November 29, 2005

Attenuate Goliath’s Technical Talent Strength

Posted in management, Product Development at 10:19 am by scottmaxwell

This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:

Large companies have a large division of great technical talent. How can smaller companies compete with this large company advantage?

Well, actually…in my view, this is more of a perceived advantage than a real advantage, as most great products originate from a small group of talented architects, engineers, and developers rather than a large group (take a look at The Mythical Man Month. Some of Fred Brooks‘ points are substantially similar. If you don’t have the time, Wikipedia has a summary).
Creating the Edge…

Small companies actually start off with a strategic edge with respect to the technical talent issue and, if they focus on a few staffing and organizational, they can increase their advantage:

  1. Inject the customer into the process and the people.  The closer the development group is too the customers needs, the better!
  2. Everyone should sit together. Yes, projects can get done without people all sitting together, but if everyone sits together then the results will be better.  The more communication opportunities the better!
  3. Architecture matters! My sense is that architects can design only what they know…if you want the best architecture, you need to start with the best architects.
  4. The core group of up to 3-5 highly talented “grade A” people who together have a very good feel for the issues and approaches around building the product and are highly productive programmers. Having too many people in this group actually hurts!
  5. Expand the group (only when the product is ready for it) by hiring only “A caliber” people!
  6. As the group expands, create an organization “structure” that activates a healthy tension between groups. The tension is really important to create, as it will result in better technology through (healthy) debates. If you separate out the people into several groups (and rotate many of them), do not allow one of the groups to have more “power” than the other groups, and encourage debate, you will be able to create the healthy tension. I would at a minimum separate out:
    • Group 1: The people who design,
    • Group 2: The people who develop, and
    • Group 3: The people who test the results (including aspects of software delivery, installation, and configuration).
  7. Rapid development cycles for all aspects of the product AND supporting activities (installation, configuration, training, service, marketing, etc.). This approach seems to be gaining rapid adoption, as it works really well. It gives you great starting points to examine, share with prospects, and generally improve, which results in much more rapid product and even business model evolution. It also seems to keep people excited about coming to work (instant gratification is good!) AND it forces all aspects of the business to work in a well-choreographed manner (they get lots of practice!), which has significant benefits.

As the organization grows further, separating the development group further by natural technology segments (e.g., UI, API, kernel, and other natural components) works really well. It allows the teams to remain very small, and the teams align with the technology. (You will want to shift people around and think of them as a pool of resources to some extent, as the natural groups will change over time as the technology changes.)
Many books and software programs have been written to facilitate technology development that are better studied than summarized, but my sense is that the points above are the key leverage points in most emerging growth technology companies at the expansion stage.

Does offshore development create a strategic advantage?

Many companies are going offshore for parts of their development effort. In my view, this is an economic advantage rather than a strategic advantage. Offshoring can help you economically, but in most cases will hurt you strategically (in the very best cases, it is neutral strategically). The major issue around offshoring is around communication (the communication between departments generally goes through only a few people, which essentially creates a low bandwidth pipe that makes managing that much more difficult even if you solve all of the other issues around offshore staff).

I have found that there is one situation where offshore development is both an economic advantage and not a strategic disadvantage (and I have made several investments in the approach). The situation is when the development effort started offshore and continues to be run completely out of the same offshore location. This has the economic advantage of offshore staff and does not have the strategic disadvantages noted above. Also, there are some great technology people offshore! From a strategic perspective, it does not really matter where the company is based, as long as the company staff is all-together, at least initially!

The technology advantage of the large companies is more of a perception than a reality. Emerging growth companies start with the advantage and can grow the advantage if they approach it right!

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November 28, 2005

Atttenuate Goliath’s “Channels of Distribution” Strength

Posted in David vs. Goliath, management, Sales at 7:20 pm by scottmaxwell

This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:

As a large company, Goliath has a well-developed set of channels of distribution, both direct and indirect in many cases. Channels of distribution come in several flavors, including:

Direct distribution approaches

  • Field sales into large enterprise
  • Telesales into small and midsized businesses, departments of large enterprises, and municipalities
  • E-commerce sales to consumers and individuals at businesses (of all sizes)

Indirect distribution approaches

  • Through systems integrators to large enterprise and large government
  • Through VARS/Resellers with or without distributors
  • Through big box retailers to SOHO and consumers
  • Through e-commerce affiliates
  • Through OEM approaches to all customer categories

The large company has spent years perfecting its channels of distribution and generally has well thought out approaches that function very well.

Attenuating the large company channel of distribution strength…

While the large company starts with a significant advantage, there are a several approaches that the emerging growth company can use to help minimize the large company strength and, perhaps, gain an edge:

  1. Align yourself with the large company channels of distribution if you have complimentary products to the large company. This is a straightforward approach that works if you are truly complimentary. (It works best if the large company agrees that you are complimentary and agrees to help!) This could result in you getting introductions to prospects as well as gaining valuable indirect channel partners.
  2. Align yourself with your large competitor’s large competitor. Two companies competing with the same large company might be natural allies.
  3. Focus on the Channels of distribution where the large company isn’t involved or where the large company has some issues. This would generally be indirect channel partners who have great relationships with your target customers that for one reason or another are not working with the large company (for example, different geographies, bad relationship, channel conflict with the large company’s direct sales force).
  4. Develop your channels of distribution that have more efficiency than the large company’s channels (note, this really needs to be part of an overall strategy that includes simpler and more targeted product, lower price, more efficient customer service, which I describe in “Aiming Toward the Economic Singularity“). The basic concept can be a significant advantage over the large company, as they will have difficulty building their more efficient channels (even more difficulty than you will, as they already have a distribution approach in place that will have conflicts, both internal and external). For example, use telesales into departments of large enterprise (and the SMB market) if they have field sales into large enterprise, use the indirect channel if they have only direct telesales, use e-commerce approaches, etc.

No matter what distribution approach you choose (excluding the OEM approaches, which are highly varied), the following approach seems to be the best practice:

  1. Start with direct distribution. You need to have direct access and relationship with the end users so that you can perfect your product, services, and marketing messages. You also need some reference customers!
  2. Once you have perfected your value proposition to your customers directly, you can work on expanding your reach through building up your indirect channel. Some thoughts:
    • You should do your homework and truly understand the segment of channel partners that are best for you. This is the exact same process as choosing the right customer segment and will take real work. Just so I am clear, it may turn out that there are not appropriate indirect channel opportunities for your product. If there aren’t, don’t push it, as it won’t work!
    • You need to perfect the value proposition for the end customer before you approach the channel. While there are some exceptions, this rule is important, as there is no reason a channel partner should work with you if you do not have a solid “package” to offer their customers.
    • The best indirect channel relationships seem to start with the emerging growth company offering value to the channel partner rather than the reverse. You need to develop your value proposition to your channel targets (this is very similar in concept to the approach to developing your value proposition to your target customers)! Note that this will take some effort and resource to do right! The key question that you need to ask is “what is in it for them?” (Btw, the best way to find out is to ask them who they currently do business with and why, what there ideal scenario is, and how can you craft a package that will add the most value for them).
    • Put in place a training program and website specifically to address the channel partner’s needs. You need to treat them like your most valuable customers, as they truly are customers!
    • Once you have your value-proposition right for the channel partners, you need to “prime the pump.” If you have ever siphoned gas from a gas tank, you know that just putting the hose into the tank and into the bucket doesn’t do anything (which is the same thing that will happen when you sign up most channel partners if you don’t “prime the pump”). Just like you need to suck on the hose to get the gas flowing into the bucket, you will need to offer up leads and help close some deals with each salesperson/group at your channel partner so that they can learn how it is done and also see how easy it is to make money relative to selling other products and services that are in their catalog.
    • Start with a very small number of target partners. Remember my magnifying glass analogy? If not, take a look.
    • Indirect channels take a very long time relative to direct channels to build. They also require you giving up some of the economics, which is hard for many companies to swallow (especially if they have a direct sales culture). My view is that if you are building a large company OR if you have a product or service that is naturally an indirect channel sale, then you will want to pursue this strategy. If you need or want short-term results, however, then you will need to pursue a direct strategy.
    • As with every other specialty in your business, there are a lot of complexities with respect to the indirect channel. I highly recommend that you hire an advisor or full time person that has this type of expertise to help you both build your channel strategy and execute it.

Large companies do have the advantage that they have great channels of distribution. However, developing a targeted approach to building your own channels can help attenuated the large company advantage. If you adopt the strategy of going after a different channel, particularly if it is part of a strategy of “aiming toward the economic singularity” or a strategy of focusing and delivering superior value to your niche then you can gain an edge, possibly a large edge in the longer term!

November 26, 2005

Attenuate Goliath’s Customer Relationship Strength

Posted in David vs. Goliath, management at 6:00 pm by scottmaxwell

This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:

Well-run large companies have many great customer relationships and the best spend a great deal of time maintaining and improving those relationships over time. The relationships result from all of the value-add points of contact that the customer has with the company including marketing, sales, professional services, and customer service contacts.

These relationships are valuable to the large company as they give the large company a better opportunity to have strong new product introductions. Also, customer relationships are similar to a bank account that you have to help you through tough short-term situations…your bank account is helpful getting you through a disaster such as an earthquake, hurricane, or job loss as a strong customer relationship is helpful getting you through a better competing product release, some issues with your product, or other temporary set-backs.

From the emerging growth company perspective, it is difficult to compete head-to-head with a large company that has built great relationships. This post examines the large company relationships with its customers and suggests focal points and activities that will help attenuate the large company relationship strength and, perhaps, give the emerging growth company an edge.

What is relationship?

When you boil down all of the issues relating to relationship, a great customer relationship means that the customer trusts the vendor to “do the right thing” for the customer.

The relationship gets stronger:

  • the more the vendor activities are aligned with customer needs,
  • the longer the relationship is in place with good results for the customer.
  • the broader and more diverse the group (on both sides) involved in the relationship. The more points of contact you have at the customer and the more different “departments” that you have relationships with, the more robust the relationship.
  • the more frequent the value-add contacts. The key here is that the contacts need to be considered “value-add” by the customer. You can easily hurt the relationship if you try to over-contact the customer and effectively waste his or her time. So long as the contacts are considered “value-add,” the more contacts the better from a relationship point of view.
  • the more the customer-initiated contacts result in a positive outcome for the customer. Most well run large companies spend a great amount of time working on their proactive contact strategy, generally out of the sales and marketing units. But, the more difficult processes to design and execute are the processes that originate from the customer having an issue and the company needing to address it. Companies that have developed best practices at resolving customer-initiated issues have much better customer relationships!
  • the more effective the contacts are at building relationship. As a general rule, in-person contacts beat video-conferencing which beats phone contacts, which beat e-mail and other electronic contacts. (Note that the costs to the vendor go in the opposite order.) This is not to say that you need in-person contact to build relationship, just that the more you move toward the electronic contact end of the spectrum, the more work you need to do to make sure that the contacts are building relationship.

Characterizing the large company customer relationships…

It is important for the emerging growth company to understand the strength of relationships that the large company has with its different customer segments. Below I offer some thoughts on how the elements of relationship work together to create various levels of customer relationship. This is greatly simplified, but offers up an approach for thinking through the relationships, which is the first step in developing a strategy that addresses them:

  • Very Strong Direct Relationships– Large enterprise and large government sales that involve field sales staff and professional services staff selling, installing, configuring and training at the customer’s location generally produce very strong relationship bonds with the customers (assuming there is a positive outcome). These types of relationships are the strongest, as they hit on all the relationship points above.
  • Solid Relationships– Direct telesales relationships with departments of large enterprise, municipalities, and small and midsized businesses can also create strong relationships (not as strong as field sales, but still strong). Also, indirect relationships that companies have through Distributor/VAR/Resellers or OEM probably fit into the solid relationship category if everything goes well (in this case, the large company needs a strong relationship with its channel partners and the channel partner needs a strong relationship with the end user).
  • Virtual Relationships. Big Box retailer and Internet-based relationships are probably the weakest relationships, as they do not generally involve human contact (which helps drive the relationship). Nevertheless, a well-run virtual relationship can be developed if it is addressed correctly.

The large company also has the opportunity to develop stronger relationships if they have a solid teleservice approach to addressing inbound customer issues, regardless of the original sales approach. More on this point below.

Attenuating the large company relationship strength…

With the above points as a guide, there are a several leverage points for the emerging growth company:

  1. Aim directly at the large company relationships if you have a product set that is highly complementary to the large company. Also, get the large company to help you to the extent that your product or service helps sell their products. The best approach here is to get a small number of sales that sell through the large company’s products and then contact the large company to discuss ways that you might be able to work together.
  2. Aim at the set of prospects that the large company does not have relationships with or where the relationships are weaker. My comments above suggest that large companies have strong relationships with their customers, but this may actually be more perception than reality based on a study by Bain & Company. The study suggests that there is a significant amount of room for companies to improve: 80% of the companies surveyed believe they are delivering a “superior experience” to their customers, but only 8% of their customers agree with this statement. I actually did not need this study data, as I have wasted a lot of time on the phone trying to get customer service!
  3. Aim at the set of prospects that the large company has weaker relationships with. This generally means going after small and midsized businesses, municipalities, and consumers as the large company is using approaches that are less effective at building relationships with this group.
  4. Radically rethink your approach to serving your prospects and customers in all segments. I am a customer of Rackspace, as an example, who has a theme of “Fanatical Support.” Everything that they do supports this theme, and it works! With all of the possible newer approaches to customer relationships, including chat, e-mail, voice recognition in phone systems, online tutorials/FAQs/Training videos, there is no doubt that there are many approaches that can be developed to produce much better relationships with your customers and prospects. Take a look at David Teten and Scott Allen’s new book (The Virtual Handshake: Opening Doors and Closing Deals Online) to get some great ideas and examples on how to go about doing some of this.

I am a strong believer that emerging growth companies have a large opportunity to both attenuate the large company’s customer relationship strength and gain an edge, particularly if you examine the situation, focus on the right opportunities, and radically rethink your approach to serving your prospects and customers!

November 25, 2005

Attenuate Goliath’s User Interface Strength

Posted in David vs. Goliath, management at 8:41 pm by scottmaxwell

This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:

Regardless what technology platform you decide to implement (I addressed the large company’s technology platform strength previously), the user interface is an independent issue. I contend that the user interface (UI) is the single most important piece of technology in nearly all software or Internet companies and probably also has the greatest opportunity for improvement! The more frequently the user uses the UI, the more important the UI is to the overall platform (and, in general, the more valuable the platform is to the user). Over time, user comfort with the UI creates some level of vendor lock-in, as the user interface becomes a natural part of the user’s day.

In situations where the large company already “owns” the user interface, what can the emerging growth company do to minimize the large company’s strength?

Attenuating the large company’s user interface strength…

The emerging growth company has a few options for addressing this situation:

  1. Embrace and extend the UI already in place. For example, Microsoft Office and Firefox on the Apple PowerBook are probably my most important user interfaces for just about everything that I do. Someone building software for me would do well to integrate their user interface into Office and/or Firefox, since I am comfortable with both. Just so that I am clear, just having a browser application is not what I mean by embracing and extending…you have many opportunities to make the user interface much better through deeper integration with the user platform. This approach does not necessarily minimize the large company’s user interface advantage, but it does at least allow you to align yourself with this advantage.
  2. Target customer segments not using the large company user interface or who do not want to continue using the user interface. I have discussed this concept already in earlier posts, so I won’t repeat the thoughts here.
  3. Create a look and feel similar to the large company user interface. As users become comfortable with a particular user interface, the approach becomes more and more “intuitive” to them. If you can align your user interface with an approach that they are already comfortable with, then you stand to make your product feel more intuitive. For example, if someone was building a user interface for me, they would be well served to make the user interface resemble the Microsoft Office look and feel (without violating any legal restrictions!).
  4. Make it easy and fun!! – Create a radically better experience for your target customer segment. As an experienced user of many software interfaces, I believe there are huge opportunities to improve the user interface experience in many ways for all of your users. If you focus on their needs, you could gain a significant advantage over the large company. For example,
    • The UI can benefit by being connected to one or more services in the cloud and/or being automatically connected to other users (data/voice/video and synchronous/asychronous are all potentially part of this idea), regardless of whether it is a browser application or a rich client application. There is an endless set of possible application, data, and networking services that would benefit the user, so I won’t start trying to list them here.
    • Every user interface can benefit from allowing the user great feature/function regardless of whether they have a network connection (Research In Motion, makers of the Blackberry, has done an outstanding job of this!!). This includes features that utilize the network when connected but can also be used when not connected. Also, when connected they should synchronize automatically.
    • Every UI can benefit by being available on different interface devices that might be used to interact with the software. For example, desktop computers, PDA, smart phones, telephone keyboards, and voice commands via the telephone. This seems somewhat “out there” at this point, but will probably be more commonplace in a few years for many user interfaces. (Note: UIs should really be available as rich clients and browser applications, but the development environments have do not make this easy at this point. I expect that at some point in the future, the two concepts converge, so perhaps this will be a diminishing issue as time goes on.)
    • The UI can benefit if the developers really develop from the user point of view. This includes how many clicks necessary for a user to perform a certain task, how much time the user is waiting for the application to finish a task, and how easy it is for the user to understand what keys to press to perform a task.
    • All UIs can benefit by delivering information to the user that is better organized, has visualization options, and can be viewed in many different angles and at more summarized or detailed levels.

In my view there are great opportunities for emerging growth companies to develop great user interface approaches, as the large companies have solid approaches, but every single user interface has huge gaps from perfection. If the emerging growth company focuses on these issues, there is no doubt that they can create an edge over the large company!

November 24, 2005

Attenuate Goliath’s Patent Strength

Posted in David vs. Goliath, management at 10:38 pm by scottmaxwell

This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:

So Goliath has a large patent portfolio and has an ongoing machine to churn out new patents. It is likely, or at least possible, that you will get tripped up in one or more of a large company’s patents if you are not careful (this is becoming a very serious issue for all technology companies).

I find that most emerging growth companies are relatively flat-footed when it comes to this issue, as the emerging growth company has a lot of other issues to think about. But, if they grow well, at some point they are confronted with a competitor’s patents…if companies are not set up for this eventuality, they have a much more difficult and expensive time of it.

I am not an expert in this area. My experience comes from a patent I received based on my Ph.D. work, discussions with my portfolio companies and their advisors, and some level of independent research on the topic. At this point, I do have a high level point of view on the topic that I share below, although patent strategy is an issue that I am actively investigating further, as it seems to be growing in importance.

Addressing the large company patent strength…

From an emerging growth company perspective, you can play defense and offense. Both are important:

  1. Defensive strategy is all about making sure that you know the patents in your field and trying to understand them in enough detail so that you develop your platform in a way that does not conflict with the patents. (You will need to find the right outside help for this activity and it will take some resources).
  2. Offensive strategy is all about getting your own patents. Some experts have told me that this is a more important strategy than the defensive strategy. There are three possible benefits for having your own patents:
  • Make sure that you have protection that allows you some defense of your approach (it will be harder for others to attack),
  • Be in a position to use your patents as a negotiation tool if a large company claims you have violated their patents (that is, the large company violating one or more of your patents will give you a better negotiation position when they come calling).
  • Be in a position to monetize your ideas through royalty, and agreements (you can make money beyond your product market sales, if you want to play this game).

Just so that I am clear, I find this whole issue a waste of resources, both yours and everyone else’s. The patent system is in really bad shape and the use of patents really disrupts innovation these days (see Steven Vaughan-Nichols article as an example). That said, we are living under the current system, so we need to develop approaches to maximize our position within the system. Unfortunately, we need to deal with the patent issue as part of this, as you can’t opt out because someone is likely to come knocking on your door if you are successful. If you take the right steps to address these issues, you will at least minimize the large company’s patent strength and potentially gain an edge. And, hopefully, in the longer term the patent system will be fixed!
I continue to explore the issue these days to help give better advice to my portfolio companies. Over time I expect to both update this post and write other posts on the topic. I would appreciate any thoughts or resources that you think would add value to the issue…

Attenuate Goliath’s Technology Platform Strength

Posted in management at 10:42 am by scottmaxwell

This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:

The platform advantage…
Goliath already has a technology platform in place with many customers. If it is software, it may also be integrated with the customer’s other applications and data sources. They can continue evolving this platform by adding functionality and, if you come up with a good idea, they can incorporate your idea into their platform. They have the advantage over the newcomer, right? Well, yes these are all good points, but the emerging growth company can take steps to address this large company advantage that will minimize the advantage and might possibly even create a slight advantage against the large company. (Note: this advantage is more important in the B2B markets, so my comments below are more oriented to those markets.)

Attenuating the large company technology platform strength:

There are several possible approaches that the emerging growth company can use to minimize the large company technology platform advantage:

  1. Focus on the prospects who are not using (or don’t want to continue using) the large company platform. No matter what the platform and how well distributed it is, there is always a segment of the population that is not using it at all or wants to stop using it. If you aim at this segment, you have neutralized any advantage the large company platform might have!
  2. Create an approach that is completely separate from the large company platform. There are many, many architectural possibilities, and the large company does not necessarily have the “exact right” architecture for every solution (For example, competing with a client-based or client- and server-based platform by creating a browser-based approach that utilizes a service with embedded data in the cloud or allows networking of some kind.). The key here is to think very carefully about the natural architectures for you approach and to build capabilities into your approach that fundamentally need a different platform! (That is, don’t force a different architecture, but rather create customer-driven feature/function into your product that results in the fundamentally different architecture.) A great example of a company using this approach is Salesforce.com that has a completely web-based approach to CRM that is completely different that the traditional Siebel Systems (now part of Oracle) installed software architecture.
  3. Create an approach that leverages more than one large company platform at the same time. This is more an observation than a structural issue, but large companies tend to want to build their own platforms rather than share the best of all the large company platforms. To the extent your product or service leverages the natural heterogeneity of any user environment, you will minimize any individual company’s platform strength and probably gain a slight edge (some people might call this “living in the white space between large vendors”). Veritas (now part of Symantec), for example, grew to become a very large company by providing data lifecycle management solutions for all the major platforms.
  4. Embrace the large company platform, but make sure that you are prepared! For example, you might
    • Focus on tactical feature/function enhancements to the large company platform (I think of it as delivering feature/function one level of abstraction removed from the large company platform). This strategy works in the short-term, but you need to be extremely nimble and always be ready to release the next generation of feature/function when the large company builds your feature/function into its products (and they will if they are useful ideas). For example C360 has a platform that leverages Microsoft CRM and users have told me that it does an excellent job extending the capabilities of the core platform.
    • Focus on customer needs when the large company releases the next generation of its platform. Most of the large companies are so focused on their next generation platform that they leave many, many holes for emerging growth companies to fill with respect to user needs. For example, migration of data and user settings to the new platform, migration of all of the other supporting infrastructure (connectors, back-up systems, administrative systems), and/or allowing users to use both the “old” platform and “new” platform at the same time (transformation and synchronization types of issues). For example, Aelita Software (now part of Quest Software) had some software applications that make it easier for users to adopt the newer versions of the Microsoft Exchange product lines.
    • Create a deep domain expertise that leverages the platform but makes it very difficult for the large company to replicate. For example, Acorn Systems has a profit and cost allocation system for businesses that uses solely Microsoft infrastructure. Their depth of domain expertise and software/service sophistication they have would make it very difficult for Microsoft to recreate. Another example is Salesforce.com, who uses the Oracle infrastructure in their data center and integrates into the browser as well as Microsoft Office on the workstation, but their On-Demand approach makes it impossible for Oracle or Microsoft to incorporate into their platforms.

These approaches work no matter whether your target users are individual consumers, families, small businesses, large enterprises, or governments, or other large organizations. The more you aim at the business product markets, the more important they become. The key is to make sure that you are approaching the situation in a way that you mitigate the platform advantage of the large companies!

(Note: full disclosure, Acorn Systems is a portfolio company of my firm and both Quest Software and Aelita Software are former portfolio companies).

November 23, 2005

Attenuate Goliath’s Management and Employee Strength

Posted in David vs. Goliath, management at 2:04 pm by scottmaxwell

additional note to my ealier post: this post is a subpoint to my post on “How Can David Beat Goliat?-Strategy #7: Attenuate Goliath’s strengths!
I have found that adding only one great leader to an emerging growth company significantly changes the outcome, and multiple great leaders working together is one of the largest ingredients for success for all companies.

Well-run large companies have great senior managers and employees at all levels and they generally have recruited and trained a large bench over the years. This is a tremendous strength for them. How can emerging growth companies minimize this strength and, perhaps, even gain an edge?

Attenuating the large company strength…

At the senior manager level, it is true that some of the best senior managers are at the well-run large companies (I have not met anyone more impressive than Steve Ballmer, CEO of Microsoft, for example), but the amount of time the senior managers can spend on a given product market is very small as they have too much to do (see my prior posts on the information advantage and the time advantage, for example); therefore, the senior manager advantage is more perceived than real for an emerging growth company in a given product market (As you become large and gain more of the senior manager’s focus, this will become more of an issue…it will also be a great “problem” to have!).

Below the senior manager level there is more of an issue. The well-run larger companies have some great mid-level managers (corporate officers) and have established solid operating processes. The advantage that large companies have is that emerging growth companies need to both compete with the quality of the managers and the quality of the processes. (As an aside, this is particularly important as emerging growth companies grow through the expansion stage and need to establish more formal processes. They do not need or want these processes at the earlier stages of company development. But, as companies grow, the multiple phase changes in both organizational structure and formality of process are highly important to successfully growing the emerging growth companies…candidates who have these tools add much more value than people who have not been exposed to these tools).

The best way to attenuate the strength (as well as possibly create an advantage) with respect to the other employees is to hire a very talented “A” caliber staff into your company that know how to establish the processes you need. Some thoughts:

  1. As I have written about previously, there is a large set of “A” caliber people who will not fit into large company culture or who are looking for stock-based compensation and opportunities for capital gains (with great risk-reward characteristics) that they can’t get at the large company. This set of people is uniquely suited for the emerging growth company experience and will not want to work for the large company. Many of these people are as good or better than the staff that fits into the large company (they are more risk-seeking and hands-on, for example). You should work on getting more than your fair share from this group! (Note: these people may have less understanding of the formal processes that you need, but they will still be a great addition and you won’t be competing against the large companies for them).
  2. For any top prospect that you want to bring into the company, especially if you are recruiting them away from a well-run large company, you need to give them a great sense that the company has a high probability of success and that they will succeed along with the company. Some approaches to do this:
  • Outline a vision for the company that is both achievable and interesting. (This is not fluff stuff, but rather what customer segment are you attacking, what is your approach, and why will it win relative to others?)
  • Demonstrate some progress against your vision. The more progress the better, especially for the more risk-averse candidates. The better the product and the more happy customers, the better you will show.
  • Make sure that they know you have appropriate funding. If you are profitable, it is easy to show. If you lack profits, make sure that they know your funding source and have the funding source give them confidence that they are behind the company.
  • Make sure that you give them exposure to your very good (and impressive) advisors. You need to both surround your company with great advisors (board members, advisory board members, Angel Investors, VCs, etc.) and give your candidates access to them. Also, the better your vision and the more they are aligned when the candidate talks to them, the better. This is pretty important for many of your more senior candidates, as it will leave the impression of a more substantial company (some very good people are involved!). This point is even more important if the large company senior managers are “wining and dining” your candidates!

There is no magic here, but it is important to get the right, competitive, staff at your company…and it will help attenuate Goliath’s Management and Employee Strength!

How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strengths!

Posted in David vs. Goliath, management at 10:12 am by scottmaxwell

So far, I have had six posts that point out the strategic weaknesses of the large companies and how emerging growth companies can exploit those weaknesses to win in the market. Large companies clearly have some very powerful strategic advantages as well. This post lists those advantages, both real and perceived and follow-up posts will address what the emerging growth company can do to minimize the advantages.

The Large Company Advantages…

There are many perceived advantages that well-run large companies have over the emerging growth company, including the following:

  1. Great senior managers and employees
  2. A technology platform in place with customers
  3. A Patent portfolio and ongoing new patents
  4. User comfort with the user interface “look and feel”
  5. Many customer relationships
  6. Well developed channels of distribution
  7. A huge set of great technical talent
  8. A brand name and reputation
  9. Significant financial resources
  10. Economies of Scale and Scope
  11. Ability to bundle multiple products

Attenuating the Large Company Advantages…

There are many very good approaches for emerging growth companies to minimize each of the perceived advantages of large companies. The following few posts will address each of these perceived and real advantages.

Additional note: as I post each of these topics, I will link each of the items above.

November 22, 2005

How Can David Beat Goliath?- Strategy #6: Set your Operating Point closer to the Funnel Singularity!

Posted in David vs. Goliath, management at 7:42 pm by scottmaxwell

I have been trying to decide if this strategy is an independent strategy or if it is just an accumulation of prior strategies. I have not completely made up my mind, but I think the approach has strategic importance, at least for certain product markets, so I am including it in the list. I have already written a lengthy (wordy?) post on the topic titled “Extreme Funnel Economics- Aiming Toward the Economic Singularity,” so I will not recreate it here.

The basic strategy is to make everything (e.g., product, pricing, customer service) other than the sales and marketing effort so compelling to the target customers that they purchase the product without a significant sales and marketing effort (or expense). The closer you get to zero sales and marketing expense (the singularity) while still growing well, the better you have executed against this strategy. There are some caveats, so read the post if you are interested.

This strategy is perfect for the small company vs. the large company, as it hits on the large company disadvantages in all of my prior posts. Your strategy should be that no matter where the large company has placed itself, set your operating point closer to the funnel singularity!
Ultimately, the strategy is similar to my thoughts as a kid, when I figured that if I could get just a penny from everyone in the world then I would be rich. With the current networked world, this dream could be at least partially realized…
Next time: Strategy #7: Attenuate Goliath’s Strengths!

November 21, 2005

How Can David Beat Goliath?- Strategy #5: Create the Innovation Advantage!

Posted in David vs. Goliath, Innovation, management, Product Development at 8:23 pm by scottmaxwell

I always get confused when I read about innovation. There seem to be a lot of different working definitions, new and interesting terminology, tremendous academic and government attention, reports, books and many, many frameworks and methodologies. I generally get confused because the topic is not as complicated as people make it, especially from the perspective of the emerging growth company.

Below, I try to distill all the concepts down to their essence (at least from my point of view) and, more importantly, describe how the emerging growth company can gain an innovation advantage vs. the large company.

Innovation defined…

So what is innovation? It is one of those words that seems to have many different meanings. My meaning here is that innovation is “the creation and application of new ideas that someone finds useful or entertaining.? The key points here are:

  • Someone needs to find the new idea useful or entertaining-In my (strong) view, innovation both starts and ends with the “customer? (see, for example, Ali Alwattari’s article “Need breakthrough innovation? Resist the temptation to build a better mousetrap?)
  • The idea needs to be new– this is a key point for the purposes of this post, as extrapolations or extensions of older ideas do not fit this definition, nor does borrowing ideas from other companies that have already successfully used the idea (these are great activities, just not what I mean by innovation here.)
  • The idea needs to be applied and used– an idea by itself is just an idea.

The innovation terminology boils down to degree of change…

The innovation can be relatively easy or difficult to apply depending on:

  • The users’ degree of change or effort implementing the innovation until it becomes “intuitive.? This includes:
  • Understanding the benefits of the idea initially
  • Convincing the decision-maker(s) to implement the idea
  • Implementing the idea
  • Getting the user(s) up the learning curve
  • The innovator’s degree of change or effort applying the idea, introducing it to the prospective users, and getting them to become users. This can include real effort in one or more departments, including:
  • Research
  • Development
  • Manufacturing
  • Suppliers and partners
  • Logistics
  • Marketing
  • Distribution (both direct sales and indirect channel)
  • Customer service

All of the different terms that people put on innovation seem to boil down to the degree of change and where the ideas are coming from. This includes:

  • Incremental innovation, evolutionary innovation (less change)
  • Radical innovation, revolutionary innovation (more change)
  • Closed innovation (ideas and application approaches come from inside a single organization)
  • Open innovation (ideas and application approaches come from inside and outside an organization)

The Large Company Challenge…

The list of issues faced by well-run large companies (large companies that are not well run have a significantly larger list), includes the following:

  • Large companies must focus mostly on their core product markets
  • Most large companies are public and need to show revenue and earnings growth each quarter…the best way to do this is to focus on the larger opportunities in their core markets. For example, a 2 percent revenue improvement on a $1 billion revenue, $100 million profit company with 90% gross margins (from their core business) is as much as $18 million in new profits (that is an 18% increase in profits!). Most new initiatives will take several years to get to $18 million in revenue, let alone $18 million in profit!
  • Large companies get this huge economic benefit from leveraging their strengths, including products/platforms already in place, customer relationships, channels of distribution already in place.
  • Large companies tend to be fact-based and sometimes political in their decision-making, which rejects a lot of the new ideas in favor of “lower risk? initiatives (ideas are very fragile when they are new).
  • Decision-making at Large companies need fact-based analysis in order to make good decisions. The need for fact-based analysis comes from some combination of management training (business schools teach fact-based analysis), some level of needing “proof? or evidence that a project will be successful, and the need to reduce proposed new initiatives to numerical analysis, which makes it easier to set priorities.
  • I also find that mental models get in the way of decision-making for new ideas. The model, or intuition, is based on the fact pattern that a person has learned over time (again, fact-based analysis, just expressed differently). New ideas a lot of time conflict with various unknown mental models in the organization. The immediate reaction from the person with the mental model is that “this must be wrong?, and if the conversation takes place away from a person that can defend the new idea, it could kill the initiative.
  • Politics at large companies also gets in the way of appropriate decision-making. As companies grow, the incentive for individuals to “grow the pie? reduces relative to the incentive of individuals to “get a larger piece of the pie.? Also, individuals are concerned with their career advancement, which generally aligns them with the needs of their supervisors and other “power centers? which don’t always align with the needs of the company. (Note, this can happen at small companies as well, but the larger companies have amplified structural issues).
  • Large companies tend to be very difficult to change, let alone to change quickly. And if the change must be coordinated across departments, the difficulty level grows geometrically.
  • Large companies rely on economies of scale and economies of scope, which are powerful economic concepts that help them reduce their cost structure and get higher operating margins. Essentially, this means that different products share manufacturing processes, distribution, finance, marketing, and all of the other areas of the company. This economic gain creates less ability to change (due to complexity in each department), especially when change is significant.
  • New initiatives generally work better when there is one person that controls and coordinates ALL the resources. The problem with the large company is that the one person is generally the CEO, who has a core business to run!
  • Large Companies are older. Most of the time the people who originally did the thinking behind the processes in each department are gone from the company or at least the department. The employees that are left generally know how things work but they don’t know why things work the way they do. When asked why they do things a certain way, they generally respond “that’s the way we do things around here? or “not sure, but it seems to work? or “good question.? This creates much more work, as people need to think through all of the interdependencies before they can make changes (think about taking on someone else’s software code and being expected to add feature/function to it…a lot of work!)


A partial solution for the large companies…

Even with the difficulties, department level change efforts can and do get done. But when it comes to significant multi-departmental innovation, the best way large companies can set up is to put together a separate “company? which has all of the control over the innovation resources and, therefore, is not bound by the constraints of the overall organization. However, even if the large company sets up this approach, they still face a number of significant limitations:

  • The governance of the effort is 100% in the hands of the large company, rather than shared with the person in charge of the effort and a small number of others who have a significant incentive to make the project succeed (and who are very involved in the project and give ongoing guidance). This governance structure reduces the robustness of decision-making, which is particularly important during difficult periods (Note the contrast to the emerging growth company governance structure!).
  • It is difficult to assign their best managers to a new project.
  • Most large companies have constraints on the number of “A? caliber senior managers. The companies are better off if their “A? producers are focused on evolution of current core of the company rather than new, small innovations.
  • The large company functional-department heads want to keep their “rising stars? not give them up for a “speculative? project. They did all the work finding, hiring, and grooming their staff…how do they benefit?
  • The best managers also want to work in the core of the company, as that is where they will find the better risk adjusted economic gain and career opportunities. Why take the risk on innovation, as the downside is career suicide and the upside is not high on a risk-adjusted basis.
  • The net result is that the large companies have difficulty staffing the unit internally with the best people.
  • It is difficult to recruit, motivate, and retain the entrepreneurial innovation leaders from the outside.
  • Companies can’t pay “A? leaders from outside the company what they can make in a successful emerging growth company stock price appreciation is key!
  • Many of the personalities of the entrepreneurial leaders don’t fit with the large company cultures.
  • The net result is that the large companies have difficulty staffing the unit externally with the best people.
  • While large companies in total have large networks, the staff of the new small unit generally lacks the “ecosystem? that develops around the best small companies. In fact, most large companies don’t even recognize that the ecosystem is available. This ecosystem includes quite a few individuals and professional groups that enjoy helping to build something great (strong personal satisfaction and economic incentives!), such as former and existing large company managers, accountants, lawyers, third party marketing, sales, development firms, and of course venture capitalists. These networks allow the small companies to tap into expertise and advice (for innovation) that the small units of the large companies have more difficulty tapping into. This is partly due to the information disadvantage and partly due to the scale disadvantage of the larger companies.
  • Large companies need to put constraints on the innovation (they can’t let the group go for the largest financial gain). When new companies form around an idea, they can start in one direction and morph into another direction very easily. My early stage VC friends tell me that this happens all the time and is necessary to truly “find the market?. This morph may include the product and the target customer but also will ultimately include the channels of distribution. It also includes bringing on new experts in various areas to help. This is very difficult for an established company to do. They put more constraints on the target customer, the technology, and the channels of distribution.

The emerging growth company opportunity…

Emerging growth companies can create an innovation advantage on the issues of the large company if they focus on the right opportunities:

  • Hire the “A? team into the company.
  • Focus on innovations that conflict with the large companies’ decision-making process. The fewer facts available, the more difficulty the large companies will have, as their fact-based analysis will get in the way. This suggests going after
  • New technologies for the product (note: this point is not valid for large companies with reasonably sized research budgets, as they will be very good at experimenting with new technologies)
  • Customer segments not addressed by the large competitor
  • Latent markets
  • Channels of distribution that are completely new
  • Approaches to customer service that are completely new
  • Make it difficult to incorporate into the core business of the large companies. For example,
  • A technology that they would have difficulty building into their current platform,
  • An approach that requires changes to more than one department in order for them to implement (the more departments the better), or
  • An approach that requires significant changes to at least one department.
  • If you aim directly at the core business of a large company, you need an innovation that completely disrupts their business or economic model (you are going after their core strengths). For example, price the product or service considerably lower, go through much lower cost distribution (such as the internet-based approaches), and have a product or service that uniquely meets the user’s need. The large company needs the economic results, so will protect their margin as much as they can.
  • Choose innovations where you have a long runway. This will allow you to continue innovating and make it harder for the large company to catch up.
  • Accelerate down the innovation runway. The more advances you can make increasing your lead, the better. This generally means that you will want to
  • Focus on rapid development cycles,
  • Distribute early adopter versions (e.g., beta versions) of your products and services to get feedback and build it into your products,
  • Really, really, really work hard at getting your customers to help you innovate (take a look at Eric Von Hippel’s new book, as an example),
  • Make sure that your technology platform supports rapid development cycles. For digital technologies, browser-based services will be easiest to innovate, followed by rich/thick client applications, followed by installed server/appliance applications. The most difficult will be hardware
  • Make the change required by the customers as small as possible. Change includes their decision-making to use your innovation, installation, configuration, training, usability, how the product fits into users’ environment/process, etc. The more the change can be “one click of the button? and the more the technology is intuitive, the better.
  • Build the best network possible to help guide you. There is a tremendous ecosystem of potential users, senior managers (both retired and active), Venture Capitalists, consultants, accountants, and lawyers that are all interested in helping emerging growth companies get up the innovation curve and build their companies. The more you build your network, the more it will help your innovation.

Set up right, emerging growth companies can have a significant innovation advantage over the large companies. The key is to really understand the leverage points!

Note: Clayton Christensen has some great ideas and data supporting some of these points in his book The Innovator’s Dilemma. He and Michael Raynor also work to help large companies address these issues in their book The Innovator’s Solution. Some of the ideas overlap with their conclusions and recommendations, but my advice is targeted specifically at the emerging growth company’s efforts. Also, I do not believe that there is a true “solution” for large companies, only best practices that can still leave them at a disadvantage to enterprising emerging growth companies (assuming the small companies approach it correctly!). A possible approach for large companies is to help the small companies build and then purchase them. Some companies, such as Cisco, have had great results with this strategy.

Next Time: Strategy #6: Set Your Operating Point Closer to the Funnel Singularity!

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