Disintermediation, Lock-In, and Blockchain Technology

Lawrence Sanders & Sean P. Sanders

The internet changed the world forever through disintermediation. The internet improved supply chain efficiency through disintermediation.  So did open source software, Wi-Fi, cell phones, 3d printing, ubersation, DVRs, Napster and MP3 compression, GPS applications, and of course microprocessors. Now the internet of things (IoT), driverless cars, artificial intelligence and blockchain distributed ledger applications will carry on that tradition.

Disintermediation is the reduction of intermediaries (such as wholesalers and middleman) between producers and consumers.  Disintermediation allows consumers to buy stocks without consulting a broker and buy directly from the manufacturer and to avoid wholesalers and brick and mortar stores. Too many consumers and businesses, the internet was emancipatory. Wholesalers, supply chain entities, and financial institutions were perceived as being detrimental to business objectives, profitability, and lower prices. And yes, productivity did indeed increase, with the greatest gains in productivity climaxing in the late 1990s (R.J. Gordon 2012)

Consumers do not have to buy at a local store or use a travel agent. They go directly to Amazon, to Expedia, and Apple to purchase products directly, without intermediaries. These new-age companies are ruthless in their commitment to owning the supply chain ( Amit Bhalya). Amazon is the poster-child company epitomizing disintermediation. But, not for long; if the emerging blockchain and cryptocurrency intermediaries have their way

The blockchain and cryptocurrency entrepreneurs want to eliminate Amazon, Google, and Apple. They also want to eliminate super-sized intermediaries such as credit card companies, financial institutions, and government agencies.

“We’re all ideologically aligned to crush Amazon and other centralized services”  Blockchain Entrepreneurs Target Apple and Google at Token Summit

Yes, and replace them with themselves. The new-new-age intermediaries will be the cryptocurrency and blockchain companies. They want to emancipate consumers and businesses from the clutches of the dotcom elites. There is a proposed blockchain application for virtually every existing legacy applications, and there is probably an initial coin offering to pay for it (www.icoalert.com ).

Lock-In

Lock-in occurs when there are switching costs involved in switching from one product to another product (Shapiro and Varian 1999).  There are switching costs when you move to new operating systems, tax software, mobile carrier, or loyalty program. Sometimes the switching costs are contractual. For example, cable television broadband providers and wireless phone providers have penalties for customers who terminate a contract early. Switching costs can involve time and psychological effort (Sanders and Huefner 2011). When you switch cable providers or get a new router, there is a learning curve related to using the new station guide, digital video-recording and setting up the router and connecting the devices to the router.

The goal of producers is to lock-in their customers and lock-out the competition using switching costs.  High switching costs make it difficult for customers to go elsewhere. Figure 1 illustrates the degree of lock-in related to various technologies and businesses.

People shop at Amazon because the interface is easy to use, Amazon has competitive prices for millions of products, they store a ton of personal information on family and friends, and fulfillment is a snap. People buy from Expedia for the same reasons. The same goes for tax software.

There are many downsides to being locked-in, but one particularly problematic area is that businesses that lock-in customers sometimes abandon innovation. The outcome is that companies eschew innovation and let their products and service languish in mediocrity.

Fig 2

Figure 1: Levels of Lock-In for Businesses and Technologies

How Lock-In Relates to Blockchain Applications

A block in a blockchain is a decentralized ledger where transactions, such as cryptocurrency transactions, are added as they occur (see Figure 2).  Because the ledger is immutable, transactions cannot be changed.  The blockchain software will not permit transaction updates. Once a transaction is posted, it is there forever.

The net result of this immutability is that blockchain-based applications lock-in the data forever.  Immutability is the strength and the Achilles heel of blockchain applications. The process of forking is the only way to correct major problems with the blockchain infrastructure. A fork spits the blockchain into two separate chains.

Simple problems with invalid transactions, you sent your private key to yourself and someone stole it,  or mistakes,  you sent 10,000 coins to the wrong person, are difficult if not impossible to fix. So if there is a high-school picture of you in a blockchain-based photo repository, it will be there for generations to view. You are locked-in forever.

FIg 1

Figure 2: Mining Process

Lock-In is not Agile Friendly

Immutable systems go against the grain of the agile manifesto and agile software development. It is contrary to the spirit of agile innovation.  Agile software development is an iterative and incremental development approach where requirements evolve, and the focus is on the customer. The interfaces evolve, the data structures evolve, and the solution evolves. You can use agile techniques in the initial design for a block-chain based application, but once the launch takes place, the evolution and innovation stops. Patching major holes in the system after launching is difficult. If a fork or major change in the blockchain is required, then there is a battle royal.

The founders, the developers, the miners, and even the manufactures of the miner hardware are the new intermediaries and the owners. The founders and developers receive a substantial portion (20-30%) of the pool of tokens and coins. Satoshi has about 1 million coins, worth over $10 billion at $10,000 per Bitcoin, and we do not even know who he or she is. Even non-profits hold tokens for employees and future projects. See, for example, the Root Project.

Recommendations for Blockchain

Blockchain technology, like all promising technologies, has desirable features and deficiencies. Theoretically, blockchain technologies and distributed ledgers should improve the integrity, tracking, security, and longevity of transactions for digital content, personal information, organizational assets, and the “real world.”  Here are some suggestions for individuals and companies considering investing in blockchain and distributed ledger technologies.

Large Companies

Large companies should begin testbed applications of blockchain technology by developing prototypes of blockchain applications.  Employees from various organizational functions should attend conferences, watch videos, talk to vendors, search for additional information on the technology and develop a brief report on the market potential for the industry. If blockchain technology looks promising,  then start building an application that complements the business.

Don’t’ be worried about first-mover-advantage. That train has already left, and you are better drawing on the work of successful and unsuccessful investors in the technology.

Small Companies

Small companies should also monitor blockchain technology and have someone report on an ongoing basis on the emergence of viable platforms for adopting the technology. The best strategy is to wait until an Amazon for blockchain arrives (ABS). It may even be Amazon. Amazon has purportedly registered amazonthereum.com, amazoncryptocurreny.com, and amazoncryptocurrencies.com.

Individuals

Individuals should just read about the technology and keep up to date. You might buy a small amount of amount of cryptocurrency and try to purchase something with it.  Don’t spend more than 1% of your annual income.  This is a great way to learn about the technology and watch how a digital currency transaction unfolds. It is a great learning tool.

Stay away from launching your own ICO or initial coin offering. Many of the ICOs will fail, some of ICOs are scams, and in some instances they have the undesirable potential to compromise your credibility. You can’t believe much you read about the industry, but here is a study that claims 81% of ICOs are scams, 6% failed, 5% dead, and 8% went on to trade.

Finally, resist buying a Bitmain Antminer S9 and start digital currency mining.  You will not make enough money to cover electricity costs. Above all, don’t connect a long extension cord to your next door neighbor’s outdoor outlet to run a mining rig.

If you want a simple and insightful overview of cryptocurrencies and blockchain check out John Oliver video produced by HBO. Be warned, some of the language used is explicit, NSFW and not for kids.

Additional References

 

 

 

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New Directions

Department chair responsibilities’ and several new projects have kept me busy the past year. Currently working on two major projects related to the role of monetary incentives in violating HIPAA laws and security breaches. Also involved in a project related to some of the underlying personality factors related to why people play online and offline games. There is also a super-secret curriculum project underway that has been occupying much of my time. And finally, there is the issue of blockchain and cryptocurrency. That’s all people want to talk about, and that will be the subject of the next blog post.

43North competition is a must-see event

The 2016 rendition of the 43North competition for $5 million dollars was outstanding.  I attended the Thursday round-of-ten and am glad I did. The competitors were prepared, the businesses were interesting, the judges were polite as well as diligent, and the stage was audience friendly.

There were a couple of glitches in last year’s competition.

Last year’s cadre of combatants had several immature businesses, not bad ideas, just immature.  However, there here were more than a few that deserved the money and the attention. ACV Auctions was the crown jewel of last year’s competition. I had earlier reported that one of the judges was permitted to invest in ACV Auctions before the finals. I was not able to verify that assertion. Dan Magnuszewski told me that they now have 40 employees at ACV. These hires are good news for 43North and the Western New York economy.

The layout of the stage last year was an issue. The audience could only see what was going on by viewing the large screens. It was very disengaging. They corrected this, and I must say that this year’s competition was great entertainment and educational.

The following presents an overview of each of the competitors and how they fared. I graded each of the competitors and ranked them and then sent my rankings to Tom Ulbrich of CEL and Sam Marrazzo of SuperiorGroup by 5pm on October 27th. The finals started at 6:30 pm that evening. The 43North Judges composite ranking was inferred from the email press release and Sunday Buffalo News article. They did not put the $500,000 names in alphabetical order, so I assumed that this was a composite judge ranking.

Here are the results with my ranking.

  1. $1,000,0000 Oncolinxcombines an antibody that only targets tumor cancer cells with a toxin (Azonafide) that kills cancer cells.  Great idea and many pharmaceutical partners. I ranked them 1.
  1. $600,000 HigherMe assists in finding, screening and hiring employees for retailers. Rob Hunter is an outstanding presenter. Tim Cook should hire him for launch days. I did not think the judges would rank HigherMe this high. I was wrong, and I actually agree with the judges after further reflection. I ranked them 6.
  1. $500,000 Asarasi  produces organic water that is bottled by Mayer Brothers as a byproduct of maple syrup production. Great story with significant sustainability implications. I ranked them 3.
  1. $500,000 UltraCell Insulation produces water-resistant building insulation from recycled corrugated cardboard. Now you have a use for those Amazon boxes. Great sustainability idea. I ranked them 5.
  1. $500,000 PathoVax  is a vaccine that targets all human papillomavirus viruses (HPV) that can cause cancers and other diseases. This looked like a no-brainer challenge for first place. But maybe the judges have better insight into this business than I did. I ranked them 2.
  1. $500,000 Formarum is a device that uses the existing swimming pool circulation system to chlorinate and disinfect swimming pools. It has an app, and it is self-monitoring.This was my favorite creative idea in the competition. This idea is so simple, yet powerful enough to be adapted to a wide variety of applications. Beautiful design and just cool. I ranked them 4.
  1. $500,000 WeDidIt assist nonprofits in mining existing donors to develop specialized targeting strategies and to assist with the entire fund-raising process. They can garner a tremendous amount of information from the email addresses of existing donors. I ranked them 7.
  1. $500,000 Bounce Imaging has a throwable 360-degree camera that can be used for first responders for disasters, fires, and police situations. Very intriguing idea. Getting local Buffalo police testimony was a good tactic. I would want 2 or 3 of these cameras in each responding vehicle. Might be a little pricey, at $2,300 plus. I ranked them 9.
  1. $10,000 The Wealth Factory design games to improve financial literacy to assist in preparing students to meet the financial core standards. This will be an important way for students to become more engaged in education. One of the judges does not play games. Ok, but if you want to understand the Millennials and Generation Z, you need to try them. They received $10,000 as the People’s Choice Winner. I ranked them 8.
  1. $0.00 Arthena is a crowdfunding platform that offers investors to invest  investing in artwork funds such as emerging art, modern masters, and contemporary art.  I think the judges were unsure about the concept and giving the 43North imprimatur.  This will probably end-up be making some people millions. Too many questions about this. I ranked them 10.

Entrepreneurship is dead: long live entrepreneurship

Thomas R. Ulbrich and G. Lawrence Sanders

There are television shows, numerous blogs and endless social media posts all focused on entrepreneurship. It is finally “cool” to be an entrepreneur. Virtually every academic level from grade schools to high school talks about entrepreneurship. So goes the government. All levels of government are jumping on the entrepreneurship bandwagon. Billions of dollars have been thrown at startups and incubators by families, friends, angels, managed funds, universities and the government. Local, state and the federal government also have the ability to give the gift that keeps on giving, tax breaks.

According to research by the Kaufman Foundation, Austin, Miami, Los Angeles and San Francisco, Las Vegas and New York, and Boston have the best startup ecosystems in the world. These ecosystems have the funding, the talent, and competitive density to facilitate new business development.

Despite the fact that the thought of becoming an entrepreneur is more popular than ever, some reports paint a slightly gloomier picture. The bad news is that the startup rate has fallen from 14% to 8% of total companies over the past 30 years. Unicorns, companies with a $1Billion valuation, are also on the decline and a  growing concern. The Financial Times attributes the decline to a lack of access to capital, stifling regulatory requirements, increases in entrepreneurial activity by large companies, and increases in student debt and a very cautious workforce. A recent article in Forbes echoes these sentiments and adds, the Walmartization of America due to Walmart’s infrastructure and buying power.

Part of the decline relates to the nature of the beast. Startups fail. And the workforce is well aware of the situation. It is common to hear of failure rates between 80 and 90%. Other sources paint a somewhat rosier picture.  According to Scott Shane, in Small Business Trends, larger and older companies have a better chance of survival. About half are still around after five years.

Entrepreneurship is not dead.

It is morphing, changing and penetrating every aspect of traditional business as we know itMarketing, finance accounting, organizational behavior, and operations have assimilated the entrepreneurship. Marketing for startups focuses on engagement via viral and social networking strategies. Startups eschew traditional channels used for legacy and mature products.  Using traditional capital budgeting is just not appropriate for startups. Financial analysis for startups uses a combination of real options theory and qualitative models for evaluation. The ideal composition of startup teams draws on a different literature than traditional team literature. Startups need engagement marketing specialists, product designers and prototyping specialists, experts with infrastructure knowledge for configuring cloud-based applications that are scalable and of course the charismatic visionary. Accounting for startups is all about forecasting and cash-flows. Operations involve a constant struggle to scale production up and down.  And how to leverage and address the Amazonification and Walmartization  of supply chains.

Oh, and don’t forget strategic planning. Traditional planning approaches are confusing, cumbersome, take too long and just not agile. One-page business plans, pitch decks, lean startup approaches and the numerous templates to assist in identifying an opportunity are replacing the traditional strategic planning approaches.  This simplified planning allows entrepreneurs to react quickly in response to customer feedback, providing an iterative process that spirals in on the best products and services.

No, entrepreneurship is not dead. It is being assimilated into every nook and cranny of successful businesses. Many large organizations have embraced entrepreneurship because they understand that products and technologies have a life-cycle, that consumers will always be attracted to the next big- thing, and because large companies have the resources to invest in entrepreneurship.   Being entrepreneurial is the best way to delay and even prevent, the natural decline of business.

Prototyping Fidelity and the Design Turing Test

Prototyping is a topic I have been involved with for 30 years [c.f. 2, 3]. Prototyping technologies and conceptual advances have changed dramatically over the years, but the two reasons we must prototype have not, and will never change.

    1. Prototyping encourages user involvement and joint ownership of projects.
    2. Prototyping facilitates the mutual and concurrent learning processes of users and designers.

Numerous conceptual advance have been made to redefine and assist with modeling and designing systems for consumers and users. One of the most important concepts is related to the coarseness of the prototype. This coarseness is called prototype fidelity.  I would like to draw on the concept of prototype fidelity and relate it to our earlier research.

Adaptive Design and Prototype Fidelity

In earlier papers we identified three levels of prototyping. Level 1 was input and output design. Level 2 prototyping was called heuristic design and it involved the addition of functional operations and limited interactions to input and output design. Level 3 prototyping was called adaptive design. A prototype built using adaptive design was an actual working systems that was improved forever in an adaptive iterative process. The concept of adaptive design was articulated by Peter Keen over 35 years ago and defined as a process of learning and evolution [4].

I like the concept of prototype fidelity as discussed by Catani and Biers much better than the levels of prototyping [1]. Prototype fidelity is a clean, easy to understand concept. An excellent article by Laura Busche in 2014 captures the idea of prototyping fidelity and illustrates why developing a low fidelity prototyping is the first step in user-oriented design.

The gold standard for a prototype is to develop a high fidelity prototype that passes for what I like to refer to as the Design Turing Test (DTT).

Although we do not yet have a specific means for determining the particular characteristics that make a user interface high or low fidelity, we can loosely define fidelity by analogy to the Turing test. To the extent that a person using the prototype cannot distinguish it from the final system, the prototype is high fidelity. If the prototype can readily be distinguished from the service, then fidelity is low. [5]

In essence, prototype fidelity refers to the degree to which the prototype looks and functions like an actual system or product. We will refer to the levels of fidelity, the degree to which a prototype reaches the Design Turing Test hurdle, as the Lo-Fi prototype, the Hi-Fi prototype and the Functional working prototype. High fidelity, functional prototypes should pass the DTT.

Lo-Fi Prototypes: A low fidelity prototype could be a sketch of the input and output screens or a process diagram of how the product works. It can also be a thought experiment with a brief description. The key is communicate the essence of the concept.

Low fidelity prototypes can be done using pencil and with a drawing program, however, I am such a terrible artist that I often turn to Grafio for Alpha prototypes. My favorite tools for low fidelity prototyping are paper and pencil, any tablet drawing program, PowerPoint, Visio, and Grafio in most situations. A new on-line and desktop tool called Creately shows great promise as a low fidelity prototyping tool.

Hi-Fi Prototypes: A higher fidelity prototype would include input and output mock up screens and it should also illustrate hierarchical and navigational relationships between the various screens. High fidelity prototypes are usually developed using wire frames. A wire frame is just an image or picture of a tablet, a smart phone or a computer screen.

My turn-to tools for high fidelity prototyping are InVision for realistic wire frame mock ups, and PowerPoint, and Excel.  You must pay for the more advanced features of inVision, but you can try it out on a small project to see how it works.  I also like Prototyping on Paper or POP. This is one of the easiest tools for taking pictures of paper and pencil sketches and then making them linkable.

If tangible products are being designed computer aided design (CAD) tools can be used. Free versions of these tools are reviewed here.

Functional Prototypes: The highest fidelity prototype is supposed to act and look like the real system or product, even though it may eventually be re-coded or rebuilt using different technologies. Functional prototypes are developed using a technology that represents the flow and dynamics of the screens, as well as supporting the background processes that support the application. Functional prototypes should usually be capable of passing the prototyping Turing test, in that the person using the prototype should not be able to distinguish it from the final system.

I do not have a favorite tool for Functional prototypes. They are typically implemented in a native language such as Xcode for IOS iPhone apps and in Java-like languages for Android apps. I usually have a developer implement Alpha prototypes. They are rarely static and are continuously redesigned in an iterative fashion.

Example of Lo-Fi and Hi-Fi Prototyping

The following figure illustrates the low fidelity and high fidelity prototypes for a system for searching and rescuing a lost climber in a remote location. Figure 1 is a very terrible drawn low fidelity prototype using a pen and pencil. My collaborator took that drawing and developed a wire frame iPad mock up using inVision.

The first version of the high fidelity prototype developed in InVision was not the idea that I tried to convey. My drawing was terrible. So I used Grafio to draw a more refined diagram, a higher fidelity, but still at low fidelity prototype, that is illustrated in Figure 2. My collaborator then went on to develop the high fidelity prototype that is illustrated in Figure 3.

The  high fidelity prototype in Figure 3 is a dynamic wire-frame that was developed using InVision. If you click on a name, for example “Kate”, you can get her health and movement status. All of the members of the rescue have hot links to their movement and health status. This application would eventually be programmed in XCode or Java, depending on the smart phone platform.

The key take away from the back and forth process of developing low fidelity and high fidelity prototypes is that developing a prototype facilitated the mutual and concurrent learning processes for both of us. It was an iterative on-going reciprocal learning process.

As illustrated in Figure 4, the prototyping process is non-linear and iterative. The process can be low fidelity, high fidelity, low fidelity, fidelity, and then the creation of an actual  functioning prototype that passes the design Turing test. Or the process can begin with a low fidelity and then go directly to the development of the functional prototype. The order is determined by the complexity of the application and the degree to which the designer and user understand each other.

Conclusion

The key to design is to get the users, consumers, designer, developers and management on the same page. Prototyping encourages learning and exploration. The ideal prototypes passes the Turing Design Test. It has never been easier to develop virtual world prototypes. There are numerous 3D printing tools and digital tools for designing products that clear the Design Turing Test hurdle. Take advantage of them. It is a prototype or perish world.

Prototyping Process

Figure 4: Prototyping is a Continuous Process

 

Additional Material on prototyping concepts  and prototyping tools

References

  1. Catani, Michael B., and David W. Biers. “Usability evaluation and prototype fidelity: Users and usability professionals.” Proceedings of the Human Factors and Ergonomics Society Annual Meeting. Vol. 42. No. 19. SAGE Publications, 1998
  2. Cerveny, Robert , G. Lawrence Sanders and Edward J. Garrity. “The application of prototyping to systems development: A rationale and model.” Journal of Management Information Systems (1986): 52-62.
  3. Cerveny, Robert P., Edward J. Garrity, and G. Lawrence Sanders. “A problem-solving perspective on systems development.” Journal of Management Information Systems (1990): 103-122.
  4. Peter G. W. Keen. 1980. Adaptive design for decision support systems. SIGMIS Database 12, 1-2 (September 1980), 15-25. DOI=http://dx.doi.org/10.1145/1017654.1017659
  5. “Virzi, Robert A. “What can you learn from a low-fidelity prototype?.” Proceedings of the Human Factors and Ergonomics Society Annual Meeting. Vol. 33. No. 4. SAGE Publications, 1989, pp 224.
Figure 1

Figure 1: Low Fidelity Version 1

Figure 2

Figure 2: Low Fidelity Version 2

Figure 3

Figure 3: High Fidelity

Figure 3

Figure 3: High Fidelity

Using Pivoting and Real Options to Evolve a Business Model

Nothing is certain, except death, taxes and business decline. It does not matter how much money the current business is making; there is a life cycle for products and technologies, and eventually the business will decline without constant re-priming. Re-priming is essentially an investment decision involving the selection of the right product, the right people, and the right technologies at the right time. Real options theory can help with that decision.

Real options theory can be traced to a 1977 paper by Stewart Myers. They are called real options because they are investment decisions in tangible, real things such as a tangible asset, a product, machine or even a process since a process can be perceived. The real options investment decisions for a startup are:

  1. Concentrate on executing the existing business model. Focus on selling your existing products and versions.
  2. Add more versions to your exiting product line. The current product line looks viable, but needs fine tuning and freshening.
  3. Redirect the business in a new direction. Use existing competencies and acquire additional competencies to develop a new product line. Your existing products are not attracting customers.
  4. Abandon the current business. Fail fast and go back to the drawing board.

A real option is a decision or choice to invest a little or a lot in a corporate asset such as a business model, a product, or a technology. Real options look very much like the relatively recent concept of pivoting a startup. Eric Ries introduced the concept of pivoting and changing business direction in his 2011 book The Lean Startup.

“Companies that cannot bring themselves to pivot to a new direction on the basis of feedback from the marketplace can get stuck in the land of the living dead, neither growing enough, nor dying, consuming resources and commitment from employees and other stakeholders but not moving ahead. pp. 151-152”

The problem with the pivot concept is that it is a bit simplistic and parochial. The problem with the real options concept, when it is applied rigorously in its academic manifestation, is that it is too abstract and mathematically complex because it is based on stock options concepts.

An Enhanced Pivoting Model that Draws on Real Options

I have expanded on the pivot concept to take advantage of the more comprehensive real options approach by extending the basketball analogy. In basketball the pivot gives you the opportunity to get into the triple threat position. In the triple threat position the player can either pass, shoot or dribble. Check out Kobe Bryant in the triple threat position.). Each game is a continuous series of decisions to shoot, pass or dribble. Each season involves games against some of the same opponents and new opponents with the same shoot pass and dribble decisions. Finally, if the game is too tough, the player and the entire team can just walk off the court, albeit a radical, though sometimes prudent strategy in some situations.

The essence of the model (see Figure 1) is that founders should modify their business model based on the market potential and the degree to which the current founders and employees have core competencies and domain expertise in a particular area.

  1. Shoot: Go with the current business model and grow the business as quickly as possible.
  2. Dribble: Try to get in a better position by modifying and tweaking the current business model using versioning and identifying appropriate market niches. Identify mashup artists, and marketing expertise. Focus on product design and prototyping.
  3. Pass: Dramatically change the current business model. Use some or all of the core concepts of the existing model. Conduct intense R&D and acquire talent and perhaps even acquire a business with the desired core competencies. Get ready to receive the ball and be in the triple threat position develop a new and improved business model.
  4. Abandon the game & fail fast. Leave the game and walk off the court. Your position and perhaps your game is not good enough to compete effectively in this situation. Try to improve your game (domain knowledge).  You might even have to find a new court to compete on and introduce a new business model that draws on previous experience and new domain knowledge.

Triple threat

Figure 1: The Triple Threat Pivot Model

Market Potential and Core Competencies

Market potential refers to the size and the growth rate of a market. The size and growth potential of a market accounts to a large extent the attractiveness of a market and often drives the decision making process for startups and legacy businesses. Questions to be answered include determining the absolute size of the market, how much of the market can be reached and your potential to gain market share.

Core competencies are the knowledge, expertise and capabilities of the founders, employees and contained in existing processes. Pivoting and going in a new direction and embracing a new business model is often the key to business survival. But there are implications, because new investments can interact positively or negatively with existing skills and assets of the firm.

(The basic idea behind the model was published in Decision Support Systems.) 

Examples of pivoting over the last 150 years

As noted earlier, nothing is certain, except death, taxes and business decline. As illustrated in Table 1, many old and new economy companies have pivoted their way to success. Survival requires adaptation. It is truly a pivot or perish world and pivoters will inherit the revenues.

Real options analysis can be very technical, requiring a significant amount of financial and technical scrutiny. However, using complicated calculations is overkill for startups and small to medium-sized businesses. Real options concepts are nevertheless important.

The takeaway from the perspective of the entrepreneur is that you need to experiment and also need to diversify your portfolio of products and projects under consideration. You need to be constantly aware of the pivot. This does not mean that you have to actually buy machinery, make products, and constantly modify your business processes, but it does mean that you should learn-about many products and technologies related to your business and learn-by-doing and experimenting when an opportunity looks promising. As noted in the previous post, you might consider implementing a Chief Illuminati Officer function and start investing in options to keep your company viable.

Table 1: Old and New Economy Pivots

Company Name Initial Business Current Business
American Express Started as express mail business in Buffalo New York 1850 with merger of Wells and Company and Livingston, Fargo and Company Financial services corporation
Apple Launched in 1976 they introduced the Apple I computer. Sells computers, phones software and  sundry electronics items
AT&T Telephone company established in 1874 to protect Bell patent Currently a voice, data and internet communications company
Blockbuster Video and Entertainment Started in 1985 as a home movie and game rental business. Company is non-existent. Casualty of Netflix and Redbox. Had an unsuccessful pivot to online rental.
Coca Cola Launched in 1886 to combat morphine addiction. French Wine Coca made of coca, kola nut, and alcohol. Multinational manufacturer, distributor, and retailer of beverages, concentrates and syrups.
DuPont Launched as a gunpowder company in 1802. Chemical company producing neoprene, nylon, Corian, Teflon, Mylar Kevlar, Tyvek, Lycra and refrigerants among others.
Facebook Started in 2003 as Facemash it was used to compare the hotness of people pictures Large social networking company
Flickr Started in 2004 as a developer of MMORPG tools and migrated to a chat room with photo sharing Video and photo hosting
IBM Established in 1911 as Computer-Tabulating-Recording Company.  Sold scales, time recorders, meat and cheese slicers, tabulators and punched cards. Designs & manufactures hardware and software, and offers infrastructure, hosting and consulting services for IT and emerging technologies.
Nike Started in 1964 as Blue Ribbon Sports by when Phillip Knight distributed Tiger and Asics shoes out of his car. Designer, manufacturer and distributor of sports footwear, apparel, equipment and sports services.
PayPal Started in 1998 as Confinity a Palm Pilot and cryptography company After merger with Elon Musk’s X.com focused on money service
Pfizer Established in 1849 and produced an anti-parasitic for expelling worms and citric acid as a flavoring and preservative Multinational pharmaceutical.
Procter and Gamble Launched in 1837.  Sold soap and candles. Sold Pringles in 2009 and, Jif and Folgers around 2001 Multinational consumer goods company selling pet foods, cleaning agents, & personal care products.
Twitter Launched in 2005 as a podcasting syndicate for audio and video content. Large microblogging company
YouTube Initially conceptualized in 2005 as a video version of online dating site. Video sharing website

Illuminati is the new name for the CIO and Technology Evangelist

Illuminati has slowly creeped into the common vernacular to mean someone possessing unique insight, enlightenment or knowledge. I propose, partly with tongue-in-cheek, that organizations should have a Chief Illumination Officer or Chief Illuminati Officer rather than a Chief Information Officer or a Technology Evangelist. The illuminati responsibility is directly related to the CIO as an entrepreneur.

As noted by McKinsey&Company, the CIOs typical responsibilities of running the IT function as a utility by keeping the lights on and facilitating business performance is evolving. The CIO is now being asked to be a venture capitalist or an angle investor. They seek, incubate and accelerate promising ideas by monitoring emerging technologies and invest accordingly. One of my good friends has actually been at the forefront of this trend and has been quite successful at keeping the lights on, facilitating business performance and being an entrepreneur.

What should be at the core of these responsibilities? I have identified several levels of investment activities, or options, that the CIO should engage in. They imply increasing levels of investment commitment.

  1. Have someone investigate an emerging technology or product and report back
  2. Develop an early paper prototype of emerging technology or product
  3. Develop a more refined prototype of the emerging technology or product
  4. Attend conferences, discuss with illuminati, talk to vendors, search and gather additional information on technology and develop a whitepaper on market growth and potential
  5. Develop a more refined prototype of the emerging technology or product
  6. Use the emerging technology to develop a version of an existing product model
  7. Scale-up production and introduce a new product line.

After each level of investment, the CIO along with the relevant parties (potential customers, employees and management) can discuss and provide feedback. The feedback and discussion should eventually lead to making a decision to invest more resources, continue monitoring, or perhaps abandoning further investment.

The implications are profound for organizations and for the CIO. Entrepreneurship is now a core competency requirement for the CIO. The good news is that much of contemporary entrepreneurship is about monitoring emerging technologies, and then designing, building, launching and maintaining business systems. This is natural territory for individuals with an IT background.