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It's typically all those sorts of questions.
Where are we? Are we an entrepreneurial company?
Are we an emerging management style company? Are we highly managerial? Where do you want
to be? How are you going to get there? What resources do you need and so on?
You can read all of those at your leisure.
One model I've always liked is the McKinsey's 3 Horizons model and in the growing numbers
that our companies have been involved with and we've always used it. Probably in 9 out
of 10 cases, it's been pretty successful. You're going to get a few duds every now and
then, but it tends to work.
Basically the 3 Horizons model looks like this. When you start a business, a good customer
is anyone who buys something from you. Anyone who's got money in their hand is a good customer.
Forget segmentation. Forget relationships. Forget all that stuff. You've got rent to
pay. You've got salaries to pay. You've got supplies to pay. You just want to get money
in the door.
That money might not be coming from work you actually want to do. It may be coming in markets
that are highly competitive. Over time, you are just trying to drive revenue and as you're
driving revenue, you get some customers.
You want to hang on to them, you want to grow a bit and you might be looking more about.
You may just success in terms of efficiency.
How much money do we make per full-time employee?
How much money do we make per customer?
What are our net contribution markets like?
You also start to think about well, are there new markets? Can I develop new products or
new services? Over time, I'd like my non-preferred work, so the money that gives me revenue,
but doesn't have long-term value for the organization.
We're still measuring things the same way. This is often referred to now. This is often
referred to as next year. The gap between Horizon 1 and Horizon 2 generally doesn't
tend to be very big.
The big opportunity comes up around Horizon 3, which is generally in the three to five-year
stage. So, we start back here at Horizon 2. I go in Horizon 1. It can be hard to do. You
start to think about those things you want to do to have a long-term revenue and profit
base.
What sort of services do we want to offer? What sort of customers do we want to have.
The important thing about that is that you're talking about having a different business
in Horizon 3 to what you have in Horizon 1. Your business model has to be different.
If you just do in Horizon 3 what you did in Horizon 1, you'll fail, because the gap between
your business model and the capabilities required by the marketplace, which are going to compete,
will fail. It will be too large.
What you try to do is create options. What are the different things that we can do? It
measures our success differently. We start to think about long term things. We want to
look at repeat business. We want to look at industry relationships. We want to be the
number one choice to the number one customers.
We look at customer service rankings. We want to grow double-digit growth. Do our employees
stay with us? Are we a good place to work? Do we grow our employee based through word
of mouth rather than advertising?
Do we pay competitive salaries, but not excessive salaries to get good people? Do we have seeing
here options, options, options? Have we actually generated some real options for our business?
Because, at some stage, you're going to value your business and options are worth money.
The simple ability to be flexible and be able to do different things are worth money. I've
been involved in start-up businesses going through this process and at this point, people
have paid an option for the culture of the organization, which was entrepreneurial and
innovative with high levels of employee retention.
They actually bought the company because they wanted to work out how they had developed
a culture like we had in this particular organization and put it back into the parent company which
had bought it. Didn't work. We sort of feared it wouldn't, but we had options, which were
based around the culture of the organization.
That's why I say what gets you to here won't get you there. The skills, resources, partners,
types of employees, types of products, types of service, type of brand that you manage
there, one gets you to there. Somewhere along the line, you have to change your business
model.
One of the first people I ever heard about who did this, you've all heard of Sun Microsystems.
Sun Microsystems was started by a guy called Scott McNally. Scott McNally was a great,
he didn't know anything about this business model. He was a great believer in the fact
that you needed to continually reinvent your business.
Sun Microsystems, like a lot of technology companies, had very long corridors and if
he saw you in the corridor, he would come running towards you, a big burley guy and
would bar you up against the wall and say what are you doing to destroy our business?
You had to tell him.
He would say, his sort of philosophy was well we need to be destroying our own business
before our competitors do it. We've got to keep on reinventing ourselves. Get rid of
the old staff. Start thinking about new ideas. He used to do it to everybody.
The guy who told me this was actually a visitor and he said but I've got a visitor's tag on.
I don't actually work here. I don't care. Give me some ideas. He would have said that
sort of guy, you're not working until you give me some ideas.
Often, we sort of think about it a bit like this, new businesses often hire types live
productivity. What I mean by that is that you've got new customers. You've got to educate
them about your business.
You sort of think about, remember when we looked at the model of the value of long-term
relationships. We said in the early years, you tend to lose money on customers. A lot
of that is because of high touch.
You've got to go and find the customer. You've got to educate them on how your business works.
You've got to set up accounts for them. You've got to service the customer. Often, that's
done by the founder of the business.
They've got their hands in everything, so it's a high touch business, difficult to accelerate
because it's limited by the capability of the entrepreneur. Often, entrepreneurs are
technical people or people with an idea rather than managerial skill.
It's a difficult thing because you don't want them to lose that entrepreneurial flair, but
you can't afford them just to become managerial, where everyone's got to have boxes and organization
structures and that type of thing and little opportunity for expansion.
This is all about defending a bit of organic growth, so a bit more work for the existing
customers and a big focus on efficiency. Whereas Horizon 3 is very different. The important
thing about Horizon 3 is it's a new business. Because you're fundamentally delivering value
in a very different way.
You go back to when we spoke about things like core conferences and value chains and
all those sorts of things, if you're delivering value in a different way, well firstly, if
you're not delivering value in a different way, you're still in Horizon 1.
Secondly, if you're delivering a different value, you must be delivering it in a different
way. Different organizational focus. Different organization of resources. Different partners.
That's why we say it's a new business model.
Look at someone like Amazon. We all know the background of Amazon, so I won't go through
that in detail, but Amazon was a business model that for many years, people thought
was a business model built around selling books online. That was never their business
model. Their business model was built around the value of the data.
That's the asset they've got. That's why they're worth 80 billion dollars. They made a billion
dollar profit last year. Well, 970 million. That's a lot of money. That doesn't make a
company worth 80 billion dollars. What makes it worth 80 billion dollars is their option
value.
The option value is created because they've got this massive customer database with huge
amounts of information that can be applied in lots of different ways, in lots of different
industries. It's that database that provides them with option value.
I'm not sure how much you know about Amazon, but they're all the companies they own. Well,
they own over 100 companies. They're all the different companies. They own online diapers,
different types of soaps, different types of internet movie database, CD deliveries.
Zepa's, which is an online clothing and footwear retailer.
Zepa is quite interesting, because Zepa, for a number of years, was voted one of the top
five customer service companies in America; an online retailer. High levels of customer
service. Amazon bought them because they wanted to understand why they were so good at customer
service.
A lot of these organizations appear to have no real relationship to the core Amazon business,
except they brought revenue and in this case, lots of customer information, great search
capability with great search technologies. In this case, great capability around customer
service.
These are some of the other businesses that they own, so they have lots of different businesses
under the Amazon name, so when Amazon started, their core value proposition was price, convenience
and selection and they've never really veered away from that.
Their strategy was to get big fast. This was their business model. Spending money on brand
awareness, getting new customers and of course, there's a technology platform that underpins
all that. They have this industry model.
As they grow, they get economies to scale. They can buy things in larger amounts, so
they get price reductions. That gives them a lower cost structure. A lower cost structure
means that they can offer lower prices.
Just remember I guess my warning when we looked at Porter's model. Lowest cost doesn't necessarily
mean lowest price. Lowest cost is a strategy in its own right. In this case, they've taken
their lowest cost structure and turned it into lower prices. That improves the customer
experience because it's cheaper.
You get an immediate improvement in value by providing things more cheaply. Because
they're more cheaply, more customers come along, generates more traffic. If you generate
more traffic, you get more people wanting to sell stuff. We'll go to Amazon because
they've got so many more people going to this site.
As you get more sellers, you give greater selection, greater convenience, a range of
delivery options, a range of different product types. That also improves the customer experience.
You've got this lovely virtuous circle of activities that are self reinforcing.
Here's the thing with Amazon, they actually think of themselves as having three different
customers and they try to develop value propositions for three different customer groups. We
would typically think about consumers and their value proposition, but the sellers are
a really important part of Amazon's business model.
If they don't have sellers supplying to them, they can't correct the selection and the convenience
for the end user. Then, of course, the developers who wants to use Amazon's developing services,
say Amazon provides a lot of information. You can be a registered Amazon developer and
they bring you inside the tent and provide you access to lots of technology and technical
information.
They have a number of different customers. Why do people go to Amazon? How did Amazon
become successful. This is a very simple model. It's our standard 200 page presentation or
200 slide presentation on Amazon, which I won't take you through because it's fairly
brief, but basically, they thought that the key to success were these measurements.
Not how much should customers spend, not what margins did we make on them, not how much
did we make per full-time employee. They probably still measure that stuff, but their goal is
attention, attraction, retention. Attention. Can we get people to go to our site. When
they go to our site, how long will they stay there? When they come there, will they come
back again?
These are all the things that Amazon looks at. These are all the things that form that
arrange the information in their database. They also realize that because at the time
they started, which was in the mid-nineties, e-commerce was a relatively new thing. You've
got to build trust.
They built all these ideas around trust. Quality, value, timeliness, appropriateness of goods
and services, reputation and security. They were the first people to focus on trust as
a really important point of differentiation around their brand. Every organization in
the world talks about the importance of trust. Amazon actually created it.
The whole idea of how long do people stay? One of their niches is sticking us, which
they measure through time on the website, number of visits, number of pages viewed and
it involves all of these elements, convenience, engagement, community and relevance.
How do they keep things relevant? That's the original Amazon site. That's what it looks
like today. Relevance is about content and it's about the products and services they
offer.
Engagement. Amazon is interesting. When we talk about coproduction, go to Amazon and
have a look at how much content is created on that site by Amazon customers. Particularly
one of the most important features of Amazon, which is customer reviews. That content is
created by customers. It is a fantastic example of co-creation in practice.
It's worth a fortune to Amazon. People go there and they interact with other people.
They also see that information really well presented, so the design of the website, the
way in which people see their own information presented and of course, you get to say whether
it was useful or not. People get the feedback.
The community is about the Amazon community and being able to link people together with
shared interest, online discussion groups, online book clubs, access to information,
what's on the New York Times Best Seller List, what were the biggest selling books in the
world last year, what won the Times Literary Awards, who won the Nobel Prize for Literature,
what have you bought before that might be relevant to what you might buy and what you
might be interested in buying in the future.
The whole thing about customization, ownership and belonging and sharing stuff, convenience,
you can actually get a one-word phrase and put it in your name and pay for your bills
with Amazon.
Speed of delivery, not such a big thing in Australia because of the international shipping
costs, their business model has sort of evolved like that. You go back to having a built-in
business model, and this is going to be a bunch of very busy slides, but you go back
to online retailing. They set out to be a mass marketer low transactions.
Low transaction profitability, high number of transactions. Small margins, very high
volume of transactions. That can only happen if they can go to a global market. To go to
a global market, they need a whole bunch of partners.
They don't make books. They don't print books. At that time, they didn't store books. All
they were was a bunch of servers with an internet site that linked people who had something
to sell to people who wanted to buy something. You have got to set up transaction accounts.
You've got to set up banking accounts. You've got to set up payment accounts; bookstores,
authors and so on.
The value proposition, as we said before, was around those sorts of things and online
retailing. Use the partners to deliver the value proposition to those consumers and Amazon
just sat in the middle of it. When we say Amazon was a new business model, that's all
it was.
Of course, they also had to set up these things to make it work. Fulfillment, IT infrastructure,
the marketing, the technology, the content, which built trust, which built responsiveness,
which built communities. That's the key to success with Amazon.
This bit other people were already doing. This bit was a bit they added on. The auctions
and Z-Shops, they're just providing intermediation services, so they're just an intermediary
between buyers and sellers. Their customers are buyers and sellers of products.
Amazon are the agency that sits in the middle and they take commissions. That's their revenue.
Similar sort of thing with Marketplace. They just take commissions. They are partnerships
and logistics service providers. People who might be currently online retailers, they
do the fulfillment.
You can buy stuff Zepo's, for example, don't deliver to Australia. You can get them to
deliver to Amazon and Amazon will deliver on their behalf. You know, when you go to
Amazon now, when you buy a product, take something as a generic product, a pair of Nike Runners.
You can actually choose which retailer you buy it from.
Amazon is one of those retailers. You can choose the retailer. Amazon didn't do the
fulfillment for that retailer. That's what that's all about. Finally, their e-commerce
platform, which I spoke about before.
Next, customized web services. You get your own via the cloud computing services.
And finally of course we get to E-books and Kindle, which I'm not sure if Kindle downloads
of outpaced books, but I think they're getting close. And so they're are all the things that
you need to do.
Clearly, Amazon don't make the Kindle. Amazon don't write the software for Kindle. It's
all done by other people. Amazon just sort of sits in the middle, offering this is their
value proposition. Portability is now part of it. They've just got a different value
proposition that involves electronic delivery, rather than a physical delivery.
Amazon is a really good example of a cluster network. I just want to spend a little bit
of time in finishing on this idea of clusters. Clusters are going to be a really significant
part of your life as managers. Creating them. Working in them. Because clusters are just
the reality of life they say. Clusters or networks, as a well-known example, Silicon
Valley and Bollywood.
If you go to Bollywood, if you have to find people who understand project management,
you find them in Bollywood because making film is a project. If you had to find lawyers
who specialize in media rights, you go to Bollywood. If you want to find actors, actresses
and so on, everybody involved in film production, you go to Bollywood. Silicon Valley all that
much better.
Basically clusters typically tend to be geographic concentrations, but they don't need to be
anymore because of the power of the internet and sort of electronic connectedness. So why
do people cluster? Reducing costs is an interesting one.
You might remember, a couple of lectures ago, I said that it used to be that the most profitable
companies in the world tended to be the biggest ones. In any industry, the people who have
the biggest markets share tend to be the most profitable. They are the most profitable because
they had economies to scale, because they had the most production.
Clusters put an end to that. Cluster meant that you could actually go and source things
with someone else who could aggregate demand from a variety of customers and their total
demand was more than yours as an individual. If you're at General Motors, making axles
and Ford and Toyota and whoever else went and found an axle manufacturer where they
could buy axles more cheaply than you could make them?
Clustering was first set up to reduce cost, but what they found is that as people specialized,
they were able to improve innovation and become more efficient and find ways of solving problems.
They learned what it takes to be competitive. This is just an example of some high tech
clusters in the US and we all know about Silicon Valley, but there are some other interesting
ones around the place.
This research part here is interesting. This research part used to be the area of expertise
was actually tobacco growing. It's in Virginia and through the major universities. They were
funded by large tobacco industry. Of course, you know, crop yield and all those sorts of
things, that was the industry in which their business model wasn't going to keep on working.
Silicon Valley, everyone here has heard of Intel. Intel was actually founded by people
were originally working for a company called Tektronix. Tektronix was founded by a guy
called William Shockley who won the Nobel Prize for physics. He was the guy who actually
invented the silicon chip.
William Shockley was a brilliant inventor and a very difficult man to work with. The
people who worked for him left and started Intel. They would have happily stayed there
as employees, but he was such a difficult man.
The founders of Intel were all academics. Andy Grove was a Ph.D. graduate from the University
of California at Berkley and worked there as a lecturer for a number of years before
joining Tektronix. Now, just look at all the companies that they have spun off.
Silicon Valley is an interesting place. A lot of these companies in here were people,
as the colour suggests, who left Intel, to go start their own business. In many cases,
their first big customer was Intel.
That's sort of unusual isn't it? You have high valued employees who leave to go and
start their own company. Typically, what we worry about is they've taken all our secrets
with them and they're going to set up in competition. Silicon Valley doesn't work like that. It
works in a very, very different way.
A guy I know in Silicon Valley, actually he's further south. He's down near L.A.; another
Australian guy. He was a champion pole-vaulter. He was dual Commonwealth Gold Medalist, dual
Olympic Representative, went to university in America, on a college scholarship and never
came back. He's this big data and does predictive modeling of data.
He basically hired the predictive modeling team out of Microsoft, because Microsoft said
that's not what we're going to be and we think big data is important. Their single biggest
customer is Microsoft. Silicon Valley is a very different place.
How many of you are thinking about starting your own business? Okay. I might play this
video and then we might finish for tonight and I'll, I knew this would happen.
Silicon Valley took about 80 years to create and what's important about Silicon Valley
is not everything you see, but what you don't see. It's the culture of this valley that
makes this place special. That culture took a long time in the self-reinforcement of the
right people being here and the wrong people leaving here, who eventually create the ethos
that makes this place what it is.
Now the topic of this is you have, at an early stage, angel investors as you called them
versus venture capitalist is a very different business model.
Let me just quickly, okay I think that might do us for tonight. I've got a few more to
go through but it will only take me a few minutes next week. I can send your name out
a way to find that video if anyone is interested in seeing it. In fact, there's a longer form
video.
I'm terrible with conferencing team D and I've spent so much of my life in academia
standing at the front, I'm actually terrible at sitting in the audience. He was one of
the most compelling speakers I've ever heard. He actually spoke for about an hour. I can
point you to a longer-form video of what he was talking about.
Anyway, it's is interesting to entrepreneur, a lesson in venture capital. I'm happy to
send you the link.
The last thing is on the assignment, now that we've had the last group, I can send out.