Radek's Tech & Innovation

National Geographic at the Crossroad

2011-06-07T11:16:00.001-07:00

This is full excerpt of the Final Paper I and my partner Gonzalo Portellano submitted as part of our final exam at IE Business School. I am posting this as the recommendations correspond with the topic of this blog and it also could help students that solve the HBS case “The National Geographic Society”. Maybe somebody from the NG will be bored at work and read this… Btw. we got an “A”

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Dear Mr. Fahley,

The National Geographic Society, after 121 years of existence, is facing great challenges that will define its future for the present century. In an exponential fashion during the last years, the media industry has evolved in a way that forces National Geographic (NG) to redefine its business model not only to keep its competiveness but to adapt and to survive to the new environment.

The following roadmap identifies the existing problems and major risks for the Organization, their impact, solutions and guidelines to drive the profound change that NG must face:

1) Definition of the problem

2) Company analysis and problems encountered

3) Recommendations

4) Financial Impact

5) Alternative Solutions

6) Risks & Countermeasures

7) Implementation Plan

1) Definition of the Problem. External and Internal Causes. Impact on NG

We have identified these problems according to its external or internal origin, accordingly establishing their consequences:

External factors and market trends in the Media Industry

As more and more the world turns paperless, overall sales of printed magazines, books and newspapers are going down. Tablets and smart phones, more and more improved and affordable have dramatically contributed to speed up this process.

The process in which TV and Internet are converging is changing the power structure of content producers, distributors and broadcasting companies. The potential customer base is now broader due to an increasing number of information channels.

With more and more channels available to communicate, more contents and free or very affordable access to them, loyalty has decreased dramatically. This has led to a tougher competition in the media industry to attract customers offering a wide range of free contents and features.

Internal factors that need to be addressed

While continuity and low risk may have been a valid driver during decades, deriving in slow decision making processes, this philosophy should be eliminated to allow the change. The current structure leads to inefficiencies and duplication of activities through harmful internal competition, missing business opportunities.

Overlapped activities and misaligned price strategy are affecting the brand credibility and diluting the name and recognition of NG. Besides, the Organization lacks an effective information system, impeding employees to collaborate across business units and accentuating the silo perception.

NGS is aware of the need for change, but it is lacking a clear strategy to face these changes, and the shift to a customer oriented approach is a fact that have been envisioned but not shaped.

2) Company analysis and problems encountered

We are using McKinsey’s 7S framework enriched by overview of strategic resources to provide and integral analysis of the NG organization:

Strategy: NG shifted from being a national US magazine promoting American topics to a global ecologically concerned magazine with 34 international editions. NG is a diversified corporation spanning publishing, media production, and travel industry. It’s revenue stream include magazine, books, and educational material publishing, TV content creation, travel agency, educational games development, branded merchandize. NG is funding and organizing scientific research and exploration that later popularize in the magazine and books. NG is aware of the current trends in media convergence and plans to adapt by creating new content delivery channels (internet, social networks) which NG calls e-commerce.

Skills: NG has one of the world’s best nature and travel photographers resulting in world class photography skills. NG products posses the capability to inspire and evoke customer’s imagination, which is one of the main reasons they continue to buy the NG products. NG is able to generate unique contents hardly matched by competitors.

Shared Values: NG staff is proud on NG rich history of popularizing science. Working at NG is rather a mission than just work. The mission is educating the world promoting ecological awareness.

Structure: NG combines non-profit and for profit activities in separate business units. The Mission Program unit is partially funded by donations and profits of revenue generating business units. Business units function as isolated silos of information and competencies limiting cross company synergies. An organizational structure divided per products promotes product orientation where products compete among each other for customers. On top of that, separated P&L for product groups creates unhealthy competition for resources and ideas.

Staff: NG staff is loyal due to a sense of belonging and identification with the NG’s mission and heritage. However, they criticize poor conflict resolution, unclear marketing strategy and silos in the organization.

Systems: NG governance processes allows duplication initiatives, which leads to internal competition and inconsistent brand presentation. Moreover, activities and programs do overlap e.g. seven different loyalty programs.

Style: The organization culture is process and consensus driven rather than results driven. Risk aversion prevails as failures are punished while successes are not always rewarded.

Strategic resources: NG brand awareness and typical yellow frame image is well positioned in customer minds as source of reliable information about the planet. The NG brand attributes help customers to identify with the brand and promote by word-of-mouth, which can be further leveraged at social networks. With 10.5 million original pictures, NG has one of the world’s largest databases, only surpassed by Shutterstock (15 million[i]). Pictures can be licensed for use in other magazines or accessed by NG community members as a membership benefit. 40 million readers around the globe position NG magazine as a top choice for readers with post-graduate education and top management positions, which represent an attractive community with potential for new revenue streams.

3) Recommendations

We have structured our recommendations based on the following pillars:

a. Brand and Core Values: Reformulation of the mission

Based upon the mission described in 2004 (“To inspire people to care about the planet”), we would like to propose its reformulation, linking it to what we believe are the pillars for a sustainable growth at NG: Planet => People => Profit => Prosperity => Peace

“A service oriented approach, and adapting to the 21st Century’s customer behavioral patterns, are key factors to position NG as the leader of the community that takes care of our Planet and Prosperity of its People.”

These premises should be included in the activities representing the NG brand. We have considered the following actions:

· Coherence with the mission, sponsoring or building strategic alliances with companies sharing common values.

· Education and value sharing, focusing philanthropic activities to broadcast its educational contents in developing areas.

· Increase the sense of Community beyond the present sphere of influence of NG.

· Walk the talk: Apart from being ecological organization, NG can use its brand reputation organizing forums in a systematic way e.g. TED Talks[ii].

b. Organizational Change

Current NG organizational structure is characterized by organizing around particular products with separate marketing and branding functions. We believe that current structure is not only entrenched in the traditional now declining business model, but also hindering the transition to the business model for the digital economy. Hence we propose radically changing the organization design to promote innovation, cooperation, and multi-channel interaction with customers.

Exhibit 1 depicts the new organizational design, which is centered on three types of customers. The ones who use NG free services, NG paying members, and those, who engage with NG in isolated transactions on pay per content mode. NG delivers the content and products to customers via four channels Print, TV, Web and Mobile platforms, and Retail Shops. The interaction in each of the channels follow both-ways while customers give feedback, comments, and also submit their own content like videos, pictures, blog posts, etc. The Sales & Channels business unit is in charge for the Channel Management, Prints Distribution, Ad Sales, and Licensing. In fact, it is the major revenue generating business unit within NG.

The Content Factory combines all content creation capabilities previously scattered around product units. Bringing Journalism, Audio & Video, Education, and Community Generated Content into one business unit, prevents duplication of activities and promotes re-using the content in various products and channels.

The Mission Programs is crucial differentiating part of the NG business model. For that reason we propose to concentrate it in separate business unit together with NG Travel.

We propose to create new business unit Marketing & Community Management that will cover all NG marketing activities across all products and channels. Marketing encompasses product management with dedicated product managers for each product, Community Management main goal of which is to develop NG customer community by not only managing the on-line platform, but also cooperating with product and channel managers to deliver coherent customer experience. Similarly, the Brand Manager will assure consistency and development of the NG brand across all channels and products.

Under Operations, the Media & Technology unit is the centralized successor of previous IT teams that will constantly look for emerging technologies that can leverage NG value offering. Also, the unit will provide IT support to all existing NG activities together with development of new tools for both internal and external customers.

The Production unit will be supporting the Content Factory with publishing specialists including pre-press and distributed printing through partners around the world. It will also cover all aspects of Audio & Video production that cannot be handled directly by the Content Factory like operating recording studios and performing advanced editing.

We are convinced that such a major organizational and culture change requires top-down coordination and support. Therefore, we propose to create functional position of E-Commerce Program Manager reporting directly to the CEO. The E-Commerce Program Manager will facilitate establishing the E-Commerce competencies in four areas of the NG organization Community Management, Interactive Products, Web & Mobile Channels, and Media & Technology projects. When the Program successfully finishes and the E-Commerce competency is deeply rooted in NG organizational capabilities, this position will be dissolved. She will be evaluated on the project performance metrics like alignment with scope, budget, and timing and on additional revenue and costs saving generated by transition to the E-Commerce business model. The proposal of new organization chart is contained in the Exhibit 3.

c. Embracing Internet and Social Platforms

On-line platforms

The future of the organization will depend on the ability of NG to make its own content and resources available for the largest number of people, generating traffic and becoming an opinion leader in the race for a sustainable planet. In our view, this scenario can be possible by creating and developing a social platform bringing together the scientific community, travelers and all people concerned and sensitive to the core values of NG.

In this “Freemium” social network (See Exhibit 4), NG content will be displayed, as well as content from other sources (users, scientific community, travelers) creating a much larger base of content, available for all the users of the platform, increasing traffic, creating network externalities and providing an additional value to the users.

The Free area with community-generated content and some content provided by NG is free with aim to generate traffic to the platform. Premium content from NG like access to articles, download hi-res photos and full-length videos can be accessed on pay per content basis. Additionally, an advertisement is another revenue stream to support the platform.

The Free level is the foothold for the Premium area that will generate revenue from the membership fees. Member’s choice how to consume the content (NG printed magazine, Web, Mobile, etc.) and possibility of interaction is the basis of the new concept of NG Membership. Also, NG Members have access to all the historic data base of the NG archives.

Off-line platforms

For NG magazine (Exhibit 5) we suggest considering upgrading to an exclusive high-end product:

Delivering a collection’s magazine with a high-end look and quality.

Magazine enhancing / augmented reality allowing readers access to dynamic additional content at the Web e.g. Esquire Magazine[iii].

Exclusive contents not available on-line to endow NGM with a uniqueness that will attract readers and NGS followers.

Higher price and margins for delivering exclusiveness.

In parallel, we suggest to consider creating a new editorial in line with NG’s philanthropic spirit, focused on a low-income segment in developing markets with room for the local community contents. Its characteristics would be:

· Content creation, edition, distribution and sale in developing countries

· Educational focus publishing books for schools at affordable price

· Use of recycled paper from local plants and ensuring fair trade policies for printing and distribution process

· Contribution of the local communities to the contents of the local edition magazine, completed with contents from NG

d. Enabling the Staff with Technical Skills and Fostering Initiatives to Achieve Result-Oriented Organization

The change is driven by employees well knowledgeable about the road map, technically competent, result-oriented and concerned about the mission. Our recommendations are based on:

Technical skills’ internal evaluation process: We suggest the formation of a team of experts in new technologies in charge for conducting test of employees’ technical skills, determining the bottom line of expertise required. We recommend ensuring that employees in New Media & Technology and Content Factory are “web savvy” esp. in blogging, social networks, email marketing, mobile applications.

Information technologies: The Marketing & Community business unit (see Exhibit 3) is suggested to provide a plan for a simple and scalable Enterprise Resource Planning Software, agreed by a commission including members of all business units and your personal supervision. This should result into more efficient internal communication and a faster decision making

Training: Rotational programs for selected employees should be implemented in order to acquire a global understanding of the organization, employees’ development and minimizing the traditional territorial behavior of the different business units.

Employee compensation: We propose changes in the variable salary structure: the weight of the individual performance should be higher than the Business Unit or company performance, fostering internal competition and instilling a result-oriented style.

Fostering initiative and entrepreneurial spirit: To foster initiative and the entrepreneurial spirit at NG, we propose that employees can choose a project of their own, aligned with the core values at NG, and dedicate up to 10% of the employee’s working hours to it.

4) Financial Impact

From the financial statement analysis, it is apparent that Catalog Sales & Licensing has highest gross margin amounting 21.92% at the end of 2009. Also, NG Magazine enjoys fair gross margin 18.82%. On top of that the gross margin keeps improving. Unfortunately, the remaining products have either negligible or negative gross margin. In total, NG reports gross margin 9.3%.

We projected NG financials until the end of 2013 in order to understand NG situation, should current trends continue assuming retaining 2009 gross margins. We believe that the decline in NG magazine sales of 21% from 2004 to 2009 was partially caused by the economic recession. Hence, we assume the decline to slow down to 2.2% per year. Additionally, we assumed slower growth in School Publishing, Documents Production, and Catalog Sales & Licensing as the market will become more saturated over time. In result, the overall gross margin will decrease from 9.3% to 8.86%. On the other hand, the Consolidated Operating Income will be $5.5m higher in 2013 in comparison with 2009 as the drop in the NG Magazine income will be replaced by the Catalog Sales & Licensing. Detailed calculation is in the Exhibit 6.

Apart from current trends analysis, we calculated financial benefits of finding new revenue streams from the on-line community platform and savings resulting from organizational transformation. The on-line platform revenue will come from cross sell of NG products and advertisement sales. We utilized the revenue per user model while we benchmarked the future NG on-line platform with per user revenue at Facebook and Twitter[iv]. The resulting user revenue $.80 per year is an average between Facebook and Twitter data. Then, the contribution is calculated using 9.3% gross margin on NG products in 2009. We also assume that the costs of the platform will not be higher than current non-consolidated NG on-line offerings, hence the revenues are incremental. The platform will generate $18m revenues and $1.68m of contribution in 2013. NPV in the course of five years amounts $6.04m at 15% discount rate.

The organization transformation will centralize many functions and remove duplication of activities. Resulting savings can be benchmarked with Shared Service Centers projects as they aim at similar goals. AT Kearney study^{^[v]}claims that such a project typically results in 17% cost savings. We used this figure to estimate savings from the Product Expenses and S&GA. The savings will be realized gradually starting with 30% in 2010 and finishing with reaching full savings potential of $67.6m in 2014. We estimated the cost of transformation to be 50% of the actual savings. The five year NPV at 15% discount rate amounts $153m. In 2013, the savings will contribute with $55.76m into NG profits. Detailed calculations for both incremental revenues and savings are in the Exhibit 7.

In conclusion, by implementing proposed savings and revenue generating initiatives, NG can improve the gross margin to 21.72% and triple the 2009 Net Operating Income. Projected financial statements after the implementation of proposed changes are in the Exhibit 8.

5) ALTERNATIVE SOLUTIONS

The proposed recommendation can be implemented also separately. However, the effect of the recommendations will be strongest when they are implemented together.

Alternative 1 – Implementing the on-line community platform without radically changing the organization structure will bring NPV of $6.04m in five years without major investments. On the other hand, there is risk that the platform will remain isolated initiative within NG product portfolio that won’t be able to deliver the synergies with the NG content from the various products. We see this alternative as a quick win approach without gaining sustainable competitive advantage.

Alternative 2 – Introducing only the organizational changes while gaining cost saving advantages from centralizing certain functions will result in NPV $152m in five years. Financial results of Alternative 1 seem almost negligible in comparison with this financial gain. Although, the savings and increased organizational capabilities will certainly “buy time”, the market trends will eventually lead to further decline in NG traditional business model.

In conclusion, we propose to implement both Alternatives at the same time as only integrated approach will yield sustainable results.

6) RISKS & COUNTERMEASURES

We foresee risks on the way of the changes implementation. Firstly, the there is a risk that the pace of changes will not be fast enough to cope with changing customer preferences and substitutes. To prevent that we propose to create great sense of urgency by the NG management in the whole organization with little tolerance for delays in the implementation of the changes. Secondly, potential resistance from the staff can hinder the changes. We believe that by radically changing the organizational structure, the staff will be forced to cope with the new situation at the workplace. At the same time, it will create momentum for the further changes in the business model. Thirdly, not being able to attract top talent in the e-commerce area can endanger successful launch of the on-line initiatives. Communicating externally in interviews and conferences about the changes NG undertakes, will create interest among e-commerce professional community. Additionally, targeted hiring of top e-commerce specialists from successful companies with the on-line business model will immediately bring required knowledge and talent to the organization.

7) IMPLEMENTATION PLAN

The full implementation comprising all the recommendation is estimated to take place within the next 33 months with a pre-implementation phase of 6 months. The detailed plan is in the Exhibit 9.

APPENDIX

Exhibit 1 – External & Internal Analysis

Exhibit 2 – New Organizational Design

Exhibit 3 – Proposed Organization Structure

Exhibit 4 - NG on-line. Configuration of the NG social network

Exhibit 5 - NG off-line. Configuration of the NG Magazine and Green Edition.

Exhibit 6 – Revenue & Income as Projection of Current Trends

Exhibit 7 – Cost and Benefit Analysis of Proposed Recommendations

Exhibit 8 – Revenue & Income as Projection of Proposed Recommendations

Exhibit 9 – Implementation Plan 2010 – 2013

REFERENCES

MARKET TRENDS

Valerie A. Haugh, The Dawning of the “E” World –How Will the Paperless Society That Is Predicted to Come Affect Your Commercial Space & Your Business?, Gardner Carton & Douglas, November 1999 http://www.drinkerbiddle.com/files/Publication/8fb4f6bb-59d3-4e32-8ce4-f2770da8031c/Presentation/PublicationAttachment/de422b7c-ee1a-40c1-ac53-0fd4371867de/Dawning.pdf

Who killed the newspaper?, The Economist, August 2006, http://www.economist.com/node/7830218?story_id=7830218

Ramzy Baroud, Making room for a paperless world, Arab News, May 2010, http://arabnews.com/opinion/columns/article57545.ece

About ebooks and the future of printed media:

Joshua Benton, Takeaways for journalists from today’s Apple announcement: Better reporting tools and an ebook boom, Nieman Journalism Lab, March 2011, http://www.niemanlab.org/2011/03/takeaways-for-journalists-from-todays-apple-announcement-better-reporting-tools-and-an-ebook-boom/

Joe Pompeo, Are ebooks about to change everything in the long-form media world?, March 2011, http://news.yahoo.com/s/yblog_thecutline/20110323/ts_yblog_thecutline/are-ebooks-about-to-change-everything-in-the-long-form-media-world

American publishers association, http://www.publishers.org/

Nate Hoffelder, One in 4 Americans Read eBooks, eBooksNewser, April 2011, http://www.mediabistro.com/ebooknewser/one-in-4-americans-reads-ebooks_b9892

iPad Sales to More than Double Next Year, eMarketet, December 2010, http://www.emarketer.com/Article.aspx?R=1008098

required Technical skills for staff in digital publishing

Tech Skills Every New Graduate Should Possess, Domain.com, May 2010, http://www.domain.com/blog/domaincom/tech-skills-every-new-graduate-should-possess/

Technology Competencies for Library Staff, Oakland Library, Fall 1998, http://www.oaklandlibrary.org/techcomp.htm

DIGITAL BUSINESS MODELS

Freemium, Wikipedia, http://es.wikipedia.org/wiki/Freemium

How to bring interactivity to traditional media

Matthew Humphries, Esquire enhances magazine with augmented reality, Geek.com, November 2009 http://www.geek.com/articles/news/esquire-enhances-magazine-with-augmented-reality-20091110/

EXAMPLES OF Organizational change to be ready for 21^st century

Organizational Transformation at the BBC, 2006, http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/BSTR231.htm

Russell Grossman, Pamela Smith, Humanizing cultural change at the BBC, Melcrum, 2006, http://www.melcrum.com/presentations/ukmca/presentations/07_Cultural_Change/grossman_and_smith.pdf

[i]Number of images at Shutterstock, http://www.shutterstock.com/?gclid=CIqOgbbkwqgCFYYTfAoda1BWrw

[ii] TED Talks, http://www.ted.com/talks

[iii] Augmented reality at Esquire, http://www.esquire.com/the-side/augmented-reality

[iv] Putting a Reasonable Price on Facebook and LinkedIn, WSJ, December 2009, http://online.wsj.com/article/SB10001424052748704146904574579543239159268.html,

Mark Raby ,Twitter on pace to reach...200 million users by 2011, TG Daily, November 2010, http://www.tgdaily.com/software-brief/52284-twitter-on-pace-to-reach200-million-users-by-2011

[v] Corporate Center and Shared Services, AT Kearney, 2011, http://www.atkearney.com/index.php/Our-expertise/corporate-center-and-shared-services.html

WeFeedBack – Charity in Web 2.0

2011-04-18T04:41:00.001-07:00

I decided to analyze interesting initiative that uses internet and social networks not to create a profit, but raise awareness about serious global issue and get people engage into solution. Wefeedback is a new initiative of the UN World Food Program (WFP) that started its public beta in March 2011. Its mission is to “Enlist your help and the help of your social networks in the fight against the chronic hunger that burdens families all over the world.” To start from the theoretical framework, successful fund raising for charity should take care of three main critical success factors:

The value of giving
The impact of social factors
The role of emotions

The value of giving should lower the costs of giving and increase the benefits in the eyes of the donor. The social factors are important in strengthening or weakening the pressure to donate. Our thoughts about expected behavior of others impact our donations. Despite the preceding factors, eventually, emotions drive the donation decision. Establishing pro-giving / spending emotions is key for any charity and any advertising. Let me analyze, how this three critical success factor have been implemented at Wefeedback.

The main idea behind the site is to make people share with their social network which food they like and how many underprivileged children have they fed by donating the price of the food to WFP. Desired user behavior on the site follows three steps:

User utilizes Feedback Calculator to estimate how much children can be fed by her favorite food
User donates the price of the food to WFP by PayPal or Credit Card
User shares the information with her social networks

Idea of the Feedback Calculator removes typical donation mental barrier of “how my money can make a difference” or “only large sum of money is needed to make a difference”. In fact, the calculator uses simple equation that every $10 feeds 40 children no matter which type of food you choose. However, choosing the particular food is important to activate user’s imagination of how many children in the third world could eat it she would sacrifice monetary value of her meal. Additionally, the type of food plays important role when sharing the message in social networks. In general, the Feedback Calculator explains the value of the donation and marginalize its costs. The value of donation are the content children and the costs are represented by one favorite meal instead of money.

Second step consist of sending the donation via PayPal or credit card charge to WFP. Immediately after the donation, user home page is updated with information about number of children fed and pre-edited message to be shared on social networks.

Ultimately, sharing information about the donation on social networks has many effects. It serves as a peer-pressure for friends to donate as well, distribute the message of how high relative value of our favorite meals have in the third world, and ultimately brings traffic to the Wefeedback site. The typical pre-edited social network message looks in following way “feeding 40 hungry children with the cost of my favorite meal. How many can YOU feed? #wefeedback http://tinyurl.com/3uxr7no” is spreading the “guilt message” how well do we live and how easy it is to help the less fortunate ones. Every user also has a public web page with information about her donations, which increases donors visibility even more. It also fulfils the second success factor of a charity fund raising campaign, building up the impression that giving is socially desirable esp. when both the costs and rewards are so tangible as in this case.

Last but not least, the emotional part is present at Wefeedback by the short one minute videos showing the children together with WFP activist in a Wefeedback T-Shirt, who is explaining how the donation is used. User gets emotional bond with the children and also understand global reach of the WFP.

Wefeedback also re-used some ideas from other internet projects like badges well known from the X-Box Live or FourSquare. And what is the behavior Wefeedback rewards with badges? Obviously these are donations, but also sharing information on social networks and donations by the referees from the user.

Hence, Wefeedback aims to create viral campaign at social networks that attracts as much users to the community. The users can donate money immediately to existing WFP program so that unlike many other internet projects, this one creates positive cash flow from the day one. The results so far seem to be promising. In more than a month of existence, Wefeedback converted web traffic to 6,925 registered users that already donated $27,000. Moreover, 3,186 people like Wefeedback on Facebook and 528 follows it on Twitter. Based on the data from iSpionage, Wefeedback spent between $1,029 to $1,608 on on-line advertising generating between 1,988 to 2,473 clicks.

According to Alexa, it current site visitors are highly educated users under the age of 35 who have more than one child. Prevailing groups are women between 18 to 24. Approx. 17% of the traffic is coming from the USA.

Chart 1 – Alexa Daily Reach (% of global internet users)

However, judging from the Chart 1, it still unclear whether traffic to the site and consequently number of registrations will start exponential growth. Also, the bounce rate of 65% is typical for PPC campaigns of sites without customized landing page. It seems that Wefeedback is yet to reach the critical mass of users that will fuel the future growth.

I believe that Wefeedback is doing a lot of things right, but there is still room for improvement in its on-line presence strategy. I would recommend to undertake following measures:

Attract more attention of influential bloggers
Optimize the “Deal Flow” by reducing number of clicks from site entry to donation
Create customized landing page for the PPC campaign (it should halve the bounce rate)
Lighten the site front page to reduce page load (it will improve the SEO)

In conclusion, Wefeedback is one of the first charities to completely embrace web 2.0 concept. Despite minor drawbacks in the design of the site, the main elements of the idea are set correctly while keeping in mind critical success factors for fund raising.

Notes from live meeting between VC and Entrepreneur

2011-04-15T10:45:00.001-07:00

In this blog post, I will write about the investment analysis procedure by the venture capitalist (VC). We had a tremendous opportunity to observe a meeting between an experienced VC, Rodolfo Carpintier from DaD and promising young entrepreneur Parisa Louie pitching the WatchFit project. I won’t give out much specifics of the WatchFit not to breach confidentiality, but will walk readers through the VC questioning process. Hopefully, this information will help entrepreneurs to prepare better for meetings with the VCs.

Investment analysis

Project Sales for next 5 years
How many employees you need?

How many now and in 5 years
What is the shareholding among current employees / founders

3. How many countries you need to be?

4. Describe the business model in shortest possible way

(Do not use the word platform or technological terms when pitching to investors)

5. How long will it take to bring the product to customers?

6. How much money you need to start?

7. What are the customer acquisition costs?

Consequently, how much will you be spending in marketing?

8. How many customers will you have in the first year?

Who are the customers? Are they the same profile (advisable to be)?
What is the conversion rate from registered user to frequent user and paying customer?

9. When do you start billing? What will you bill?

(It is very difficult to get money from advertising unless you have 800k or more users. Do not assume more than 15% revenues from advertising)

10. What profit will you make and when will you breakeven?

Evaluation criteria

Entrepreneur’s knowledge of the market
Entrepreneur’s knowledge of her business
Numbers are reasonable (VC will run her own calculations and challenge you with them)

Visualize the business plan in a simple single spread sheet
Test the assumption about the market at the social network or perform a pilot

In general, VC see dozens if not hundreds of project per year. Most of the projects are viable, it means that business model makes sense, there is a market and good entrepreneurial team. Being viable is necessary, but not sufficient condition to receive an investment. Actually, most of the viable projects are not interesting to investors either due to lack of scalability and / or lack of real need of investor’s money to set up the business. What the VCs are looking for are investable projects, which have interesting growth potential and good future valuation in order for investor to get her required multiples on the money invested.

Interestingly enough, valuation of the company will vary based on the country, where the business carried out or starts. The reason behind is that VCs want first to try the product in their country. The market potential of countries differs greatly. For instance, valuations in the UK are approx. 2x higher than in Spain, France is in the middle, Germany 80% of UK, and USA 3x of Spain. Concluding from that when you are in a small country, the valuation will be also smaller.

Additionally, VCs like entrepreneurs to be focused on their product and market. Diverse product portfolio creates suspicion especially if the product targets both enterprises and consumers. For conducting B2B business, the team’s skill set is rather different than being in B2C.

We shortly discussed if there is a bubble growing around the recent valuation of internet businesses. Rodolfo suggested that despite being in the 21st century, 95% of the companies behave as if we still were in 19th or 20th century. In particular, today’s E-commerce is just copying the old business models at the internet (except Amazon, E-Bay, …). Hence, e-commerce has to be completely re-done and there are more examples like that. Consequently, internet business is to be taken seriously among other also in financial valuations.

Entrepreneurship with Pablo Larguía

2011-04-13T11:32:00.001-07:00

Today we had a workshop at IE with Pablo Larguía, serial tech entrepreneur and owner of three theaters in Madrid. Pablo moved to Madrid after selling his venture Bumeran.com, leading job search site in Latin America to Terra / Telefonica in 2000. After staying in the company for compulsory 18 months after the sale, Pablo moved to entertainment industry producing successful movies and theater shows. On top of that, Pablo organizes already third annual conference on tech entrepreneurship La Red Innova. I will focus on two topics in this blog post, advices about tech entrepreneurship from Pablo and how it is to organize a top Spanish Tech Business conference.

Entrepreneurship

Founding a start-up is pretty much like a personal relationship with someone. The start-up is your partner. Therefore, Pablo sees three key qualities in your entrepreneurial attitude:

You must be proud of what you are doing
Have a strength to maintain the core value of the business over time and despite pressures
Have a respect to your team, customers, and competitors

About the business idea itself, Pablo believes that If you need more than one sentence to describe your project, you have a problem. Clearly, simplicity of the idea helps in communication with customers and investors. Also, simple ideas are probably much easier to implement. To be an entrepreneur it is like to be a salesperson 24/7. You must constantly sell your ideas!

Particularly, I liked Pablo’s attitude towards seeing the bigger picture in the business and his impact on a society, typical for Latin American entrepreneurs. Every entrepreneur should have a higher purpose, big idea behind the business that benefits the community. In case of Bumeran.com, the big idea was to increase efficiency of the Latin American job market.

La Red Innova Conference

La Red Innova aims to be an exciting meeting platform for entrepreneurs, investors, and developers. Pablo prepared three streams running in parallel:

Inspirational speakers
Technical workshops – on business models, technologies
Start-up competition

Technical workshop attracts developers, which boosts ticket sales. Start-up competition attracts both entrepreneurs and venture capitalists, which results in self-reinforcing increase in ticket sales. The more entrepreneurs come to the conference, the venture capitalists come and vice versa. Inspirational speakers gives the conference visibility. There is a matchmaking tool behind the conference web site that facilitates networking among participants e.g. linking people with interest into same technology.

However, conference is about creating an energy. Therefore, Pablo also invites stars from the entertainment industry like singer of Ace of Base and other artists to get the fun and glamour factor. Anyway, at the end, people value quality of the conference based on the party at night.

Internet from Venture Capitalist’s Perspective

2011-04-09T14:51:00.001-07:00

With experience from direct investment from 1995 and 20 completed investment with average IRR 25%, Roberto Saint-Malo became a legend in Spanish Venture Capital community. Recently, Roberto founded a new venture capital company Kibo Ventures specialized in internet business models with regional focus on Spain and Latin America.

Roberto’s point of view as a VC nicely contrasted with those of RJ Friedlander from ReviewPRO, who prefers to keep company under his control without VC interference and Jorge Mata that does not believe in other value of VC than providing the funding, practically denying the “smart money” concept. Although, Roberto is an example that certain type of VC can add non-monetary value in three distinctive ways:

1. Shaping / generating the idea

2. Facilitating the business planning

3. Utilizing personal network for further investments into venture

Apart from evaluating entrepreneurial ideas, Roberto has a vision about the future of internet business and actual ideas where internet business models can change the way we do things today. Therefore, apart from funding, Roberto can also “assign” an idea to the promising team of entrepreneurs. Good business planning is often the shortcoming of many new ventures due to the inexperience of the founders. Good VC does not reject the business plan, because of its shortcomings, but use her expertise to improve it together with the entrepreneur. Finally, should the business grow beyond funding possibilities of Kibo ventures or become “too mature”, Roberto can help to attract other Angels or VCs to invest thanks to his personal network.

Moreover, typical Kibo ventures investment cycle takes only 8 weeks in comparison to 4-6 months in the VC industry. There are three types of investment Kibo engages into:

1. Proven model optimization

2. Early stage investments

3. International opportunities

In proven model optimization, Roberto invests either to a regional copy-cat of proven idea that successfully works elsewhere or to optimized version of existing idea. Early stage investment, comprise of investing into a brand new idea. In this type of investment, Roberto wants to be involved as early as possible typically providing seed investment with option of further funding. International opportunities consist of co-investments with other VCs to ventures they revealed while keeping the personal network alive, which later helps make them invest to Roberto’s projects.

Now is time to reveal the secret. What are the criteria Roberto uses to evaluate investment opportunities? Here they are:

Right DNA / character / drive of the entrepreneur
Great team
Low capital intensity at the beginning
Short-term value path + large market opportunity
Proven / clear business model

Apart of that, bias to action is vital. At the end, it is not about what you think, but what you do. Entrepreneur’s track record is often mentioned as key criterion, however examples like Mike Zuckerberg are strong cases against the track record. Therefore, it is possible and increasingly common to invest to 22 year old entrepreneur, who has the right character qualities and drive. Interestingly enough, doing an MBA or working in big companies might distract you from developing the entrepreneurial skills. Roberto recommends not to put your dreams on hold. Act now!

Reputation Management On-Line

2011-04-06T08:53:00.001-07:00

Today IE hosted a workshop with RJ Friedlander, CEO of ReviewPRO, highly technological social media research company focused on reputation management in hospitality industry. According to their advertising leaflet, they cover more than 70 million reviews - in 8 languages – from thousands of sources, including 60 of the most important Online Travel Agencies. So how the product actually works? If you are a hotel, you choose in one of the three price plans with regular payments. What you get in return is a web based software resembling Google Analytics, but all about reviews of your hotel’s and your competitor’s services and in social media. The results are presented in the form of sophisticated graphs, where you see how your Global Review Index (GRI^TM) evolves over time and where you stand in comparison with your competitors. You can receive an alert when your GRI is deteriorating or a negative review has been recently posted. To handle the negative review, proportion of which is surprisingly small with 14.7% in average, ReviewPRO offers workflow that helps hotel’s management to investigate the issue and implement corrective measures. The software works in real time, hence is more effective than traditional mystery shopping, which captures only static picture of a given day. The greatest competition up today is Radian6, recently acquired by Salesforce.com. There are other products that focus vertically on hotels like ReviewAnalyst, but none of them has integrated that many sources and supports industry specific workflow.

Although, I am not entitled to share specific numbers, I can say that ReviewPRO has been very successful in past 18 months expecting to break even in summer 2011. I believe that key to the success are two obsessions RJ Friedlander suffers. First obsession is to develop the product to perfection. ReviewPRO had spent surprisingly large sum of money to make their product best in its class to get some head start with their competitors. Second obsession is related to clients. ReviewPRO sales force is persistent in hunting down clients constantly coming up with different proposals in case of refusal. The result is rapidly growing customer base with almost 0% churn rate.

The advantage of focusing vertically on hotel industry is two-fold. Firstly, hotel industry is globally very large and fragmented with a long tail. Although, in the USA, 70% of hotels are co-branded, in Europe it is the other way around. Hence, there is a place for 5-6 reputation management software, while all of them can get reasonable revenue volume. Additionally, there is a plenty of exit strategies incl. variety of potential acquirers. Secondly, hotels are critically dependent on their reputation and bookings are largely driven by recommendations. On top of that, performing semantic analysis of the reviews is far easier, when you restrict yourself to one industry or topic as you analyse less variations of words and their combinations.

Who would think about a business like that back in 2007? On-line booking changed the travel industry. Lets’ see how far the social aspect of choosing the products will go. In the meanwhile, companies will need social media monitoring tools to at least know what is going on with their brand.

Alberto Torron and drilling

2011-04-05T10:49:00.001-07:00

IE hosted a workshop with entrepreneur Alberto Torron Rodriguez, who opened a series of vertical e-shops for professional equipment. I know from my experience that vertical e-shops work very well due to their simplicity and deep expertise in the product. I recall an entrepreneur from the Czech Republic, who owns a price comparison product search engine, where he mines the data about products people are searching. As soon as he spots a new trend that is not covered at the Czech market, he immediately opens another vertical e-shop and lists it at his product search engine.According to my knowledge, he already owns more than five such e-shops.

Alberto currently owns fours e-shops, which he and his partner manage as a part time job.

The visit to sale ratio is 1 sale for every 300 visitor with €230 average ticket price. The daily sales are €1000. Focus on one single product category enables Alberto to be profitable even with lower volumes (Nader thanks for this facts). Additionally, Alberto focuses on quick and friendly customer service and minimal operational costs as the e-shop are run on open source software. Alberto keeps his eyes open on other opportunities at vertical sales in Spain, but at the same time deliberately keeps the growth slow.

How to Build an On-Line Community

2011-04-04T14:20:00.001-07:00

Today we held a workshop at IE with Pedro Jareño, from Minube.com, ambitious travel site founded in Spain, which recently expanded into France, Italy, Portugal, and China. Pedro is in the travel discovery business inspiring travellers into discovering places to go and things to do there. The biggest representative of this interesting category is tripadvisor.com. The revenue comes mainly from so called “Quality Plan”, a scheme that promotes certain region or city at the web site by creating professional content about the place and placing it at the front page.

90% of the content at Minube.com is user generated with all the pros and cons associated with that. Typically, the greatest cons of such content is lower quality and lack of comprehensiveness. On the other hand, content from users bears a badge of authenticity and personal touch. I believe that users generated content is characterized by the “snowball effect”. The more content you have, the more comments, photos, experiences you get. Therefore, I would suggest Minube.com to generate more of its professional content about various places and encourage users to comment, add videos, maybe even correct some information. By doing that Minube.com will mature in terms of amount and quality of information provided, but without losing the social community aspect of the site.

The whole session was centred around the topic of creating and managing the communities. Here is Pedro’s “manual” how to build a community at Minube.com:

1. Target identification (travellers, bloggers, active users)

a. Look for travel bloggers everywhere (found 2,000 blogs)

b. Wrote to each of them about the minube.com

2. Get users

a. Tell a story what we are and why they are important

b. Contests to attract travelers advertised at other sites or community portals

c. Create a friendly brand - community is about feelings

3. Invite dynamics into the community

a. Let users feel that you are interested in them

b. Every day show some activity

c. Keep conversations going

d. Organize contests to let users participate

e. Users get badges for activity

4. Retain users

a. Increase community loyalty by organizing “off-line” events

b. Send newsletters AND reply to answers you get

5. Public recognition

a. Prizes, gratitude, badges

b. User picture / video / post of the day

There are following key factors in building successful community:

1. Constant innovation

2. Passion is contagious

3. Reveal the human behind the brand (e.g. founders)

4. Be honest, be what you are

5. Focus on your topic e.g. traveling

In conclusion, building your business around a community is always risky, but when you can offer superior product with good community management, feasible. Anyway, in world of today brands and companies do not decide who they are, the people decide.

Idealista.com

2011-04-04T03:02:00.001-07:00

On Wednesday we had a workshop with Jesus Encinar, charismatic founder of the largest Spanish real estate web site idealista.com. When Jesus founded Idealista in 2000, the Spanish on-line real estate market seemed to be more than overcrowded with around 30 real estate sites. Jesus decided to differentiate by focusing only on Madrid and getting as much ads as possible. His good “off-line” preparation before actually launching the site brought its fruits so that Idealista had 5,000 adds at the time of the launch, which qualified it to the largest real estate site in Madrid from the day one. Jesus’s team achieved this by placing 25,000 tele-sales calls to both real estate agencies and individuals.

Idealista’s second differentiating feature and competitive advantage at the same time is the simplicity and user friendliness principles applied to the web site design. Both is achieved by continuous improvements employing latest technologies as eye camera and heat maps. However, the most powerful user friendliness tool is proximity of web developers and testers in Jesus’s team. Web developers are invited to come and see the users struggling with their complicated design, which made them correct the mistakes quickly and silently.

However, funding was the issue as costs of establishing a web site back in 2000 was approx. EUR 1m in comparison with EUR 400 per month, deal you can get today. Investors were not eager to step into Jesus’s business as it was only Madrid local preferring scalable international projects. Hence, Jesus hired Andersen Consulting to raise EUR 6m in venture capital. The money were eventually raised after speaking to 150 different investors and using the Andersen’s credibility.

After penetrating major cities in Spain, Idealista went to Portugal and Italy, two markets culturally proximate to Spain. While expansion into Portugal was literally virtual with little local presence and dedicated Portuguese call centre in Spain, expansion to Italy was a different story. Italy appeared to be a hot market, where you had to be so that Jesus decided to follow despite the fact his two main competitors lost EUR 1m and EUR2m respectively while doing business there. Entry to Italy represented challenge as all Idealista’s profits from Spain were invested into Italian market for two consecutive years. Jesus drew important lesson from this experience that it is better to be powerful leader in your market then being diluted in many countries.

Chicisimo.com

2011-03-29T06:03:00.001-07:00

I am continuing in giving account of IE Managing Technology Start-Ups classes. This time IE hosted Gabriel Aldamiz-Echevarria, serial entrepreneur with experience from the Silicon Valley, who talked about his latest project Chicisimo. The whole idea started as Gabriel and his wife revealed a group of girls, who took a picture of them every morning to share how they will be dressed that day. They posted their pictures on Flickr and hence generate traffic to their profile pages. Gabriel was thinking how to leverage this idea and eventually came up with a photo sharing platform dedicated to fashion.

The users of Chicisimo are fashion conscious girls some of them perhaps wannabe models with 17-25 years living in large urban areas. I have spotted large concentration of users from Spain, but they are also plenty of them from the UK, USA, Germany and the rest of the developed world. Currently, there are not many users from the fashion metropolises of Japan and China, most likely due to the language limitation. This is fact is a bit disturbing as the new fashion trends are more and more being created in Asia. Hence, capturing Asian market would create interesting synergy and source of inspiration for the users.

Gabriel is exploring more ways to monetize the platform in the future. At the moment, he focuses on expanding the user base in order to create sizeable community. The monetization could come in various ways. I can think of following revenue streams:

Generating leads to Fashion Web Shops
Selling advertising space
Promoting certain brands via campaigns (e.g. picture yourself with anything from Burberry and win …)
Selling statistics / reports about fashion trends and market development

Indeed, the market seems to be very promising as number of fashion buyers at the web ranked second in Europe in 2010 (Nielsen). Moreover, the online fashion shops market in the USA amounted $30b in 2010 and fashion advertisers spent $4b in 2009 on ads in US printed journals (Forrester and Magazine Publishers of America).

I think that Chicisimo is on promising path to success. The feature, which is now painfully missing at the platform is existence of a comprehensive regularly updated fashion product catalogue. With such a catalogue, user would not only identify the brand she wears, but a particular product, which would be linkable to the web shop generating lead revenue for Chicisimo. On the other hand, I understand that creating such a catalogue means entering into negotiation with more than 400 brands that are currently represented at Chicisimo so that time will be needed.

In conclusion, Gabriel needs to attract four groups of people to make Chicisimo a success users, fashion brands, fashion journalists, and investors. You need to have a great product to create a community of users. However, users do not directly influence corporate fashion brands, journalists or investors so that with users Gabriel is still half way through.

New Cars with Discount over Internet

2011-03-24T09:57:00.001-07:00

I read that selling cars is referred as “a sucker’s market”, because car dealers wait for a “sucker”, on whom they can score. Away from urban tales, George A. Akerlof received a Nobel Prize in Economics for studying the market for lemons, where he referred to used cars market as an typical example of trading lemons. The theory in a nutshell says that owners of good cars keep them and owner of lemons place them at the market. As customers cannot distinguish between good cars and lemons, they are not willing to pay the fair price for a good car, hence pricing all cars as average at the market. As a result, owner of good cars do not sell their cars at the market, where only over priced lemons remain.

That is probably one of the reasons, Iñaki Arrola, founder of autodescuento.com and coches.com started its website with new cars only. The business model is following:

1. Contracted car dealers enter their stock cars to the web page

2. Customer searches for a new car based on her criteria

3. Customer sees only models and prices without disclosing the dealer’s identity

4. After filling out the request form, customer gets into contact with dealer

5. Coches.com receives commission from sales. Additionally, coches.com can contract insurance or financing for the car with commission as well.

The process is very easy for both dealers and customers. Dealers just select car model and set desired discount from the official list price. Customers enjoy very intuitive interface with option to specify car they want based on “human” terms like “small” or “big” etc. All the photos and car presentation is very professional, informative, but not overwhelming. Iñaki claims inspiration with Apple design philosophy of simplicity and usability.

The advantage of new cars over the used one is absence of the lemon issue mentioned in the beginning. Moreover, new car itself of the same model is de facto a commodity without a difference for customer from whom she buys. Therefore at coches.com, dealers compete with each other only on price without possibilities for differentiation with services etc. Unlike at German competing site mobile.de, dealers cannot put their address or contact number to the site so that they are fully “enveloped” in the platform. What about car manufacturers, do they like these two sided platforms between customers and car dealers. Not at all. As, Iñaki mentioned during the presentation, car manufacturers pretend they do not know as such platforms destroy their regional distribution model. At coches.com any dealer from any part of Spain can sell to customers anywhere, which substantially increases competition and eventually will push down prices for new cars.

Workshop on Raising Capital with Jorge Mata

2011-03-22T11:17:00.000-07:00

On 21.03.2011 successful Spanish origin entrepreneur Jorge Mata in the mobile industry held a workshop with IE Business School students about founding start-up and getting funding. These are short notes from the workshop. You can find tweet stream from the workshop here.

Features of the business ideas to be attractive to investors:
- Scalable & Disruptive
- Contain real process that solves a real problem
- Management team - CEO, CFO, COO, Sales Director, who are working in the company
- Good credentials of the founders

Jorge is building on the experience from his past whenever evaluates a new idea. Which experience from the past and knowledge he possesses can be leveraged in the idea.

Remarks about raising capital to the venture
- Venture Investor diversifies by investing to multiple ventures. On the other hand Entrepreneur must focus on product not decreasing risk by further diversification within the venture. Hence, Investing Entrepreneur's own funds to the venture is not recommended by Venture Investors.
- Do not differentiate among investors, money is green everywhere.
- You have to create a spiral of investment. Majority of investors do not invest unless somebody did that before. Think to whom you will talk as first, second, etc.
- At the beginning - give away max. 30% of the company

Jorge share with us his insights about dealing with different types of investors.

Angels
- Be careful in nurturing relationship with them. Angels invest in you rather than into company. There is more into the relationship than what is in the contract.
- Expected outcome for an Angel Investor 20X as they invest in early stages.
- Angels usually invest around $0.5 mil.
Venture Funds
- Maintain formal and informal Quarterly / monthly communication.
- Investors use a big chunk of entrepreneurs to learn from them rather than with interest to invest.
- As an Entrepreneur, achieve at least $2-3 mil. pre-money valuation to be in good negotiating position before exiting from the venture. With valuation of $0.5-1 mil. you will have difficult time to extract money.
Venture Governance
- Board of Directors - equity investors representatives
- Advisory Board (optional) - board of experts or well connected persons
- Get a local CEO in local country esp. at emerging markets

At the end, Jorge made few remarks about the current hot trend in mobile applications.

Few mobile applications are solving a real problem
Most of the company value is making things simple to the user and solving a real problem rather than possessing superior technology.
Currently, there are thousands of patents unused e.g. in Bell Labs

WeblogsSL–Impressions from Session with Julio Alonso

2011-03-20T05:34:00.001-07:00

Let’s start with some facts about the WeblogsSL. It is the first company in Europe in vertical publications with more than 40 blogs and 15.8 million unique visitors in January 2011. The Madrid based company was founded in January 2005 by charismatic entrepreneur Julio Alonso, who gave up his successful consulting career to start this enterprise. Initially, the founding team was working from Julio’s bedroom with zero outside funding. Julio surrounded himself with passionate bloggers, subject matter experts for particular topic, who write deep, insightful and interesting posts about the topic they like. There lies the main difference between WeblogsSL and traditional media, where journalists are usually “generalists” assigned to topic by the chief redactor. Additionally, on-line community of readers actively comments on blog posts and correct even slightest errors or omissions, powerful feedback mechanism most WeblogsSL’s competitors lack.

WeblogsSL’s product is the content it generates and publishes for free at the Internet. Quality, frequency of updates and the topic of the content is what determines how many readers it attracts. However, are WeblogsSL’s readers its customers? Given the fact that the content is for free, the answer is clearly no. Producing the content is actually the cost side of the value chain as WeblogsSL pays to its carefully selected bloggers. The revenues are generated from advertising in the form of banners. The Julio’s company deals directly with media agencies and advertisers while using Ads placement services such as “AdSense” only for ad inventory, which was not directly contracted. For attracting the advertisers to allocate their budget to WeblogsSL’s blogs, Julio needs to have convincing arguments at hand. Hence, daily data traffic is being thoroughly analyzed in terms of from which sites are the readers coming, what are their demographic and geographical data, how much time they spend on the blog and do they return. Example of such metrics for advertisers from Xataka blog can be found here. In conclusion, WeblogsSL business model is based on managing relationship and balancing the needs of three parties Bloggers, Advertisers, and Readers.

In the past Julio was using leading ERP system for media agencies OperativeONE, which served for managing the relationship with advertisers and tracking the ads campaign results. After some time, despite the investment to the ERP software, Julio decided to abandon it in favor of “in house” developed solution based on Google Analytics and Google Apps. Although, the complete reasoning behind this decision was not presented at the session, I assume it followed similar pattern of trade-offs between standardized and “made to measure” solution. Based on my experience, typical issues with sophisticated ERP systems are:

Company usually utilizes a fraction of available functionalities
Learning curve for the users is long given the loads of functionalities
Processes in the ERP system are hard to modify so that company has to adjust its processes according to the ERP system (in consequence it leads to unifying processes in the industry and losing of competitive advantages)

Firstly, WeblogsSL mainly needs to gather exact statistics about its readers and ads campaign efficiency. Secondly, it needs to share these data across the company and with its customers (Advertisers). Google Analytics is one of the most powerful data traffic analytics tool at the market with massive advantage of being free. Also, Google Apps are relatively cheap in its enterprise version with immense capabilities in sharing the documents (data traffic results) with anyone inside or outside the company in real time. On top of that, both applications are in the “cloud” eliminating needs of maintaining own server infrastructure. Therefore, I can understand Julio’s decision to build own solution based on these two leading technologies at the market.

In summary, it was an inspiring session, which made me realize how powerful Internet is in delivering the right marketing message even for very specific audience. No wonder that Internet Ads with $22.7b represent third biggest advertising spending in the US after TV and newspapers. Another take away is that it is possible to build a large company with very limited financing if you can manage the growth wisely.

Business Case of Casa del Libro

2010-06-20T03:25:00.001-07:00

Introduction

Casadellibro is leading online book retail store in Spain since 1995. Owners of the company decided to revamp the product and turn the company around in 2001. They already bought new expensive IT equipment, but before putting it live, economic crisis hit the world reducing revenue prospects. As a result of market turmoil, new Casadellibro management has to decide whether to continue in implementation of already purchased solution and bear higher than appropriate development and maintenance costs than appropriate given current market conditions or purchase cheaper solution based on Microsoft technologies.

Assumptions

Casadellibro is on line store that operates in the mode 24/7 and any outages would negatively influence customer perception. Hence, the application could be considered being mission critical. Drawing from this fact Casadellibro needs at least two set of servers (application, database, and web server). One set as a main production servers able to maintain high load of daily operations and second set for a fail over in case of both failure and regular maintenance.
Additionally, all data have to be backed up regularly.

Decision Criteria

As Casadellibro already purchased hardware and software, this already invested amount represents sunk costs, hence should not be considered in the decision.

Decision Criteria

Purchase cost of new hardware and licenses of Microsoft solution
For both solutions is necessary to compare

Implementation costs
Maintenance costs
Which SLAs can I agree on with vendors of both hardware and software. How quickly can I receive support in case of failure?
Scalability in terms of possibility to increase processing power in case of need
Future functions expandability. Will Microsoft standard solution limit choices of customization?

Recommended Solution

As 2001 is the time of the case, irrespective of the choice I would also consider option of renting the hardware equipment rather than purchasing it. Moreover, the equipment could be placed in the outsourced data center so that Casadellibro would not have to worry about choosing the proper bandwidth as it would be scalable. Also, outsourced data center would provide backup power plan in case of power failures, necessity for mission critical systems which could become very expensive to realize in house.

Hence, my decision would be to deploy cheaper Microsoft solution to the rented HP server, which would be placed in a outsourced data centre. By doing that I would reap benefits having cheap solution now, when the demand and excepted load is lower and later I could scale up the solution taking advantage of falling hardware prices in the future.

What could be done today?

Best option at today's IT market would be to transfer the whole application to the cloud and pay per computing power usage and bandwidth usage. By doing that Casadellibro would not have to worry about customer traffic and load projections as the application would have been completely scalable. Additionally, the cloud computing services provider would be able to assure higher availability of the application at lower costs than Casadellibro's IT department.

Tesco as Pioneer in the Customer Intelligence

2010-06-19T16:00:00.001-07:00

Retail stores chain Tesco suddenly overtake its grand rival Sainsbury in 1996, which was result of successful deployment of customer loyalty card called “Clubcard”. Clubcard is a sophisticated version of previous loyalty program used in the UK already from 1958 called the “Green Shield Stamp”. Green Shield Stamps concept was based on collecting stamps for purchases and then exchanging the stamps for goods at the Green Shield catalogue. Before 1995, both Tesco and Sainsbury were part of the Green Shield scheme. In fact, the Clubcard and Green Shield Stamps fulfill the same purpose of stimulating purchases and incentivizing customers to return to the shop. Then, why the Clubcard made such a difference to Tesco market position?

Before answering the question, let’s see some facts behind the Clubcard. The new loyalty program cost Tesco £300 million over the first three years, which represented about 4.5% of Tesco profits. Despite of that Tesco gained back the initial investment in just seven months. In the first six months after Clubcard introduction, Tesco increased its market share in retail grocery by 3%. Six years after Clubcard launch, the scheme attracted 20 million customers, 10 of which were regular shoppers.

The main difference between the Clubcard and Green Shield Stamps lies in the fact that Clubcards are personal. For every Clubcard owner, Tesco knows her name, surname, address, and if she has children. Additionally, if the card owner presents the card at the purchase, information about all purchased products will be saved in the customer database. Customer receives in exchange “Clubcard points” that can be later used for shopping in Tesco or participating in Clubcard deals.

Tesco gets extensive amount of data about its customers, which is handled by NCR Teradata Datawarehouse, into deep insight into customer behavior. This insight allowed Tesco to adjust its discounting policy, send personalized offers to customers, and shape its product categories. Additionally, Tesco is a pioneer in internet retailing as it realized first on-line sale of groceries already in 1984 using videotext. Also, it operates its homes shopping service from 1996 and Tesco.com platform from 2000. Both Tesco’s brick & mortar and internet operations are powered by the Clubcard. Hence, Tesco can track customer behavior across all retail channels.

In conclusion, I believe that Tesco generates substantial competitive advantage by being pioneer in the use of new technologies. As being pioneer, Tesco might not do everything right for the first time, but the benefits of learning are tremendous. Therefore, Tesco will stay at the top for some while.

Should companies adjust their processes to ERP or other way around?

2010-06-14T13:23:00.001-07:00

Enterprise resource planning (ERP) systems attempt to integrate several data sources and processes of an organization into a unified system.

There was a big hype around ERP system in the business community around the world in the 1990s. ERP systems have been seen as an ultimate weapon against disintegrate unclear processes. They promised to lift company to the next level of information and process maturity and at the same time reduce inventories, lead times, and overhead costs. Additionally, they carried with themselves industry specific “best practice” process models, which were previously highly valued and guarded possession of the consulting companies.

Yes, implementation of ERP system had its drawbacks too. Among others, following are frequently mentioned:

· Large ERP systems are very expensive both in terms of license fees and implementation costs (According to Panorama Consulting, Average costs of ERP implementation are $6.2 mil. Also, license fees have sometimes character of a tax as they represent percentage of sales volume, number of employees, etc.)

· Implementation of ERP system is risky (according to Robbins-Gioia survey in 2001, 51% of ERP implementation were considered unsuccessful)

· Implementation of ERP takes more time than you think (according to Panorama Consulting, average project duration is 18.4 months and in 57% cases the project takes longer than expected)

· Companies fail to adjust its processes to the ERP system and therefore unable to capture the benefits

Let’s look a bit deeper into last point of adjusting the processes. Is it good that ERP comes with pre-defined processes? The answer is yes and no or it depends (choose, which one you like).

Firstly, the pre-defined rules & processes can help you if the company should comply with various international standards like ISO:9001, IFRS, Basel II, etc. as the system already has it all. Moreover, the company will get regular updates should the international standards change. Secondly, in case of building a company from scratch, using pre-defined processes in the ERP system, allows for rapid company build up without lengthy process design. Thirdly, ERP implementation project cost and duration is significantly reduces if pre-defined processes are used.

However, using any kind of “best practices”, pre-defined processes etc. makes your company look alike any other companies in the industry. Then, what if your competitive advantage is in distinctive operational process? In theoretical example that all companies would be using ERP system with the same processes, their operational models would be identical and only differentiating factor would be product itself and marketing. In reality it is not yet the case, but both consulting companies with benchmarking and GAP analysis tools and ERP system integrators contributed to standardization of within and among industries. No wonder, that many consulting companies teamed up with ERP system integrators often forming joint ventures.

In summary, ERP system implementation brings tremendous benefits in integrating the whole company’s data into one system. Following pre-defined processes, which come with the ERP package, helped many companies to strengthen internal discipline, increase informational quality, and make better decisions. Despite that ERP system is not for every company and not to be applied to every functional area. Stand alone software packages for areas like CRM (Customer Relationship Management) are still far better than CRM modules included in the ERP system. Additionally, if your company has a distinctive operational model, which is part of its competitive advantage, it might be sensible thinking about custom developed software or flexible standard package that allows to follow company’s process instead of changing it.

Dell Hell

2010-06-11T12:57:00.001-07:00

Now when you screw your customers, your customers can fight back and publish and organize. (Jeff Jarvis)

Jeff Jervis is a blogger, journalist, and university professor. Jeff wrote an insightful book “What would Google Do?” and regularly writes at his blog “Buzzmachine” about new media in the information age. In June 2005, Jeff decided to buy a notebook, which comes with a home repair service in order stop worrying about technology and focus on writing. The notebook was from the pioneer of direct sales over the Internet Dell. It broke on the very first day Jeff received it. Jeff thought that such things can happen and contacted Dell’s customer service. Unfortunately, technician, who came to his home, could not repair the notebook on the spot as the home repair service advertised. Moreover, Dell could not fix the notebook even in its repair centre. Also, Jeff’s repeated interaction with Dell’s customer service did not get him closer neither to the solution nor did make him happy.

Jeff decided to write about his experience at the blog. First reaction was hoarding comments from other unsatisfied Dell’s customers at his blog. When he wrote an open letter to Michael Dell, Jeff got cited at on line version of prestigious business journals like BusinessWeek and Financial Times. Eventually, Dell’s shares significantly dropped at the top of the negative publicity verge.

What is most surprising that Dell’s reaction to Jeff’s blogging was close to zero. Dell was sitting quietly watching as the situation unfolded. At one point, Dell even closed its general customer forum as if it was the only platform, where their unhappy customers could speak up. But, what should have Dell done? Here are some general advices.

1. Actively seek for customer complaints at the internet. Analyze them differentiating between isolated incidents and systemic problems.

2. If the forum allows company intervention, professionally answer on comment at the forums especially those negative ones e.g. by referring to own company technical support forums.

3. Act on complaints. Customer complaints represent best opportunity to turn complaining customers into active company promoters by providing excellent customer service.

4. Set up a company blog, ideally run by members of Dell’s management, where Dell could comment on recent development in a lighter manner than in official PR announcements. It would give Dell additional channel of communication, which could prove extremely useful in case of Jeff’s blog attacks.

5. Engage into social media. Create pages at Facebook and other major social sites and gather a fan base. These people could help Dell to counter attack Jeff’s blog posts by comments on their Facebook walls.

I believe that Dell learned its lesson as the Dell vs. Jeff Jarvis is taught at the business schools and today Dell actually has a Facebook page with more than 173,000 fans. However, did other companies learned from Dell?

Facebook in two years

2010-06-07T14:36:00.000-07:00

Facebook is most popular social network today with more than 400 mil. users. Oddly enough, nobody can really determine what was Facebook’s competitive advantage over social networks like Orkut, My Spaces, … that gave Facebook such a head start over them. I believe that it was from a great part luck and from the other part ease of use that Facebook gained critical mass of users quickly enough to became number one in the world (Although, in some countries like Brazil or Russia, social networks like Orkut and Odnoklasniky dominate the market).

Facebook, as a private company, does not publish its financial data. Therefore, all numbers about revenues, which are on internet blogs are just rumors or estimates. According to blog InsideFacebook, Facebook reached up to $700 mil. revenues in 2009, most of which came from advertisement.

In its early days, Facebook used to be a place to connect with your friends and find new friends. Today, it is a major place for searching and consuming multimedia entertainment recommended by your friends. At times, Facebook even surpasses Google in internet traffic. However, how will Facebook look like in two years?

Firstly, I believe that Facebook is here to stay at least for another five years unless there will be a huge problem with security or performance and at the same time, users could easily switch to available alternative. Secondly, importance of social games at Facebook platform and sale of virtual goods will grow both in usage and revenue. Thirdly, Facebook might extend use of its virtual currency at the expense of PayPal and credit card payments, which could create another stream of revenue (approx 1.5% of value of each transaction ). Last but not least , there will be more emphasis on privacy of personal information, where Facebook will have to prove itself as a reliable and trustworthy partner.

Marketers are ready to put even more money in executing their campaigns on Facebook, now it depends if Facebook stands the challenge.

Will Google Operating System Change the way we use computer?

2010-05-30T07:01:00.001-07:00

On the 7th July 2009 Google announced its own operating system Chrome OS based on Linux and other open source technologies. Chrome OS will in its look & feel resemble Google Chrome web browser and web browser actually will be single application installed on the Chrome OS powered devices. The new OS will be released in July 2010 with first devices coming from major computer manufacturers. Chrome OS is supposed to run on:

Tablets
Netbooks
Notebooks &desktops.

Each of the Chrome OS version will have modified input and display methods to fit the specifics of the device. After success of Google’s mobile devices operating system Android. Chrome OS announcement has been considered as an openly communicated aspiration to replace Microsoft’s “application’s eco system” including its core product Windows.

From Google, it is definitely a bold step. However, is operating system on a computer still important? Do we really care about OS underlying infrastructure and communication standards or we care more about applications and GUI (Graphical User Interface)?

I believe that role of the role of OS today is less important unless it fails to cope with basic requirements for stability and security. On the other hand, given the current stagnant homogenised retail OS environment led by Windows, followed by MacOS and Linux, where major innovations are originating from 1970s, there is a room for improvement.

What could be changed at current OS:

Speed of booting up
Access to documents from anywhere / any device
Minimum interference with what user does
Increase Security
GUI easier to use

What Chrome OS offers:

Speed booting and immediate Internet access (in 2sec)
Data accessibility across platforms and devices (on line documents storage)
Worry less about drivers (Cloud printing)
Enhanced security (physical developer / admin button)
GUI resembles web surfing

"The promise of Chrome and Chrome OS is that the devices that you give to your employees will have a 2-second boot time, will be completely disposable and the price will be incredibly low." (Eric Schmidt at Atmosphere, 12.04.2010)

Does it mean that Chrome OS is the new big thing? I would like it to be so. Unfortunately, there is a major issue in its deployment strategy to the market.

Even though developers can view its source code and compile it, Chrome OS won't be available for download because it requires a special hardware configuration and it's not designed for multi-boot. Chrome OS is just the platform for Chrome OS netbooks.

If you have to get Chrome OS with new computer without possibility to download it and install side by side with your current operating system, its penetration will considerably slow down.

If Chrome OS would run on the same machines as Windows and MacOS does, users would boot into Chrome OS in just 2 secs in comparison to 43 secs with Windows in case that they would like “just” to check their email, chat on Facebook or watch videos on YouTube. Later, they would find out that they do not need their “main” OS that much, because Google Docs can do basic word processing and spreadsheet job and store their documents on-line. That would ultimately hit Windows market share. Why Google didn’t choose this compelling strategy is mystery to me.

As Google went into shipment with new computer devices model, it also chose its competition consisted of:

Microsoft Windows / MacOS esp. on notebooks with standby / hibernate feature
Apple iPhone OS on iPad / iPad in general
Linux on netbooks

I think that Chrome OS makes greatest sense on tablet devices, therefore the toughest battle will be with the iPad. We can see similar situation between Android mobile devices and iPhone.

In conclusion, I think that Chrome OS can make a difference at the outdated OS marketplace. However, its shipment strategy is flawed and will hinder its market inception. At the same time, Chrome OS might had a bright future in tablet devices, provided tablet manufacturers will adopt it quickly and will create similarly “sexy” devices as iPad.

Quo vadis, Microsoft?

2010-05-22T10:11:00.001-07:00

Although, there is a lot of resentment among PC users about Microsoft, I am not going to comment on emotions, but rather will stick to facts and general trends. You can argue about Microsoft’s internal innovation capabilities and its sometimes controversial contributions to the shape of the IT industry. However, nowadays, Microsoft is without doubt the biggest player in the IT industry at least based on the market capitalization (see figure 1). At the same time, its arch rivals Apple and Google are getting closer with their business models more relying on Internet (in case of Google totally relying on Internet).

Figure 1

Microsoft’s obligatory SEC filling 10K reveals information about current revenue streams. The cash cow product is Office together with Enterprise Resource Planning system Dynamics (former Navision). Expectantly, second place with 25% share in revenues assumes Windows, followed by server software like Windows Server and Microsoft SQL Server. Then come so called “hungry dogs” represented by two groups. First, entertainment services with Xbox, Zune, and Windows Mobile and second “hungry underdog” On-Line Services with 5% revenue share (mainly coming from Microsoft’s Advertisement product). See figure 2 for graphical expression.

Figure 2

To expand on the On-Line services subject, where Google was able to generate $23.65 bil. of revenue with gross profit $14.86 bil., Microsoft generated only $3.09 bil. with operating loss $2.25 bil.! I would call this a strategic gap.

Apart from competition, Microsoft creates troubles for itself on its own. The most significant example is its operating system Windows Vista, which did not persuade corporate customers to switch from reliable and proven Windows XP. As a remedy for that, Microsoft had to launch new re-vamped operating system Windows 7 ahead of product roadmap followed by massive advertisement campaign. To add to the problems, Microsoft’s mobile devices platform shrink its market share to 7% in 2009 (see Figure 3).

Figure 3

What is going to be Microsoft’s reaction? Well, Microsoft always pursued strategy identifying the best technology or product at the market and than either purchase or replicate it. We have been noticing executing this strategy recently as Microsoft started replicating Google products like:

· Google Search vs. Bing

· Google Maps vs. Bing Maps

· Google Docs vs. Microsoft Office 2010 On Line

· Gmail vs. re-vamped Hotmail

· Google Sites vs. Microsoft Live Groups

Most importantly, Microsoft announced Google’s main technological pillar cloud computing as its cornerstone strategy for the near future.

On top of that, Microsoft is aware of rising importance of mobile internet. Recently, unusual news has been released that Microsoft, company which in the past refrained from engineering its own computer or mobile hardware, launched its own branded mobile phones KIN ONE and KIN TWO with totally re-vamped Windows Mobile 7. Moreover, Microsoft’s management felt a need for such a radical change that due to almost complete re-design of the operating system, majority of applications designed for previous version of Windows, will not work on Windows Mobile 7.

Steve Ballmer’s vision of Microsoft product mix from the CEO Summit 2010 is on Figure 4.

Figure 4

In conclusion, I believe that Microsoft could stay at the top of the industry at least for next two or three years, provided that it will shift its core products like Windows and Office even more into on-line services without the hassle of deploying additional technologies (e.g. Sharepoint Server for collaboration). This can be achieved by further moving to the cloud, which could overtake part of the IT infrastructure used today in corporate sector. Firms will definitely welcome low frill collaboration services and decrease maintenance costs. In the retail segment, imitating Google approach seems to be a good strategy. Also, Windows 7 was a genial way out of the “Vista” problem with additional cash from unhappy Vista customers. Now the stakes are on the Windows Phone, whether it can compete with Apple, Android, RIM and Symbian. Generally speaking, this year we will keep hearing about Microsoft.

FourSquare and money lying on the ground (Updated)

2010-05-09T02:30:00.001-07:00

Recently, I registered to a one year old internet service called FourSquare (foursquare.com). FourSquare caused new internet hype with adding 100 000 additional users just in ten days in March 2010. Estimates for current number of users are amounting 1 mil. Allegedly, Yahoo offered $125 mil. for the company, although it's valuation based on its capital is $6 mil. FourSquare is most frequently compared to Twitter, recently valued at $1.44 bil., which is 240 times as much as FourSquare's current value. According to web analytics firm Compete, Twitter had 22 mil. visitors in December 2009, which is 22 times more than FourSquare. In conclusion, investors value future cash stream of one Twitter customer as $65.5 and FourSquare customer $6. Building upon investors valuations, is FourSquare under or overvalued? Lets look deeper in FourSquare's history, what it does and it's business model.

FourSquare has been founded by Dennis Crowley and Naveen Selvadurai after trying similar project with Google called Dodgeball in 2005. It was probably too early for such a project as Google shut down the service in 2009. Dennis and Naveen should thank Google for the time and money it invested to shape the product as FourSquare is sometimes called DogeBall 2.0. So, what is ForSquare about? Actually, it's a mix of location based social network and a game. After registering to the service (you can link your Facebook and Twitter account), you mark the places you visit in a good old fashioned physical world and get various virtual badges . After collecting the right badges, you can actually get discounts and gifts at various bars, restaurants, food chains etc. I believe that the badges concept was taken from Microsoft's XBox Live service where you gather achievements for completing special task in games or on-line. Similarly as achievements, badges earn you honor when ranking with other folks at the FourSquare and more importantly guide users to specific behavior like going to places you want them to go. And here we are getting to the FourSquare business model. For instance, if you are a restaurant owner and want to attract more customers, you go to the FourSquare's paid Dashboard application, where you can offer specials for people, who step by in your place. Moreover, all the users, who checked in to your place, let their friends know over FourSquare site so that you get a multiplication effect by 21st century "word of mouth" advertising. Another source of revenue will be marketing statistics about consumer behavior, which could serve big companies like Coca Cola and Starbucks to track, who is coming to their stores.

Nice idea? Local internet advertisement business is estimated to be worth of $10 billion and so far nobody could tackle it in a proper way. I believe that FourSquare is on the right track to make a big cut from this market for several reasons:

It's a community service so that updates about hot vs. not so hot places will happen really quickly
FourSquare put its stakes to mobile internet, which is growing by building application for all major mobile platforms
It is gaining critical mass of users thanks to ability to import friends from Facebook and Twitter
Last but not least, FourSquare is very easy to use…

My opinion is that Foursquare has a more sustainable business model than today's Twitter and therefore it's valuation could be even higher than $125 mil. On the other hand, the threats on the way could be the "second movers" like Twitter, which announced its service @anywhere and Facebook. Moreover, in January 2010, users were coming to FourSquare from three main sources:

From Google 24%
From Twitter 21%
From Facebook 19%

It means that if Twitter and Facebook create their own location based services, FourSquare could theoretically loose 40% of its incremental user's base. Given the FourSquare's three digits growth in users base, the speed of competitors move is crucial. This competitive risk is most probably the reason of mediocre FourSquare's valuation. I place my bets on FourSquare!

HP is buying Palm for $1.2 Billion

2010-04-29T12:35:00.000-07:00

Do you remember these cool monochrome devices, geeks used to track their dentist's appointment? At that time, nobody even dreamed about iPhone and Internet was available only in desktop computers with huge CRT monitors with small screens. Yes, I mean legendary Palm Handhelds, which dominated the nineties.

The company had hard time in 00s and at one time even dropped its own operating system PalmOS to replace it with Windows Mobile in its devices! That was horrendous for all Palm fans and customers. In 2007 Palm management refused to launch net-book "Folio", which could have been the EePC of today. ASUS and others took that niche... Eventually, in 2009 Palm hired former Apple executive Jon Rubinstein and launched a "my last chance" smartphone PalmPre. Unfortunately, the candidate for an "iPhone Killer" got killed and now HP got the pioneer company in handheld computing. Lets see what the future brings.