Paul Buchheit, the creator of GMail, and a founder of FriendFeed (which I wrote about earlier) wrote an interesting post describing his philosophy on the development approach of innovative products (typically in startups). I found his thoughts to be very similar to those of my own. My favorite part is:

So what’s the right attitude? Humility. It doesn’t matter how smart and successful and qualified you are, you simply don’t know what you’re doing. The good news is that nobody else does either, though some are foolish enough to think that they do (and that’s why you can beat them).

What is the humble approach to product design? Pay attention. Notice which things are working and which aren’t. Experiment and iterate. Question your assumptions. Remember that you are wrong about a lot of things. Watch for the signals. Lose your technical and design snobbery. Whatever works, works.

What I tell people over and over is that one can be the most accomplished product designer/manager/engineer, but when developing a new product, you are really just making an educated guess about what will resonate with your user. Sometimes what makes so much sense on paper just doesn’t jive with users. In a sense, the design+requirements for the initial product is the hypothesis and the v1.0 of the product is the experiment that tests the hypothesis on users.

What separates the winners from the losers is the analysis of the results, which in the case of web-based products can be efficiently done by looking at specific engagement metrics. This does not just mean pouring through Google Analytics data. Instead, I’ve found it to mean combining the analytics data with database queries that measures key application engagement metrics.

The point is that the development of innovative products must be both rigorous and methodical. Use the standard scientific method. The unknown question is “What do my users want?”. Start with a hypothesis, experiment by testing your products with real users, analyze what worked and what didn’t, modify your hypothesis, test, …

With all this talk about the Amazon Kindle, I Googled Jeff Bezos (Amazon’s founder and CEO) and found an article by Fast Company about his, and Amazon’s, story.

On page 4, Jeff’s rules of leadership - and management - are listed:

• Hire very carefully — you’re creating an enduring culture.
• Be stubborn and flexible.
• Obsess about customers, not colleagues.
• Know when to throw away the org chart.
• Get good advice — and ignore it.
• Don’t chase the quick buck.

…and his rules for Amazon:

• Communication is terrible.
• Take leaps of faith.
• Be simpleminded.
• Add up lots of little advantages.

I’d encourage you to click the link above and read the details behind some of these bullets. His general rules on leadership you’ve probably heard before in one shape or form, but his rules for Amazon - particularly the “Communication is terrible” rule - I found to be thought-provoking.

I was reading this post by Paul Kedrosky talking about how Amazon’s gross profit margins have been consistently declining since 2001, which sort of contradicts the company’s claim, since its inception, that massive scale will make the business more profitable.

I realized that I wasn’t exactly sure of the the definition of gross profit margin versus operating profit margin. I googled it and found this Income Statement Analysis guide on About.com. Before I knew it, I had spent a good half an hour going through most of it. I found it to be a very practical crash course.

Some interesting things I learned:

1. For asset-intensive businesses, how the company accounts for depreciation is a really important thing to consider. Depreciation methods, rates, and salvage values can make big differences in a company’s bottom-line. More specifically, they can be easily played with to make the company’s earnings look better.
2. EBITDA is BS. Creditors demand interest payments, the IRS demands tax payments, and depreciation and amortization are absolutely real costs of earnings. EBITDA is sexy but really misleading.
3. Comparing operating margin versus gross margin across many competitors in the same industry can tell you a lot about each company’s business models. Like this post that talks about Tim Hortons vs. Starbucks.
4. If a company owns a minority stake (< 20%) of another business, it only reports the actual cash (dividends) it receives and NOT the % portion of earnings that the owning company is entitled to. This profit that the owning company is entitled to but doesn't report is referred to as "look-through" earnings. In one famous example, Berkshire-Hathway, actually had it's look-through earnings exceed it's own earnings, so Berkshire's actual earnings report was a horrible understatement of the company's performance.
5. “Record earnings” don’t necessarily mean jack. ROE (return on equity) is the number to look at. After all, a company which generates the exact same operating income every year, but sticks all its earnings in a 5% interest bank account, will consistently have record earnings simply because of the increased interest income on increased equity. Shareholders can put their own money in the bank and earn that interest. They don’t need a company to do it for them.

Anyways, I would highly recommend you at least browse through this guide if you aren’t already familiar with these concepts. I was somewhat familiar with many of these concepts, but this guide really tied everything together nicely. Thanks Joshua Kennon!

Ask most people about Alibaba and you’ll likely be met with scratching heads. A lot of people have heard the name, but only a few folks seem to know that Alibaba is a Chinese company that offers a directory service for Chinese manufacturers and suppliers. I had watched some sort of documentary a few months back that played up the vastness of Alibaba’s directory and how through a couple clicks of your mouse, you too could can find a suitable Chinese supplier for just about any type of good you want to manufacture or sell.

Alibaba makes a lot of sense. I mean let’s face it. Doing business internationally is intimidating. Doing business in China is even more intimidating unless maybe if you’re Chinese and speak the language well. I certainly am not such a person so I know that connecting myself to the right Chinese supplier would be next to impossible without an agent to help me. From what I’ve been told, such agents can be quite expensive and because of biases (read: kickbacks), the agent may not even connect you with the optimal supplier for your needs.

Alibaba usurps the need for such an agent and provides someone like me direct access to the suppliers. It’s a simple concept that offers exciting opportunity for creating business relationships between foreign companies and China. Assuming Alibaba works as advertised, it’s no wonder that Yahoo! invested $1bn for a 40% chunk of the company. But, the question is, does it work? Is it really that easy for an average American businessman to locate and work with the right Chinese partner?

For one man’s experience, check out this post by Greg Runco. Greg designed a slipper and was looking for someone to manufacture it. He used Alibaba and describes his experience thus far with the supplier he chose. Greg also has several other interesting posts on his blog. I find his style sort of similar to mine and I enjoyed reading through his posts. Thanks for the introduction Greg!

It’s been a while since the last review I posted and I must admit that the pace at which I’m going through The Personal MBA reading list is not as brisk as I would like. The good news, though, is that I just finished reading Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne.
The book has quickly garnered a laundry list of awards and is endorsed by one of my business-world idols, Carlos Ghosn. My curiosity was piqued so I hopped over to Amazon and ordered it.

The book promises to teach the reader “how to create uncontested market space and make the competition irrelevant”. That’s a pretty bold promise. So, does the book deliver? I think so. Or about as well as a book can.

So “What’s this ‘Blue Ocean’ thing??”, you might ask. Well, to define what a Blue Ocean is, it’s easier to first define what it’s counterpart, the “Red Ocean”, is.

Red Oceans represent all the industries in existence today or, in other words, the known market space. The boundaries in such industries are well-defined and the competitive rules of the game are known. Companies in Red Ocean industries try to outperform their rivals to snag a greater share of existing demand. Because of such factors as accelerating advances in technology, trend towards globalization, and stagnant worldwide demand, industries have witnessed accelerated commoditization of products and services. This commoditization means that buyers increasingly select based on price which leads to price wars which leads to shrinking profit margins. Every industry is or will eventually become a Red Ocean and companies regularly employ traditional competitive-stategy techniques to survive in bloody Red Ocean environments.

However, for a company to sustain high performance, it must look beyond it’s current environments and grab new profit and growth opportunities. This is precisely what a Blue Ocean offers. Blue Oceans represent all the industries that don’t exist today or, in other words, the unknown market space. (If you raised the BS flag after reading that sentence, think about this: Many multi-billion dollar industries of today did not even exist 30 years ago e.g. bio-tech, personal computers, mutual funds, cell phones, express package delivery, coffee bars, and the list goes on… )

The underlying process of creating a Blue Ocean is something the authors call value innovation. Instead of focusing on beating the competition, focus on making the competition irrelevant by creating a leap in value for buyers. Value innovation is contradictory to the commonly accepted competition-based strategy concept of a “value-cost trade-off” which says that there must be a compromise between product differentiation (added value) and low cost. Blue Oceans achieve differentiation and low cost simultaneously.

The authors cover the basic analytical frameworks of the Blue Ocean strategy: the strategy canvas (the value curve), the four actions framework, and the eliminate-reduce-raise-create grid. In later chapters, the authors go into further detail about the formulation and execution principles (there are 6 in total) of the strategy.

One thing I really liked about the book was that the authorss unit of analysis is a single strategic move of a company, not the entire company or industry. In the first chapter, the authors find fault in books such as In Search of Excellence and Built to Last which had put several companies on a pedestal as “model” firms, yet, today, many of these firms are far from being industry leaders. The authors reasoned that if the same company can be brilliant and lame at different points in its history, then it doesn’t make sense to make the company the unit of analysis for studying strategy.

Another aspect of the book that I really liked was the extensive use of case studies. They helped to solidify the concepts being explained as well as making the text more enjoyable to read.

Overall, I would highly recommend this book. This shouldn’t be the only book you read about competitive strategy, but I think it should be on your reading list if you want a more complete perspective of the subject. At the very least, find a copy of the book and read the first section as it does a nice job of covering the key points of the strategy.

Note: As I did before, I made fairly detailed notes while reading the book. If you would like a copy of the notes, shoot me an e-mail and I’ll be happy to send you a copy.

There’s a new networking event for local folks in the tech entrepreneur community called Stirr. I’m usually not a big fan of going to such events, not because I don’t like talking with people (anyone that knows me knows that if there’s one thing I absolutely do like is to talk) but because loud, crowded environments such as these don’t usually promote much meaningful conversation. By the end of the night, I have a bunch of business cards and a voice that’s shot to hell. Some people probably think that a stack of business cards equals victory but for me the only thing tangible I get out of going to these types of events is meeting other entrepreneurs who share the same spark that I have. It’s inspiring to me and often serves as that extra glass of Kool-aid that I need to stay optimistic about entrepreneurship. Anyways…. one thing unique about Stirr is that they allow a few companies at each events 60 seconds to pitch their company and live demo their product(s) throughout the night. The companies that participated tonight were:

3Jam - Text message a group of friends at once. Definitely a nifty tool when you need to engage in a conversation with multiple contacts on your cell phone. The problem is that this is a feature, not a business. They can either charge users a nominal fee per use or add advertising to the messages. A lot of people text message so this should be good revenue right? Wrong. If this becomes popular, you can bet that carriers will implement this simple functionality on their own and add it to their own list of paid services. It’s unlikely that carriers, who are notoriously snobby, will agree to some sort of joint marketing/revenue partnership. Carriers also have the resources to better integrate such functionality into the phones themselves.

Accomplice - According to Accomplice, their product is “a simple, intuitive application that integrates an efficient personal organizational tool with the ability to quickly pull together a team. With Accomplice, busy professionals can be effective, save time, and execute on all of their personal and work activities using a single system.” Ummm.. Yeah. Your guess is mine. I did see a demo of their product from a distance and it seemed polished but from what I’ve seen, most people end up sticking with very simple - often crude- solutions to organizing their personal information rather than using fancy PIM’s. I’m not saying Accomplice is bad but if I can’t understand what it is and how it’ll simplify my life in 15 seconds, that’s a problem. But who knows, maybe my life just isn’t busy enough?

JumpCut - Edit videos online. I haven’t personally used their service yet but I was impressed by the demo they were showing. I don’t see these guys surviving as a standalone service. They will need to be able to integrate with other video services such as YouTube to directly access, modify and then save videos stored elsewhere. Otherwise, it’ll be too much of a pain in the ass to upload your video to JumpCut, modify it, download it back and then upload it to YouTube. And this is when the service is free. Presumably, JumpCut will want to earn some money so that will further deter users. Video sharing communities like YouTube will either build thier own tool (which of course will have much better adoption even if it’s not as good) or buy JumpCut. I could definitely see a big player like Y!, Google, MS, Fox Interactive buying these guys to bolster their respective video sharing offerings. Again, I have not actually used JumpCut so I don’t know how good it is.

LogSavvy - The dude who spoke about LogSavvy roused the most interest from the audience by talking about how relational DB’s do not allow applications to easily mine the data to discover relationships between …. eh, I sort of lost him in the middle. Their website is similarly vague. From what I can tell they have software/systems to analyze web server logs, db logs, and other logs to form custom reports and views. Being able to poke and prod your data to optimize your product for your customers is becoming ever-more essential to success especially as not only user data but also user behavior is logged. So, I could imagine the demand for this type of software is high. I guess we’ll have to wait for something more tangible to understand what they’re up to.

TheMintPages - Review site for female beauty products. As the host of Stirr reminded the audience, the female beauty product market is huge. Review sites for every day products don’t really exist so I could definitely see a niche site focused exclusively on the needs of this consumer catching on. Of course, this is basically a social content play so the key to success is all about not only reeling users into the site, but hooking them into creating content for the site - whether that means writing a product review or replying to other user’s comments. I personally did not like their site design though. It’s way too Web2.0 which gets the thumbs-up from the geeks but geeks (usually) don’t buy makeup.

I accepted an invitation to be on a “Young Entrepreneurial Careers” panel taking place during a week-long entrepreneurship summit organized by the Asian-Pacific Student Entrepreneurship Society at Stanford. The description of the presentation is:

What does it mean to be a young entrepreneur? Hear from panelists with recent entrepreneurial experience, people who still remember the trials and concerns that come with starting up a venture for the very first time. They will discuss some of the issues that young entrepreneurs face, such as making the first leap to entrepreneurship and balancing a “normal” job and life with the entrepreneurial venture. We will also hear from panelists who will discuss what embarking on an entrepreneurial career entails.

Many of the events on the schedule for Summit 2006, which takes place from April 10th to 15th, are open to the public, including a keynote speech - that I’m looking forward to - by Peter Thiel. For more information about Summit 2006, click here.

Out of all the RSS feeds that i subscribe to, Paul Graham’s Essays is my favorite. When I see a new item on his feed, I usually pause what I’m doing and read it. His latest essay this month is titled “How to Make Wealth” and it discusses the difference between money and wealth and how understanding this difference is fundamental to understanding entrepreneurship. Some of my favorite quotes:

Someone graduating from college thinks, and is told, that he needs to get a job, as if the important thing were becoming a member of an institution. A more direct way to put it would be: you need to start doing something people want. You don’t need to join a company to do that. All a company is is a group of people working together to do something people want. It’s doing something people want that matters, not joining the group.

To get rich you need to get yourself in a situation with two things, measurement and leverage. You need to be in a position where your performance can be measured, or there is no way to get paid more by doing more. And you have to have leverage, in the sense that the decisions you make have a big effect.

The problem with working slowly is not just that technical innovation happens slowly. It’s that it tends not to happen at all. It’s only when you’re deliberately looking for hard problems, as a way to use speed to the greatest advantage, that you take on this kind of project. Developing new technology is a pain in the ass.

This is a good plan for life in general. If you have two choices, choose the harder. If you’re trying to decide whether to go out running or sit home and watch TV, go running. Probably the reason this trick works so well is that when you have two choices and one is harder, the only reason you’re even considering the other is laziness. You know in the back of your mind what’s the right thing to do, and this trick merely forces you to acknowledge it.