Tag Archives: Business

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?

Book – The Phoenix Project

Book The Phoenix ProjectThe Phoenix Project: A Novel About IT, DevOps, and Helping Your Business Win is written the by Gene Kim in the tradition of The Goal (1984, by Dr. Eliyahu M. Goldratt). The Goal is a management novel explaining the Theory of Constraints. This book, The Phoenix Project shows how the theory in The Goal works in an IT environment.

The Goal – Theory of Constraints

In simple terms the Theory of Constraints is about:

A chain is as strong as its weakest link.

In this theory the first step is to identify the constraint. Step 2 is to exploit the constraint. In other words, make sure that the constraint is not allowed to waste any time. Only by increasing flow through the constraint can overall throughput be increased. This to the extend that improving something anywhere not at the constraint is an illusion.

Because of the need for flow, work in process (WIP) is the silent killer. Therefore, one of the most critical mechanisms in the management of any plant is job and materials release. Without it, you can’t control WIP.

The Phoenix Project: A Novel About IT, DevOps, and Helping Your Business Win

The Phoenix Project describes the problems that almost every IT organization faces, and then shows the practices (based on the Theory of Constraint, Lean and more) of how to solve the problems. The main character Bill, is thought how to deal with these problems using the Socratic Method. Each dialogue a question is posed to which in turn causes Bill to think and to talk to his colleagues to come up with a solution to their problem.

Bill starts to see that IT work has more in common with manufacturing plant work than he ever imagined. Leading to the application of the Theory of Constraints in terms like:

The First Way helps us understand how to create fast flow of work as it moves from Development into IT Operations, because that’s what’s between the business and the customer. The Second Way shows us how to shorten and amplify feedback loops, so we can fix quality at the source and avoid rework. And the Third Way shows us how to create a culture that simultaneously fosters experimentation, learning from failure, and understanding that repetition and practice are the prerequisites to mastery.

Work in process in IT perspective

Until code is in production, no value is actually being generated. It’s merely WIP stuck in the system. By reducing the batch size, you enable a faster feature flow. In part this is done by ensuring the proper environments are always available when they are needed. Another part is automating the build and deployment process. Here we recognize that infrastructure can be treated as code, just like the application that Development ships. This can enabled to create a one-step deploy procedure.

Besides the parts mentioned before this requires removing a unneeded (since no value is created) hand off between Development and Operations. For this to work the two have to be integrated, not separated.

Like in a manufacturing plant, in IT, it is crucial to manage the release of work to the shop floor / development and to track the work in process. There are a lot of visual aids available to support this, like Kanban or scrum boards. All have their origin in lean or agile ways of working.

No need to say that in the novel this all works out pretty well 😉 In real life we see that these principles work, however more iterations are needed to really improve things. These iterations at first look like failures because of the acceleration of entropy. They are needed in the learning process of people and organization. Reduce the feedback cycle and learn fast!

On the relation between business and IT

There are some interesting statements in the book, that are heard more often in the industry.

IT is not just a department. IT is a competency that we need to gain as an entire company.
We expect everyone we hire to have some mastery of IT. Understanding what technology can and can’t do has become a core competency that every part of this business must have. If any of my business managers are leading a team or a project without that skill, they will fail.

And:

In ten years, I’m certain every COO worth their salt will have come from IT. Any COO who doesn’t intimately understand the IT systems that actually run the business is just an empty suit, relying on someone else to do their job.

Personally i think they hold at least some value. Please share your ideas in the comments.