Archive for the ‘Uncategorized’ Category

Often times start-up ventures have difficulty identifying how to do business in their market. The question of how in this sense is not in absolute terms, but in relative terms. This is important to understand because relative can outweigh absolute in a competitive market. A business can offer a great product at a great price, but how is the “greatness” determined? Is it by absolute measures, or relative? Often it is due to relative measures, as a product is compared to the competition in an open market and therefore the relative advantages of a product determines how it is viewed in the market. For a start-up venture, this is important because they must focus on how to differentiate from the competition, and this is certainly done in a relative manner.

There are many ways we can apply this idea for start-ups, or for any entrepreneurial activity (which is essentially any activity based in growth efforts), but I want to talk a little about it under the framework of the replication-adaptation continuum. I became familiar with this idea in the book “Scaling Up Excellence” by Bob Sutton and Higgy Rao, which was in the context of leading a scaling effort within an organization. We can apply this idea to business development also, with a lot of connection to benchmarking and deciding where to start when in an ambiguous state. The replication-adaptation continuum is basically the idea that a new process can be placed on a continuum where sometimes it is better to replicate from elsewhere and sometimes it is better to adapt and innovate. Obviously for a business this can be applied as well, as innovation is always something that a firm looks to do, even if it is innovation from within.

For an entrepreneurial action, we can take the idea of benchmarking and of replication as a way to help figure out where to start. Maybe you are familiar with the idea of Bright Spots, in context of identifying successful practices, and use them as an appropriate starting place to determine how to move forward. For benchmarking, this can be done by looking at another firm that has done a similar thing and look at what worked or didn’t work and then understand why. This should be sounding like a familiar idea that understanding the market and our competition is vitally important for any firm, but we can take this idea and use it as a way to help determine starting places and next actions. Sometimes we may decide that a given action will be more influenced by replication and other times by adaptation, but we should have reasons for choosing one or the other (in line with System 2 thinking discussed by Daniel Kahneman). Of course, we are always looking for a way to differentiate and gain a competitive advantage, but this does not mean that everything has to be different all the time.

 

 

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Sales Process Caveat

Posted: May 27, 2014 in Uncategorized

Today, I want to discuss an issue related to the sales process of an organization. Sales, although often dreaded by many, is crucial to the success of any business. And remember, understanding sales translates beyond simply the selling of a product, as any business is involved in sales in some form. For example, a service related business may not sell a tangible finished good, but does have to sell themselves to a particular client. Whatever the “product” is that is being sold, understanding sales will help deliver greater efficiency to a business.

I want to touch on something I recently came across, which although it is fairly intuitive, deserves some formal attention. Any potential buyer, consumer or client, certainly cares about the economics of a deal, but I think sometimes we tend to think that is all that matters, and it’s not. Now I don’t just mean economics, as in price, as a low price obviously is only one aspect of economics, and could very well mean that the quality is poor and thus the value is not there. What I mean by economics in this sense is the value of the product is good, and typically a buyer would buy when this good economics presents itself, but then they don’t buy.

So for an example, a company sells a product that contributes a high value to the customer, for several variables, and in general if the payback on the product to the buyer is within, say 5 years, it is deemed as a viable project. Now, of course, different organizations will have their own acceptable payback or IRR, etc., but for arguments sake let us say that Company X is looking for a product that delivers a payback of under 5 years. So Company Z, is offering a product to X, with a payback of under 3 years, while delivering high quality and has a great track record of their products. Z believes they will sell very well to this company, but X says no. Why?

There can certainly be many examples of why they say no, but this is a true story and I want to use it to explain why it happened in this instance. Cultural attitudes and differences are crucial in understanding how to sell to a buyer. In this case study, X was a company in a very risk averse culture (this was an international case) and due to Z being from another country, X was far to concerned about reliability. X pitching the product in terms of economics is not going to be enough, but rather needed to understand that the barrier to a sale was assurance of reliability, not economics. The most important route Z needed to take was to emphasize the long-standing success of the product in the market and focus the attention on how reliable it is. When these concerns are met, a sale will take place.

The point I am trying to make is that do not make the mistake of only emphasizing economics of a sale, but be aware that other factors will apply. The economics will always be important to include, but overlooking other variables will impede a successful deal.

The Diffusion of Innovation theory is one that looks to explore the why and the when that a population adopts some form of innovation. It is essentially looking at understanding the function of how change is created, specifically in the context of social change. Everett Rogers, an expert on this theory, asserts that a significant portion of the probability of successful adoption of an innovation relies on 5 key elements. In this post, I want to briefly discuss these 5 elements and how we can relate them to altering the global energy market. I want to say, that this is a longer post than normal but it needed a little lengthy to cover the necessary information but I think you will find it interesting and worth the few extra words.

Element 1: Relative advantage. This is the perceived notion of how the innovation compares to the status quo, where the perception is determined by the groups of users that the innovation impacts. Obviously, the greater the perception of advantage, the more likely to see adoption. In energy, we can look at this in two broad ways which can be either the individual or the society as a whole. I will speak to the society as a whole for our purposes, as I think it is more appropriate. Because the perception of the relative advantage can be due to a number of variables, there is potential for large variations in this. Subgroups of the society will differ according to what they value the most. For some, costs are the most important where for others it may be the issue of climate change and environmental concerns that are the dominant variable. This is very easy to identify in the micro-aspects of society, and also evident at the national level with the introduction of government policy that encourages cleaner energy sources, even when it is more expensive. However, I contend (and I would not think it is a radical thought) that cost of these cleaner energies has played a significant role as a barrier to larger scale incorporation. The trade-off between cost and environment (i.e “guns or butter” idea) is strongly related, and we see that as governments have more concern for climate they are willing to spend more on clean energy, where the opposite situation also exists.

Element 2: Compatibility with existing values and practices. This is the idea that the innovation needs to be consistent with the existing values and needs associated with the society. I don’t need to touch on this much, as I think that for our purposes the existing values and needs of energy are easily identifiable. I think that renewable energy does have some problems here in that the acceptance of some of these sources as efficient supplies is not absolute across society.

Element 3: Simplicity and ease of use. How easy is it to transition to the innovation? It is difficult for energy. From development of economies to scale to the development of the necessary infrastructure, renewable energy has a long way to go before absolute adoption. Even in terms of policy, how easy is it for investment of renewable energy projects and how easy it is to get the incentives? Especially for energy, I think this is a very important barrier that we have to meet in order to provide the adoption at a large scale. Between this and the costs, I think this may be the more significant because even those that value climate more than costs, can be barred from utilizing RE when the ease of use is absent.

Element 4: Trialability. How permanent is this or can we just experiment? Again this can be difficult due to the nature of long term projects, which would mean long term experiments. If we change our energy infrastructure, only to find out that RE is not an effective large scale source, then there will be a problem. Finding ways to alleviate this concern is important so that there can be a kind of contingency plan for the potential that it does not provide the required level of reliance. I think this is where the intermittency problem sits.

Element 5: Observable results. How easy is it to see the impacts? For governments, it can be difficult because economic payoffs may not be seen for years, and that is a difficult political issue. For the climate, we can see emissions reduce, but how quickly can we see the improvements in climate change and dangers of pollution?

In another post I will address how to reach the different types of people within this theory and how energy can be applied to the various groups. I ask that you think about these elements and comment your ideas for how we can address them as I believe this can be a significant way to find solutions.

Interest Groups: Oil and Gas

Posted: April 17, 2014 in Uncategorized

Just how much power do interest groups have on policy? The first step of this is understanding how interest groups get involved and whom they get involved with. I want to just look at the amount of money interest groups spend and who gets the money. Let us start with oil and gas industry.

Since 1990, the oil and gas industry has donated 238.7 million dollars to political figures, with 75% of those funds going to republicans. Just from that first figure, I think we can gain a decent idea of why republicans cater toward oil more than other forms of energy. I do not want to assert that it is the only reason, because renewables have not yet proven their large scale competitiveness to oil and gas. However, I do think that had we been for consistent in our development of renewable energy, that we would have a more advanced market than we do today. Quick rant; I do not believe that America, the land of innovation, would not be capable of answering to the question of finding solutions had we provided the necessary resources over the past decades. Out of these contributions, who was the largest contributor in the 2013-2014 period? Koch Industries.  The Koch brothers are oil billionaires, that are very active in many aspects of politics, and are associated with many think tanks and organizations, i.e funding. Now I want to state now, that I am not inferring a value judgement and I think that Koch Industries provides value to the world and many of the organizations they are associated with also provide significant value. I just want us to be aware of how the political process looks. Now interesting to also point out, is that the even President Obama received more than $800,000 dollars from Koch Industries during his initial campaign for president. So either way, it is safe to say the “money talks” in Washington, and that is bipartisan.

What about lobbying for this industry? Well the total amount during 2013 was $144,682,462, with the top three contributors being Exxon, Chevron, and Koch, with more than 35 million between them. Who are the top recipients of the money? John Cornyn, Senator from Texas (R) was the top recipient. What may be a surprise is the 3rd leading recipient is a Democrat, Mary Landrieu. In total, Republicans received 87% of the funding with the Democrats getting the other 13%. But interesting enough, there are more Democrats that receive funding from this industry that Republicans in the Senate, but the Republicans get almost double the amount of funds on average.

I say again, do not just go to thinking negatively of this. Wait until we look at the role of the alternative energy and their partisan funding. Also, remember that oil and gas and companies like Koch have been responsible for significant amounts of growth and economic development that has been available because of affordable energy that comes from oil and gas sources. So come back to check out how the alternative energy industry compares to this.

 

We often hear about how certain renewable energy sources are intermittent. But that is not the only indeterminacy they should be associated with. Government spends on energy, we know that. But in terms of cleaner and renewable energy, there has also been intermittent approach to it. Typically, government spends on renewables when things go bad in the traditional fuel market place. However, then when those traditional sources become widely available, government spending on renewables decreases. This is why it is so damaging to have such a partisan political process, especially with regard to energy. An example of this was Jimmy Carter to Ronald Reagan. Carter had set goals for advanced use of solar in the U.S. and provided spending and support for the growth of renewable energy markets. However, when Reagan came into office, this idea changed. The growth of these renewables were associated with Carter and so not a very attractive commitment. Additionally, the case for self-production of fossil fuels were advocated and in conjunction with the falling prices of fossil fuels, renewables lost the support and the development.

Renewable and clean energy growth needs to be associated with both parties for real change to occur. We have to be able to have consistent policy on the importance of growing alternatives power supplies to allow for these markets to develop. This is not going to be profitable right away. We are going to have to spend money to do this, and where the spending comes from depends on what we choose to use as policy. In another post I will explore some of these policies, but for now I will refrain.

The figure shows how in more than thirty years, the commitment to renewable energy is lacking. Had we taken a dedicated approach to this back then, it is very possible we would be in a much better situation today. Not to mention the way the world would be changed. Our R&D would have resulted in innovations that applied to rest of the world as well as us. Emissions and environmental damage would be seriously reduced.

This is a rather important thing to understand because renewables need to acquire economies of scale to become a viable solution. Start-and-Stop policy makes it difficult to get actual development that persists long-term, which is needed to drive the development of the market. When we look at regions where policy has been relatively stable for long periods of time, such as Germany, the renewable market does much better and experiences significant growth. I would hope that we can find a stable approach to development of these markets and urge everyone to remove this important issue from our partisan political nature. Both parties need to accept the importance of this and commit to the development of the market. So move beyond the partisan fog, for this issue at least, and then analyze what you think government should do with regard for spending.

Development of clean energy markets is vital to the ability of wide-scale adaptation in the global economy. As I have said before, the most sure-fire way to do this is through the power of business innovation, Schumpeter’s “creative destruction” if you will. In this post I want to explore how government can play a significant role in this process.

Government is not the everywhere and always “bad guy” nor the epitome of how to fix problems. However, I do believe that in terms of development of clean energy, the governments can be a significant impact for good. At least that is my view at the moment. With that said, government should not be a dominant player is this game, but rather the facilitator or incentives. We have discussed before the power of price and how there is currently a disconnect between price of energy supply and the incentive to invest in renewables. Government has, all throughout the world, taken this issue upon themselves to provide incentives via energy policy. There are a wide variation of policies, some better than others, and as with most policy options there are multiple ways to look at it.

For this post, I want to focus on the validity of accepting the role of government sponsored incentives. I have no doubt that if there was a significant change in the energy supply and prices skyrocketed for fossil fuels, that innovation would take place for renewables, at some point. I find myself believing that we should begin to develop these markets sooner rather than later, especially before we wait for the potentially damaging situation where these costs of fossil fuels do skyrocket.

Given that we are aware of the current failure of wide scale adoption of clean power in the United States, how can we use policy to promote development? I like to think of it as a portfolio that a government has which allows for a variety of tools that can be used to development the clean energy markets. There is no need to think that we should have just one policy, as that will limit the impact of total development. So which policies should be included? Well, there are a wide variety of policies that are proven to be effective, but I find myself in favor of Feed In Tariff policies more than any other. In a later post, I will discuss FIT policies in much more detail, but for now I want to focus on just the acceptance of government policy, and not the importance of consistency in policy.

Policy can help to overcome the difficulty in generating development because we subsidize for now, in an effort to promote long term efficiency. Policy that can prove that economies of scale can be achieved and wide scale implementation with minimal cost is something that we should be open to. Remember, we subsidize fossil fuels as well, so it is not a new idea to help make energy more affordable to the end user. When a lack of incentive is present in the market, for an issue that needs to be addressed, the government should be a player that helps to facilitate change. Policy is the tool that can do it, and choosing policy wisely is important. Regulatory restrictions are an option, but not one I would advocate. I want to advocate for tools that provide an incentive for investment into cleaner technologies, which can help to develop a market globally. As a nation, we spend an incredible amount of money on things that are not all that important, in my opinion anyway. Energy should be something we spend money on, and specifically the development of energy markets that will provide significant benefits for generations to come. To do this, we could benefit from attractive policy to induce investment.

 

 

 

Regulation is not a straight forward process. No matter how altruistic a policy may be, it is rarely ever clean of some level of corruption or rent-seeking behaviors, not mention unintended consequences. Governmental paternalism has potential for both good and bad outcomes and I want to share a story that can provide an example of how these things can take place, and that we should look past the surface of any policy. This story is not a “n=1” assertion that all regulation is bad, but should provoke a thought process that gets us to think a little deeper about issues.

The EPA wanted to reduce the sulfur emissions of coal plants, a very reasonable goal. Through amendments to the Clean Air Act, the chosen plan was to adopt a “scrubber technology” that was proven to reduce sulfur emissions. Yes, these scrubbers cost some money but the belief was that it helped to solve the externality problem of dirty coal. There was a difference between regional coal, as in general, western coal was clean and eastern coal was dirty. The amendment required that plants purchase the scrubbers to reduce the emissions of coal produced power.

The idea does not seem outrageous at all, right? The problem though was what happened, and was a response to the incentives of regional coal plants. For east and west regions, it was relatively straight forward. Western regions with the clean coal at a higher price, were better off purchasing the local product and having lower emissions. The Eastern coal was dirtier and cheaper and it was more advantageous to just purchase the scrubber and the still use the dirty coal. The key change was the Midwest. Due to the cost of the scrubbers, it was now more cost effective for Midwestern plants to purchase the dirty coal at a lower price rather than the clean coal. This meant that even with the scrubbers, there was more sulfur emissions because of the higher utilization of dirty coal. But this wasn’t supposed to be the case! The regulation did not change much of the operation on the western or eastern front because of logistics, but the Midwest now had real incentive to choose the dirty coal rather than the clean, and all due to the cost of the scrubber. With a goal of reducing emissions, the regulation actually resulted in some an increase in sulfur emissions.

Just for some further interesting information, this was largely due to the political problems of regulation. Eastern coal, the dirty coal, wanted to protect its interest and had a strong presence with legislators. They wanted this regulation and advocated the scrubber. You see, the regulation only allowed for this one scrubber technology to be used, not an open technology competition. This reduced efficiency and innovation of the market and gave way to the poor regulation. What was also interesting is the environmentalist also backed this regulation, but obviously for different reasons than the eastern coal. A fascinating look at this concept is called “Bootleggers and Baptists” theory by Bruce Yandle

Regulation is not a simple task that automatically leads to more efficient outcomes. Next time you hear about any regulation, just think about potential side-effects or spillovers and think about whether there is a bootlegger to the baptist of the issue.