1. Starting Out

Many companies start out with a neat idea. They put together a great demo or presentation. They attract hot people. They raise big money. They start development. And then somewhere along the line, things go wrong. The product never ships, or customers don’t like it, or someone comes out with a better version. Money runs short. People leave. Other firms acquire the technology, or maybe just copy the ideas. The company lingers, is absorbed or dies. And the cycle starts all over again. True, this does make for a steady stream of new and interesting jobs. But there’s got to be a better way.

In the first chapter of Sunzi bingfa, Sun Tzu discusses the five factors that govern conflict between nation-states, the means for sizing up which of two competing sides has an advantage, and how to deceive, confuse, and manipulate your opponent. The key point: unless you understand all this before you start, you’re likely to fail in the end.

Product development is vital to the company: it defines the landscape of success and failure, the road to growth or collapse. It must be thoroughly studied.

Every company has a product: that which it produces, sells, or exchanges. The product may be something physical, some form of information, some service, or a combination of the three. Product development, then, includes the entire cycle of conception, design, and production of a finished product; in its most general sense, it also includes marketing and selling the product.

So what is success? I’m tempted to paraphrase an old quote: I may not be able to define it, but I know when I see it. The same is true with failure.

The closest working definition I’ve come up with for success is achieving the goals of your company, its employees, and its investors (and stockholders, if any). Of course there may be a lot of different and even incompatible goals in that group. That’s why success is relative. Consider this classic example: a large company increases its profitability through a sustained program of cost-cutting and layoffs, and as a result its stock price climbs. Stockholders — and thus the board of directors and the CxOs — see this as a success. On the other hand, the tens of thousands of people laid off see it as a failure. Customers, in the meantime, may have mixed reactions, depending on the impact on their particular favorite products.

This may all seem self-evident; a review of Econ 101 mixed in with the latest issue of Forbes. But it’s so hard to succeed and so easy to fall. I know – I’ve been on both sides. All things considered, I prefer to succeed, and I prefer as many people involved as possible to succeed.

These factors govern the success of the company: Tao; the economy; the marketplace; leadership; management.

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Tao means running the company so that all the employees share the same vision of success. The employees may prosper or they may end up unemployed, but they accept the risk and trust in management.

This is probably the most difficult concept – and task – introduced in this book. Why? Because it is hard to achieve success for a diverse group of people, and the more people involved, the harder it gets. Universal stock options help, but they are not by themselves sufficient.

It is also difficult because there is a moral element involved. For Tao to be achieved there has to be an outstanding level of reciprocal dedication, loyalty, and trust between the employees of the company at all levels. This does not mean that employees are not accountable to their managers or vice versa; quite the contrary. But there is a Taoist paradox at the heart of this: the manager must focus on the needs of the employee, while the employee must focus on the needs of the company. This is a powerful situation, since each acts as the other’s advocate, each helps the other to succeed, and each (in theory, at least) trusts the intentions of the other.

It breaks down, of course, if that mutual advocacy isn’t there. When both manager and employee place the needs of the company as paramount, the stage is set for burnout, declining quality of results, and turnover. When both place the needs of the employee as paramount, then the company suffers and, eventually, so does the employee. And the last situation — where the manager places the needs of the company first, while the employee places his or her needs first — is the classic adversarial management-vs.-labor relationship that has been the source of tremendous conflict, inefficiency, fraud, violence, corruption, waste, and suffering since the start of the Industrial Revolution.

Does Tao guarantee success? No. Does lack of Tao guarantee failure? No. But as market forces continue to dismantle or reorganize the large corporate structures that have dominated the last century (and the mentalities that go with them), firms that seek to achieve and maintain Tao will have a decided advantage. [MORE]

The economy means buying and selling, lending and borrowing, and the inevitable business cycles.

Technology-based industries go through waves of prosperity that aren’t always related to the nation or global economy. This still fuels the basic dream of a small group of developers making a fortune, even though cost to market has risen tremendously, and the technical economy now tracks the national economy more closely. Even so, new opportunities can turn things upside down; witness the mad, intense scramble into the original dot.com boom (and bust), as well as the current [2015] tech bubble.

The economic aspect of product development has to do with cash flow for the company itself: how much money (or credit) is on hand, what monthly “burn rate” of resources is, what additional sources exist, what additional expenses are required or anticipated, what the bottom line is each and every month, and how well future income and expenses can be predicted.

New companies typically must raise sufficient capital to complete an initial product and then successfully bring it to market. That capital may be from sweat equity, personal savings, contract work, advance royalties, private investment, corporate partnerships, or venture firms. Each of these sources has its advantages and its costs; failure to understand these trade-offs can lead a bright young company to the point where it carries the heavy burden of development and marketing without much in the way of rewards. [more on cycles]

The marketplace means competitive position, time to market, ease of development, potential demand, and risk of failure.

Success depends on how quickly and cheaply you can bring to market a product that people are willing to buy in sufficient quantities. This means you’ve got to understand both what it is you’re trying to build and who is going to choose to spend their money on it instead of on something else, including equivalent products from other firms. Beyond that, you have to be able to sell your products for a price at which you can make a profit — not just pay back what you spent coming to market, but actually show a return on that original investment. And you have to do this in an arena filled with companies that are better staffed, better funded, better known than yours.

Leadership means the qualities of wisdom, integrity, humanity, vision, and fairness.

Wisdom means knowing the right thing to do, and the right reason for doing it. Integrity represents the ethical and moral dimensions of business that are sometimes neglected in executive offices, particularly those of sales and marketing. Humanity involves remembering that every decision made affects people’s lives — including those in competing firms. Vision is the quality of seeing beyond the next quarter’s results and into the future. Fairness mixes compassion, justice, and evenhandedness appropriately.

These qualities are uncommon, and are seldom found in equal and sufficient proportions in a single person. But that does not excuse their absence, nor does it relieve us of the effort to achieve them. They must reside in those who lead the company, and they must be expected of employees at all levels.

Management means organization, communication, acquisition of resources, and budgeting.

Many start-ups are run by technical or visionary individuals who do not fully understand or appreciate the role of management in a successful company. This can lead to failure to recognize or reward contributions, exhaustion of resources, inefficient use of time, and even legal problems. Management skills should be as important in a company, division, or product group as technical skills.

Any competent CEO has heard of these five qualities. The CEO who knows how to apply them will succeed; the CEO who does not, will fail.

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By answering these seven questions, you can judge ahead of time how well the company will succeed:

Does the board of directors have Tao?

The common image is that the directors are only interested in the bottom line. But a board that is collectively committed to the company vision can be a powerful force for good: when they have to ask the difficult questions, they do so for the right reasons. There are boards like that, and they benefit the companies they advise.

Does the CEO offer true leadership?

Leadership is the quality of setting a direction that encompasses the charter of the company, then guiding the employees to that end. True leadership must be built upon integrity, or it will ultimately fail.

How well does the company adapt to the economy and to the marketplace?

Because of the long path that often winds from original idea to shipping product, the company needs to be willing and able to adapt to the changes in the economy and in the marketplace as it goes along. This becomes ever more critical as the rate in the technical market continues to pick up speed.

As importantly, the company needs to be able to complete and launch products successfully. This requires marketing acumen, sufficient capital, and a product that meets the needs and demands of the customers, not of the engineers, or the management.

How excellent are the management skills?

Management is the art of increasing communication, reducing friction, and achieving goals. Superior management comes from below, as the managers see themselves serving and supporting those they supervise.

How committed are the employees?

Leadership, management, and Tao are essential in having the employees commit to see the process through. Stock options and profit sharing doesn’t hurt, but they will not long compensate for lack of management or leadership.

How skilled are the developers and managers?

The “infinite number of monkeys” approach doesn’t work for technology development. You are better off having a few excellent engineers than a lot of mediocre or inexperienced ones. In many cases, you’re better off having just a few excellent engineers than a lot of excellent engineers. Why? Communication, coordination, and unity of product architecture.

How much opportunity is there for growth and how little tolerance for incompetence?

Excellent developers and marketers don’t change jobs to do the same old thing; they change jobs to do something new. Keeping excellent engineers means giving them the chance to grow professionally.

On the other hand, one unwilling or misdirected developer or marketer can tie up significant resources. Make it clear when someone is hired that competence, cooperation, and hard work are prerequisites to keeping their job. I once had the awkward experience of having to fire a friend whom I had hired for a development project because I felt he was unwilling or unable to complete the tasks assigned to him. I’m afraid the friendship didn’t survive the experience.

By evaluating these questions, you can predict a venture’s success or failure.

And yet it is remarkable how many companies fail to adequately and honestly evaluate these questions, even — or especially — when there are vast sums of money at stake.

A CEO who understands and pays attention to these factors will likely succeed; hire him. A CEO who does not understand or pay attention to these factors will likely fail; fire him.

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Once you have evaluated these factors, use them to craft a strategic advantage. That strategic advantage comes from guiding the company based on your evaluation of these factors.

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Successful product development required stealth and misdirection.

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Hide your strengths at first and appear to be weak; when actively developing, show no signs.

Any concept, once viewed, can be imitated, in appearance if not in fact. There is a real danger in exposing product concepts too quickly, though it is a risk that sometimes must be taken to raise capital. Likewise, you don’t want to tip off your competition as to what you’re doing, unless there’s an advantage in doing so.

Managing external perceptions and expectations while developing a new product is a difficult task. Revealing too much too soon can raise expectations too high while giving your competition a clear view as to what you are doing.

If product release will be soon, make it appear to be far away; if product release is far in the future, make it appear to be imminent.

With the first approach, you can lull competitors into complacency and lower the expectations of consumers. In both areas, the advantage of a soon-than-expected release can be tremendous.
The second approach is the classic FUD strategy: fear, uncertainty, and doubt. This tactic was honed to a fine art by IBM and then was adopted with success by Microsoft, at least until the Vista development effort. The danger is in loss of credibility, particularly with customers and the press, but it may work to freeze or misdirect the competition.

Entice the competition into a market segment, and then confuse them by your response. Where they are focused, strengthen yourself. Where they are successful, avoid them.

It helps to have a market niche that you are prepared to grant your competitors, particularly one that they would be interested in anyway. Talk it up, lure them in, then go elsewhere where your real strengths are.

Build strong walls where your competitors might intrude on your market share. Don’t waste resources attempting to win committed customers away from them.

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Annoy their leaders to irritate and distract them. Hide your advantages to make them take you lightly.

Feuding CEOs are a time-honored tradition in the technology industry; large egos have often prevented what might have otherwise been successful partnerships and mergers. If you can get your competitors on the defensive, or at least really ticked with you, you may be able to tempt them into doing something rash.

There’s an art to making your customers (and investors) love you while having your competitors not take you seriously, but it can be done. Many successful, established companies started out as small and/or declining ones that weren’t taken too seriously; witness, for example, Apple being near-death in the mid-1990s and becoming the most highly valued company in history some 20 years later.

Wear the competition out by faster development.

Invest in your engineers. Take the time to give them proper training, resources, and tools. Discover the secrets of rapid product development, and when you do, keep them to yourself. In the process, be sure you wear out the competition and not your own developers.

Break up competing alliances and sow internal dissensions.

Alliances between convergence companies are constantly forming and shifting. Mergers are announced almost monthly; some actually go through. “Strategic alliances” are more common, but are less significant unless resources are actually committed. Even so, if those mergers and alliances threaten your company, you should find ways to undermine them.

Likewise, when it is your interest, look for ways to cause disagreements within a competing firm over a product and market direction (see Chapter 12, “Competing by Influence”). This will slow them down and may even misdirect them.

Release products at a time and in a market that they do not expect.

The competition will base a lot of their plans, consciously or unconsciously, on what they expect you to do. The more you surprise them, the less effective their plans will be and the less confidence they’ll have in those plans.

Your success will depend upon such a strategy. You will have to create it in response to the market; you cannot determine it in advance.

[change?] To compete, you need a product technology that allows you for last-minute shifting of the final specification and target market without the months of delay such changed usually entail. Companies that achieve this will have a better chance of surviving the rapid technology turnover in the industry.

If before launching your venture you determine that most of these factors are in your favor, you will likely succeed.

Too many business plans are an exercise in creative writing. This is often done to convince others to invest in a company, an effort of dubious ethical and practical results. The greatest danger, though, is when you believe the fantasy yourself.

If before launching your venture, you determine that only a few of these factors are in your favor, you will likely fail.

Beyond that, your plan for business must be something far beyond the traditional written business plan. You must systematically address the issues raised in this chapter at the very start and lay the groundwork for success from the beginning. Otherwise, you risk wasting the time and/or money of all involved.

How much more so the venture that has none of these factors in its favor?

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Through assessment of these factors, success or failure will become apparent.

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While success may depend part upon luck — that is, upon events and circumstances outside your control — it remains a truism that fortune favors the prepared. This chapter covered the ways in which you can prepare for success. Any resistance you and the others feel towards considering these issues and questions in detail should be a warning flag.