Category Archives: Reading

A business that can endure the future

Even if your business can sort of escape competition by crafting a monopoly, it is only a great business if it can endure the future. Is one of the statements in the book Zero to One by Peter Thiel and Blake Masters.
A great business is defined by it’s ability to create cash flow in the future. In other words, the value of a business today is the sum of all the money it will make in the future.

Most value of low-growth businesses is in the near term. Valuation of technology companies follows another trajectory. They often lose money in the first years: it takes time to build a valuable thing. This means delayed revenue. For this to happen a company mustn’t just grow it most also endure. In other words, will this business still be around a decade from now?

Characteristics of a business that can endure the future

Companies with a large cash flow far into the future usually share a combination of the following characteristics:

  1. Proprietary technology
  2. Network effect
  3. Economies of scale
  4. Branding

Proprietary technology

Proprietary technology is the most substantive advantage a company can have. It makes it difficult or impossible to replicate the product. As a rule of thumb proprietary technology must be at least 10 times better than its closest substitute in some important dimension. If it is perceived lower it is harder to sell the product especially in a crowded market.

The clearest way to a 10 times improvement is to invent something completely new. In that case the increase in value is theoretically infinite.

Amazon made a 10 times improvement by offering at least 10 times as many books as any other bookstore. The Apple iPad made the tablet go from almost unusable to useful.

Network effect

The network effect make a product more useful as more people are using it. However this will only work if the product has value for the first customers. Paradoxically businesses based on the network effect must start in small markets. Facebook started with just Harvard students.

In general network effects businesses aren’t started by MBA types, since the initial markets are too small to appear as a business opportunity at all.

Economies of scale

With economies of scale the fixed cost (engineering, management, office space) of creating a product can be spread out over greater quantities of sales. Software startups enjoy an hughe economies of scale because the marginal cost of producing another copy of the product is close to zero. Service businesses, like consultancies, yoga studios, etc, gain limited advantages as they grow.

Branding

Creating a strong brand is a powerful way to create a business that can endure. However techniques for polishing the surface don’t work without strong underlying substance. Starting with a brand without substance is dangerous. Coolness is interesting bus what products and value will the business create?

Innovation – Horizontal and Vertical Progress

In the book Zero to One Peter Thiel (member of the PayPal mafia) distinguishes between two types of progress:

  • Horizontal or extensive progress
  • Vertical or intensive progress

Horizontal or extensive progress

Horizontal or extensive progress means copying things that work. It is going from 1 to N. It isn’t to hard to imagine horizontal progress. We already know what the base looks like.

From another level horizontal progress is globalisation. It is taking things that work somewhere and making them work everywhere.

Vertical or intensive progress

Vertical or intensive progress means doing new things. It is going from 0 to 1. Vertical progress is harder to imagine because it requires doing something that nobody else has ever done.

The single word for vertical progress is technology. However there is no reason that technology is limited to computers! Any new of better way to do things is considered technology.

Technology matters more that globalisation

Thiel states that if the future would be just about globalisation it would be catastrophic. If without any technological advancement just China and India would copy the way we live in Europe and North America, we would need to scale energy production and utility of scarce resources to such an extend that would devastate our planet. Spreading (copying) old or even current ways to create wealth are not sustainable. We need technology to advance our ways to create wealth in a sustainable way.

The thing is that although since the invention of the steam engine around 1760 up to around the 1970 there has been a tremendous technological progress. Creating more wealth and well-being for each generation. And we expected this to continue. But did it? But a better future doesn’t come automatic. Since the late 1960’s only computers and communications have improved dramatically.

Just think of Eroom’s Law: the observation that drug discovery is becoming slower and more expensive over time. This isn’t a new trend. It was first discovered in the 1980’s.

European Digital City Index 2015

European Digital City Index 2015The European Digital City Index 2015 describes how well different cities across Europe support digital entrepreneurs. The aim of in the index is to support digital entrepreneurship across Europe and for policy makers, the index provides a tool to benchmark cities and decide where they may need to devote more resources.

The EDCI is a composite index based on the following factors:

  • Access to capital
  • Business environment
  • Digital environment
  • Skills
  • Entrepeneurial culture
  • Knowledge spillovers
  • Lifestyle
  • Market
  • Mentoring & managerial assistance
  • Non-digital infrastructure

The data for the European Digital City Index stems from among others Digital Economy & Society Index (DESI).

It should be no surprise that access to capital is by far the best in London, followed by Paris and basically all the others are really small compared to these.

Mapping to other indexes

First of all it is interesting to compare this map to the Global Startup Map. The number 1, London, in the EDCI has tentimes the number of startups in the global startup map compared to the number 2, Amsterdam.

The European Digital City Index maps really well to the Digital Evolution Index (DEI). However we should note that the DEI is not as optimistic about the growth of the digital capabilities of most of the countries where the top-10 cities are located.

Support doesn’t equal results

The European Digital City Index looks at support of digital entrepreneurs in Europe. This doesn’t equal results! If we look at global list of unicorns (in short billion dollar startups) both compiled by WSJ and TechCrunch results differ. There is just one unicorn in Amsterdam (Adyen), the number 2 on the EDCI, where both Berlin (number 7) and Stockholm (number3) have more.

Bloomberg Innovation Index

bloomberg innovation index logoBesides the Global Innovation Index there are other indexes measuring and comparing innovation around the globe. Another interesting index is the Bloomberg Innovation Index.

Bloomberg’s innovation index is based on six equally weighted metrics. Their scores are combined to provide an overall score for each country from zero to 100.

  • Research and development – Research and development expenditure as a percentage of GDP.
  • Manufacturing – since it takes a lot of knowledge and know-how to stay at the leading edge of making things. Manufacturing value-added per capita.
  • High-Tech companies – Number of domestically domiciled high-tech public companies as a share of world’s total high-tech public companies.
  • Postsecondary education – Number of secondary graduates enrolled in postsecondary institutions as a percentage of cohort; percentage of labor force with tertiary degrees; annual science and engineering graduates as a percentage of the labor force and as a percentage of total tertiary graduates.
  • Research personnel – Professionals, including Ph.D. students, engaged in R&D per 1 million population.
  • Patents – Resident utility patent filings per 1 million population and per $1 million of R&D spent; utility patents granted as a percentage of world total.

bloomberg innovation index  2015

The Bloomberg Innovation Index takes less factors into account compared to the Global Innovation Index (GII). The GII gives more attention to context. It includes political and regulation environment, infrastructure, market sophistication and creativity.

Other innovation lists

There is a more extensive list of innovation indexes.

Global Innovation Index 2015

The Global Innovation Index (GII) 2015 is an annual publication which features a composite indicator that ranks countries/economies in terms of their enabling environment to innovation and their innovation outputs. The GII covers 141 economies around the world and uses 79 indicators across a range of themes. The Global Innovation Index 2015 was created by Cornell University, INSEAD, and the World Intellectual Property Organization (WIPO).

Here is an overview of the indicators that are used to create the innovation index and how they are related:
Global Innovation Index factors

And this is how the measures are calculated:

  • The Global Innovation Index is the simple average of the Input and Output Sub-Indices.
  • The Innovation Efficiency Ratio is the ratio of the Output Sub-Index over the Input Sub-Index.
  • The Innovation Input Sub-Index is the simple average of the first five pillar scores.
  • The Innovation Output Sub-Index is the simple average of the last two pillar scores.

Global Innovation Index Ranking

Here is the 2015 ranking for the Global Innovation Index. Switzerland, the United Kingdom (UK), Sweden, the Netherlands, and the United States of America (USA) are the world’s five most-innovative nations; at the same time, China, Malaysia, Viet Nam, India, Jordan, Kenya, Uganda, and a group of other countries are outpacing their economic peers in 2015. Global Innovation Index Ranking

The top 25 countries in the GII consistently score well in most indicators and have strengths in areas such as information and communication technologies and business sophistication, which includes knowledge workers, innovation linkages, and knowledge absorption; they also create high levels of measurable outputs including creative goods and services.

Technology Gap

On average, the technology gap between developing and developed countries is narrowing. One explanation for this phenomenon is that more and more developing countries outperform in innovation inputs and outputs relative to their level of development.

By tracking global progress in innovation and focusing on those developing countries that out- perform in innovation compared to countries at similar levels of development, the GII can be used to monitor progress in innovation and identify areas of strengths and weaknesses in innovation efforts.

At low income levels, countries that outperform their peers focus on removing structural obstacles to innovation, such as poor access to finance and poor linkages within the innovation systems. At higher income levels, efforts concentrate on increasing investments, spurring growth in innovation outputs, and improving human capital.

Research and development (R&D) is one of the key policy areas that can secure technological potential and, therefore, innovation and economic growth. In order to reach the income levels of high-income countries, low- and middle-income countries need to expand their access to technology and their capacity to use it.

And digital?

Given the importance of strengths in areas such as information and communication technologies (ICT) for leading countries in innovation, it should be no surprise that the top 10 shares a lot of countries with the leader in the Digital Evolution Index. Especially since innovation is one of the underlaying drivers in the DEI.

Same remarks hold for the Digital Economy and Society Index. Only the latter is just focussed on Europe.

Global startup map

Following the several indexes on startups and innovation I’ve been following last period I found an interesting map of startups. Startupblink offers a world map of the startup ecosystem. You can use the startup map to zoom, filter etc the startups in your neighborhood. Besides a map of startups, it offers information on other related entities such as co-working spaces, accelerators, startups organizations, tech reporters and much more…

You can read an interview with the Startupblink founder at Business Insider. You can help to expand, for example by adding your startup…

Startup map example

startup map

Another interesting week for studying organisational culture

As expected reactions, stories and initiatives didn’t halt just a week after the NY Times published: Inside Amazon: Wrestling Big Ideas in a Bruising Workplace. This was just the beginning of an interesting study of the culture of high demanding organisations.

Julia Cheiffetz - studying organisational cultureLast days I was moved and impressed by Julia Cheiffetz story. The Executive Editor at HarperCollins Publishers wrote about here experience at Amazon: I Had a Baby and Cancer When I Worked at Amazon. This Is My Story. If you don’t have a Medium account and don’t want to get one check the coverage and quotes on GeekWire. Julia’s story shows both upsides and downsides from the culture she experienced at Amazon. It offers a strong perspective.

Given her experience at Amazon I think she gives great feedback to Jeff Bezos in a very strong way. Feedback he asked in a reaction on the NY Times article. Julia Cheiffetz:

You asked for direct feedback. Women power your retail engine. They buy diapers. They buy books. They buy socks for their husbands on Prime. On behalf of all the people who want to speak up but can’t: Please, make Amazon a more hospitable place for women and parents. Reevaluate your parental leave policies.

And on hiding behind numbers:

You can’t claim to be a data-driven company and not release more specific numbers on how many women and people of color apply, get hired and promoted, and stay on as employees. In the absence of meaningful public data — especially retention data — all we have are stories. This is mine.

The thing here is that culture is reflected in the way you act on a daily basis. If it doesn’t show there, it is just words…

Alternative leadership principles will change the culture

Another way of providing feedback requested by Jeff Bezos, was the launch of a blog called Amazonian Manifesto. The post were published by “A Concerned Amazonian“. The text suggests that there is some collective behind this avatar.

The blog publishes alternative leadership principles for Amazon. In short they are:

  1. Obsess about the Customer
  2. Obsess about the Employee
  3. Obsess about the Partner
  4. Hire and Develop the Best
  5. Own and Fix
  6. Invent and Simplify
  7. Deliver Results

It is clear that these principles are inspired by and based on Amazon’s current leadership principles. However new dimensions are added (focus on the employee, the partner, own and fix) that are ment to heal the flaws that could lead to an unhealthy work environment. It is clear that different guidelines and measurement will lead to different results…

What if Amazon studied culture at Zappos (it owns)

Delivering Happiness - studying organisational cultureAnd what would happen if Amazon started studying organisational culture at zappos.com, a shoe and clothing shop it acquired in 2009? Zappos was founded in 1999 by among others Tony Hsieh, who wrote Delivering Happiness: A Path to Profits, Passion, and Purpose . A book that is described as:

The visionary CEO of Zappos explains how an emphasis on corporate culture can lead to unprecedented success

and features quotes like

I made a note to myself to make sure I never lost sight of the value of a tribe where people truly felt connected and cared about the well-being of one another. To me, connectedness—the number and depth of my relationships—was an important element of my happiness

Zappos culture is obsessed with customer happiness. And Tony Hsieh is for Zappos obsessed with creating a corporate culture based on connectedness and care. That creates different and great results. The book Delivering Happiness offers great insight on how to achieve this and what choices have to be made. It is a great read.

Digital Economy and Society Index (DESI) 2015

The data presented by Digital Evolution Index seems supported by data from the European Commission. The EU defined a Digital Economy and Society Index to support and measure progress on the digital agenda for Europe:

The Digital Economy and Society Index (DESI) is a composite index that summarises relevant indicators on Europe’s digital performance and tracks the evolution of EU member states in digital competitiveness.

The Digital Economy and Society Index (DESI) is based on five dimensions:

  1. Connectivity – The Connectivity dimension measures the deployment of broadband infrastructure and its quality. Access to fast broadband-enabled services is a necessary condition for competitiveness.
  2. Human Capital – The Human Capital dimension measures the skills needed to take advantage of the possibilities offered by a digital society. Such skills go from basic user skills that enable individuals to interact online and consume digital goods and services, to advanced skills that empower the workforce to take advantage of technology for enhanced productivity and economic growth.
  3. Use of Internet – The Use of Internet dimension accounts for the variety of activities performed by citizens already online. Such activities range from consumption of online content (videos, music, games, etc.) to modern communication activities or online shopping and banking.
  4. Integration of Digital Technology – The Integration of Digital Technology dimension measures the digitisation of businesses and their exploitation of the online sales channel. By adopting digital technology businesses can enhance efficiency, reduce costs and better engage customers, collaborators and business partners. Furthermore, the Internet as a sales outlet offers access to wider markets and potential for growth.
  5. Digital Public Services – The Digital Public Services dimension measures the digitisation of public services, and focuses in particular on eGovernment and eHealth. Modernisation and digitisation of public services, including eHealth, can lead to efficiency gains for the public administration, citizens and businesses alike as well as to the delivery of better services for the citizen.

Note that factors included in the Digital Evolution Index like market supply and demand, and innovation are not included in the DESI.

Same leaders

Both the Digital Evolution Index and the Digital Economy and Society Index show the same countries as leaders in the digital market in Europe.
Digital Economy and Society Index

Denmark, Sweden, The Netherlands and Finland are the highest performing countries. They are not only ahead in the EU, but they are world leaders in digital.

DESI shows progress for Europe

The Digital Economy and Society Index improved from 2014 to 2015:
Digital Economy and Society Index progress
Keep in mind that there is no benchmark to non-European countries! Besides that it is remarkable that all countries improved. Also the Digital Evolution Index didn’t show progress for the highest performing countries. I think there’s a little too much optimism here.

The Digital Economy and Society Index has a more optimistic outlook for the digital economy in Europe compare to what the Digital Evolution Index shows us. However both support the case for a digital agenda for Europe in 2020.

Nevertheless the Washington Post showed in June Europe has an acute need for harmonisation. The article states that it’s easier for Europeans to buy and sell online with non-member countries, especially the United States, which accounts for more than half of all the EU’s digital business. Which is rather unexpected for a union. So there is a lot to do for Europe if the leading countries want to keep playing at the world top level and for the other countries not to fall to far behind.

From that perspective it is remarkable that there seems to be little focus on harmonising laws and bringing down barriers for digital trade in the Digital Single Market initiative.

Links and references

Digital Evolution Index shows Western Europe is stalling

Earlier this year The Fletcher School published the Digital Evolution Index. The Digital Evolution Index analyses the key underlying drivers and barriers that govern a country’s evolution into a digital economy:

  • Demand – including consumer behaviours and trends, financial and Internet and social media savviness.
  • Supply – including access, fulfilment, and transactions infrastructure.
  • Institutional Environment – including government effectiveness and its role in business, laws and regulations and promoting the digital ecosystem.
  • and Innovation – including the entrepreneurial, technological and funding ecosystems, presence and extent of disruptive forces and the presence of a start-up culture and mindset.

The data/ scores for all 50 of the included countries (XLS) can be downloaded.

The index is developed to identify how a group of countries stack up against each other in terms of readiness for a digital economy. Based on the performance of countries on the index during the years 2008 to 2013 they are categorised to one of four trajectory zones: Stand Out, Stall Out, Break Out, and Watch Out.

  • Stand Out countries have shown high levels of digital development in the past and continue to remain on an upward trajectory.
  • Stall Out countries have achieved a high level of evolution in the past but are losing momentum and risk falling behind.
  • Break Out countries have the potential to develop strong digital economies. Though their overall score is still low, they are moving upward and are poised to become Stand Out countries in the future.
  • Watch Out countries face significant opportunities and challenges, with low scores on both current level and upward motion of their DEI. Some may be able to overcome limitations with clever innovations and stopgap measures, while others seem to be stuck.

How to read the Digital Evolution trajectory chart

Digital Evolution Index
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The Digital Evolution trajectory chart

The Digital Evolution trajectory chart
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In the example of The Netherlands, their Digital Evolution index is still top-10, however the Evolution within the Digital Ecosystem is at the bottom of the 50 included countries. Similar data is seen for more Western European countries. Of that region the United Kingdom and Ireland are just in the group of Stand Out countries.

Harvard Business Review uses the Digital Evolution Index to compare The Netherlands and Singapore:

Take, for example, Singapore and The Netherlands. Both are among the top 10 countries in present levels of digital evolution. But when we consider the momentum – i.e., the five-year rate of change from 2008 to 2013 – the two countries are far apart. Singapore has been steadily advancing in developing a world-class digital infrastructure, through public-private partnerships, to further entrench its status as a regional communications hub. Through ongoing investment, it remains an attractive destination for start-ups and for private equity and venture capital. The Netherlands, meanwhile, has been rapidly losing steam. The Dutch government’s austerity measures beginning in late 2010 reduced investment into elements of the digital ecosystem. Its stagnant, and at times slipping, consumer demand led investors to seek greener pastures.

Actions for Western Europe

The Stall Out economies of Europe, including the Netherlands, Finland, Belgium and France, could jumpstart their recovery by taking advantage of increased regional integration, selling goods across national borders to the 500+ million consumers in the wider EU.

The Washington Post is skeptical on the creation of a single European digital market. In June 2015 an article stated that it will be hard for Europe to overcome their innovation deficit. This is largely due to confusing and complex national regulations.

Besides that Stall Out countries are also tend to be “aging”. Attracting talented, young immigrants can help revive innovation.

Germany is also in the Stall Out countries but is home to a very ambitious company Rocket Internet. Their mission:

To Become the World’s Largest Internet Platform Outside the United States and China

They have been busy launching e-commerce start-ups across a wide range of emerging and frontier markets. Their companies are poised to become the Alibabas and Amazons for the rest of the world: Jumia, which operates in nine countries across Africa; Namshi in the Middle East; Lazada and Zalora in ASEAN; Jabong in India; and Kaymu in 33 markets across Africa, Asia, Europe, and the Middle East.

Update October 2015

In the last days of October 2015 HBR published a post: Europe’s other crisis a digital recession. It looks into how Europe has dealt with falling behind in the digital era. The post covers 3 reactions:

  • Frustration with — and even rejection and censure of — the more dominant U.S. position.
  • At the regulatory and policy levels, authorities have doggedly pursued U.S. tech companies.
  • Acknowledgement by the President of the European Commission (EC), Jean-Claude Juncker, of Europe’s severe digital decline. The EC’s pronouncements signal the beginnings of a “Digital Maastricht Treaty.” The proposal is to create a “Digital Single Market” in the EU.

The story offers Europe 4 take aways:

  1. Harmonizing across the e-commerce value chain.
  2. Reforming immigration policies.
  3. Investing in innovation capacity.
  4. Developing a risk-tolerant culture.

Links and references

Theory of constraints

The Goal - Theory of ConstraintsThink it was back in 1993 I first read The Goal by Eliyahu Moshe Goldratt. The book was one of the first and most notable in the genre of business novels. The book – The Goal – introduces the theory of constraints (TOC) process for improving organisations. The book is set in a manufacturing company. However the book provides the context for a more generic approach to continuous improvement.

Theory of constraints

The theory of constraints is a paradigm that states that the output of a process is limited by a very small number of constraints. In a process there is always at least one constraint. TOC offers a process to determine the bottleneck/constraint and than restructure either the constraint or the work around it so the constraint can deliver it’s maximum output. Since the bottleneck’s output determines the output of the business process, other optimisation are local suboptimal interventions that do not generate any real business value.

The theory of constraints boils down to:

A chain is as strong as its weakest link.

More verbose: An organisation (especially a process or a business) is only as strong or powerful as its weakest activity or person. A group of associates is only as strong as its laziest member.

Constraint

A constraint is anything that prevents the system from achieving its goal. In TOC, the constraint is used as a focusing mechanism for management of the system. The concept of the constraint is analogue to the one in mathematical optimisation. In optimisation, the constraint is written into the mathematical expressions to limit the scope of the solution (X can be no greater than 5).

Types of (internal) constraints:

  • Equipment: The way equipment is currently used, is the limit to the ability of the system to produce more saleable goods/services.
  • People: Lack of skilled people limits the system. Mental models held by people can cause behaviour that becomes a constraint.
  • Policy: A written or unwritten policy prevents the system from creating more output.

Throughput

In general the throughput is seen as the movement of inputs and outputs through a production process. Bottomline it can described as the rate at which a system generates its products or services per unit of time.

In the theory of constraints throughput is the rate at which a system achieves its goal. Mostly this is a monetary revenue and not the items or volume created to be sold or kept as inventory.

Continuous improvement

Goldratt - on-going improvementAs said before the theory of constraints offers an approach for continuous improvement. Optimising the utilisation of the constraint is an important part of the process. Of course this could lead to the discovery that another resource became the constraint. So we continu the optimisation.

As Goldratt states in The Race:

In the midst of a competitive race we should not look for an improvement, we should look to implement a process of on-going improvement.

Beyond manufacturing

IT Operations

The Phoenix Project borrows both content and genre from The Goal. It is a business novel that explains how the theory of constraints can be applied to IT operations. The Phoenix Project describes the problems that almost every IT organisation faces, and then shows the practices (based on the Theory of Constraint, Lean and more) of how to solve these problems.