Segmentation and execution matter

My favorite meeting place here in Silicon Valley is any place named “Panera”: the food is fresh (if overpriced), the atmosphere is bright and cheerful, and — most importantly — the Wi-Fi is free.

Even now that Wi-Fi is free at Starbucks, I prefer Panera because they are less cramped and they have things that I actually want to buy to rent the table. There are three I use regularly near my home, in addition to several in San Diego and one in Santa Monica. I was at one last night and will be at a different one tomorrow morning.

Ron Shaich, founder of Panera, was interviewed this morning in the WSJ about how the created Panera and its predecessor, Au Bon Pain. He bootstrapped his first bakery chain, then merged it with a struggling supplier called Au Bon Pain. The merged company IPO'd in 1991.

To have something that was more suitable for suburbia he then acquired a small sandwich chain and renamed it Panera. To pay for the growth, he sold off Au Bon Pain.
So with his Harvard MBA, Shaich turned around and grew two existing concepts through superior execution. Although the competencies were similar, he found it essential to keep the two organizations (and concepts) distinct:

Q. After Au Bon Pain went public in 1991, you decided the company needed a new focus. How come?

A. The very thing that had made Au Bon Pain a success was limiting it. We could go to Rockefeller Center or World Trade Center and offer real food to people that could be served quickly, like turkey with smoked brie. It did extraordinarily well in high-density markets, but it wasn't mass-market.
…
Q. Why did customers like Panera?

A. We changed the environment [of fast dining] away from formica chairs bolted to the floor. And we changed the bread itself. We make fresh dough, every night. We have thousands of bakers. Those details really matter.

Chronic (aka serial) entrepreneurs seem to bore of old challenges and be always chasing the next big thing. But in this case, Shaich shows the importance of keeping the two businesses distinct, and not trying to achieve synergy (or brand extension) by blurring the lines.

Also, in Silicon Valley we tend to think of entrepreneurial advantage in terms of superior technology, IP or other formal entry barriers. In this case, both the Au Bon Pain and Panera concepts were something anyone could have had — the vision is much more incremental than Ray Kroc or Harland Sanders.

The success of Panera Bread Company (PNRA) was a function of willingness to bet on the vision, the ability to execute it consistently — and the ability to generate (or acquire) the capital necessary for expansion. As technology-based industries become more mature and more crowded, these previously underestimated success factors are increasingly important.

Execution matters

The first event of the SVCE fall speaker series was entitled “Getting off the Ground: Ideas and Execution.” The panel consisted of an entrepreneur, two early-stage C-level execs and an intrapraneur:

• Steve Erickson, VP and GM, Audio Products, Creative Labs
• Matt Ready, VP, Sandforce (SJSU ’81)
• Paul McGrath, CEO, Ridespring
• Steve Olson (SJSU ’83), CFO, Ridespring

The one common thread was that the idea was (at best) a small contributor to the ultimate success of the startup venture. I don’t know that this is heresy around these part — in the land of big idea tech startups — but certainty it is contrary to the popular mythology. Given the excess entry (often funded by VCs) and inevitable shakeouts in local tech industries, the opportunity for having a unique idea seem pretty rare.

After taking sales positions at 12 different companies since he graduated from SJSU nearly 30 years ago, Ready said that he evaluated a career opportunity the same way that local VCs do, by looking at the market, the technology and the team

In particular, he looked at the new firm’s market, technology, team. He advised entrepreneurs: “if you come up with a new idea, you have to vett it against all three of these vectors.” The biggest problem that he saw was the first one, specifically the Total Available Market. If the company was going after a large enough market, it didn’t matter how good a job it did.

Not surprisingly for a finance exec, Olson was even more blunt in favoring operational excellence: “it’s less about the idea than the execution” because success is “90% execution and 10% a great idea.”

His advice to entrepreneurs was twofold. First, the entrepreneur has to be tenacious, finding creative ways to overcome the inevitable obstacles and surprises. Secondly, (s)he has to have a startup team that share that philosophy — one that is flexible and willing to roll up their sleeves to get things done.

The latter point reminds me of my longstanding observation that beyond entrepreneurs and non-entrepreneurs, many employees seem better suited for startups. Perhaps it’s because they thrive on chaos, perhaps it’s because they prefer being generalists — or maybe they just prefer an environment that provides the freedom to be creative.

As a board member of various startups, Erickson also agreed execution is what separated the winners from the losers. Without directly criticizing his employer, he noted that one of its employees created a hard disk-based MP3 player two years before the iPod . We all know who won, although getting their first brought Creative a $100 million royalty payment from the big A.

Even the one CEO offered only qualified support for the importance of the big idea. In particular, McGrath has given up on the idea of hoarding his ideas and keeping them secret for fear someone will steal them Instead, he encouraged entrepreneurs to “be brutal with your own ideas” and share them widely, encouraging others to identify any flaws.

He was blunt in encouraging entrepreneurs to get honest criticism sooner rather than later:

It’s painful if you find out your idea sucks, but it’s a lot more painful if you sink a lot of money into it.

Prosaic tech startups

Commoditization — or at least the business strategies of companies in mature industries — has become the norm for many tech companies. Wednesday morning, the Merc quoted Yahoo CEO Carol Bartz as accepting Yahoo’s shift away from innovation:

On the valley's perception that Yahoo is no longer a cutting-edge engineering company:
"We did lose that. . . . The comparison we get a lot, for instance, is Google. They've got a $4 billion engineering budget, and we've got a $1 billion engineering budget. We're not going to play with phones and broadband; we've got to play in our own space."

This is something that is increasingly central as I teach technology strategy to Silicon Valley engineers. Last semester, Exhibit A was the transformation of HP from innovation leader to the Fiorina-Hurd penny pinching era.

With my MBA students tonight, it was a much smaller story, that of JibJab the online greeting card company.

Two years ago, JibJab parlayed its clever political satire and ability to milk PR on the Tonight Show to create a viral hit during the Xmas 2007 season.

Since then, I’ve used JibJab with students to illustrate business models and the freemium idea. It’s a simple company to understand, unlike enterprise software, B2C/B2B social networking plays, and other more complex stories.

Today, JibJab has acquired many traits of a company in a mature industry, starting with the fad nature of its original business. The bouncing heads were novel then but now are old hat. (It also once claimed a pending patent would protect it from rivals, but now has non-exclusive rights to a third party patent.)

The company faces the challenges of any other entertainment studio of producing compelling original content on an ongoing basis. And if it’s not differentiated, its goal may be to create loyalty to the brand and the service to keep the customers it’s already won.

None of these are bad things. But it’s yet another example that success for many tech companies is less about innovation, and more about sales/marketing (ads, PR, distribution) as well as the ongoing challenge of execution.