31 August 2013

Company competitiveness - do it yourself

Weakness of growth and exports as well as outsourcing of manufacturing to other countries are making big headlines in Finland. Although structural problems and weakening cost competitiveness should be addressed immediately, companies also need to assess their own efforts and how they are building their competitiveness. These measures will have a significant impact on the general
business conditions, too.

This post has business perspective focus: What factors are deteriorating local business environment (local in this post refers primarily to national environment, i.e. Finland) and causing problems, when a firm tries to drive its competitiveness. In addition, we shall discuss some ideas, how the negative trend can be reversed. Structural issues or general cost competitiveness are not addressed here.

Local business environment is instrumental for business

Local business environment, or "commons" as it is called, and how a company can utilise this environment, are essential building blocks of the company's competitiveness, also in global business context. Globalisation has created vast amount of new opportunities through international division of labour and expansion of reachable markets, and there is no need to cry over past, it´s gone.

It is often argued that future winners, especially in software and content businesses, do not need to care about physical distances. Yes, it is true that access to target customers and smooth distribution of products to customers make is possible to expand business rapidly. But, as in other industries, also software and content businesses lean heavily on local environment - and actually their biggest new business opportunities are often linked to physical products.

A company that has extensive global operations and networks, might not depend so much on local commons. But when studying this on single product or business level, it is clear that competitiveness can be considerably boosted by supportive local business environment.

Thus a successful business carefully utilises its local operating environment, and also recognises that it is profitable to contribute to continuous development of commons.

Erosion of local business environment

As noted above, local environment can either support or hinder development aims of a firm. Omitting macro-economic factors, competitiveness of Finnish companies is also considerably affected by management decisions: Focusing on operational efficiency, resulting in delayed or insufficient renewal and innovation in response to new opportunities and challenges.

Cutting costs by moving production to lower cost countries, of course, can help in the short term, but in the long run, it will not save the company. The sad story is that by outsourcing manufacturing, a company also significantly narrows many essential capabilities needed for renewal and innovation - especially, when creating high value-added products, manufacturing process often plays a key role. Once manufacturing is no longer physically close, process engineering expertise cannot be maintained, since it depends on daily interactions with manufacturing. Without process engineering capabilities, it is difficult to conduct research on new process technologies, which in turn makes developing new products more challenging.

In Finland, one good example is dilution of electronic product related capabilities, caused by Nokia gradually moving manufacturing operations abroad. Similar kind of development is ongoing in other technology sectors, too -  for example, related to STX cruise ship business.

Outsourcing of manufacturing to other countries is particularly affecting expertise of subcontractors. If there are no muscles to follow the principals, e.g. sub-suppliers focusing on development of tools, materials and testing, have less motivation and assets to continue enhancing their products and skills further.

When conducting mechanics, electronics and software R & D, continuous dialogue with component suppliers and manufacturing operations ensures low-cost bill of materials, low assembly and testing costs, good manufacturability and product quality. Often also purchase logistics, including sub-assemblies, is outsourced, which hampers high-quality R & D work.

Manufacturing companies are also important customers for new products or processes - often it is possible to develop new products in collaboration with geographically close customers, jointly finding the solution features that really bring value to customers. Especially for startups and small businesses, physical distance may be an insurmountable obstacle to such an approach.

Joint product and business model development with customers is one of the cornerstones of modern company's competitiveness. Although the Internet, social media and other advanced tools allow development with far-away consumers and enterprise customers, those customers that are located in close vicinity and otherwise qualify as good customers have their strong merits. In consumer markets, it is important that Finns continue to be willing and capable of testing and deploying new solutions. Good customer companies, on the other hand, are eagerly seeking vendor partners that can help them increase their own competitiveness: Hence, if a company renewal is forgotten, it has also a very negative impact on its supply chain companies. Both in B2C and B2B businesses, ability to build international customer relationships and distribution solutions is a prerequisite for a scalable, successful business - target market know-how, networks and experience are critical.

If investors do not have understanding of a company business, it has significant consequences - for big listed companies, smaller ones and startups. In Finland, low number of listed consumer product and health care companies results in limited understanding of these businesses, lower levels of interest and high risk aversion. Startup investors prefer cases that relate to their own experience - in Finland e.g. mobile and gaming areas are overweight at the expense of other sectors.

Case: A consumer product startup

Let´s take a closer look at a Finnish consumer product startup to more deeply understand, how it was supported by the local operating environment. While the experiences can not be generalised to firms that are e.g. larger, operate in other industries or in B2B businesses, the case probably reveals many common experiences.

Company product consists of dedicated devices with mechanic and electronic parts, device embedded software, smartphone or tablet application and cloud service software. The company had considerable expertise in various technologies, international business, sales and marketing, but it needed partners is such areas as development of mechanics and electronics, manufacturing, product commercialisation, distribution channels and business finance.

In the development of mechanics and electronics, some of the key challenges were:
  • Sufficiently robust plastic construction that is easy to produce
  • Reliable and affordable solution for motion detection
  • Industrial design, which communicates intended use and positioning
  • LED-based lighting solution that reproduces colours well enough also during the day
  • Electronic component selection optimised for consumer products
Particularly difficult was to find a partner that is able to take overall responsibility for the mechanical and industrial design of a consumer product, and that has enough understanding of materials and mechanical components. It also looks that skills to develop consumer electronics hardware are not so strong outside of mobile device world: There is a lack of vision for the best future solutions, and thus component choices were problematic. Without company's own strong experience in project management, both development quality and schedules would have suffered badly.

There were several suggestions that the entire device development (mechanics, electronics and embedded software) and manufacturing should be outsourced to experts (ODMs) in China and its neighbouring regions. On the basis of the evaluation, however, it was concluded that because product definition, product development and manufacturing need a concerted effort, it is best to outsource manufacturing to a Finnish or possibly Estonian partner, at least in the early stages. The challenge was that after Nokia gradually moved its manufacturing operations out of Finland, there are no companies left that are capable of assembling consumer products in volumes - the focus is primarily in industrial customers with small volume needs. Another example is steel molds needed for manufacturing plastic parts: After business changes of Perlos and Eimo, molds are not anymore manufactured in Finland and also very much of the related capabilities have been lost.

The company got plenty of advice, how to commercialise the product, but it became clear that demand and brand building skills, painfully needed in international markets, were in short supply. Very often publicity tricks or tips of possible partners were the only substance, whereas, for example, it was difficult to get comprehensive business views, how to use the Internet and social media as a tool for commercialisation. Few people seemed to have experience in high-tech consumer product commercialisation, and if they had, it was strongly linked to mobile devices.

In addition, understanding of international sales channels and distribution strategies beyond mobile operators and phones is thin. Larger retailers in Finland are also very careful in terms of new product concepts: They are waiting for tangible evidence of demand, rather success cases in the most important markets of the world, before they want to commit to new products, marketing and sales.

Securing financing is one of the key startup challenges. In Finland very few potential investors have optimal experience and knowledge background for the case company business: High-tech consumer products and their commercialisation as well as distribution channels to consumers.

What can be done?

What can a company then do to best utilise local commons and contribute to further development of local business environment? Here are some ideas to start with.
  1. Companies need to create a customer-focused culture of continuous internal renewal and innovation. Understanding of customer needs, iterative product development based on customer feedback and a strong desire to find customers more value-adding solutions are the core of innovation and success. Not mere cost-cutting.
  2. Drive cooperation with other companies, especially in innovation and development. If you trust that your company is able to internally generate ideas needed for future success, tendering well-defined products and projects is a sensible model. But rarely all the wisdom is only within the company. The firm must open its innovation and development process in such a way that products, technologies, and expertise of external firms and other actors are actively screened. Promising ingredients are then combined with the company's own competences to create solutions and business models that even better meet the needs of customers.
  3. Experience and know-how to better use. There are plenty of experienced and knowledgeable professionals with seasoned business background that are under-utilised. First of all, they should be utilised much more widely, in particular for SMEs and startups, but also for business development of larger companies. Second, besides normal fee based consulting, there are plenty of other models, how experienced persons can be more deeply involved. Besides participating as an investor, e.g. performance-based assignments, interim management or part-time employment are feasible options. These experts are also often able to contribute their international networks and best practises, how to deal with them.
  4. Owners and investors should demand renewal and innovation. Future success correlates with ability to produce new value for customers. This applies both to listed and non-listed companies, and should be reflected in the guidance of its owners.
  5. Boosting public sector effectiveness requires renewal and innovation. Strictly limited invitations to tender are not the best means to get new ideas and to create opportunities for innovative companies to develop reference customers. Innovations in collaboration with corporate partners should be an integral part of the public sector toolbox.
  6. From company support to innovation support. Customer money is much more valuable than any direct support received. Could part of the Tekes funds be re-directed to support joint customer - vendor business innovation? Thus, for example, a client could get support for introduction of a new solution and would pay supplier as usually. And if the new and innovative solution achieves targeted business benefits, the customer would pay the support money back to Tekes.

27 August 2013

4 things to help finding good first customers - and preventing your product to become net sinker

In the 1990s, I led a startup company that launched wireless payphone as one of its first products. At the time, such solutions had a large customer potential, even in Finland - cell phones had not yet taken the role of everybody communicating everywhere.

The first customers of our product were mobile operators AIS (Thailand) and MTN (South Africa). Agreed volumes were significant, we cooperated well in the definition and implementation of product characteristics and also the deliveries and installations went smoothly. So, we got excellent references.

But business of these products did not develop as expected. Yes, we did work hard, and we got a reasonable amount of new customers - what went wrong ? There are probably several reasons, but here I would like to highlight only one: The first customers were not necessarily "good" ones as regards to future economic success of the product and the company.

In this post I bring forth four important factors, which need attention, when identifying essential characteristics of a good reference customer. Hygiene factors, such as large enough customer purchases or high enough price level, are not discussed here.

1. Customers with right type of needs

In the case of our company, AIS wanted to use our product for telephone services in taxis, mainly in Bangkok. In a big city, famous for traffic jams, there was definitively demand for this kind of services. MTN, on the other hand, was offering telephone services in remote villages, lacking other means of communications. Later, it turned out that these types of needs were not sufficiently in demand in other market areas or meeting the needs was not economically viable enough.

Customer jobs to be done, or needs, have to be so widespread, that there is large enough market potential for a company to target. Especially, if your product is technologically advanced or otherwise innovative, it is usually fairly easy to find customer companies, who are keen on new technologies or want to use the product  to disrupt industry structures. These companies are sometimes excellent partners to initialise mass markets. Very often, however, their needs are too exotic or context-dependent, leading to mismatch between requirements to achieve a wider market and product features and business model.

2. Large enough customer segments

Our first wireless payphone customers were mobile operators, and though we were later able to win other types of customers, such as payphone operator British Telecom, the first customers had a profound impact on our segment approach and focus. As such, Thailand and South Africa were excellent reference markets, but we were not able to utilise them adequately enough, because in other markets we were often targeting wrong kind of customer candidates.

Good reference customers provide a vendor not only reference value, but also a roadmap for who to approach and how, when aiming to get new customers. Best references are like beacons in their industry, their activities and business decisions are tightly followed by other players and imitated as much as possible.  Similar type of operating environment or geographical proximity is also strongly affecting the strength of references. By creating solid insights on right marketing and sales channels, vendors are creating a repeatable model to expand to new market areas, to generate demand in these markets and to identify right type of prospects.

3. Lucrative revenue model

AIS and MTN preferred to purchase our products in such a way that only some installation, training and maintenance services were included. Although we had developed a very modern remote management system for our products, also taken into use by these two customers, we were not able to agree on significant revenue streams in our agreements. The approach, requested by our customers, focused on one-time investments, had a significant impact not only on our revenues but also on customers' own business and expansion plans.

At its best, a good revenue model makes planning and execution of purchases easy for customers, as well as supports successful business building and expansion - and enables vendor to develop and grow his own business. First, the scheme must, of course, be acceptable for customers. Most probably it is impossible to sell a very exotic construction, unless superior benefits can be demonstrated through references or otherwise. On the other hand, a successful model generates additional customer orders and helps providing great business case examples. Business logic reproducibility with multiple customers is an excellent signpost for good results.

4. Purchasing processes to support scaling

In both AIS and MTN organisations strong individuals and teams drove our shared projects. Already before the first contacts, they had views and even some plans, how to build business around payphones. The responsible teams in both companies were at least partly outside of formal decision-making structures.

Identification of individuals involved in purchases and understanding of purchase process are the foundation to develop effective sales argumentation and scalable sales process. Customers that are willing to openly go through their way of purchasing and name influencers affecting it, not excluding any complications related to the process, are ideal partners here. In addition, these companies need to well represent their reference group in their shopping behaviour. When sales process and argumentation are properly developed and documented, it is possible to transfer this knowledge to new sales cases and personnel, effectively scaling the business.

Epilogue: Net sinkers

And what happened to wireless payphones ? On the other hand, we got some great news. For example, in South Africa human lives were reported to be saved, enabled by our products and calls made with them. But in a Southeast Asian country our products, delivered with colourful cover, found an unexpected use purpose: Local fishermen bought our products second-hand, with a low price, and found them some good reuse - to attract fish and acting as net sinkers.

20 August 2013

From sustainable to transient competitive advantages

I was one of the numerous people to learn to use Michael Porter´s sustainable competitive advantage concept, describing how to build a favourable, long-term competitive position in industries by building entry barriers. Over the years, Porter's concept has received a lot of criticism, and in recent years both research and practical experience have created a strong evidence of its shortcomings. These findings have also much to offer to an individual company's strategy.

Transient competitive advantage

Sustainable competitive advantage is forgetting, the critics say, that globalisation, digitalisation and other changes have crucially altered competition.

More and more companies are realising that intra-industry competition is not the biggest threat: Industries are fighting against other ones and different business models compete with each other. Today's competition has many faces: Besides close substitutes, it can be a low-end disruption to meet customers´ most basic needs, a new market disruption to serve new market segments or it maybe a big bang disruption that combines existing technologies in a new way and thus creates dramatically improved user experience. As a consequence, incumbents often ignore these new competitors.

And because of their competitive position can not be secured permanently, companies must strive to build more short-term, transient competitive advantages; seize opportunities, utilise them and be ready to move on to new ones, when former opportunities are drying up. If a company builds its business, systems and processes to only protect its competitive advantages, it is difficult to change, when business environment requires more flexibility.

Instead of defining competition based on very similar, substitute offerings, customer needs should be emphasised. Customers are trying to get some jobs done in their lives, whether it's something useful or fun, and for this they are looking for different kind of solutions - regardless of where these solutions are coming from or if their vendors realise that they are competitors or not.

In this context, where competition environments can be called arenas, product features, technologies or gradual improvement will no longer provide long-lasting competitive advantages. Customer relationships and user experience are more valuable, but they are volatile, too. Nokia is a great example: It was long capable to monetise its efficiency, brand and distribution capabilities, but then came Apple with its iPod music players and iTunes music store, followed by iPhone smartphone and App Store, and took the leadership position in smartphones.

In the world of transient competitive advantages a company must build skills and capabilities that are useful in arenas, where the company will end up competing. Here we do not necessarily refer to traditional planning followed by execution model or drifting along with the current - the future can be also successfully shaped using a process, where product and business model are iteratively verified with customers and markets.

In the following case, we shall discuss Tiimari, a Finnish retailer, which will be analysed using the tools described above.

Case Tiimari

The analysis is based on public material available.  It will look at the current situation, as well as use the situation in 2006 to 2007 as a benchmark. The company's structure, ownership, and scope of business operations have had various changes during these years, but their impact on the findings and conclusions is relatively small.

Tiimari Business

Tiimari business consists of interior decoration products, craft supplies, stationery, school and office supplies, as well as various seasonal products (Christmas, Easter, etc.), with retail store operations in Finland and the Baltic countries. The product range includes both unique products manufactured only for Tiimari and standard products. Tiimari acquire their products from domestic and foreign suppliers, it does not have its own manufacturing operations. The majority of the Tiimari customers are private individuals. The customer base is heterogeneous, but the main target group are mothers (25 to 45 years) and daughters (5 to 15 years). In 2007, the company's business was essentially similar to the current one.

Net sales in 2012 amounted to EUR 62.1 million (2007: EUR 74.6 million) and operating income EUR -8.2 million (2007 EUR 4.3 million). The company has made losses since the year 2008.

The company lists Tiimari brand, affordability image, product range and store network as its competitive advantages. To differentiate themselves from competitors and to improve margins, the company seeks to buy the majority of its products directly from Far East suppliers, who do not supply similar products to major competitors of Tiimari. The 2006 annual report refers to the same strengths as mentioned above, and in addition mentions skills of senior management and other organisation, a good competitive position and effective procurement and logistics function as advantages.

Tiimari, by themselves, do not identify any direct competitors, i.e companies, which operate in the same markets, in the same product categories and focus on retail chain sales - media, on the other hand, mentions Tiger, Hemtex and Claes Ohlson. The most significant indirect competitors, as Tiimari see it, are speciality stores (such as book stores, hobby shops and various lifestyle stores) and hypermarkets with significantly narrower range. The 2006 Annual Report sees the competition in much the same way.

Tiimari strategy analysis

Tiimari sees its industry from product perspective. Strong focus on brick and mortar sales as the only sales channel is complementing the picture. In addition, the company has been building communications based on product use (crafts, decor, children's parties). From consumer point of view, the message is confusing and stuck in the middle between product and use perspectives, because for each of the use categories, Tiimari offer only a quite narrow range of low price products. The fact that Tiimari sell own products and standard ones that are widely available also elsewhere, makes the situation even more complicated.

Consumer needs and buying behaviour have changed considerably since 2006, not to mention the situation more than ten years ago - to give some examples, it was very rare that a mother or a daughter had a smartphone, and also social media was still in its infancy. If Tiimari want to define their offering based on product use or jobs to be done, they should make their activities more focused and update product lines to better meet current and emerging consumer needs.

Tiimari´s competition is much broader than they realise by themselves. First of all, the products sold are mostly not necessities, but rather bringing consumers joy, fun and new ideas.  For this kind of needs, consumers are offered a tremendously wide range of new products and services, particularly enabled by new technologies. Secondly, countless online stores provide consumers access to all categories and products that Tiimari offers - it is not only domestic brick and mortar stores that are competitors, but virtual merchants throughout the world.

Tiimari seem to think that their success factors are close to eternal, even if the world around us is changing.

Consumer awareness of Tiimari stores is certainly still good, but overshadowed by the above-mentioned vague positioning. The company's marketing and communications are also not updated to meet the present day: For example, use of the Internet to find and acquire customers is lousy. I did a test, how Tiimari will rank in search engine results (SERP) with its key business search terms (test made in Finland with Finnish search terms): Craft (askartelu in Finnish) rank 46, interior decoration (sisustus) more than 100, stationery (paperitarvikkeet) more than 100, children's parties (lastenjuhlat 2, school supplies (koulutarvikkeet) 99 - in general, all the familiar and unfamiliar competitors had better results.

Affordability image is still strong today. Even to the extent that it substantially interferes expansion to more comprehensive solutions and to more expensive products.

Effective procurement is not anymore among competitive advantages, but Tiimari still believe that they can differentiate based on product range. If yes, it is very probable that these advantages will not be long-lived, due to widely deployed global procurement and the Internet.

The last of the competitive advantages is the sizable store network. The network strengthens Tiimari brand, is a communication channel with customers and the sales completion means. But little by little it has also become a barrier to success, a factor that severely limits business development options. As previously discussed, opportunities to use the Internet and social media for awareness building have not been used, communications in the web is - despite of existing loyalty program - almost entirely one-way, and the company does not have any e-commerce site yet. Secondly, it is very slow to transform high cost store network and store concepts to match with change pressures coming from customers and markets.

New strategy building blocks

The results of the analysis clearly show that Tiimari´s strategy and competitive advantages have lost much of their strength and are often deadweight, when building future success. Here are some ideas, how to update the current approach and to create more flexibility, making responding to future challenges easier.

Tiimari´s definition of its industry and competition are the biggest obstacles to a successful future. To be able to renew itself, the company must look for customer jobs to be done - which do not necessarily coincide with Tiimari´s existing products. This also calls for redefinition of company positioning, so that it would be possible to actually realise goals.

Next, the company must create willingness and readiness to listen to customer voice in their business development. In other words, Tiimari need to test new products, business models and concepts at an early stage, before making any major investment decisions.

The Internet and social media provide very affordable and flexible tools for testing purposes. Key new capabilities to be built include creation of e-commerce capabilities, inbound marketing, customer acquisition and retention, as well as creation testing execution skills.

Online shop is absolutely necessary, not only to expand customer interface and to meet customer expectations for today's retailer, but also to create a fast tool to test demand of new product categories and products. Inbound marketing grows awareness of company products and improves attractiveness of the brand. In addition, it lays foundation for determining e.g. customer needs, business models, target segments and marketing messages. Together, web activities and the physical stores get customers to truly commit to Tiimari, which will be reflected in willingness to two-way communications and in participation in business development enabled by web testing. The above tools will not be sufficient, unless skills and processes are developed to use them systematically and continuously.

Tiimari also needs more speed to be able to react to changes. The biggest slowing factor is stiffness of the store network. It is not foreseeable, of course, that the company would get rid of the assets, so pronounced in its strategy, but by building e-commerce capabilities and supporting online presence alongside, response speed improves significantly. For example, launching new own products and store concepts is much more effective through tests and continuous improvement than by trying to do advance guesses requiring considerable investments at a very early stage.

13 August 2013

Big business is outside of stand-alone applications

Applications have initiated significant development efforts and business activity. Besides very successful game and other application companies there are also other, even more significant opportunities, closely related to applications: Improvement or expansion of existing businesses or creation of completely new ones. This will also have major positive impact on national economies.

Application economy

Application (or app) economy refers to economic activity that relates to mobile applications, industy practically born only after 2007.

It is estimated to be a major economic contributor. In the United States it last year directly employed 466000 persons and in Canada 41300. According to another study, North America employs this year 525000 persons and Europe 531000. Growth forecasts are also very upbeat, in Canada + 51 % by year 2016.  The EU has also woken up to measure economic impact of applications and ways to better harness their potential to support economic development.

Application economy size and business models

Applications are brought to market with wide range of business models, such as paid downloads (incl. subscriptions) , in-application purchases and advertising. In addition, they can be used to make physical product or service purchases or one can purchase different types of media content (such as music, videos, books).

Recently published appNation study evaluated that the size of app economy is 59.8 billion USD in 2013, expected to grow to 151 billion USD in 2017, see the illustration below.

These figures are reasonably in line - but not completely matching - with other market research. Not counting sales of physical goods and services, Portio estimates for 2013 20.4 billion USD, ABI Research 27 billion USD. 2017 figure of Portio predicts 63.5 billion USD, and ABI Research for 2018 92 billion USD.

Portia has also assessed sales according to monetisation methods, see the picture on the right. Consistently with appNation, they predict that relative importance of in-app purchases increases significantly, and accordingly paid downloads will loose. Distimo sees even more dramatic change, they say that in-app purchases are now already three times bigger in the United States and nine times bigger in Asia than paid downloads. 

Also estimates of the role of application advertising vary, for example Strategy Analytics estimated 2.9 billion USD in 2012.

Games bring most of the revenues in application storesin the second quarter of 2013 they accounted for 80 % in Google Play 80% and around 75 % in Apple App Store. 

Applications in physical product and service business

The most noteworthy element in the AppNation prediction above is revenues from sales of physical products and services - much bigger than that generated by other business models. Vision Mobile research strongly supports this conclusion, too. Estimation of sales figures accurately is very challenging, because definitions of included sales vary and because statistics may not be planned to produce results on this.

Amazon and Ebay are examples of companies selling primarily physical products and Hilton an example of a service company: All have created applications for the most popular smartphones and tablets, targeting to create a handy and convenient buying experience.

Besides using applications for commerce, businesses are using them as business model cornerstones, to improve user experience and to build stronger relationships with their customers. While these activities are absolutely essential, there are no consistent methodologies, how to include them in market estimates. Thus when evaluating importance and size of the application economy, reliability of results is often very low.

Inter alia, Siemens utilises applications to improve their business. For example, their hearing aids unit has developed an application that provides information about hearing problems and allows users to test their hearing by themselves - a great way to increase company's credibility and gain customers.

Planmeca again, for example, extends its teeth imaging tool with an application that allows images to be viewed outside of imaging sessions.

Implications for businesses

It is clear that the greatest potential for applications is linking them to company business, either to sell its products or services, to generate better business models and products or to assist in creating and strengthening customer relationships.

This does not in any way rule out a possibility of creating new and thriving business around applications - such as Rovio and Supercell have built in game industry. Besides games, there are also other industries, where successful business, utilising digitalisation, can be established - either by existing companies or startups. And, as Rovio has shown, after sufficient initial success,  it is then possible to extend business model - even in a way that leaves an original monetisation model only a minor role. 

Companies, selling physical products or services, need to develop capabilities to understand opportunities and restrictions of the application world. These insights are then linked to new business model and product development and their go-to-market, marketing and sales support and to activities to tighten customer relationships. Everything need not to be made in-house, but adequate understanding is necessary to create genuine competitive advantages and to partner successfully. For example, detailed application specification and development can well be outsourced.

Anticipated growth of application economy creates new opportunities for application development companies, but in order to be a credible and desirable partner for a wider range of companies, developers have to increase expertise in their customers´ business pain points, business models and customer engagement.

And, finally. Applications, especially together with other products and services, are a great tool for both established companies and startups to radically disrupt existing businesses.

7 August 2013

E-books boost short story business

E-books create opportunities for emergence of short prose and non-fiction that is not sold in collections but one by one. This phenomenon is also one of the tools that helps literature to fight on consumer´s time consumption. The main drivers of this phenomenon are changed consumption habits enabled by new technologies, as well as other changes introduced by digitalisation of book industry's value chain.

Emerging business

The book world is going through the same digital revolution that has already had a strong influence e.g. in music and video business. In both of them, consumer needs, technology enablers and newly formed value chains have led to strong growth in supply and demand of short form works. In digital music stores it became possible to download individual tracks, in parallel with collections. In videos affordability and easy access to creation tools, as well as readily available distribution (such as YouTube) have completely transformed earlier short film scene. A similar type of development is about to swipe across written word.

Short stories usually comprise of 1,000 to 8,000 words and novella of 7500 up to 30,000 words. Size limits are vague, and therefore, we use the term short story very liberally to cover the whole field of short prose. Also non-fiction texts are part of the phenomenon: Texts that are too short to form a whole book but too long for a magazine article. Special types of short form literature are also looming, such as the one visible in fan fiction.

Three major players, particularly active in the United States, are pushing short e-book formats: Amazon has Kindle Singles program, Quick Reads of Apple's iBookstore and Barnes & Noble Snap. Thin Reads site reports that in 2013, by the end of July, a total of 211 new short titles were published, the number of publications increasing quarter by quarter. The business is still modest, although Kindle Singles has sold 5 million copies since beginning of 2011 until April 2013. 28% of titles have sold more than 10,000 copies, and sales prices are typically between 0.99 USD and 2.99 USD. The catalogue available is already quite versatile, but according to Thin Reads, fiction best seller list is led by Debbie Macomber with her newest romance short story, and non-fiction list by a murder case study.

There are a lot of differing opinions on the case of short form E-books: Critics often refer to negligible sales figures or claim that no changes in readers' habits and needs are taking taking place. In the following, we examine key value chain changes, to better understand opportunities and challenges related to short form.

Value chain changes

Short stories and other short texts have been read for a very long time, either being part of a larger collection (a book consisting of multiple short stories) or published as an individual story in a magazine. Traditional masters include such names as Hemingway, Steinbeck, Kerouac, and Vargas Llosa, Stephen King is one of the more recent ones. In Finland, e.g. Veijo Meri, Maria Jotuni and Tove Jansson have created popular short stories.

Digitalisation of media and always accessible personal devices, such as smartphones and tablets, are changing reading context. First of all, reading is competing for consumer's use of time against other media and communications applications available through a personal device, as well as social media and other Internet content and applications. On the other hand, one can carry as much reading as ever needed in her pocket, and especially short form is ideally suited for fragmenting media use, where consumption takes place more rapidly and more frequently.

E-books can be read on dedicated reader devices or on computer, tablet or smartphone having a reading software. In particular, younger readers seem to prefer general-purpose devices: Pew Research Center found in a study in Autumn 2012 that in 16 to 29 year age group, 41% use smart phone, 55% PC, 23% dedicated reading devices and 19% tablet to read e-books.

When short stories are sold in physical form, cost of a one single item is not significantly lower than that of a short story collection. When selling a product in digital format, this kind of constraints do not exist - thus there is no pressure to sell short stories in collections in one package. Short stories can then be sold one by one, in much the same way, as when publishing in literary or other magazines. Due to very low marginal costs, setting price of a digital form short story is much more flexible.

Low manufacturing costs and ease of distribution, enabled by digitalisation and the Internet, have already attracted amateur and other hopeful writers: Short stories provided in electronic form are a great way for writers to convince consumers of their skills at an affordable price, and thus create greater demand for their writings and stimulate interest among publishers. More famous writers can also count on short stories to produce significant returns.

E-books have a special advantage, because various multimedia elements can be layered on top of text. For creation of such experimental media formats, there is also is also some special software available.

On the Internet anybody can sell anything, and this also applies to short stories. In practise, however, consumers' ability and willingness to find offered texts favour large vendors, such as the previously mentioned Amazon, Apple and Barnes & Noble. All of them have their own editorial teams, who closely watch over quality and level of originality of offered texts. For an author, of course, this is an additional barrier, but worth a try for potential big marketing support.

Due to low working capital needs in production, distribution and sales, it can be expected that number of short format sellers is going to increase and the market will begin to follow long tail concept. In this case, the challenge will be, how to improve your chances to be found in a shop that is selling short form e-books.

The Internet and social media offer excellent and affordable tools for short story marketing. An author is no longer at the mercy of publishers and booksellers in increasing her popularity, and even though these are willing to promote her book, an author is able to further increase efficiency of marketing by herself. Single short stories are also used to promote collections of short stories or novels, publishing often taking place before actual works will be launched.

Who benefits 

Short form text market is estimated to be 25 to 40 million USD this year. The same industry expert predicts rapid growth with billion USD market in next five years. Although you would not fully believe in these figures, short form will be an important marketing tool and demand driver, so competition in the area will be strong.

The top three retailers have built their businesses from different starting points, and each have their own distinctive strengths. Amazon revolutionised physical book e-commerce, has since expanded to large number of other product categories and taken a leading role in both normal and short e-books. Apple´s stronghold is in its devices, well-suited also for reading (e.g. iPhone and iPad with reading application) and in successful sales of digital content and applications. Barnes & Noble is in turn a traditional bookseller, which has gradually expanded its range and harnessed also the Internet to their sales efforts. In future, each of these will probably continue to invest in short texts in order to maintain and improve their positions. Google is one of the other major players worth following, with already other activities with books.

Startup publishers are challenging large and well-established ones with their greater willingness and ability to approach the market in a new way. The most notable ones are, among others, Thought Catalog, Atavist, Byliner, Think Piece and New Word City. It is to be expected that more newcomers will enter the market with new combinations of content focus, multimedia use, business models and marketing innovations.

As we have seen, for example in establishment of digital music ecosystem, key players are often very conservative, and this will also significantly affect development of short form text. Many self-confident writers might value novels over shorter forms, and though they would be writing short stories, collections would be preferred to single stories. On the other hand, there are writers like Stephen King, who have been quick to spot new opportunities. Those forerunners have an opportunity to expand demand for their products and gain a larger share of sales revenues by becoming a self-publisher and by effectively marketing their own texts. As regards to short form text publishing and sales, it is interesting to see, how quickly we shall see new operating models that will support supply of a much broader selection, according to long tail concept.

Situation in Finland

In Finland, e-book market is at a very early stage: In 2012, e-books accounted for only 0.36% of total general literature sales. In the US the corresponding figure was 22% and in the UK 13%.

None of the biggest local e-book suppliers is actively driving increase of short form sales. Adlibris, with presence in Nordic countries, as well as Finnish eLibris and Suomalainen Kirjakauppa are offering some collections of short stories, but no single digital texts are available in their shops. On the other hand, Ellibs provides at least investigative journalism texts of Long Play and Elisa Kirja has also some short stories available.

There are, however, numerous sites with varying focus available for short text writers. It is quite easy to get at least some visibility, but getting paid and other promotional and commercial benefits are limited.

Well-established writers have not yet found market of short story singles, nor have used singles to market larger literary entities.

The question is, who will act first, who will reap the benefits?

1 August 2013

Find next major customers early enough

When I was selling mobile phone systems in 1988, working with a major player in the business, I received on my desk a request from then Czechoslovak Socialist State-owned telecoms provider, SPT Telecom. It called an indicative offer of  NMT exchanges, base stations, and a bundle of services. Details of the tender were limited, and no means to ask for further information were provided. Only the address and time, where and when the offer was supposed to be delivered.

Although the signs to make a deal were very poor, we decided to make an offer. As requested by the customer, it meant three binders in five copies - two large suitcases full of paper. I flew to Prague to deliver the offer, with the aim to try to meet the senders of the invitation to tender, to clarify their plans and to create for us a good position for the following steps. At SPT I was welcomed by a guy that looked like an accountant. He took the papers, but was unable and unwilling to discuss anything about the project and could not arrange meetings with the ones with more knowledge. I was sure that this will not work.

Fast forward to 1991. After some vivid years Czechoslovakia is now liberated from socialism, SPT Telecom is privatised, it has established a cellular joint venture Eurotel with American operators - and we have won the Eurotel contract to supply the country's first NMT network. In that autumn Eurotel's core team comes to Finland via Stockholm. The ferry trip to Helsinki will be used to celebrate cooperation, besides ordinary business meetings. At night, I sit on board along with two of Eurotel's senior directors, who have been involved for a long time, and I hear from them a warming tribute: In 1988, we were the only company that answered their call for tender, the resulting information helped them greatly forward, and then established relationship was significantly affecting the selection of the supplier.

The story above is a great proof of how vital it is to start building customer relations already today, though they probably will not bear fruit until tomorrow. Here we shall dig this deeper. The focus is not to predict future client needs but measures to utilise changes in customer business circumstances, with the aim to open our products and services for new opportunities. The ideas are more applicable to ​​corporate customers, in the consumer side of the approach is slightly different.

Changes in customer circumstances

How to track these changes ?

As noted above, changes in the macro-level operating environment create big opportunities to transform a hesitant would-be customer into buying one or to increase their sales volume significantly. These changes are already under way rapidly, for example in the BRIC countries, and many new countries, e.g. in Africa or Burma and Cuba, are worth following.

Another country or regional level change opportunity relates to new or heavily increasing investments in certain geographical areas or domains. Wide interest in food, water and energy supply, or projects planned in the arctic regions are examples of this.

On individual company level, planned changes in the ownership structure are a sign that there might appear demand for new products and services. Ownership arrangements may generate resources and willingness to implement plans, which were previously beyond means. Investments can also be directed in adjacent sectors or new geographical areas.

Planned changes in company's business model anticipate new opportunities for sellers. New needs and customer segments to be served, re-shaped offerings, sales channel and customer relationship strategy changes, renewed revenue model, etc. are all signalling change in a way of working, thus potentially implying new or broader supplier relationships.

Facing significant external influences, such as globalisation, digitalisation and growing social media influence on customers' purchasing decisions, may suddenly change company's competitive horizon. To meet this challenge typically requires new solutions and new partnerships.

For most of the products and services, startups are very insignificant, or at least high risk customers - you never know, whether an emerging business will continue to exist, if any growth is to be expected or if a company is capable of paying their bills. On the other hand, if a startup survives and is able to grow, it needs for further expansion same products and services that also established companies use. And even bigger growth will be seen in subcontracting and services related to startup´s business domain, as well as in complementary and supporting products and services. By creating contacts and business relationships with these companies at an early stage, there will be an option to benefit from potentially astonishing growth.

Preparing for changes

The good news is that you can also be prepared for these changes.

With existing customers, the company must first define possible and relevant change options in the horizon, prioritise them and then select the customers that the main changes would mostly impact. On customer level impact of changes need to be taken into account in the customer-specific action plans and in their implementation. This is best done by modifying attractiveness assessment of the customer that is part of the overall plan. Future potential is explicitly taken into account in the assessment of challenges facing customers in the future, their probability, and thus possibly resulting additional sales. In this way, also currently low-valued customers get enough attention and a company positions itself well for future growth.

In case of new customers, a company needs to be prepared for possible changes also when selecting new target countries or regions, prioritising new focus customers and when evaluating willingness to establish a beachhead in companies, whose potential is small at the moment but in the future may be significant.