tasks in the past. If that organization has not repeatedly formulated plans for competing in markets that do not yet exist, it's safe to assume no processes for making such plans exist. Values are the standards by which employees make prioritization decisions : whether an order is attractive, whether a particular customer is more important, which customers they will call on. It's important for senior managers to train employees at every level to make prioritization decisions that are consistent with the strategic direction and business model of the company. Successful senior executives that spend so much time articulating clear, consistent values that are broadly understood throughout the organization. Resources and processes are often enablers that define what an organization can do. Values often represent restraints : they define what an organization cannot do. As companies upgrade, they often add overhead cost. Gross margins will seem unattractive at a later point. As companies become large, they literally lose the capability to enter small emerging markets. Huge size makes a disability in creating new-growth businesses. In the start-up stages, much of what gets done is attributable to its resources, that is : its people. Over time, the capabilities will shift towards processes and values. When hot young companies flame-out, The founding team fails to institute the processes or values that came help the company follow-up with a sequence of hot new products. As a new company's processes and values are coalescing, the actions and attitudes of the company's founder typically have a profound impact. As successful companies mature, employees gradually come to assume that the priorities they have learned to accept, the ways of doing things, are the right way to work. Once members of the organization begin to adopt ways of working and criteria for making decisions by assumption, rather than conscious decision, those processes and values come to constitute the organization's culture. Culture is powerful management tool. When organization's capabilities lies many in people, changing to address new problems is simple. When they have become embedded in a culture, change can become extraordinarily difficult. Disruptive innovations occur so intermittently that no company has a practiced process for handling them. Disruptions are inconsistent with the leading companies' values. Established companies have the resources (people, money, technology) required to succeed at disruptive, but their processes and values are disabilities in their efforts to succeed at disruptive innovation. Ensure that responsibility for making the venture successful is given to an organization whose processes will facilitate what needs to be done and whose values and prioritize those activities. If execs can stop using one-process- and one-organization-fits-all policies for all types of growth innovations, they can greatly improve the probabilities that their growth ventures will succeed. What is disruptive to one company might have a sustaining impact on another. Organizations cannot disrupt themselves. If innovations are developed within the mainstream organization, the processes and values ensure that it can only implement sustaining innovations. Processes and values can also be made or bought. Identify managers who are able, here and now, to grapple succesfully with the challenges of building a new business. To develop managers for the future, organizations need to put up-and-coming managers into situations and responsibilities for which they are not yet qualified! It is the only way they can learn the skills required to succeed. You need to be creating successful businesses in order to have the right curriculum within your internal schools of experience in which next-gen managers can learn. Yet having capable managers in place is a prerequisite to building these growth businesses. Successfully wrestling with these dimensions if the innovator's dilemma is a critical responsibility of a director of human resources. Potential should not be measured by attributes, but rather by the ability to acquire the attributes and skills needed : the ability to learn. Avoid the trap of assuming that the finite list of competencies important for today are those that will be required in the future. Look for "seeks opportunities to learn", "seeks and uses feedback", "asks the right questions", "looks at things from new perspectives", "learns from mistakes". Those who are "ready now" are, by definition, the ones that have the least to learn by doing it. A company that works to develop a sequence of new-growth businesses can build a virtuous cycle in management development. Launching growth businesses creates a set of rigorous demanding schools in which next-gen execs can learn how to lead disruption. Companies that only sporadically attempt to create new-growth businesses, in contrast, offer to their next-gen execs precious few of the courses they need to successfully sustain growth. When there is a well-defined interface between the activities of two different people or groups - meaning that you can clearly specifiy what each is supposed to deliver, you can measure and verify what they deliver, and there are no unanticipated interdependencies between what one does and what the other must do in response - then those people and groups can interface at arm's length and need not be on the same team. The reason an organization cannot disrupt itself is that successful organizations can only naturally prioritize innovations that promise improved profit margins relative to their current cost structure. For Schwab, for example, it was far more straightforward to create a new business model that could view $29 as a profitable proposition than it would have been to hack enough cost out of the original organization so that it could make money at the disruptive price point. This is the best way to change values, because the new disruptive game almost always must begin while the established business still has substantial profitable sustaining potential. The disruptive business needs to have the freedom to create new processes. Judgement calls are a key role of the CEO. Every time one company buys another, it buys its resources, processes, and values. CHAPTER EIGHT : MANAGING THE STRATEGY DEVELOPMENT PROCESS Though execs are obsessed with finding the right strategy, they can wield greater leverage by managing the process used to develop the strategy. Deliberate strategies are the appropriate tool for organizing actions if three conditions are met: (1) - the strategy must encompass and address correctly all of the important details required to succeed, and those responsible for implementation must understand each important detail in management's deliberate strategy. (2) - if the organization is to take collective action, the strategy needs to make as much sense to all employees as they view the world from their own context as it does to top management, so they will act appropriately and consistently. (3) - the collective intentions must be realized with little unanticipated influence from outside political, technological, or market forces. Because it is so difficult to find a situation in which all three of these conditions apply, the emergent strategy-making process almost always alters the strategy that the company actually implements. Emergent strategy bubbles up from within the organization - the cumulative effect of day-to-day prioritization and investment decisions. Tactical, day-to-day operation decisions made by people who are not in a visionary, futuristic or strategic state of mind. EXAMPLES: Sam Walton's decision to build the 2nd Wal-Mart in another small town near his first one was just for logistical and managerial efficiency. Intel had "top performing gets top priority" process at the bottom ranks, and this process alone moved them from RAM into CPUs, without top execs hardly even noticing. ("Senior management recognized that Intel had become a microprocessor company") Intel's remarkable strategy shift was not the result of an intended strategy articulated within the executive ranks. Rather it emerged through the daily decisions made by middle managers as they allocated resources. Most of the ideas for developing new products, services, businesses bubble up from employees within the organization. Emergent processes should dominate in circumstances in which the future is hard to read and in which it is not clear what the right strategy should be. This is almost always the case during the early phases of a company's life. In 90% of all successful new businesses, the strategy that the founders had deliberately decided to pursue was not the strategy that ultimately led to the business's success. Entrepreneurs rarely get their strategies right the first time. The successful ones make it because they have money left over to try again after they learn their initial strategy was flawed, whereas the failed ones typically have spent their resources implementing a deliberate strategy before its viability could be known. Learn from emergent sources what is working and what is not, then learn to cycle that learning back into the process through the deliberate channel. Act before everything is fully understood. Respond to an evolving reality rather than having to focus on a stable fantasy. Learning what works. Failure often comes from implementing a deliberate strategy in the early stages when the right strategy cannot be known. Efforts to catch new waves of disruptive growth need to be guided through emergent processes. The mainstream business needs to be guided by deliberate strategy. Many companies' execs perceived the need to allocate resources to disruptive growth before it's too late, but very rarely are they able to consistently manage the strategy development process appropriately across a range of businesses in various stages of maturity. After they have entered a deliberate strategy mode, they find it very difficult to let new businesses be guided through an emergent process. EXAMPLE: Prodigy in 1992 noticed that their 2 million subscribers were spending more time on email than web. They had planned on being a web company so they started charging extra fees for sending more than 30 emails per month! Rather than seeing email as an emergent strategy signal, the company tried to filter it out, because in deliberate mode, management's job was to implement the original strategy. EXAMPLE: Handheld computers. Apple Newton, HP. All failed. Palm, who made the O.S., succeeed. What was the mistake? The computer companies employed deliberate strategy processes from beginning to end. Invested massively to implement their strategies, then wrote the projects off when the strategies proved wrong. Palm was the only one that shifted to an emergent strategy process when its original delibrate strategy failed. When a viable strategy emerged, Palm shifted back to a deliberate process as it migrated up-market. Managers must: (1) - Carefully control the initial cost structure of a new-growth business because this will quickly determine the values that will drive the critical resource allocation decisions in that business. (2) - Actively accelerate the process by which a viable strategy emerges by ensuring that business plans are designed to test and confirm critical assumptions using tools such as discovery-driven planning. (3) - Personally and repeatedly intervene, business by business, exercising judgement about whether the circumstance is such that the business needs to follow an emergent or deliberate strategy-making process. CEOs must not leave the choice about strategy process to policy, habit, or culture. Execs need to pay careful attention to getting the initial conditions right. New ventures need a cost structure that makes small customers and products financially attractive. Enthusiastically pursue the small orders. DELIBERATE planning (TRADITIONAL / for existing-sustaining): (1) - make assumptions about the future (2) - make a strategy based on those assumptions & build financial projections based on that strategy (3) - make decisions to invest based on those financial projections (4) - implement the strategy in order to achieve projected financial results DISCOVERY-DRIVEN PLANNING: (for disruptions) (1) - make the targeted financial projections (2) - what assumptions must prove true in order for these projections to materialize? (3) - implement a plan to learn - to test whether the critical assumptions are reasonable (4) - invest to implement the strategy note #3 : a plan to test the validity of the most important assumptions. This plan needs to generate quickly, with as little expense as possible, validating or invalidating information about the most critical assumptions. The resource allocation process can get sticky, which is why the CEO needs to keep their hands on the control constantly and consciously. When a viable strategy has emerged and it's time for execution, the CEO needs to aggressively switch to a deliberate strategy mode and stop funding emergent opportunities that might divert the company from its focus on the winning plan. CHAPTER TEN : THE ROLE OF SENIOR EXECUTIVES IN LEADING NEW GROWTH Create a Disruptive Growth Engine : which capably and repeatedly launches successful growth businesses. Sense when the circumstances are changing, and keep teaching others how to recognize these signals. One problem with the "send the big decisions to the big people" theory is that most of the data is in the divisions. Decision-making processes that work well without senior attention are critical to success in circumstances of sustaining innovation. For those decisions that the mainstream processes and values were designed to make effectively (sustaining, primarily) less senior executive invovlement is needed. It's when senior execs sense that the processes and values of the mainstream organization were not designed to handle important decisions in an organization (such as in disruptive circumstances), that senior execs need to participate. Disruptive innovation : powerful senior managers must personally be involved. Sustaining innovation : delegation works effectively. Barring the employees from deviating from the standard would kill innovation. Create a system to surface the most important and successful innovations from the day-to-day operations level of the company. Plant managers were evaluated on the measures of plant performance in these reports, and their reputation was affected by the relative ranking of their plants. This system, in other words, provided ample motivation for managers to search for any innovation that would improve their performance and relative ranking. *** CREATING A GROWTH ENGINE: (1) - It needs to operate rhythmically, by policy, rather than in response. Start before you need to. Build while you are still growing. A budgeted number of new businesses that need to be launched each year. (2) - CEO or senior exec must lead the effort - someone who has authority to lead from the top when necessary Be able to separate ideas with disruptive potential from those that are best deployed on an established sustaining trajectory (3) - Establish a small corporate-level group - "movers and shapers" - whose members develop a repeatable system for shaping ideas into disruptive business plans that are funded and launched Create a separately operating process through which ideas can be shaped into high-potential disruptions. Collect disruptive innovation ideas and mold them into propositions that fit the litmus tests outlined in Chapters 2-6. The members of this team have to understand these theories at a deep level, stick together, and apply them frequently. (4) - Train the troops : System for training and retraining people throughout the organization, to identify disruptive opportunities and take them to the movers and shapers Capturing ideas for new-growth from people in direct contact with markets and technologies is far more productive. EPILOGUE: Where you start, relative to the direction of the competitive, technological, and profit-seeking forces acting upon you, can make a huge difference in the probability that you will succeed. This view simplifies the challenge of creating new-growth businesses. It means that when you start a new business you do not need to envision accurately the details of your strategy or predict foresightedly how technology will evolve. Rather, you need to focus primarily on getting the initial conditions right. If you start from a good place, then the choices that lead to success will look like the right choices. ADVICE TO EXECS: * - Never say yes to a strategy that targets customers and markets that look attractive to an established competitor. Find clients that established competitors will be happy to ignore. * - If your target customer is already using pretty-good products, instead find a way to find nonconsumers. Customers need to be delighted to have a simple inexpensive alternative to nothing. * - If there are no nonconsumers available, explore whether a low-end disruption is feasible * - Help customers get done more conveniently and inexpensively what they are already trying to get done * - Segment the market in ways that mirror the jobs customers are trying to get done. * - Develop competencies where the money will be made in the future * - When a new venture is said to fit your company's core competence, ask these 3 questions: * - Do we have the resources to succeed? * - Will our processes facilitate what needs to be done to succeeed in the new business? * - Will our values enable the critical people to give the needed priority to this initiative, when compared to the other initiatives that compete for time/money/talent? * - Ask these last 3 questions about your channel partners, as well. * - In choosing the management team for your new venture, search their resumes for the problems they have grappled with, and compare them to the problems that you know this venture must confront. * - Halt decisive plans to implement any strategy before there is evidence that it works. * - Be impatient for profit * - Keep your company growing so that you can be patient for growth ## the scale of the plan - growth The devout pursuit of market share may be the single greatest creator of no-profit zones in the economy. The euphoria of being in a high-growth environment blocks out the reality that growth creates a much higher management challenge. The curse of growth arises when a business grows by stretching its business design to serve customers that the business design was not intended to serve. Activities that were once valuable turn profitless. Value migrates toward activities that are more important to customers - activities where profit is possible. ## the scale of the plan If you can start small, do it - Because of technology, startups in many industries are extremely affordable to begin, sometimes only the cost of food and rent! Achievable: take 10% of your forecast, make this your goal, and blow it away. Postpone touchy-feely goals. Companies that reach on measurable goals are happy. Marvin Minsky: Pick a big enough project, something that's really hard, something that over the years you can work on. ## why a business plan matters Entrepreneurs are apt to stick with a flawed business plan they spent months drafting. The more important reason to write a business plan is to force the management team to solidify the objectives (what), strategies (how), and tactics (where, when, who). When you write your plan, act as if you know exactly what you're going to do. You are deliberate.