Den eneste formelen en gründer i internett-økonomien må kunne utenat

Som de fleste leserne som følger meg vet, er jeg veldig skeptisk overfor enhjørning-kulturen som har utviklet seg de siste årene. Havet av likviditet som sentralbankene har oversvømt de finansielle markedene med etter finanskrisen har skapt en surrealistisk situasjon. Selskaper som taper milliarder av dollar hvert eneste år – og deres gründere – blir hyllet som helter og verdsatt utover all logikk basert på forventninger om uendelig vekst og et antatt komponent av disrupsjon i deres forretningsmodell. Dette er spesielt bekymringsfullt når mange av disse selskapene er nesten ti år gamle og ikke er i stand til å kommunisere engang når de i det hele tatt kommer til å tjene penger. Fra Spotify til Uber eller Xiaomi, listen med blødende enhjørninger er så lang at det gjør vondt å tenke på tapene for samfunnet som de representerer. Kroneksemplet er den uforståelige børsnoteringen av SNAP, som var nesten designet for å stjele pengene fra småinvestorer.

Les også: Snapchat – The pigs get slaughtered

Hvilken er hovedgrunnen for at disse selskapene ender opp i denne situasjonen? Svaret er at de fleste enhjørningene er skapt og lider under den dødelige kombinasjonen av plattformøkonomien og mangel på inngangsbarrierer.

Plattformøkonomien impliserer at bedriften må investere i plattformen før den i det hele tatt er i stand til å koble brukere til den og dermed begynne å generere kontantstrømmer. I seg selv er dette ikke nødvendigvis et stort problem, Forutsetningen er at marginen som hver kunde eller bruker i gjennomsnitt  genererer blir høy nok til å både finansiere investeringene og generere positiv margin for aksjonærene.  Et eksempel er telekomoperatører. De har drevet med plattformøkonomien og har vært i stand til å vokse og levere sunne marginer samtidig i mange år.

Det er mangelen på inngangsbarrierer som er problemet. De fleste enhjørningene er basert på enkle ideer og teknologi som er lett tilgjengelig eller lett å kopiere. Konkurransen kan dermed komme fra overalt og fra hvilket som helst sted i verden. Dermed blir den eneste måten å sikre sin egen overlevelse å vokse ekstremt raskt for å kunne oppnå en global ledende markedsposisjon. Dette konkurranselandskapet driver dermed prisen på tjenesten under kostnadsnivået som plattformøkonomien krever. Tapene akkumuleres år etter år.

Les også: Five business development mistakes that Unicorns can afford, but you can’t

Enhver gründer og investor i internettøkonomien må være klar over denne mekanismen, fordi investeringene som å spille enhjørning krever er altså enorme. Det er dermed ekstremt viktig for gründere og investorer som satser på plattform-baserte tjenester å kunne forutse  på hvilket tidspunkt en bedriften vil bli lønnsom.

Heldigvis finnes det en formel som forklarer dette, og den er (i teorien) ikke vanskelig.

Formelen lyder:   CLTV > (CAC + CRC)

CLTV = Customer Lifetime Value, eller verdien som en kunde eller bruker i gjennomsnitt genererer for selskapet i løpet av alle de årene han eller hun betaler for tjenesten.

CAC = Customer Acquisition Cost, eller gjennomsnittlig kostnad ved å vinne en ny kunder eller bruker.

CRC = Customer Retention Cost, eller gjennomsnittlig kostnad ved å beholde en kunde eller bruker i løpet av de årene han eller hun betaler for tjenesten.

Ulike selskaper kan ha ulike definisjoner for alle disse tre faktorene. Det er akseptabelt så lenge de forblir de samme over tid. Generelt sett:

  • CLTV er målt i dekningsbidrag (gross profit)
  • CAC bør inkludere alle reklamekostnadene adressert til nye brukere
  • CRC inkluderer alle reklamekostnadene adressert til eksisterende brukere

 

Noen nyttige konklusjoner:

  • Kun når CLTV er større enn de to andre faktorene til sammen er man på vei til å bygge opp en finansiell bærekraftig plattform-basert virksomhet, med lønnsom vekst.

 

  • Denne formelen forklarer hvorfor «Freemium» forretningsmodellen er så sårbar. Når bare en liten andel av brukerne betaler for tjenesten blir CLTV veldig lav. Dette er en av grunnene hvorfor Skype aldri klarte å tjene penger før selskapet ble kjøpt opp av Microsoft i 2011. Skype hadde også nettogjeld i balansen på 686 millioner USD på det tidspunktet. Spotify på sin side prøver på alle mulige måter å konvertere «freemium» brukere til betalende kunder.

 

  • Tatt i betraktning hvor nådeløs konkurransen i internettøkonomien er, og den furiøse utvikling av stadig nye tjenester, bør CLTV ikke estimeres for mer enn 7 år.

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5 questions to test whether your project is innovative for your company or not

Suppose a team comes to you with an initiative that it claims is innovative for the company. How would you test if it is true in order to invest the resources it may deserve? Should it on the contrary be put under current operations? Five questions do the job for you.

Lately I have been reading the book «The end of competitive advantage», by Rita McGrath.

The book has some good chapters. Chapter 5, «Building an innovation proficiency» is one of those. There you find the case of Brambles, a  company founded in 1875 that circulates and commercializes pallets around the world from its headquarters in Australia.

The case is interesting in itself. How do you transform a relatively immobile company into an innovation powerhouse? There are of course a lot of activities leading to the desired output, but one of the first obstacles the upper management had to face is the definition of innovation itself.

This is not a trivial issue. In order to being able of pursuing a new business opportunity any management has different tools at its disposal. However, if the management doesn’t correctly identifies the opportunity as an innovation as opposed to, say, a new exercise in operational efficiency, the wrong set of tools will be applied. The new offering will be trusted to silos and regular operations. It will then most certainly die there. The people that should have exploited the opportunity will be busy aiming for the operational parameters they are measured upon and will not invest enough time and effort in anything else than that.

I have written before about the importance of identifying the right type of innovation in order to match it with the strategic goals and resources of the company. You can find the classification matrix beneath and the blog post describing it in detail here.

 

Innovationstrategies
The four types of innovation at corporations

 

The following questions will reveal whether the new initiative presented to the management is an operational issue within the boundaries of organic innovation or a project that should be put under the governance of the innovation team. At Brambles, an affirmative answer to two of them classifies the new initiative as innovative for the company.

  1. Does the proposal represent a new operating model or business model? 
  2. Is it something that would open us up to new or different customers?
  3. Does the idea expose us to potentially new competitors or different competition?
  4. Would it require new skill sets  – do we need to recruit or train people to do it?
  5. Would it require new technologies or types of resources or facilities or whatever that we don’t know how to manage?

Concerning business models, from my experience any initiative that changes a box in the Business Model Canvas represented below is definitely suspicious of being innovative. In addition, the management has to be very aware of the power of this decision. To change business models is extraordinary difficult for any potential follower. Chances are that they will react too late and the first mover will dominate the market for a long period of time.

Read more about how some companies made it here.

 

7-selskaper-som-endret-internettokonomien
A simplified version of the Business Model Canvas featuring some companies that destroyed their competition by changing a single block of the model

 

Any initiative that will open your company to new customers or competitors is most probably innovative for your company and maybe the industry you operate in. You should however be aware of the implications. Changing customers and competitors imply potential new revenue models, billing and IT systems. It also implies challenging the value of your Key Account Managers for the company and even their incentive models.

Finally, new technologies, and therefore new skills, are an almost sure sign of innovation. However, in my opinion, the management should pose one more question in such case: Is the technology already known for some competitors in the industry? If it is, we are dealing wth organic innovation and the initiative should be transferred to the operative core of the company.

Innovation is not easy. Top managers have many other tools to increase shareholder value in the short and medium term that are far less risky. The management may hesitate when confronted with it. It is therefore imperative to have tools like these five questions to identify whether it is indeed an innovation and in such case act decisively upon. If not, chances are that an opportunity for  new growth and revenue will be wasted.

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Derfor har disrupsjon gjort R&I viktigere enn noensinne

I Norge som i resten av verden er R&I fortsatt et avgjørende element i kampen om kundene og fortjeneste. De som glemmer det kan fort miste bunnlinjen i regnskapet.

Hele min karriere har jeg jobbet for teknologiselskaper. Jeg har sett hvordan produkter som inkorporerer specs som kunden er villig til å betale ekstra for har erobret markedet på få år og sikret en preferert posisjonering i mange år.

Det er derfor merkelig for meg når stadig flere ledere og innovatører ignorerer verdien av teknologi med variasjoner av setningen: «teknologien fikser man bare».

Siden finanskrisen og den ultra-ekspansive pengepolitikken fra FED – og alle de andre sentralbankene – har vi vært vitne til en økende trend i denne trivialiseringen av rollen som teknologi spiller i verdiskapning. Silicon Valley og andre har oversvømt oss med historier om selskaper som fra starten av bruker standard teknologi (off the shelf) og som har erobret verden på kort tid. Twitter, Uber, Box, Spotify, Xiaomi, Snapchat… Listen er lang.

Likevel har ingen av disse selskapene tjent penger ennå til tross for mye glam og gloss. De fleste blant dem vet ikke engang hvordan de skal tjene penger i fremtiden heller. Deres strategi basert på å bruke standard teknologi som motor i deres operasjoner har gjort deres forretningsmodeller til en grotesk vits. Det vi har vitnet siden finanskrisen er simpelthen en massiv feilallokering av kapital.

Snapchat er sannsynligvis arketypen av denne tankegangen. «The camera company» skal snart børsnoteres. Det er fortsatt et så gigantisk pengesluk at CEO og medgründer Evan Spiegel advarer svart på hvitt i prospektet til investorene at «selskapet kanskje aldri vil tjene penger».  Verdien av selskapet som Mr. Spiegel likevel sikter mot etter børsnoteringen? Tjue milliarder dollar, for et selskap som aldri har tjent penger og kanskje aldri vil gjøre det ifølge gründeren selv. Go figure.

Disse selskapenes strategi basert på å bruke standard teknologi som motor i deres kjerneoperasjoner har gjort deres forretningsmodeller til en grotesk vits

Realiteten er at å utvikle egen overlegen teknologi rettet mot parametrene som kunden prioriterer er fortsatt en av de beste måtene å øke verdien for aksjonærene på sikt. Fra Google til Samsung og Nvidia, de virkelige heltene av internettøkonomien  er som regel de som behersker og kontrollerer teknologien som kundene ikke kan leve uten. Disse klarer kunsten av å både vokse å være profitable.

Fenomenet gjelder i Norge også.

For noen måneder fikk jeg som oppdrag å utførte en analyse av hva som karakteriserer de produksjonsselskapene i Norge som viser konsistent  «double digit growth» over tid. Resultatet ble krystallklart. De få selskapene i Norge som har klart denne bragden over tid er kun de som har satset på produkter basert på egen teknologi og langsiktige mål.

Eksempler på det motsatte, altså selskaper som har mistet troen på egen R&I og tapt, finnes også mange av. Leseren husker kanskje den fancy kampanjen som Ericsson lanserte for flere år siden: «It´s about communication between people…the rest is technology». I dag kjemper Ericsson for sin egen overlevelse.

Egen R&I er fortsatt et verdifullt element når det kommer til å etablere konkurransefortrinn. I disrupsjonens alder, å gi opp egen innovasjon og kjøpe standard teknologi som alle andre konkurrenter også har tilgang til kan fort bety en langsom og uungåelig død for din virksomhet. Your move.

Interessant? Del gjerne!

 

Er Facebook nøkkelen til en ny digital fascisme?

Facebook er i ferd med å kidnappe internett. Er digital fascisme neste steg?

Min venn Kjell-Ola Kleiven er en av Norges mest kjente og dyktige eksperter innen sikkerhetshåndtering, eller risk management om man vil.

Han er også foredragsholder og reiser Norden rundt med sitt foredrag Naive Norge.

Jeg har skrevet et innlegg på hans nylig relanserte blogg – kleivenblogg.com, som anbefales,- om faren som Facebook kan bety for demokratiet i det lange løp. Er politikerne klare over disse farene og hva slags beredskapsplaner har de utviklet mot dem i så fall? Lenken finner leseren her på kleivenblogg.com .

Leseren kan også se på videointervjuet med Kjel-Ola som jeg publiserte i januar om risikoer og personvern ved det digitale samfunnet.

kjellola-salvador
Vi slipper digitale skurker inn i stua

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So you think you have a competitive advantage? (II)

There are six types of competitive advantage. Previously I have focused on proprietary technologies, access to resources and switching cost. This post covers economies of scale, economies of scope and regulatory influence.

In the previous post on this subject I explained how the term «competitive advantage» has been diluted in many ways both by entrepreneurs and by innovation teams at established corporations. I listed the six types of competitive advantage I have both studied and worked with in practice.

The six types of competitive advantage that I assess in front of a new or established venture are: Proprietary technology, privileged access to resources, switching cost, economies of scale, economies of scope and regulatory influence.

In the previous post I described the first three of these advantages. In this post I will describe how the last three can protect or grow your business.

Economies of scale: This type of competitive advantage is created when the players in the industry only can achieve profit after passing considerably high production volumes. However, when production volumes grow beyond a critical volume, the profits per unit sold increase dramatically, often exponentially. Indeed, the massive scale and installed base that some players in certain  industries enjoy have given them an advantage that goes beyond production: It spills over to marketing, distribution, purchasing power vs. suppliers, R&I etc. This not only applies to physical product like mobile phones, digital cameras or, maybe the best example, mainstream automobiles. It also applies merciless to retail (like Walmart), consumer goods, telecom operators and pure internet players. Telecom operators are indeed absolutely dependent on achieving a massive critical number of customers in order to deliver a profit out of ever cheaper communication prices. On the other hand, internet-heroes like Spotify and Uber are still bleeding money. Why? Among other factors, because they still haven’t achieved big enough international scale and number of paying customers to cover their investments and operations. Economies of scale are an extremely powerful entry barrier against newcomers and they are specially effective when the company pursuits a strategy of organic innovation.

consumer-goods
The race for economies of scale: Only 10 companies control almost all consumer goods in the world. Most of them have dominated their markets for over 100 years.  Source: convergencealimentaire.info

However, companies making use of or planning to achieve this kind of competitive advantage must be wary.

First of all, it is extremely capital-intensive and can make the corporation very vulnerable to macroeconomic downturns, when sales may diminish dramatically. Those are the typical occasions when a wave of consolidation usually reduce the number of players even more and make them even more dominating. After the financial crises in 2008, the few «too big to fail» banks have become even fewer and even bigger.

Secondly, economies of scale imply a large balance sheet and massive investments and installed base. They usually imply rigid processes and business models. Therefore, a disrupting technology or a new player exhibiting a more nimble and effective business model can rapidly destroy them. The tragedy of Nokia or the struggles of Walmart against Amazon are good examples of this. A company or startup pursuing economies of scale should make sure that either their operations and business model are resilient to technological changes or dare to lead them. 

Economies of scope arise when the value of the products and services it sells increases in function of the number of business that the firm operates in. It is often associated to the same companies that make use of economies of scale. The main economies of scope are operational and financial.

Operational: This is the case when different business units of the same company share activities  -like R&I – or when the competencies from a particular business unit can be transferred to another. For instance, a single sales force can be used by the parent company to sell several brands to the same client. The same sale agents can «bundle» products and services together and achieve status of «single point of contact» for the customers, thus reducing their search and transaction costs. Telecom companies have done this for decades, combining TV, telephony and data access as an integrated offer to their customers.

Financial: This type of economy of scope arise when capital can be allocated among business units across the  company for the purpose of financial or taxation efficiency (read «pay less taxes»). Some companies buy other firms in financial distress in order to profit from tax reductions due to the accumulated losses of the acquisition target. When I worked as an Investment manager at Telenor New Business, it happened that entrepreneurs with failed startups came to us  with the purpose of being acquired. Their argument towards Telenor was precisely their accumulated losses and the tax efficiency that those could mean for Telenor.

In my opinion, Facebook has mastered economies of scope like few other technology companies have. The social giant has  seemingly done everything right. It has several services – messenger, Facebook, whatApp, instagram etc. Their users flow from one service to another thanks to the fact that those services are de facto «bundled», consuming advertising in the process. At the same time, the core operations infrastructure (sales, servers, data rooms, analytics…) is common for all of those services.

Is your new corporate venture capable of creating economies of scope? How could the new services be bundled with current ones? Will other business units acknowledge the value increase that the new venture represents for them or will they just ignore it and kill it in silence? Which incentives will you use in order to avoid such fate? 

Regulatory influence (or lobbying): Technology giants like Google, Microsoft and Apple dedicate huge amounts of money to lobby for their own interests vs. regulatory agencies. Telecom operators have lobbied (and still do) protecting their interests through organizations like ETNO (European Telecommunications Network Operators). Microsoft fought many years against making office documents compatible across productivity programs. Each fiscal year that compatibility was avoided,  the shareholders of Microsoft were rewarded with billions from the MS Office cash cow. The dominant manufacturers of electromechanical contactors  have avoided the introduction of cheaper, electronic ones in Europe thanks to their influence on European standards.

Is your company present in the right lobbying organizations? If you are a startup or small entreprise, are your much bigger partners doing it? What are those partners lobbying for? Are you at least following the standards and regulatory frameworks that may transform your competitive landscape?

Even in these turbulent times, it is possible to develop and sustain a competitive advantage. Both Google and Amazon  are over 20 years old already. Microsoft is over 40 years old. Toyota is over 80 years old and has consistently been a dominant player in the automotive industry. The Norwegian painting producer Jotun is 90 years old and enjoys healthy growth. All these companies have built and maintained competitive advantages that have secured their dominance for several decades

Either you are an established company, a new venture inside a parent corporation or a startup, to chose a competitive advantage is crucial. In a world subject to permanent changes, it is the responsibility of the management to develop the right resources and skills to build, change, and defend them.

Interesting? You may want to share this with your peers.

So you think you have a competitive advantage? (I)

Which competitive advantage is your business built on? Do you have one at all? There are only six types of competitive advantage. Decide which one will be yours and you can dominate your market.

In most of cases, when a startup or an innovation team at an stablished company present a new venture, they will be asked a crucial question: «Where is your competitive advantage?» The answers may not always be neither clear or specially convincing. The term «competitive advantage» is used and abused by entrepreneurs at startups when defending their business idea in front of investors on a daily basis. The same can be said about innovation teams at established companies.

In fact, there are only six types of competitive advantage that I judge credible beyond deciding whether a company should build on differentiation, cost leadership or focus. It is crucial for innovators to precisely identify which of those they are intending to create in order to build a lasting business.

The six types of competitive advantage that I assess in front of a new or established venture are:  Proprietary technology, privileged access to resources, switching cost, economies of scale, economies of scope and regulatory influence.

This post will cover the first three. The next and final three types are covered in this post.

Proprietary technology: A company or startup that has developed a superior proprietary technology can enjoy market dominance for a long time. Google is an excellent example of this. When Google appeared, its proprietary PageRank algorithm was vastly superior to any of the competitors in the market. From Altavista to the Norwegian player Sesam, all competitors had to surrender eventually. Today, Google has 90% of the desktop internet search market. On another level, today we see a frenetic race among technology giants like Apple or Amazon in order to acquire much smaller companies with superior products within Artificial Intelligence. Their purpose is of course to secure the best possible AI technology to embed in their current and future offerings. Is your new product or service backed by a superior technology vs. your competitors, and how long do you think that superiority can last? Based on what? If not, which technology should you develop or acquire?

Privileged access to resources: When some resources are scarce and/ or vital for an industry, the player that controls them enjoys a tremendous and lasting advantage. A resource can be physical assets (like raw materials or factories), intellectual (like customer data), human or financial. A key resource to examine in detail is distribution, physical or virtual. For instance, the IBM personal computer was not necessarily the best of its breed when it first was launched. However, the most attractive market for PCs was the enterprise market and IBM had a total dominance in it through its sales channel. The rest is history. Another critical resource is customer base. A dominant customer base makes the company a much attractive player for partnerships and acquisitions because of market access. When it comes to social media, the customer base, measured in MAUs (Monthly Active Unsers) or DAUs (Daily Active Unsers), is one of the most significant drivers of the enterprise value.  Which are the resources that your enterprise controls? Are they relevant enough to secure a durable competitive advantage? Are they valuable, rare and/ or difficult to imitate? 

Switching cost: It refers to the cost a current customer or user incurs when trying to replace your product with another one from a competitor. It is probably one of the most powerful competitive advantages, specially when it comes to platform-based businesses. It is very difficult for a business customer that has invested significant amounts of money and resources in a given platform to abandon it. There are not only financial reasons behind this. Installed systems talk to each other thanks to previous integrations between them that are difficult to remove or suspend because they may be business critical. Banks have suffered under this reality for decades. In some cases, they only decide to revisit their IT systems (and thus their vendors) when the employees in charge of maintaining them retire or simply die. Switching cost is also essentially what makes Facebook so difficult to defeat: For a user, to move into another similar social medial platform implies the cost of building up a new «friends» base without any guarantees that his or her friends will do the same. The Google+ debacle is a powerful reminder of how resilient switching cost may be, even for the giant of Mountain View. Is your product or service built around a switching cost? How can you quantify that switching cost? Is it greater than the one from your competitors? 

Interesting? You may want to share it with your peers!

«Vi slipper digitale skurker inn i stua»

Denne gangen har vi intervjuet Kjell Ola Kleiven. Han er en av landets mest profilerte risikoeksperter og Administrerende Direktør i Risk Information Group.

Vi har snakket med Kjell Ola om personvern og konsekvensene som misbruk av teknologi har for nordmenn hver eneste dag.

Vi har snakket også om de store økonomiske konsekvensene som «hacking» har for norske bedrifter allerede nå, og om hvordan Schengen og gammeldagse holdinger fra myndighetenes side gjør å ta et fly nærmest til en risikosport.

Og forresten, hvilke er farene som et «cash-less» samfunn skjuler for oss og våre barn?

Vil du vite mer, kan du se på videoen eller høre på podcasten lengre ned.

Takk for at du følger oss!

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