Business Debriefing

Many years ago, I became acquainted with the CEO of a storied software publisher. Bill Goodhew had recently taken over as CEO of Peachtree Software in a management buy-out. While Peachtree had the pedigree of being one of (if not) the first personal computer based accounting software packages, it had never made a profit. Peachtree was sold to Management Science America (MSA), an early mainframe software company, and during their tenure as owners, the division still did not make any money. Bill and his management team took it over, drastically reduced the price of the software, and marketed it predominantly using direct response advertising.

While that seemed very extraordinary at the time, Bill filled me in on his seemingly simple strategy. He selected three different advertising placements, all with coded responses, so he always knew which was producing the results. He continued these for some set period of time and then would pick the one that worked the best and double its frequency. The one that was the worst, he discontinued. And the other, he continued as it was. He also added one more publication and tried that.
Interestingly enough, using this strategy and the much lower price, Peachtree’s owner-management team made money for the first time in the company’s history. Bill made it very clear that he was no marketing genius. In fact, Bill seldom guessed correctly in advance which advertising placement would work. However, after receiving the results, he was in a perfect position to learn and adjust.

The lesson I learned from Bill’s strategy expanded well beyond advertising and marketing. What this taught me was the value of feedback. Learn & Adjust - that idea has lived with me for the several decades since our encounter.

Every business process can benefit from this concept of learn & adjust. None of us is smart enough to predict the actual results of our actions. But assuming we have a clear and available way to listen to the results of our actions, treat them as objective data – free from our personal prejudices, and be willing to act and adjust our behavior based upon this data, we can create learning systems that create impeccable institutional knowledge that can be shared within our organizations.

The US Air Force uses Stealth Debriefing sessions after every sortie. Immediately after a flight, the pilots debrief in an objective and selfless manner. They learn and adjust from these sessions so that they can institutionalize better practices in their very next encounter. As the Air Force puts it, for them it’s a matter of pure survival.

In business we usually survive multiple mistakes. But the best organizations are compulsive about feedback and learning processes in everything they do. I have participated in great sales organizations that use debriefs as a critical part of their process. After each sales call, the sales person and her team, get together to discuss what went right and what went wrong. These sessions enable the team to determine what is working and what is not, enabling them to hone in on their sales pitches in their very next call.

Seems pretty simple? Yet there are all too few organizations that institutionalize this type of behavior. Meetings occur without any summary of the results. Business decisions get made without the benefit of any recorded feedback. Marketing dollars get spent, without any clue as to their effectiveness. In today’s economically stressful times, using this simple (and cheap) process to immediately improve what we do, every time we do it, is long overdue.

Focus your attention

I often come across early stage ventures that are pursuing three or four different alternative products or strategies. When I inquire how they plan to win at several of these simultaneously, I get the same answers. We are pursuing multiple paths because we are not sure which one will be the winner. Or, Our investors are happy to have a portfolio of opportunities to reduce their risk. This causes me pause. On one hand, certainly in this early stage they are right, its difficult to pick a winner before their products are complete or the market has had a chance to vote. But, can they really afford to be pursuing multiple strategies?

Making tough decisions is always a difficult proposition. But not making them sets you up for much more certain failure. The word decide is made up of the Latin roots de- "off" + cædere "to cut"as in cut off other alternatives.

What entrepreneurs and investors who allow the pursuit of multiple alternatives do not understand is that without cutting off several of their multiple alternatives they are giving management permission to fail. That's right permission to FAIL!

Human nature is such that if you have a "fall back" position, an alternative if your pursuit fails, then you tend not to take success to its limits. Somewhere in the back of the homo sapiens' mind, we keep the glimmer of a trap door alternative to failure. Contrast that with the very powerful survival instinct that each of us carries. In the face of utter failure, we are able to call upon super-human capabilities to make the impossible occur.

If you study enough start-up ventures that had everything to lose by failing, you find a long list of very successful entrepreneurs who accomplished the impossible. Again, contrast that with many corporate ventures where the person leading the charge had a cushy job to fall back upon if their intrapreneurial venture failed. Is it any surprise that entrepreneurs create many more important ventures than corporations who have many times their resources are able to create from within these large entities with gracious safety nets?

Entrepreneurs who are pursuing multiple paths take note. Cut off your alternatives and your chance of success will increase! And investors who advise their early stage management teams to retain a portfolio of opportunities should instead capture their portfolio safety from multiple investments rather than diluting the focus of any individual management team!

Why is it so hard to focus?

Early stage businesses are risky. Investors know that. Entrepreneurs are notorious risk takers. Statistically, most new businesses fail. But the ones that succeed often disrupt the status quo, challenging traditional industry leaders, and creating substantial value for their stakeholders. With the benefits of winning so high, American entrepreneurship is alive and well and fueling thousands of aspiring startups each year.

But all too often, we see startups adopting a hedging strategy. They pursue two, three, or more different products, markets, or opportunities at the outset, prior to establishing any beachhead position. When asked, usually the answer is: "its too early to tell which of these might succeed, so therefore we would be negligent to count any of these out."

This portfolio strategy for a newcomer attacking the market is doomed!

A reduced risk strategy for an not-yet-established company will seldom work. While it is possible to just get lucky and win the lottery (and some companies have) the chances of succeeding with a diffused set of investments, lacking a laser focus, has proven to be faulty. The competition is fierce. Well heeled competitors with established distribution, brand recognition, and operating momentum are tough enough to compete with head to head. But, trying to fight multiple battles concurrently is a prescription for disaster.

Startups succeed when their drive, willingness to take on risks, and gorilla strategies all point in the same direction. They win by attacking staid competitors who themselves see that new potentially winning strategy as risky, who lack the desire to do "whatever it takes" to be successful, and who are busy covering their bets so they do not risk the shareholder value they have already created.

This is probably why we often find that entrepreneurs are young and early in their careers. They either are naive to the risks of failure, or they have little to loose. But entrepreneurs who are willing to risk it all, are the ones that big established businesses should be afraid of.

There are many analogies that can help understand why this focus is necessary. Have you ever tried to drive a dull nail into a hard piece of wood? The resistance of the wood, coupled with the larger surface area of the dull-ended nail, makes this a difficult task. Better a very sharp nail with all the force directed on its head to succeed at this task.

War analogies also apply to this situation well. Small armies attacking larger established forces never attack in multiple locations. Instead they pick their targets, focused on the spot of most vulnerability, and use all of their forces in one location. No self respecting general would ever pursue a strategy of trying to go head to head with a much larger enemy in multiple locations at one time and expect to live to fight again. That is until they establish their beachhead and then branch out from there.

And of course there is the old Chinese proverb: "He who chases two rabbits catches neither." Ever tried to chase down even one rabbit at a time - that alone is tough. But with the added distraction of the second, the chances go down exponentially.

Business leaders who are unwilling to focus, to pick one target, and give it all they've got to try to win, are not entrepreneurs at all. They should go back to the comfort of their less risky established company jobs and run a division. As an investor, who better to take advice from than Warren Buffett? Mr. Buffett suggests that if you are looking for a portfolio of investments, then buy the stock of multiple companies, rather than investing in companies with a hedging strategy.

Geoff Moore, Author of the seminal marketing treatise: Crossing the Chasm, suggested that disruptive inventions solve one problem for one market substantially better than the existing solutions (if any exist at all) and focus on taking a single beach head on the other side of the chasm. Doing otherwise increase the risk of failure.

Rather than decrease risk, entrepreneurs that follow multiple simultaneous paths, actually increase their risk of failure.

The Power of Focus

Most early stage company failures are not caused by starving from a lack of good ideas. More often than not, instead they are choked by trying to digest too many at the same time.

Competition is fierce. Even companies with unique offerings run up against companies with orders of magnitude more of resources, experience, existing customer relationships and brand awareness. They can often favorably compete with the new entrant, even with a not-as-good solution. As the business world continues to expand, this competition will accelerate and they will set even higher hurdles for these entrants.

There is but one proven way to compete against these business Goliaths. That is to focus intensely and put all of your resources and momentum into driving that single finely honed direction. The sharper your focus the less "force" needed (or the more powerful it will become). Anything short of complete focus diffuses your efforts. Incumbents find it much easier to defend their turf when a new entrant gets distracted by things that blur the new entrant's vision.

Then why do so many early stage companies chase multiple opportunities rather than just one winning strategy? Our research tells us its risk aversion. Despite their entrepreneurial risk- taking swagger, CEOs (and sometimes their investors) like to hedge their bets, invest in several potential projects, hoping one will bear fruit. (Maybe some of this is because CEOs have short attention spans.) But this lack of complete focus is actually riskier than pursuing the one effort that really might have a shot at winning.

Confucius has been quoted as saying - he who chases two rabbits catches neither.

Business Models Matter

Have you ever tried to swim against a strong current? Even if you are a good swimmer, almost no matter how hard you try, its very difficult to make any forward progress.

This is a similar situation for companies who have business models that work against them. [Business models are roughly defined as the value proposition that your company brings to the market.] No matter how hard you work, or how smart you are, or how great your solution, you don't seem to make any money.

Smart CEOs attack business models first when founding or taking over the leadership of a business. Once they have that down, everything else is much easier to handle. In fact history has shown us that even great CEOs will likely fail with a poor business model and in fact the converse, poor CEOs often are propped up and succeed with great business models. So rather than continuing to swim against the tide, consider altering your model.


So what's a good business model look like?

We have found that good business models have the three characteristics that match up with an immediate, a future and a long term time frame.

Great Profit Margins
Stickiness
Defensibility

Great profit margins - Business thrives on this. Seems simple. However, there are untold numbers of businesses that don't get this. The work hard, sell lots of whatever it is they are producing, and like the old proverb, "will make it up in volume." Actually that is what many of these businesses believe (hope?) - that once their volume is sufficient, they will become profitable.

Instead, smart founders and CEOs seek out ways to make their business profitable today. Clayton Christensen used the term "impatient for profits" in his book Seeing What's Next. It's important to ensure that your business today (or as soon as practical) earns profits and that those profits are not necessarily dependent upon reaching some volume threshold. It certainly makes it easier on your scarce capital to do it this way. Businesses that clearly differentiate themselves from the competition (have a unique offering) generally have an easier time making a profit. They tend to have selling prices that have no direct relationship to their cost - typically large spreads between the two. Instead their prices are based upon their value they deliver to the purchaser. Scarcity helps as well - if you are the only one delivering this solution to a target market - you can often name your price.

Severing the markup-over-cost relationship can accelerate any business model. There certainly are great examples of this in the market, often associated with luxury goods that create a perceived value in the mind of the buyer. But great margins are sometimes found in more innovative ways. I've experienced two technology companies that saw this light. Tangoe, an application software company based in Orange, CT found that their telecom expense management was so good it saved big companies millions of dollars. Rather than just charge some amount that amortized the steep development costs of their software, Tangoe has begun to charge based upon "sharing" that value with the customer. Another company based in Hickory, NC, Transportation Insights, had the insight (pun intended) to charge their customers based upon how much their freight logistics services save their customers, generating large percentage profits for this young company.

At one company that I lead, we found that offering our software as a service (back before Salesforce.com made this term vogue) was our key to juicing our margins. After listening hard to our customer base, we heard there was great value in not just handing them the CDs with the code, but in fact in running the application for them (in this case employee equity management) provided more value and hence higher profit margins. (This move also had an ancillary positive impact on the idea we'll discuss in the next post - stickiness.)

So just don't take the business model you've been handed for granted. Be sure it works for you! If not, no matter how good you are, its probably a critical enough factor to rethink whether this is really a business for you.


Good business model provide enticing profit margins - so enticing that your well-heeled competitors might view this territory as ripe for their expansion. While a good business model (and a great product) might generate some nice short term profits, how do you keep this good thing going?

We call this next stage Stickiness. Stickiness is that quality that keeps your customers loyal to your solution.

Stickiness has another dimension as well. The stickier your solution, the less effort you should have in deriving additional revenue from that same client. Sticky solutions are the "gift that keeps on giving." You've probably been told that is is much cheaper to continue to keep a customer than to try to find a new one. Stickiness trumpets this characteristic ... and more!

Often times smart companies can create solutions that are sold once but paid for on an on-going basis. Subscriptions, leases, maintenance, outsourcing, services, royalties and the like are all examples of long term payouts from a single sale. If you can morph your business model into one that has recurring revenue, rather than a one-time fee, do it! Salesforce.com, mentioned earlier, pioneered a concept called SaaS - Software as a Service. Rather than do what everyone else in the software business was doing - selling based upon a large up front perpetual license fee and relatively small annual maintenance fees (usually running 15-20% of the license fee), they decided for this and other good technological reasons to charge a use fee - based upon the number of users, charged annually. This model changed the dynamics of the software industry. Sell a customer today, collect 100% of this year's fees this year, and then be virtually guaranteed next year's fees next year too! Compare that to the typical company that received 100% of this year's fees today and only 20% of that fee next year. Salesforce.com's model almost guaranteed growth - just by selling one more incremental customer.

Other sticky models are created through a community model. By community, we mean that the company has done something more than just sell you today's solution. They have developed a brand that you become loyal to because they delivered what they promised and they provided the reinforcement for you to continue to identify with that solution. eBay created a great community model that actually became more attractive the more customers it captured - there were more reasons to attend an eBay auction each time a new customer joined.

Each of these characteristics provides an ongoing value proposition for each new customer - one that will continue to generate benefits for the company - and for the customer. Done right, these can be like the proverbial snowball - gaining (revenue) volume at an accelerating pace.

Sticky solutions enable CFOs to sleep at night. Sticky solutions generally have a more predictable and less lumpy revenue flow - characteristics that are valued on Wall Street.

So now you have a great profit margin and a reason for your customers to stick around; what else do you need?



With both profit margin and stickiness, you may be set for the short and middle term. But what about the long term, once competitors have enough time to regroup and mount an attack?

We used to call this a barrier to entry. Most Venture Capitalists used to quiz their founder CEOs on how they were going to maintain their position in the light of big competitors targeting them.

Like security, no protection is fool proof. What you need is to find as much protection as you can today and then run like hell to build yourself as sticky a solution as you can. The government gives you some protection if you have developed something novel by issuing patents and copyrights. Each gives you a bit of a legal monopoly (hence scarcity) on your particular invention. But intellectual property protection is usually not available for services or other non-proprietary businesses, and patents wear out and are costly to defend, copyrights are relatively weak protection, so you will need to take much of this matter into your own hands.

So ultimately your long term protection will be built on establishing yourself, through both bulk and brand. Bulk comes from just that - getting big quick. Companies like RIM who invented the Blackberry was a company just in this situation. They initially relied on patent protection which ultimately backfired (they had to pay almost $1 billion for allegedly violating someone else's patent). But even with that big settlement, they didn't have to fold their tent and go home once their IP barrier was breached. Instead they were large enough to withstand the financial impact, had created a very loyal user base, and continued to innovate off of their original design.

There are always obstacles to customers changing brands - sometimes they are simply psychic impediments such as "I don't know how that new product will work - but I do know that the one I use now works fine" - or sometimes there are real switching costs - like having to convert one's data to a new format. But smart companies rely much more on the positive side of attractiveness to retain their loyal customers. They provide a great continuing customer experience - one that keeps the customer from even thinking about changing in the first place.

Together, great profit margins, stickiness and a good defensive strategy can create long term value for the owners of a valuable solution.