Four things Apple’s slow slide teaches us about business strategy

From a quick dipstick I did last week, I’d guess a good chunk of my readers use a Macbook, and even more use an iPhone. I think it’s fair to say: Most of us are Apple fans.

So, it’s concerning to see the company meandering over the last few years. Lackluster product launches, even more lackluster products. Even Siri seems dumb now.

 

Is Apple losing the plot?

Smart folks are really worried about Apple.

apple-slow-slide

Apple’s slow slide illustrates four key principles of business strategy:

1. The S-Curve of Company Growth: Any successful company inevitably goes through a life-cycle of stuttering beginnings, rapid growth, and then gentle maturation – an S-curve. This has been true both in the Internet era and before, as Ben Evans illustrates in The best is the last. Apple is no different. Apple may be the next Microsoft.

 

2. Limited Window of Optionality: There is a way to prolong your growth arc, though. Keep transforming your business, when your previous product is succeeding, and the wind is at your back. Jobs leveraged this limited window of optionality successfully, with the iPod, then the iPhone, and then the iPad. Larry Ellison did it at Oracle too.

But Tim Cook hasn’t been able to lead such pivots at all.

Why?

 

3. The Visionary Leader – Executor Follower Conundrum: Steve Jobs was a visionary (duh). And he built a strong team of executors around him, to implement his vision. So, guess who succeeded him? A superb executor, but short on vision. Tim Cook is great at delivering on an existing strategy, but he just hasn’t kept pace with a fast-changing world.

[The similarity with Microsoft shows here too. It’s the same reason Bill Gates chose Steve Ballmer as his successor. With similar effects.]

 

4. The Jobs-to-be-done Framework: There’s another interpretation of Tim Cook’s non-success. And it comes from Clayton Christensen’s second big theory – jobs-to-be-done. As he says, consumers buy products that complete specific jobs for them.

“People don’t buy quarter-inch drills, they buy quarter-inch holes.”

The job-to-be-done is quite clear with the iPod, the iPhone, and the iPad. But Apple is struggling to find jobs for the Apple Watch and Apple Pay.

 

So, plenty of problems for Tim Cook. But maybe, just maybe, we’re all wrong about this and a major pivot is coming.

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How to break the chicken and egg problem – A Framework

In March last year, I published an article called How Uber solved its chicken and egg problem (and you can too!).

Multi-sided business models are a unique phenomenon – unlike standard businesses which offer a product / service to a particular type of consumer, multi-sided businesses don’t offer any product / service. Rather, they provide a platform that connects buyers and sellers.

Think of Uber – it connects cab drivers and passengers, who benefit each other. E-commerce marketplaces are also examples – they connect buyers with sellers.

Such businesses face a natural chicken and egg problem. For the platform to be useful, both sides have to be present. Sellers won’t come on to your platform without buyers, and buyers won’t come either, unless there’s enough choice (i.e., sellers).

For example, people buy video game consoles only if there are games they can play. But game designers make games for a console only if there are enough people who own it. The proverbial chicken and egg problem. How do one solve this impasse?

The above article discussed a few ways in which businesses can break this deadlock. Many readers wrote in after the article, asking if I could create a framework / checklist that they could use to brainstorm ways to scale their own multi-sided businesses.

Towards that end, I recently published this presentation on SlideShare. Check it out, download it, and let me know what you think!

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How to save yourself from a bad startup idea that looks good

Startup_Ideation

The startup bug has bitten you. You want to start a business, grow it for a few years, sell out and rest easy for the rest of your life. A great dream to have. But that’s the easy part. The hard part is building the business. And this long, arduous journey starts with a single step – having a great idea.

How do you come up with a startup idea? To start, you read this article by Paul Graham of Y-Combinator. It’s thought-provoking, even by Paul’s lofty standards. Paul says a lot about the characteristics of great ideas. But he also talks about a similar-looking but antithetical concept – the “sitcom” startup idea.

What is a sitcom startup idea? It’s one which sounds plausible, but is actually bad.

This is not just a bad idea. We have tons of those, and they are easy to identify. Even if our ownership of the idea blinds us to its infantile stupidity, our friends will warn us. They’ll tell us it’s the dumbest thing they’ve ever heard. And we can swallow our pride and move on to the next idea.

No, the sitcom startup idea is not bad in the same way. It’s an idea which sounds plausible. So plausible that when you go ask customers whether they’d use it, they don’t say no.

This is what makes it dangerous. You can read Lean Startup, dutifully ‘validate’ your idea with customers, and then build it. Only to find out that there actually is no market.

Social network for pets

Paul illustrates this with an example of a ‘social network for pets’. If you have pets, this sounds like a good idea. Sure, you can imagine posting photos of your pet parakeet on petlife.com, where others are waiting with bated breath to “like” them. Or, what’s far more insidious, you can imagine others around you loving this service.

I actually tried this during my lecture in IIM Trichy, and people loved the idea. But it’s bad on two levels:

  1. It’s erroneous to assume that if people say they like a product, they’ll use it. I might like 30 different websites, but that doesn’t mean I’ll check all of them every day. Given my limited attention span, the only social network I’ll use daily is Facebook.
  2. If you talk to 100 people and they all say they “know someone who would use this”, then you’ve found yourself a community of 100 almost-users. Or to be precise, exactly zero users.

So how do you differentiate between sitcom startup ideas, and truly promising ones? How do you know if you’re on to something huge, or just a mirage?

Mirage

The short (and hard) answer is – you try anyway. You build an MVP and check if there’s traction in the market. If there is, congratulations, it worked. If there isn’t, then you know you just had a “sitcom” idea.

But there is an easier way. I’ve come up with a few patterns to identify what is probably a bad idea, even though it sounds plausible.


Before we jump in, a caveat. I don’t know if any plausible sounding idea is actually bad. What I do know though, is that the universe of plausible ideas is much, much larger than the set of good ideas. So, an idea that is only plausible is probably bad.

Venn_diagram

Just like I know that a monkey banging away at a keyboard will not produce Romeo and Juliet (it might, but the probability is infinitesimal), if all I know about a startup idea is that it’s plausible, it’s probably bad. Sure, you get a Twitter every once in a while. A product that seems random can suddenly catch fire. But such instances are so few and far between that you can ignore them.

With that done, let’s dive in to the patterns:

1. Broad and shallow, vs. narrow and deep

One of Paul’s theses in his article is that you should solve a deep need for at least a few people. If the need you are solving is shallow, then it’s not a great startup idea. Even if it affects a broad set of customers.

It’s got to be a major problem – a mild or one-time issue won’t cut it. You’ve got to create a product that at least a few people NEED, not one that a large number of people WANT.

A sitcom idea of the ‘broad and shallow’ variety can follow several patterns.

A “vitamin”, not a “painkiller”

The social network for pets falls into this category. It’s a nice-to-have, like a vitamin capsule. No one needs it, like the root-canal patient who’ll pass out without a painkiller. If people just ‘want’ what you’re building but don’t ‘need’ it, tread with caution. You may be onto a bad idea that sounds good.

Not solving a top-tier problem

But only solving a problem is not enough. It has to be important. Simply put – if the problem you’re solving is not one of your customer’s top 3 problems, it’s not important. Give up now, before it’s too late.

I once thought of building a software tool to help VCs manage deal flow. It would have a visual funnel, to tell the VC how many deals they have seen in the last 3 months, and at what stage of discussion each deal is. And they could dice it by any filter (e.g., SaaS vs. consumer, location, stage of business, etc.) to see their deal pipelines.

A great idea, I thought. The only issue – it’s not an important enough problem. Getting strong deal flow is far, far more important than tracking it. Many VCs are happy enough using Excel to track their pipelines. They’re not even trying generic funnel management systems like Salesforce. Why will they bother using one tailored for VCs?

“Solving a problem people don’t know they have”

This is a first cousin of the two patterns above. While not a “vitamin” solution per se, it’s solving a problem people don’t know they have. Which begs the question – how do you know they have this problem?

I tried doing this a couple of years ago, with a plug-and-play loyalty program for small business websites. Users would get points for coming back to the website every day, reading articles, sharing to social networks, etc.

A great idea for large, stable businesses trying to increase customer retention, maybe. But a small business finding its feet? These guys don’t even think about gamification or loyalty. They have other problems. They need to build a user base first, before trying small tricks to engineer loyalty.

I tried selling this for 6 months. It did not work. It’s hard enough convincing people to buy your product. Why do you want to add the burden of convincing them that they need it?

UPDATE: Mike Fishbein makes a similar point in this article. If you want to avoid building something no one wants, then solve known problems.

“This product solves everyone’s problems” OR the “Microsoft Office” product

I love Microsoft Office. It’s so flexible, so all-encompassing. No matter what type of problem you’re working on, you can bet that Excel and PowerPoint will be super helpful. Or think of Google – no matter your query, you can find the answer.

These are all excellent products. But aiming to solve everyone’s problems in one go can sound the death knell for startups. Why? Taking the example of my gamification system again:

  1. It’s unlikely that there’s a dire need for your product among a huge mass of people already. If you’re solving a problem for everyone, it’s probably a broad and shallow problem, not a deep one. My system was a nice-to-have, not the answer to their top 3 problems.
  2. In most cases, flexible products necessitate a learning curve among customers. Newsflash – your customers are too busy to spare any time to learn how to use yet another product. Unless you’re solving a problem as critical as the ones Office and Google solve, good luck getting adoption. It’s more sensible to focus on one type of customer, and solve their problem better than anyone else.
  3. Solving everyone’s problems at the same time requires a complex back-end. Why build that without strong market validation first? You’ll either end up building a buggy product, or worse, build a great product that no one wants. In the case of our product, the tech challenges proved intractable. Trying to integrate our system with several website technologies meant that it didn’t work well with any.

“Cool product I’ve built”

You get this a lot from engineers (I’m one too). We focus on the product, because we feel that the product alone is good enough. “My cool new app allows you to share your photos with all your Whatsapp groups in one go”. Great, but what if your users don’t want that?

“Build it and they will come” doesn’t work, in this world where a million apps are fighting for people’s eyeballs. See the chart in this article to see how high the bar is. You need to be sure that you’re solving a problem, and a top-tier one. Else, you could just be a “solution searching for a problem”.

Demonstrate need first. Else, your intricate product could just be another elaborately constructed pipe dream.

2. Templatized business models

“Uber for X”

[as used in “Uber for bicycles: On-demand bicycles for your riding pleasure”, or “AirBnb for cars: Rent other people’s cars when they’re not using them”]
"Do you want a bicycle at this very moment?"

“Do you want a bicycle at this very moment?”

This template is as old as the Internet. Take what’s working in one sector, and plonk it into another. It was “Website for X” in the 90s, and “Social network for Y” in the 2000s. But it’s a dangerous stratagem. Why?

Sure, Uber has been uber-successful in the cab market. But that doesn’t mean on-demand could work for every other sector. Unless the idea has grown organically from a problem, you have to assume it’s bad. You have to assume that the founder has applied the Uber template to the first sector he could think of.

Another clue that you’re facing this situation is when founders have no real expertise in the area they’re building for. Then how do they know that the problem is real? They don’t. All they know is that the solution is real, for another sector.

“X for India”

This is an even more pervasive and notorious template. Unless the model has some kind of geographical constraint (e.g., on-demand cabs), there’s nothing stopping a successful US business from expanding to India.

Moreover, if the model involves network effects, then you’d expect something that’s grown in one place to capture share rapidly in other places too.

As Mahesh Murthy is wont to say, the Facebook of India is Facebook. The Tinder of India is Tinder, and not Woo.

There’s one more problem with this template – some models just don’t extend across geographies. On-demand bicycles may be a great idea in Scandinavia or Taiwan. But it just won’t work in hot, sultry, noisy and overcrowded Mumbai (gosh, why am I still living here?).

3. Incremental business models

This is another type of business idea that we see quite often. It often involves just a slight tweak to solutions existing in the market. Again, this can be of two types:

Cloning an existing player, but with slight improvement

Think “Uber with wi-fi”. Of course, Uber has started doing this now. But even if it didn’t, this would be a horrible idea for a startup. Wi-fi is not differentiation. It’s a cosmetic touch-up engineered solely to help you raise money from rookie investors.

It’s wrong on two levels:

  1. It assumes that the incumbent will sit idle while you bring out an improved product. If what you’re bringing to the table is only an incremental improvement (i.e., 1x, not 10x), you can bet that the incumbent will also include it in their next release, if they find out it’s a helpful add-on. Don’t assume stupidity.
  2. Often, your improvement has nothing to do with the core problem you’re solving. Wouldn’t it be silly to say, “Uber works, but people hate the fact that it doesn’t have wi-fi.”?

Cloning an existing player, but in an adjacent market

Back when Bookmyshow (a movie ticketing website in India) was only a couple of years old, a friend told me he wanted to build a “Bookmyshow for Plays”. This is a bad idea too. Bookmyshow had already solved the harder problem of getting customers. So, it was much easier for Bookmyshow to include plays on its platform, than it was for a new player to start afresh. And true enough, plays appeared on Bookmyshow a few months later.

A giveaway for this kind of sitcom idea is a statement of the form “Today’s solution is satisfactory. But mine’s much better”. For your idea to be definitively good, today’s solution cannot be satisfactory! At least for a segment of the audience. Otherwise, your idea would be like my deal flow management solution for VCs. A nice-to-have, but not nice enough to change an existing process.

What is nice enough though, to change one’s existing behavior? A 10x improvement – whether in ease, time taken, or effectiveness.

4. “No Competition”

You often hear founders say that they’re the first team to do X, and that there are no competitors. Or they may say that everyone is a competitor (which is another way of saying “no competitors”). If you hear this, run in the opposite direction as fast as you can.

Why? Why is lack of competition alarming? For two reasons:

  1. If there really is no competition, maybe the market itself is unattractive. Today, it is difficult to come across a problem that no one has seen at all. Why do you want to solve unambitious problems, when it’s just as difficult as tackling ambitious ones?
  2. The founders may not have done thorough analysis, or may be suspended in the myth that their competitive moat is bigger than it actually is. Would you want to back such founders?

Wait, so am I saying competition is actually important? Yes – many players trying to solve a problem demonstrates strong need. But to succeed, you still need to differentiate. You need to have an ‘unfair advantage’ in startup parlance. Whether industry experience, critical partnerships, etc. – you must have a secret sauce in your recipe for success.


That’s it. Those are the patterns that should raise your suspicion antennae when listening to startup ideas. Am I missing any? Let me know in the comments, send an email to gt.jithamithra@gmail.com, or tweet at @jithamithra.

Of course, some ideas may actually be great, even if they fit these patterns. They may end up changing the world. Only one way to find out for sure – launch an MVP, and prove me wrong.

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What do you really need to start up? [Slideshare]

Last week, I was invited to the Indian Institute of Management, Trichy, to talk to the students about startups.

Given the hype associated with “starting up” today, with investors opening their purses wide and newspapers dedicating daily centerfolds, everyone wants in. And if I remember correctly from when I was a student (or even when I was working in strategy consulting), it can become difficult to separate fact from fiction when you’re looking in from outside. More so if your only source of information is a newspaper.

 

Therefore, I decided to speak on “The truth about startups”. Apart from being clickbait, the topic is also pertinent for a number of reasons.

  1. Startup accounts in newspapers are almost always after the fact – they are tinted with 20:20 hindsight. There’s a lot more uncertainty when you start a business. Lots of things go wrong. All of this is airbrushed away in the ‘inevitable march to victory’ accounts you find in newspapers.
  2. If you look for patterns only in companies that succeeded, then you’ll suffer from survivorship bias. Seeing that many successful founders are passionate today is not enough to conclude that it is necessary and sufficient for starting up. For all you know, the graveyard of failed businesses may be littered with passionate entrepreneurs (and it is, as you’ll see in the Slideshare presentation below).
  3. As Steve Blank says, small companies are very different from large ones. A company that has just started is very different from one that has found product-market fit, which itself is distinct from one that has scaled. You hear only of startups that have found some measure of success already. Applying patterns from such companies to your fledgling company indiscriminately will at best be a waste of time. At worst, it can cause active harm.

 

As a founder who’s in the trenches right now, I thought I must set the record straight. When you’re trying to find your feet and learning how to build a sustainable business in an uncertain world, what do you really need to set out on the path to success?

I asked the students this question at the outset – what do you need to start a company? Almost all the answers were variants of the following:

  1. Passion
  2. Vision
  3. Dedication
  4. A brilliant idea
  5. Lack of competition
  6. A sound business model
  7. Huge risk appetite
  8. Tons of money / resources

These sound quite definitive. But they aren’t.

I don’t think you need ANY of the above to start up, as I explain in the embedded Slideshare presentation. They may become important at later stages of your startup’s life, but they are definitely not needed when you’re just starting out.

And I’m not saying this just to make a point. Some of the above factors are distractions at the start, and some others may in fact insidiously drive you to inevitable failure.

 

Then what do you need? You just need two things – a decent idea, and a willingness to learn. These are necessary and sufficient for most business ideas. Check out the presentation for more.

The presentation also includes links to various articles for further reading. I love diving down the rabbit hole, and I hope you do too.


I’d love your thoughts on this. If you see any gaps in logic or don’t agree with something, please comment here, write to gt.jithamithra@gmail.com, or tweet at @jithamithra. I’m willing to learn.

PS. Thanks a lot to Abhishek Agarwal, Aditi Gupta, Akshat Poddar, Shashank Mehta and Srinivas Chaitanya for their inputs on this.

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Your Minimum Viable Product can be more ‘minimum’ than you think

[A slightly abridged version of this appeared first in YourStory.]

Minimum Viable Product, or MVP, is sure to show up in any startup glossary. It would be the first word in the glossary if glossaries weren’t alphabetical. And like most other jargon, it is often misunderstood.

Final00001

But before we get into that, let’s come up to speed on the popular notion of the MVP.

An MVP, or Minimum Viable Product, is the most basic version of your product that still delivers your core offering. You build a bare-bones product fast (emphasis on ‘fast’), so you can get validation early before investing more time and money. Thus, the product needs to be as ‘minimum’ or basic as it can, but it also needs to be ‘viable’ – i.e., it still needs to solve the one problem it was created to solve.

Aiming for an MVP helps entrepreneurs (especially first-timers like me) avoid the rookie mistake – building too much product before validating market need. We all want the ten revolutionary features in our first version. But not only will these features take five extra months to build, most users will also not see them.


So that’s the concept of an MVP – sounds simple, right? I thought so too. I congratulated myself many times as I built my first prototype in three months, found that people didn’t need it, and junked it. And again when I built my next one in four months, tested it out over the next three, and pivoted it to its current form.

But when I took a step back recently, a thought struck me, “Four months to build an MVP? Sounds excessive.” We’d done all the right things – cut the feature bloat, honed in on the two key functionalities, and built them. But that’s how long it took. Notwithstanding my obvious bias, we couldn’t have done it in less than three months.

From talking to other entrepreneurs, I see that this is a common conundrum – why does the damn MVP take so long?

The reason is that we’ve got the notion all wrong – for all but the most tech-intensive products, you don’t need to ‘build’ an MVP. You just need to ‘put it together’. And this often doesn’t need much coding at all.

Final00003

Let’s say you’re starting a website that offers personalized fashion tips. You can launch in one day or less – you don’t need the full website right away.

  1. Buy a domain – 3 hours. [Hint: The name doesn’t matter. But we know you’ll take the time. And buy five domains.]
  2. Build a one-page website with LeadPages, where people can upload photos or ask questions – 1 hour. No need to create an account or browse any content – they can ask fashion-related questions, and you can email your replies.
  3. Or, you know what? Ditch the website. Just have a number that people can Whatsapp their snaps or questions to. 1 hour [for you and your co-founder to fight over whose number to use.]
  4. Run a small Facebook campaign publicizing this site / phone number. Or tell ten friends, and have them each tell ten more. That’s your test audience. 2 hours.

Thus, you can be up and running tomorrow – even if you’re slow because this is your first time. What are you waiting for?

I know what you’re thinking – why should we listen to this guy? What has he done?

I’ll tell you what he’s done (yes, it’s normal to talk of yourself in the third person). He’s compiled a list of companies that hacked together an MVP. You may recognize some of them.

 

A. Started with an incomplete product

  1. Zappos is a US e-retailer specializing in shoes. When it started, the founders visited a few shoe stores, took photos of their merchandise, and put them on their website. When customers purchased the shoes, they would buy them from the stores and ship them.
  2. I’ve heard this about Flipkart too. At the beginning, they went out and bought books themselves when they received orders, and couriered them.

Back then, they still had to build the e-commerce website. Today, with Shopify, you can do even that in a jiffy.

 

B. Started by combining existing products

Final00004

  1. Angellist is a LinkedIn for startups – a marketplace that connects startups and investors. How did they start? Their MVP was good old email. They made intros connecting a startup looking for funding to an investor looking for investments. That’s it!
  2. Amazing Airfare helps you find ridiculous bargains on airfare. The company put together its MVP with text messages, PayPal, Excel, and email. No code.
  3. Saralmarket is a fruit procurement company. They don’t have an ordering website or complex prediction algorithms. They use Whatsapp to send out market rates and take orders.

 

C. Started without a product (!)

Final00002

  1. DropBox started as… a video! No product – just a clip of the founder shifting files between folders. Interested people could sign up for updates. And tons of people did, so this was strong validation.
    1. Wait, there’s no product! So how can this be an MVP? You’re right – this may not be an MVP. But it is a great example of how to validate your product without a single line of code.
  2. Kickstarter campaigns do exactly this. You put up interesting product ideas before you build them. Others demonstrate their desire by supporting you. Validation complete – go build the product now.
  3. Buffer, a tweet-scheduling tool that manic tweeters swear by, also started as a two page website ‘MVP’ – the user could see what Buffer would do, and could sign up to learn more. When several people signed up, Joel Gascoigne knew he was on to something.

We’ll see more and more of this, as social media makes it ever easier to test your product. Even when it doesn’t exist. As Ryan Holmes (CEO of Hootsuite) demonstrates, you can simply ask Twitter.

 

This list can go on. But I’ll stop here with an anecdote. A friend told me a couple of weeks ago that he had a great business idea. He’d planned it in detail – he already knew the 12th feature he’d introduce in month 22. But he hadn’t launched yet – seemed too daunting. So this is what we did – we took one of these to-do books (check them out – the irony is delicious), and made a list of starting tasks. It wasn’t that long – only three items, one of which was finding a name – which he had, so we ticked this with a glorious flourish. You’ll hear from him soon.


I hope to build many MVPs over my career, so any lessons from your experience would be quite handy. Mail me at gt.jithamithra@gmail.com, tweet at @jithamithra, or comment here.

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Clear and Present (Virtual) Reality

Final00005

I first encountered Virtual Reality in a few movies in the 90s. Characters wearing giant headsets and inhabiting virtual worlds. At that time, it seemed a creative plot device, but not much more. Till recent months, I thought of it only as a somewhat cool but clumsy gaming mechanic. It could make playing Call of Duty more immersive, sure. Till you turn your head and the surroundings pixelate.

But I was wrong.

A lot of articles today talk of the VR industry as fast coming of age. The first heavy-duty Virtual Reality headsets will hit the market in 6 months. Yes, ‘coming of age’ is a heavy cliché – Bollywood has been coming of age since I was ten. But the term has a specific meaning in Virtual Reality – ‘presence’. A VR environment achieves presence when it’s of such high quality that it tricks your brain. It’s when your mild fear of heights stops you from bungee jumping in a virtual adventure game. One minute you’re laughing at a joke from your friends. The next, you’re struck with sudden terror that a zombie’s about to eat you.

I thought this talk of ‘presence’ was idle fan-boy chatter. How can an obviously artificial image fool anyone? Then I saw this:

Looks like VR will achieve presence soon (if not already) in games. But what are the implications of this, beyond standard First Person Shooter games? Is it going to affect oldies like me who’re over games?

 

 

There’s a saying in the industry that virtual reality is the ‘last medium’. Once VR achieves presence and becomes ‘real’, you don’t need any other communication medium. You can communicate anything within VR, using just code.

If that’s the case, possibilities are limitless.

I’ve just listed a few below, off the top of my head. These are not flights of fancy. Quite the contrary. What would surprise me is if someone somewhere is not already doing all of these things.

 

1. Games + Motion Tracking

Final00003

I lied – I’m not over games. The most immediate potential is there. But not Doom in VR. When Doom first came out, I heard of people dying from shock while playing the game on a slow PC. Imagine the same in (virtual) reality – recipe for a spike in heart attacks.

Instead, simpler games could be the way to go. Just like Wii caught on with embarrassingly crude graphics in amateurish games. Combine this with motion tracking, and this could well be Wii 2.0. Mortal Kombat, where you’re actually fighting. Tip: Make sure you do this in a large room, or you’ll bust your knee on a wall.

 

2. Physical Fitness & Development

This follows almost immediately from gaming. How would you port Temple Run to Virtual Reality? With a treadmill. And what better way to learn a martial art than to spar with Morpheus? (Plus it would be a virtual rendering… of a movie about virtual reality).

But not just physical development. VR could also improve your confidence. Could a VR simulation where you defuse an atomic bomb and save a billion people improve your self-esteem?

Peace of mind is also not far away. No longer will your meditation guru say, “Imagine a sylvan paradise…” He’ll say, “Wear this headset.”

 

3. Tourism

This could well be the ‘killer app’ that brings VR to the mainstream. Can’t spare the cash for a trip to Easter Island? Experience it in VR instead. You’ll feel like you’re there. You could also make the long pending pilgrimage to Las Vegas with your best friend. Sitting at your respective desks 500 miles apart. Always scared of skydiving? Do it virtually and enjoy the thrill (and terror) from the comfort of your sofa.

But why restrict yourself to places on Earth? You could even travel to distant stars, stopping over at Pluto on the way.

And talking of space, can time be far behind? I visited some Indus Valley ruins last year and got mighty bored. What if, instead, I could go back in time and walk among the people who lived there?

Having explored all four dimensions of reality, why stop there? (Can you tell I’m enjoying this?) Dive into a book instead – Sophie’s World Redux. Experience To Kill a Mockingbird from Scout’s eyes. Or Atticus’ – take your pick. What about movies? I don’t know about you, but I’d love to say, “Why. So. Serious?”.

 

4. Education

Education also smacks of potential for virtual reality. When I was a kid, my dad got me a Dinosaur encyclopedia CD. It had videos that you could watch with 3D glasses. I loved that almost as much as Jurassic Park. But tomorrow’s kids will be able to experience all this in VR.

VR will also pave the way for a better understanding of the micro-world. A biology student will be able to take a roller-coaster ride through the esophagus. Then fall into the stomach, just in time to see digestion happen. Or zoom in a little more and see how the body’s cells function.

 

5. Occupational training – Simulators

Simulators have been in use for a long time to train pilots. But VR would bring a step-change in training and testing. You’d be able to place the trainee under pressure with a stalling engine, and see how they react. It’s one thing to know what to do in a theoretical exam. But when you actually believe you’re going to crash, we’ll see what stuff you’re made of.

We could also use simulators for physical rehabilitation after severe injuries. Re-learning movements would be much easier (and more enjoyable) if you’re playing a  game.

Parental training is another area to explore. VR and motion tracking could help test how well you’d handle a child, and teach you what to do. Maybe in the future we’ll have parent certifications too? OK, maybe I’m getting a bit ahead of myself.

 

6. Augmented Reality

Final00001

Augmented reality (AR) is a close cousin of Virtual Reality. Instead of a completely artificial world, you overlay simulated objects on the real world. But good AR is at least five or ten years away. With current processor speeds, it’s much harder to overlay virtual objects on your surroundings in real-time.

But once Moore’s Law does its thing, great AR will become possible. Once that happens, we could do a lot of interesting things:

  1. We could have real-life navigation in our cars. The correct turns would be highlighted on your glasses. Yes, this may be distracting. But we can have our little fun, before self-driving cars make all this redundant.
  2. Games could become a lot more engaging. Imagine: you’re in Rome, and you play a treasure hunt across the important monuments. The ‘treasures’ don’t have to placed anywhere. The moment you reach the right place, you’ll see them on your glasses.
  3. The next Farmville won’t be on Facebook. It may be in your drawing room.
  4. There would be business implications too. Virtual meetings will finally become a decent substitute for actual presence. You’d see perfect holograms of your colleagues around your table, as you brainstorm on the next VR product you’re going to create.
  5. Finally, the way you consume content would change completely. Remember Minority Report? A company in Florida, Magic Leap, is working to create exactly that experience. Check out this video:

I’m excited about Virtual Reality, and the many new frontiers it will unlock. But it will also unlock several opportunities to make a ton of money.

Every new communication platform creates several industries in its wake. TV created filming technology innovators, video content companies, and network behemoths. iOS and Android have fueled sharp growth in many industries – app design and development, mobile advertising, and even frameworks and systems to make app development easier.

Virtual reality holds even more promise, as it combines both technology and visual depiction. The main platforms are emerging – Oculus Rift, Sony’s Project Morpheus, and Samsung’s Galaxy Gear. Others will appear soon. This will create opportunities in many areas, including:

  1. Creation of VR content. Whether games, tourist content, or any of the ideas mentioned above.
  2. Technology to help capture the content. 360-degree camera rigs to capture VR-ready videos, apps to help you create VR videos using your phone, etc.
  3. Programming architectures to write code for VR, and frameworks / SDKs to help in VR app development (like PhoneGap for Android and iOS).

Thus, VR could be the next big thing. It could change how we consume content and travel, and afford tremendous business opportunities. And then they’ll start using it for porn.

Final00006

Hope you had as much fun reading this article as I had writing it. I didn’t think VR was a big deal, till I got to reading about it. What’s your reaction – comment here, tweet at @jithamithra, or email me at gt.jithamithra@gmail.com. Also, before I forget. I’ve put together a few interesting articles on VR in my newsletter this week. Check it out here.

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The Barbell Strategy, or how you can have your cake and eat it too.

[A version of this article appeared on YourStory last week.]

One of the tenets that stock market investors live by is diversification. As their advice goes – if you invest in several (uncorrelated) stocks, you reduce the risk of a sharp fall in one stock damaging your income significantly. An extension of this argument is that traders should maintain a mix of low-risk and high-risk assets in their portfolio; even if the risk materializes and your high-risk assets blow up, you still have some income. This is called the ‘barbell strategy’.

This is a very useful concept in stock investing. But can we take advantage of this in other businesses?

 

Before we try and answer this question, let’s understand the ‘barbell’ concept a little better.

Barbell Final

The reason this investment strategy is called a ‘barbell’ is that all your investment goes to the two extremes of low risk-low return and high risk-high return, much like the weight of a barbell is concentrated at its ends.

Barbell SpectrumThus, you deliberately plant your feet at both ends – low risk and high risk; low payoff and high payoff; short-term and long-term.

Sounds like a great investing idea – limit your potential losses, even while pursuing high-risk investments. But, you may ask, how does this help those of us not in the financial sector? If you’re not a trader, how can you take advantage of diversification in general, much less a ‘barbell’?

 

There are several different avenues of business where a barbell approach can help cover downsides, and allow you to test new channels of growth.

1. Startup Marketing: There are several different channels through which you can market your product (Traction, an excellent book on the subject, lists 19!). But not all of them are equal – channels like TV advertising, SEO, and viral growth have a high ceiling on saturation (i.e., you can acquire millions of users through these channels), while others (PR, social media, community emailing, etc.) are far less scalable. But there’s a flipside – the former ‘moonshots’ are also more expensive, far more risky, and take longer to optimize.

When you’re selling a new product, you should definitely explore some of the moonshots – if any of them work, they can make your company’s destiny. But you should also invest in the more near-term, less-scalable channels, to ‘keep the wheels turning’ with a small flow of users. This also gives you time to perfect your product and plug the leaks in your user acquisition funnel, so that when one of your moonshot experiments suddenly delivers a deluge of users, you are able to effectively retain them.

Andrew Chen has written an excellent article on this. And Paul Graham refers to a similar concept when he says, “Do things that don’t scale.

 

2, Short vs. long-term value propositions: Sometimes, startups also need to bet on a combination of short and long term opportunities. Your product vision may be very ambitious, but you often can’t offer that proposition from day one. In fact, the more ambitious your vision, the longer it will take to start delivering it. So, if you want to survive long enough to achieve your dream, you need to sell something else till that happens.

A great example of this is Zomato – they started as a pure-play information source on restaurants around you. Gradually, as the user base grew, they began overlaying restaurant promotions. Now, they’ve just started an even more lucrative food delivery service. And I bet they’ll add other services soon – allowing you to book a table, pay for your meal through the app, etc. (I predicted this in an early March blog post, maybe 10-15 days before they started the food delivery service :P).

 

3. Multiple product lines: More mature businesses also employ the barbell strategy. They often have one-two cash cow product lines, which they can milk till the cows come home (I had to take the metaphor to its conclusion, didn’t I?). This gives them the freedom to invest in potential breakthrough products – many of these will fail, but a few will succeed and make up for all the losses and more.

Think of skincare brands – they all have some stable products like fairness creams and face washes, and periodically introduce more cutting edge products (e.g., anti-aging elixirs) to test the market.

 

4. Your own entrepreneurial career: The above examples are at a company level. But even individuals can employ a barbell strategy. For example, I have a startup, and have been working on a couple of products for 2 years now. At the same time, I also do some freelance consulting, and am about to run a taxi on Uber / Ola. Not only does this small but steady income give me the staying power to explore more opportunities at my startup, it also gives me a reserve to tap into, should any of my experiments work and I want to step on the gas. You may say I’m hedging. I don’t disagree, but I’ve found this safety net invaluable – I can apply myself to my venture in the best frame of mind, without worrying about a fast-falling bank balance.

This is similar to the entrepreneurial system that Scott Adams talks about in his book. And James Altucher has often spoken about how rich people have 7-10 different income sources.

 


 

Thus, you can employ the barbell strategy in several different situations, to reduce your risk even as you take on high-risk opportunities. And that, ladies and gentlemen, is how you can have your cake and eat it too!

I’d love to hear what you think of the barbell concept. Can you think of any other applications? Comment here, drop me a line at gt.jithamithra@gmail.com, or tweet at jithamithra.

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The reading list that transformed my professional life

Bookshelf_Small

6-9 months ago, when everyone was posting lists of the top 10 books they read, I was unfortunately busy with work. And then, when I wanted to post my own list, it was much too late to do so – people had moved on to sharing Upworthy articles instead.

Nevertheless, what’s far more useful is to talk about the top things I learnt from books – the ideas, insights, stories that changed how I think about life and work. After all, that’s why you read books – to improve yourself in some way – isn’t it? Well, at least all books apart from the Twilight series.

So, here are the 5 ideas that transformed how I think about life and work, and the books I read them in. Rather than describing these ideas in detail, I’ll also share links to articles that offer a short version. But I would definitely recommend you read the book themselves too!

 

1. System 1 vs. System 2 Thinking – Thinking Fast & Slow

An understanding of psychology is, in my view, an essential skill for anyone whose daily life involves interactions with other people to get stuff done. The human mind is not only not rational, it is also irrational in a few consistent and repeatable ways. Understanding these cognitive biases and fallacies that we suffer from can go a long way in helping you get what you want in interactions with people.

One of the key concepts I’ve come across in this area is that the human mind is really two distinct personalities – let’s call them System 1 and System 2. System 1 is the more automatic, quick-and-dirty, heuristic based, lazy thinker – get to an answer quickly by applying habits and patterns, often at a subliminal level. System 2, on the other hand, applies more careful, overt deliberation to any problem, coming to a solution in a more considered manner.

At any time, you’re thinking in one of these two modes. For example, when you’re doing math, you’re carefully thinking of the problem and solution – that’s System 2 in operation. When you’re tying your shoelaces, you’re usually not thinking about the loops and knots actively – you just do it. That’s an example of a System 1 task.

Now, at most times, the mind defaults to System 1 – which tries to recognize and apply patterns without thinking too much. And the result is that it can get tricked in fairly predictable ways – what we call cognitive biases. Two examples of these are anchoring (where an initial number suggested to you often influences your answers to a numerical question) and availability bias (you tend to overestimate the probability of an event if you can remember examples – this sometimes results in people paying more for earthquake insurance than insurance for natural calamities – even though the latter includes earthquakes!). Won’t go into detail on these biases here – you can read the articles I’ve linked to, and the book. But I’ll blog about them soon too!

Another interesting implication of the dominance of System 1 is that you can trick your brain into certain emotions. For example, you know that when you’re happy, you tend to smile. But did you know that this can work in reverse – that you can trick your brain into happiness, by simply smiling? This was a ridiculously amazing insight for me – to know that causality works both ways, and I can control my emotions. I’m a ‘moist robot’, in Scott Adams’ words.

Book: Thinking Fast & Slow – one of the best books I’ve read – and I actually prefer fiction.

Further reading: 15 Lessons from Behavioural Economics – Slideshare, Scott Adams on Programming the Moist Robot

 

2. Making Skewed Bets – Fooled by Randomness & Antifragile

When I was in business school, I read Fooled by Randomness, by Nassim Taleb. At that point, I thought it was the best book I had ever read – so many brilliant ideas, one after the other. I read it again recently, and while I’m a little less effusive, it’s definitely worth a read – it’s long-winded and unnecessarily complicated in parts, and the language is often self-absorbed – but if you can look beyond that, the insights will hit you at an unrelenting pace.

But the most important insight for me – in that it almost exclusively governs my world view since I read it – is that of making skewed bets. The world is innately random – your success depends far more on your luck than on your ability. At first glance, this seems to encourage laziness. Why work hard when your destiny doesn’t depend on it? But looking deeper, the implication is that you should try and expose yourself to ‘positive’ luck as far as possible, while limiting the impact of ‘negative’ luck. In simpler terms, expose yourself to very high upside, while limiting your downside as far as possible.

This is called making a skewed bet – where if you win, the gains are a windfall; but if you lose, you don’t lose that much. A lot like financial options or a startup – if you make it, you make it. And if you fail, then your losses are limited – the cost of the option, 1 year of salary, etc. Of course, the probability of a loss may be 90%. But if you make 10 skewed bets, then you’ll make a windfall gain on 1 of them – and that may be more than enough.

Another important way to keep yourself open to good luck is by simply staying on the field. Thomas Edison got the light bulb right on his 1000th attempt – and that happened only because he kept trying different things, and didn’t give up after 999. To surf a ‘killer wave’, you need to first be in the sea, navigating the 100 tepid waves before.

Book: Fooled by Randomness. Antifragile, a subsequent book by Taleb (even better), actually takes this one idea and distills it far more.

Further reading: The hard part about surfing

 

3. Goals vs. Systems / Success as a process- How to fail at almost everything & still win big

Taking the previous point further – success, then, seems to be a process rather than a brilliant idea, inch-perfect execution or just good luck. Try a lot of different things, observe, learn, and iterate. So that you slowly, over time, collect all the right materials for the magnifying glass of luck to ignite. You do all the right things and keep improving, so that when Lady Luck knocks, you’re ready.

Success is therefore a system (take several skewed, high-reward/low-cost risks), rather than a goal (I want to get rich). Now that’s at a macro-level, but this makes sense even at the micro-level – rather than adopting a goal of doubling your user base and throwing money at it, take a systematic approach of trying different things, observing, and then betting the farm on the 2-3 marketing techniques that work.

Scott Adams (of Dilbert fame) carefully charts out this approach in his book.

Book: How to fail at almost everything & still win big. I would venture that this is one of the best and most actionable books I’ve read. But read at your own peril – as they say, one should be careful when taking life and business advice from a cartoonist.

Further Reading: Goals vs. Systems – a short blog post applying this concept to life in general.

 

4. Power Laws, or why working hard is not enough – Zero to One

I’ve already blogged about this here, but it’s worth reiterating. Today’s business world is not a normal distribution, with most people distributed around average payoffs. Rather, it’s an exponential distribution – very few companies will make most of the money to be made. Therefore, success depends far, far more on what you do, than on how you do it.

random-vs-power-law-distribution-2

In a power law distribution, very few sample points account for a majority of the population’s value.

The power law will permeate all your decisions (e.g., one marketing hack will drive 90% of your traction, one product feature will drive 90% of repeat users, etc.). Won’t go into more detail here – definitely read the post!

Book: Zero to One

Further reading: The Power Law, or why working hard is not enough (my blog post, again)

 

5. Attractor States Good Strategy Bad Strategy

The previous three concepts have all been around the idea of work and success. This one is different, and is a tool that I’ve found quite useful in jump-starting creative thinking about problems.

Let’s say you’re trying to think of a startup idea in a given space. You could look at what users do now, what they buy, how they consume, etc., and try to find areas where you can add value. Or, you can look at how the industry will inevitably evolve in the future and see how you can accelerate that.

The author calls this concept an ‘attractor state’ – given industry trends today, what do you see as the logical next frontier over the next 10-20 years? And how can you participate in that, rather than making incremental changes to the status quo? To paraphrase Wayne Gretzky, the ice hockey legend – don’t skate to where the puck is, but to where it will be.

This is a slightly nebulous concept, so let me provide an example. Let’s say I want to create an offering in the payments space. One option is to join the crowded current market, and provide a mobile wallet solution, a payment gateway, etc. Another way is to think of where the industry will be in 10-20 years – its attractor state. I’m not a payments expert, but seeing how it has evolved over time (barter -> gold -> paper money -> credit cards -> mobile wallets), there’s a clear trend towards individualization. The reasons mobile wallets are a great innovation is that everyone carries a mobile today, and they don’t share mobiles – it is a unique identifier of a person. Taking this individualization further, the next wave of advancement has to be biometrics – where unique characteristics of your person (iris, voice patterns, fingerprints, etc.) are your identifier, based on which transactions can be completed from your account. You don’t need to whip out your phone or credit card – just staring at a tiny lens is enough to connect to your payment account.

How does this help an entrepreneur? With this end-game in view, entrepreneurs can think about how they can add (and capture) disproportionate value in the long-term – the products and services they can start building today, to accelerate the attractor state. In the case of payments, it could be future biometric sensors, systems for collating massive customer data, POS terminals for accepting payments, etc. – each of these possibilities could be game-changing.

Won’t go into much more detail here – but I’ll write a blog post or two on this concept soon. I find it an incredibly powerful way to improve your creativity when thinking about problems and solutions.

Book: Good strategy Bad Strategy. Apart from a discussion of attractor states, this book also has a great discussion of chain linked strategy and focus as a source of competitive leverage. I’ve blogged about this here.

Further Reading: Will write a detailed post on this soon!


These are the five concepts from books that changed my world-view. It may be asking too much to hope that they fundamentally alter your thinking too, but I hope you find these perspectives and books interesting. Do comment!

PS. Have you signed up for the Startup Weekly yet?

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Why Taj is the best customer service company in the world

I stayed at a Taj Hotels property in Delhi last week, for a conference. And I was blown away by the customer service there. Thinking back to my days as a business consultant, I stayed at several hotels across the price spectrum while traveling. But Taj hotels – whether Gateway, Vivanta or the higher-end ones – were always head and shoulders above the next best ones. Why, even when I’m just visiting a Taj for a meeting, the customer service there is superior to other hotels that I may actually be staying at.

But this post is not about why Taj is the best hotel. It’s about why it’s the best company, across sectors – how it embodies customer delight like no other company.

Taj

Over the years, I’ve interacted with a bunch of companies that excel at customer service. Amazon, for one, always has me marveling at how wonderfully well it treats its customers. Whether the big stuff (the ridiculously good deals that it offers with Prime and the Kindle) or the small (you don’t have to call Amazon if you have any issues; rather, they call you), Amazon has got your back. Many of Amazon’s customer service decisions fly in the face of its bottom line, but they are guaranteed to make customers happy – and Amazon always trades off in favor of its customers. It’s not for nothing that its stated vision is “to become the Earth’s most customer centric company”

But whether Amazon or Zappos (which introduced the “Try different shoes, and send back the ones you don’t like” model), excellent customer service feels ‘processified’. So, over time, these become expected and fail to surprise you anymore. So, while you would become a loyal customer of Amazon (I am), you’d not necessarily become an advocate (I wouldn’t write a blog post solely extolling its virtues). This is excellent customer service no doubt, but it’s not customer delight.

With Taj hotels, on the other hand, customer delight is present in every interaction with guests. The staff – whether in housekeeping, at the restaurants, or room service – all perform random acts of kindness that leave you surprised. So, rather than a customer service process, a customer service culture shines through. When I was preparing for this post, I could remember at least 10 examples of how their customer service left me spellbound. I won’t share all 10 (I wanted to write a short post for a change), but here are a few:

  1. An ex-colleague of mine broke his suitcase trolley while in Nairobi on a project. He tried everywhere, but couldn’t get it fixed – the standard advice was “Buy a new suitcase”. After two weeks of lugging it around on one wheel, he had become inured to the inconvenience. But the moment he entered the Taj Palace in Delhi, the bellman came up to him and said “Can I get that fixed for you?” This was over 4 years ago, but he still uses that example to highlight the ‘jugaad’ innovation approach in India. I think, though, that the lesson is far deeper – he would not have received the same response at every other hotel.
  2. During my most recent visit, the waiter at breakfast remembered that I had ordered a dosa on the first day and brought it to my table himself the next day. I marveled to myself for a bit about how, among a multitude of guests, he remembered what I wanted. But when I started eating, I realized that he had also remembered what chutney I hadn’t touched the previous time – it was missing from my plate! I was quite spellbound at the detail-orientedness that goes into their customer service (and remember, they don’t have big data algorithms churning at the back!). And this is not necessarily designed to show every customer they care – if I wasn’t similarly detail-oriented, I may not have noticed. This is not lip service customer care – they genuinely want guests to feel comfortable.
  3. From the previous example, you may have guessed I have OCD. But the hotel housekeeping staff didn’t know that. Yet, when I returned to my hotel room after a conference session, I noticed that they had velcro-ed all the stray charging wires I had left hanging from plug-points. A great convenience, but one many guests are liable to not notice. But ones that do are guaranteed to be pleasantly surprised at how customer delight permeates every single interface with the Taj’s staff.
  4. This stellar customer service is not restricted to the hotel’s guests. I had a meeting at a Vivanta once, and I was an hour early. I ordered coffee at the hotel’s restaurant, and was quite a prima donna about it – I asked them to bring it to the lobby (quite a distance away), as there were no free plug points at the restaurant and I wanted to charge my laptop. Not only did they cheerfully comply, they were equally cheerful in saying that it’s on the house when I asked for the cheque an hour later.

A common theme across these examples is the element of surprise. And I think it’s essential. This tiny overlap of excellent customer service and complete unexpectedness is what really creates customer delight.

Another critical element of customer delight is service recovery. Anyone can smile pleasantly at genial and benign customers. But how do you rescue a negative situation – a disgruntled customer, an overturned wine glass, a missing booking, etc. – in a way that transforms the irate customer into a loyal one? Sure, you can create many customer-friendly policies like a free dessert or a large discount to defuse such situations, but to truly delight even the most agitated nay-sayer, you need to go above and beyond. These extreme cases are what distinguish merely excellent customer service companies from ones that delight customers.

And the Taj staff came through in what is perhaps the most extreme case of all – the 26/11 attack in Mumbai, when terrorists laid seige to the Taj Mahal Palace hotel at Gateway of India. Numerous employees, in different parts of the hotel, were instrumental in shepherding the guests to safety – all of them made sure that guests came through unscathed. They were the last men out. And in some cases, they did not get out.

The Taj has thus created a culture – not a mission, not a process – of customer service. And unlike a mission statement “We exist for and because of our customers” that’s only read out sonorously at company meetings, this has trickled down to the lowest level employees across departments – employees are empowered to make customers happy, even if it means extra costs.

This willingness of Taj’s employees to go beyond their remit – in both traditional and extreme situations – is how great customer service stories are made.


I can’t afford to stay at the Taj whenever I travel, but it’s one hotel I look forward to visiting, even if just for a meeting. Do you guys have any other examples of such companies – where you look forward to just interacting with them? Would love to hear about them – do comment below / mail me at gt.jithamithra@gmail.com / tweet at @jithamithra. And yes, do subscribe – I post roughly once a week, on startups, business models, consumer behavior, etc.

PS. I’ve just started a newsletter called The Startup Weekly with Abhishek Agarwal, a close friend, curating the most interesting articles, case studies, etc. for startups that we come across every week. It would be a good addition to your inbox. Sign up here – the second issue goes out this Saturday! And here’s a link to the first issue, in case you need some more convincing!

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Sometimes, good old focus can be a competitive advantage.

We constantly read about companies that have created barriers to entry – through technology, intellectual property, large-scale manufacturing, or sometimes even by throwing a ton of money at a problem. For startups, this barrier to entry is a constant refrain, especially in conversations with potential investors – “What’s your barrier to entry? What asset are you building that’s hard to replicate?”. And this is a hard question with no easy answers, especially for a young company that’s not building a high-tech, proprietary product – a bigger competitor with deeper pockets could appear at the ramparts anytime, and replicate exactly what you’re doing.

But what if just focus on a particular user segment could help you develop a competitive advantage? What if expending all efforts to serve a particular market niche or user segment could help you unearth a resilient barrier to entry?

Barrier to Entry

I read a book called ‘Good Strategy Bad Strategy’ last year and was struck by how insightful it was. I’ve revisited my notes from the book at least twice now, each time capturing a new nuance. It’s a must read for students of strategy, advisors on strategy, and practitioners. Having been all three (in that order, oddly enough), this is right up my alley.

The book had many great ideas on sources of power for companies – what gives a company lasting supremacy in its market. One idea that stayed with me was of single-minded focus – how focus on a particular type of user can be a sustainable source of power or competitive advantage. How would this work? Let’s dig in – this feels like another 1800 word post.

 

Any company’s business model has 9 different parts, as below:

Business Model

Source: Strategyzer.com

The author, Richard Rumelt, points out that to focus on a specific user segment, you need to make coordinated changes across multiple or all parts of your business model. Thus, your final offering to the customer is a sum of many moving parts that have all been finely configured – a sum that, as the cliché goes, is more than its parts. Applying such focus takes incredible coordination of policies, which, along with their interlocking and overlapping effects, can then confer unassailable advantages and make you a hard act to follow.

 

I know this seems very philosophical (a little like bad strategic advice!), so let’s look at a few examples to illustrate this better:

1. IKEA

IKEA

Rumelt uses the example of IKEA to illustrate this concept. IKEA is a furniture retailer that sells ready-to-assemble furniture. It targets do-it-yourself or DIY users, who love the feeling of putting something together. It has been hugely successful across multiple countries, but 70 years since its founding, no credible competitor has appeared or lasted. That’s sustainable competitive advantage!

IKEA has no secret sauce in terms of patented technologies for furniture, greater marketing strength, etc. The source of IKEA’s lasting advantage is, instead, the coordination between the different elements of its business model to serve its target segment. For a competitor to challenge IKEA, they don’t just have to sell ready-to-assemble furniture – they’ll have to change their whole business model.

  1. They’ll have to design new types of furniture;
  2. They’ll have to start carrying larger inventory;
  3. They’ll have to create their own, branded stores; and
  4. They’ll have to change their selling models.

Thus, copying IKEA is not a simple matter. IKEA’s policies are so different from the norm in the furniture industry that any competitor would have to replicate ALL of them to meaningfully compete for the same user segment. Adopting one or two of these policies and implementing them, even perfectly, would be useless – it would add huge expenses without providing any real competition.

2. Apple

Apple

Apple is another example. Over the years, Apple has targeted its products at premium customers who want a superior experience – well-designed products that just work. They’re not interested in the most technologically advanced products with the most bells and whistles – they want products that do their job simply and well. Oh, and there’s snob value too.

Apple has made several interdependent decisions to target this group:

  1. Complete ownership of the product: Take the iPhone. Unlike its closest competitor, Android, Apple controls the entire product – the OS, the hardware, user interface, etc. This allows it to deliver a very coordinated and quality user experience.
  2. Complete ownership of computer ecosystem: Moreover, Apple coordinates the experience across all its products. The Apple ecosystem can satisfy all your computing needs – desktop, laptop, tablet, phone and music player. All of these products follow the same design language, and work together seamlessly – they sync with each other very easily, without any need to fiddle with system settings.
  3. Branded retail stores with a luxury experience
  4. Marketing mainly to premium customers who don’t mind spending more – this not only raises product revenue, but also increases the long tail of revenue from app store downloads, music downloads via iTunes, etc.

The reason Apple’s position in the market is unassailable is that a competitor can’t just copy one or two things to start selling to the same group of customers. The competitor would have to copy everything, a formidable task even for very nimble companies. And copying sequentially won’t work – you can’t begin to deliver the Apple or IKEA value proposition without copying everything from the outset, in a coordinated manner. Which is why, even though Android and its partner OEMs have copied a lot of product design elements from Apple (in fact, the first Samsung Galaxy S was an iPhone in all but name), they haven’t been able to displace Apple from its position as the proprietor of all things cool.

Thus, the business models of IKEA and Apple are like a chain – multiple independent elements interlock to engineer a truly durable value proposition. As for a competitor, the flipside of a chain-linked model applies – your proposition is only as strong as your weakest link. Focusing on strengthening just one or two aspects of your model won’t increase your ability to compete even one bit – you need to strengthen everything, all at once.

Chain

 

Let’s try and apply this mental model of a chain to a few other sectors. Are there other companies as well, which have used focused, chain-linked business models to derive competitive advantage?

3. Wal-mart: In the 60s and 70s, Sears and Kmart dominated retail. But they mainly served large towns or cities that could ‘support’ a large retailer. Wal-mart changed the game by creating large-format stores away from cities, allowing enormous spaces at lower costs. It positioned itself as a ‘discounter’, something other players avoided like the plague. And it was able to make money while offering deep discounts, through several interlocking innovations:

  1. Extremely wide product portfolio with deep discounts on some products, cross-subsidized by other high-margin products
  2. Cutting-edge technology to track customer purchase behavior, and tailor portfolio accordingly
  3. Agile supply chain, keeping its stores well-stocked with the right products very efficiently

Thus, several innovations, all focused on offering products at the lowest prices, gave Wal-mart lasting competitive advantage. By 2002, Wal-mart was the largest retailer in the world, and Kmart was bankrupt.

4. Dell: If you wanted to buy a desktop in the US in the 80s or 90s, your only options were to either buy a standard configuration through a retailer, or buy individual PC components to customize the machine yourself. Unless you built the PC yourself, you did not get much choice in the product or configuration you wanted. Dell saw an opportunity to change this by offering customized configurations, and thereby targeting the more technologically adept consumer.

Dell took a number of hard decisions to make this happen. It created an easy to use online / phone interface for users to configure computers of their choice. It delivered this promise through a mass customizing production process, and built a direct-to-customer distribution channel. None of these decisions were easy to replicate even singly, much less in lockstep. The result – a lucrative business model that stood unchallenged during the PC boom of the 90s.

 

OK, these are standard business school case studies. Let’s look at a few newer companies.

5. Innocent: The British healthy drinks / smoothies player has built a strong position in its home market. Innocent offers health-oriented users very fresh fruit-based drinks – their promise is, zero preservatives, only natural fruit. Offering this focused proposition means a number of business model decisions – sourcing the best fruits only, producing for short shelf life, faster cold chain logistics to get the product to retailer shelves very quickly, and so on. All separate decisions, coordinated to deliver user value. Competitors have found it very hard to replicate this – Pepsico, after years of trying to compete in this market, finally bought a smaller competitor to gain a toehold.

6. Zara: Zara has carved itself a preeminent position in the ‘fresh fashion’ space. Zara’s stores are always stocked with the latest trends – Zara gets clothes from design to outlets in 10-15 days flat. And it has done this by tailoring multiple parts of its operating model to accentuate this speed:

  1. Much larger design team than other apparel brands – its 200 designers ensure a steady flow of new designs, taking advantage of the latest trends and feedback from customers.
  2. While most apparel brands manufacture in China, Zara manufactures in Europe close to its main markets – this gives it a head-start of at least 1.5-2 months.
  3. Short production runs, with limited quantities – Zara doesn’t run more than one production cycle for most of its products. If a particularly striking outfit runs out at its stores, that’s it. You won’t see it again. From a user’s point of view, this drives a purchase decision faster. If you plan to come back tomorrow to buy a dress, it may not be there.

Putting these aspects together, other brands find it very difficult to catch up with Zara – all of these are major business model revamps that are difficult to pull off, whether alone or in coordination with each other.

 

These and several other successful companies show that focus and coordination can create a massive barrier to entry and lasting competitive advantage, keeping challengers at bay for years to come. It’s a telling reminder to businesses – you don’t need cutting-edge technology or a massive fund-raise, just good old-fashioned customer service will do!


What do you think? Are there any other consequences – positive or negative – of focusing your business model on a specific user segment? Would love to hear from you – mail me at gt.jithamithra@gmail.com, tweet at @jithamithra, or comment here on this blog. And do subscribe here – I post roughly once a week, on startups, business models, consumer behavior, etc.

PS. I’ve just started a newsletter called The Startup Weekly with Abhishek Agarwal, a close friend, curating the most interesting articles, case studies, etc. for startups that we come across every week. Would be a good addition to your inbox (so much for conquering it). Sign up here – first issue goes out this Saturday!

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