Innovation Tribune eng

Getting to plan B

Getting to plan B, by John Mullins and Randy Komisar, is an important book. In short, the thesis of the book is that successful startups very often had to change their initial business plan. To quote Mullins and Komisar: "If the founders of Google, Paypal or Starbucks had stuck to their original business plans, we'd likely never had heard of them." The startup process, largely driven by poorly conceived business plans based on untested assumptions, is seriously flawed. And the authors to give a few interesting examples of business plans changes that were successful. If only for this, the book is important because, despite many criticisms, business planning remains the cornerstone of entrepreneurship courses at business school, and well honed business plans are a must-have to pitch venture capital. The fact that no business plan survives the first encounter with reality seems to bother no one in industry. Importantly, the flaw does not lie in some limitations of the planners. In other words, it is not because of poor planners that business plans are useless, or even harmful. It is the very process of planning that is problematic. Behind the notion of planning lie the idea that to control the future, we need to predict it. However, recent research on entrepreneurship by Sarasvathy (see the concept of effectuation) showed that in uncertain environments, it is simply not possible to predict the future. Hence prediction is really a gamble.

Based on their experience (Mullins is a professor at London Business School and Komisar is a VC), the authors acknowledge this and propose a process to make corrections to an initial idea through comparison (compare your idea with existing models that work or don't work to learn from them), leaps of faith (uncertainty can only be solved by actually making a reasonable hypothesis and going for it rather than accumulating data), experiments (to resolve uncertainties) and data-driven corrections to the model. These four points are applied to the five elements that determine any business model's economic viability: its revenue, gross margin, operating, working capital and investment models.

As we progress through the book, however, the sense of excitement wanes a bit. Indeed, several interesting examples of successful plan B conversion are given, but one starts to question whether the framework used is not overly oriented towards a financial view of the venture. It is certainly necessary for a venture to succeed to get its economic equation right if value is to be created eventually, and the book give many useful hints and rules to check this. But is it sufficient? Take the case of Amazon, which is described extensively in the book. It took 8 years for Amazon to become profitable, but was it really a plan B? Or rather, wasn't it a case of a successful concept that 1) Needed time to scale, and 2) Needed to be streamlined from an operational point of view? If so we are not talking about a plan B so much as we are talking about scaling a business whose concept is unchanged throughout. More interesting is the case of Paypal, given at the beginning of the book.

What would indeed be really interesting would be to take the concept of plan B further and really focus on the elements of the business model that come first, ie the products and the markets. Indeed, I would venture to suggest that in Mullins and Komisar's book, the product's shadow is everywhere, but the product itself is not much to be seen. If we acknowledge that most plans A are destined to fail, and that take off usually happens at plan C or D, and sometime much later, then the question becomes "how do you manage the switches?" This is not rhetoric. There is money at stake. Sarasvathy and Kotha describe how Realnetworks started as a TV channel and ended-up as the leading video streaming solution on the Web. That's typical plan B switching, but before we look into Realnetworks' economic model, we must understand how you start as a TV channel and end up with a streaming solution. That is a hell of a plan B iteration.

In conclusion, "Getting to plan B" is a wake up call and as such reading it should probably be made mandatory in any MBA course on business venturing. But the book really calls for further inquiry into the very process of transformation that startups undergo in finding their sweet spot in terms of products and markets. And in this, much remains to be done.

New book: Getting to Plan B: Breaking Through to a Better Business Model

If the founders of Google, PayPal, or Starbucks had stuck to their original business plans, we’d likely never have heard of them. Instead, they made radical changes to their initial models, became household names, and delivered huge returns for investors. How did they get from their Plan A to a business model that worked?  Why did they succeed when most new ventures crash and burn?

John Mullins and Randy Komisar argue that the startup process, largely driven by poorly conceived business plans based on untested assumptions, is seriously flawed. But there is a better way to launch new ideas—without wasting years of your time and loads of investors’ money.

In Getting to Plan B, Mullins and Komisar present a field-tested process for rigorously stress-testing your initial business idea, and using the evidence you uncover to make swift corrections that tip the business equation in your favor. Focusing on five elements that determine any business model’s economic viability— its revenue, gross margin, operating, working capital, and investment models—the authors’ approach significantly reduces your risk of failure by:

• Comparing your idea with existing models to steal what works, avoid what doesn’t, and add improvements
• Identifying “leaps of faith”: the as-yet-untested questions you are banking your business on
• Conducting fast, inexpensive, data-driven experiments to support or refute those questions
• Using this data to make smart strategic changes and course correct before it’s too late  

Through examples from their first hand experience and research in businesses around the world, Mullins and Komisar reveal how companies have used such systematic experimentation to transform their current business into a viable Plan B. Whether launching a new venture in the marketplace or inside your company, Getting to Plan B will help you replace assumptions with evidence—and vastly improve your odds of success.

John Mullins is the author of the business best-seller, The New Business Road Test, and an Associate Professor of Management Practice at London Business School
Randy Komisar is the author of the critically acclaimed best-seller, The Monk and the Riddle, a partner at Kleiner Perkins Caufield & Byers, and a lecturer on Entrepreneurship at Stanford University

Find the Amazon reference here.

So you still think starting a business requires a great idea ?

Then maybe it's worth going back to the history of a few great companies.

That's one of the things that Jim Collins and Jerry Porras did for the millions of readers of "Built to last". The first myth they shattered in their book was the "great idea" myth, meaning : "it takes a great idea to start a great company". You need evidence ?

Sony is a perfect example. How did Sony start ? The company started in the devastated Japan of 1945, when Masaru Ibuka rented an abandoned operator room, in the remnants of an old department store. Sony at that time was $1600 of Ibuka's personal savings, and seven employees who didn't know what they were going to work on. So Ibuka and his employees had a brainstorming session after starting the company, to figure out what kind of business the company should enter ! The first Sony products were not terribly successful ; there was a deficient rice cooker, then a dangerous heating pad. Although Sony didn't know which products it should sell, Ibuka and his employees knew why and how they wanted to work. So Ibuka wrote the following for the May 7th 1946 opening ceremony of the company (which was called at the time Tokyo Tsushin Kogyo, short version Totsuko) :

Purpose of Incorporation :

• To establish of an ideal factory that stresses a spirit of freedom and open-mindedness, and where engineers with sincere motivation can exercise their technological skills to the highest level,
• To reconstruct Japan and to elevate the nation's culture through dynamic technological and manufacturing activities,
• To promptly apply highly advanced technologies which were developed in various sectors during the war to common households,
• To rapidly commercialize superior technological findings in universities and research institutions that are worthy of application in common households,
• To bring radio communications and similar devices into common households and to promote the use of home electric appliances,
• To actively participate in the reconstruction of war-damaged communications network by providing needed technology,
• To produce high-quality radios and to provide radio services that are appropriate for the coming new era,
• To promote the education of science among the general public.

(if you want to know more, Sony's website http://www.sony.net/Fun/SH/index.html, already mentionned by Philippe last December, is extremely well-documented)

You need another example of the great idea pointlessness ?

Everybody knows Bill Hewlett and Dave Packard started Hewlett-Packard in a now famous Palo Alto garage. What is less known is that neither men had no very fixed ideas about what they were going to produce. As Bill Hewlett explained to Collins and Porras : "When I talk to business schools occasionnally, the professor of management is devastated when I say we didn't have any plans when we started - we were just opportunistic. We did anything that would bring a nickel. We had a bowling foul-line indicator, a clock drive for telescope, a thing to make a urinal flush automatically, and a shock machine to make people lose weight. Here we were, with about $500 in capital, trying whatever someone thought we might be able to do".

What was at the beginning of groups like Sony, Hewlett-Packard, or even Wal-Mart, was not a "great idea", but more simply men with a corporate vision which went beyond products. But that is another story, and we will expand in another post on the concept of corporate vision as defined by Collins and Porras.

'Crossing the Chasm' or why don't people buy your revolutionary product

It's an unfortunate thing that Geoffrey Moore is not so much read these days, particularly here in France. Moore has written essential things about marketing new technologies that are as true today as they were ten years ago. In particular, in his book "Crossing the Chasm", Moore discusses why most companies fail at marketing disruptive technologies. If your job is to market new technologies, it's a very bad idea not to read the book.

In the book, Moore makes the following observation: when a company introduces a revolutionary product, it usually enjoys an initial success with sales with a few key clients, but just when all signs suggest that take off is imminent, sales stall and the product eventually fails on the market. The same story happened, and continues to happen, to countless startups with brilliant products. Why is it so hard to sell revolutionary products?

To answer this question, Moore looks at the well-known technology life cycle. According to the underlying theory, your revolutionary product is first bought by the techno-enthusiasts. These are the guys who buy any new technology, whatever it is, because their passion is to get their hand at unproven technologies. There are not many of them, they have no budget, and indeed they think they should get the stuff for free, but they prove invaluable in testing the technology and providing feedback. But nobody listens to them, so once you've sold the product to the few who are likely to, you're back to square one. The next in the list are the strategic (or early) adopters. Those have an entirely different motivation: they buy innovative technologies because they want to gain a competitive advantage. They were the first buyers of SAP, and they bought the first PCs when corporations thought they were just toys.  It is with these guys that you will close the first sales, and start the first pilot projects during which you will improve the product. They are your first source of revenue, your first reference, but their projects are never-ending and you can find yourself completely trapped with a totally specific product if you don't learn how to say no at one point, unless you want to become a service company.

Again, the strategic adopters are not many, and there lies the problem leading to the growth stall. You will sign big projects, but never ever think that this is kick-starting growth. There are only so many of them... After a few projects, the source dries up, and you are again back to square one.

The real money lies with the next group: the mainstream buyer. This is an entirely different lot. They only buy completely mature products that present zero risk for the company. A typical mainstream buyer is the IT manager of an insurance company. He couldn't care less about innovative technologies and cool stuff. Any new stuff is by definition a headache, and a potential source of problems, not to mention costs.

A common assumption is that you can convince the mainstream buyer with your successes with strategic buyers. Moore's luminous insight is that nothing could be further from the truth: between the strategic adopter and the mainstream buyer, there is nothing. No continuity, hence the notion of chasm. After a few successes with lonely strategic buyers, you have to cross the chasm to reach the mainstream buyer. For him, the strategic buyer is not really a valid reference. In fact, the mainstream buyer buys on only one criterion: the reference. He only buys from the leader of the market, because he doesn't want to take any risk, which means that as long as there is no leader on the market, as is often the case on emerging markets, he will not buy.
He forms his opinion by reading the professional press -as conservative as it can be- , by talking to peers in other companies. If John has chosen Product X and is happy, then I can consider buying X, rather than Y which nobody knows. The result: as long as you are not the leader, you won't sell anything to the mainstream buyer, which means 95% of the market is out of reach. This is of course a catch-22: because, by definition, as long as you don't sell to them, you won't become the leader.

This explains what happens to the usual start-up. When the new product is introduced, it triggers excitement among the techno-enthusiasts. This is the cool stuff of the moment. Blogs and bulletins boards talk about the product. After a big effort, the sales force lands a few big contracts with strategic adopters., usually some R&D managers. First revenues, first references. That's usually when number crunchers start plotting a straight line of revenue growth, and eagerly send it to anxious investors. Big mistake. Because after selling to the few strategic buyers around, there's nothing much to sell, and certainly not to the mainstream who are horrified by this new stuff that threatens their existing view of the world.

To move on to the next step, you need to convince them. Usually, they are business unit heads, a very different population from R&D managers. The kind that ask for you last three annual reports (but we've only been around for 9 montsh!!!), how many people you have in the quality department, and if you're able to have a dedicated 24/7 support line for their Tokyo office. Of course, you've none of this, so the buyer is put off. You're just to much risk for him. How many real deployments do you have, and I'm not talking pilot projects here? None, Sir, you would be the first! Ah, being the first, the absolute no-go for a mainstream buyer... He'll just wait until you're the leader of the market, because then there will be no risk.

So what is the solution? Very simple: become the leader, and come back to him. How to do that? Simple, and brilliant answer from Moore: reduce your market until it is no more than a micro-niche, because it's always easier to be a big fish in a small pond than a small fish in a big pond.

Once your market is reduced, which means that you have carefully micro-segmented it and selected the best segment, you can target similar clients, members of the same group. For instance, the retail banks in the northwestern part of the US, or the Rap music fans in New-York. If you target similar clients, a successful sale to one client can be leveraged to sell to the next one, whereas a sale to a bank will be useless as a reference to sell to a car manufacturer. So the golden rule is: focus, focus, focus. The counter-intuitive approach consists, therefore, when the going gets tough after the initial successes, not in running all over the place trying to sell to anybody, but rather to sit down and select just one segment, and put all efforts to conquer it.

The segment will of course be chosen based on what has already been sold, by determining which sale to a strategic buyer can be leveraged to sell to a mainstream buyer - that can happen. Once this is done, approaching the next mainstream buyer ill be a bit easier. With this approach, the micro-segment can be conquered. The strategy consists then in choosing the next segment to conquer the same way, such that the first segment can be used as a reference. After a few iterations, the micro-segment gradually coalesce into a real segment… of which you are the leader.

In summary, Crossing the Chasm is a very insightful analysis of radical innovation marketing, which identifies the difficulties, explain the causes and suggest very effective solutions. No wonder the book is a best seller, and a bible of high-tech marketing.

"Active inertia" : a key-concept to understand corporate failures, including innovation-related failures ?

There are people you don't forget. I was lucky enough to have Don Sull as strategy professor for the two years of my MBA at London Business School ; he was obviously among the smart ones (he flew shortly after to Harvard Business School). In 1997, I heard him explain his "active inertia" concept. He expanded on it in his 2003 book "Revival of the fittest". What is it about ? It's the astonishing plain idea that a company can put its own existence at risk by pursuing harder recipes which previously brought success, while the environment has changed.

The Compaq history can be read that way :

In 1982, Rod Canion and two senior Texas Instruments executive have lunch together and draw on a napkin a personal computer with a handle. Disappointed by the Texas Instrument approach of the PC market, they hire other TI employees and start Compaq ; portability and superior quality are the motto of the new company. In 1983, Compaq beats the record for a one-year old company : a $111 million turnover ! In 1990, eight years after its beginning, Compaq has 10,000 employees, and a $3.6 billion turnover. In these years however, the PC is quickly becoming a commodity. In 1991, when five out of the eight largest American PC producers follow a low-cost strategy, Compaq hangs on to a strategy of innovation and superior technology. The company is incredibly active, all the more active that a price war is starting to erode its margins. But faced with major choices raised by its changing environment, the company is passive. Benjamin Rosen, Compaq's President, tries to save the company by replacing Rod Canion, the founder, with Eckhard Pfeiffer, but the history of Compaq will end in 2002 when the company is bought by Hewlett-Packard.

Innovation can be a trap if it's not aimed in the right direction. Keeping on selling very high quality and technologically innovative PCs with a unitary price difference sometimes beyond $2000 compared with a Dell equivalent, proved a fatal trap for Compaq.

The "active inertia" concept reminds us of the Clayton Christensen "innovator's dilemna". According to Christensen, the major trap regarding innovation is the focus on "incremental" innovations. Think of Kodak, stepping up its efforts on the historical picture technology at the time digital photography starts to grow ; the company is racing full-speed as the threat materializes. But it's going in the wrong direction, and from a strategic point of view, it's going nowhere.

Innovations : incremental, radical, major or strategic ?

In "Fast second", already mentioned in this blog, C. Markides and P. Geroski suggest an innovation typology. They rely on two criteria :

• the effect of innovation on consumer habits and behaviors;
• the effect of innovation on established firms' competencies and complementary assets.

The easiest case, incremental innovation, occurs when the innovation relies on established firms' competencies, and the effect on consumer habits and behaviours is low. The launch by Mercedes of the ABS system designed by Bosch, in October 1978 (already), is a typical example of incremental innovation.

Major innovation is characterised by a strong impact on consumer habits and behavior, but builds upon the established firms' competencies. The introduction of internet services in the banking industry is a good example of major innovation. Although it deeply changed the way consumers use financial services, the established banks were indeed the ones who possessed the skills and assets to develop them. The difficulties of "pure internet players" (such as Egg in France) seem to confirm this analysis.

Things become more dangerous for established players when innovations challenge, or destroy, steadily built competencies and assets.

When innovation threatens these competencies and assets, and when the effect on consumer habits and behavior is limited, Markides and Geroski define such innovations as strategic innovations. The wave of flat-screen TV might be analyzed this way: these product don't fundamentally change the television habits of consumers, but the required technologies (LCD, plasma screen…) have the power to seriously threaten established players who would reluctantly exit traditional technologies (cathode ray tubes).

In the final case, when innovation threatens established firms' competencies and have a major effect on consumer habits, Markides and Geroski call this type of innovations radical innovations. Mobile phones, PDAs and video-tape recorders are historical examples of radical innovations.

One of the interests of this typology is obviously that companies can consider different responses according to the nature of the innovation they're pushing, or the are threatened by.

C. Markides and P. Geroski : "Fast second"

What if the smart strategy to win the over competitors was to be a "follower" ?

This provocative question is raised in "Fast second", written by Constantinos C. Markides, management professor at the London Business School, and Paul Geroski, economy professor, former Dean of the LBS MBA, and current Chairman of the UK Competition Commission,

Which firm create onlined bookselling in the 90s ? If you instantly think of Amazon, you're wrong. The concept of online book selling was born and put into practice by Charles Stack, an Ohio-based bookseller in 1991. Amazon started selling books over the internet in … 1995. In the same spirit, Ford didn't create the automobile market, nor Procter & Gamble the disposable diapers markets.

C. Markides and P. Geroski remind us of what we all know : individuals or companies who create new markets by innovating are not always in the best position to make these markets grow. Other organisations are often more adequate to bring the new market to its full potential. A must-read if you still think "first-mover advantage" is a golden rule of strategy…

Andrew Hargadon "How breakthroughs happen"

In "How breakthroughs happen" (Harvard Business School Press 2003) Andrew Hargadon , professor of technology management at UCLA, takes us into the history of radical innovations, from Edison's incandescent lamp to Reebook shoes. He takes into pieces the complex mechanisms at play behind the "lonely inventor" myth. After studying for ten years the companies which demonstrated their ability to bring radical innovations to the market, Andrew Hargadon concludes that the ones which succeed are "technology brokers". It's the ability to understand and integrate previous or exogenous technologies, to creatively recombine ideas and concepts, which enables a few companies to work as "innovation factories". A unique and well-researched point of view really worth reading.