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Every year at a fundraiser for the Glide Foundation, a non-profit organization that helps the homeless in San Francisco, Warren Buffet auctions off a private lunch. Business people from all other the world bid millions of dollars just to sit with the world’s wisest financial investor for a few hours. The June 2012 winning bid was $3,500,000. Buffet has auctioned off private lunches for 13 consecutive years and has raised more than $11.5 million for the Glide Foundation.
Warren Buffet was once the richest man in the world. He’s called the “Oracle of Omaha.” He is the chairman and CEO of Berkshire Hathaway, a multinational conglomerate holding company, which holds more than $392 Billion in net assets. He’s been picking stock, buying companies, and outperforming the market for the last 60 years. He’s the undisputed financial guru of our time –so when given an opportunity to have lunch with him, investors make the investment.
$3,500,000 is a lot of money. The average person doesn’t even make that much over the course of a lifetime. So chances are, if you’re reading this, you’ll probably never have the opportunity to go to lunch with Buffet. But what if I told you that I know a man far richer than Warren Buffet? And better yet, all of his wisdom has been recorded in an easily accessible book which is free of charge to all investors. His name is King Solomon, and he wrote Proverbs, the Songs of Solomon, and Ecclesiastics in the Bible.
The book of Proverbs is one of my favorite business books. It contains practical wisdoms that have stood the test of time and made many men rich. In this post, we will look at three essential proverbs of King Solomon that every aspiring entrepreneur needs to know.
- Proverbs 24.3-4 Through wisdom a house is built; and by understanding it is established: 4 And by knowledge shall the chambers be filled with all precious and pleasant riches.
Webster defines wisdom as the quality of having experience, knowledge, and good judgment. It’s the ability to apply what you know –what you’ve learned from school, internships, jobs, and mentors. Successful entrepreneurs know how to diagnose the market, identify customer needs and wants, and craft solutions that satisfy the customer. Every business owner should be an industry expert in their respective area of business. You should know the regulations, trends, industry best practices, competition, buying habits, customer behavior, culture, and demographics data. Business is built on knowledge of industry and knowledge of customer.
2. Proverbs 14.23 All hard work brings a profit, but mere talk leads only to poverty.
Good business ideas are everywhere. Anybody can come up with a business plan and talk about it, but putting it into action is a different ballgame. There is no legal way to make easy money. The road to success is paved with countless hours of hard work and dedication. So many would be entrepreneurs, with great ideas and know-how, expect things to be easy and at the first sign of adversity, they crumble. Success only looks easy. Ask any successful person in business, sports, relationships, religion, or any other aspect of life, and they’ll tell you, it takes hard work.
3. Proverbs 6:6-8 Go to the ant, you sluggard! Consider her ways and be wise, which, having no captain, overseer or ruler, provides her supplies in the summer, and gathers her food in the harvest.
Ants are master planners, savers, collaborators, and laborers. When you get a chance, study the ant, and you’ll be absolutely marveled at the wisdom of this tiny insect. For now, suffice it to say that ants are great entrepreneurs. They work hard, in unison, all summer to gather food and supplies for the winter. They build colonies and maintain their society by gathering resources today, for the benefit of tomorrow. Business should be managed the same way. You never know how bad the winter will be, so you must be frugal and diligent during the sunny times.
King Solomon was the wisest and richest man to have ever lived. You should definitely take yourself to lunch and get acquainted with his proverbs. All of them are profitable. All of them are free. Bon appetite.
If you were allergic to ads you’d be dead by now! We’re exposed to about 3,000 ads per day. Everywhere you go and everything you do is permeated with millions of messages carefully designed to make you buy something. The onslaught begins the moment you get up in the morning. From product placement to commercials, billboards, street furniture, radio, print, online, to coffee holders and clothing; your sensory system is taking in more information than your mind can even process. According to AdAge, U.S. companies spent more than $147 Billion to place ads in 2011. That doesn’t even include the political ads placed to buy your vote. News analysts expect campaign ad spending for the 2012 presidential race to exceed $1.2 Billion. Big business and politicians spend billions of dollars to reach mass demographics at work, home, and play with ads that run constantly — 24 hours per day, 7 days a week.
The mass media scattergun approach began after the second World War, when radio and television became ubiquitous, and continues today on an increasing scale. So much advertising money is wasted sending messages to people that aren’t listening, watching, reading, or clicking. In order to save face, marketers try and justify their waste by intellectualizing. In 2007, Professors Dr.Kenneth Chow and Donald Baack introduced a pyramid called, “The Hierarchy of Effects” which explains how ads weave into a person’s psyche and effects their buying behavior. The model indicates that there are five psycho-emotional steps that a person passes through before buying a product (awareness, knowledge, liking, preference, conviction, and finally purchase). The “hierarchy of effects” is a long-run advertising strategy whose goal is to build on each subsequent step with ads tailored to win miniature battles. For example, “Knowledge Ads” aren’t intended to win a purchase, but rather to simply help you understand the utility value of the product (features and benefits). Marketers absolutely love this model because it’s scholarly, long-winded, and 100% unquantifiable. If an ad is a waste, they can easily classify it as a “liking” or “preference” investment, and nobody questions it. WHY? Because business people believe that mass media is the best choice in a pool of bad options. The “hierarchy of effects” is just a coping mechanism. Everybody knows mass advertising is broken. Al Morris Hite said it best, “advertising is salesmanship mass produced. No one would bother to use advertising if he could talk to all his prospects face-to-face. But he can’t.”
Mass advertising is broken because it fails to relay a timely and relevant message to a specific audience. Time, relevance, and specificity are the fundamental elements needed to maximize your advertising return on investment. A timely ad is always welcome by the customer, and is delivered when the customer is actively researching, prospecting, or “in the market” to purchase a solution. Seth Godin reintroduced and popularized the concept of permission marketing. He says, “permission marketing is the privilege (not the right) of delivering anticipated, personal and relevant messages to people who actually want to get them.” Customers give permission by giving their personal information directly to marketers. They subscribe to newsletters, sign-up for free trials, or pull ads from search engines and listing sites. A relevant ad clearly communicates the value proposition. What are the benefits of the product or service? And lastly, specificity is the process of segmenting markets, gathering data, and targeting niches with a propensity to buy your stuff.
Google is the most efficient online media outlet in the world. Adwords delivers immediate sponsored ads to customers that search “keywords,” which strongly relate a category of commercial products or services. Marketers can restrict their ads to certain locations and languages. Adwords also allows them to remove their ads from certain neighborhoods of the internet map via IP exclusion filters. By clicking on the sponsored ads, people give marketers permission to advertise to them, guaranteeing that the ad message is delivered to a willing recipient.
Facebook is a utility. It is a tool that brings people together around a common experience, interest, problem, or cause. The key to Facebook is the social graph. Similar to a decision tree, a social graph is a series of nodes and connections. The nodes are the individuals and the connections are the friendships. By connecting with your friends on Facebook you assemble a social graph, and you can distribute any kind of information through your connections. Social graphs are assets, and collectively, they represent the core business of Facebook. All of this information is collected by Facebook and leveraged to deliver timely and relevant ads to a specific audience.
If there is anything that businesses can learn from the success of Google and Facebook, its the importance of ad placement. The “throw something up against the wall and hope something sticks” approach of mass advertising has given way to a more efficient model. It’s only a matter of time before other media outlets incorporate time, relevance, and specificity into their placement methodology. Your business can be ahead of the curve. Be like Facebook. Gather information about your target customer. All information about your target customer is good information because it makes you a more informed, and therefore more creative, marketer. Social media gives you the tools to engage and listen to your target customers. Be like Google and deliver on-time relevant ads. As you learn more about your customer, their buying happens and their lifestyles, you be able to place better ads. Its all about your customer data. At Route Norte, our motto is “better data yields better business.”
 David Kirkspatick, author of the Facebook Effect.
Brand is to business what reputation is to person. Every business has a brand, even if they don’t want one. A brand, just like a reputation, can either be an asset or a liability. Businesses invest millions of dollars on advertising campaigns to establish positive brands (assets) that encourage people to buy. The brand is the bridge between the company and the customer. The brand makes the connection, sustains the relationship, and delivers the real value. Although a rose is still a rose by any other name, the same cannot be said about a brand. A Brand is unique -even more valuable, at times, then the products or services that they represent.
Tangible assets like computers and inventories are easy to quantify. But how does your business measure intangible assets like brands? Every successful brand is built on a central and very compelling set of values that resonate with its customers. When customers relate strongly to a brand, they will pay a premium for it, even if cheaper alternatives exist. How much is that worth to a company? In this article we’ll discuss quantitative and qualitative ways to measure your brand.
Most retailers use a simple accounting equation to measure brand value called the “Brand Value Margin.” Here’s how they calculate it:
Brand Value Margin = Price of Brand Product A – Price of the Generic (Low-Cost Leader) Brand
By benchmarking against the generic brand, you’ll have a quick snapshot of the premium that your brand yields. Almost every industry has a readily identifiable LOW-COST LEADER. It’s the company with the lowest cost per item. Low-cost leaders don’t do a whole lot of advertising or sophisticated marketing campaigns to win people over. They are high volume sales, low margin, and cheap input (labor and materials) businesses. Wal-Mart is the low cost leader in retail industry. Wawa is the low-cost leader in the Philadelphia coffee market. A 16-oz cup of Wawa coffee cost $1.35. At Starbucks, I pay $1.90 for a 16oz Pike Place Roast coffee. Starbucks has a Brand Value Margin of $0.55 cents per 16oz cup. This means that given all of Starbuck’s branding efforts, their brand ultimately yields a $0.55 price premium.
The Classic Brand Formula is a qualitative measure which clearly identifies the type of brand and its three components.
Brand Type = Category + Target Market + Competitive Advantage (Point-of-Difference).
There are three types of brands. Experience brands seek to establish a product or service as a pleasurable or desirable event. Disney World is probably the most well-crafted experience brand in the world. Disney World is a fairy-tale destination location. People come from all over the world to experience the legend of Walt Disney. Customer service focused company are experience brand. Leading customer service companies like Zappos.com seek to enhance the customer experience by far exceeding expectations.
Image brands appeal to your idea of self-worth and identity. Image brands typically use celebrities to associate their products with athleticism, beauty, or some other quality. Nike is best image brand for sports. Functionally speaking, LeBron James’ basketball sneakers are absolutely no different than any generic basketball sneaker. Nevertheless, LeBron’s kicks sell for $160.00 ($101.50 more than the Adidas Commander Lite Td, the low cost leader, on Zappos.com). In 2003, LeBron James signed a 7-year $93 Million deal to Nike even before he took a shot in the NBA. In 2010, LeBron James extended the deal another 7 years for $100 Million.
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Functional brands focus on the utility value of the product. “All-In-One” is an example of functional branding. Secret Clinical Strength deodorant is a function brand. Clinical strength is branded as an antiperspirant. Their commercials depict everyday people in pressure situation, like first dates and job interviews, where sweating would be disastrous.
“Category + Target Market + Competitive Advantage” is fancy business jargon that simply shows the industry the brand competes in, the customers it serves, and its value proposition. For example, in 1998 Tony Hsieh CEO of Zappos.com realized that there were no dominate players in the Footwear e-commerce business (category identified). The mail catalog market was worth $2 Billion. If people were buying via catalog, they’d buy on-line. There were $2 Billion worth of people buying shoes without ever trying them on or actually seeing them in a store (customer identified!). For most brands, the competitive advantage is the source of its value. A competitive advantage is “whatever” you do better than everyone else in the category. Zappos’ advantage is customer service. Zappos’ call center team is super enthusiastic and helpful. If you called Zappos.com right now and asked for a product they didn’t have in stock, the reps are trained to check at least three competitors to help you get what you want right now! If you ask a Zappos.com rep for a pizza, the guy will ask you for your location, and then look up the best pizza spots in your area. TRY THEM!
What is your favorite brand? How do you feel when you interact with it? Brands humanize companies by giving them qualities we can relate to. When building a brand, it’s best to start by selecting a type. Do you want an experience, image, or functional brand? The type of brand you chose will change your business model. Use the Classic Brand Formula to focus your business around your brand. The Brand Value Margin shows the gross profit margin brand. To yield and sustain a high brand value margin, it takes thorough marketing and creativity. By analyzing your favorite brands, and noting the emotional affects they have on you, you’ll learn different ways to make emotional connections and build brand loyalty with your customer base.
Most people don’t know that 85% of all U.S. businesses are micro businesses. A micro business is a business with fewer than 10 employees. Although Fortune 500 Companies get all the press, micro businesses truly sustain American ingenuity. According to the Small Business Administration, micro businesses generated 64 percent of net new jobs over the past 15 years. Micro businesses produce 13 to 14 times more patents per employee than large patenting firms, which is a leading statistical indicator of innovation. All businesses were once micro, so its important to know the key success factors of micro commerce if growth is a part of your business plan. Let’s draw insights from the Retail Industry.
Now If I had to guess, I would say that a little less than half of all U.S. micro businesses are in the retail industry. A retail business sells goods to the public for use or consumption rather than for resale. This would include food & beverage businesses like coffee shops, pizzerias, lunch trucks, and some restaurants. Merchandisers like apparel stores, gift shops, and bookstores would also fall into this category. Retailing is so attractive to entrepreneurs because of its simplicity. Everybody knows how to buy low sell high, smile at customers, and place an ad. But often times, retailers fail to mature in the three strategic areas most vital to their success. I call these the 3X3 Key Success Factors of Micro-Business Retailing.
- Customer Service
- Company Culture
- Employee Training and Development
Consumers have been empowered by the emergence of social media, increased access to information, and the high degree of choice in retail. Most micro businesses try and cater to the “empowered consumer” by bending over backwards and calling it, “superior customer service.” Yet they fail to realize that customer service is an extension of your company culture, and your culture is reinforced ONLY through training and development initiatives.1. GOOD 2. FAST 3. CHEAP NOW, PICK TWO of the THREE
Fast food is fast and cheap. Restaurants are good and fast. And Home Cooked Meals are good and cheap. The point is that, as a retailer, you have to know how to represent your products. In the retail food & beverage sector, the Good-Fast-Cheap Triangle clearly illustrates the trade-off of dining. Most people go out to eat because home cookin’ is soooo time consuming. So from a consumer’s perspective, FAST is already a part of the equation. For them, the only question is whether they want to save some money or eat well. AND IF YOU’RE THINKING… well, McDonald’s is Good, Fast, and Cheap. Watch SUPER SIZE ME, case closed. As a retailer, you will have trade-offs. Some micro-business owners mistakenly try to be the low-cost leader and high-quality retailer at the same time. You have to know your strengths, accentuate your positives, and don’t fight losing battles.
Data mapping is the process of merging distinct data sources in an effort to improve the quality of information. Some retailers have market research, point-of-sales reports, financial statements, and sales forecast. Data mapping merges these sources so that you can make better business decision. Based on the data, retailers should identify problem areas and eliminate waste in the operation. This is known as continuous improvement.
Innovation always springs from knowledge of industry and knowledge of customer. You have to know your market well enough to diagnose problems and unsatisfied customer “needs.” New products and services are an entrepreneur’s prospective solution to a recognized problem in the market. You should also research and develop new products in your industry so that your offerings are current.
The 3X3 Key Success Factors of Micro-Business Retailing will keep you focused on the right things. A business is an organization, and no organization does everything well. There are so many different elements and expertise needed to survive in a competitive market. At some point you need to hire talent that can help you improve in a few of these areas. Don’t Be A DAVE.
The game of baseball has an ontology to it that is strikingly similar to that of modern business. For starters, there is no parity in baseball. Historically, the richest baseball teams win the most games. Teams located in big market economies can charge more for tickets, concessions, and merchandise. Big market teams have a stronger fan base, better media coverage, and more corporate sponsorships. In 2009, the New York Yankees generated $441 Million in total revenue and won 103 games (the most in MLB in both categories). On the other hand, the Kansas City Royals generated just $145 million and won only 65 games (amongst league lows in both categories). The Royals are a small market team located in a small economy. Kansas City’s gross metropolitian product (GMP)  was $101.1 Billion in 2009, less than a tenth of New York City’s GMP ($1,259.7 Billion). Wealthy baseball teams like the NY Yankees can afford to pay higher salaries to better players, and better players win games. Business works the same way!
Cash-flow and Liquidity wins in Business
Companies with strong cash-flows and high liquidity ratios, relative to the industry averages, have more opportunities to improve and reach more customers. Not only can they afford better players (employees), but they can also invest more in research & development, social/traditional media, and technology. Focus on your Cash-Flow. Sit down with your accountant and periodically review your financial statements and liquidity ratios in order to gauge your business’ vitality.
Business At-Bat: Your chance to hit the ball
Ted Williams of the Boston Red Sox holds the Major League Record for the highest batting average in a single season. In 1941, Ted had 185 hits on 456 At-Bats. That means he hit the ball 40.6% of the time. That also means that he failed to hit the ball 59.4% of the time. Ted William once said, “Baseball is the only field of endeavor where a man can succeed three times out of ten and be considered a good performer.”
In business, it is hard to get a hit. According to U.S Small Business Administration SBA, over 50% of small businesses fail within the first five years. There are many reasons why businesses fail (i.e. inadequate capital and illiquidity). But don’t let statistics prevent you from swinging the bat. Hitting in baseball, and in business, is about recognizing the pitch, timing your swing (When is the right time to open your business?), and body control (Use a SWOT Analysis as an assessment tool). Pitch recognition can be equated to understanding your market and knowing your customer. Every business owner should be an industry expert in their respective area of business. You should know the regulations, trends, industry best practices, Porter 5 forces etc. And folks, what is the goal of every business? If you said, “to make a profit” then you just got STRUCK OUT! The goal of every business is to get a Customer. All businesses should be customer focused. If you don’t understand that, then you’ll never get to first base.
So you’ve gotten on base. Congratulations, but you’re a long way from home. If you’re on base, you are an expert in your business field; you know exactly who your customer is, and you know how to reach him. Now, how do you advance? In business, you advance through innovation. There are two ways that companies innovate, but remember, innovation always springs from knowledge of industry and knowledge of customer.
Companies can introduce new products and services. New products and services are an entrepreneur’s prospective solution to a recognized problem in the market. Identifying the problem is the first step to finding the solution. Your business, irrespective of its size and past successes, must always be looking to solve your customer’s problems.
Companies can find new ways to deliver their existing products and services. This is called, “process innovation” or “renovation.” Process innovation is all about efficiency. What is the difference between Amazon.Com and Borders? Although they both sell books, the two companies are night and day. Amazon.com is automated (efficient)–it is the most searchable and user-friendly shopping experience in internet retail to date. You get reviews, recommendations, deals, and advanced searchability all on this cool website with wonderful workflow. Borders filed for Chapter 11 Bankruptcy earlier this year, reasons cited: battered by online retailers and burdened by too much debt (inefficient). In 1997 when Amazon.Com entered the market, Borders Inc. was a major player in the industry, yet their failure to INNOVATE ultimately lead to their collaspe.
In baseball, when you are on second base, you are said to be in scoring position. Scoring position can be equated to readiness in business. If you’re on second base, you understand the importance of innovation within the framework of your industry and relative to your customer. You’ve got your product and service mix down cold. You are almost ready. The next step is to design and implement your accounting system.
Accounting is the language of business. Accounting is designed to give information to specific users in order to help them make a decision. Ask yourself these questions: Does my accounting system facilitate my decision making process? Does it give me the feedback I need to improve my business processes in order to better serve my customers? If you answered “no” to either of these questions you’ve got a serious problem.
Build your accounting system to help you make decisions. Your accounting system will encompass the budgets and reports you’ll need in order to measure the performance of your marketing campaigns and control your cost.
Third Base is known as the “hot corner” in baseball because a lot of balls are hit in that direction. That’s where the action takes place. In business, the hot corner is the marketing department. Marketing can be broadly defined as all forms of communication and interaction with the customer. You are on third base if you understand how to market effectively in your industry. You know if you are marketing effectively if you are reaching new customers and learning from existing ones. You can reach new customers through traditional forms of media, social networks, and by doing such an outstanding job that you turn your existing customers into advocates for your business (Zappos.com Model). You should also be learning from your existing customers. Review post sites like Angie’s Lists, Yelps.com, and Citysearch.com provide amazing feedback. Read the reviews that reflect negatively on your competition and your company, assess them, and improve if necessary.
Quick Recap: How to Score in Business
1) Be an expert in your field and know your customer.
2) Innovate: uses your industry expertise and knowledge of the customer to identify problems and come up with solutions.
3) Set up an Accounting System that helps you make decisions.
4) Marketing is communication and interaction with the customer. Learn from your customers, and reach out to them. Never squander an opportunity to strengthen your bond with the people that make your business possible.
Project management is planning and controlling workflows that consist of numerous tasks performed by various people. The success of most projects depends, in large part, on the manager’s ability to orchestrate his band of workers and minimize the risk of disruption. Technologies like Salesforce.com and Basecamp by 37Signals have emerged as the leading collaboration tools for business teams by streamlining workflows on the cloud. Yet from a project manager’s perspective, it takes more than cloud-computing and software to effectively lead the team. Managers must understand that technology is never an end, but rather a means through which an end can be achieved. Internal controls and reinforcements need to be put in place to ensure that the team is properly using technology as they work together towards achieving a common goal.
Is your team using technology? Or is technology using your team?
In order to answer this question, you need to have a firm handle on your workflow and objective. Traditional flowcharts and Gantt-charts are good tools for documenting your workflow —you’ll have a visual snapshot of the critical path, possible disruptions, and collaborative nature of your project. Every project has a collaborative nature. Thomas W. Malone, Professor of Management at the MIT Sloan School of Management, thoroughly defined the collaborative nature of workflows in the March 1999 issue of Management Science. Malone proposes that every project has a flow, sharing, and/or fit dependency.
“FLOW Dependency: tasks occur in a sequence, with later tasks reliant on the output of earlier ones (HBR July-August 2011).” Projects with flow dependency are linear and extremely flat. A relay race is an example of a flow dependent workflow. Once a task has been completed in a flow dependent sequence, it is very costly to go back and fix a problem, especially if subsequent tasks have already begun. Image if you discovered a hole in the PVC pipe running through your floor after you’ve laid and grouted the marble tiles. In a flow dependent sequence, checkpoints and appraisals should be used extensively at the beginning of the project and less frequently as the project progresses.
“SHARING Dependency: more than one worker uses the same source (HBR July-August 2011).”Projects with sharing dependency are orbicular and participatory. Brainstorming is an example of a sharing dependent workflow. The value of the think-tank increases as people share relevant information from different perspectives. A project manager should offer workers incentives to give, and also use, information. Ferrarini Home Transformations, kitchen and bathroom specialists, uses Salesforce.com to keep their craftsman, estimators, designers, sales associates, logistics coordinators, and customer services reps on the same page. Each one of these specialist has unique insights that ultimately affect the customer’s experience. At Ferrarini, if the logistics coordinator gets word that the kitchen appliance delivery will be delayed, he’ll immediately posts the details on Salesforce Chatter, which automatically notifies the customer service rep, craftsman, and project manager. The project manager will then adjust the Gantt charts and reallocate resources to other projects. Meanwhile, the customer service rep has already informed the client of the setback and made dinner reservations at the client’s favorite restaurant to mend any possible issues that might have arisen as a result of the unexpected delays.
“FIT Dependency: when separate outputs must be integrated into a whole (HBR July-August 2011).” Projects with fit dependency are modular and standardize. Modern car manufacturing is an example of a fit dependent workflow. Each part is manufactured in separate quarters and then assembled at a distribution hub. Fit dependent projects require the use of design modeling, reverse engineering , and strict design standards. Programming is another fit dependent workflow. When forming software, computer programmers tend to write sections of code, intergate open source code, and insert modules from other applications. Often times, the syntax of one programmer is difficult to follow, which makes assembling and supporting the product a nightmare. Fog Creek Software developed the Fogbugz, a bug tracking system for programmers, to assist software teams with fit dependent projects. In addition to the tracking system, Fog Creek co-founder Joel Spolsky also developed standards for his team to ensure better coding. See The Joel Test
All projects have varying degrees of flow, share, and fit dependency. The key takeaways for the project managers are as followed:
- Chart out the workflow (I use Microsoft Project)
- Document the Critical Path and Collaborative Nature(s) of the project
- Quantify the risk of disruption and highlight the problem areas
- Simply, Standard, and Automate the Process with Technology when appropriate
- Train your Employees to use the technology
- Continuously Improve
Real quick point on number 5, Train your employees. I hate the Pareto Principle. It is a classic example of hyper simplification –it basically states that 80% of effects come from 20% of the causes. IT consultants often claim that 80% of employees use only 20% of the software features. The Pareto Principle is baloney, but the salient point is that employees seldom use all the software features. Whatever technologies you use to facilitate your project workflow, please give the users adequate training… nobody reads those .pdf manuals!
Rayce on Blog referenced the July-August 2011 Harvard Business Review article called, “The Big Idea: The Age of Hyperspecialization” for Thomas Malone’s Flow, Sharing, and Fit definitions sited in the article.
The opinion of one successful practitioner is worth more than the comprehensive works of ten career academics. I love to read the short candid antidotes of Jack Welch in order to curb my enthusiasm for business theory. In business today, it is so easy to get caught up in financial models and metrics, and ultimately forget about the importance of identifying a sustainable competitive advantage.
“If you don’t have a competitive advantage, don’t compete.” – Jack Welch former CEO of GE
A competitive advantage is “whatever” you do better than everyone else in the market. A company can either have a cost or a differentiation advantage. A cost advantage is one’s ability to offer a product or service cheaper than anyone else in the market. A cost advantage is secured through superior logistics, lower cost of goods sold, economies of scale, or automation via technology, just to name a few. A company with a competitive cost advantage must continue to develop in those areas that allow it to be the low-cost leader in the market.
A differentiation advantage is a quality that a company can provide, for which the market is willing to pay a premium. People will pay a premium for design (Apple), fashion (Louis Vuitton), organic/eco-friendly (Whole Foods), convenience (Rite-Aid), taste (Coca-Cola), speed (Verizon FIOS) etc.
The goal of every company should be to identify an opportunity for competitive advantage, and then, to work strategically in efforts to make it sustainable. The sustainability of a competitive advantage can lessen due to external factors such as changes in consumer preferences, regulations, and technological advancements. Such external factors cannot be remedied. Nevertheless, there are areas within the company realm of control that can lead to advantage sustainability, such as research and development, marketing, and perhaps most importantly, productivity.
Productivity is at the epicenter of all sustainable competitive advantages. Every manager should strive to increase productivity at the workplace (but in order to increase something, you must first attempt to quantify it). There are several measures of productivity; you can email me at firstname.lastname@example.org for an industry specific productivity metric, but for the sake of this blog post I’ll use a direct billable hours model:
Productivity = Benefit / Cost
Suppose you paid this employee $45,000 per year. On a per hourly basis, this employee would cost the company:
cost/hour = salary/direct hours per year = 45000/1920= $23.44
Most companies take their hourly cost for each employee and gross it up by a factor of 2.5 or 3. So you’d take $23.44 * 2.5 = $58.59, and you’d charge the client accordingly. The gross up factor covers overhead and the company’s profit. The gross-up factor you choose must be linked to your competitive advantage. Therefore, a low cost leader needs to reduce overhead as low as possible so that they could have the lowest gross-up factor in the market. If your company has a differentiation advantage, let’s say convenience for example, you should use a higher gross-up factor and invest in those areas that make your product or service to be even more convenient for your customers.
A productive employee is one that earns you the projected return. If our hypothetical employee earns us $112,492.80 ($58.59 * 1920 hrs. worked), then he is productive. The goal is to use a productivity metric that helps you further develop your competitive advantage into sustainable ones.
Now, let’s go over a few ways to increase productivity.
1. Hire passionate people
When people are passionate about something, they are self-motivated to do great work. I have a friend that works for Clear Channel Radio as a sales associate. She’s a hip-hop aficionado! She designed an entire program for Power99 radio station called, The Movement which follows Philly’s underground hip-hop artist. She also self-published a book called, “Pack-Light,” a love story with hip-hop overtones (neither of these accomplishments were required sales related duties).
2. Training and Professional Development
Knowledge professionals like lawyers and accountants need to take Continuing Professional Education credits (CPE) to keep their licenses current, but most professions don’t have a regulatory body that enforces CPE. Your company should place a high value on training programs that increase workplace productivity by teaching your employees new skills. Let’s take your receptionists for example. In addition to fielding phone calls; do they know enough about your company’s objectives to effectively represent your brand on Facebook? Can they use twitter to interact with your followers? Can they use SnapEngage to engage people browsing around your company’s website? If no, there are training programs out there for you.
3. Objective Appraisals
Jack Welch used to sit down with his employees at the end of every quarter and tell them exactly what he liked that they were doing and also what they needed to do to improve. Every employee knew exactly where they stood with the company. Employees that consistently excelled where rewarded, while those that didn’t improve where helped out….. I mean literally, helped OUT of the company.
4. Outsource or Automate
Some jobs are just too expensive to handle in-house. Payroll processing is an example of a function that is almost always cheaper to outsource. Each one of your employees should have a list of objectives (this also facilitates appraisals) to complete. You should be looking to outsource, or automate, any non-value added activities in your workflow.
5. Manage Effectively
A manager’s job is to remove obstacles preventing workers from getting their work done, and to find ways/tools to help them do it better. Upper management is not the brain-trust. Upper management is overhead. Enforcing rules that have nothing to do with accomplishing the job-at-hand is counter-productive. Do dress-codes, clean desk, and your strict punch-clock policy really increase productivity? Mix things up a little bit. Often times policy-makers should consider giving way to production. Try flexible work hours. Try work from home or from a satellite office via virtual private network, VPN.
Get wisdom and get understanding!
Five months after getting an entry level position at Oracle, Tony Hsieh quit. He linked up with his former Harvard University roommate, Sanjay Madan, and they started LinkExchange in 1996. LinkExchange had a relatively simple business model:
LinkExchange’s Target audience: Small companies with websites and small ad-budgets.
- LinkExchange offered their “target audience” a free service. To enroll cost absolutely nothing.
- Your company would then insert a code on its website.
- The code would cause banner ads to appear on your company’s website.
- Every time a visitor came to your site, you would earn a credit.
- After you earned 500 credits, your website’s banner ad would appear 500 times on other company websites within the LinkExchange network for free. In other words, your company would exchange links with other companies (i.e. Fidelity Investments has a banner ad on the Harvard Business Review site; image this on at the small business level).
LinkExchange’s Monetization Strategy: Grow the Ad-Inventory. A larger company will pay us to advertise across the LinkExchange network. In other words, suppose LinkExchange had 750 businesses that each averaged 15 impressions (ad-views) per day. A large company would never pay to place a banner ad on a small business site with only 15 daily impressions. However, they would pay LinkExchange to place a banner ad on each small business website in the newtork. That’s 11,250 daily impressions!
The LinkExchange business model was a huge success. In 1998, just two years after starting the company, Microsoft bought LinkExchange for $265 million. Tony Hsieh walked away with close to $40 million.
What Tony Hsieh did next is the focal point of his new book, “Delivering Happiness: A Path to Profit, Passion, and Purpose.” On this blog, I am going to do a Business Book
Review Audit! My Book Audit is designed to breakdown the business model and offer takeaways to other businesses. From an audit perspective, a good book is one that offers substantive business development content. I don’t care about feel good maxims or how these CEOs found their inner peace. Nor do I care about how the book reads. If I want to be entertained I’ll pick up a John Grisham fictional. Mr. Author, Tony Hsieh, are you going to tell me how you grew Zappos.com from no-sales to more than $1 Billion in ten years, or not? That is the question.
Review Audit: Delivering Happiness by Tony Hsieh CEO of Zappos.com, Inc.
After selling LinkExchange, Tony started a venture capital fund called, “Venture Frogs” which offered funds and consulting services to internet and e-commerce businesses. One afternoon, a guy named Nick Swinmurn pitched his online shoe store idea, “Shoesite,” to the Venture Frogs. Although Tony wasn’t crazy about the idea, he was blown away by the numbers. In 1998, Footwear was a $40 Billion industry in the United States and mail-order catalog sales made up 5% ($2 Billion). If people were buying shoes through the mail without ever setting foot in a store, they’d buy online.
Audit Finding: Innovation always springs from knowledge of industry and knowledge of customer. The mail catalog market was worth $2 Billion (industry defined!). In 1998, there were no dominate players in the Footwear e-commerce business and there were obviously people buying shoes without trying them on or actually seeing them in a store (customer identified!). Have you defined your industry and identified your customer?
Tony Hsieh agreed to fund the project. They changed the named to “Zappos.com, Inc.” and developed the operational model for their new business. (I want to add a real quick point that’s not covered in the book, but it may help your business appeal to more people. Always be cognizant of how you name things. On the internet, we see a lot of two-syllable named companies like Google, Apple, Kinkos, Facebook, LinkedIn, MySpace, Twitter, Zappos, etc. Many of these company names don’t mean anything, but they are very marketable and brandable).
The initial Zappos.com operation was built on a business model known as “drop ship.” Here’s how it worked:
- Zappos.com held no inventory.
- Footwear vendors would send a periodic inventory list to Zappos.com
- Zappos.com would compile the list and post the footwear brand data online for customers to see.
- Zappos.com would process the sales transaction online, and send the shipping information to the Footwear vendor.
- The vendor would then ship the shoes directly to the customer.
The drop-ship model is advantageous in that it is easy to set-up and administer. You don’t have to hold inventories or worry about shipping, per se. Most importantly, the drop-ship model allows you to establish relationships with vendors and learn about consumer preferences and buying habits. Nevertheless, drop-shipping is easy to replicate and very susceptible to vertical integration (that’s when your suppliers stop supplying you and go directly into competition against you through acquisition). Also, drop-shipping is too dependent upon the accuracy of the vendor’s inventory list and shipping ability. If the vendor’s inventory list was inaccurate or their logistics sucked, Zappos.com would ultimately suffer and lose customers, not the vendor. (Drop-Shipping is a great way to Soft-Open a internet retail business).
In 2002, Zappos.com opened a warehouse in Kentucky, located in the eastern central part of U.S., so that they could ship shoes to the Boston, Chicago, New York, Washington D.C., Philadelphia, and Miami demographic within 2-business days. Their warehouse was located near a prominent UPS distribute Hub. By 2003, Zappos.com was generating more than $60 million in annual revenues. The company decided to stop the drop-ship segment of their business, which accounted for 25% of sales in 2002, because it wasn’t sustainable long-term. Zappos.com saw logistics as a key success factor for their business. Before terminating their drop-ship segment, Zappos did something very interesting that I think should be commonplace for retailers. Zappos.com setup an extranet, a dedicated website, where vendors could get real-time inventory levels with pictures, sales information, and profit analysis directly from Zappos.com. The extranet allowed vendors to see what Zappos.com was working with; therefore, they could offer more brands and submit timely proposals based on Zappos.com’s needs.
Audit Finding: Accounts payable turnover (total supplier purchases/average accounts payable) is a liquidity ratio that managers use to quantify the rate at which suppliers are paid in a given period. If your company’s account payable turnover is falling from period to period, that means you are taking longer and longer to pay your suppliers. Conventional wisdom says, “Good job, always pay your bills on the last day due unless you have an incentive to pay earlier (like 1/15 n 30).” However, holding out on your vendors doesn’t really help you in the long run. Vendor Relationship Management (VRM) is important and your vendors should be viewed as partners. Paying earlier and being transparent, open, and honest with your vendors will help your business. Do you take your vendors to lunch to pick their brains about different products, changes in the industry, and better purchasing terms?
In 2004, Zappos.com moved their business headquarters from San Francisco to Las Vegas, Nevada. People in the San Francisco Bay Area didn’t like the idea of working in a call center. However, the “call-center” was a key success factor for Zappos.com. They encouraged people to call. Traditional call centers used metrics like Average Handle Time, which measures the average time it takes to resolve the customers issue and end the call. Conventional wisdom says, “the faster the better.” Average Handle Time doesn’t build lasting relationships with your customers. Zappos.com’s call center employees are trained to talk to you like you are a friend of theirs, they’ll discuss your interest, and brainstorm with you about Lady Gaga styles or those sneaks Lebron James had on last night. Call them right now at 1-800-927-7671 and see for yourself. They also changed the name of their call center operation to the “Customer Loyalty Team.” The name “call center” has all kinds of baggage and negative connotations attached to it. When I say “call center” does pleasurable customer experience and quality service come to mind?
Audit Finding: Your Company should cherish every opportunity to enact with your customers and represent your brand. The people that answer your phones should be enthusiastic and helpful. If you called Zappos.com right now and asked for a product they didn’t have in stock, the reps are trained to check at least three competitors to help you get what you want right now! If you ask a Zappos.com rep for a pizza, the guy will ask you for your location, and then look up the best pizza spots in your area. TRY THEM! Every company doesn’t have the time or resources to entertain customers in this manner, but does your company care at all? How much does your company invest in customer service?
In 2008, Zappos.com generated more than $1 Billion in Sales Revenue. In 2009, Zappos.com was acquired by Amazon.com for $1.2 Billion. Zappos.com’s success is based on their investments in the following areas:
- Customer Service
- Company Culture
- Employee Training and Development.
In my opinion, Delivering Happiness is a must read for any business that is serious about exceling in this day and age. Social media is here folks and word of mouth is everything. Bad service will spread like wild-fire and one customer can destroy your brand with a single twit on twitter. Tony does a wonderful job of using real examples like company emails and employee testimonials to get his points across. Does “Delivering Happiness” tell you how Tony Hsieh grew Zappos.com from no-sales to more than $1 Billion in ten years? Yes it does.
Also, get a copy of the Zappos.com culture book at http://www.zapposinsights.com
How I did it: Gunter Pfau of Stuzo (a Dachis Group Company)
Background: A rising tide lifts Gunter’s boat…
Facebook is a utility. It is a tool that brings people together around a common experience, interest, problem, or cause. The key to Facebook is the social graph. Similar to a decision tree, a social graph is a series of nodes and connections. The nodes are the individuals and the connections are the friendships. By connecting with your friends on Facebook you assemble a social graph, and you can distribute any kind of information through your connections. Social graphs are assets, and collectively, they represent the core business of Facebook. Facebook functions like an operating system, but instead of managing a computer’s hardware resources, it manages the social graphs, and provides a set of common tools/services for other web application developers.
Mark Zuckerberg & F8 Recap The Facebook platform launched in 2007. Mark Zuckerberg wanted Facebook to be to cloud applications what Microsoft Windows was to software applications over the past two decades. Facebook briefly stopped making applications and focused on enhancing its platform for developers. On May 24th, 2007, Facebook launched F8 (pronounced FATE), which was a media extravaganza “coming out party,” where Zuckerberg clearly differentiated Facebook from other social media companies as a platform (web-based operating system).
F8 was a success of monumental proportions –within six months, there were 250,000 registered developers operating 25,000 applications on Facebook. The top 5 Facebook applications are Zynga, Playfish, Causes, CrowdStar, and Rock You! (They’ve raised a combined $359 Million USD in investment capital). Zynga, makers Farmville and Mafia Wars, generate about $200 million in annual revenues. According to Facebook statistics, there are currently more than 500k applications operating on Facebook, created by millions of developers from 190 different countries.
As F8 would have it: Gunter creates Stuzo…
A few of those Facebook applications were created by Romanian born entrepreneur Gunter Pfau, and his team of developers at Stuzo. Gunter started Stuzo shortly after graduating from Temple University in December 2005. He changed the business model several times over the succeeding years, but he ultimately found his niche on Facebook. Stuzo was so successful marketing through social media, that they drew the attention of The Dachis Group, a team of social business designers that help global brands engage their stakeholders. The Dachis Group purchased Stuzo in November of 2010. Gunter Pfau is now one of the key members of the Dachis Group management team.
The road to success wasn’t easy for Gunter. He fled communist Romania with false documents that his family used to enter Austria. In 1987, his father moved the family to Philadelphia –Gunter was just 9 years old. Gunter worked his way through the Philadelphia school system and enrolled at Temple University in 2002. He majored in Finance and Entrepreneurship.
As a Temple student, Gunter saw how the bookstore would sell a textbook for $150.00 at beginning one semester, buy that same textbook back at the end of the semester for $20.00, and then resell it for $115.00 at the beginning of the following semester. It was an absolute racket. As an entrepreneur, Gunter saw an opportunity to cut out the middle man and give Temple students a website where they could buy and sell textbooks directly with each other. New products and services are an entrepreneur’s proposed solution to a recognized problem in the market. Stuzo was Gunter’s solution to the Temple textbook shakedown.
When Stuzo entered the market in 2005, eBay’s Half.com was the dominate player in the national used textbook market. Locally however, the market was divided between Temple University and Zavelle Bookstores, two brick and mortar fronts on main campus. Gunter positioned Stuzo as a campus bookstore alternative. Stuzo’s point of difference was that students could use their service to make transactions on campus.
In order to register on Stuzo.com, students had to have a valid Temple University email address. Stuzo provided three ways to buy or sell a book on Temple University’s main campus:
Students could …
- meet at an agreed upon location
- use postal services
- use Stuzo Spot, a drop off and pick up station designed for anonymous transactions
Gunter charged a nominal fee for using Stuzo Spot. Credit card users were charged $3 for transactions less than $50 and $5 for anything greater than $50. Within 3 months, Stuzo had more than 1000 registered users and 600 books posted. Gunter poured a ton of money into Stuzo.com and even maxed out a few credit cards. He would stand outside of the Student Activity Center (Temple’s largest bookstore) dressed as a mascot, promoting Stuzo and handing out book markers. In order to increase traffic, Gunter rebranded Stuzo as an on-line marketplace where students could buy, sell, and trade anything directly on campus. Nevertheless, cash-flow and sustainability were still big problems. Sites like Half.com and Amazon had much larger customer bases and cheaper book listings. The only unique component to Stuzo.com was that it offered students the “meet up option.” Yet over time, Gunter realized that his model just wasn’t going to work.
Stuzo becomes a social product development company…
Gunter is an earlier adopter. If you were to Google him right now, you’ll see that he’s already using every emerging social technology available to the public. The day that Facebook opened on Temple’s campus, Gunter created a profile page and began to follow social media very closely. On May 24, 2007, Gunter saw an opportunity to take Stuzo to greater heights by building social applications on Facebook’s new platform.
Gunter hit the Facebook platform with three marquee social applications.Sports Fan was an app that connected sports fans from around the world so that they could talk about their favorite teams. My Heritage brought family members together so they could try and retrace their roots as far back as possible. Compliments gave friends a way to express their emotions about an experience by using text and cool graphic icons.
Gunter and I have a mutual friend named Victor Feinman, a software developer. In preparation for this blog post I asked Victor, “what makes Gunter such a unique entrepreneur?” He responded without hesitation, “Gunter is an executer! He can turn his ideas into products and get them to market faster than anyone.” Gunter’s speed and executive skills were made evident with the immediate success of his social applications. By the end of 2007, Gunter’s three apps had more the 1.5 million Facebook users.
Stuzo becomes a social media services company…
Gunter continued to push Stuzo further and further into the world of social media. Right from the start, it was obvious to Gunter that Stuzo had what it took to tap the power of Facebook’s social graphs. Stuzo knew how to bring people together. But the question was: “What is our monetization strategy?” You see, every entrepreneur is by definition an innovator. Innovators, simple put, find new commercial uses for existing concepts. He rebranded Stuzo as a creative technology and social media company, and began offering services to global brands. From an on-line bookstore, to marketplace, to social products development, to social media design and consulting, Stuzo kept on evolving.
In 2008, Gunter started managing contest and promotions for global brands on Facebook. Stuzo developed and launched the FIRST EVER promotion on a Facebook Fan Page. Their Doritos’ promotion generated nearly 800,000 video views, tens of thousands of comments, hundreds of thousands of votes, and millions of page views. Stuzo’s approach was unique in that they used social media in conjunction with traditional outlets from day one. They could develop social apps, design promotions, and create content that fit together nicely with their client’s brand message and overall marketing strategy. According to
Gunter, a successful promotion has three components:
- Media Spent
- The Prize behind the Promotion
- The Brand of the Company (Cool and Attractive Brands)
Stuzo drove millions of users to their client’s Facebook fan pages and company sites. According to Gunter, nearly 100% of their clients became repeat customers. Stuzo’s revenues quadrupled in one year.
In November 2010, Stuzo was purchased by the Dachis Group. After just four years (and four strategic shifts in the business model) Gunter had grown Stuzo into a marquee player in social media, while most marketers, including some bigwigs on Madison Avenue, were still trying to figure out exactly how to leverage social graphs. This is a story about an entrepreneur! This is how he did it:
- New products and services are an entrepreneur’s proposed solution to a recognized problem in the market. An entrepreneur is, to some degree, a problem solver.
- “Gunter is an executer! He can turn his ideas into products and get them to market faster than anyone.” –Victor Feinman
- Be Flexible. Gunter changed his business model four times. In business, you have to evolve and make adjustments as you learn more about your industry and your customers.
- Working smart is all about time management and allocating resources. You have to understand your strengths and weaknesses as an entrepreneur. Try to optimize your time by focusing on value-added task.
- Gunter has a legendary work ethic. He doesn’t let his intelligence get in the way of actually finishing something. There are a lot of highly intelligent, but very lazy people out there. Go Hard.
Special thanks to Gunter Pfau. Thanks for doing the interview, God bless you bro. Pros to Victor “some guy” Feinman, thanks for reaching out and organizing everything. David Kirkpatick, AWESOME WORK, with The Facebook Effect. It is a great read …..very substantive. Thanks for reading guys: kept Gunter on your radar, he’s doing big things!