Message from Jeremy: To all Tech IT Easy readers, who could obviously not necessarily remember the initial announcement, I have invited Fidji Simo to write about web strategies and provide you with insights on how to manage and develop small & medium businesses. Fidji’s mission statement is that there’s no mission statement: what matters most is to start nice conversations and have fun.

There are not so many book reviews on this blog, but as we are making changes, it might be interesting when great books generate great discussions.

I have just finished “Payback” (James P. Andrew, Harold L. Sirkin), and even if there’s nothing revolutionary, it gives a clear vision of the three different innovation models: integration, orchestration and licensing.

What is really fascinating is that there is no winning model; not even for a specific industry; it really depends on the company and on the type of product. The choice must be conditioned by the different components of the cash curve (prelaunch investment, time to market, time to volume, support costs) and the required risk exposure level.

Integration (e.g. the company manages all the innovation process internally) seems to be the best model when:

• control is necessary,

• the company has world class capabilities,

• the risks are manageable,

• knowledge assets must be protected.

This model was until recently the most chosen, but the Polaroïd example shows that it also carries some risks: although this model had always worked perfectly to the company, it has caused major delays when entering the digital market which has led to bankruptcy.

Ochestration (e.g. the company collaborates with others to innovate, arbitraging between what to keep in house and what to delegate) should be considered when:

• a capability is missing,

• entering unfamiliar territory,

• you don’t want to invest in building capabilities,

• you trust others,

• you want to share risks.

One great example of orchestration (sure that Jeremy will agree ) is the creation of the Tablet PC by Microsoft (even if Microsoft is traditionally a licensor): to launch into pen-based computing, Microsoft needed to also create Tablet PC hardware as no such platform existed. But without the key resources and experience to do that, Microsoft preferred to stick to what it knew well (software) and partner with hardware companies (IBM, HP, Toshiba, Acer…) to help them create hardware and adapted the software to their needs.

Licensing (e.g. the company is the primary owner of the spark of innovation, but has limited involvement in the realization) is an under-used model which is becoming more and more popular to generate payback. It is particularly relevant when:

• the company doesn’t have the possibility to commercialize innovation,

• the innovation can create critical mass or lead to the creation of a standard,

• competition can be transformed into a royalty source.

This last point is very well illustrated by P&G strategy. I know it is not tech-related but this really clever strategy can easily be imitated by tech companies: CEO claims that his goal is to license his innovations to his competitors for one dollar less, and one day sooner than they can do it themselves. Of course it totally nips into the bud any willingness of competitors to invest in risky innovation.

A little quiz to finish: what is the innovation model of:

- iPod?

- iTunes?

- TiVo?

- AIBO from Sony?

- Dolby?

- Intel Microprocessors?

Free beer for those who find all the answers…

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The difference between these startups and any Web 2.0 parody of brands is that a vast majority of these software startup actually generate cash. On the WWW, eCommerce companies put aside, the bulk of services generate zero revenues. In the so-called Web 2.0 world, only market leaders like Meetic, LinkedIn, Facebook and MySpace are profitable – which is not the case with software publishers in general, software being the one industry amongst its peers with the highest row margins.

A few stats about these startups:

- all segments of the software industry represented (digital entertainment, enterprise software, mobility, robotics, SaaS and…Web 2.0)

- an average growth rate of 300%, some of these startups even topping 1000% figures (Miyowa, Excentive, etc.)

- 2 failures out of 50+ companies (4% mortality ratio: extremely low for early stage companies)

- about half of these software ventures have raised series A for an average financing of 3m euros (4m USD) with top-tier venture capital shops

I’m keeping internationalization figures for myself – but I’m telling you, it’s very impressive. More info about the Microsoft IDEAS program aimed at enhancing the expansion of high potential software startups right here.

Before I wrap this post up, which French software startups are to join IDEAS next? We’re opened to all recommendations and I’ll be glad to answer any question regarding this program.

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