Category Archives: strategy

Leo’s Pawn to King Four: HP To Acquire Vertica (Updated)

Posted on February 14, 2011 | 9 Comments

HP today announced that they will acquire data warehouse and analytics platform provider Vertica of Billerica, MA.  Cowen and Company estimated the price at 5x revenues, estimating that Vertica did $40M in 2010 revenues, suggesting a valuation of $200M which I find low.  Frankly, I wouldn’t be surprised if it were twice that given the hotness of the space, the gradual opening of the IPO window, and the opportunity cost for Vertica of forgoing independent growth. See the bottom of the post for more math fun and guessing.

[Update:  I have now heard valuation guestimates including "over $300M" and "north of $500M" so at this point I'm starting to get confused -- rumors around valuation usually converge, not diverge.  Yesterday, the 451 Group said they believed the price was $275M up-front with up to a $100M earn-out that can be earned over time through performance.  This makes sense  to me both in terms of valuation range and in terms of the confusion about valuation.]

This move follows on EMC’s July acquistion of Greenplum, rumored to be in the $400M range.

The move marks Leo Apotheker’s first big move as CEO of HP and — finally — gets HP into the data warehousing and analytics market in a real way.  (Let’s not talk about NeoView which, for whatever reason, was never taken seriously in the market.)

Many folks, including me, thought HP missed their big chance to enter the DBMS and data warehousing markets by failing to scoop up Sybase back in May, which SAP did for $5.8B.

The move is probably a change in direction for HP’s software head, Bill Veghte, who joined HP in May from Microsoft, where he had spent his entire career after graduating from Harvard, and where he was most recently responsible for shipping Windows 7.  Based on his background, I suspect that Veghte was going to head into data center, security, and infrastructure (a la the $1.5B acquisition of ArcSight in September).  Perhaps Leo’s moves into data warehousing, analytics and presumably one day — enterprise applications — will complement, rather than replace, that more infrastructure-oriented strategy.

Yesterday, The Mercury News ran an interesting piece on HP’s new non-executive chairman of the board, Ray Lane, who was appointed at the same time as Apotheker, and who has already taken major steps to reshape HP’s board.  Lane was instrumental in steering Oracle out of a financial crisis in the early 1990s and driving their growth throughout that decade.

I suspect this is HP’s opening move.  There will be many more to come.

Guessing Vertica’s Size:  $25 to $35M-ish
LinkedIn says Vertica has 96 employees.  For West Coast companies this figure is usually quite accurate; let’s assume it is for Vertica.  “Normal” productivity of $250K to $300K/head implies revenues of $24M to $33M.  LinkedIn says Vertica has 36 employees in sales.  If one of three of those are quota carriers, then you have 12 quota-carriers at “normal” productivity of $2M implying $24M.  Alternatively, if you assume 15% of a enterprise software company’s headcount is quota-carrying that implies 15 quota carriers at $2M each yielding $30M.  All of this is very back-of-the-envelop and breaks under high-growth rates.

Nevertheless, I’ll guess they are $25 to $35M in revenues, suggesting that a $200M exit would be 6-8x revenues and a $375M exit would be 11-15x, basically validating the possibility of $200M+ up-front price with a performance-based earn-out.

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Posted in HP, strategy

The Opportunity Quality / Execution Quadrant

Posted on December 20, 2010 | 9 Comments

One thing they drill into your head in business school is how to make everything a quadrant.  While I don’t know for sure if it started with the famous BCG matrix — which groups business into dogs, cash cows, stars, and question-marks — I’d bet that the BCG matrix played a big part in initiating the quad-thinking movement.

I’ve been toying with a quadrant lately that compares businesses based on the quality of the opportunity they pursue and how well they execute against that opportunity.  I rate execution from clownish (“Inspector Clouseau”) to flawless (“Swiss Watch”).  I rate opportunity quality from difficult (“Hardscrabble”) to easy (“Fertile”).

When I built the quadrant, I decided to try and place a few companies at which I’ve worked during my career on it.  (I thought about trying to place MarkLogic, but decided against it for a number of reasons.)

Please let me know what you think of my model, what you think of my placements, and what other companies you’d place where on this diagram.  In addition, if anyone has clever names for the four quadrants themselves, I’d love to hear them.

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Posted in strategy

More Emergent Strategies: Groupon, Greendot

Posted on September 10, 2010 | Leave a comment

I’ve always loved emergent strategies for many reasons:

  • They’re practical.  You invest in what works as opposed to what leadership wants to work.
  • I’ve seen too many strategy offsite white-board, created-in-a-vacuum strategies fail.
  • The premise that genius is not in crafting a particular strategy, but instead noticing what’s actually working and investing in that.
  • They often involve marketing, essence, and the truth:  positioning around what you really do as opposed to what you want to do.
  • They are so common.  There are countless stories of companies and products where success was predicated on observing this intention/reality gap and then positioning on reality as opposed to intention.

Some of my favorite examples include:

  • NyQuil.  In testing, they realized this regular cold medicine kept putting people to sleep.  The solution?  Reposition the product as a nighttime cold remedy, which it’s been for over 25 years.
  • Viagra.  Originally intended as high-blood pressure medication, patients in the clinical trials consistently reported an interesting side effect, so they repositioned the drug around the side effect and created a multi-billion dollar category in the process.
  • FriendFinder.  When users kept posting explicit profile pictures on FriendFinder, a B-tier social network, they needed to make a policy decision:  block the behavior or not.  They decided to run with the idea, spun up derivative site AdultFriendFinder, became the dominant social network for swingers, and later sold the site for $600M.
  • Sybase.  Originally conceived as a fast relational database, Sybase realized that financial institutions were particularly attracted to that value proposition, repeatedly doubled down on the finance vertical, and became a powerhouse in providing databases to financial services.

While I’d say that MarkLogic’s focus on media was similarly emergent, my personal favorite emergent strategy was actually at BusinessObjects.  When analytic applications were the rage, we created a unit to build a high-end CRM analytic application called Ithena.  The trouble was we staffed the unit with platform people, not applications people.  Since they had basically no idea how to build a CRM app, they kept building enablers, effectively building another layer of platform on top of BusinessObjects.  (I kept saying “there’s no app in your app” but nobody wanted to hear it.)  When positioned as a CRM analytic application, Ithena was a non-starter.  When we repositioned it as BusinessObjects Application Foundation, a platform for building analytic apps, sales took off.  By simply calling something what it was — instead of what we wanted it to be –we enabled a new, and quite successful product line.

To pick some more recent examples, I read an article about Groupon in Forbes a few weeks back.   Groupon is conjunction of group and coupon and they provide daily deals in a large number of cities where you can, for example, get a massage worth $80 for $35 provided enough other people also take the deal.  Groupon gets a cut of the total revenue (often 50%) and the merchant offering the deal gets either a bunch of new customers or the chance to unload some inventory.  The company is on track to break $500M in revenue this year and raised its last round at a $1.35B valuation.  While I confess I’d not heard of Groupon before the Forbes article, I now get the daily deal email and think it’s a great concept.

And Groupon is also an example of an emergent strategy that morphed several times along the way:

The [first] idea soon morphed into ThePoint.com, an online platform for petitioners to muster support for all sorts of causes. ThePoint launched in November 2007 and drew national press attention for its users’ zany campaigns. One amassed 1,000 people committed to donating millions of dollars toward solving Africa’s aids epidemic–on the condition that u2 front man Bono would retire from public life. Another corralled several thousand supporters of building a dome over Chicago to keep the city warm all year. The publicity helped lure $4.8 million in venture capital from the likes of Sand Hill Road’s NEA. “I figured it was just a matter of time before I had my $400 million company and got my big payout,” quips Mason.

But ThePoint didn’t attract enough eyeballs to live on advertising revenue. One of Mason’s lieutenants, Aaron With, proposed paying for popular Google search terms related to societal issues–such as “make weed legal.” Mason got traffic, just the wrong kind. Obnoxious fans of the band Insane Clown Posse, known as Juggalos, made ThePoint their online playground. As losses mounted in 2008, Mason trudged to With’s house to lay off his friend. “If I was a rational person, I probably would have quit right there,” says Mason.

One promising trend: Some of ThePoint’s most effective campaigns banded consumers together to gain buying power. Mason began featuring a blog that offered readers a different deal from various vendors every day. Having little to lose, his investors encouraged him to pursue the strategy. Groupon–then called Getyourgroupon.com–was born.

I went to a function last night where I heard the hilarious founder of Greendot, Steve Streit, talk about his company’s beginnings.  The original idea was a e-commerce site where kids could buy junk online (e.g., www.isellcrap.com).  This, in turn, begged the question how kids would pay for stuff online, which lead them to the idea of a payments service for kids, which in turn lead to Greendot which, as it turns out, is not focused on kids at all:  it serves the 50M Americans who either don’t want or can’t get credit cards with prepaid reloadable Mastercard and Visa cards.  His company went public earlier his year and is now worth $2B.

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Posted in strategy

The Fit or Fat Startup

Posted on April 7, 2010 | 2 Comments

As I sit here at Palantir’s Govcon 5 conference at the lavish Ritz Carlton in Tyson’s Corner (Virgina), I can’t help but think about the recent “fit or fat” startup debate that hit the blogosphere a few weeks back.  The debate started with a post by VC Ben Horowitz of Andreessen Horowitz entitled The Case for the Fat Startup.  Excerpts:

The [Sequoia RIP Good Times] presentation catalyzed a movement. Startups everywhere adopted a lean, low-burn, low-investment model. To this day, companies seeking funding at our venture firm, Andreessen Horowitz, proudly proclaim in their pitch decks that they are raising tiny amounts of capital so they can run lean.

Here is my central argument. There are only two priorities for a startup:  (1) winning the market and (2) not running out of cash.

Running lean is not an end. For that matter, neither is running fat. Both are tactics that you use to win the market and not run out of cash before you do so. By making “running lean” an end, you may lose your opportunity to win the market, either because you fail to fund the R&D necessary to find product/market fit or you let a competitor out-execute you in taking the market. Sometimes running fat is the right thing to do.

The part of his argument with which I agree is the “sometimes.”  The simple fact is that strategy must be a function of situation and there are indeed some situations (e.g., landgrabs) where the run-fat model is required.  By landgrabs, I mean the early days of new, destined-to-be-large markets with sufficient switching costs so as to realistically justify losing lots of money in the quest to establish market leadership.  Examples include Amazon in online retail and PayPal (which raised $194M) in online payments. Remember these strategies do not always end happily:  WebVan consumed  $1.2B in venture capital before it went bankrupt in 2001.  Hence my two key criteria:

  • A destined-to-be-large market (WebVan missed here, the market for web-ordered groceries today is still non-existent)
  • Sufficient switching costs to justify the years of  major losses (many online retailers who “sold dollars for ninety cents” were surprised to find their customers disappeared when they tried to sell them for $1.05)

When you “go big or go home,” sometimes you go home.  I’d argue that the media biases us by looking primarily at successes, not failures, artificially reducing the perceived risk in such strategies.  It’s a bit like saying inner-city youth can escape the inner city through athletic scholarships.  Yes, it does happen.  And yes those athletes sometimes become rich and famous.  But simply because it sometimes works, you cannot argue it’s a good strategy.

I was going to use Oracle as example because they played the landgrab game superbly in the early days of the RDBMS market.  But I think they only raised $10M or so before their IPO in 1986. (Vent:  I just wasted 30 minutes trying to find a precise answer).  So unlike the go-big VC burners, Oracle largely self-funded its ten-year journey to $50M.  My prior employer, Business Objects, raised a total of less than $5M in VC.

The debate picked up steam when fellow VC Fred Wilson of Union Square Ventures responded with a post entitled Being Fat Is Not Healthy.  Excerpt:

In short, since I started investing in the web in ’93/’94, I have invested in about 100 software-based web companies. And the success rate of fat companies versus lean companies is stark. I have never, not once, been successful with an investment in a company that raised a boatload of money before it found traction and product market fit with its primary product.

Boatload is a subjective term. So is traction. So is product market fit. And so is successful. So let me try to define them in the way that I think about them. A boatload of cash is more than $20mm of invested capital. A boatload of cash is monthly burn rates of tens of millions of dollars. Traction and product market fit are customers or users buying or using your product in droves. It is the realization that you’ve found the sweet spot of the market you were going for. And successful is an investment that pays out multiples of the dollars we invested in it. Getting our money back is not successful in my book. Getting three times our money back is good. More than that is great.

Let me say it again. I have never been involved in a successful software-based web service that raised and spent boatloads of money before it found it’s sweet spot. But it has happened. The Loudcloud story that Ben lived and tells in the All Things D post is proof that it can happen.

You can also win the lottery. The odds aren’t great that you will. But millions of people play it every day. I don’t.

Basically, I agree with Fred, with the sole exception of those Amazon- and PayPal-like landgrabs that really are one-shot opportunities that someone is going to win.  The problem is that entrepreneurs, being rabid and optimistic, assume they are in that 1-in-1000 situation about 95% of the time.

Back to Palantir, I think they’re pretty clearly playing the “fat” strategy.  That’s logical because the founders are from PayPal and are undoubtedly applying some rewind/play logic from those days and should certainly have some survivor bias because — well — it worked last time.   (Try convincing a lottery winner that buying lottery tickets is, on average, a very bad idea.) While they’ve raised $35M to-date, I suspect they’ll be raising another round soon, especially if they are to grow from 250 to 400 employees by December 31st as CEO Alex Karp said this morning.

My issue for Palantir is that I don’t see a landgrab market opportunity which they (see prior points) most certainly do.  The technology looks like a set of nice data visualization and graph analysis tools; kind of a nice suite of graph-centered BI tools for tracking entities, relationships, events, and documents across collections of unstructured and structured data tapped from various repositories.  While the front-ends are sexy, and most likely easier to use than what they’re replacing, if you think using traditional BI tools is tough, I think these tools are harder.  Search meets BI this ain’t.

Visualization companies have had a checkered history in enterprise software, with the most successful being vertical and application specific (e.g., Spotfire), so I think Palantir’s vertical focus on government is a good one.  They seem also to make an effort in finance, but my gut feel is that they’re 90% government.  The company is good at PR, has some creative and interesting management philosophies (e.g., 210 of the 250 employees are supposedly “engineers”), and has a professorial and clearly very intelligent CEO.

Operationally, I think they’d be an excellent partner for Mark Logic because we specialize in back-end heavy lifting and (whether they’d freely admit it or not) everything I saw today strikes me as front-end and/or data aggregation, as opposed to data management, technology.  I know we have some partners in common and I believe some customers may have integrated the systems.

Could Palantir be BusinessObjects for unstructured data?  I don’t think so — the technology seems too specialized and too hard for the average user; it’s clearly made for analysts.  On the other hand, could they be MicroStrategy?  Maybe.

Either way, they’re one of very few enterprise software startups these days playing it fat.  If I’m right, they’ll be raising another round in the next few quarters, probably at a nice valuation, and basically playing Horowitz’s playbook.  On verra.

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Posted in strategy, Uncategorized, Venture Capital

Five Rules for Competing with Giants

Posted on March 24, 2010 | 8 Comments

I’ve spent my career competing, for the most part successfully, against companies from 10 to 1,000 times bigger than my own.  Thus, over the years, I’ve developed some rules that can help maximize your odds of success when competing against giants.

  • Concentrate force.  The easiest way to be bigger than your competitor is to focus.  While Oracle was around 100x our size when I joined Business Objects,  our BI team was bigger than theirs; in 1995, we had nearly 300 people who did nothing but BI.  Focus can be about either product or market.  At Mark Logic, I believe that Endeca is around 2-3x our overall size, but by my estimation Mark Logic is 3-4x bigger than they are in our core markets of media and government.  While Autonomy is more than 10x our overall size, I believe that we may be bigger  in media and government (for relevant use-cases), and I’m nearly positive that we’re bigger in the dead center of our markets:  STM in publishing and intelligence in government.  Focus is hard because there are always people who are more obsessed with the opportunities you’re not pursuing than with those you are, so have a clear sense of your growth goals, decide rationally if you can meet them with your chosen focus areas, and then jettison those who can’t get with the focus program.
  • Be the best.  I like to say that no sane person wants to buy software from a startup.  Most IT folks sleep much better at night buying from the mega-vendors, even if they feel like they’re getting gouged on price.  People buy from startups not because they want to, but because they have no choice.  How can you give people no choice but to buy from you?  Solve one problem better than anyone else in the world.  Those are easy words to say, but they’re very hard to do.  Ask yourself:  what is the one problem that we can really solve better than anyone else in the world.  That’s what the VC cliché “world class” means.  Most startups aren’t honest with themselves in this department; they tell themselves white lies about where they can realistically be the best.  The result is they overextend and end up with three or more mediocre products instead of one great one.  Sometimes this is driven by greed for more addressable market; sometimes it’s driven by fear and the desire for diversification.  Remember the Andrew Carnegie quote:  put all your eggs in one basket and then watch the basket.
  • Split pins.  Most technology strategists are familiar with Geoffrey Moore‘s “bowling alley” model which says that startups should view markets as bowling pins, using one market to knock down the next.  This model encourages startups to skip through markets hastily, like American travelers skipping through countries in Europe (e.g., If this is Tuesday, it must be Belgium).  Instead of skipping pins, startups should split pins.  Without sounding too cosmic:  look for micro-alleys within bowling pins.  When I started at Mark Logic, I thought “publishing” was a pin and that all publishers were basically the same.  When I focused on publishing and looked not just for similarities among publishers but also differences between them, I learned that STM, education, news, market research, credit/financial, legal, trade, and B2B publishers were all different.  I like to say that all beagles look the same unless, of course, you’re a beagle.  By splitting pins instead of skipping them, you learn more about your customer’s needs, can serve them better, and — best of all — typically discover that the market you were about to skip over is about 10-100x bigger than you originally thought.
  • Hire stars.  Giant-fighting startups are not places for the weak or mediocre.  You need a team of aggressive, high-energy people who understand the mission and are ready to make the sacrifices required to win.  High-growth startups are lousy places to learn on the job.  That’s why the VC model gives nice chunks of equity to experienced managers with safe jobs in big companies.  They want to lure them into the startup and compensate them for the risk in so doing.  In the end, VC’s are not risk takers; they are risk eliminators.  They try to isolate all risk to the fundamental innovation and do so by setting every other lever of the business to standard. (See Chris Dixon’s recent post, Don’t Be Creative About the Wrong Things, for more.)  That’s why you need to build an A-team and be sure the people on it are scaling with the company.  Rest assured, even if you’re not asking the “can they scale” question about your team, the board is asking it about you.
  • Work together.  I’ve seen too many startups with divisive, prima-donna-laden cultures where staff meetings devolve to finger-pointing contests.  “I was the top salesperson at SAP and I can’t sell this stuff unless it works.”  “Well, I was the smartest guy at Harvard and my technology is so wonderful that a monkey could sell it.”  On and on.  This doesn’t work.  When you’re competing with giants you need the extra advantage that comes from brilliant people — working together — to solve problems.  All of us, when working in a functional group, are indeed smarter than one of us.  It took years to get this lesson through my head.  I first got it doing an exercise at a leadership program where each individual rank-ordered a list of items required for wilderness survival.  Then we broke in about 8 groups of 6 and re-did the exercise.  The worst group score beat the best individual’s score, and one of the individuals was a Brigadier General in the US Army.  Years later I discovered The Wisdom of Crowds and learned it again.  While it may sound hokey, teamwork is an amplifier of talent.  That’s why All-Star teams don’t do well in sports:  while each individual may play superbly; they just don’t play together.

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Posted in autonomy, endeca, Marketing, startups, strategy

A Few Quick Takeaways From A Speech By Morgan Stanley's Jim Rosenthal

Posted on March 18, 2010 | Leave a comment

I had the privilege of hearing an after-dinner speech by Jim Rosenthal, COO of Morgan Stanley Smith Barney and Head of Corporate Strategy for Morgan Stanley overall.  The speech was particularly interesting because of Jim’s almost accidental IT experience; Jim’s background is in strategy, not IT, but he nevertheless served for two years as Head of Firmwide Technology at Morgan Stanley.  This made the speech, delivered to an IT audience,  all the more interesting because it was something of an exposé:  an outsider’s inside view of IT.

I don’t have time to provide comprehensive notes, so I’m just going to jot down some of the key things I took away:

  • Technology is second biggest expense in banks next to producer compensation.  Banks should treat it as such.
  • Regulators are our friend.   If anyone is going to push technology up the importance agenda, it’s going to be the regulators.
  • IT execs need to earn the right to participate in the business conversation.  This is done through delivery on both strategic and myriad tactical items.
  • IT needs to steep senior management in technology.  Technology is critically important to banks and technology leaders have an obligation to educate senior management to relevant technology issues.
  • Put performance metrics on change.  Don’t just put metrics on operations but also define and measure key metrics related to strategic change.
  • Kryder’s law:  magnetic disk storage areal density doubles annually.  While I’m not sure I understand the math in either the referenced article or the Wikipedia entry, this means that stored information grows even faster than processor speed (i.e., Moore’s law).
  • Data architecture is the key to coping with Kryder’s law.  Data architecture lets you control what would otherwise be an uncontrollable wave in the future.
  • We will never put our data in the public cloud.  We love cloud computing, but for private, internal clouds.
  • Technical skills and quant skills are converging.  It’s not about the technology anymore, it’s about what we can do with the data.
  • IT is odd in the sense that it seems to feel it deserves more respect than it gets.  There is an odd tension about whether IT is a first- or second-class citizen.  IT needs to be a first-class citizen and CIOs need to learn to work senior executives and the board to make it such.
  • Banks need to think of themselves as technology companies that happen to work in financial services.   (This is analogous to Google who considers itself to be a technology firm that happens to be in media/advertising.)

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Posted in financial services, Kryder's Law, Moore's Law, strategy, Technology laws

Open Text Snags Nstein

Posted on February 22, 2010 | 2 Comments

Open Text Corp. today announced that it was acquiring Montreal-based text mining and publishing solutions vendor Nstein Technologies for CDN $0.65 per share, or CDN $35M, equivalent to US $33.5M, a 100% premium over the trailing 30-day average closing price of Nstein’s common shares which are traded publicly on the Toronto Stock Venture Exchange (TSXV).

In its most recently reported financial period, 3Q09, Nstein reported (all figures CDN) $4.6M in revenues, and -$0.8M in EBITDA.  Revenue was down 24% on a sequential basis and 17% on a year-over-year basis.  Given the $18.4M run-rate and the $24.2M in TTM revenues, Open Text paid 1.9x run-rate and 1.4x TTM revenues for the small, largely text-mining focused concern.  While the 100% premium is surely good news for shareholders, it’s off a valuation that is less than 1x TTM revenues (0.72x to be precise).  Then again, the company was both losing money and shrinking.

I’ve charted 11 quarters of Nstein history above, which makes the picture pretty clear.  Even the 2/08 acquisition of Picdar couldn’t get growth going, organic or otherwise.

In terms of focus, Nstein’s roots were in text mining.  The Eurocortex acquisition brought them a poor man’s CMS, with Nstein paying less for a  company than large Documentum customers pay for a license.  Picdar brought them digital asset management.  So you had a company doing $4.6M a quarter split across three areas:  text mining, CMS, and DAM.  Given the abnormally low 52% gross margins, that means a whole lot of that revenue was services, so they were maybe doing $2M a quarter in license.  That’s $0.7M in license for each of the three areas, which basically rounds down to nothing.  Remember the expression:  if you try to be all things to all people you can end up nothing to everyone.  This appears to be yet another example.

To my knowledge, this focus splitting was done in the name of “solutions” though what the company was known for — to the extent  it was known at all — was text mining.  I’ve previously blogged on such solutions strategies, and Nstein’s in particular:  NStein 2Q08, Growth Slows:  The Moldy Sandwich.

The tension highlighted in the “moldy sandwich” argument is that between creating a truly best-of-breed component (e.g., a sentiment analysis engine) and offering customers complete solutions to problems.  Companies are invariably pulled by their salesforces to the latter, while most companies can only credibly offer the former.  Simply put:  do you want to offer your customers either great ham, great cheese, or great mayo — and ask them to build the sandwich — or do you want to offer them a complete sandwich, but made from bad ingredients?  For most technology companies, I’d say you’re kidding yourself if you can think you can do both.

While I’ve never been a fan of the moldy sandwich strategy, I both know and like several of the folks at Nstein, and want to offer my congratulations to them on this deal.  While I’m guessing the CMS will go away and the DAM customers will be moved to Artesia, I’m reasonably sure that they have found a nice home for the text mining engine and gotten a reasonable valuation for the firm (given its trajectory) and a nice pop for shareholders in the process.

Other coverage of the deal:

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Posted in strategy, text analytics, Uncategorized

Does Benihana Mean Birthday or Teppanyaki?

Posted on January 5, 2010 | 3 Comments

On the face of it, Benihana is a pretty simple restaurant which ought to mean just one thing in the mind of its customers: teppanyaki, the form of tableside cooking/entertainment for which they are famous.

I like the notion of businesses owning one word in the mind of the customer. While I’m not sure where it originated, Ries and Trout are big believers in this marketing concept. See, for example, Positioning, The New Positioning, virtually any of the Immutable Laws books, or the recent book by Jack Trout (not to be confused with the flyfishing guide) In Search of The Obvious: The Antidote for Today’s Marketing Mess.

Examples: Volvo means/meant safe. Siebel meant sales. PeopleSoft meant HR. At this point, I think Oracle means software. I’m not sure what Microsoft means. To me, Sun meant struggling. SAP meant ERP for a long time; I’m less sure what it means now. They would like it to mean clear, but there’s often a difference between what marketing puts in the ads and what sticks in the mind of the customer. LinkedIn means colleagues, or maybe jobs. Facebook means friends. Twitter means tweets, an example of inventing your own word which can work really well or be a total catastrophe such as fahrvergnügen.

I understand why teppanyaki doesn’t work in terms of word ownership for Benihana. The word is not well known, it’s hard to pronounce, and it’s harder to spell. There’s also the confusion with the word hibachi, which the restaurant seems to foster. So I get why perhaps teppanyaki doesn’t work as Benihana’s word, but I don’t get how Benihana came to mean birthday instead.

Many years ago, my kids started taking/dragging us to Benihana on their birthdays. I didn’t think much of it at the time. But now that I’ve done it multiple times/year for several years, I can say first-hand that every time I got to Benihana virtually every table (of eight) has at least 1 and sometimes 2 people celebrating a birthday. And, by the way, the place is always jammed.

How did this come to pass? Frankly, I don’t know.

Yes, they do an allegedly bi-lingual happy birthday song and free photo for those who claim/admit it’s their birthday. But that certainly can’t be enough to reposition the entire restaurant from “the place for wacky tableside grilling” to “the place for birthdays.” Yes, if you dig around you can find a $30 coupon for use on your birthday, but I doubt that’s it, either.

For now, it appears to be a great mystery of organic repositioning. For no matter what they’re trying to do at a marketing level, somehow they have been positioned in the only place it counts — the mind of the customer — as the place for birthdays.

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Posted in Marketing, positioning, strategy

The Great Dysfunctional Corporate Budgeting Process

Posted on December 3, 2009 | 8 Comments

A former colleague hit an old nerve the other day, sending me the following message about budgets and budgeting.

Dear Dave, 

A question for you — I just saw a typical idiotic internal email about budgets yesterday, and to my recollection [at our last company], you tried to make the system less dysfunctional, but didn’t really make much headway, and almost earned yourself some finance team enemies [in the process].

Now that you’re CEO, do you still have those feelings about budgets, or have you now seen the other side of the coin? Do you have any tips for somebody who still gasps at how bad it seems to be, but wants to understand?

I still find it incredibly hard to imagine that this is the best system possible for using money strategically.

Best,
Joe

Since it’s currently planning and budgeting season for most corporations — including mine — I thought I’d share a few thoughts as a former budget rebel turned CEO.

First, let’s review my problems with the classical corporate budgeting process.

  • It rewards negotiation not performance. The division manager who negotiates a 30% growth plan and who delivers 33% is a hero, while the one who negotiates 75% growth and delivers 60% is a zero.
  • It ends up a trending exercise. Budgets end up tweaked extrapolations of prior years. Well-intentioned zero-based budgeting exercises end up expensive re-creations and re-justifications of the status quo.
  • It ends up a budgeting, not a planning, exercise. What’s supposed to be a planning process that includes generating a budget as one part ends up a budgeting-only exercise. In marketing, I call this the “buckets of money” problem. Which tradeshows have we decided to do based on what strategic criteria? Dunno, but I have $500K allocated to tradeshows next year. Which analysts? Dunno, but I have $250K allocated. What are our key themes? Dunno, but we can figure that out later. All those questions should be answered in the marketing planning process, but they get lost in budget-myopia.
  • It encourages convergence to the norm, ironically in the name of “best practice.” CFOs and boards benchmark the company against competitors with keeping up with the Joneses logic. This drives everyone’s P&L to look the same. For example, at Business Objects, we consistently decided that we were underspending in R&D and overspending in sales and marketing (S&M) relative to industry averages. So every year, we’d cut S&M and increment R&D expense by a few points. I’d argue that we were good at S&M and bad at R&D and ergo we should reinforce our strengths and perhaps acquire (not develop) technology to dump into our excellent S&M engine. This argument repeatedly lost to the normalcy one, reminding me of the Vonnegut story where ballerinas have sash-weights and bird-shot tied to them so they can’t jump and geniuses have noises blasted into their ears so they can’t think. One person’s best practice is another one’s sash-weights and bird-shot.
  • It is, ultimately, not strategic. Somehow benchmarks, trends, negotiations, averages, and politics end up trumping strategy. Instead of strategically deciding what the organization needs to accomplish and then building a budget to accomplish that, the process gets hijacked by these forces along the way.

The problem is, of course, there’s only one thing worse than having a budget; that’s not having a budget.

Much as the marketing VP should be automatically fired if the company ever launches a new product without an updated website, so should the CEO (and CFO) be fired if the company ever enters a time period without a board-approved operating plan. I remember when I was a first-line marketing manager at (the original) Ingres and we went into June of a year without an approved budget. It was a study in how not to run a company.

So what can we do to improve things? Well, it’s not easy. If you’re really interested in this area, you can read the book Beyond Budgeting. It goes into great depth on the sorts of problems I’ve described and how to solve them. One key concept is to reward absolute performance (e.g., growth or growth in relative market share), as opposed to plan performance which is more gameable. The problem is that getting good data (e.g., relative market share for an emerging category for every country in Europe) can be very hard to come by — particularly in enterprise software.

I will tell you — and Joe — what I’ve done at Mark Logic to try and avoid and/or mitigate these problems.

  • I try to derive budget from strategy. We start the budgeting process with a strategy meeting. We end the strategy meeting writing down 10 -12 goals for the coming year. As we make, review, and iterate the budget, I keep checking and revising the goals to keep them top of mind and synchronized with the budget.
  • I stay aware of the endemic budgeting problems and try to keep an eye out for them.
  • I tend to rate people, whether I want to work with them, and how I help them in their careers by whether I think they’re gaming me in the budget process. So either don’t game me or be very good at it. I prefer hard-working people who are all about the company to a group of all-about-me mercenaries flying in greed formation.
  • I track metrics and benchmarks but refuse to be enslaved by them. I never assume that because the average family has 2.5 kids that I should, too. I want to know how many kids the average family has, and I want to use that information as part of the equation for how deciding how many kids I want to have.
  • I drone on endlessly on the difference between planning and budgeting. I try to find buckets of money (or buckets of people) and blow them up, asking for supporting detail. So, we have $250K for tradeshows — which ones and why? So, we want to hire X sales people — what will their territories be? If you don’t know, you have a budget, not a plan. I want both.
  • I remind people that happily, as a company gets some size, some budget issues are purely emotional. Those few people I cut might amount to a rounding error in a manager’s quarterly budget. I advise them to go ahead and do what they think is right, just checking with me once with me and finance before doing it.
  • I also remind people during the year to closely track their spending on both the high and low side. I remember one career-defining moment at Business Objects when a VP pleaded, begged, and moaned for money, saying he was under-staffed, complaining that the company was myopic and refusing to invest in his area. The CEO responded: “you spent only 85% of your budget last quarter; do not ask me for more money when you are not spending the money you have.” Ouch. Oddly that VP disappeared not too many weeks later.
  • In same vein, I remind people that the plan’s a plan. While I am a big believer in planning, I also remember the famous Eisenhower’s quote: “in preparing for battle I have always found that plans are useless, but planning is indispensable.” What we actually do will be a function of how things go once the year starts and we are free to spend more or less than plan as we go along. Think: uncertainty. Think: empowerment.
  • I try to be pragmatic. Decisions need to be made. Targets need to get set. In the end, getting the budget done trumps getting the budget done perfectly.

In the end, I don’t claim to have solved all the problems with classical budgeting, but I hope these measures take some of the usual insanity out of the process.

If you have ideas to share on how to improve the corporate budgeting process, please share them.

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Posted in management, strategy

DHT, Listen To Your Heart, and Flanking Strategy

Posted on September 15, 2009 | 1 Comment

In 1988, Listen To Your Heart was the third single issued in the USA by the Swedish pop duo Roxette. In this post, I’ll use the song as fun example of flanking marketing strategy. First, the original song/video.

(Sorry, but EMI disallows embedding, so you’ll have to press the above link to hear it.)

Then, in 2005 the Belgian dance group DHT released several trance cover versions (i.e., remakes) of the song. Here is one such example, the “hardcore remix”:

Now it starts to get interesting. Based on the success of the trance cover versions, later that year DHT then releases an acoustic version of the song, which goes on to receive substantial airplay. Here it is:

Now, not being an music expert, I can’t say anything for sure, but what are the odds that DHT would have done anywhere near as well by entering the market with a directly competitive Listen To Your Heart? My guess: quite low. Heck, even Alvin and the Chipmunks have remade this song.

In my estimation, the magic — the reason it all worked — was they entered the market on a non-competitive flank (club music) and then, once established, bridged from there into making a what I consider a better-than-original acoustic version of the song.

But “better” isn’t the point. Simply having a better version on the initial attack would have gotten them nowhere. But building a strong position in the trance genre (flanking) and then bridging made all the difference.

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Posted in Marketing, strategy