Lecture on thinking about business concepts from the perspective of an engineer. I focus on clearly scoping business questions into 3 contexts and discussing methods for thinking about business concepts at each level. July 12, 2017. Odessa, Ukraine. First Draft Slides and first public presentation of this material. Hopefully more to come.

1. ENGINEERING ‘BUSINESS’ SYSTEMS
EXPLORING BUSINESS CONCEPTS WITH AN ENGINEERS PERSPECTIVE
DR. MICHAEL ZARGHAM – JULY 12, 2017

2. AUTHOR
• 12 Years experience with Business applications of mathematical engineering:
freelance data and decision scientist, systems thinking consultant
• Lead Engineer and Architect of Data Science Projects at Cadent
• Founder Data Science Team @ Cadent (Cross MediaWorks, LLC)
• PhD in Optimization/Decision Science from UPENN, ’14;
• EE/CS/Wharton interdisciplinary research
• Academic expertise in Control Theory, Game theory, Decision Science and Applied
Math: Statistics, Linear Algebra and Convex Analysis
• Robotics & Control Engineering degrees from Dartmouth ‘08 and UPENN ‘10, and an
Arts Degree Technology Adoption from Dartmouth ‘07
• Taught Convex Optimization @ UPENN ’15 (x-list: EE/CS/WHAR/STAT)
• Partner @ Techtel, systems thinking, market research & tech adoption consulting firm
• Formerly, Founder/CTO at LBRY; incentives and analytics in crypto-economies
• IBM Spark Technology Center Advisory Council

3. ABSTRACT – PERSPECTIVE AND SCOPE
RelevantPerspectives
Environment
Self
Components
You are here
“Your Outer System”
“Your Inner System”

4. THE 3 CONTEXTS
How it Works What it Does
What that means
Components Self
Environment

5. SELF: BUSINESS MODEL
• A Business:
“Value generation, distribution and monetization mechanism”
• At the end of the day a business must provide value in exchange for revenue. Common mechanisms are
products and services but rather than constrain our thinking we think about it more generally.
• It is all relative. Everyone already deals with every “problem” they have, how is your “solution” better?
• This is the context most focus on when designing a business

6. COMPONENTS: YOUR “INNER SYSTEM”
• Components aka functional design:
“how you do what you do”
• Define your business as a network of interacting components
• Components are people, process, software, data, materials
• The network is made up of relations between these things and external relationships
• This context often comes together organically through a sequence of decisions
made on an as needed basis and is rarely subjected to design principles.

7. ENVIRONMENT: YOUR “OUTER SYSTEM”
• Environment aka Ecosystem:
“how you impact the world and in turn how it impacts you
• ”Big picture” thinking:
• Knowns, unknowns, points of failure and ability to respond to (and benefit from) change
• This context gets attention when evaluating market fit but rarely does the analysis
adequately account for feedback loops and system stability

8. SELF: BUSINESS MODEL
CREATING, DISTRIBUTING AND MONETIZING VALUE

9. SELF: DEFINING VALUE
• What is ‘value’ ?
• Assumption: everyone has some response to every want or need they face but that solution
may be insufficient, inefficient or in adequate relative to a better solution.
• As far as business systems are concerned, all value is Relative Value
• Relative Value: decreases in costs or increases in benefits compared against a baseline
• Sometimes the gap is obvious, sometimes it is not. When someone says they have solved a
problem ”they didn’t know they had” it is critical to press for the root case and understand
relative value

10. SELF: TYPES OF VALUE
COSTS
• Money
• Upfront Capital and/or Operational costs
• Time
• Time required to complete the function and/or time
required to receive the rewards of that action
• Risk
• Uncertainty over any of the costs or rewards
• Effort
• Upfront and/or ongoing attention/action required
REWARDS
• Objective Utility
• i.e., how effectively a concrete function is fulfilled
• e.g., the quality of the photos taken by a camera
• Subjective Utility
• i.e., how effectively a perception based function
is fulfilled
• e.g., the status signaling associated with wearing
a designer watch

11. EXAMPLE: AMAZON PRIME VS BRICK AND MORTAR
COSTS
• Money
• About the same cost for goods
• Time
• Time required to purchase goods is reduced
• Time required to receive goods is increased
• Risk
• Slight increase in uncertainty
• Effort
• Greatly reduced effort to acquire goods
REWARDS
• Objective Utility
• Same: desired good is acquired
• Access to broader selection
• Subjective Utility
• Perceived value of greater choice
• ‘good feelings’ from the purchase occur
both at purchase and at arrival

12. SELF: CREATING VALUE
• In this general sense creating value boils down to defining a means or
mechanism of improving utility or decreasing cost
• One must take a holistic view to ensure that appropriate trade—offs are
made as it is rarely if ever possible to unilaterally improve all categories
• In general, humans are un-motivated by small scale changes in costs or utilities
but very sensitive to large ones
• A small improvement in every category is likely to go without fanfare while a huge
improvement in one category at the cost of small losses in others will garner attention

13. SELF: DISTRIBUTING VALUE
• Distributing value is about scaling
Unit of Scale
Cost
convex
linear
concave
One could give an entire talk just on Scaling across various business types but we will stop with this simple observation
Slope = Cost Per Unit of Scale

14. SELF: MONETIZING VALUE – FINDING BALANCE
Price should be
sufficiently high that
all costs to create
and distribute are
covered, and there
is significant margin
Price should be
sufficiently low that
use of your
product/service/etc
is a no-brainer
• Business Models for which no such stable pricing equilibrium is possible don’t create enough value
to be self sustaining businesses – fundamentals of the business idea need to be revisited
• A success method lately ’free-mium’ where by basic use is free but advanced features cost money

15. SELF: SUMMARY
• All in all most entrepreneurs are very attentive at the ’self’ level and are prepared
to give detailed and compelling analysis of their business models
• It’s important to simultaneously be aware of monetization and not strangled by it,
often this part is determined by the type of funding and relationship with Investors
• This section was designed to stay very general and provide some basic concepts that
set the stage for discussing the Inner and Outer Contexts that generally do not
receive the attention they are due.

16. INNER SYSTEM
PEOPLE, PROCESS, SOFTWARE, DATA AND RELATIONSHIPS

17. A BUSINESS AS AN ITERATIVE PRODUCT
• GOAL ORIENTED TEAMS ARE BEST AT THIS
• I HIGHLY RECOMMEND AGILE/SCRUM CONCEPT FOR BOTH PRODUCT AND BUSINESS DEV
• https://www.mountaingoatsoftware.com/articles
• HOWEVER BEING GOAL ORIENTED MEANS NOT PUTTING PROCESS AHEAD OF PROGRESS

18. TYPES OF COMPONENTS
• People
• Humans are great at learning to perform tasks with relatively unstructured information
• Process
• Imposes a pattern that makes information more structured, makes repeated tasks easier
• Software
• Excellent at tasks with highly structured information
• Data
• Information, structured or unstructured that is available for use
*Tech focused discussion; more broadly one must consider Infrastructure and
materials as well as supply chains but we differ these concepts for today

19. RELATIONSHIPS BETWEEN COMPONENTS
• People (use) Software
• People (follow) process
• Software (imposes) Process
• Software (logs) data
• Software (uses) data
• Data (informs) software
• People (design) software
• People (define) process

20. DESIGN THE SYSTEM – SUCCESSIVE ELABORATION
• List the critical functions and their relationships that build a functional design
• Think of designing you business like designing a product
• simon sinek: ‘start with why’
Why?
• Motivation
• Goals
What?
• Scope
• Use cases
How?
• Methodologies
• Tools
Functional Design: next level down: why, what, how

21. FUNCTIONAL DESIGN EXAMPLE:
MEDIA PLANNING/BUYING
Client
(External,
person)
Account Exec
(people)
Planning
Software
(enables/enforces
planning process)
Media, Order and
Client Historicals
(Data)
Proposed Plans
and Orders
(Data)
Media Buyer
(people)
Bidding System
(software,
external)
Buying
Software
(enables/enforces
buying process
Reporting &
Analytics
(Software)
Committed
Orders/Bids
(data)
Invoicing, Payment
and Accounting
(enables/enforces billing
process)
Event Logs
(Data)

22. WHY: MAKE BETTER DECISIONS
WHAT: DEV DATA DRIVEN DECISION ENGINES
Data Quality Decision Quality
Data-Driven Decision
Making
Data-Driven Decision Management
Decision-Driven Data Management
Data-Driven Decision
Management
Decision-Driven Data
Management

23. UI/UX
Business Logic
Model micro-
services
Event Data / 3rd party
Structured Data
Features make data
insights useful to end
users.
Data must always be
easier to use correctly
than to use incorrectly
or not use
Enforce Logical
Consistency and
ensure business
requirements are
met
Machine Learning and
other mathematical
models extract
statistically relevant
insights to inform
business logic
Relational Database
systems store and
retrieve data for use in
business logic and
micro-services
Raw logs, business inputs
from structured data and
third party data are
preserved and combined
through enrichment
processes.
HOW: BREAK IT DOWN INTO SMALLER PEICES

24. CLOSING THE LOOP WITH ‘DESIGN’ THINKING

25. OUTER SYSTEM
HOW YOU IMPACT THE EXISTING MARKET ECO-SYSTEM AND HOW IT IN TURN
IMPACTS YOU

26. UNDERSTANDING FEEDBACK SYSTEMS
• Eco-system view: Causal Loop Diagram
• Network Effects: understanding feedback
• Hype Cycles and bubbles
• Anti-Fragility

27. GEO – BASIC NETWORK EFFECT
Users Usefulness+
+
+
GEO is an alternative economic platform in
which each participant can exchange goods
and services by creating a network of trust
bonds between people.
https://geo-pay.net/

28. GEO – REINFORCING FEEDBACK DYNAMICS
Users Usefulness
Freeloaders
Vendors
Accumulated
Balances
Accumulated
Debts
+
++
+
-
+
+
+-
+ +
-
-

29. GEO – IDENTIFYING AND MEETING NEEDS
Users Usefulness
Freeloaders
Vendors
Accumulated
Balances
Accumulated
Debts
+
++
+
-
+
+
+-
+ +
-
-
Notary and
Exchange
Services
- -

30. TECHNOLOGY HYPE CYCLES

31. SPECULATION AND HYPE
actual
value
Perception
of value
(hype)
Absurdity
(gap)
Speculation
Disillusion
+ +
+
+
+
+
+
-
+
-- +

32. HYPE CYCLES

33. ANTI-FRAGILITY
• Term coined by:
Nassim Nicholas Taleb
• Taleb describes anti-
fragility as utility convex
in volatility

34. BENEFITING FROM THE UNEXPECTED
• It is not possible to know everything to come
• In general, if you know something then others know it too
• Thus anti-fragility is achieved through adaptability
• Do not act as if you know that which you do not know
• Do not fail to act because you do not know
• Gather knowledge by acting and observing without bias
• Iterate

35. CONCLUSION
RelevantPerspectives
Environment
Self
Components
Network effects, points of failure and anti-fragility
Appropriate use of technology and people;
hierarchical thinking and iterative work
Traditional Business Model:
Creating Value, Scaling and monetization

36. THANK YOU!
https://www.linkedin.com/in/mczargham/
https://www.facebook.com/michael.zargham