Avoiding the Halo Effect Through Real Time Analysis

One of the challenges in evaluating start-up strategy and analyzing what works or does not work is the Halo effect. In other words, we're inclined to search for patterns and stories by looking at companies that have had successful outcomes. The same problem occurs when we try to evaluate execution.

To avoid this, I'm going to spend the next few months looking at a new start-up that I'm tracking. It's called Medium.The start-up is brand new. But it is by the founders of Twitter and Blogger. So these folks either know their stuff or have been extremely lucky. My intention is to note down some of the things that they are doing in terms of execution. And provide commentary on whether a particular initiative will work or not based on the frameworks inside my head (which I'm ever willing to challenge.)

The Halo effect can still occur since this new company is by the super successful entrepreneurs ... so some kind of a virtuous cycle is likely to kick in. People will pay attention, super star employees are likelier to join this company, investors are likely to bet money etc.

Name: I like the name Medium. While a number of positioning and branding purists (Jack Trout, Al Ries) may suggest that you avoid generic words for names of companies, I do believe that when it comes to domain names, generics are pretty powerful.

Positioning: It's still a little muddled. What I'm getting is:
Overcoming quality problems of web content via categorization and collaborative content production and collaborative filtering.

This is the market that is currently occupied by sites like Reddit and Pinterest. So even if they make their site 10% better than Reddit, they have a good chance of leap-frogging ahead.

Execution Lessons Learned: 
1. Seed the site with extremely good content in order to showcase key features of the site - example.
2. Get big names to use the site initially - example - Kevin Rose and Biz Stone
3. Release early - they've released the site without a home page

The "Self-Expression" Star

Many successful star businesses are successful because they allow users to express themselves. Examples:

• Powerpoint, Word, Excel
• Websites
• YouTube
• Flickr
• Facebook
• Pinterest (recently discovered ... has star business potential.)
• Camibands (not an Internet business ... nor even a guaranteed star business but definitely an engine of self-expression!)

So think about how to enable self-expression among your customers and which parts of your business have the opportunity to become engines of self-expression.

Is the Novo Medical Center a Star Business?

The Novo Medical Centers is a venture funded business which provides day care surgeries in India.

Is this a star business?

Positives:
Revenues - They can probably grow revenues faster than 15% a year for the next several years.
Market Leadership - They are creating a whole new category by dividing the surgery business into day care surgery (laproscopy, arthroscopy, D and C, biopsy etc.) and longer care surgery (requiring a longer period of post-operative care.) They are the leaders in short stay surgeries.
Scalability - Because the space needed for their business model is relatively lesser than the average hospital, they can find real estate to expand in India pretty easily.
Sales channels - Doctors are the ones who tell their patients about Novo medical centers and get them to come in to Novo.
Ability for competition to enter the space - The existing competition is from small and large hospitals. However, once a chain of Novo Medical Centers is set up it will take a lot of work for competition to replicate what Novo is doing.
Value of brand and mind share - If the brand is established all across India, in 20 years this company can become a dominant player. It will offer standardization of services to patients.

Negatives:
Government regulation - The medical business is heavily regulated.
Exposure to black swans - This is what is most disturbing to me. The company is vulnerable to black swans. It is too easy for a procedure to go wrong causing bad press, legal liability or a clamp down by Government.
Vendor power - Their "vendors" are super-specialist doctors who are typically associated with large hospitals. To get these doctors to come and work at their facilities requires Novo Medical to share a large part of revenues with their doctors. Some doctors may choose Novo for convenience and responsiveness (ease of scheduling surgeries, better facilities, more proactive management etc.) but in the end, it will be the money that drives doctors to choose Novo versus other hospitals. In this case, the profitability of Novo may be under question.

Google's "Cool" Problem

If you've read this blog for awhile, you may begin to think that I'm biased against Google. In reality, I have nothing personal against Google. I use their search, browser, blog and email services almost everyday. The reason why I pick on them is because they are a big, well-known business run by seemingly intelligent people who seem to be making classical positioning and differentiation errors.

Today's rant however, is about another aspect of Google's management policy ... that of killing products.

In the last few years, Google has killed several products such as Google Answers, Google Wave and Google Gears.

While this strategy may appear "cool", it has several problems. It dents the confidence of users in Google products. And developers will think twice about developing on Google platforms and building businesses around them. It also affects morale of Google employees. Finally, competitors begin to believe that Google is not invincible and that it can be beaten ... perhaps even in its core search and advertising businesses.

Most projects have a U-shaped curve with time on the X-Axis and confidence of team members on the Y-Axis. You start with hope at the start of the project, you run into a valley of despair and after some struggle you emerge on the other side feeling confident. Google seems to be killing products as soon as they run into the valley of despair. It seems to be forgetting that it's core search business took years to become profitable.

Google management may argue and say that they kill products if the products don't gain traction. But this is a little like a chicken and egg problem. How do your products gain traction if you don't tweak and improve upon them? Also, by virtue of the concept of the "mere exposure effect", products that have been around for a while tend to become accepted and used.

Google management will do well to learn from the Microsoft method which is to never give up and to try, try and try again until you succeed. In fact, part of the allure of having a stable cash-generating core business is that it allows you the luxury of resources and time to keep  pursuing projects even if they appear to be flailing in the initial stages.

Google management needs to recognize that if you develop a culture of iterating until you succeed, it will force your top management to really do their homework before launching new products. At present, Google engineers seem to be treating product development like a weekend cooking project. While this may seem cool and sexy, it leads to all kinds of problems in the long run.

Google will do well to become a little more like a staid old-world company which is slow to launch products and slow to kill them as well. It may not be sexy but it works in the long run.

The Decision-Free Star Business

Most businesses consume too much of management effort. By management effort I refer to the following:

1. The number of day-to-day decisions that managers need to make
2. The amount of attention that managers need to invest in understanding non-traditional patterns
3 The amount of emotional energy and will power that managers need to put forth in order to get things done

If you need to think about hiring a new person, that's a decision. If you need to pay attention to a hacking attack happening on your website, that's a decision. If you need to motivate your people to work harder or for lesser salaries, that's expenditure of emotional energy. If you need to launch a new product, that's emotional energy.

The best businesses are those which have reduced the number of decisions that need to be made on a daily basis.

At Mc Donald's managers don't make decisions about business models, positioning, branding, product line, etc. Even franchisees have very limited decisions to make. Most of the core decisions have been made and bridges have been burned (Mc. Donald's will never try to become a full service restaurant chain.) This freeing up of emotional energy (decision energy) frees up managers to focus on a few things such as new locations, fulfillment, quality control, training, etc.

Richard Koch in his earlier book - 'The 80/20 Principle' speaks about Return on Management Effort - the results that are obtained from a given output of management style work. I propose a slightly different measurement method - Return on Decision (or ROD).

Return on Decision refers to the results from each decision that you make:

For example, if you hire a person and you get returns which are equal to the person's lifetime output less the person's lifetime salary. On the other hand if you clearly define what kind of people your company hires and if you are able to pass on the job of hiring to other's then you've created a system that will probably have a higher return on decision made.

Of course, creating systems so that your managers have fewer decisions to make is hard in businesses that are changing significantly. That is why start-ups need to have people who can take on multiple roles, be willing to learn and change their job profiles. This is even more important if your start-up "pivots" into a new business either to stave off a threat or take advantage of a new opportunity.

While the standard way to move towards "decision-free status" is to introduce processes and systems (ISO, CMM, etc.) I believe that most companies fail to focus on the most important element which will reduce the number of decisions that they and their managers will need to make. And this is the company's positioning. If the positioning is right, then managers will have vastly lesser decisions to make. And they'll be able to really focus their emotional energy on the minutiae of the business (the second source of long term competitive advantage after powerful positioning.)

Taggle Fails

A few months ago I'd predicted that Taggle would fail mainly because it was a question mark (a follower in a fast growing market.)

Today (Dec. 8, 2011), I discovered that it had become reality.

It's sad. But it further validates the star principle.

The Curse of Creativity

Google engineers get 1 day a week to work on personally satisfying projects. In theory this sounds like a good idea. And it probably helps to keep superstars from leaving the company. And it has probably helped launch a few successful products.

Therefore, creativity must be good. Right?

But here's the problem.

Every time a Google engineer works on a non-search problem, the company moves away from it's core position. So you land up with nonsense products like Google Wave and Google Plus. By itself, such small failures for a company like Google don't matter in the short run. But in the long run two problems develop:

1. People begin to think of Google as just another technology company and not a search company.
2. More importantly, when other companies see Google products failing it removes the veneer of invincibility. Other companies begin to think that they can even beat Google in the search game. They develop the will to try and beat Google in it's core business and this is a dangerous thing.

What should Google actually have done?

They should have practiced "constrained creativity" - coming up with creative solutions within the rigid boundaries of the company's positioning statement. They should think very much inside the box.

Does an engineer want to build a search engine for lawyers? Yes!
Does an engineer want to build a faster search engine? Yes!
Does an engineer want to build an email search tool? Yes!
Does an engineer want to build Twitter search? Yes!

Does an engineer want to build a social messaging system? Not allowed!
Does an engineer want to build a photo sharing site? Not allowed!

At the very least, such non-core ideas should be tried under different brand names with NO association with the Google brand.

At this rate, Google will be the Cisco of the future (directionless and with a brand that stands for nothing.)

So the big takeaway if you are fortunate enough to be running a star business is this.

Get your smart people to work on products that deepen your differentiation and strengthen your competitive position. Don't allow them to do "fake work" and work on non-related areas.

If they do come up with breakthrough products, run your experiments under a different brand name.