Just before the shopping craze of the recent holiday season, an article was published in the Money section of USA Today discussing the pros and cons of the extremely fast-growing phenomenon of mobile shopping, that is, on your smartphone. Clearly the potential of mobile retail is still fairly latent, but some of the article’s contributors would have their readers forewarned: it is the future.

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In front of an audience of entrepreneurs at Babson College on November 19, Ron Bienvenu spoke of his experiences at building several successful software companies. He covered many topics from financing a new business to the skills needed to be a successful entrepreneur which includes toughness and creativity. The MBA students were especially interested in the process of pursuing and funding an idea. One key factor that Bienvenu cited was that it is crucial to have the right idea, at the right time.

In order to know when to pursue the right idea at the right time, Bienvenu applies the theory of Punctuated Equilibrium to technology cycles which is covered in his new book, The Fourth Shock. Without exploring the technical arcana surrounding the nuances of the neo-Darwinist evolutionary debate, the Theory of Punctuated Equilibrium generally holds that evolution rarely occurs and that long periods of stasis are occasionally interrupted by rapid, catastrophic change.  In periods of stasis, most mutations fail as the ecosystem and the species that make up the environment are in balance.  This is not to say that all evolution ceases, but the types of evolution tend to be gradual and within species rather than the radical creation of totally new species. However, every so often a fundamental shock to the environment occurs and all hell breaks loose as the ability to radically mutate becomes a huge advantage in an evolutionary sense of the word.  In these periods of punctuation, evolution tends to explode as incumbents in the old environment are replaced by new species better adapted to the now changed environment. Continue Reading »

There is another E in use of demand data to dominate your market, but it will not make your company as popular as the previous three. This E is a process exemplified by none better than software giant Microsoft. The fourth E is exterminate.

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The three E’s are a simple roadmap for how to use demand data to gain dominance in your market. Companies that will thrive in a world where demand data changes hands in real time will be those who will use that data to embrace, empower and extend their markets. Given that those verbs are a little esoteric, let’s use Wal-Mart as an example. The first E is embracing the supply chain, which Wal-Mart has done extremely well. Wal-Mart has a consumer data gathering system called Retail Link, which offers up to the hour sales information to its suppliers. There were already data content providers established and used by big suppliers, but when Retail Link was introduced, it was an exclusive and much faster way for suppliers to know exactly what was happening with their products on Wal-Mart’s shelves. Rather than see their suppliers as players to be disaggregated and marginalized in an effort to control more profit, Wal-Mart embraced them as a virtual extension of their own business and offered consumer data that suppliers could use to grow their business within Wal-Mart. This feeds into the second E.

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Like each of the Shocks, the Internet did not just show up on the global scene and change everything immediately. The Internet had been forming since the 1960s when the U.S. Department of Defense commissioned J.C.R. Licklider, a man who had for some time been a proponent of creating a global network, to research the possibility of doing just that. One of Licklider’s key ideas was his incorporation of the concept of using “packet switching” to move information rather than single fixed connection. Packet switching is a form of communicating on a network in which a data stream is broken down into individual pieces, or packets, to be transmitted in easier to manage sections than if the data was transmitted whole.

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Writing, as a means of storing information, has been an aspect of human life since the 4th millennium BC. Sumerians used impressionable clay tokens, clay tablets and styli to keep track of trading commodities. For thousands of years, the human race has refined its ways of communicating with each other and storing information. Continue Reading »

The Second Shock was the popularization of personal computing, mainly in the 1980s. With the digitization of information in the 1930s, building computers started to become a commercially viable enterprise. By the ’60s and ’70s, living room-sized mainframe computers were being manufactured to be smaller, faster, more efficient. The mainframes that could only be used by a few select technologists were replaced by minicomputers that were usually about the size of refrigerators, but could be used by four or five people. With the ’80s came the personal computer. The Altair 8800 from Micro Instrumentation and Telemetry Systems in 1975 is credited as being the first commercially successful personal computer. But it was really with the 1981 release of the IBM Personal Computer that people really began to consider keeping a computer in their living rooms.

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Google has become more than a household name. It is one of the biggest companies in the world whose name has literally become a commonly used verb. How has Google gotten to where it is when it started as merely an Internet search engine? The answer is in the intrinsic value of using historical and proprietary demand data to glean insights on consumer behavior.

Why does every advertiser want to have a blip up on Google.com? Because of their unique storehouse of an inordinately large amount of demand data.

No one else has the share of computer user history that Google has. They have been recording it since their search engine began, and now no one else can claim the extensiveness of their mass of user data. Google’s search engine may not even be the best on the web, but it does not have to be the best. Their user data is untouchable. And the important part was that they got there first.

Their data is proprietary; they alone have control of it. Thus what Google has done by amassing their proprietary data has been to create an insurmountable barrier to entry in their market. In this chapter, we look at how, often times, being a first mover in a certain market can have the negative effect of simply alerting a larger, more powerful market participant to an opportunity, but not so with the demand data. Google’s first mover advantage has turned into a barrier to entry that they enjoy solely. Because they were first to move on capturing the behavior of millions of people, no one can duplicate what they have. With the advent of mobility, those companies who are first to begin capturing real-time demand data will find themselves in Google’s position, while those who wait a year or five years will find themselves outside of a large barrier to entry.

The inversion of the business model is one of the key strategies for market domination that a demand data advantage allows. Enron is our key example, in that they positioned themselves to be able to harvest more information than anyone else in the market. They were constantly making transactions with producers, and taking price and quantity information in on that side. But they were also turning around and selling that gas to consumers on the other side of their pipeline, and taking demand information from those transactions. Enron’s pipeline was a physical one for transporting gas, but also an informational one, offering them more data that any one gas producer or customer. By gleaning data from one side, Enron had a better idea of how to trade with the other. Therefore while most market participants would use their own production – how much they were selling versus their rate of production – as a hedge to protect against trading activities that might be too risky, Enron, because of their informational advantage about what was happening on both sides of the market, was using trading as a hedge against production risks. The result was that trading that could be much more profitable because they could offer prices that others would not – because they had information that others did not.

The ability to capture real-time demand data and act on it is the key to dominance in any market. This is the foundation of the Fourth Shock. Enron serves as a great example as to how well a company can thrive when it has a informational advantage in demand data. Enron, as a pipeline company, sat in a unique position to capture data on both sides of the natural gas transaction – both from the producers whose gas was going into one side of their pipeline, and from the consumers to whom it was flowing out the other. By gathering that demand information on both sides, Enron had insight into what supply looked like  and what demand looked like, whereas the average gas supplier or gas customer only had one or the other. Once Enron had captured this information, they inverted the business model by using trading activities as a hedge against the risks of production, rather than using production as a hedge against the risks involved in trading. Once their informational advantage allowed for this kind of inversion, they could make more profitable trades than any other market participant because they had more information about the direction of the market. This was so important because they could take a set of assets that had historically generated say 10% in capital, extract the demand data out of that generation and use it, and they could suddenly generate significantly higher rates of return from the same set of assets. It became a brilliant profit machine.

Enron figured out that what they needed was a piece of the supply chain that would offer them unique information about the distribution process. They found this in their use of the pipeline, and the gathering of information at both ends.

After a few years, they turned and duplicated their process in the electric power market. In the chapter, we look at how Enron turned the mechanism of the power plant into a substitute for the pipeline in the data gathering process, and how that turned into a second successful inversion of the business model. Finally we look at why Enron failed, not because of corporate greed and lies, but because of entering markets in which they had no informational advantage. With no informational advantage, their trading was not nearly as successful, and the losses incurred were what ended up necessitating the lies and cover-ups that essentially ended the reign of Enron.