CDOQ-Chander's Diary of Observations and Questions

A Logistics Principle

2009-11-11T11:32:00.000-08:00

You can not improve something which you can not measure.

Market Segmentation

2009-11-11T11:29:00.001-08:00

In most corporations, markets are segmented based on available data and not on buying behavior of consumers.

Needs

2009-11-11T08:25:00.000-08:00

A man's needs should not be sacred. Many people go into bankruptcy because they think that their needs are sacred and they maintain their lifestyles even when their incomes significantly decline.

Munger on Economy

2009-11-08T23:18:00.000-08:00

Charlie Munger, one of my heroes, recently gave an interview on the BBC re why the current financial crises occurred. See the entertaining video at http://news.bbc.co.uk/2/hi/8326369.stm

Life Span

2009-11-05T10:51:00.000-08:00

Why do the life spans of species vary drastically- from a few seconds to thousands of years?

Tragedy

2009-11-04T17:13:00.000-08:00

Tragedy is the monumental collision of will and destiny.

Adapted from writings of Roger Osborne.

Obituary - Russ Ackoff

2009-11-04T16:37:00.000-08:00

One of my heroes-Russ Ackoff-passed away last week on October 29th, 2009. He was a brilliant man who I learned Systems Thinking from and his pioneering work in this area did make the world a better place. Dr. Ackoff's ideas are integral in policy making and management and will be with us forever.

My condolences to his family and friends.

Problems

2009-11-02T09:05:00.000-08:00

Everyone has problems.

Fear & Desire

2009-11-01T14:17:00.000-08:00

A man with no desires and no fears is a very luck man. Joseph Campbell said that all worry is result of fear and desire.

Calligraphy in China

2009-11-01T12:49:00.000-08:00

Calligraphy is considered the highest art form in China. Process is emphasized in Calligraphy, unlike most other art forms. Furthermore, Calligraphy became popular in China after the arrival of Buddhism which helped the Chinese learn about individualism for the very first time. Hence, Calligraphy became a form of self-expression.

Victory and Goodwill

2009-11-01T12:40:00.000-08:00

Winning an argument or being proven right at the loss of goodwill is usually not a victory.

Halloween

2009-11-01T12:39:00.000-08:00

Homeless people do not celebrate Halloween.

Zappos - Have Fun, Make Customers Happy, Money Follows

2009-10-26T10:59:00.000-07:00

Last month, I attended Shop.org annual summit which is the biggest gathering of prominent online retailers in the country. Since the event was in Las Vegas, I took the opportunity to visit Zappos headquarters in Henderson, NV for a company tour.

Zappos is a fascinating company. It was started in 1999 and booked $1B+ in sales last year. A few months ago, it was acquired by Amazon for ~$940M. The company mainly sells shoes with laser sharp focus on customer service. The company tag line is "Powered by Service". The story is that the Zappos founder, Nick Swinmurn, could not find a pair of shoes he was looking for and there was no online retailer which specialized in wide selection of shoes. So, he started Zappos. Today, Zappos has 4M+ items in its warehouse in Kentucky, 1200 brands and 200,000 styles, and 900,000 UPCs.

Zappos is known for wide selection, fast and free delivery, free return shipments, and 365 day return policy. Behind the scenes, there are three main attributes which make Zappos successful:

1. Understanding of the impact of organization culture on business
2. Understanding of consumer needs and behavior
3. Sophisticated supply chain technology use

Following are my random observations from the two hour long Zappos tour:

1. The User Experience (UX) team has 8 people and is divided into three groups:

a) Information Architecture
b) Design
c) Usability Testing

Isn't it amazing that 8 people create a UX which generates $1B in sales/year?

2. Separate teams which need to collaborate on regular basis are housed next to each other. For example, Development, Quality Assurance, and UX teams sit next to each other.

3. All new employees must attend a 4 week training program which includes answering customer phone calls and warehouse training. This teaches employees interdependence among various teams and discourages "silo" thinking.

Zappos employees at work

4. After two weeks of training, new employees are offered $2,000 cash to leave the company. This is to make sure that the employee likes the culture. And, the company wants to protect the culture. Last year, 3% of new employees took the offer.

5. All potential employees are interviewed by two people- one tests the candidate for skills and the other for the culture fit. Both interviewers must agree for the candidate to get the job.

6. Top three fastest loading e-commerce websites are:

i) http://www.coldwatercreek.com/
ii) http://www.zappos.com/
iii) http://www.dell.com/

7. Zappos only uses Direct Marketing with focus on:

i) Email Marketing
ii) Affiliate Marketing
iii) Search Engine Marketing (SEM)
iv) Comparison Shopping

8. Each item can be viewed on 8 different angles on Zappos website.

9. Zappos uses RFID and Robotics in its warehouse. This makes the supply chain fast and cost effective.

10. Merchandisers are free to choose what items they want to make part of Zappos collection and they also forecast how many of the selected items Zappos will sell.

11. Zappos shows real-time purchases on the US map to identify local trends.

12. All products have a Wiki page which the customer service reps can pull up when a customer calls about a product and modify it based on the customer interaction. The customer service team is called Customer Loyalty Team (CLT) at Zappos.

13. There is 1 copywriter for the entire Zappos.com website!

14. 90% of Zappos sales are shoes and 8% are apparel.

15. All employees get free food, snacks, candy, etc.

16. All employees get free books which management likes.

17. 6PM.com, a site operated by Zappos, has a separate CLT.

18. There are 4 people in Zappos Brand Marketing Team!

19. There is no requirement for CLT to complete a call within certain time frame. The idea is to make the customer happy and not to get customer off the phone ASAP. There is no commission and no script for completing the call!

20. Zappos gets 6,500 calls every day.

21. December 15, 2008 has been the biggest sale day for Zappos so far. They sold $6M worth of merchandise that day.

22. There is a nap room for employees and visitors to take a break.

23. Dr. Vik is the famous coach at Zappos. Any employee can set up a 30-day goal (anything an employee wants) with Dr. Vik and he helps you achieve it.

24. Zappos reinforces the culture with its ten values. See http://about.zappos.com/our-unique-culture/zappos-core-values. This is not just talk. When you visit Zappos you can feel that the employees live by these values.

25. The extra money Zappos spends in empowering employees and keeping customers happy is more than compensated by repeat customers (and better supply chain). 75% of sales are to repeat customers. According to Zappos, their margins are comparable to other online retailers.

The most amazing part was that the two hours I spent at Zappos, I did not see a single employee who was not having fun.

Possibility

2009-10-26T10:38:00.000-07:00

Anything that can be done, will be done eventually.

Advice on advice

2009-10-15T13:37:00.000-07:00

Do not act on advice from experts or from your friends if it does not make sense to you. People give advice based on their past experiences and their view of the world. No one knows your circumstances better than you do. There is an old saying in India, "listen to everyone and do what makes sense to you".

Relative vs Absolute

2009-09-16T21:03:00.000-07:00

People tend to misjudge when to think in relative terms and when to think in absolute terms.

Tough times ahead for US Wireless Carriers?

2009-09-15T23:05:00.001-07:00

~93% of US population has a cellphone. The US wireless market is getting saturated (in terms of new subscribers). To continue the revenue growth, the Wireless Carriers (WC) have seen in the last few years, the WC will have to find new ways since what was a growth driver-new subscribers- in the past is no longer there. Let's look at a few other reasons and understand why I think that the WC may have tough times ahead of them.

1. Decline in Voice Revenue: WC make most of their money from voice calls. The revenue from voice (per user) has declined in the last few quarters and will continue to decline in the coming years. The product is mature and there are not many ways to differentiate it. There is increased pricing pressure from low-cost carriers like Metro PCS and MVNOs (Mobile Virtual Network Operators) like Tracfone. A customer can easily get an unlimited voice minutes (and SMS, and some amount of data) service plan from these low cost carriers for $50 or less with no contract. For similar rate plans, the major WC usually charge double that amount with a two year contract. Furthermore, in the coming years, the threat of VoIP will continue to increase, depending on the regulation. Skype on iPhone is one of the top 5 downloaded iPhone applications even though one can not receive Skype calls unless the Skype application is running.

2. Increase in Data Usage: WC are updating their networks to 3rd Generation (3G) which has enabled customers to get average data speeds of 300kbps to 500kbps. And, with availability and capabilities of devices like iPhone the data usage has increased tremendously-400% in last one year. The data usage will continue to increase as more and more people get smartphones like iPhone. There will be more applications, more videos, and more social networking on mobile devices. Furthermore, new form factors like netbooks, on WC networks, use huge amounts of data. There is no end to how much bandwidth users need. The problem is that the revenue increase from data usage is not proportional to increase in data usage. Data is now around 25% of ARPU (Average Revenue per User). 3 years ago, it was around 15% of ARPU.

3. Margins and CapEx: The network cost of generating $1 in data revenue is ~4 times cost of generating $1 in revenue from voice. As data usage continues to increase and voice revenue (per user) continues to decline, the WC's margins will shrink. At the same time, to cope with increased data usage, the carriers will have to continue to invest CapEx in upgrading their networks with 3.5G and 4G networks. This is a tough position to be in. To reduce CapEx requirements, WC are offloading data traffic on WiFi networks which are much cheaper to install and to maintain. You may recall that AT&T bought Wayport, a WiFi service provider, last year and is now present at Starbucks coffee shops. Furthermore, since the market is saturated, it would cost more money to acquire new customers and to keep the existing customers, affecting the margins.

4. New Opportunities: We are only at the beginning of what wireless will enable in future. There are eReaders like Kindle, location based services like loopt, and machine to machine communication like telematics, etc., which are working today. There will be many more new services. However, these new services generate little revenue for WC. The services will have new players in the middle of WC and customers who would want to make money as well. So, the revenue and the margins would be split among more parties just like search revenues (or margins) on mobile phones are split with search companies. For example, in case of iPhone, consumers have a direct billing relationship with Apple for application and digital content downloads and AT&T does not get any revenue when you download a song or an application on your iPhone.

5. Bundling: To create a competitive position and to increase customers' switching cost, WC will bundle wireless services with other services they offer. Especially, AT&T and Verizon which have wireline operations to offer video (cable) and broadband services. Bundling also enables these carriers to reduce back-end costs and offer integrated wireless-wireline services. Remember, long distance companies like MCI, Sprint, etc. They disappeared because the bell companies started to bundle local and long distance after telecom act of 1996. In response to WC bundling, the cable companies will offer bundles and reduce prices which WC will have to match hence reducing margins.

6. The New Consumer: Although we avoided a depression with the recent financial market meltdown, the economic growth and hence the wage growth will be slow in the coming years. Consumers are getting more cost conscious and saving more. These days, having a cellphone is necessary but spending a lot of money using it is not. The consumers may be unwilling to try new applications which are expensive. To keep the customers, WC will have to offer higher handset subsidies and consumers may switch to cheaper service plans reducing WC margins.

The WC may try to grow with international expansion or with consolidation in the US. They may start providing new services like cloud computing. Furthermore, if one major WC makes a big strategic error, like Sprint & Nextel integration a few years ago, then other WC may continue their growth at the expense of the erroneous WC.

No one knows the future. However, based on how things are today, it is likely that the WC will see declining margins in the coming years. And, the consumers will see more wireless innovation and better prices.

Like vs Necessary

2009-09-15T21:57:00.000-07:00

People tend to do what they like rather than what is necessary.

Latest Stats from the Wireless World

2009-09-11T11:56:00.000-07:00

I attended Mobilize 2009 yesterday. It was an interesting conference and many of the big names in the wireless industry were present.

The main trends highlighted at the conference were:

Mobile broadband and Smart Phones represent a big opportunity
Wireless carriers are updating their networks to handle the mobile data demand which was jump-started with iPhone
More Android phones will be launched in the coming months
The Mobile Application market will continue to grow
Companies are trying to figure out how to make Mobile Advertising work

Following are a few stats which were mentioned during the presentations:

There will be 1 Billion mobile broadband subscribers by 2013
100k websites are created every 24 hours
There are 5 Billion websites today
There are 1.6B Internet users today and 98% primarily access it via the PC
There are 1.3B fixed/wireline phone lines in the world
210B emails are sent every 24 hours
1B searches are done on Google every day
1B pictures are added to Facebook every month
Collectively people spend 5B minutes on Facebook every day
Currently, Facebook has 250M users and 120M visit Facebook every day
65M people who use Facebook mobile spend double the time on the Facebook PC site compared to users who do not use Facebook mobile
The biggest cost of Mobile Application Development is QA (Quality Assurance)
4,000 Mobile Applications today use users location information
In surveys, 70% of people say that they do not like location based advertisement. However, many respond to the ad when presented with it
In the US, within last one year, number of people who access the Internet from their phone has increased 104% to 22M
50% of Mobile data traffic is generated by Social Networking sites
800M people will be on online social networks by 2012
ATT has 38 data centers is planning to offer Cloud Computing
Mobile data usage has increased 400% in last one year and 50% of the increased usage is coming from video
Qualcomm's FloTV will cover 200M PoPs by YE2009.
In Japan and Korea, wireless/mobile TV penetration is 40%. The main reason is that the service is free
US will have 280M wireless subscribers by YE2009
Wireless carriers in the US will generate $160B in service revenue in 2009; of which $45B will be from data i.e. 40% YoY increase
US wireless subscribers will use 2.3 Trillion voice minutes in 2009
US wireless subscribers will send/receive 1.7 Trillion text messages

Please verify the stats before using them.

What are Complex Systems?

2009-09-06T23:47:00.000-07:00

Complex Systems consist of diverse, interdependent, connected, adapting entities. For example, financial markets have diverse banks which are connected and interdependent and they adapt to risk and to each other.

Complex Systems (CX) are:

1. Unpredictable
2. Produce large events (wars)
3. Robust (how ecosystems withstand loss of species)
4. Produce bottom-up emergent phenomenon (how a city operates)
5. Produce Novelty/Innovation

CX are not Normal i.e. they don't follow the Normal Distribution bell curve. However, they do follow the Power Law. CX exist between order and chaos.

It is important to understand CX because the world is becoming more and more complex. It is :

1. More diverse because of more people and species
2. More interdependent because of trade
3. More Connected because of transportation and the Internet
4. More Adapt because of frequent changes in technologies

There is a difference in Complex and Complicated. Complicated Systems don't adapt.

Emergence happens when the Macro is different than Micro. For example, a single water molecule is not wet. When many water molecules get together the wetness phenomenon emerges.

Phase transitions or Tipping Points occur when the behavior changes only after a critical threshold.

A good example of adaptability is Sea Squirts who in the larval state are mobile after they find a rock to live on they eat their brain because they don't need it anymore.

Adapted from lectures by Scott Page.

OPEN Brand

2009-09-06T16:28:00.000-07:00

I just finished reading OPEN brand which is a book on branding in the age of the Internet. The book offers a lot of common sense using uncommon words. OPEN is an acronym for On-demand, Personal, Engaging, and Networked. The other meaning of OPEN is that companies should open their brands to customers and make them part of the brands.

The basic idea of the book is that companies should listen to the customers and use the web and the mobile phones to engage the customers with the brand i.e. focus on Pull Marketing. The companies will have to change how they market to customers now that the customers are connected to each other and can make their voices heard on the web.

For a more detailed summary of the book see http://www.amazon.com/review/R131RGK09KXHZ3/ref=cm_cr_rdp_perm

Outliers

2009-09-06T16:01:00.000-07:00

The book Outliers by Malcom Gladwell proves with various interesting stories that people become successful by working hard and by being at the right place at the right time. One can increase ones chances of being at the right place at the right time by never stop trying. Your family, society, culture, the time and place of your birth, etc. are all part of being at the right place at the right time.

Warren Buffett and the Business of Life

2009-09-06T12:51:00.000-07:00

I just finished listening to an audio book - The Snowball: Warren Buffett and the Business of Life. It is a biography of Warren Buffet who is one of my heroes. The audio book is 37 hour long and is very addictive. I could not stop listening to the audio book until it was finished.

Buffett is an extraordinary human being. One learns a lot from his biography. However, since I usually don't listen to audio books, I don't remember most of what I heard:-) after being in awe for 37 hours. Following are a few random things I remember:

1. Buffett never acquired a company with a hostile takeover.

2. One should always have "margin of safety" when making investments. What that means is that one should not make investments where there is a risk of losing money if things don't go according to the plan.

3. It is not a good idea to be on company boards where one doesn't have any influence on the CEO.

4. Praise the individual and criticize the category. Buffett followed Dale Carnegie principles for human relations.

5. Charlie Munger played a critical role in changing how Buffett thought about investments.

6. Time is the friend of the wonderful business, the enemy of the mediocre.

7. Allies are essential.

8. Commitments are so sacred that by nature they should be rare.

9. Grandstanding rarely gets anything done.

10. One should think independently.

11. Work for people you admire and do business with people you like.

12. Protect your reputation at any cost.

13. The best way to solve a problem is to invert. For example, if you want to buy something think about why the other party is selling.

14. Society plays a big role in one's success. If Bill Gates were born in Bangladesh, he would not have been successful. Buffett calls being born in the right society which gives you opportunities to succeed as winning the ovary lottery.

15. 2008 was not the first time when the government help bail out private banks. The fed intervened to bail out LTCM in 1998.

16. Be fearful when others are greedy, be greedy when others are fearful.

17. History does not tell you the future.

18. Doing a job just because it looks good on your resume is like saving sex for old age. Do a job that you like.

19. When you are buying a stock, you are buying a piece of the business.

20. The most important factor that made Buffett successful is Focus. And, Bill Gates has the same opinion about the importance of Focus.

21. Stay within your circle of competence when making decisions.

22. Invest in business which have Sustainable Competitive Advantage or a "moat" around them.

This is in no way the complete list. Just a teaser to encourage you to read the book:-)

Senses

2009-08-24T17:44:00.000-07:00

Most humans are slaves to their senses.

Freedom and Responsibility culture

2009-08-05T12:02:00.000-07:00

I have written about Netflix before. They are an admirable organization and one of the few which understand Complex Systems. The presentation below describes the Netflix culture. The concepts which are highlighted in the presentation are well-studied in the field of Complex Systems. However, I see them applied in a big public company for the first time at Netflix. It is very exciting!

In coming years, we may see more organizations moving to "freedom and responsibility" culture.

Culture

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