2 Reasons Rudolph Is The Most Famous Reindeer Of All

By:  David M. Kashmer, MD MBA (@DavidKashmer)

 

Yes, you know Dasher (and Dancer and Prancer and Blitzen…) but why, when you think of Santa’s reindeer, is there really just one who’s top-of-mind?  Here we explore what makes Rudolph the Red-Nosed Reindeer, and what his classic tale can tell you about your startup business.

 

Unique

 

When the Montgomery Ward department store wanted to create its own coloring book in 1939, the tale of Rudolph was born.  What is it about the character that has made Rudolph “the most famous reindeer of all”?

 

Rudolph is unique.  Sure, he was laughed at.  Aspersions were cast.  Yet, like it or not, Rudolph has one very obvious feature that is ingrained into what he is.

 

Michael Porter, and other modern thinkers in business strategy, espouse this idea of competing on uniqueness.  Look here.  There was no way Rudolph could successfully compete with other reindeer on their terms.  What reindeer could dance like Prancer, or pull that sleigh with the strength of Blitzen?  (Ok, who knows if Prancer dances and Blitzen is strong–but, I mean, come on:  Prancer and Blitzen!) The key is to find some difference that it can preserve.  Just as Rudolph has a singular, unique feature, much of modern strategic thinking for startup businesses focuses on being something special…

 

 

Valuable

 

…and being something unique, alone, is not enough.  Rudolph’s nose generally got him laughed at until it did something incredibly useful.  Once that red proboscis had saved the day, it didn’t seem so silly to have a large, red nose.

 

The ability to translate uniqueness into value is an important essence of building competitive advantage.

 

After the holiday season, when we all get back to work, it may be worthwhile to spend some time thinking of exactly what the “big red nose” is for you or your business.

 

How, exactly, will you design a valuable uniqueness into your startup?  How will you find what it is that makes your team go to the front of the pack?

 

Until then, Happy Holidays from all of us at the blog.

Building An Entire Ecology Around Your Business Canvas

 

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http://strategy-models.blogspot.com/2011/06/use-of-porters-1985-value-chain.html

 

One of my favorite things to discuss with new startup teams is strategy.  Michael Porter, from Harvard Business School, has nicely described several concepts that are integral to our understanding of strategy for an existing business, a new business, or business looking to change.  Professor Porter has given us a framework called Porter’s Value Stream.  If you haven’t heard of Porter’s Value Stream I invite you to take a moment to go to Wikipedia and look at this powerful concept. Porter’s Value Stream has several important consequences that can and have been leveraged to great effect.  There are also unique facets to this concept that can give insight to the nature of our new business, existing firm, or other system and how it competes.

 

For example, sources of competitive advantage may include the manner in which discreet activities in the value stream interface.  Inbound logistics is one of the first primary activities of Porter’s Value Stream.  Inbound logistics refers to the manner in which we bring in a substrate to which we add value.  The way in which we add value include our firm’s operations.  Sources of competitive advantage may include the way in which inbound logistics hands the baton off to operations.  A smooth transition in that area can be a source of competitive advantage.  Similarly the way in which our operations fit into our outbound logistics may be a source of significant competitive advantage.  Clearly Amazon and other retailers in their space draw a portion of their competitive advantage from their excellent outbound logistics and the interface between their outbound logistics and operations. Again Porter’s Value Stream is very key.

 

This post builds on this concept of Porter’s Value Stream.  In anther post we will discuss more of its specifics and consequences. However, here, I want you to recognize some interesting concepts around Porter’s Value Stream and how firms compete in industry. Take, for example, Disney World.  You may have been to Disney World lately with your family.  If you haven’t, I invite you to take a moment to just read up on exactly what Disney is doing nowadays.

 

Disney and other companies like Apple have created an entire ecology into which the consumer fits.  That is, many of us have experienced the feeling of being seemingly locked in to Apple or Google’s products because, for example, all of our music is on our iPhone and our iPhone interacts with our iCloud.  Our iCloud gives us email etc.  This “lady-who-swallowed-a-fly” scenario is no accident.

 

Apple has created an entire ecology into which we fit and it is one that seeks to contain our spending habits.  We don’t spend outside of the ecology because we obtain maximum value inside Apple’s ecology. There is no need to take the time to export our songs etc.  Apple and other companies may even make barriers to exporting our music and other digital information so that we must stay inside their ecology.

 

Clearly this is a situation in which the firm delivers maximum value not just with the classical concept of Porter’s Value Stream but, in fact, because there is an entire ecology into which they fall.  This concept of ecological thinking or consumer ecological thinking allows us to open broad possibilities for business model innovation.  Let’s return to Disney’s on-location operations at Disney World.

 

Disney World is literally an entire world of consumerism.  That is, they have the multiple theme parks, they have a resort at which you can stay, they have an entire down town shopping district and they deliver all of this in a manner which is value added.  You need not rent a car to get from the airport to Disney…you can take the Disney Magical Express. The Disney Magical Express imports you into the ecology where you stay at the Disney hotel on property and take the monorail or Disney transportation to the various locations.  You are encouraged to spend all of your money on Disney property in a clear Disney ecology. This is not to say this is a trap or is somehow bad or wrong, this is to say that Disney and other companies have set up a strong system that delivers maximum value within their ecology.  Again, for Disney you need not rent a car or be bothered with any issues like that.  Your luggage is whisked quickly and effectively from your arrival at the hotel to your room and Disney has many other value added systems they can run because of economies related to their ecology.  It is truly an interesting concept.

 

3D printer manufactures like Makerbot realize their 3D printers are part of an ecology.  So, when appropriate, they extend to supplying 3D scanners that interface easily with those 3D printers.  Viola, building ecology.  What are some ecologies that exist in surgery?  Are there any places where the business canvas you’ve recently designed for a new service line may fit?

 

In fact, there are ecologies that can (and do) exist in surgery and healthcare although it may feel unusual to think of things this way.  When a patient enters the hospital there is an opportunity to create an ecology for the patients and their families. Although the primary activity of the hospital is delivering excellent patient care, there is an opportunity while the family is in the hospital with the patient to direct their spending toward add-ons related to their loved one’s stay.  There is nothing evil, wrong, or malicious in this; it can be the provision of an excellent service and a real patient satisfier.  Where charging $12 for a cup of coffee would likely be inappropriate, allowing a Starbucks or similar chain to rent space in your lobby (or setting up a coffee cart yourself) may be a nice value-add to the ecology of your hospital.

 

Creating these ecologies can often occur in service lines as well.  That is, vascular surgery may provide a free screening for peripheral vascular disease and thus import patients into their ecology.  A patient now has contacted the vascular service, is known to them, and may come to feel comfortable with the advanced practitioner or surgeon performing the screening.  It may become easier now that they know their way to the hospital or similar location to return to it for further care.  These types of events are ways in which the ecology of service can be created.  A trauma service may use the open abdomen technique when necessary and go on to perform add-ons for patients who require them.  That is, they may then perform component separations etc where necessary.  To be clear, I am not supporting doing procedures for patients who do not require them.  I am saying that thinking of services lines as creations of ecology in which we can deliver maximum value is a very different way of thinking of business models but in fact these typically exist in healthcare.

 

When I work as a surgeon I am careful to only perform interventions for patients who need them rather than in the interests of revenue or ecology and I think it’s important to have made up our minds ahead of time about where we stand on issues like these.  On another personal note, I avoid applying population level data to individual patients without extreme caution.  I do not look at insurance or consider reimbursement in forming treatment plans for individual patients.  (I’ll step down from the soap-box yet you may hear that again at some point on this blog.)

 

Again, just as Disney is seeking to do the best possible job and deliver the most value for the dollar, healthcare business model innovation can deliver the most value for patients or their families who need a given service, device or even a meal.  So, next time you think of how you will innovate your business model, consider cases like these.

 

Innovating an entire ecology around the business model (including add-ons and additions) can often be useful especially after we have finished our business canvas and have a system that is running nicely.  For more information on Porter’s Value Stream and business model ecologies, perform a quick google search and take a moment to review Porter’s Value Stream as it contributes to the margin we can obtain on different business models.

A Military Take On Competitive Stategy

 

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from OODA loop Wikipedia Article

There have been multiple military thinkers through the ages who have greatly influenced modern thought on strategy in warfare. In this entry we do not discuss the competitive nature of the firm in industry as if it is war; however, we, instead, turn towards some of the greatest thinkers of military strategy to try to learn some useful lessons for how we compete and form strategy as a business or new startup business in the modern day.  Our investment team has found these ideas particularly useful as we evaluate the ability with which a firm can compete amidst the uncertainty of changing markets.

 

One of the most classic military thinkers is von Clausewitz, who eventually became a Prussian General.  Prior to becoming a general he wrote a classic treatise named On War. Von Clausewitz clearly described several things that deviate significantly from thinkers prior his time.  Many thinkers prior to von Clausewitz had espoused more of a technical, almost proscribed approach to war-fighting.  Von Clausewitz, among other things, introduced many important tenants of war-fighting that have made it to the modern day.  One thing that was very different is what von Clausewitz did not do:  he did not seek to make a cook book for how to fight successfully.  Rather, he described over-arching philosophic and process-type issues that allowed for effective war-fighting.  Perhaps von Clausewitz’s most often-cited ideas include war as a continuation of politics, and the idea that it is (in general) easier to defend a position than to attack one.

 

From von Clausewitz, we take several important lessons:  first, it is challenging to adopt a new position.  Once a team has a position in a market, however, it is easier to defend than to “attack” a new one.  This does NOT mean a firm should never change its position, yet indicates it should evolve carefully when it feels it is time.  (We feel first should be looking for innovative changes that give long-term returns.) Please realize, however, that easy does not always equate with successful or desirable.

 

Also, von Clausewitz helps remind us that healthcare startups, and others, must have a good reason to be bothered starting up.  Going for a new position in a market will be challenging, and the effort to do so must always be subservient to some plan just as the horrors of war serve the end of politics.  In any event, von Clausewitz helps us remember that the “getting there” is challenging and must serve some higher purpose.  Once a team gets there, it will be easier to defend territory, although again we caution against complacency.

 

Now, let’s transition toward more modern war-fighting theory such as that described by John Boyd.  John Boyd was a United States Air Force pilot who helped contribute to a manner of approach in dog fighting and other conflicts that lead to a great amount of success with the F series of fighters.  In short, per my rudimentary understanding, the F series of fighters was, in many ways, felt to be technically inferior to the Russian MiG owing to certain characteristics of the F series itself.  However, with Boyd’s direction this concept of being able to ‘turn under power’ had been designed into the F series and became key in the United States Air Force designs and implementation.  Although the F series may have lagged in classic measurements of fighters, its ability to maintain thrust and TURN to adopt the best attack angle made it highly effective in combat.

 

This idea of turning under power directly affects our thoughts on firms and industry.  A firm must continue going forward and yet be nimble enough to take the best angle of attack.  A team must be able to pivot.  This is key in startups:  turning while remaining moving forward, or turning under power, is a key characteristic.

 

John Boyd, however, went one step further and described what has been called the OODA loop. The OODA loop describes a light, flexible pattern of war-fighting in which first a participant must Observe a situation obtaining observations accurately.  Then, these must be passed through filters including education, cultural background, and the different elements that compose that person’s background as the person or entity Orients to the situation.  That means they must understand where and how they fit into a given the situation as individuals.  Next, they must appropriately and quickly come to an effective Decision.  It is not enough to come to a decision quickly; the decision must also be as accurate as possible given the background of the situation.  Last, the person must be able to implement this decision in a rapid tempo fashion so as to effect the other participant in the struggle, conflict or market.  In short that person must Act.  Results of the action and the updated situation then feedback to the beginning of the loop.

 

In our angel investment practice, we found that using the OODA loop as a shared mental model for certain aspects of competition to be very key.  We talked in an early blog entry about Blue Ocean strategy.  Here, however, we describe the importance that is to be allotted to this concept of a decision cycle.  The Boyd loop tells us several important things.

 

First, the Boyd loop is a useful mental model to describe the importance of the decision cycle as a means of competitive advantage.  When another firm, an enemy, or another participant makes decisions more slowly than our team this can be a source of advantage for our team.  That is, when we ‘operate inside the decision loop’ of the other side we find this is very effective in competitive strategy.

 

Making decisions more quickly is not the only source of competitive advantage. However,  it can be done to great effect as the opposite side or sides feel like we are the tempo setter for an industry and that they are rushing to catch up.  Eventually they may feel like they are following in our wake no matter which direction they turn as we operate inside their loop.

 

Besides simply decision time we also focus on accuracy in decisions.  It is not enough to make a poor decision quickly.  Instead, we focus on making the best decision we can amidst uncertainty.  This uncertainty is a key feature of the process and has been described by military thinkers such as Marine General AM Gray in Warfighting as the ‘fog of war’.  The fog of war is a useful term that describes uncertainty in fluid, unique situations that arise as part of competitive strategy.

 

Beyond the fog of war we focus on the concept of friction.  Friction, here, refers to those small impediments that, when summed, make it more challenging for us to impose our will on a situation.  The minimization of friction, coupled with effective decision making in uncertainty, is a hallmark of high-performing teams in our estimation.  In fact, we found that teams that actually need to communicate verbally or in a written manner to be less than the most effective.  Communication based on the team’s intent, or so-called implicate communication is a hallmark, in our opinion, of high functioning teams.  Each team member knows what plans can be executed in different situations because they know the team’s intent.  Rather than over-communicate about each small item, only large items are communicated and even those are minimized.  Everyone knows which way to row and doesn’t have to make decision cycle time longer by stopping to ask questions about each ripple in the water.  Given that, team members need to say very little to be very effective because they share the same mental model and are on the same team.

 

In short, we have much to learn from some of the classic military thinkers regarding competitive strategy in our market.  We have chosen several distinct elements from some of the great military thinkers that describe modern war-fighting, decision cycle, and friction amidst uncertainty.  One of the most important things on which we focused in our practice is this concept of decision making amidst uncertainty.  The ability to make high quality decisions in a rapid, effective manner, despite red herrings and other fog of war is key for success with your new business model whether that be in surgery, healthcare, or another field.

The Nature of Competitive Advantage In Your Business

 

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Our last post talked mostly about premium positioning and its influence on the probability of success for your business model.  One of the sidelights included the fact that you need to justify your premium positioning.  Specifically, you need to be able to demonstrate value to your consumer.  Part of the way you can bring this increased value to your consumer and maintain a substantial lead on competition is finding a source of competitive advantage.  There are lots of different types of competitive advantage, and some of these have been alluded to earlier.  Competitive advantage is what you do that gives your business a unique, sustainable, non-obvious, and slightly opaque perspective.

 

Let me describe exactly what I mean.  First, we talked in an early blog post about the fact that, as investors, our team looks for a non-consensus opinion on whatever market you are in. This is similar to when we focus on competitive advantage.  You need a unique business take on the value stream you are describing.  We described Porter’s Value Stream in an early blog entry, and for now, it suffices to say that you must have some unique spin on the value stream for your firm in your industry.

 

This can be competitive advantage coming from how discreet elements in the value stream interlock.  That means you may focus on how your inbound logistics and operations go together. There may be opportunities as you bring a new substrate into your system to position it for eventual easy outflow from your system.  You may be able to eliminate inventory etc., altogether.  These are ways to look for competitive advantage in how the pieces of your business fit together.  That said, and I can’t suggest this strongly enough, you should focus on a unique take on your business model.  Meaning it is not simply how the discreet activities fit together but rather what discreet activities you are performing in what proportion, and in what way, to what final effect.  This represents the portion of competitive advantage that focuses on having a unique position in your industry or field.

 

Once you have a unique position carved out, this position needs to be non-obvious. That means the more simple and straightforward this seems the more likely everyone is to do it.  Also, the more obvious the advantage is, the more easy it is to discern and copy.  So, one of the categories on which we recommend you evaluate your competitive advantage is just how obvious an idea this would be to everyone else in your field with a similar amount of knowledge.

 

After the non-obvious criteria we recommend that your competitive advantage be slightly opaque.  That means there is no need to share with your competitors exactly how you do what you do.  Further it should be not easy to discover with merely casual contact with the company.  This means that whether you are able to process data and information more quickly, you are able to compete with data analytics to a greater degree than other companies, or you are able to speed up your decision cycle to make accurate, clear decisions based on the data you obtain from customers and other sources,  people contacting your business should be unable to tell how you do it.

 

Competing on data, for example, is one focus for current, modern businesses.  Sometimes, owing to the sheer volume of data and the processing power required to interpret the data, this methodology is called Big Data.  Big data can be a powerful source of insight but it is not typically used in small businesses or brand new startups owing to the significant time, intellectual capital investment, or possible need for massive data warehouses etc.  Also there may be challenges in implementing insights from Big Data into the frontlines of your company.  So, again, we recommend that whatever the competitive advantage you create, you make it a semi-opaque one that other competitors in your field are not easily able to discern from a casual interaction with your company.

 

Next, we recommend several other important characteristics of your competitive advantage.  For example, we recommend that it be sustainable.  That is, those things on which you choose to compete must be expected to persist, must be able to be replenished, and must be able to make for an effective going concern. You need to be able to have the elements that contributed to your competitive advantage persist and have reasonable expectation that you can sustain those things on which you have chosen to compete.  This is no easy task, yet sustainability is one of the hallmarks of a good competitive advantage.

 

However, you should note that competitive advantage is very different than a strategy in the market.  As Michael Porter has described in his previous work, and as we have referenced earlier in the blog, competitive strategy and competitive advantage are truly distinct.  The manner and market architecture in which we compete relates to our competitive strategy and the characteristics of our business model including its specific resources, modes of delivery, etc, are some of the sources of that competitive advantage which may influence our strategy.  How you run the race is strategy, and the body you bring to run represents your unique advantage.

 

Competitive advantage can even come, in part, from the market you have chosen to enter.  Some startup texts recommend that you start a business in a field in which is feels like you are running downhill.  Meaning that you should open your business in a field in which it seems that you have an unfair advantage owing to either certain expertise, an extensive contact network, information about where the market is going, or some similar impressive advantage.  Starting off with a good selection upfront about which market to enter can translate into a higher likelihood of success in your chosen field.  (Notice, however, that by choosing wisely which market to enter, you may have made it more likely that your business will succeed but as we have described earlier it is by no means a sure fire prospect simply because you have chosen so wisely.)

 

So we have discussed briefly some of the key elements of competitive advantage.  We recommend that you focus on building a sustainable competitive advantage that is non-obvious, slightly opaque, and can be translated into a unique strategy and a unique position for your business.  Rather than compete in everyone else’s game which has often been ironed out early on and years prior to your starting your business, we often recommend that you evolve a game changing take on the market.  This is in line with blue ocean strategy as we described earlier on in the blog.

 

Whatever you choose to do, we recommend a premium positioning paired with a sustainable, non-obvious, unique source of competitive advantage.  This will prevent you from difficult errands we have seen created by startup owners including:  strategies that are focused on competing based upon price, strategies that are focused on competing in a manner in which the business is not built to compete, or focusing on a source of competitive advantage which is easily extinguished with the next technological leap or slight fluctuation in the market.

 

My colleagues and I hope that you found this brief description of the nature of competitive advantage useful.  These are some lessons that are textbook level from such books as Understanding Michael Porter.  However, as is usual, once we have read the lesson in the text book we must go live it several times before it sinks into us and becomes part of our practice. Here, we continue to hope that you are able to use this blog entry and others to avoid issues we have seen and experienced with new startup companies.  Please, use this to learn from our mistakes rather than having to make them yourself.

Premium Positioning Is A Good Option For Your New Business Model

Did you know that there is evidence that positioning your brand as “premium” is significantly associated with improving your startup’s outcome?  It turns out that positioning your brand as premium or a value-added proposition for customers is associated improving your outcomes.  This is because, in part, early on in a startup a premium positioning allows a substantially increased margin on what would be relatively low sales at the onset.  This makes it more important than ever to focus on how your brand adds value to your customers above and beyond what other brands may perform.  You need to focus on reasons why your comparatively new product or service is worth the premium price.  Our experience resonates with this teaching.  Premium positioning works and makes startups, all else constant, more likely to be successful.

 

Take a moment to think about an important point:  it is incredibly challenging to compete on price versus existing players in the market.  That is, choosing to compete on price is usually a recipe for disaster for startups owing to the fact that they will lack the volume to obtain substantial profit and they lack the economies of scale of larger competitors.  They also lack negotiating power to bring down the costs from suppliers.  Thus, competing on cost versus large competitors is a recipe for failure.

 

Consider how it would it would look versus a company such as Walmart, Target, or similar large distributor based on price alone.  They are able to negotiate substantially lower prices from their suppliers owing to their expected volume of sales and positioning. These, and other economies of scale present in larger retailers, make competing with retailers in that vein almost impossible.  Thus, we frequently recommend to new startups that they not focus on competing on price and instead compete on value.  Again, competing on price decreases the probability that your startup will take off.

 

We usually support an innovative, sustainable, UNIQUE viewpoint as represented by the business model.  If you can’t answer what your unique take on the business is, how this translates to a value-added situation for clients, and therefore why your product is a premium product, well, in our experience you are less likely to achieve the type of break-out success for which teams often look.

 

This and other interesting facts about startups and positioning will be discussed in future blog entries.  I invite you to review Understanding Michael Porter, or a similar text, for thoughts on premium positioning and competition.  It can be counter-intuitive for a startup to create, and work to maintain, a premium product.  That said, it remains:  premium positioning in startups seems to be associated with success.

 

For a nice example of a premium-positioned startup that has enjoyed considerable success, visit www.emergencysurgicalstaffing.com.  This team focused on premium positioning compared to traditional locum tenens staffing models in Surgery.  The positioning and value they add has allowed considerable success in their field.

 

Do you think premium positioning is worthwhile for your startup?  Let us know in the comments field beneath.  We’re always interested in a lively discussion about positioning in new startups.

Compound Annual Growth Rate vs. Blue Ocean Strategy: Also-Ran Versus Whole New Class?

 

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One of the typical markers taught in business school to evaluate entering a new market is the compound annual growth rate or CAGR (pronounced kay-jer). A compound annual growth rate of 15% or greater is considered a favorable market and one you may want to consider entering.  There are lots of complex formulae to calculate the CAGR however there is a relatively straightforward one in a book entitled Harvard Business School Secrets by Emily Chan.  Don’t be taken in by the table she lists at the end of the book with the CAGR trick.  Unless I have misread it, Emily, or Emily’s editor, actually rearranges the fast formula for CAGR likely on accident.

 

The quick formula for CAGR is 0.75 divided by the amount of time the market takes to double in size.

 

So, if the market takes 3 years to double in size, the CAGR would be 25% and this would be a favorable market.  This is one pole of strategic thinking which is sort of an also-ran strategy.  Meaning this focus on entering a market that is already doing well is a nice way to try to move in the same direction as everyone else and obtain a return.

 

However, there is another extreme on the spectrum of strategic ideas called Blue Ocean Strategy.  If you haven’t heard about Blue Ocean Strategy I invite you to consider reading a book also entitled Blue Ocean Strategy which has really been fascinating in my opinion. It is one of the more interesting business-related books I have seen in the last 10 years.  Blue Ocean Strategy is the name given for what was originally an Eastern idea of blue and red oceans.  Red oceans are depicted as ones in which there are multiple competitive entities that bloody the ocean with the products of their competition.  A blue ocean, by contrast, is a here-to-fore unseen market created with a game changing product, service, or business model.

 

A nice example of Blue Ocean Strategy is the counter-intuitive idea of the gaming console that makes us get up and move.  Where originally gaming consoles were thought of as static things that favored sedentary lifestyle, the Nintendo Wii and now other consoles such as Microsoft XBox with Kinect have really completely changed the market to where now a substantial degree of motion is expected in certain gaming consoles. Nintendo’s game changing move to the Wii resulted in substantial sales, first mover advantage, and an incredible blue ocean for some time until the rest of the predators were able to enter that same field.  So, Blue Ocean Strategy sort of reflects a first mover advantage until copy-cats arrive. However it is more than that as it focuses on innovation as an important deciding factor in gains.

 

Blue Ocean Strategy draws a contrast to the older business school thinking that leads us to the idea of the CAGR and the also-ran strategies. I take these as two spectrums in product development and invite you to read more about both Blue Ocean Strategy and typical tools to evaluate a market such as the compound annual growth rate.  Each has its place and utility.