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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 computer system.

 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.

8.  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 challenge, become 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.”

Sampler is 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.”

 “In any 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.”

Take the 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.

There have 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.

In fact, 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 to bed?

Today, 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.”

The new 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.”

According to 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.

As most 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.

When it 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.

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