Category Archives: Business

The trust premium

Posted on June 1, 2008 | Comments Off on The trust premium

You see advertisement of Yahoo! Search and Ask.com on the television, but still end up using Google. You search on Internet for USB drive and find a zillion online stores where you can buy one, but still you choose Amazon, even if you have to pay a couple of bucks more over there. Out of a dozen brands of washing detergent in a store, you pick Tide (or your favorite brand) irrespective of minor price differences. That’s because you are paying the trust premium. Customers know that they will find whatever they are looking for on the Internet through Google, they trust Amazon with their order handling, credit card information and other personal information, and they believe that a product of a certain brand will be better than others.

People pay the premium for various reasons and one of those reasons is trust. I believe trust is the most logical reason to pay the premium, and leads to a win-win scenario. For the brand, it takes huge efforts to gain a position where they can rip the fruits of trust, and I believe when a company go an extra mile to gain that trust,  they should be entitled to earn the premium. For the customer, it’s like an insurance. They trust a brand and any premium they put down for it buys them the peace of mind.

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Posted in Business, Marketing

Eliminate back office

Posted on May 30, 2008 | 1 comment

Back Office: the departments in an organization that are not directly involved in generating cash for the company. For example, the IT department in a company, or the accounting department in a broker-dealer organization. These departments are absolutely indispensable, because if they were not, they wouldn’t exist.

But does it really make sense to have such a cost center in the organization? Specially when you have options around it. A couple of ways to eliminate the back office would be by outsourcing your back office to someone else or developing expertise in the work you do in your back office to an extent where you can make it part of your business offering.

Your back office is for some one else the “front office”, or the core business offering. So instead of putting resources in your back office and diverting your attention from your core business, a better option would be to look for the best choice out there and outsource your back office. Benefits of this approach are cost savings in most cases, since you will be choosing from a pool of service providers, and ability to pay more attention and resources to your core business.

Another option is to expertise back office work and spin-off the back office into a money generating business. This has been a very successful operation in the software industry, more since the advent of software as the service. The most visible example that comes to mind is Amazon S3 and related services. Amazon hosts big servers through its IT department to power its online store. Amazon now uses the expertise of its IT department to provide a host of services to enable other businesses use its infrastructure and do computing in the cloud, eliminating its back office by turning it into a profitable offering.

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Posted in Business, Technology

Customer is the King

Posted on April 9, 2008 | 2 comments

There is a common misconception when it comes to defining who or what rules an industry. Technology companies think technology is the king. Media companies think content is the king. Companies in real estate think location is the king. And we can go on and on. But the real fact is, be it any industry, it is the customer who is the real king. 

Take for example technology industry. A company can develop some out-of-the-world cutting-edge technological applications by making great investments in R&D. But if there is no customer problem that this product is going to solve, what is the use of it? Or in other words, how can it be successful? A technological application can be successful only if it solves some problem faced by the customer or fulfills a requirement of the customer. To find the requirements and problems of the customers  is not a trivial task. Sometimes you have to go to great lengths to discover these requirements, or make the customer realize that they have a problem. The right way to do this is to put efforts in discovering what is missing from the customer’s world, or how something can be made better, or what problem a customer is facing and then develop applications to solve those problems (and sometimes vice versa).

One interesting thing to ponder over is what makes customer the king? I believe two things play an important role here: limited resources and availability of options. Most of the time, customers have limited resources. This makes the customers prioritize their needs. Add to the mix the availability of options to fulfill those needs, and we can pretty much figure out the result.

In order to be successful in this customer-centric world, any business needs to focus on a few key things. The business needs to make sure that whatever it is providing, or whatever it is working on, is way up on the problem list of the customer. It must be able to evaluate the customer’s pain-points and then use resources to address them in the order of importance for the customer. When there is choice, there’s got to be a differentiating factor, and this is as important in a customer-centric world as anything else. So another thing to focus on is to make sure it stands out of the lot and can be distinguished from the competition. And one more thing, the business needs to make a commitment to make sure it has the best customer service in the industry.

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Posted in Business, Marketing

Dependency on competition for survival

Posted on March 24, 2008 | Comments Off on Dependency on competition for survival

Consider the situation where your life support is your biggest enemy. That’s a graphical way to put the dynamics of the technology industry in many cases. There are several companies out there that leverage their biggest competitor to survive. For example look at companies like Wikia and Mahalo– the human-powered search engines gaining popularity on the Internet. How do people reach these sites today? The entrepreneurs behind these efforts confess that 90% of their traffic is directed through Google. How do they make money? They use Google’s ad sense to show advertisements along side their search results. Who is their biggest competitor? Well, of course, Google. So this popular search engine company Google is both their biggest competitor and currently the sole source of survival.

Similar situation arises when a company builds a platform. Success of the platform is measured on the basis of number of applications that are built on top of it. Most of the times, the companies that build the platform also makes applications on that platform, hence competing with other application makers. Hundreds of Internet application making start-up companies survive on the Facebook platform. At the same time, they compete with Facebook for the time people spend on the Internet and hence for the advertisement dollars. Another example that cannot be ignored here is Microsoft. Thousands of companies depend on the Microsoft Windows platform for their survival and hundreds of them compete with Microsoft on the applications front.

This dynamic in the technology industry teaches us one very important lesson. You got to continuously try expanding your customer base without any reservations by utilizing every resource in the best possible way.  The point is to stay focused on the end goal, doesn’t matter if in that quest, sometimes you end up depending on the company that might be your worst nightmare.

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Posted in Business, Technology

Reactivity vs. Creativity

Posted on March 9, 2008 | Comments Off on Reactivity vs. Creativity

Michael Dell gave the commencement address to my graduating class at University of Texas at Austin in which he said – “never measure your success based on the success of others – because you just might set the bar too low.” That’s so true with businesses as well. When businesses try and steer themselves to follow the competition, they in a way shut down the creative brains in their organizations by setting the bar too low. Blind reactivity is the killer of creativity. It’s creativity that will make you the winner in the long run, because you can react and do the catch-up only to a certain extent.

This is true in almost all the fields. For example, take branding. We talk about the Apple brand all the time. Everyone wants to be the Apple of their industry. But how many Apples are out their? Companies try to build advertisements that resemble iPod or Mac, they try to name their product to follow the conventions set by Steve Jobs, they try to shape the brand resembling Apple, but often they are a miss. So where do they go wrong? I believe they lack the originality and the genuineness in their branding. They lack the creativity which is the only thing that attracts customers to Apple.

Another area where reactivity leads to disasters is product development. What better example here than a company that redefined the Internet business? Google is known for it’s creativity in product development. Recently Fast Company rated it the most innovative company in the world. There are numerous companies ranging from biggies to the start-ups trying to catch-up with Google in search and other product development. But more than 60% of people still use Google for their search queries. Reason: it’s hard to catch them. They are always a step ahead. While other companies spend energies trying to do the reactive catch-up business, their creative engines take them a step ahead.

But then there is creative reactivity hitting aces from time to time. Creative reactivity works almost all the time. You can never be the first to come up with a product all the time. You got to use the creativity after seeing the competition doing something right and develop on top of it to take the lead. The difference here as compared to blind reactivity is that you are not trying to catch-up, you are acknowledging that the customers are embracing something new and trying to fulfill their requirement in better and more creative ways. That’s creativity invoked by reactivity.

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Posted in Business, Technology

Maximize profits vs. Build platform

Posted on March 3, 2008 | 2 comments

This is a classic one that every company faces sometime in their life: should we focus towards building a platform or try to go for maximizing profits? There are merits going either ways. Building a platform helps in the long run once you are able to make your platform the de facto standard for a customer base. Maximizing profits helps you to cash on the innovation you brought to the market before competition catches up.

At the same time, there are downsides for both the approaches. In case of the platform race, most of the time it’s winner takes all. For some reason, if your platform does not transform into the standard, you might end up losing all. Talking about maximizing profits, this is a risky if you are planning to go big in the long run. More profits normally lead to smaller customer base. It also makes the field more lucrative for other companies, leading to more competition. So now you end up with a smaller customer base and smaller profits to fight competition.

I believe building a platform is a risk worth taking. By building a platform, a company in turn raises the barrier to entry for competition. Once there is a platform, it is really hard for competition to come up with something new and replace the existing status quo. The best example in this space is Microsoft Windows. Windows is there on 90% of computers in the world. There are more applications on Windows than on any other operating system. Microsoft sold Windows for relatively low price in order to build the platform, at the end making money by converting it into a volume game. To displace Windows from the operating systems world and replace it with something else is an uphill task, to say the least.

Another growing phenomenon in the platform world is Facebook. Facebook has done an amazing job creating a platform. Facebook took a bold decision by providing application developers access to their interface and letting them serve their own ads, all in spirit of building a platform. Today there are more new applications created for Facebook than for any other social networking site. Same is true for number of new users joining any network.

Both these examples make a strong case that once a platform gets successful, it’s really hard to replace it. At the end of the day, integration beats innovation, hands down. In the process you take a hit on your short term profits. But then there are lucky (and smart) few like Apple iPhone who change this discussion to build platform “and” maximize profits.

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Posted in Business, Technology

Niche: the way to go

Posted on January 28, 2008 | 6 comments

When you make a web search in your favorite search engine, nine out of ten times, you don’t go to the second page. So it’s the first ten results that matter and rest are ignored. Same way the human brain works. There’s a list of top choices for everything and we normally ignore the others. So here’s the question: do you want to be the top choice for something, or mediocre for everything? I believe in today’s world, to be a specialist in something is what matters, which endorses that niche is indeed the way to go.

Targeting a niche market is important also due to the fact that one size doesn’t fit all, be it individual or industry. Consider something like developing Enterprise Resource Planning software. There are several minute details in every industry and to make sure you are optimizing resources for a company in that industry, you need to know those details inside-out. So I believe the best way to sell ERP solutions is to target an industry, master the economics of that industry and mold your software to take those details in consideration and make your solution attractive, and the primary choice, for companies in that industry. Such an ERP solution will definitely appeal more to companies in that industry as compared to generic ERP solutions.

In certain consumer products, companies make a mistake by directly going for the mass market ignoring any niche to which the product might have a special appeal. This process is often more expensive and doesn’t work for most companies, with exception of a few with really deep pockets. I believe a better approach is the one taken by companies like Apple and Whole Foods. These companies market their products to a small niche, to people who consider themselves member of these company’s cult, and then expand their reach to the masses. In the process, they generate support from a group of mavens who add to the company’s capacity to target a bigger and broader market in the long run.

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Posted in Business, Marketing

Let’s think green

Posted on January 4, 2008 | 1 comment

Green is for everything, and you don’t have to make your product bland to make it eco-friendly, all you need is creativity in product development to attain it. I came across gDiaper video a few days back and I believe these diapers certainly endorse this fact. gDiapers consists of a washable outer pants and plastic free flushable refill. The outer pants make the diaper look nice, the flushable refills make them a lot easier to use and dispose, and at the same time the plastic free refill makes the product eco-friendly. So next time when you think that your product doesn’t have scope to go eco-friendly, think about the diapers to get some inspiration!

This is just one example where making the product eco-friendly makes it easier and smarter to use. Another one that is gaining lot of attention is Honda Pilot. Honda built this car which looks like an SUV and gives twice the gas mileage as compared to a normal SUV. By making a green product, Honda is on its way to cash on all the bad publicity SUVs are gaining for bad mileage, which makes them both non eco-friendly and costly to use.

So what does “think green” mean? “Think green” simply means add features to your product that gives it added advantages along with making it better for the planet. Using creativity and making conscious efforts in designing the product can lead to an eco-friendly output with features that can attract the customers. Plus you need one more thing – marketing. You need to let the customer know that your product is eco-friendly. Eco-friendly pitch can give your product the much needed differentiating factor, and in some cases can even help you de-commoditize the product.

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Posted in Business, Marketing

Starbucks: Goal – Soul. Bonus – Belly.

Posted on December 22, 2007 | 2 comments

Living in Seattle, it’s hard to escape two things – rain and Starbucks. Experiencing both in abundance and spending quite a good sum–money and time–at my neighborhood Starbucks on frappuccino, it came as a surprise when Starbucks lowered its forecast for 2008. One of the reasons for lowering of forecast is increased competition from McDonald’s and Dunkin’ Donuts. This raises the question – what is the best way for Starbucks to take on these two giants moving forward? I believe the best way is by sticking strong to their roots and concentrate on filling the soul. In the process if the belly is filled, that’s an added bonus.

I recently completed reading Howard Schultz’s Pour Your Heart into It : How Starbucks Built a Company One Cup at a Time. Schultz’s very well defined the foundation of Starbucks i.e. making the local Starbucks as the third place for the people in the community after their work and home. Starbucks should make sure they do not loose their coffee bar atmosphere while tackling any competitor. That atmosphere is as integral to their brand as is the high quality coffee. Another important thing to note is that people do not come to Starbucks just for a cup of coffee, they come to get satisfaction of buying coffee in a store, where there is the perfect atmosphere to buy that perfect cup of coffee prepared by the cheerful (mostly) barista, or as Schultz put it, people come to Starbucks to fill their souls.

Now let’s talk about the specific competition from McDonald’s and Dunkin’ Donuts. Starbucks cannot take on either of these two on price equation. McDonald’s is known for its economical offerings and has an edge over all its competitors in this field, Starbucks being no exception. In fact, we all know that Starbucks charges a premium, and that has become an integral part of the brand. As far as the rising cost is concerned, it is experienced equally by all the competitors, so I won’t bring that in this equation.

McDonald’s and Dunkin’ Donut are primarily known for their “not so healthy” food. Fat rich offerings at both these places are not the first choice for the health conscious customers. That creates a perfect opportunity for Starbucks to play the health card! Starbucks has always created that perfect third place atmosphere for its customers. By offering healthy food for breakfast with the cup of coffee will provide Starbucks the opportunity to make it the one stop shop for customers in the morning, rather than hopping to different places for coffee and breakfast. Selling point – they are having the best coffee with a healthy meal.

The basic point to understand here is that people do not come to Starbucks to buy the panini sandwich, they come there for the cup of  coffee, but while getting that cup of coffee, if they can get something healthy to eat, they would appreciate that as compared to eating that thousand calories breakfast with a not as good cup of coffee.

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Posted in Business, Marketing

Howard Schultz and Ray Kroc

Posted on December 16, 2007 | 2 comments

Howard Schultz and Ray Kroc are two great entrepreneurs behind two of the most identified American brands, Starbucks and McDonald’s respectively. I love long plane journeys, one reason being that I get to catch-up on my reading. During my most recent trip to India, I picked up Pour Your Heart into It : How Starbucks Built a Company One Cup at a Time authored by Howard Schultz. This is one great book. (One thing to learn from Howard Schultz apart from his entrepreneurial skills is the art of story telling…) Coincidentally, during my last long plane journey (to Milano, Italy), I was reading Grinding it Out: The Making of McDonald’s by Ray Kroc, another book that falls in the same autobiographical league. The two autobiographies have some amazing similarities worth talking about.

First, both were believers. After his first visit to the single McDonald’s store in California, Ray Kroc knew that this is going to be something bigger than what anyone can think of. He believed in the concept of McDonald’s and had the drive to spread it beyond boundaries more than anyone else, even more that the McDonald brothers running it. Similarly, Howard Schultz was impressed by the coffee bars he saw in Milano, Italy. He believed that Americans should start enjoying their coffee experience and became a preacher of serving hot coffee in the once retail-only Starbucks stores. Their belief powered by persistence through all the ups and downs led to the formation of these two global brands.

Second, neither one of the two started the first store of what they are known for. Not only this, both of them were suppliers to the stores they later converted into big phenomena. Ray Kroc supplied juice mixers to the original McDonald’s store in California and Schultz supplied appliances to the Starbucks stores in Seattle. A slight difference in approach over here, Ray Kroc signed a deal with McDonald’s owners to use their name and concept to open similar stores elsewhere, while Howard Schultz joined Starbucks as a marketing manager, left the company to open coffee joints under the name of Il Giornale, bought Starbucks and became its CEO.

Third, both were obsessed with the names. Kroc went through series of issues with the McDonald’s founders but stuck with the name and the famous M curves. Ditto for Schultz. He opened his coffee bars Il Giornale, but liked the name Starbucks so much that he renamed all his already running Il Giornale stores after acquiring Starbucks.

Fourth, both left stable jobs to chase their dreams. Kroc was selling mixers when he came in contact with McDonald’s. Within weeks, he was on plane with deal papers to start his journey. Schultz decided to quit his well paying job of $75,000 a year in 1980 and took a big pay-cut to join Starbucks.

Fifth, both were staunch believers of quality. Starbucks is known for its quality, and Schultz developed the entire enterprise one store at a time keeping the quality intact. Till today, Starbucks does not compromise on the quality as far as possible. They do not add flavor to the beans, or sell low quality beans in their stores. Starbucks, since its inception has a 40 hours training program for its baristas to serve the perfect cup of coffee. If McDonald’s is known for one thing, its the fries. McDonald’s got a perfect process for preparing its fries and they have not compromised on standards there even a little bit. There’s a complete university like program for the employees at McDonald’s for decades and every person working in McDonald’s goes through this program to maintain the McDonald’s quality and service standards.

Sixth, like any other successful entrepreneur, both Kroc and Schultz pioneered the unique quality of building and leading great teams. Read their autobiographies and you will find chapter after chapter in praise of the people they worked with and the great folks who embarked on the journey with them to lay the foundation of their respective enterprises.

These two individuals, role models for many budding entrepreneurs, and the similarities in their approaches endorses the importance of persistence and people management among other things. A look at one big difference between the two can be interesting as well. Howard Schultz started his first coffee store operation when he was 28 years old. On the other hand, Ray Kroc started his first McDonald’s when he was 52. If nothing else, this definitely proves that age is no barrier to kick-start something you believe in…all you need is a dream and the vigor to chase it!

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Posted in Business, Management