Creative destruction - the value of information

Smaller companies find getting information difficult. Many small firms exist in "survival mode". They have enough income to survive and stay what they are doing, but with little room for error or any spare cash for expansion.


The approach to break out of this "survival mode" takes confidence that you can reach a market that long term will enable growth and profit. This confidence can be gained in a number of different ways:

• Fate or good luck giving you a good customer - this helps you identify other "good customers".
• You do some research - but make sure that you match the results (potential opportunities) to your capabilities
• Trial and error, taking little steps at first and testing your way before developing a formulae for dealing with your market. This will probably involve a number of parameters around your marketing, not just your promotions.

Often it is a mix of all 3.

Research is often thought of as "Lies, damned lies, and statistics". Implying that research bolsters weak arguments artificially. I would agree - you can find as many facts as you like to support an argument. In this situation the person has been subjective, the statistics are subjective and the result is still opinion.

Owning a small business is a highly personal experience. Whilst you are expected to be objective in your decision making, you are effected emotionally as your business is your lively-hood. If you have selective information then you have an emotional person making decisions based on insufficient information.

The majority of businesses do not take positive action for their businesses with respect to marketing systems as they do not have enough information to know that it will work. In the short term they have not got enough cash to risk. The result is stalemate - and a business may stay here for years.

Research studies do say that stable and growing companies have both the ability to form complex marketing systems (ie more than just advertising) to grow and make a decent profit.

One of the key "entrepreneur" abilities is finding dealing with hard to find or ambiguous  information (and taking action).

Clearly both these factors are linked and the mixture of collecting, analysing and making decisions is important for any company to make a better than average start.

http://plugintoyourmarket.blogspot.com/ deals with these issues and http://prdpartnership.com/plugged.htm gives details of a service that supports small businesses to make those key decisions.

Creative destruction - Micro Renewables 2010

The latest consultation from DECC on the Renewable Heat incentive suggests that there will be subsidies for Micro Renewables based on the deemed heat need (surveyed) and the lifetime of the equipment.

The table below shows the proposed subsidy per kWH

Is 2010 the year that Micro renewables finally takes off in a big way? So that it is "common" in the UK to have a Micro renewable source of fuel. Creative Destruction implies that an industry changes completely and has a significant impact on our lives. How might the energy market change?

Micro renewable is a term that implies use at the household level and technically an output of 45 kWH or less. This could be a biomass boiler or a ground source heat pump.

The government survey on gas and electricity use in 2006/7 shows gas use at between 16000 kWH for smaller houses and 24,000 kwh for larger houses. This does vary by geographic area and by type of house.

An "average" gas bill for a year is said to be about £800. Oil may be higher than this, as will LPG, and again will vary on the sort of house and location. Purchase, Installation and maintenance may increase the cost to £17000 over a 15 year period assuming prices stay the same.

The majority of people have ignored the Micro Renewable market as the capital cost of installation is simply too high. If, for instance the cost of installation and equipment were £5000 higher than Gas or Oil, the payback period, even if the fuel was "free" would be over 6 years.

There are a number of factors that are causing this market to show signs of shifting:

Gas and oil prices are going up significantly and are perceived as coming from politically unstable places.

The public are starting to believe carbon neutral is a good thing

The government in the UK have signed up to reducing CO2 and home heating is a big area

The number of businesses offering a Micro Renewable solution has increased and households are becoming more familiar with what each solution can do.

Planning regulations will come into force in the future that new homes should be carbon neutral

Renewable Heat incentive will be introduced in April 2011 for all "approved" new installations post July 2009 to harmonise the market.

There are therefore 2 key factors:

We want to feel "greener"

We want a good deal

How might this work?

For biomass the subsidy is 9p per Kwh for 15 years. Using the average house consumption of 20500 kWH this equates to about £27,000.

If you paid:

£5000 for your boiler

£2000 for installation

£200 per year for maintenance (£3000)

Between £9000-£14000 for fuel over the lifetime of the boiler (depending on how and where you buy your fuel from and accepting that prices of fuel may rise)

This gives a total of about £20,000 for the average house over 15 years or £1300 a year

It is clearly more expensive than gas. However if the 9p is accepted you will get back £27,000 - and you will gain £7000 over 15 years for having biomass heating rather than gas. This is therefore an investment opportunity.

This scheme is to be introduced by April 2011 and administered by Ofgem. It wont get ratified in parliament before the next election - and it is clear that this 9p rate may change. What is encouraging however is that there is cross party agreement on the approach and the need to do this. Even if the rate were 3p it would mean a £9000 subsidy over the life time of the equipment and would make biomass (wood pellets) cheaper than gas.

Creative destruction - New markets in 2009

The idea of creative destruction is that innovation or creativity delivers something to the market place that is taken up and destroys what was there previously - at least in part.

If you look back over the last few years you can see some consumer products having their hour of glory coming up to Christmas - for instance what was the year that everyone bought a digital camera? Satellite navigation? iPods? or if you look back further - your first mobile phone.

2009 did not start well, and by all accounts it is not finishing that well either. In the UK we have had negative growth over the year, with particularly hard hit sectors of the economy being:

Finance and banking

Transport and distribution

Construction

Agriculture

In amongst this we have used less utilities - less oil, gas, electricity and water both commercially and at home.

Small firm liquidations are up 14% (2008 Q3 to 2009 Q3) whilst corporate liquidations are up 51% on the same period. Personal insolvency is also up 35% on the previous year. If you compare with 2005 company liquidations are up from about 3000 per quarter to nearly 5000 per quarter. Individual insolvencies are up from between 12 and 17 thousand per quarter to nearly 35 thousand per quarter.

This volume rise is quite stark

Some clear casualties have been IFA's, Estate agents, Bankers, and Energy sales. This is against a backdrop of global warming, Twitter, flexible working, and grumbling Unions.

Bearing in mind the economy will have shrunk by a single digit when the analysis is done. For instance estimates discuss 5 percent fall for 2009. Bearing in mind the huge drop for some, this might beg the question - how is everyone else doing?

In some respects the government have "propped up" ailing industries such as automotive and banking to soften the impact. They are also supporting renewable technologies especially micro renewables such as biomass, solar, etc.

In theory the government want to reach challenging targets in 2012, 2016, 2020 for use of renewable fuel. At the moment the industry has not got the capacity of stoves, boilers, installers, and possibly even fuel to deliver this.

Whilst insolvencies are increasing corporate redundancies are generating more self employment and start up businesses. There are more people trying to work at home, working in a flexible way, and using the ever increasing set of digital services available to us.

What is clear is that the structure of the way that we live and work has changed quite radically. Some things have been checked by the market as a consequence of that, other changes may be cyclical.

If you are looking for the next big idea - you wont find it here! Picking winners is hazardous and logical presentation sounds good, but consumers and businesses often behave differently.

From a personal perspective I just think we are a little closer to some markets than we were a year ago. Technology for many things has been developed, but the market or the market structure takes time to get right. However if you are an engineer - then the renewables markets may perform better over the next year and the general energy market may have harder times ahead. If you are into business services, then the standards expected will continue to rise. Communications inches forward - a modern phone does a lot of things, but not everyone has one, so newspaper advertising may live a little longer.

I would not have picked a "slanket" to be a winner this year. In fact if someone had approached me with the idea I may have asked them a few challenging questions. It is a winner though - have you got one?

Christmas Wreaths

There are a shortage of Christmas trees this year in Wiltshire. Most of the discussion is about trees. There are other seasonal decorations that have not had much airplay. What about Christmas wreaths?

Energy2grow employs is part of a work scheme to help disbled people in Swindon find work. They have made some beautiful wreaths for Christmas.

Further details are available here

Creative Destruction - Orange customer service!

In a previous post I suggested that many business ideas happen to people when they experience poor customer service or a poor product and they think that they can do better themselves. Whilst creative destruction is about making a difference to people's lives. Improving the autoprompt lists in the call centres would just be a different version of the same thing. Coming up with something better (more intelligent?) might be welcomed, at least by consumers.

I have had such a moment today and am straining hard to get over it and move on.

Some issues with Orange:

Responsibility

My HTC phone didn't work properly - the only solutions seems to be to send it back to the maker where they will assess whether its at fault or not. The problem with this is that you have a period of time without a phone without any return date. Orange will insist that its not their issue.

The issues are that no one wants to bear the expense of the fault. The result is the customer spending a long time on the phone for no result.

Broken systems

Having decided to get a new phone rather than repair the old one I phone Orange. Their IVR system asks me for my phone number, then 2 letters of a password. 10 minutes of waiting. The operator asks me for my full name, address DOB, password and account number. Their computer system is broken and both web and phone services don't work. I will have to try later. Am I unlucky or does this happen a lot? The operator said they have problems when it rains in Wales (not sure what they were really saying here) They are unable to process my requests for over 24 hours. Their call centre is apparently filled with people doing nothing! More wasted time. The operative suggests to me that I reduce my contract as I am not using many minutes. I inform him of the broken phone with no responsibility. We move onto the new phone alternative. The operator phones me back to say that he is really embarrassed, and again a day later to process the order.



Delivery

Orange use DPD to deliver new phones and will give you a day to stay in and wait. If your phone is broken Orange will also pass on your broken phone number to DPD even though they take your home number as you have suggested that your Orange phone wont work.

A promised delivery day and I wait in..... No one arrives, no card, no phone call. I phone Orange who say that someone phoned and carded me. I must be in tomorrow. I ask for the delivery company - DPD - which I am given, but they refuse to give me a parcel number. Orange said the company would try again tomorrow.

I phoned DPD they said they needed a consignment number, but would like to resolve the issue.

I phoned Orange again with the name of the DPD supervisor. Reluctantly they gave me a consignment number. I phoned DPD and found out that they had been given the broken phone number and gave them my landline. I also found out that in the days of sat nav being on mobiles - indeed my new mobile will have Orange Maps - DPD provide their workers with a road map and no more - unless these workers want to pay for it themselves!!!!!!!!

I found it a little bizarre that a phone company advertising Orange Maps sends out its phones via a company that cannot find a house with a road map.

Time spent - well over an hour

The Customer Service voice over

The company leave you hanging on the phone for a long time. While they do they tell you over and over again how good they are at customer service. This did inspire me to give them some feedback. I will be inserting a "find the Orange feedback form" into the next treasure hunt in the village. In fact when you do find it - the page does not work (for me at least).

I did have a few frustrated moments - but fortunately I wont be starting another business. Am I alone in my frustrations? It is widely reported that "The deteriorating customer service and increased customer dissatisfaction has coincided with the takeover by France Telecom " Wikepedia

Call centres are flawed. IVR is flawed. There are better ways, and I know people trying to get there. Creative Destruction is not just about making a difference - it is also about coping with the innovation, resourcing and education needed for it to get adopted.

Creative Destruction - my boiler blew up

How can you make the best decision for a new heating system? Every year many of us have to replace our heating systems. Technology is changing, our markets change, and we don't buy heating systems very often. How would you choose if it happened to you?

I would be grateful if you could answer the questions in the survey link below. I will post the answers on this blog in due course.

Click Here to take survey

Creative Destruction - Why are razor blades so expensive?

Creative destruction suggests that if someone comes up with an idea that is a better solution it will "destroy" the existing solution in the market.

The market leader Gillette is owned by Procter and Gamble, and is currently being investigated by the Office of Fair Trading as their blades can be produced for 5p and are sold for up to £2.43 each. http://www.dailymail.co.uk/news/article-1191456/Sharp-practice-The-razor-heads-cost-just-5p-make-sell-2-43-each.html Gillette have a reputed 72% of the world market (2003) worth

Whilst in Sainsbury's the other day I noticed this and also noticed the cheaper alternative made for Sainsbury's and gave them a try. Whilst cheaper the result was both painful and ineffective.

This is the sort of situation that spawns "men in sheds" inventing a better solution. Gillette allegedly spent £680m developing the Mach3 blade. Surely it is possible to develop for cheaper in your shed.

http://www.prdpartnership.com/giraffeinmyshed/ explores the idea that many inventors or would be entrepreneurs get locked into a particular idea. In this situation we would call this an elephant. Why? Well there were a few books written about large companies and elephants a while ago (e.g. Teaching elephants to dance - Rosabeth Kanter), where the elephant was a large lumbering giant. Simply put - if you invent an "elephant" type product or service you should think very carefully before doing battle with the likes of Gillette and Procter and Gamble.

Our simple advice is to think more about Giraffes! Think a little bit differently, and possibly not to go for the centre stage wide part of the market, but for a little bit, possibly that others are not interested in, or cannot make work. Why? Simple risk reduction. Yes your profits and revenue get reigned in - but unless you are that "special" person that Schumpeter said was necessary to harness all the resources necessary to make Creative Destruction happen - then your chances of success may be small.

Consider the razor blades. Why is it that Sainsbury's have a blade that doesn't work very well?

• Their R+D team don't shave
• They don't want to have repeat customers
• A very lazy buying team
• They cannot get round the Gillette patent
• Proctor and Gamble are bigger than Sainsbury's

Possibly the last 2 have more to do with reality than the first 3.

The first problem therefore is one of protection. The razor blade market is one of the most heavily patented, with over 1000 patents existing. Gillette filled over 100 patents for the Mach3 system. Procter and Gamble also have lawyers. They will protect their territory be it patent, trademark, or even slogan "shave yourself" or "the best a man can get".

Creative destruction challenge: Can you produce something that not only doesn't infringe on an existing patent, but one that is not going to attract attention from the likes of Proctor and Gamble's lawyers. Can you afford to fight them?

The second problem is one of market power. The market was valued at $7.5b in 2003 and 72% of that is worth having. Even if you get round the lawyers - where are going to sell your product?

Creative Destruction challenge - Can you get it on the shelves at Sainsbury's? It would be nice if it was in an obvious place with attention drawn to your branding.

The third problem lies with the consumer. Gillette advertise heavily. when they introduced the Mach3 they spent between $100m and $300m on the launch. In addition there is the business model that Gillette invented back in the very early 20th century of giving the razors away, but making profit on the blades. The razors are propriety, and so will only work with the right blades, protected by patent. This combination gives rise to strong consumer loyalty, and Gillette have had a 10 year head start on the Mach3 and over 100 years head start since they started.

Creative Destruction challenge - how do you get the consumer to change their habits and buy into your system? What resources will you need?

Whilst in a fit of frustration in Sainsbury's the market is in desperate need of competition, there isn't a good cost effective shaving solution out there at the moment, solving the problem is not simply coming up with a new razor. There are many other challenges, each of which requires resources and possibly experience. Whilst there might be a James Dyson out there somewhere who can take on the likes of Hoover and win, it is a daunting and expensive challenge.

Why are razor blades so expensive?

Gillette would say that they have spent a lot of money on advertising and on R+D. In addition they do have a few lawyers. The key fact is that the market is uncompetitive and sewn up by Gillette. We all want to make a little profit, hats off to them for achieving it over such a long time period.

In terms of Creative Destruction, Schumpeter was doing his research in the 1930's and would have been studying companies like Gillette. Born in 1855, King Camp Gillette was standing before his mirror, ready to shave, when he realized that the Star razor in his hand was useless. "It was not only dull," Gillette would write later, according to his biographer Tim Dowling, "but it was beyond the point of successful stropping and it needed honing. As I stood there with the razor in my hand, my eyes resting on it as lightly as a bird settling down on its nest, the Gillette razor was born."

It took him five years to find someone who could provide a machine that would automatically hone thin sheets of steel to the required sharpness, and at first the blades sold for less than they cost to make. Undaunted, Gillette forged ahead and eventually had a second epiphany: He would give away a razor and sell the blades. By 1910 Gillette dominated the razor business, and its founder was a millionaire.