Sunday, May 29, 2005

Insights into who successfully identifies new market opportunities

The author of Blink, The Power of Thinking Without Thinking, explores how intuition works.

The Met in NY buys an ancient Greek sculpture. To authenticate it, they ask art experts in NY to opine, and even have scientists examine the patina. Comfortable that it is real, they pay a small fortune for the work.

At an exhibit of the sculpture in Athens, experts who deal in Greek antiquities on a daily basis look at the sculpture and instantly identify it as a fake. Further tests conclude that the Greek experts are right. The author's question is, how did the Greek experts have the intuition to instantly know, when other experts didn't?

Part of the author's answer is:
We take it, as a given, that the more information decision makers have, the better off they are. ... Quite the opposite: ... all that extra information isn't actually an advantage at all: that is, in fact, you need to know very little to find the underlying signature of a complex phenomenon.

Through years of experience that had developed intimate familiarity with Greek antiquities, the Greek experts had developed fine filters which allowed them to quickly find key features of a work and assess its authenticity. This process is known as "intuition." The Greek experts themselves might not even be entirely sure what clues trigger their intuition, because much of their thinking occurs deep in their subconscious.

Academic research by Geoffrey Smart demonstrates that venture firms that have the best track record of success in picking people have a rigorous methodology for assessing and improving the management teams of portfolio companies. They use multiple sources of data from past oriented interviews, reference interviews, and work samples. They carefully review a candidate's accomplishments, his failures, what negative feedback he thinks references might give, and his reasons for leaving prior companies. The objective is to accurately assess the candidates past behaviors that have led to their success or failures as the best indication of future behaviors that can be expected.

The challenge of creating new markets is that it is impossible to do conventional research on markets that do not currently exist. The best entrepreneurs, who have highly developed skill in identifying and developing new markets, progress through a series of incremental milestones to learn what the new market is and how to serve it.

Blink points out that it can be futile to ask experts how their intuition works, because they probably do not know themselves. Likewise Smart's research indicates that it is not very illuminating to ask potential entrepreneurial leaders what they will do to make a company successful, as they probably don't know either. Smart's research indicates that the best venture capital firms have a methodology for selecting leaders who have the best intuition, by depending on an entrepreneur's past track record in similar situations as the best indicator of an entrepreneur's future success.

Like the Greek experts in Blink, great entrepreneurs have spent a career honing the power of their intuition, which is to a large extent what venture capital firms are investing in.

An innovator's dilemma: Is there a critical mass of talent and innovation in the southeast?

In the Innovator's Dilemma, Harvard professor investigates why CEOs of major companies can be blindsided by discontinuous innovations - how did Sears get blindsided by Wal-Mart, IBM by Microsoft, or US Steel by Nucor.

His answer is that these new companies created markets of new customers that did not previously exist. At Harvard, MBA students are taught to do market research to understand the needs and wants of customers, and then to develop products to meet these customers needs. This is a proven way of commercializing sustaining innovations that enhance a company's most profitable products delivered to its best customers. But how does one do research on new markets that do not currently exist?

His answer is that highly successful new companies don't. What they do is a series of incremental experiments to discover what the new market is and how to serve it. By the time the new market is obvious to everyone, the new company has such a depth of knowledge, expertise and relationships that it is a very potent competitor with the potential to overthrow not only the previous market leader, but the entire value chain of which the leader is a part.

I recently was brought face to face with the dilemma Dr. Christensen describes. An associate and I are assessing the opportunity for a company that depends on a deal flow of high-quality investment opportunities in emerging companies in the southeast. My colleague sought the advice of an expert in corporate finance, who asked a series of questions we all would like the answers to:

Is there ample southeastern deal flow?

How many closed seed/startup capital raises have there been in the southeast?

What was average size of capital raised?

One thing is certain, the southeast as a region is underserved in terms of the amount of venture capital invested. The MoneyTree Survey of US venture investments indicates that states they define as the "southeast" have 16 percent of the US population but only 6 percent of US venture capital investments in 2005 Q1, and half of that was in only 7 companies.

While the market research ought to be done, I am also fairly certain that there will not be enough closed investments in the southeast to convince our finance expert a market currently exists for the company we are envisioning.

But then Sears didn't understand how important rural communities like Bentonville, AR were, IBM did not understand the individuals and small businesses that were the initial market for PCs, or US Steel did not understand how reprocessers of scrap steel who made low quality re-bar could be important.

I am certain we can create a market of wealth creating, emerging companies in the southeast. But, for the most part, this market does not yet exist. We can document what is not happening in the southeast, but is very difficult to document companies that can be created that to not exist today.

This is precisely the innovators dilemma that Clayton Christensen describes.

Saturday, May 28, 2005

The right question is does freedom work?

I recently had a fascinating discussion about how to improve public education. An abbreviated excerpt starts with a quote: "A major study conducted by Boston College researchers shows Europeans are the world's best mathematics and physics students at the high school level, and that their American counterparts perform well below the international average in both subjects."

To which the unexpected reply was "It's astonishing how those Socialist, far less religious countries, can have better educational systems isn't it?"

Me: "American public education is a socialist system. That's the problem."

Him: "So facts are irrelevant. You just hate public education on 'principle'."

Me: "The facts aren't irrelevant. Our socialists are not as good as European socialists. That is a fact."

Him: "So it all boils down to your irrational fear of the government. Who do you think runs the local government schools?"

Me: "There is no irrational fear of government. Individuals making their own decisions will make better decisions than some centralized group making decisions on their behalf. We have an obligation to provide the resources for every child to have an education. Given the resources taxpayers allocate to education, parents will make better decisions about what is in the best interest of their children than some central committee. The right question is does freedom work?"

Him: "Seems like the socialist systems in other countries are can it be socialized education that is the problem...central committee stuff works pretty well in these other countries."

Me: "This isn't about proving that markets work. Every day of your life you experience the reality that when consumers have choices quality goes up and costs go down. When consumers don't have choices the opposite happens. You understand that."

Him: "I disagree with your view that Americans can't do anything well unless a private corporation profits."

Me: "You really have a distain for the free market. You don't believe freedom works, so you have to control the decisions that parents would otherwise make in the best interests of their children."

Him: "No I don't."

Me: "You can not claim you believe freedom works, and then turn around and say you do not trust people to make decisions about their own lives and the lives of their families. You either believe freedom works, or you believe the state has to make decisions on behalf of people because they will not make wise choices for themselves."

Him: "The error in your thinking comes from the belief you seem to have that public schools are not run by individuals. By using the word "state" over and over, you ignore the fact that these are real Americans just like you and I, running these schools. They are parents and citizens just like everyone else."

Me: "You want to believe that freedom works, though you are not sure what is wrong with socialism. And you argue that public education is based on freedom, but you don't trust parents to make decisions that are in the best interest of their children."

Him: "It's only your assertion that socialism and freedom are not compatible. A socialized system such as public schools is run by the citizens who use the system. Nothing could equate freedom more than such a system."

Me: "Socialism and freedom are mutually exclusive. The more you have of one the less you have of the other."

Him: "Thanks for continuing to present your nonsensical assertions."

So there you go. I'll admit I am still amazed.

Thursday, May 19, 2005

Innovation and Entrepreneurship: The Core Model

In recent months, I have been working out a model of innovation and entrepreneurship that allows organizations to create enormous wealth by identifing and serving new markets, while managing the inherent risk. The model has four elements:

Visualize a significant opportunity. Nothing meaningful happens until a leader develops a passionate, realistic vision of what can be. Great ideas often are found at the intersections of diverse disciplines, organizations, and cultures. InnoVenture is all about getting enough diverse, world class organizations together to precipitate out great, innovative ideas—in other words, getting enough atoms in the jar to create heat. The concept of the intersection is perhaps best described by Frans Johansson, author of The Medici Effect, who was the keynote speaker at InnoVenture 2005.

Assemble an outstanding team. Essential to building an outstanding team is clearly identifing what skills and behaviors are necessary for success and then attracting top talent with a successful track record of having done what is necessary. Perhaps the most articulate person I have met in building a successful team is Brad Smart, a proponent of topgrading.

Develop a compelling strategy. There are some types of innovations that are consistently commercialized successfully by market leaders. Get in between them and their best customers and they will take you out. There are other types of innovations though, where new entrants consistently are successful. These are discontinuous innovations, where new markets are created of customers who are not well served by the status quo. This is most clearly delineated by Clayton Christensen in The Innovator's Dilemma.

Execute a focused plan. Visualize a great opportunity. Assemble an outstanding team. Develop a compelling strategy. Then you must execute by narrowing the company's focus to a beachhead of mainstream customers, in order to simplify the process of delivering 100% of what is necessary for the product to be easy-to-buy. Satisfied customers will create word of mouth referrals, which is always the most efficient and effective marketing. This process is best described by Geoffrey Moore in Crossing the Chasm.

I have published a book, Swamp Fox Insights: Innovation and Entrepreneurship in a Time of Profound Change, that describes in more detail the core model and my experience with it over the course of my career.

Is continuous improvement enough in public education?

Recently I attended the annual meeting of the Carolina First Center of Excellence, a program managed by the Greenville Chamber of Commerce to bring continuous quality improvement, including Baldrige principles and practices, to schools in the Greenville County School District.

The superintendent of the Greenville County School District, Dr. Phinnize J. Fisher, along with a principal, a teacher, and a student all made impressive presentations of how applying continuous improvement principles enhanced the quality of education delivered. Everyone involved in this program should be congratulated for making a real difference in classrooms in Greenville County.

But is it enough to meet the needs of all students?

There is a great diversity in how people think and learn. The typical public education classroom is designed to meet the needs of one style of learning. Even in schools where many students are succeeding, a considerable number of students do not match up well with this paradigm. Public schools, for the most part, make an assumption that students come from families who will and can continue the students' learning at home. Drop out rates are high in communities where the families' support at home is not strong.

For these students who are not well served by today's system, public schools doing what they do better may improve their situation but it still won’t solve their problem. The real solution for these students is having a wider diversity in how education is delivered so that students and their parents can find educational alternatives that match up with the students’ ability to learn and the families’ ability to support them.

Continuous improvement is necessary, but not sufficient, to meet the needs of all students. Public education also needs innovation, and innovation is driven by entrepreneurs. What public education needs are entrepreneurial educators. Almost by definition, some entrepreneurs will approach problems differently than they have been approached in the past. And in many cases, in fact in some cases that have the potential to transform how education is delivered, it will not be clear at first whether these experiments will work. The most radical innovations will almost certainly have large numbers of loud naysayers.

A innovative education system that meets the needs of all students must allow entrepreneurial educators to bring innovative alternatives to market. Then for those innovations that do not gain traction, either because they do not find a customer or because they are poorly executed, the system must have a self-correction mechanism so that failed innovations stop. Likewise, the system must have a way for successful innovations to attract additional resources so that they can grow and meet the needs of more consumers.

That is the way free markets work. That is what school choice is all about. Until we design innovation into our public education system, we can spend all the money we want, we can test all we want, and we can have all the continuous improvement that we want, and we will not meets the needs of many students not well served today.

Friday, May 13, 2005

Why public schools may never serve the needs of poor students

Large organizations have grown to the size they are because in the past they served a core constituency very well. The organization aligns with its best customers through a value chain of vendors and employees. This value chain has a cost structure targeted at delivering the most profitable products to the best customers. The chain typically is very good at incremental innovations to improve value delivered to these target customers. The chain typically is not very good at meeting the needs of customers that are not in the target segment.

Markets are dynamic, and as they mature, some customers are not well served by the status quo. In some cases, an entrepreneur will identify how to deliver s simpler, cheaper, more convenient solution to these customers that creates a new, growing market. In some cases this new value proposition is so powerful that eventually it overthrows the original value chain. Think of Wal-Mart overthrowing Sears, and the PC overthrowing mainstream computers.

I have been involved in lots of companies an advisor, manager, and investor. I have been on both sides of this phenomenon, in the market leader that was being challenged and in the emerging company that was doing the attacking. Often the cost structure of the market leader makes it extremely difficult to serve these now customers with a cheaper, simpler, more convenient solution and still make money.

As the challenger becomes more successful and inflicts pain on the leader, people inside the leader become anxious and disparaging about this new emerging threat. You hear that these new customers just don't get it. They are unsophisticated. That the new upstarts are screwing up the market. That they are cockroaches. The customer is to blame for the problems the leader is experiencing.

Then you hear that the company just needs to work harder. Let’s get back to basics and focus on our fundamentals. Six sigma and other testing regimes are installed. But these leading companies will never succeed in this new market, no matter how hard they work or what they measure, unless and until they develop a new value that can be effectively delivered to these new customers.

I have come to believe that a similar phenomenon occurs in public education. The paradigm of the existing system is that schools will have considerable assistance from well educated parents in helping students with homework and studying at home. In South Carolina, half of students will not graduate from high school on time. If your family does not meet the educated, middle class paradigm the school was set up to serve, you tend to fail.

What is the answer from the public schools? Not that their paradigm does not serve students well who are not from educated, middle class families. Large organizations rarely admit that is the problem, rather they blame the customers. The parents of these children are to blame, because they are not involved with their kids in the way the schools are designed to work. Schools just throw up their hands in resignation; we can not meet the needs of these students because the parents don't get it.

What is the real problem? Just like Sears did not know how to serve customers in Bentonville, AK, existing public schools do not know how to reach students not well served by the status quo. This is where entrepreneurs are the most valuable in our society, creating new value to serve emerging markets of customers not well served by the status quo.

We desperately need school choice to unleash the power of entrepreneurs to meet the needs students failing in the current system. The entrepreneurial process is very difficult, with lots of starts and stops before someone finally gets it right. It is unrealistic that a system tuned to serving educated, middle class families is ever going to meet the needs of underserved students on its own, no matter how much money we spend or how much measurement we do.

When we place our bets, which we do every day with our tax dollars, let's bet on the educational entrepreneurs.

Saturday, May 07, 2005

George Fletcher to Lead SC Council on Competitiveness

Thursday, a friend of mine, George Fletcher, was elected Executive Director of the SC Council on Competitiveness. I think this is very encouraging and the shot in the arm that the Council needs to deliver on its potential.

George is a doer. In 2001, Clemson President Jim Barker called a meeting to discuss what we would do different if Clemson were located in Greenville. George asked to organize a committee to study having more Clemson research in Greenville. I participated on that committee, and we met for about a year. Ultimately the conversation led to what became the Clemson University Center for International Research. With partners Clemson, BMW, Michelin, IBM, and Microsoft, and a total of $112 million committed to date, this is the most important knowledge-based initiative in South Carolina today.

George also was the heart and soul behind the recent Greenville Vision 2025 process. This was an enormous effort to get many different organizations in Greenville together to begin to form a common vision of the community we want to create over the next couple of decades.

Neither CU-ICAR or Greenville Vision 2025 would exist today without the leadership of George Fletcher. The SC Council on Competitiveness could not have chosen better.

InnoVenture MicroBusiness

Over the past year, I have had numerous conversations about how to have more diverse participation in business organizations I am a part of, from InnoVenture to the Chamber. One of the recurring issues that comes up over and over is that most African-American and Hispanic businesses are micro-businesses, with four or fewer employees. Often the owner can not afford the time away from the company, or the financial cost of participation is too high, for an activity that is not directly relevant for their business today.

I have come to believe it is important to focus on the needs of micri-businesses, in order to prime the pipeline of the growing businesses of tomorrow, especially in the African-American and Hispanic communities. So if I can find a Chairman and Executive Committee willing to organize the event, I am interested in having an annual InnoVenture MicroBusiness Conference.

If you are interested in participating, please let me know.