New venture outsourcing blog

Kivi Leroux Miller at www.writing911.com is hosting the Carnival of Nonprofit Consultants. This issue is a great collection of how nonprofit managers and employees can increase their productivity in some pretty simple ways!This carnival is a collection of the best advice and resources that consultants and other support organizations are offering to nonprofits through their blogs each week. It’s a pretty good collection to read, even if you’re not in the nonprofit business. If you are however, it’s definitely worth a look at this and previous issues!

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In the last couple of weeks, a number of flights were either diverted or had suspicious passengers eased out of the plane. Many Asian travelers found themselves getting unwanted attention from fellow passengers and authorities. Last week, 12 Indians on a NW flight from Amsterdam to Mumbai were detained and then released without charges. The flight had entered the German air space when the crew diverted it back to Amsterdam due to suspicious passenger behavior. Similar incidents elsewhere in Europe have led to strong protests in Asia and charges of racial profiling. A lot of people I have talked to in India since that incident have told me they will avoid traveling to Europe if they can. Even for travelers inside EU and across the Atlantic, UK authorities are enforcing strict measures for cabin baggage. So much that RyanAir is planning to sue them for flight delays!Most governments around the world already use tough security measures while screening in-bound cargo. It has added both costs and delays to international cargo movements. Are all these security measures hurting trade? On first pass, it does not seem so. However, a closer look paints a different picture. World trade and globalization were facilitated by a softening of state sovereignty that allowed a less restrictive flow of goods, ideas, information, money and people across borders. The onset of internet facilitated it further through a free flow of information across the world. The stringent security measures, whether necessary or not, works to re-erect some of these barriers. As the states try to reassert their sovereignty, free flow of goods and people is the first casualty. There have also been efforts in some parts of the world to restrict access to internet in order to deny terrorists an opportunity to use the web. What’s next- a national internet that filters out users from other countries?Globalization, while raising fears in some parts of the world, is also responsible for enabling millions of people around the world and bringing prosperity. So while Boeing is buying cheaper IT services from India, it is also selling the finished planes by the dozens to India. The same money that reaches Indian workers then creates demand for air travel leading to orders for new planes. These orders, in turn, help create new jobs or sustain the existing ones in the US. If the world trade becomes a casualty of terrorism (or anti-terror measures), then we would have handed the terrorists a real big victory. What do you think? Join the discussion on our forum.

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This week, we will look at why LG has been so successful in India. While a blog is too small a place to discuss the details, I will try to highlight some of the important reasons behind their success. When LG entered India in the middle of 1990s, few people in India had heard of it. Leading Japanese brands like Sony, Sanyo and Panasonic were much better known and respected. Some of them have had a market presence in the television market for some time. However, over the next ten years, LG became the market leader in almost all major appliance categories, ahead of even local brands at the low end of the market.

While there have been major factors at work, the most important one has been PG’s approach towards the Indian market. They restrained from transplanting strategies that had worked well in other markets. They understood the peculiarity of the market-each part of India is a different market and consumers are extremely value conscious meaning they look for not just the cheapest but the best that fits the budget. Also, a lack of established distribution channel means the manufacturers have to rely on third party distribution, especially in tier-2 cities and beyond. LG has done rather well on all counts- it established a local sourcing base, even before the volumes could justify one, to cut down the costs. It used third party distribution to penetrate smaller cities and gain scale. LG also priced the entry level products aggressively to compete with local players. It created new products for the market- like an entry level TV to capture the low end of the market and a more refined, flat screen 21” model used as upgrade bait. The model was priced about 10% higher than the entry level model and has been surprisingly successful. Of course, it had the traditional, premium product retailing at the higher end. The volumes game allowed LG to achieve the manufacturing and distribution scale that enabled it to sell premium products with lower overheads as the costs were spread over a larger base. The company also tied up with aggressive local and foreign finance companies for financing consumer purchases, an area so far overlooked by major players. LG also did something unusual in its market entry strategy- it avoided getting into joint ventures (JV) with local companies. For a long time, management gurus and their ilk have championed the cause of joint ventures for entering new markets. However, the ground realities are quite different- most JVs have been utterly unsuccessful in India (more on this in a later). As an independent entity, LG India was not constrained by the limitations and interests of the local partner. The freedom allowed LG to invest freely and expand the product lines as it saw fit. Many other companies were unable to invest or bring in new products due to their partners limitations.

The result – LG had sales exceeding $2.5 billion in 2005 and expects to increase it to $10 billion by 2010. There is a lesson in this for everyone planning to sell to Indian consumers. However, LG’s situation was unique. It was a fairly large company and could afford to invest before seeing real results. It could also keep prices down due to economies of scale. But what if LG had been a small player? Had this strategy still worked? It’s doubtful. For starters, if you are a small player, you cannot hope to achieve scale, and therefore compete effectively at the low end of the market. But then, you probably don’t need to. Since LG was large, it needed to have a large business for it to make any sense. But for a small company, say $10m in revenue, even a $2m per year market will be attractive. It means that if your product sells for $100, you need to sell about 20,000 in a year to get to $2m. Is that doable without investing lots of money? Absolutely! We will see how in the next post.

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Entrepreneurs are always looking for money. It seems that they’re just on the brink of a fantastic idea - if only they had just a little more to fund it with.  Similarly, VCs, angel investors, and the rest are constantly complaining at how money is ubiquitous and how few good ideas are out there.  Who’s right?  Well, it seems that Steven Kreft and Russell Sobel at West Virginia University have determined that, “… it is the presence of entrepreneurial activity that draws venture funding to an area and not vice versa.”

In their paper, Public Policy, Entrepreneurship, and Economic Growth the two find that:

• The amount of sole proprietorships attract venture capital
• Increased patent activity draws more venture capital
• Sole proprietorships and patent activity tended to reinforce each other
• That various state and local laws could increase entrepreneurial activity (patents and sole proprietorships

This has significant impacts for entrepreneurs - if your idea is good and requires more money - don’t be deterred. The money will come looking for you soon enough!

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I found a very interesting post/rant about pricing software as an independent developer. It’s an interesting read if you’re in the software business and you have a few minutes. The basic dilemma is how to price software that you’ve just written. Having been exposed to the pricing discussions at even decent sized software companies, it amazes me how little “science” goes into pricing (unless you’re in retail). Therefore, it amazes me when companies (new or old) start talking about pricing they immediately want to know the same thing - What will it cost to produce this?!?

The question about whether it costs you $1 or $10 to make your widget is irrelevant in determining how much someone else will pay for it. What matters is the how else the person can get whatever it is you’re offering! Economics tells us that pricing depends on the customer’s alternatives. If you sell cars as a means of transportation, then your customer’s alternatives are plentiful: planes, trains, busses, walking, bicycles, even taxis. If you sell cars as a status symbol, your competition becomes: Rolex, boats, and even houses. Once again, we see that alternatives is what matters, not just competitors, not your cost to produce, and certainly not any sunk costs in R&D you’ve made. Coke and Pepsi learned this when juices, sports drinks, energy drinks, and bottled water started eating into their market (for gulps!) a few years ago! Certainly costs matter to a company. When you compare them to the prices the difference has to be favorable for you to want to continue in that business. However, if you start a pricing discussion with costs in mind, you’re heading down a troubled road. Psychologically you’ll find it much easier to rationalize and justify that your customers will pay your target price once you know that you “have to hit it.” Alternatively, I recommend the opposite.

Start with your customer’s alternatives - then narrow in on a price range. Now go find a way to manage your costs to meet that price range. If you can’t get there, then abandon the project. If you can, I like your chances!

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Check out Ron Steen selling 2% of his future earnings for a debt-free college experience! The man started the bidding at $100,000, which implies that he believes his future income stream is worth at least $5MM over his 40 working years!

So is this a good idea?In the 2005-2006 school year, the College Board’s 2005 tuition report found that at four-year private nonprofit institutions, college cost students $29,026. Four year public institutions cost just 42% of that, coming in at: $12,127. They also found that the rates of increase were slowing to about 6% annual increases. They also found that the trends in student aid favored higher income people.With the amount of student aid ballooning in 2005-2006 to $129BB - I find it hard to believe that he couldn’t have financed part of his education through debt.

Therefore, I think the best idea would be to agree to his equity terms, and then “refinance” the equity by having Ryan take on a student loan - but then agree to guarantee the loan for him. This would get the equity holder most of his money back, at an interest rate totally out of reach for him, and Ryan would get to go to college debt free!

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Everyone wants to come up with the next new thing. Unfortunately, this is hard to do. Thinking outside of the norms in your business/industry takes hard work or inspiration. Unfortunately, you can’t learn inspiration!Any new idea has two outcomes - you either decide to go with it or you don’t. The trick to new ideas is to figure out which ones are out there that are just waiting to be discovered - the marketer’s false positives.As a quick tutorial, there are four outcomes with any two-choice decision - “yes” vs. “no for example. You can either say “yes” (positive) or “no” (negative). Similarly, there are only two possible outcomes. You can be right (true) or wrong (false). Thus, there are four combinations of outcomes:

• True positives (you guessed “yes,” and were right)
• True negatives (you guessed “no,” and were right)
• False positives (you guessed “yes,” and were wrong)
• False negatives (you guessed “no,” and were wrong)

Back to the marketer’s false positives. False positives are all of the ideas that were never acted upon. They’re the small businesses who pass up exploiting myspace, the larger companies who don’t reward employees for failure as Intuit does, or everyone who missed out on the tremendous garage sale market that eBay captured.  These are the ideas that never were; they represent very fertile ground for new opportunities in business today. How can you find them? Focus on something people are good at: comparisons. Differences to be more specific.

Most people, who try at all, go about their market research by examining their competition in close detail. The next level of depth is to examine the substitutes for your product or services. What about the alternatives? Ryanair for example, a European low-cost airline, has thought very carefully about the differences between the alternatives of travel: airtravel, bus, train and automobile travel. To date, they have efficiently organized air travel around the primary features that cars & busses have going for them (cheap) while also utilizing the benefits of an airplane (fast). Their whole business is about owning the market somewhere between busses, trains, airplanes, and every other way of getting from here to there.

What do your non-customers choose as alternatives besides your obvious competitors? To do it themselves? To buy a book about it? To have a friend help them out? These are all choices being made over your product or service - and you could learn a lot by asking about the differences between what you offer and what the alternatives offer.

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Brad Williamson asks a great question: Should you advertise in newspapers?

His basic analysis of the industry is at a high level saying they’re screwed. While it may be true for now, I think there’s actually a lot of room for opportunities there. I know of a few papers in Washington D.C. are experimenting with some different formats, distribution methods, and even business models.  However, his point of the post is that small businesses probably have better alternatives for advertising these days, and I would agree. Personally, even if the action ratio were the same for any given ad, I’d much prefer the online & direct mail advertising because of the detailed tracking. This allows one to dramatically improve the response rates over time by being able to track small incremental improvements through experimentation.

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A quick search on entrepreneurship, start ups, and other similar terms seems to indicate that getting money is the important part of starting a business.

Maybe I’m alone here - but it sure seems to me that there is plenty of innovating to be done “on the cheap.” Don’t get me wrong, there are lots of new businesses which require huge amounts of capital. When Southwest started - they were well advised to buy at least one airplane!

Money is something that certain people have an easier time getting access to than others. Whenever I hear about a new business idea that requires any serious money, my first instincts are:

Is there a way to reduce the capital required during the proof-of-concept stage? Would a few key customers be able to fund growth? How can this be done with an order of magnitude less money?

More often than not, if you force yourself to think about having to do more with much less - the results can surprise you!

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