Planning and Starting A Successful Software Company

Transcript Planning and Starting A Successful Software Company

Planning and Starting A Successful Software Company

• • • • Professor Ronald M. Baecker University of Toronto Founder and CEO, Expresto Software Corp.

19 September 1998, Vancouver, British Columbia

How to Contact Me

• Ronald M. Baecker Department of Computer Science University of Toronto 10 Kings College Road Toronto Ontario M5S 3G4 Canada +1 (416) 978-6983 (phone) +1 (416) 978-5184 (fax) [email protected]

Introduction

• • • • • • • • Ronald M. Baecker Objectives Methods Course Themes Guest Entrepreneurs Strategic Issue Session Seminar Schedule Any Questions?

Ronald M. Baecker

• • • • Founder and CEO, Expresto Software Corp.

Professor of Computer Science, Elec. and Comp. Eng., and Management, University of Toronto Founder (1996) and Director, Knowledge Media Design Institute, University of Toronto Past Visiting Prof. or Research Scientist at M.I.T. Media Lab, Univ. of British Columbia, Univ. of Maryland, Apple Computer, Xerox PARC

Ronald M. Baecker (cont’d)

• • • • Founder (1976) and CEO, Human Computing Resources Corp. (HCR), sold in 1990 to SCO Adviser and consultant to a number of start-up software firms Taught this in Toronto, Ottawa, Vancouver, Los Angeles, Buenos Aires (Arg.), Santiago (Chile) B.Sc., M.Sc., Ph.D., M.I.T.

Objectives

• • • • • To understand the high-technology, computer, and especially the software business environment To learn principles for defining and crafting a healthy profitable growing software business (entrepreneurial or intrapraneurial) To convey a healthy appreciation of how difficult this is To hone one's skills in thinking about strategic software business issues To join and help to create a community of software entrepreneurs and intrapreneurs

Methods

• • • • Lecture and discussion of 4 themes (see next slide) and 60 principles for success Elaborations and illustrations, especially from guest entrepreneurs, past and present, through both second-hand and first-hand accounts (live and on video) Exercises for students Discussion of student questions and issues in strategic issue session

Course Themes

• • • • I. Innovation in the Software Industry II. Focus and Objectives — Defining and Planning the Business III. Opportunity and Timing — Market and Product Planning IV. Writing the Business Plan

Other principles for success

• • • • Organized into the following categories: Marketing and Distribution of Software Services and Products Cash — Financial Management and Acquisition of Financing Leadership — Team Building and Management Partnerships — Strategic Alliances, Mergers, and Acquisitions

Guest Entrepreneurs

• • • • • Characteristics • Experienced entrepreneurs • • • Successful entrepreneurs Products and service companies Information technology in a broad sense 20-25 minute presentations 35-40 minutes of question-and-answer, based on your participation!!!

Discussion and critique Guest Entrepreneur List

Strategic Issue Session

• • • Discussion of actual strategic issues faced by seminar participants These could deal with, for example, • Innovation, business definition, markets, or technology; or, • • Marketing or sales; or Finance, financing, leadership, or corporate organization Please fill out and hand in Participant Information Forms by the close of lunch time.

Schedule Day One

Any Questions?

• • Let’s make it interactive!!!

Now please introduce yourselves....

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I. Innovation in The Software Industry

• • • • • • • Data on the Canadian Software Products Industry Data on the U.S. Software Products Industry 1 Data on the U.S. Software Products Industry 2 The Multi-Faceted Business of Software Many Kinds of Software Hardware-enabled Software Paradigms Drucker’s Sources of Innovative Opportunity

•

Data on the Canadian Software Products Industry

Growth of the Canadian Software Products and Computer Services Industry Year Rev. Employ. S'ware Prod. Rev.

• • 1990 $5.8B

1991 $6.1B

1992 $6.5B

1993 $8.2B

1994 $9.3B

employed 64K 64K 67K 71K 76K $0.8B

$0.9B

$1.0B

$1.3B

$1.6B (est) Excludes the 25% who are self S'ware products compound annual growth of 20% • 55% of total revenue generated by the 1% of the companies with sales > $10M • Net profit margin of 6.2% for sample of

30 software products firms 16 • Source: Industry Canada, April 1996

•

Data on the U.S. Software Products Industry 1

Growth of the U.S. Packaged Software Industry • • Year Revenue 1987 $ 5.7B

1988 $ 7.3B

1989 $ 9.0B

1990 $11.7B

1991 $13.0B

1992 $14.4B

1993 $16.6B

Income before tax 20.4% over that period $0.5B

$0.7B

$1.3B

$1.4B

$1.2B

$1.7B

------ Average annual growth rate of revenue = Source: WEFA Group (via SPA), August 1994

• •

Data on the U.S. Software Products Industry 2

• Relationship to other industries Year Print/pub. PCs/WSs Films S'ware pub.

1987 $137B 1988 $144B 1989 $150B 1990 $157B 1991 $157B 1992 $160B 1993 $163B $10B $13B $15B $16B $16B $19B $24B $14B $6B $14B $7B $17B $9B $19B $12B $18B $13B $21B $14B $23B $17B Annual growth rate 3.0% 16.7% 9.0% 19.6% Source: WEFA Group (via SPA), August 1994

The Multi-faceted Business of Software

• •

Remember, as you search for sources of entrepreneurial opportunity, that the business of software includes not only software development and marketing, but activities as diverse as market analysis, customer training, and information publishing. Thus software innovation need not consist of new paradigms or proprietary algorithms, but can instead be based on other innovations, such as the novel coupling of technology to an application, or a new approach to distribution, training, or support. (#1)

Varieties of software-related business

Varieties of software related business

• • • • • • • • • • • • Consulting Contract software development Systems integration Software products development Software products publishing and marketing Software distribution Value added reselling Technical documentation Industry analysis and publishing Training and customer support Electronic publishing, CD/ROM, multimedia On-line and Internet-based 20

Many Kinds of Software

• Systems software • • • • Operating systems Languages, programming utilities Software engineering, CASE Networking and communications • Applications software • Industrial automation, computer-aided design • • Business software Personal productivity software • Media and information • Games, multimedia, educational software • Electronic mail, conferencing, groupware • Information access and resource discovery

Hardware-enabled Software Paradigms

• •

Scan technology trends carefully looking for new hardware paradigms that could open up and enable new software paradigms and applications. New software paradigms, such as the spreadsheet, object-oriented programming, CASE, hypertext, neural nets, or groupware open up new domains for vigorous entrepreneurial activity. (#2)

Examples

• • • • • • • • • • • • • IBM Mainfr. Capacity planning HP minis RDBMS+4GL PowerHouse PC PC software develop.

Apple II IBM PC IBM PC Mac Spreadsheet Integrat. productivity PC tax software Desktop publishing SGI Workst Sensual 3D design Best 1 Basic Visicalc Lotus 1-2-3 TaxPrep PageMaker Alias Rsrch Networks Networks Notes Network file systems Groupware NetWare Lotus The Internet Global comm+inform. Netscape Hand-held... Pen-centric software Penpoint Go Wireless ???

???

•

Drucker's Sources of Innovative Opportunity

• • •

Search for sources of innovation systematically, as Drucker asserts is possible, looking at (#3):

• • New knowledge The Unexpected • • Process need Changes in industry or market structure Demographics Incongruities Changes in perception, mood or meaning.

New knowledge

• • New hardware paradigms New software paradigms and proprietary algorithms

New hardware paradigms

• • • • • • RISC architectures enabling new applications for workstations Highly parallel machines enabling new approaches to weather forecasting, exploration, information retrieval, etc.

VLSI graphics chips enabling new applications in computer animation, simulation, virtual reality, etc.

Multi-media technology enabling new applications in entertainment, education, etc.

Ubiquitous computing enabling new applications in both office and home Global networking via the Internet enabling new applications for 26

New software paradigms & proprietary algorithms

• • • • • • • • • • • • The spreadsheet The relational database management system Windowing environments Object-oriented programming Hypertext Neural nets Performance modelling algorithms Speech recognition algorithms Handwriting recognition algorithms Groupware Information resource discovery engines Intelligent agents

The unexpected

• • • • • • Use of “scientific” computers for business Success of the personal computer Use of Lotus macro languages and HyperTalk by non-programmers Penetration of PCs in the home Success of the Internet Licensing of the Macintosh operating system

Process need

• Interfaces between systems and standards • Software to emulate one environment in another environment • Compilers to replace interpreters, e.g., DBase-Clipper • More generally, performance enhancements • Novel coupling of technology to application, e.g., Aldus PageMaker • • Network design and management tools Software metering tools • Virus immunization and other computer security software and services • Universal mailbox software

• Email filtering software 29

Changes in industry or market structure

• • • Innovations in promotion, e.g., Lotus Innovations in pricing, e.g., Borland Innovations in distribution, e.g., shareware • Innovations in packaging, e.g., software suites • Decentralization/communications replacing travel, hence the need for electronic mail • Merging of computing and telecom opens opportunities for groupware • Opening up of Eastern Europe provides new markets for technology and software • Increasing use of multimedia for entertainment, education, advertising

• 30 New publishing and distribution options via the Internet

Demographics

• • • • • • • • Increasing amounts of home-based business Increasing amounts of telecommuting Increasing numbers of female executives Increasing levels of illiteracy Increasing numbers of elderly people Increasing expectations and progress in “developing countries” Increasing numbers of skilled people who have been “downsized” Increasing numbers of people connected to the Net, and who have their own home pages

Incongruities

• Discrepancies between reality as it actually is and reality as it is assumed to be or as it “ought to be,” e.g.....

• “High-level” languages not very high level, hence the need for 4GLs • VARs not self-sufficient hence Genamation becomes a super-VAR, providing assistance with business planning and development, sales support, training, and marketing • Voice mail is just electronic answering machine technology hence straightforward; not true, hence “voice mail surgeons” needed • Everything you want to know is on the

engines needed

Changes in perception, mood, or meaning.

• • “I'm mad as hell and I'm not going to take it anymore” leads to “the computer for the rest of us” and increasing emphasis on ergonomics and “user friendliness” • Success of the Apple Macintosh Computer as a gateway to communications and information rather than a stand-alone device • Growth of the Internet

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II. Focus and Objectives — Defining and Planning the Business

• • • • • • • • • • An Equation for Entrepreneurial Success The Entrepreneurial Spirit Focus and Objectives Self Knowledge Competitive Edge Distinctive Competence Proprietary Technology Barriers to Entry Other Sources of Competitive Edge The Business Plan

• •

An Equation for Entrepreneurial Success

To succeed, according to Silver's Law of Venture Capital, you must identify a major problem, devise an elegant solution to the problem, and assemble an outstanding entrepreneurial team capable of turning the problem and the solution into a successful business. If any of the three factors is lacking, all is for naught. (#4)

Silver’s Law of Venture Capital

Silver's Law of Venture Capital

• • • If V = Valuation P = Problem size (i.e., market) S = Solution elegance (e.g., technology) E = Entrepreneurial team quality Then V = P X S X E.

“The goal of entrepreneurship is to create value (V) by formulating a big problem (P), creating an elegant solution (S) that solves the problem, and forming a capable entrepreneurial team (E) to create a unique system for delivering S to P.”

The Entrepreneurial Spirit

• •

Don't start a business unless you possess an entrepreneurial spirit —sturdy self-confidence, serious drive and energy, unflappable commitment, a willingness to take risks, the ability to venture into the unknown, and the courage to make decisions despite uncertainty. You must also possess expertise — a distinctive competence, and qualities of leadership. (#5)

Motivations for entrepreneurship • Wealth • Independence, must be your own boss • Building something be done

•

What is entrepreneurship?

of creating

incremental wealth

. The wealth is created by individuals who assume the major risks, in terms of equity, time, and/or career commitment, of providing

value

for some

product or service

. The product or service may or may not be new or unique, but value must somehow be infused by the entrepreneur by securing and allocating the necessary skills and resources.” (Ronstadt, 1984, p. 28) • • “Entrepreneurship is a little like coming to a traffic light which is red and not necessarily stopping.....” “The job of an entrepreneur in our 'competitive' economy is to create an unfair advantage.....” • “I can smell the Ferrari.”

Focus and Objectives

•

Choose your focus carefully, and keep it narrow and relatively constrained. Define precise objectives, both short term and long-term, dealing with technology to be developed or obtained, the market to be served and captured, and the financial results to be achieved. Make precise who on your team is to do what by when. (#6)

• Mission statement • Example, Alias Research: “Our mission is to be the world leader in 3D computer graphics software for creative design.” • Dimensions of focus: technology and market

• Dangers of too diffuse focus 40 • A lesson in defining objectives

Dimensions of focus: technology and market

• BGS Systems • Computer systems performance modelling for large IBM mainframe system managers • Geac • Transaction processing systems for vertical markets, e.g., libraries, financial, hotels • HCR • UNIX operating systems programming for hardware manufacturers without UNIX expertise needing speed to UNIX market • Wainman+Kydd • Tax calculations and tax planning for

Dangers of too diffuse a focus

• • • Causes • Opportunity strikes • • The temptation of incremental effort Financial pressures due to undercapitalization • • Lack of adequate planning Failure to define one's focus and goals • Arrogance and inflated egos Dangers • Not achieving excellence in one endeavour • • Undercapitalization intensifies Management and staff overload, 42 Example: Waterloo Computer Products

A lesson in defining objectives

• Writing the world's best electronic mail package

versus

achieving, by 1997, 20% market share for PC-compatible electronic mail software used by physicians and hospitals • Achieving a reputation for service excellence

versus

achieving a 95% renewal rate on service contracts and logging 10 new sales per month from customers who switch to you from a competitor's product because of your reputation for service excellence • Having a high-quality efficient bug-free product

versus

completing a 3-month beta test period at 20 sites having found no fatal errors and no more than 3

serious errors 43

Self Knowledge

• • • •

Know who you are, and what your strengths and weaknesses are, and use this knowledge intelligently in chosing your focus and objectives. (#7)

Example: Lanpar Technologies Example: HCR Example: Alias Research

Competitive Edge

• • • •

To succeed, you must have a competitive edge, such as a distinctive competence, proprietary technology, or barriers to entry hindering the competiton. (#8)

Also called

sustainable competitive advantage

Varieties of competitive edge Introduction follows, deeper discussion in Part IV

Varieties of competitive edge

• • • • The distinctive competence Proprietary technology Barriers to entry Other sources of competitive edge

Distinctive Competence

• •

One of the most potent forms of competitive edge is to have a distinctive competence — expertise which is unique, difficult to attain, and not possessed by your competitors. (#9)

Examples of distinctive competence

• • • • • Adobe — Warnock and Geschke • Page description languages (Xerox) Aldus (now part of Adobe) — Brainerd et al.

• Electronic publishing (papers, Atex) BGS Systems — Buzen Goldberg and Schenk • Comp. syst. perform. model. (Harv., H'well) Object Technology International — Thomas • Object-oriented toolkits and systems implementation methodology SoftArc — Welch and partners • 48 Wainman+Kydd, TaxPrep — Wainman and Kydd

Proprietary Technology

• •

Another powerful competitive edge is the ownership of proprietary technology — algorithms, software, tools, or methodologies which allow you to solve a problem that cannot be handled as well or at all by competing technologies. (#10)

Examples

• Algorithmics • Formal math. model to derive synthetic securities in a uniform way • Apple • Operating system, user interface, etc.

• BGS Syst.

• Comp. syst. capacity plan. algorithm • Borland • Techniques for high-speed compilation • Fulcrum • Full-text storage, indexing, retrieval algorithms (also Open Text) • Netron • Technology of adaptable reusable code components • Visicorp

• 50 Spreadsheet implementation...not enough!!!

Barriers to Entry

• • •

Established companies can hold their positions because they gain a powerful advantage through barriers to entry, which may result from cumulative investment and lead time, market and customer knowledge, or access to distribution channels and shelf space in retail outlets. New companies need to devise a plan to counter this advantage. (#11)

Varieties of barriers to entry How to combat barriers to entry

Varieties of barriers to entry

• Cumulative investment and lead time, e.g, Lotus with Notes • Proprietary technology, e.g., Fulcrum Technologies with FulText • Market knowledge and customer knowledge, e.g., Wainman+Kydd w.r.t. the accounting profession • • Customer loyalty, e.g., IBM (in the past?) Customer access, e.g., Microsoft — Fortune 500 • Brand name recognition, e.g., Microsoft, Lotus • Reputation for quality, e.g., Hewlett Packard • Saturated distribution channels

Saturated distribution channels

• • • Also no shelf space in retail outlets Closed to all but established software and multimedia vendors The example of multimedia • One vendor estimate — only 4 of roughly 10,000 titles really successful • Another vendor estimate • 20 titles generated 90% of the revenues despite 20,000 new titles in 1995 • From 1994 to 1995, titles increased by 95% while shelf space increased by 23%

How to combat barriers to entry

• • • • • • Be better, exploit a distinctive competence, develop proprietary technology Look for a market niche (Part III) Look for a market window (Part III) Move quickly to exploit new paradigms, open new markets, e.g., Netscape Have a hit, e.g., Myst Look for distribution channels that are not saturated, e.g., Internet distribution

Other Sources of Competitive Edge

• • • • • • • • Getting there first (e.g., Corel, Netscape) Price (high or low) (e.g., Borland) Ease of use (e.g., Apple) Market presence & market share (e.g., Microsoft) Marketing knowledge and skill (e.g., W+K) Brand name recognition (e.g., Rand McNally, world's leading commercial cartographer, for its TripMaker and StreetFinder CD/ROMs) Geography (e.g., W+K, Altamont Computers) Spanish language (in Latin America)

The Business Plan

• •

Develop and refine periodically a business plan to serve as a management tool, a reality check, an environment for exploring possible alternative futures, and a vehicle for raising funds. (#12)

Substance of a typical plan

• • • • • • • • • • Executive summary Concept and objectives The market The product and the technology Marketing and sales strategy Competition and competitive edge The company Financial forecasts and projections Investment proposal Possible appendices

Executive summary

• • • • The highlights of the plan Focus on the problem Focus on the solution Focus on the entrepreneurial team

Concept and objectives

• • • • • • Background The concept The key idea The business focus The business objectives — short term, long term The mission statement

The market

• • • Market identification and characteristics Market segmentation Market sizing

The product and the technology

• • • • Services or products to be offered Proprietary technology and its advantages Prior investment Required R&D, development plan, time and cost

Marketing and sales strategy

• • • • • • Basic strategy Positioning Distribution Pricing Advertising and promotion Sales organization and strategy

Competition and competitive edge

• • • • User benefit compared to status quo, payback period Major competitors — competitive positions, market shares, strengths and weaknesses Competitive edge vis a vis the competition Barriers to entry for new competitors

The company

• • • • • • Management management management!!!

Corporate organization — key players, credentials and distinctive competences Growth plans — access to additional key and skilled personnel Competition schemes, including profit sharing and stock ownership Current legal status and organization Background and history

Financial forecasts and projections

• • • • • Short term (1-2 year monthly forecasts) Medium term (2-3 year quarterly forecasts) Revenue and P&L, cash flow, balance sheet Assumptions Sensitivity analysis, “worst case” scenario

Investment proposal

• • • • • Funds required and their purpose Equity offered Return on invesment Liquidity, exit plan Sources, timing for future investment

Possible appendices

• • • • • • • • Detailed financial forecasts Resumes Market survey data Company profile, product literature Testimonials from customers Literature from competition Risk factors Names of references

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III. Opportunity and Timing — Market and Product Planning

• • • • • • • • Market Definition Customer Identification Market Segmentation and Sizing Competitive Analysis and Product Differentiation Market Niche Market Share Market Window Business Redefinition and Corporate Agility

Market Definition

• • • • •

Define your market by positioning yourself in a multi-dimensional marketplace space that includes technology, market, service, and pricing factors. You must find a niche that can be defined with some precision, that has customers who are accessible, that is growing “fast enough,” and that is not “owned” by one established vendor. (#13)

Criteria for well-chosen markets Examples of well-chosen markets Characteristics of poorly chosen markets Examples of poorly chosen markets

Criteria for well chosen markets

• • • • • • • • Can be defined with some precision, a niche (see below) Well timed, within market window (see below) Customers accessible Growing “fast enough” Not owned by one established vendor Expansion paths to other niches Well suited to your strengths Also need vision, guts, and luck • Example: I.P. Sharp with APL in the 70s • Example: John Lowry with electronic children's books in the early 90s et al. with electronic commerce in the mid 90s

Examples of well chosen markets

• • • • • • • Capacity planning software for IBM mainframe installations in the late 70s Cost accounting software on personal computers for large farms in the central California valley in the late 70s UNIX porting services in the late 70s and early 80s Tax packages on IBM PCs for Canadian accountants in the early to mid 80s Desktop publishing software on the Macintosh for the graphic arts industry in the mid 80s Groupware for large corporations in the early 90s World Wide Web servers, browsers, and 72

Characteristics of poorly chosen markets

• • • • • • • Vague Too large Premature, or too late No clear way to reach customers Static or declining Already owned by others Not suited to your strengths

Examples of poorly chosen markets

• • • • • • Software for the doctor (too vague) The word processing market (too large) The office automation market (too vague and too large) Accounting software for time-shared computers in the 80s (too late, declining) Integrated productivity tools market on the IBM PC in the late 80s (already owned) Fourth-generation languages for HCR (not suited to the company's strengths)

Customer Identification and Characterization

• • •

Identify your customers in terms of who they are, what they do, how you can find them, and why and how they will use your products or services. (#14)

Dimensions characterizing customers Key concept is user benefit

• • • • • •

Dimensions characterizing customers

Business or profession, e.g., oil exploration Kind of user, e.g., accountant Activity for use of the software, financial planning Size of the target business Geographic location Machine and/or software environment

Market Segmentation and Sizing

• • • • •

Segment your market appropriately, and then attempt to size it in a number of different ways — by working top-down in terms of percentages of some larger population, by working sideways through comparisons with your competitors, and by working bottom-up in terms of specifically identified potential customers or classes of customers. (#15)

Market segmentation: multimedia titles Market sizing: the U.S. K-12 school marketplace Market sizing: tax packages for accountants Market segmentation exercise: the 77

Market segmentation: multimedia titles

• • • • Games • Adventure, role playing • • • Simulation Strategy Sports Business Personal/reference/finance Education

• • • • •

Market sizing: the U.S. K-12 school marketplace

14,000+ school districts 100,000+ schools 2.8M educators 48M students 34M families

• • • • • • •

Market sizing: the U.S. K-12 school marketplace

Technology for school administrators Technology labs (e.g., Writing to Read labs) — 100K labs Classroom computers — 2.8M classrooms PCs for teachers — 3.3M teachers and administrators Student home computers — 46M students, 30M families Early childhood market Private school market — 15K schools, 5.5M students

Market sizing: tax packages for accountants

• Tax packages (personal and corporate) for Canada on the IBM PC in the early to mid 80s • Top-down analysis • Market is roughly 10,000 accountants • Sideways analysis • Enumerate the competition, the number of accountants using service bureau packages or the number of client returns being processed by service bureaus • Bottom-up analysis • Enumerate target accounts: A number of “big 8 firms” X A number of offices per firm X

Market segmentation exercise: the Internet marketplace

• • One segmentation of the WWW market • Corporate publishing and advertising market (“Yellow pages”) • • Personal Web pages (“White pages”) Internal corporate communications, Intranets Class exercise (individual or group) — Develop a more comprehensive segmentation

•

Competitive Analysis and Product Differentiation

Carry out a thorough competitive analysis, investigating the strengths and weaknesses of both the products and the companies from which they originate. Then decide on how you will position yourself and differentiate yourself from these competitors. (#16)

• • Competitive analysis Product differentiation — Choosing a product position such that one’s product is distinguished favourably from all others • • Examples of product positioning Product differentiation via a positioning diagram

Product definition to be discussed later

• • • • • •

Competitive analysis

Identify the competitors Formulate and ask questions with goals in mind Gather the data: commercial intelligence • Read trade papers, magazines, industry market reports, etc. for reviews of other products • Read literature and look at demos of other products • • Talk to customers of other products If need be, buy the other products Organize the data Analyze the data • Identify strengths and weaknesses Present the data, e.g., via product-feature matrix

Examples of product positioning

• • • • • • A position in terms of...

• The intended customer, e.g., the Mac, “the computer for the rest of us” • • Price, e.g., Borland in the mid 80s Market dominance, e.g., Lotus 1-2-3 in the mid 80s • Talking the customer's language, e.g., Wainman+Kydd Features, e.g., WordPerfect Standards, e.g., UNIX System V Ease of use, e.g., Claris Customer support, e.g., WordPerfect Perceived quality, e.g., Hewlett Packard 85 Microsoft

•

Product differentiation via a positioning diagram

Example: Alias Research's positioning vis a vis other computer graphics vendors 3D + + + + Alias

Analytical Creative

+ + + + 2D

Market Niche

• • •

You must find a market niche — a position in a corner or along an edge of a marketplace where it is reasonable to expect to have competitive advantage and to expect to garner a significant market share. (#17)

Characteristics of market niches Examples of market niches

Characteristics of market niches

• • Ideal size of a market niche • Large enough or potentially large enough for growth and profitability • Small enough to be affordable and to discourage competition The niche and barriers to entry • • • • Unique distinctive competence Proprietary technology Creation of a default “standard” Specialized market knowledge • Lack of interest because of small size

Examples of market niches

• • • • • • Altamont Computers — Cost accounting systems for large farms in the central California valley BGS Systems — Capacity planning software for IBM mainframes Fulcrum Technologies — Full-text storage, indexing, and retrieval software for OEMs Mortice Kern Sys.

—UNIX toolkits under DOS SoftQuad — Enhanced UNIX TROFF — Interactive document editors for SGML, WWW InContext — SGML, WWW creation, mgmt.

Waterloo Computer Products —High 89 perform. optimizing C compilers for IBM

Market Share

• •

You must garner a significant market share, a substantial percentage of a marketplace. The best way to do this is to create a new market, rather than trying to carve share away from existing players in a market. (#18)

Advantages associated with market share

• • • Advantages of having market share • Large customer base • • • Referrals and reference accounts Potential for repeat business Profitability (correlates with market share, PIMS study, Harvard, 1970s) Disadvantages of not having market share • • • Price vulnerability Media inattention Shelf space unavailability Market creation, not market sharing!!! (McKenna)

Market Window

• •

You must enter a marketplace during the market window — the time period when there is opportunity to dominate an emerging market niche or at least to capture significant market share. (#19)

Examples of market windows

• • • • • • Late 70s — Spreadsheets Mid 80s — UNIX relational data base management systems Mid 80s — Networking software Late 80s — CASE software 90s — Groupware 90s — Software for global information and communication systems via the Internet and the World Wide Web • • 90s — Multimedia 90s — Software for pen-based computers?

• 90s — Software for environmental concerns, e.g., WK Information Systems Greenware

Business Redefinition and Corporate Agility

• •

Because market evolve and change, and windows open and close, it may be necessary to reinvent the business frequently, perhaps every 4-6 years. In fact, “reinvention” may be necessary from the outset as one searches for a winning product and market. Don't be afraid to experiment. (#20)

Examples of business redefinition

• • Dataline • Time sharing --> applications software --> services for industry segments --> stock quotation services • • • Corel • Desktop publishing systems integration • • PC-compatible graphics software Desktop publishing software (acquisition of Ventura) Desktop videoconferencing Multimedia products Office productivity suites (acquisition of WordPerfect)

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The business plan

• • • • • Proprietary Technology and Capability Marketing and Distribution Cash Leadership Partnerships

Proprietary Technology and Capability

•

Consider carefully the advantages and disadvantages of selling a service, packaging and marketing a product, or various ways of providing a combined product and service. (#21)

•

Clients contract for consulting and software-related services because they do not want to hire permanently or cannot find critically needed skills; your success as a consultant/contractor is based on the degree to which you can professionally, skillfully, and consistently deliver high quality and knowledgeable service such as advice, management assistance, software development, or training. (#22) The Business of Software © 1992-8 Ronald M. Baecker

Proprietary Technology and Capability

• •

Software development, whether carried out for clients or internally for purposes of product development, is notoriously prone to cost overruns. You must therefore estimate carefully, monitor progress, and re-estimate assiduously, using methods such as “divide and conquer,” Delphi, and post mortem. (#23)

Always remember Brooks’s Law: Adding more manpower to a late project makes it later. (#24) • Use exploratory programming and software prototyping to experiment with new product ideas, including both functionality and interface; then employ

more rigorous processes of software 99 engineering to structure the carrying out

Proprietary Technology and Capability

• Develop software specifications after prototyping but before carrying out product development; these must include: • metaphors and mental models through which the user will comprehend the product • • • required functionality the look-and-feel of the interface processor, memory, and other hardware requirements • performance requirements. (#26) • A critical component of any piece of software is its user interface, which determines how it looks and feels to its

through a process that is user-centred,

Proprietary Technology and Capability

• •

Software product quality must be systematically tested to guarantee that it meets desired standards; this includes alpha testing within one's own organization and beta testing at carefully selected customer sites. (#28) To remain competitive, convince customers that the company is innovative, and provide an additional source of revenue, software must be continually improved through a carefully managed process of enhancement, testing, and new releases. Yet what one omits from new releases is even more important than what one includes. (#29) The Business of Software © 1992-8 Ronald M. Baecker

101

Proprietary Technology and Capability

• Competent and responsive customer support is essential in today's software marketplace, and serves as an additional provider of revenue, a necessary component of effective sales to customers who are not computer specialists, a method of corporate and product differentiation, and a source of intelligence about the strengths and weaknesses of your product and those of your competitors. (#30)

102

Proprietary Technology and Capability

•

Functionality and complexity of software seems to grow at least as fast as its alleged “user friendliness,” hence customer training is essential and can serve as an additional source of revenue. Corporate training skills can also be applied to the professional development and internal training of one's own employees, which is an essential component of honing and sharpening one's competitive edge. (#31)

•

Although the intellectual property of software should be protected, with the help of a knowledgeable attorney, through trade secret, copyright, patent, The Business of Software © 1992-8 Ronald M. Baecker agility is the best protection for a new

Marketing and Distribution

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Carefully design your product name, logo, and literature to assert forcefully and consistently who you are and what you do and make. (#33)

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Specify your product in terms of what a customer wants and needs, and what the user benefit will be, rather than in terms of what its features are. (#34)

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Think about software pricing in terms of value to your customer, what the customer will pay, what your competitors are charging, and your cost structure; ideally, these methods will result in similar recommendations and help you set your pricing. Then, pay attention to the marketplace and be willing to make The Business of Software © 1992-8 Ronald M. Baecker changes. (#35)

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Marketing and Distribution

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There are many ways to distribute products and reach customers. Considering your company's strengths and weaknesses, the nature of your customers and how they can be reached, and the nature and price of the product, pick methods that are most appropriate from among (#36):

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Direct sales Use of sales representatives Original equipment manufacturers (OEMs) Distributors Value added resellers (VARs) Dealers and retail outlets sales

Marketing and Distribution

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Consider carefully various methods of promoting your company and product and reaching your customer, including but not limited to (#37):

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Advertising Direct mail Trade shows Seminars Articles and reviews Industry participation Public relations Relationship building and word-of mouth

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Uses of the Internet

revenue on marketing, sales, G&A

Marketing and Distribution

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Use the trade show not only as an efficient method for reaching your potential customers and talking to your customers, but for building strategic alliances, carrying out corporate intelligence, and building morale and customer awareness within your company. Effective use of trade shows requires careful planning before the show, skillful execution at the show, and systematic follow-up after the show. (#38)

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Marketing and Distribution

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The sales process must be structured and managed — consider it as a funnel in which leads are systematically and steadily culled and promoted through stages which may be termed suspects, prospects, targets for closing, and customers. (#40) View your relationship with your customer, in Levitt's words, as “a marriage, not as a one night stand.” Thoughtful and attentive concern for your customers' well being will often lead to the most desirable goals of repeat business and good word of mouth. (#41) The Business of Software © 1992-8 Ronald M. Baecker

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Marketing and Distribution

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Pay careful attention to the management of sales personnel and sales managers; structure thoughtfully a system of financial incentives and rewards keyed to agreed-upon performance objectives, backed up by an infrastructure of effective administration, sales training, and technical support. (#42) Understand the Technology Adoption Life Cycle; do not overvalue early sales success or underestimate the difficulty of crossing the chasm between “early adopters” and the “early majority.” (#43) The Business of Software © 1992-8 Ronald M. Baecker

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Cash

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Central to your business plan must be a financial forecasting model which provides a reality check, allows the exploration of options, assists the establishing of expectations and standards of financial performance, and aids the intelligent management of business downturns. (#44)

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Use your financial statements and models in tandem — initialize the model with actual data from the statement, and transfer the results of the model into the statements as budgets. (#45)

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Cash

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Establish a set of key indicators — financial measurements which can be used to track and evaluate financial performance and business health. Properly attribute costs in various projects, products, and services, so that you can determine the profitability of each one. (#47)

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Budgets are projected sets of desired lower bounds on revenues and upper bounds on expenditures. They force planning, and facilitate understanding, thoughtful management, and control. They must be negotiated in a top-down, bottom-up manner by all those who will be responsible and accountable. (#48) The Business of Software © 1992-8 Ronald M. Baecker

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Cash

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Bank financing for start-up software ventures is for all practical purposes impossible unless backed by security and personal loan guarantees. (#49) Venture financing for start-up software ventures is possible, but usually only after initial software development is complete and a few early sales have been made. Look for venture funding that results in advice and connections as well as cash. Venture firms will look primarily at management quality, and will seek outstanding potential returns as well as a path to liquidity. (#50) The Business of Software © 1992-8 Ronald M. Baecker

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Leadership and Management

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Leadership is vision, knowledge, drive, confidence, optimism, openness, humanity, and caring. It is direction and guidance that inspires dedication, confidence, and achievement. It is required to inspire and bring out the best in people, and to give them the courage to survive the tough times. Effective leadership sets and molds the corporate culture. (#52) It is essential to have a management team of compatible and versatile individuals who have complementary skills and shared values; one-person bands will not succeed. (#51) The Business of Software © 1992-8 Ronald M. Baecker

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Leadership and Management

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You must delegate responsibility and accountability for a task to be accomplished, and authority — the tools with which to carry out the task; otherwise there will be no ownership, and hence litte commitment, little striving, and little achievement. A desirable goal is collective responsibility shared by members of a committed team. (#53)

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Hire only the best people; use every avenue at your disposal, including multiple interviews and careful reference checks, to ensure that this happens. (#54)

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Leadership and Management

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Employees need and resonate to praise; be generous in recognizing, acknowledging, and rewarding achievement. (#56) Be courageous, decisive, and clear in recognizing and openly confronting non achievement, defining and communication necessary behaviours, and documenting discussions, plans, and progress or lack thereof, and in firing those that despite these efforts do not perform. (#57) The Business of Software © 1992-8 Ronald M. Baecker

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Partnerships

Do not be committed to developing your own technology, but consider dispassionately the make-or-buy decision. Speed to market can be enhanced by taking advantage of the opportunities for licensing technology from government, universities, customers, or other companies, both competing and non competing. (#58) The software industry is becoming more and more competitive, with established firms wielding more and more power; one weapon for a new or existing company is a strategic alliance with one or more other companies. (#59) Be open to merger and acquisition possibilities, but be particularly sensitive to the mesh of corporate cultures. (#60) The Business of Software © 1992-8 Ronald M. Baecker

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Course Wrapup

• • • • • • 8 themes 21 key principles for success Good books to read More books to read And even more books And finally...

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8 themes

• • • • • • • • Innovation in the Software Industry Focus and Objectives Opportunity and Timing Proprietary Technology and Capability Marketing and Distribution Finance and Financing Leadership Partnerships

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21 key principles for success

• • • • • • • • • • #2 — Software paradigms #3 — Purposeful software innovation #4 — Entrepreneurial success factors #6 — Focus and objectives #7 — Self knowledge #8 — Competitive edge #16 — Positioning and differentiation #17 — Market niche #19 — Market window #20 — Business redefinition and agility

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21 key principles for success (cont.)

• • • • • • • • • • • #23 — Software project managememt #28 — Software product quality #30 — Customer support #32 — Intellectual property protection #34 — User benefit #36 — Distribution channels #39 — Word of mouth #46 — Cash #51 — Management team #52 — Leadership #59 — Strategic alliances

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Good books to read

• • • • • • Bell, C.G. with McNamara, J.E. (1991). High-Tech Ventures: The Guide for Entrepreneurial Success. Addison Wesley.

Brandt, S. (1982). Entrepreneuring: The Ten Commandments for Building a Growth Company. Mentor.

Cusumano, M.A. and Selby, R.W. (1995). Microsoft Secrets: How the World's Most Powerful Software Company Creates Technology, Shapes Markets, and Manages People. The Free Press.

Doyle, D. J. (1990). Making Technology Happen. Available from Doyletech Corporation, 60 Queen Street, Suite 1202, Ottawa Ontario Canada K1P 5Y7. (613)567-7540.

Drucker, P.F. (1985). Innovation and Entrepreneurship: Practice and Principles. Harper and Row.

Gumpert, D.E. (1984). Growing Concerns: Building and Managing the Smaller Business. Harvard Business Review. John Wiley and Sons.

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And even more books

• • • Brandt, Steven C. (1986). Entrepreneurship in Established Companies: Managing Toward the Year 2000, New Americal Library.

Jelinek, Mariann and Schoonhoven, Claudia Bird (1990). Innovation Marathan: Lessons from High Technology Firms, Blackwell.

Kanter, Rosabeth Moss, (1983). The Change Masters: Innovation and Entrepreneurship in the American Corporation, Simon and Schuster.

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And, finally...

• • • Any more questions???

Please fill out and return course evaluation forms Thank you, and happy entrepreneuring and intrapreneuring!!!

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