Find The Bottleneck, And Own It
Professor Jeffrey Sampler Offers a Crash Course in
the Evolution of Business Models
Dr. Jeff’s Prescription For Things You Have To Do Right Or
You Will Die
1. Do a sensitivity analysis and take it
seriously. Is your business model
viable if you lose 20% of your customers?
2. Get accurate customer profitability data.
Check out how the credit card companies do it if you want to study the masters.
3. Have accurate cost data. In many, many
sectors the Internet is about slicing margins. Remember those companies that
thought they could build a business on selling below cost?
4. Avoid cross-subsidy business models which
depend upon taking a loss in one area to support another. Take a cue from Proctor & Gamble, the
king of branding, which recently realized they had to eliminate over 4000 SKUs.
5. Own the bottlenecks. That’s where the shifts
are that create the greatest opportunities.
It’s all about the value proposition.
6. Adopt continuous customer interaction. In the auto business, where customers
usually buy only once every several years, General Motors says it expects to
make over one third of revenues from services such as its On Star onboard
7. Know and use the right channels for the right
product/service/customer mix. For
example, men make up 15% of Victoria’s Secret in-store sales, but 60% of sales
online. Why? It’s an uncomfortable product for them to purchase in
public. Says Sampler, with the
exception of pure information businesses, very few companies will be able to
survive on the Internet alone.
Get incredible IT infrastructure. eBay
has had three major system outages, each causing a drop in their stock price of
33%, 16% and 25%, respectively. How'd you like to be the person explaining that
to the shareholders?
(Bethesda, MD --
October 18, 2000) It’s a typical
immersed in a field and one tends to see everything through its prism. Among netpreneurs, that can lead to the mistaken impression that while many
things are different about doing business in the New Economy, not everything is
different. Nowhere is that assumption
more dangerous than when applied to business models.
At this morning’s Coffee & DoughNets meeting, Jeffrey
Sampler, Associate Professor of Information Management and Strategy at the
London Business School, put the predictions
and press releases into historical context, offering a more rational,
researched and relevant view for assessing the viability of business
models. For New Economy entrepreneurs,
to whom buzz words like
“leverage” and “scalability” have become standard dinner table conversation,
Sampler offered perspective: “All of this is very simple: I get more out than I
put in. An economist calls this
fundamental economic growth....It is not an Internet driven phenomenon; it is a
technology driven phenomenon. It is
what technology has done throughout history, and it's what it continues to do,
and yet we seem to have stumbled upon this and think it's some great insight.”
not the stereotypical university professor. For one thing, he’s funny, and for
another he’s practical. His
presentation left the ivory tower for the trenches with examples from his work
as a well-known consultant on eCommerce strategy to global companies such as PwC-Europe, Nokia and Pearson. And by
synopsizing 150 years of competition, he gave the audience a framework for
realistic planning and analysis. When
it comes to finding true opportunity, rather than flash-in-the-pan notoriety,
the key word is “bottlenecks.”
industry,” said Sampler, “the value chain is not one dimensional or two
dimensional, it's always three dimensional, and at some point there's a
bottleneck, then it fans back out. You
want to own that bottleneck.”
grocery business, for example, where the bottleneck used to be shelf
space. Where technology, or innovation,
for that matter, can shift the point of the bottleneck, people will make money. In the recording industry, the bottleneck
used to be shelf space as well, but that was pre-Napster, and that’s the other
key. Bottlenecks can come at different
points for different industries, and they shift, as we’ve seen through history.
been three great technological waves, and each has mainly affected a different
stage of the value chain: producers, intermediaries or customers.. The first wave, the Industrial Revolution,
shifted bottlenecks at the point of production. During the wave of the 1960’s-80’s, advancements in computer
technology altered the bottlenecks of distribution. Today, the Internet is radically transforming the bottlenecks of
information and decision-making.
according to Sampler, what’s most unique about the Internet is that it’s the
only technological revolution that has effected the consumer interface
first. The others, mainly because of
price , played out first in government, industry or defense, so, “We have unprecedented
growth rates,” observed Sampler, “and we have an unprecedented source of
innovation and models.” When you add
wireless connectivity, mCommerce, set top boxes and more, it becomes a
technology revolution that goes far beyond computers or the Internet. For example, game units may turn out to
become the preferred connectivity platform in Europe where PCs have nowhere
near the market penetration they do in the US.
Could that be why Sony recently acquired a bank, in order to provide
financial services to parents using the PlayStations after the kids have gone
banking may be the poster child for those key bottleneck areas. In fact, said Sampler, “Let me just
summarize it this way¾banks are dead.” The services provided by physical banks
simply won’t have much value over time, which is why the strategies of
financial corporations are in such a state of flux. Sampler suggested that it’s also what Alan Greenspan meant when
he said that the Federal Reserve’s discount rate is no longer an effective
means for controlling the money supply.
Why? Today, 80% of all financial
dollar movement occurs outside the commercial banking sector, and banks are not
a product leader in any of the categories they offer. “If 80% of your funds float outside the channel,” Sampler asked,
“what does that mean? That's the market
telling you that you are irrelevant.” And it means that the Fed’s discount rate only affects one out of five
dollars. “If the market doesn't need
you, if government regulators don't need you, that's the kiss of death. It's just a matter of time.”
technologies are causing similar channel disruption in almost every industry,
because that’s where so many of the bottlenecks are¾and
where the real opportunities are for
netpreneurs. “Decision-making,” said
Sampler, “is occurring outside the channel.”
That means redefining how we calculate brand value, and it causes
problems for traditional businesses like mega-retailers and auto dealers. Just two years ago one-third of Americans
knew what price they would pay for a car before they set foot in the dealer
showroom. Last year, it was 67%. A decade ago, 80% of auto dealer profits
came from new car sales; today it's less than 20%. Profitability has shifted to used cars and service, and the main
reason is that the decision is being made outside of the channel. “Car dealers,” said Sampler, “have become a
secured parking lot. The dealer
showroom is not a decision making point, it's a car collection point, and if
you have a secured parking lot, you basically get a fee similar to a parking
garage for your services.”
Morino Institute Chairman Mario Morino who wrapped up the session, we’ve
already seen similar waves of business model and bottleneck shifts on a micro
scale within the Internet industry. In
the early days of it’s commercial introduction, the focus was on creating Web
sites. Around 1995, it moved to channel disruption opportunities, then supply
chain enhancement, and later customer relationship management. Today, he said, the biggest challenge may be
how to handle multiple channels.
netpreneurs are learning in their search for VC money, you’ve got to pay much
more rigorous and realistic attention to the fundamentals of your business
model. In the edited
transcript to this session, you can find more
advice and examples from both Sampler and Morino.
comes to searching for the opportunities in the New Economy, and staying on top
once you’ve found them, an old saw about the Internet may have more meaning
today than ever before¾change is fast and constant. According to Sampler, “The Internet is not
going to be overnight death, destruction and chaos. In most cases it will be much more evil than that. Any manager worth his or her salt can manage
a way out of a crisis because it's all or nothing¾focus the entire company and solve
the problem. For most companies,
however, the Internet is the slow erosion and the death of a business
model.” For Internet entrepreneurs, therefore,
Morino urged, “Clearly articulate your business model and show a compelling
understanding of how that model responds to change. That will go a long way in helping investors and others have
great confidence in your approach.”
Copyright © 2000 Morino Institute. All rights reserved.