The terminology Poundstone uses seems roughly analogous to that employed by other businesses in portfolio planning, the BCG Growth-Share Matrix.

From the New York article:

Puzzles, anchors, stars, and plowhorses; those are a few of the terms consultants now use when assembling a menu (which is as much an advertisement as anything else). “A star is a popular, high-profit item-in other words, an item for which customers are willing to pay a good deal more than it costs to make,” Poundstone explains. “A puzzle is high-profit but unpopular; a plowhorse is the opposite, popular yet unprofitable. Consultants try to turn puzzles into stars, nudge customers away from plowhorses, and convince everyone that the prices on the menu are more reasonable than they look.”

Instead of puzzles, anchors, stars, and plowhorses charted based on popularity and profit margin, the BCG matrix uses stars, cash cows, dogs, and question marks organized by market growth rate and relative market share. So, the tools are similar in their mechanism but analyze slightly different marketing situations.

While a cash cow sounds like an expensive filet mignon, I can see why Poundstone wouldn’t want to label any restaurant dish with “dog”. These are both simple but powerful tools that can be used in strategic planning exercises to illuminate options for improving future profitability.

Another indispensible but deliciously simple strategy tool? SWOT.

Via Tyler Cowen’s Ethnic Dining Guide via Marginal Revolution via New York Magazine.

BUGbase with keyboard and display modules

No, this is about the BUG do-it-yourself gadget from BUG Labs.

From their site:

BUG is a collection of easy-to-use electronic modules that snap together to build any gadget you can imagine. Each BUGmodule represents a specific gadget function (ex: a camera, a keyboard, a video output, etc.). You decide which functions to include and BUG takes care of the rest, letting you try out different combinations quickly and easily. With BUG and the integrated programming environment/online community (BUGnet), anyone can build, program and share innovative devices and applications. We don’t define the final products – you do.

BUG debuted around CES 2008, and this year, at CES 2009, they announced five new BUGmodules. The BUGprojector sounds awesome, enabling the projection of a 480×320 screen (using DLP® Pico™ technology from Texas Instruments) anywhere. Another new module is BUG3g GSM, adding phone functionality and SIM card input. So, you can basically build your own custom phone with off-the-shelf hardware.

The BUGbase is an ARM-based computer running a Linux kernel and all the software is open-source. I know what you’re thinking… “An open-source, Linux-based phone. Are we talking about Android here?”

No, this is separate from Android, although there has been talk on the BUG boards about modding Android and running it on the BUGbase. But there is definitely some crossover in possible applications and customizability with important implications for the BUG Labs team and the future of their product.

Now that developers can buy an Android Dev Phone (or use a normal T-Mobile G1), many of the hobbyist applications that might have been created on the BUG can be built on Android instead. The G1 has many of the same features out-of-the-box that BUG provides in BUGmodules, including: touchscreen, keyboard, accelerometer, camera, Wi-Fi, Bluetooth, GPS, microphone, and speaker. Of course, the G1 doesn’t have a video projector yet, but the aforementioned features cover the most common use-cases for a handheld gadget.

The BUG product initially struck me as a great toolkit for college students studying computer and electrical engineering and computer science, or even mechanical engineering. The platform is entirely open and documented, including the electrical and mechanical CAD files. As someone who studied engineering, I can say that the BUG sounds like a more exciting project than the usual programmable rolling robots I played with in school. All those robots could do is run into walls.

With the BUG, I can build a gadget that hangs around my neck, detects when I’m walking, pulls my GPS location, and searches the internet (via Wi-Fi or 3G) for nearby ice cream shops. (This search behavior is based on the following logic: if I’m moving, I’m burning calories, so I’m probably hungry, so I definitely want some ice cream.)

But with Android and the G1, we can do the same thing (at least in theory), and the phone is smaller and cheaper than a BUGbase with all the necessary modules. Plus, if I write this application and other people like it, too, I can share it with thousands, or millions, of other Android users. The Android userbase is undoubtedly many times larger than the BUG community.

It seems that BUG is up against some serious obstacles, so what do they do to carve out their own niche?

I love ideas like this that encourage creativity, play, and learning, so I hope that the BUG is successful. Here’s a few stratey suggestions:

Evolve the BUG developer environment to a point where someone like me, a non-programmer, can handle creating simple applications. At that point, the device will be accessible to kids and can serve as a enriching learning environment. This puts BUG in the neighborhood of toys like LEGO Mindstorm. Android is focused for use by professional programmers, so BUG won’t have the competition in this market segment.

Create lower-cost components. This corresponds with the above recommendation. If there were a BUGbase with a reduced feature set and a lower cost, it could be used by children and by schools.

Focus on gadget applications not served by Android and smartphones. As a generalized and versatile platform, the BUG won’t be able to compete directly against devices designed to be phones and mobile internet browsers. So, focus on the capabilities that the Android and G1 can’t touch. This includes applications using the projector module and… well, I’m not sure what else. But I’ll keep my eyes open for cool ideas and add them when I find them.

That’s all for now. Do you have any more ideas? How does the BUG stand out against Android as a platform for gadget experimentation?

It's all a big social media circle

It all started when I decided to apply for the position of Founder’s Associate at Twitter. Rather than a standard cover letter, I submitted a strategic analysis outlining Twitter’s current competitive state and its options to win the microblogging battle and larger social communications war. The primary tools used were scenario planning and Porter’s 5 Forces.

I then presented this analysis in a session at BarCampSD (San Diego) on November 12, 2008 to an audience with great interaction and sharing of thoughts.

Fast forward to the present. I have been a bit off the grid the last couple weeks while traveling home for Thanksgiving and working on the family business. So, just yesterday I read the news that Facebook had, so far, unsuccessfully negotiated an acquisition of Twitter.

About time. Their partnership was my first recommendation in the strategy presentation.

In my mind, at least an attempt by Facebook to acquire Twitter was inevitable for these fundamental reasons:

It’s a mutually beneficial relationship

Twitter gets a business model, as tweets are displayed amongst advertisements in users’ feeds.

Facebook buys Twitter’s large, existing userbase and brand recognition rather than battling Twitter head-on with a modified status feature.

They need each other

Twitter has, by far, the largest userbase of all microblogging services. But yet its size pales in comparison to the number of people using Facebook. It’s hard to imagine another way Twitter could scale its userbase so quickly.

Facebook is missing out on all the conversations that occur outside its walls on Twitter. It would be beneficial for Facebook user frequency and volume to have Twitter conversations integrated with profiles, the Facebook platform, and the rest of the user’s social graph.

I called this scenario “Slap in the Facebook World”, describing a situation where Twitter must either partner with Facebook or watch as Facebook builds a Twitter clone and leverages its size to bully Twitter out of the ring.

Other scenarios included in the presentation:

• “Twitter in the Cloud Behind the Curtain” — Twitter as a service provider, with revenue coming from premium API access
• “Microblogging the Microsoft Way” — The microblogging platform with the largest corporate userbase wins the consumer game
• “Open Sesame” — Open standards and open source win (e.g. Laconica) and no company makes significant revenues directly from the product

If you’d like to check out the strategy presentation, I’ve embedded it below.

Disclaimer: I made this presentation quickly and for the purpose of sharing indirectly, not for delivering a speech. Therefore, I don’t advise following my example in such text-heavy slides and lack of graphics. You will put your audience to sleep!

But this post isn’t about that kind of automobile noise. This is about the noise emanating from Detroit in regards to the future of our nation’s decimated auto industry and how we — yes we, the people and our government — will be responsible for keeping the industry afloat.

Thomas Friedman opened an article in the New York Times, called “How to Fix a Flat”, on the subject with this:

Last September, I was in a hotel room watching CNBC early one morning. They were interviewing Bob Nardelli, the C.E.O. of Chrysler, and he was explaining why the auto industry, at that time, needed $25 billion in loan guarantees. It wasn’t a bailout, he said. It was a way to enable the car companies to retool for innovation. I could not help but shout back at the TV screen: “We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?” If we give you another $25 billion, will you also do accounting?

As usual, Friedman’s ideas were thought-provoking. He received 594 comments on the article before commenting was closed.

Friedman paints a picture where auto executives steered their companies away from any long-term competitiveness toward short-term fixes and Michigan’s legislators shielded the industry from the regulation that would have forced it to compete globally.

And now the industry just isn’t asking for votes in its favor it’s asking for billions in financial support. See the industry’s latest innovation below in a comic by Signe Wilkinson.

Detroit's Latest Plug-In Design

Or Nick Anderson’s comic take:

Catch Detroit

I think it is the gift of a truly talented cartoonist to create comics like these, images that make the viewer laugh out of one side of his mouth while he winces with the other. These comics are painfully entertaining.

Friedman unfortunately chose to close the essay with a tired cliche: that all the auto industries need for redemption is a year of leadership from Apple’s Steve Jobs.

While I have deep respect for Mr. Jobs and his achievements leading Apple to design some of the most popular products of this generation, the problems facing Detroit are larger than any one person can repair.

The fundamental, underlying market mechanisms that steer the behavior of the American auto industry are like, well, a buggy GPS system — they told the industry to turn left in the middle of a bridge and now the industry is through the guardrail and plunging headfirst into the abyss. (For a visual, refer again to Nick Anderson’s comic above.)

Why are the product offerings of the Big (but shrinking) Three so out of line with current consumer demands? Because the companies tuned their product lines to produce the greatest possible short-term profit, without regard to their long-term global competitiveness.

When oil was cheap and carbon even cheaper (aka free), it made economic sense to build the most expensive vehicle a customer would buy, because the pricier the vehicle, the larger the profits. And by the way, this is America, and in America, we like to get a lot for our dollar, so the bigger the vehicle, the better. It’s the same game that restaurants are playing with ever-increasing portion sizes, in a way.

Cheap oil refines into cheap fuel, and cheap fuel does not provide much financial incentive for consumers to purchase fuel-efficient vehicles.

Free carbon (dioxide) means that the emission of greenhouse gases has no cost, and this leads to a similar outcome as cheap fuel, because fuel-efficiency and greenhouse gas emissions are related (inversely).

The problem is that oil isn’t cheap (the falling prices are only temporary) and greenhouse gas emissions aren’t free. Ultimately, greenhouse gas emissions have a cost and the price is paid by the environment in the form of climate change.

So, Detroit has been shielded from economic reality in the US by a curtain of cheap oil and cheap carbon. Suddenly the curtain is pulled back and, uh-oh, Detroit is caught on stage with its pants around its ankles.

It turns out that where Detroit’s competitors live — primarily Japan, Korea, and Europe — fuel is a few times more costly and greenhouse gas emissions are regulated by the Kyoto Protocol. The competitors have been preparing for the automobile market of the future for decades, but the Big Three were thrown into reality over the course of about half a product development cycle, and what a cold shower of reality it was.

Yes, the US has Corporate Average Fuel Economy (CAFE) standards, but I won’t even bother to dive into that controversy. Let us just agree that the regulations haven’t prepared Chevy, Ford, and Chrysler for today’s sudden market reality. After all, it was CAFE that laid the red carpet for the arrival of minivans and SUVs to displace place of wagons. Wagon, as “passenger cars”, were required to have higher fuel economy than minivans and SUVs, as “light trucks”.

In the end, the US was lacking the necessary indicators of cost to influence purchasing behaviors towards sustainable automobile designs. Additionally, the stock market rewarded short-term performance, so the auto companies had no incentive to take responsibility and guarantee their own long-term competitive strength. Since the industry was blind and could not look forward to plan for its own future, we — the US people and our government — are now responsible for taking the industry by the hand and saving it from running into a wall of bankruptcy.

The government may soon step in with financial aid, it looks like we the people might all be proud new owners of auto industry stock. Of course, that stock looks less like a stork carrying a bundle of joy and more like a burning, stinking bag on the doorstep.

Just don’t step on it.

The relatively low risks to launching a new Internet business, compared to physical ventures with higher capital requirements, also leads to exciting, experimental ventures that can afford to launch in a less-than-perfected state and then polish and revise their product as users provide real-world feedback.

But these same qualities that attract attention of aspiring startups, like honey for entrepreneurial bees, also leads to the recurring bubbles and hype that seem inextricably tied to the Internet business world.

The low up-front investment requirements and accompanying cheap maintenance costs lead to ventures with uncertain, and often completely unknown, revenue prospects. But this itself is not the problem. I won’t dispute that a business with hundreds of thousands or millions of passionate users has a realistic possibility of eventually discovering a method to monetize those customers — even if that business model is not apparent up-front.

The problem is that a profit-producing business model is not the only wrench missing from these companies’ strategic toolboxes. On the contrary, some of these ventures are so far from defensible profitability, they’re bringing a standard wrench to a metric party.

Let’s look at Slide, the social network widget company, as an example. In its fourth round of financing, they raised $50 million, valuing the company at around $550 million. They just opened an office in New York City from which to sell more advertising. If you need more background on Slide, read here.

As I said earlier, the problem for Slide isn’t necessarily that they haven’t cracked the humongous money nut that is their 170 million unique monthly viewers. Hearsay evidence says that their CPMs aren’t anything spectacular. But they will probably figure this out eventually.

The problem for Slide isn’t that they don’t already make tons of cash off their sky-high viewership numbers.

The problem for Slide is that they aren’t going to last long enough to solve the business model puzzle.

Let’s grab a few of Michael Porter’s 5 Forces out of the strategic toolbox and start wrenching on the broken machine that is Slide — let’s say, barriers to entry, threat of substitutes, and degree of rivalry, for starters.

Barriers to Entry

The barrier to entry in Slide’s industry, producing widgets for social networks, is like a speed bump in front of a monster truck. The driver might feel it, if he’s sitting just right.

Brand identity:

Almost nonexistent. No user cares who wrote the tool that allows them to chest bump their friends. They just care that they can now do it online and no longer have to risk pecular injury or social embarrassment should their super chest bump end in a super pile of flailing arms and legs.

Capital requirements:

Lunch money. It doesn’t cost anything to put your application on a social network and the network does the hosting for you. You might even have change left over for a rectangular piece of lunchroom pizza.

Threat of substitutes

Switching costs:

Again, almost nonexistent. What keeps me from uninstalling your application from my profile and never using it again? The years of experience I’ve accumulated and deep integration of my workflow with your software? Oh wait, that’s Photoshop. Nope, I can learn a new application in the time it takes to super fart on a friend.

Degree of rivalry

Product differences:

Does Slide possess a unique ability in the industry to design a widget user interface that revolutionizes the marketplace, a la the iPod in a sea of mediocre MP3 players? Nope. Their viewer advantage is due to moving first, network effects, and questionable practices in recruiting users’ friends to add an application. But now that Facebook, for example, has cracked down on runaway app invites and is redesigning the profile page layout, Slide’s previous advantages have melted away like a chocolate bar errantly placed near my laptop’s cooling fan. (I swear it’s about to burn up.)

Now Slide needs to rely on actual product development talent to provide useful, long-term solutions for their customers — not flash-in-the-pan fads, which will never scale into a large, predictable revenue stream. Investing in venture capital is already like gambling. Slide’s investors have either steel balls or empty skulls to want to scale up the risks even greater and bet big on a company, like Slide, whose fortunes ride on something as unpredictable and finicky as consumers’ flavor-of-the-week poking preference.

Not to mention that the social networks themselves can quickly duplicate Slide’s applications on a whim and erase Slide’s business model. The next day, what were the basis of an entire company are now one of a hundred features of someone else’s product.

Sliding into home (aka The Conclusion)

If you’ve made it this far, it’s should be sufficiently clear that the strategic flat tire that will drag many Web 2.0 companies off the information super highway and into the ditch of dot-com blowouts isn’t simply their lack of a business model.

The fact that companies like Slide can build huge viewership numbers isn’t a freestanding sign of success. McDonald’s gives away millions of free toys every year. But with every one, it’s selling a burger-like hockey puck or nuggets that taste like chicken. And making money off of them, too.

Right now, Slide’s products are the equivalent of Happy Meal toys I didn’t ask for. If I show up at Facebook and find a Kung Fu Panda figurine in my Inbox, I’ll probably have fun with it for a while. I might even tell my friends to get one so we can start a big plastic-throwing fight.

But just because you’re good at getting millions of people to play with your free toys for a while doesn’t mean you’re the next Google.

Slide, if you’re listening, remember this:

You need to do something unique and useful.

Uniqueness is different than novelty. Novelty wears off quickly because it’s replaced quickly. Uniqueness comes from solving a problem in a way no one else can.

Usefulness is different than full of users. Making decisions expressly to grow your viewership, when you aren’t making much money off viewers, is aiming at the wrong target. Aim to be useful, first, to just a small number of people, and your audience will grow as everyone realizes your product is indispensable.

Be unique and useful first, and eventually you will find your proverbial chicken-flavored nugget of gold.