Category: Business Design

Using Real Options to Value Design Concepts

The common way that financial people will judge the potential value of a project, or a design concept representing a potential future concept, is by building a model, usually a discounted cash flow model like Net Present Value (NPV). The calculation essentially asks, if we do this project and gain the profit we think we’ll gain, how much is it worth to us right now? That way we can compare it against our other options.

The problem with these models is that they assume the world doesn’t change. The model tries to predict everything that will happen in the project from beginning to end in order to arrive at a single numerical value. But in the technology world, there’s lots of change.

So peeps at the forward edge of product and service development have started using real options to value projects. Real options essentially breaks the project down into a series of decisions. At each decision point a number of outcomes can occur, and for each outcome there’s a probability it will occur. There’s also a revenue associated with each outcome that we receive if it occurs. By multiplying the probability by the revenue we get the value of the option.

This is often illustrated using a decision tree, as with this analysis of a drug in clinical trials…

What’s the big deal? It turns out this is a better way to value investments in Internet services for at least three reasons I can think of off-hand…

  1. Versioning: The Web 2.0 way of doing things is to release our work in stages, the public beta being a perfect example. If the beta is a big fail, we stop there and cut our losses, or we go down a different path of the decision tree.
  2. Uncertainty: There’s a great deal of uncertainty in our work. Twitter, for example, is a big success, but at the cost of a very tricky technical challenge. Instead of an NPV model that would judge the value of the project to be either simply negative or positive, we can model this reality of “large audience / technologically expensive.”
  3. Fast Risk Management: The ease of building betas makes it tempting to skip a big financial modeling activity, especially if it can’t accurately reflect (i.e. predict) how customers will react. Creating at least a simple real options analysis can save a lot of investment before building a beta that is hard to emotionally trash once it’s built. And while it’s tempting to say predictions are impossible so we should just run a trial, few managers with any P&L responsibility will invest in that.

Real options isn’t a perfect technique, however. Proponents claim it supports decisions with “mathematical certainty,” but the probabilities are derived from managers’ experience and judgment which is subjective and imperfect. Getting a group of people to agree on the probabilities may be difficult, and once a project is up and running a team may be unwilling to revise their estimates downward to reflect new information, much less kill their own project. Still, for the kind of work we do it’s better than the old ways.

References:

Google Labs Embedded in Gmail

I think a lot about how organizations and their products evolve quickly rather than remain static, and Google Labs are a prime example of that. By developing many alpha products, releasing several public betas, and getting live feedback they use the market to tell them what works. For many companies the notion of releasing your proprietary ideas is very scary, and yet the effect is the opposite: risk management.

A colleague just gave me a heads up to the Labs section of Gmail (accessible from Settings). It’s interesting for a few reasons:

  1. They’ve turned the labs upside down, embedding experimental ideas as preferences in an application rather than silo’d sites.
  2. Each feature is attributed to the employee(s) who invented it, acknowledging that great experiments often originate with one person, even if it takes a company to implement it.
  3. Some of the features — like “mouse gestures” which lets you navigate conversations by moving the mouse — innovate at the user interface level.

Gmail Labs

Design Thinking to Finance Skyscapers

In her comment to my post on the recent HBR article on design thinking, my friend HK writes, “What the article is missing is some concrete examples — what do designers do at strategic phases of projects, when the problems they’re solving aren’t explicit design problems?” She goes on to describe three of her own examples.

I suspect it’s both very hard and very easy to show examples. Very hard because applying creativity to what are normally analytical activities is a design problem in itself. I’ve found that inventing even rudimentary tools is hard. It’s reinventing how we’ve done business for hundreds of years, and it’s going to take years to build a more creative practice as reliable as our current methods.

But finding examples of design thinking applied to business problems is also easy, there are examples all around us. Financial deals can be quite complex and structuring one requires creativity. I was reminded of this last night while reading Adam Gopnik’s Through the Children’s Gate, stories about living in New York. In one scene he tours midtown Manhattan with a property tycoon…

It was a cold, crisp fall day, and as we looked at all the great glass skyscrapers of Park Avenue — the Seagram Building and Lever House and the Citicorp Center — he unraveled for me the complicated secrets of their financing and construction: how this one depended on a federal bond, and this one on a legendary thirteen-year lease with a balloon payment, and this one on the unreal (and unprofitable) munificence of a single liquor baron and his daughter…

We can imagine the sort of creativity needed to solve a problem like financing a building costing hundreds of millions of dollars involving several parties, credit instruments, commitments over time, tax structure, and so on. I’d like to know if anyone in finance is studying these deals as creative activities to help us understand how to design them better (and if traditional designers will be interested in this sort of design!).

Dan Hill on the Monocle Site Design

Monocle, as a business, a magazine, and a website, is an interesting story. I’m not sure how well the business fares, but it’s been around long enough and the content is growing in quantity and richness that it seems the affairs are in order.

Dan Hill recently posted about his work on the design of the site. The design reflects their strategy, which in a word could be summed up as bespoke. They’re differentiating on quality of a hand-crafted nature. While everyone else is installing white label social media packages, aggregating content from all over, and throwing features at the readers’ overwhelmed wall of attention, Monocle redoubled efforts to create a beautiful layout, professional writing and production, and a brand strong enough to extend into physical products.

Here’s a few of Dan’s notes that stood out for me:

  • Monocle was conceived as a multi-platform brand from the start.
  • We wanted to make Monocle a journalism brand that you had a weekly relationship with via the internet, as well as the monthly relationship via the magazine. Ultimately, this should be daily, if aspirations come to fruition.
  • I knew from the BBC that getting the broadcasts into iTunes would be the thing that really extended the viewership of the programmes… we waited until we had a critical mass of content before entering iTunes, with a podcast of all the programmes.
  • We’d seen many other broadcast news outlets appear to be getting ever more parochial, and produce editorial with lower quality (…the apparent step forward of journalists filing video reports via their mobile phone is often merely a cost-cutting exercise, and a step backwards in reporting quality). …we wanted to raise the bar in online video: to shoot things in high quality – we have our own Panasonic AG-HVX200 HD cameras and Mac Pro-based Final Cut Pro editing stations – and edit and encode professionally, embedding on the page in 16:9 ratio, to subtly give a sense of high quality broadcast.
  • I’ve conceived the video player… doubling up from it’s smallest size (470px to 960px) and then capable of going full-screen in the downloaded mp4 mode… We encode our programmes twice – once in Flash (using Sorensen Squeeze) for inclusion on the website, both in ‘lean-forward’ mode as embedded on the page, and in ‘lean-back’ mode when the user hits the double-size button; and then again in downloadable .mp4 files, which are encoded at the highest possible quality settings for iPod/iPhone.
  • Critically, we wanted to ensure that the sound is recorded correctly, so we used broadcast facilities in central London… before converting a space in the Marylebone Monocle HQ into a voiceover booth… Many other players have clearly not thought enough about sound…
  • Creating the right office/studio environment was also key… The centre-piece of the office is a large wall on which the issue emerges bit by bit, as useful for us commissioning video content alongside as for talking people through the brand.

    • Monocle's layout wall

    Continue reading Dan Hill on the Monocle Site Design

HBR Finally Runs Their Design Thinking Article

Tim Brown Those of us following the dissemination of the design thinking meme were wondering if and when the Harvard Business Review would jump on board, and the waiting is over. In the June 2008 issue there’s an overview article courtesy of IDEO’s Tim Brown, a logical choice. He makes some key points while sidestepping unnecessary hype. Examples:

  • His cases include Coasting bicycles, Kaiser Permanente nursing shift changes, and the Aravind Eye Care System. But he wraps the piece with a comparison to Thomas Edison:

    • The lightbulb is most often thought of as his signature invention, but Edison understood that the bulb was little more than a parlor trick without a system of electric power generation and transmission to make it truly useful. So he created that, too. Thus Edison’s genius lay in his ability to conceive of a fully developed marketplace, not simply a discrete device… Edison wasn’t a narrowly specialized scientist but a broad generalist with a shrewd business sense… Innovation is hard work; Edison made it a profession that blended art, craft, science, business savvy, and an astute understanding of customers and markets.

  • Design applied downstream is tactical, design applied upstream is strategic.
  • The importance of a human-centered approach
  • Brainstorming and prototyping stand as examples for the array of possible techniques
  • Constraints as a springboard for creativity
  • Aesthetics are still important because they appeal to our emotions
  • As more of our needs our met, we crave better experiences

And so on. If you haven’t been introduced to design thinking, it’s a good place to start. If you have, it’s a good article to educate your clients.

Who Needs Reliability When Your Consumers are Addicted?

Twitter logo Lately Twitter’s database crashed. They occasionally have to turn off features for technical reasons. Sometimes they’re down and they don’t even know why (having been a sys admin I feel their pain). It seems they’ve picked a service with a a hard technical problem: scaling a web messaging system. And it’s reached the point of parody.

Do Twitterers complain? Sure. But they keep using it. They even send the Twitter staff pizzas.

Considering we don’t actually need Twitter and could easily go back to life without it, the devotion of Twitterers is amazing. But I realize this is nothing new for Evan Williams, the founder. In the early days of Blogger there were also massive technical problems. As an early Blogger I remember them devoting weekends to keeping the service up as I sent in my donation to keep them going.

This approach feels like a key variation on the beta launch approach: if the app is addictive enough, consumers will hang on and tolerate downtime. So launching a good idea even earlier than the usual beta may pay off despite technical pain later on (e.g. Blogger survived nicely). For many product development and IT managers, launching betas is radical enough, launching unscalable betas will be a tough lesson to absorb.

p.s. check out their nifty over capacity page…

Tool: Business Design Concept Poster

Each semester I tweak my Business & Design class as I learn more about how to teach undergrad design students about business, and help them to blend business and design ideas rather than see them as two separate spheres (while relating cautionary tales, as with Ford bean counters who show up at the end and revise the design!).

This semester culminated with a poster that could encapsulate the artifact, consumer experience, and business model on one sheet of paper. Once we had all this information in one place, we could see that, for example, it wasn’t going to make enough money, and then use our research and idea generation techniques to tweak some aspect, such as the price, and watch how it changed other aspects, like the target audience.

For a one semester course, it was a lot for them to absorb, and the results will still look elementary to professionals, but they rose to the challenge and I think this format has potential to help designers and businesspeople see the connection between form, function, audience, costs, revenue, and business model.

Here’s three examples. Click through the link to see the high-res versions.

The Ten Distinguishing Properties of Wicked Problems

You may have heard of Rittel and Webber’s wicked problems (problems that are messy, circular, and aggressive). I was interested to see their original paper (pdf) includes ten distinguishing properties “that planners had better be alert to” because “policy problems cannot be definitively described.”

  1. There is no definitive formulation of a wicked problem
  2. Wicked problems have no stopping rule
  3. Solutions to wicked problems are not true-or-false, but good-or-bad
  4. There is no immediate and no ultimate test of a solution to a wicked problem
  5. Every solution to a wicked problem is a “one-shot operation”; because there is no opportunity to learn by trial-and-error, every attempt counts significantly
  6. Wicked problems do not have an enumerable (or an exhaustively describable) set of potential solutions, nor is there a well-described set of permissible operations that may be incorporated into the plan
  7. Every wicked problem is essentially unique
  8. Every wicked problem can be considered to be a symptom of another problem
  9. The existence of a discrepancy representing a wicked problem can be explained in numerous ways. The choice of explanation determines the nature of the problem’s resolution
  10. The planner has no right to be wrong

It makes me wonder if any politicians have tried to campaign on a process for solving wicked problems instead of prescriptive solutions.

The Wii’s Blue Ocean Has to Float Partners Too

It seems Wii games aren’t selling as well as competitors’ games. The New York Times article cites two culprits:

  1. Audience: “They don’t buy new games with the fervor of a traditional gamer who is constantly seeking new stimulation.“
  2. Marketing: “Part of the problem, analysts say, is that other game makers have yet to embrace unconventional advertising methods that can reach this broader audience.“

Those are probably contributors, but I would cite one overriding factor: strategy. The Wii is a famous example of Blue Ocean strategy, achieving low-cost through asymmetrical and differentiating product characteristics. In a recent experience, I realized this strategy has to extend through the product extensions created by partners, or the whole system loses momentum.

In 2006-7 I worked with a media company partnering with a fitness company that had gone from a small franchise to an international leader in its category using a Blue Ocean strategy. They wanted to extend the business online, but somehow forgot why their customers loved them: an innovative, different experience that could be had at a lower price. The online product we were asked to create was not different, not better, and not cheaper. Although it’s designed well and effective, it’s not selling well. I’m not sure if the client saw the strategic mismatch, but they certainly didn’t enforce it with their partner.

If I were in Nintendo’s shoes, I would be hammering away at a broad effort to help my partners follow the strategy that has been 20-million-consoles-effective. Example: Guitar Hero shouldn’t be the same price for the Wii as for Playstation and Xbox, it should be a lower price (and it can’t be a whopping $90, who do they think this segment is anyway?). And the games need to work hard to find new, fun things to do with that motion controller. Fun and cheap, the Wii is as simple as that, and partners need to get on board with that strategy.

If Da Vinci Blogged the Mona Lisa

Comments

Cool! But the background looks all messed up. Is it done yet?

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The model looks a little schizo — happy and menacing at the same time. Can you fix the smile?

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yo leo, what’s with the green thing jutting out of her head?!?!

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Cheap baby furniture. Cheap meepit furniture for neopets. Cheap wicker furniture. Cheap micro-suede furniture. Cheap furniture. Cheap sex furniture. Cheap garden furniture

Tyler Brûlé on Starting Up

Tyler Brule at CEBit

Some facts about his new start up:

  • No research
  • No focus groups
  • No creative conflict
  • No eating at your desk
  • No PowerPoint presentations to clients
  • No walls
  • No freebies
  • No user generated content

Photo, link courtesy John Maeda

Entrepreneurs: Beware of Big Liabilities

The Zollverein School in Essen, Germany was a great hope for the business design field, starting the first MBA of its kind in Europe. But this newspaper story lays out a tale of caution for anyone starting a venture like this. In short, it seems the gorgeous new building they constructed to house the school has become a real estate liability. Even with taxpayer funding, the operating costs are a burden.

The dot com downturn of 2001 sank some firms like Scient but not others like Razorfish. The difference wasn’t client base or capabilities (or even the fact that I was working at Razorfish :), it was real estate liabilities. Scient invested in a lot of expensive offices whereas Razorfish put their spare cash in the bank for a rainy day.

Let’s hope the Berlin C-School — through partnership with Steinbeis University — avoids this issue.

“Don’t own nothin’ if you can help it. If you can, rent your shoes.” — Tom Peters Forrest Gump

The Failure of Failure

Much has been written about the importance of failure in design. To improve things we need to try new approaches which sometimes work and sometimes don’t. Straight forward enough, at least to designers.

But business managers won’t go near that. “Yes, I need to fail!” Bull-shit, you ain’t gonna hear that in many management offices. So I’ve been thinking about how to re-frame the word “failure”.

“Iteration” is pretty good, but implies each pass is good and just keeps getting better. Michael Linton, CMO of Best Buy, has trials he calls “ready-fire-aim” activities. And I just thought of a new one:

A try.

This is riffing off two different words. One is “the ask” which is more commonly being used as a noun, meaning “the request” (annoyed the hell out of me for a while, but I’m adjusting). But mostly try is a riff on the rugby use of the word which refers to the major way of scoring points in that game, equivalent to a touchdown in American football.

How might I use it? The sketch looks great, let’s make one in foam core and go for a try with some customers…

It could be a wonderful evocation of cognitive dissonance, as it would simultaneously mean to make an effort as well as score!

Hamel and the Technology-Driven Future of Management

Here’s some terms from a recent interview with Gary Hamel, management guru…

digital device
Internet
the Web
Googlers and bloggers and mashers and podcasters
community
open source projects
PCs, routers, and hubs
social network
MySpace
…

I’m fascinated by his view that technology — particularly Internet tools — will change management. This isn’t just the hyper-hype of the Cluetrain Manifesto, this is a top-tier business professor who regularly publishes in HBR. When I wondered aloud a couple years ago, Who are the new rebels? (Managers?), I saw this as daydreaming, but perhaps the entrepreneurs of the Internet will also influence future management techniques.

Alex’s Draft Business Model Innovation Manual

This draft from Alex Osterwalder is very very interesting…

Yesterday I finished a draft for a simple business model innovation manual… The manual will help business people describe their business model step by step, assess its strengths and weaknesses in order to then improve it.

I’ve tried teaching business model creation before, and it’s not easy. In opening Alex’s manual, I immediately looked for his first step; in a model where so many elements are inter-related, where does one start? He starts with customers, which I think says a lot about this perspective of the business world, and how we do business in the 21st Century.