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December 31, 2004

Fortune at the Bottom of the Pyramid

As a follow up to my post on Innovation Blowback, I have found another interesting set of analysis by C.K. Prahalad and company that covers a different form of business innovation.  Prahalad talks about the opportunity that multinationals have in trying to create products for the very poor for counterintuitively the poor are actually:

  1. A big enough market worth trying to satisfy
  2. Companies have been able to build a reasonable size business trying to satisfy the very poor e.g. Hindustan Level, Standard Bank of South Africa, etc,
  3. <>

    The innovations to satisfy the very poor can be then applied to more developed markets which is similar to the point John Hagel is trying to make.

The full article on this is Download bottompyramid.pdf

 

Posted by Venky Ganesan at 05:37 PM in Economics | Permalink | Comments (22) | TrackBack

The Long Tail and Innovation Blowback

Two business concepts that are going emerge from the blogoshere to the mainsphere in 2005 are Chris Anderson's The Long Tail and John Hagel's Innovation Blowback

Chris is an editor at Wired and wrote an article in October 2004 about the phenomenon of internet companies such as Amazon, eBay, and Google creating value from previously forgotten content or niche market segments.  The article is not revolutionary per se but does a great job of giving a concise description of how the community aspect of the internet as well as its low cost of distribution and interaction facilitate big new market opportunities.  One example he uses effectively is British climber Joe Simpson's book Touching the Void.  It was written in the late 80's and got good reviews.  However it disappeared from the book charts without much of an impact.  In the late 90's, Jon Kirkauer wrote the book Into Thin Air which became a bonafide best seller. The  interesting part of the story is that a combination of Amazon's algorithmic recommendations and the positive feedback loop of internet reviews resulted in Touching the Void becoming "rediscovered" and then selling twice as much as Into Thin Air and even being optioned to be made into a movie.

Innovation Blowback as explained by John Hagel is:

Innovation blowback refers to a phenomenon that's occurring in the global marketplace, particularly [in] emerging markets like China and India. My sense is that most companies significantly underestimate the importance of those economies. In part because they're viewing them simply as a growth market; they're rapidly growing markets, they help to compensate for lower growth in the more developed economies, and so you ought to invest in those markets.

In fact, that's only a small part of the opportunity. The real opportunity in those markets has to do with the pressure of very demanding customers who want more value at much lower prices and [who] are forcing product innovation in a variety of industries. It goes across from healthcare, to motorcycle manufacturing, to cell phone and wireless network equipment, where companies are being forced to fundamentally redesign products to deliver more value at lower prices. And guess what? Those products are not just going to serve those markets—they're going to blow back into the developed economies and become the basis for attacker strategies against products in these markets. So think about these emerging markets not just as growth engines in their own right, but as a seedbed for product innovation that will provide the basis for attacking strategies here in developed economies.

I will blog about both of these phenomenons shortly . . .

Posted by Venky Ganesan at 12:42 PM in Current Affairs | Permalink | Comments (20) | TrackBack

December 27, 2004

Tsunami in South Asia

As most of you know a terrible Tsunami hit Southern Asia two days ago.  The death toll from this event is staggering - 25,000 and counting.  Hard hit areas include Indonesia, Sri Lanka and India (specifically my home state of Tamil Nadu has been badly hit).

In this season of giving, please consider donating and helping people recover from this terrible tragedy.  Information on how to give can be found in this blog.  The Red Cross is also receiving donations for this cause.

Posted by Venky Ganesan at 12:58 PM | Permalink | Comments (1) | TrackBack

December 25, 2004

Cranberries and Ocean Spray

Interesting blog by BusinessPundit on the cranberry story.  The original story is from the Economist. One element that the story does not go into too much detail is that Ocean Spray is a co-operative of 700 cranberry farmers.  I have always felt that co-operatives are "socialist organizations" that can neither be efficient or effective.  Clearly that is not the case.  A co-operative close to home that Chari and I frequent is Arizmendi Bakery.  I don't know the economics of their business but the Pizza is spectacular and the staff very friendly.  Its something I hope to study further . . .

Posted by Venky Ganesan at 09:21 AM | Permalink | Comments (36) | TrackBack

December 21, 2004

The Economics of Customer Businesses

Read a recently article by Michael J. Mauboussin called "The Economics of Customer Businesses"  which I highly recommend.  For those not familiar with Legg Mason, they run a bunch of world class mutual funds which subscribe to a value philosophy and have terrific long term records.  Michael is the Chief Investment Strategist for Legg Mason.

In his most recent piece, he analyzes consumer businesses such as Netflix, Sirius Satellite, DirectTV, etc. and has some non-obvious insights.  Some of them were:

  1. Aggregate churn rates in these high growth consumer businesses can be misleading early on.  The more relevant information is to look at churn rates for various cohorts i.e. customers who joined during a particular time frame and then track that over time.
  2. Not all customers are equal.  There can exist a whole spectrum of wildly profitable to wildly value destroying customers in your customer base.  The trick early on is finding out who is profitable and keeping them while getting rid of the "unprofitable" bunch.  For example, Amazon recently launched an online DVD rental service in England very similar to Netflix except for one crucial difference - while Netflix allows unlimited rentals in a month, Amazon only allows a limited number of rentals in a month.  Any customer who rents more than 9 "new" movies a month is a money loser for Netflix and they "eat" that loss for the value of the "unlimited rental" message.  Amazon is cleverly sucking away some of the "profitable" customers away from Netflix with their modified positioning
  3. There are also some diffusion equations that can predict customer adoption well.

Posted by Venky Ganesan at 10:18 PM in Economics | Permalink | Comments (21) | TrackBack

December 20, 2004

The First Venture Capitalist

Continuing my "casual reading" list, I recently picked up a copy of "The First Venture Capitalist" - a collection of historical materials on General Doriot edited by Udayan Gupta.  For those not familiar with General Doriot, he was a professor at HBS who started the first institutional venture fund called ARD (American Research and Development). 

His most successful deal was DEC.  He provided a seed round  of $70,000 (yes you read it right, seventy thousand dollars) to Ken Olsen and the rest as they say is history.  General Doriot was a true gentleman.  He never collected fees or carry on his funds and actually never made money on DEC himself.  He believed that the process of funding innovative companies and creating jobs was patriotic and was its own reward. 

In these days of Billion dollar funds and executive pay gone crazy, thank you General Doriot for thinking big and thinking long term.  Your legacy lives on . . .

Posted by Venky Ganesan at 10:47 PM in Books | Permalink | Comments (2) | TrackBack

December 17, 2004

Stock Option Expensing

This is going to be all over the news wires tomorrow and you can almost hear all the tech lobbyists starting their Pandora cries - FASB has decided that all companies must expense stock options.  Call me ignorant and naive but I don't understand what the hullabaloo is  - stock options are a form of compensation that transfer value from shareholders to employees.  We expense salaries and other benefits that provide value to employees, why should we then not expense options?

I know, I know  - you are now going to say that this is going to result in companies issuing less stock options to employees and thus take away the "engine of wealth growth."  I disagree.  This law is going to have minimal impact for startups.  Startup options are priced low enough that its not a big deal to expense them.  For public companies it is going to have an impact but the big grants post-public are given only to senior management e.g. CEO, VP's.  I actually think that this accounting change will put a brake on runaway executive compensation and force compensation committees to think longer before giving their favorite CEO a huge swath of options. 

Posted by Venky Ganesan at 03:20 PM in Economics | Permalink | Comments (14) | TrackBack

December 16, 2004

The Myth of Averages

This is the time of year that I normally slow down and try to do some "casual" reading.  One genre that I like to catch up on is books about the technology business (Yes, its sad, I know I need to get a life.)  Thanks to Chari, I am currently reading Robert Cringely book "Accidental Empires." 

Early on in the book Robert talks about how some people have such off the chart skills around programming that they are 1000 times more productive than the average programmer.  He then makes the somewhat non obvious point that rather than worrying about what the average math scores for 8Th graders are in America we need to be more focused on how we can make sure that we have "off the chart" skilled people in our country.  I call it non obvious because every time someone announces average math/science scores around the world, people start lamenting that America is somewhere in the middle and not as smart as the Koreans/Japanese/Chinese.  Don't get me wrong.  It will be nice if our average scores are higher.

However the true barometer of our success is tied not to averages but rather to how many "off the chart" people we have in our country.  It is these people, 3 standard deviations away from the norm, that make the orders of magnitude difference in outcomes.  I would any day have 3 genius programmers than 100 better than average programmers.  What we need to do is to make sure that our schools and society are structured in a way that these "off the chart" individuals can grow and thrive

Posted by Venky Ganesan at 09:58 PM in Current Affairs | Permalink | Comments (6) | TrackBack