LegalZoom has built a $200+ million business catering to the needs of customers with a legal need who don’t want to hire a lawyer. The company started out selling forms and helping preparing them. If you needed to file an LLC with your state and did not know how to do it yourself, you could pay LegalZoom to help. The company carved out a niche doing law-related work, mostly forms-based, that did not require a lawyer to complete. This allowed the company to operate outside the state-by-state licensure of attorneys.
This model proved very disruptive and successful carving out a niche of underserved customers at the low end of the legal market. By turning non-consumers of legal services into buyers, LegalZoom creates a profitable and growing niche similar to what the Vistaprint business model did in the printing industry.
As the company expanded, so did the services offered. The most logical areas of expansion were ones like trademarks and copyrights which required a lawyer but were national in scope vs. local. This allowed LegalZoom to have a handful of attorneys plus an army of assistants doing lightweight legal work.
Now the company is at a bit of a crossroads. They are the leader in quasi-legal work at the low end of the market. Directly above LegalZoom in the food chain is the army of lawyers selling services by the hour. This market is over 1000 times bigger at $250 Billion a year. With over one million active attorneys in the U.S., all with friends, relatives, clients, and personal connections, an Internet-based impersonal model may work against LegalZoom attacking this market.
So how can LegalZoom penetrate local markets and expand their offerings? One option would be to open Legal Zoom branded retail locations with several attorneys co-located in the same office. There are several business model options:
LegalZoom buys or rents a retail location and co-locates ten local non-competitive attorneys in the same office. Any services that fall outside LegalZoom’s offerings could be immediately referred to the on-premises attorneys. Of course, the attorneys would pay LegalZoom above market rates for the space as LegalZoom could not legally charge for referrals given. LegalZoom could also co-op advertising with the attorneys as a profit center. This option leverages the powerful LegalZoom brand into the much larger local legal markets.
Legal Zoom buys or begins competing with LegalShield (formerly Prepaid Legal). LegalShield is a larger entity than LegalZoom. According to the company website,
Now with over 4 million users, LegalShield not only provides legal services in 49 states and 4 Canadian Provinces; but also it provides confidence and peace of mind for families everywhere. For one low monthly fee our members gain access to quality law firms without having to worry about high hourly costs. Because our attorneys are all paid in advance, they provide the same level of service for trivial or traumatic legal situations.
LegalShield has referral relationships with attorney groups in all fifty states, so it has already accessed some of the local attorney business that LegalZoom desires.
LegalZoom adopts a Franfiliate© Business Model. A Franfiliate model combines a traditional affiliate model with the local owner-operator aspect of a franchise. If LegalZoom were to adopt this model, they could sell a franchise to sell forms and other non-law products/services to lawyers. The lawyer franchisee would run the LegalZoom store selling some of the same product and services found on the web. That’s the affiliate portion. The benefit to the lawyer is the traffic generated by the LegalZoom name, the profits generated from the operation of the storefront (probably minimal), and the overflow business from LegalZoom customers who need more than the traditional LegalZoom offerings. LegalZoom wins because there is a large segment of the population that does not want to do anything legal over the Internet or phone. They just feel more comfortable dealing with a person face to face. The local storefronts solve this problem for LegalZoom and open up a new segment of the market, potentially doubling or tripling sales.
LegalZoom has built a successful business as a disruptive force in the legal industry. It’s time for them to move up-market into the massive state-licensed legal services arena.
What does a company do when they want to grow their distribution network but a conventional business model has limitations? They combine a franchise model with a distributor model and create a Franstributor ™ © business model.
The traditional distribution model allows a product’s creator to license exclusive or non-exclusive distribution of products. This model has worked well for thousands of products such as: Coca-Cola, Diehard and Exide batteries, Kohler bathroom supplies, Krocs sandals, Tumi bags, Allstate Insurance, Lennox (both the china and air conditioning) Fannie May Candies, and many more.
However, in some situations, the product creator wants additional control over the day to day operations of the distributor or simply a better way to increase profitability. For instance, a distributor can sell your product but may also stock directly competing products. They may also stock indirectly competing products and try to push their customers to these products because their margins are higher. The product creator also has no control over the effort level of the distributor to attempt to sell their product. A franchise solves these issues.
Many prominent companies have used the Franstributor business model:
- Most major automotive dealers are franchises, not distributors.
- Snap-On Tools sells their tools to the franchisee who loads them on a truck, sells them, and provides customer service.
- General Nutrition Centers (#28 in the Franchise 500) fills the franchisee’s store with mostly their own branded product.
- UPS Store (#37 in the Franchise 500) was formerly known as Mail Boxes Etc. but extending the footprint for the distribution of UPS shipping services was so critical that UPS bought the franchise and renamed it.
- Wild Birds Unlimited (#125 in the Franchise 500) helps franchisees create unique bird-lover stores. Since these products are so unusual, franchisees must purchase many of their products from the franchisor.
- Hallmark card stores sell knick-knacks not bought from Hallmark corporate, but half of each store is filled with Hallmark cards bought from the franchisor.
- Yankee Candle stores work on a similar model to Hallmark.
- Guard-a-Kid (#194 in the Franchise 500) created several child protection products, many of them involving advanced technology beyond the reach of a franchisee. Therefore, the franchisee is charged with selling the products and educating the customer on their use.
- Dippin Dots ice cream uses a patented flash freezing technology to create the tiny balls of ice cream so it would be impossible for a local franchisee to make the product. Franchisees purchase all the ice cream for the stores from the franchisor. Compare this to a McDonald’s or Wendy’s who bread, beef, and produce from approved local vendors instead of the franchisor.
- Miracle Ear (#19 in the Franchise 500) franchises cannot manufacture the complex hearing aids. Local franchisees test and measure clients and send orders to the franchisor.
- Sandler Sales franchisees deliver training locally, but the bulk of the content has been created by the franchisor.
- Scott’s Lawn Care franchisees use Scott’s lawn products to maintain customer’s lawns.
I have saved the most ingenious use of the Franstributor model for last – Midas International. The Midas model has deteriorated a bit since the glory days when they were known as Midas Muffler. From the early 1980s through the 1990s, the muffler business was exceptionally profitable. A well-performing Midas Muffler Shop could net in excess of $500,000, and top stores netted over $1MM (in 1980 dollars too).
Knowing it was their business model that made franchisees successful, Midas corporate found some ingenious methods to profit from each franchise location. Here’s some of the ways Midas leveraged the Franstributor model:
- All lifetime warranty mufflers had to be purchased from a Midas sister company for above market price (10% – 20% more than a comparable Monroe muffler).
- All lifetime brake pads had to be purchased from a Midas sister company for above market price.
- Each dealer could purchase non-muffler exhaust parts and non-Midas brake parts from local vendors but a strict limit was placed on how much the store could spend each month. This forced the franchisee to spend the bulk of their money on expensive Midas parts.
- Most dealers were not allowed to purchase their building. Midas selected their location and built a building for them. Midas then rented the location for the high end of fair market value. However, each year the rent increased so after five years, the rent paid was well above market rates.
This model was exceptionally profitable for Midas and provides valuable lessons how you might leverage a powerful business model of your own with the Franstributor business model.
Deutsche Telekom’s T-Mobile USA made a bold move to remove smartphone subsidies. Carriers have long complained that handset subsidies benefit manufactures such as Apple and Samsung to the detriment of carriers. For instance, an iPhone 5 sells for $199 with the remainder of the $650 cost buried in the required two-year service agreement.
With the new T-Mobile plan, the Samsung Galaxy Note II will cost about $680 upfront or $20/month financed. Alternatively, the customer can opt for a $200 down-payment and a two-year contract. Of course, the monthly contract amount drops radically as the cost of the phone subsidy is removed. Forget all the number mumbo-jumbo; this bold move by T-Mobile raises several interesting questions:
1. How committed are Americans to cheap psychological pricing. A comparison of plans shows that financing the phone combined with T-Mobile’s lower monthly service rates is the cheapest price for an iPhone 5. However, will American’s balk at the hefty upfront charge for the phone, feeling it’s “too expensive.” Many a car has been sold for $199/month rather than $18,589. I dare you to ask a car dealer how much a car “costs.” They will tell you a monthly payment amount, not purchase price. They understand how American’s think. We think “how much per month,” not “what’s the total cost?” There may be significant pushback once American’s see just how much that new Galaxy smartphone costs.
2. Are Apple and Samsung the real losers? It can be argued that T-Mobile is pulling back the curtain and exposing the wizard (along with his $800 smartphone that everyone thought was only $199). Does pricing transparency cut into iPhone and Galaxy sales? If so, it could come in two forms: 1) the customer now sees that the phone service is $30 now matter what the phone and opts for a cheap flip phone, or 2) the customer decides that the Galaxy S III or the iPhone 4S really isn’t obsolete after all and decreases the frequency of new phone purchases. Imagine how many less iPhones would be sold if the average time to replace a phone went from 2.5 years to 3.5 years…ouch!
3. Is this a break for Blackberry and Nokia? These ugly duckling manufacturers have an opportunity to step into the newly created iPhone-lite market if they can provide a half-priced version of the Galaxy or iPhone that is “good enough.”
4. Will other carriers follow suit? It’s an oligopoly after all. I’m not suggesting collusion, but the carriers would love to shift the billions in cell phone subsides away from Apple/Samsung. Look for Verizon and AT&T to move towards this plan if there is any sign of traction for unsubsidized plans. More likely, the larger carriers might try a Solomon’s Solution keeping the existing subsidized plans while subtlety guiding customers towards non-subsidized plans over a couple year period.
5. If consumers slow down smartphone purchases, what does this mean for technological advancement? The billions of dollars in profits pouring into cell phone carriers coffers has upped the stakes for all players and created a rash of innovation. Even if unsubsidized plans become standard at all carries, smartphones aren’t going away. However, what happens to innovation when a large portion of the profitability erodes. This begs another question – is society better off with manufacturers reaping these larger profits or the cell carriers? Carriers will argue the profits can be plowed into a better network infrastructure. Manufacturers can argue these profits drive faster innovation in chips, applications, and other device related functions. This may be a tough argument for Apple as they sit on over $100 Billion in cash that they can’t figure out how to use.
What do you think? Will T-Mobile’s plan work?
In business, change is not usually your friend. . You work hard to create and work your plan, and then competitive, economic, and sociological changes degrade it. .
Clever entrepreneurs are capitalizing on the politically charged changes to the gun business. As eBay, Google Shopping, and other large marketplaces are prohibiting gun listings, savvy entrepreneurs are creating niche marketplaces like freegunshow.com to connect gun buyers with sellers.
Let’s set personal and political positions aside and confine the conversation to the business aspects of gun sales. . Annual gun sales in the U.S. total around $3.5 billion, a fraction of total sales for large e-tailers like eBay and Google. To sidestep potential damage to their primary business lines, eBay and Google have walked away from a profitable niche.
Orphaned business units or customers
One of the tenets of a strong business model is outstanding margins. Easy to say, but hard to do. Serving unserved or under-served markets is a terrific way to command excellent margins.
These savvy guntrepreneurs saw a soon-to-be underserved market for gun buyers and pounced.
Pitfalls such as governmental action, regulation, or even Mother Nature can harm an otherwise solid business model. These guntrepreneurs certainly face a few pitfalls with their opportunistic business model.
First, if the political climate cools down, Google and eBay may reenter the market and will probably cut into the customer base.
Second, the market could fragment from a few large sites like eBay to dozens of gun sites, not allowing any one site to gain enough critical mass to effectively serve customers.
Third, were gun sales on eBay and Google peripheral to many other purchases/sales or were they primary? The answer is certainly a little of both. Some gun enthusiasts will gladly move to other sites to purchase their wares. However, others may move out of the gun market altogether without the convenience and credibility of eBay.
Fourth, customers could shift to offline purchases at sporting goods stores or local gun shops.
Fifth, the political climate that caused eBay and Google to cease selling guns could adversely affect the new sites. Political pressure and uncertainty was strong enough for large operators to choose to exit the business. Guns were one of many items sold on these sites. A site devoted solely to gun sales might create even more attacks from anti-gun groups than Google or eBay endured.
Lastly, the government could regulate away the business by disallowing gun sales on the web or prohibiting sales altogether.
Maybe a Kayak Business Model Version 2
To play on Kayak’s “Search one and done” slogan, this opportunistic business model is probably good for a profitable quick hit and then it may be over. If the political climate returns to normal, the big boys become competitors again. If the government steps in, the lights are instantly shut off.
Today, the business model of these niche sites looks good. A website is inexpensive to create and to shut down. However, this business model still capitalizes on a trend that is probably temporary.
Do you think this business model will work and have staying power?
If you frequent the grocery store, you have probably noticed the variety of products labeled, “Contains Real Girl Scout Cookies.” Everything from ice cream to Nestle Crunch Bars is now co-branded with Girl Scout cookies. This mass distribution and leverage of the Girl Scout Cookie brand is undoubtedly an economic boon for the Girl Scouts of America’s finances.
However, what’s good for the Girl Scouts of America Inc. is bad for Girl Scouts. As the father of two girls who benefited tremendously from selling Girl Scout cookies, I am not particularly excited about this change. I saw both my children muster up the courage to walk up to a stranger’s door and ask for a sale. I watched them both gain confidence and poise from this process. I watched them set goals and work to achieve them. I saw their troop bond and pull towards a common goal. I saw the troop use the monies earned from selling cookies for a special troop event. With Girl Scout cookie flavors easily available from grocery stores instead of Girl Scouts, I worry that this time-honored tradition may die.
I have no statistics, but I am certain that the proliferation of Girl Scout cookies in dozens of products will cut into the special “only available once a year” nature of the cookies. Many people used to look forward to Girl Scout cookie season and make large purchases to get them through the eleven months they weren’t available. The local scouts and troops benefited from the demand for Girl Scout cookies.
Now, that demand is being pushed towards products that benefit the national organization at the expense of the local chapters. Even if the new system generates more profits than the old system, what does this say about the priorities of The Girl Scouts of America? By diminishing the demand for door to door cookie sales, the national leadership is choosing profits over the personal development of the very young women they serve.
This brand-lending by the Girl Scouts may be a necessity of the times. However, I encourage the Girl Scouts to create new traditions that replace the character-building effect lost as cookie season goes away.
It is estimated that 50% of Americans consume at least one soda per day, totaling about 8.5 billion gallons. SodaStream (NASDAQ: SODA) has taken an interesting approach to this market, dominated by Coke and Pepsi. Coke and Pepsi have a traditional sales and distribution model centered around transforming concentrated syrup into a bottle of soda and getting it into the hands of a customer. Soda Stream makes a home soda system that takes syrup, injects CO2 and water, producing a liter of soda right in your kitchen.
On the surface, this razor-and-blades business model seems like a vast improvement of the clunky, multi-step distribution model of Coke and Pepsi. A variety of flavors are available for every taste. The stock has risen dramatically and year-over-year revenues are up 49%. Soda Maker Units, Flavor Units, and CO2 Refill Units have shown increases of 31%, 76% and 19% respectively. This is no anomaly for SodaStream. With the exception of a blip in the 1st quarter of 2011, the company has realized 15 quarters of consecutive revenue growth. SodaStream has grown earnings at a rate of 67% year over year in 2012.
The real question for the SodaStream business model is twofold:
1. How much distribution is lost with the direct-to-consumer soda bottling business model? With no convenience store purchases, one bottle at a time purchases, or soda fountain purchases (which is 24% of all soda sales), much of the market is unavailable to SodaStream. By the same token, the take-home soda market is still a significant percentage of the $76 billion market.
2. What about the kid factor? Eighty percent of all schools have a contract with Coke or Pepsi. Adults might enjoy the advantages of SodaStream, but good luck converting a 13-year-old away from Coke or Pepsi.
3. Is home-bottled soda the next fad like home bread makers and pasta makers? Fans point to the green effect of a home-based system free from transportation of caramel-colored water and millions of wasted bottles. Pundits dislike the business model because of the inconvenience factor plus the lack of branded soda flavors. Generic soda is the only type available on SodaStream (e.g. Lemon Lime vs. 7-Up, Cola vs. Coke). On store shelves, generic soda represents less than 2% of all soda sales.
So far, like or dislike the model, it’s working. You can find the SodaStream machines in most major retailers from Wal-Mart to Bed Bath & Beyond. The company has the critical mass to continue growth if the trend is more than a fad. If I am going to weigh in, I vote fad. The thought of filling and refilling my very own one liter bottle of non-Coke product versus picking up a bottle at any of thousands of convenient locations just doesn’t cut it for me. If SodaStream partnered with Coke, Pepsi or both and had availability of flavors customers wanted, my opinion would change a bit. I still vote fad, but I think the fad would last several years longer before 2010’s version of making your own pasta wore off.
What do you think of the SodaStream business model?
Many pundits are forecasting the demise of big box retailers, including troubled Best Buy. Sales are down. The stock has been pummeled. Now the company has brought in a new CEO with a new 5-step plan to turn things around.
Let’s take a closer look at his strategy.
1. Reinvigorate the customer experience
The first step in the “Renew Blue” plan is to offer shoppers special benefits and exclusive membership programs. Best Buy already does this and it’s not working particularly well. It’s hard to imagine what special benefits Best Buy can offer that will truly stand out from the competition. It’s hard to imagine their Reward Zone plan rivaling Amazon’s Prime program.
Additionally, Best Buy will try to be more “helpful” to customers. This means no selling and more “service.” I went into a Best Buy the other day and saw this new plan in action. I was asked if I needed help no less than 5 times in a few minutes. “Just checking out TV’s,” I said. By the fifth helpful person, I was annoyed.
Best Buy needs to realize that the internet has fundamentally changed the way people shop. Anything resembling sales, including “can I help you,” feels like sales. Sell is now a four-letter word. Best Buy can say they are not selling me, but why do they keep hounding me offering to help? Because they want me to buy something, and that feels a lot like selling to me.
2. Attract and grow “transformational leaders” and energize employees to deliver “extraordinary results”
Huh? Ok, hire great people and have them lead us through the wilderness. Got it. Every corporation in the world wants to do this. It’s not even a new priority at Best Buy.
“The company plans to introduce a new store labor model to be implemented in all of its U.S. big box stores before the 2012 holiday season that will provide increased store employee training and a new enhanced compensation plan that introduces financial incentives for delivering on customer service and business goals,” read a press release in March.
3. Work with vendors to innovate and “drive value”
This one has some promise depending how Best Buy plays it. Best Buy is still the largest electronics retailer in the U.S. and can leverage that with vendors. Creating one-of-a-kind products, available only at Best Buy, is an idea on the right track. However, if Best Buy is simply looking to work with vendors to drive down costs, forget it.
Best Buy will not be able to compete with Amazon’s pricing structure and will need to find other ways to beat them. A recent study conducted by KeyBanc Capital Markets showed that Amazon’s prices were 8% lower than Best Buy’s even without the sales tax advantage.
4. Increase the company’s return on invested capital by growing revenue & efficiency
This includes cutting “unproductive” costs, such as administrative and non-product expenses.
Best Buy is aiming for a return on invested capital of 13 percent to 15 percent, in addition to a 5 percent to 6 percent adjusted operating margin target vs. 4.7% today. This percentage has been declining, not rising. It’s going to take more than wishing it higher to drive better results.
The best way to accomplish this may be moving to smaller stores the way it has been doing with its tiny Best Buy Mobile stores. If it wasn’t for RadioShack, this might make sense. Unfortunately, going heavy into mobile has been a train wreck for RadioShack. It’s hard to see how a similar strategy will work for Best Buy.
5. Making the world a better place through recycling effort and providing teenagers with access to technology
I’m all for cleaning up the planet, but I don’t see how recycling batteries gets someone to pay $50 extra for a television.
Teenagers can already sell their used phones and iPods online for cash. The other half of the market doesn’t care about recycling.
Worst of all, there’s only a temporary need for recycling of CDs, DVDs, books and video games as these products move to digital delivery. This strategy seems to be nothing more than corporate speak and PR nonsense.
Conspicuously absent from Best Buy’s plan of attack is what they plan to do about showrooming. As long as Best Buy pays for Amazon’s showroom space, their business model is a mess. To me, Best Buy should take the lead on combating the showrooming issue while they still have clout with vendors.
Here’s my laundry list of ideas, wild and not so wild:
- Get rid of appliances. Big boxes rule because they offer exceptional selection over smaller stores. Best Buy needs to focus on “wowing” customers with the offerings they have and get out of weaker areas. Lowes and Home Depot offer 3-4 times the number of appliance SKUs. I don’t even consider shopping for an appliance at Best Buy, and I bet I’m not the only one.
- Lean on vendors for exclusivity, even if it’s only a token. Sony Television Model # FVG554 is $445 at Best Buy and $423 at Amazon. It’s not a tough choice. If I’m not in a hurry, I buy from Amazon. Best Buy needs to offer 27 or 28 inch TVs vs. 26 inches or 45 inches vs. 42 inches. Anything that makes it more difficult for customers to compare apples to apples. People want to buy things today. They don’t want to wait for it to ship. This can serve Best Buy. However, people don’t want to overpay. It’s an obsession. Take away the ability to compare and consumers won’t feel like they overpaid.
- Consider blocking cell service. I realize this is radical, but if the showrooming doesn’t stop, it’s over. The issue isn’t whether blocking cell phone service in the store will annoy customers, it’s will it stop them from shopping.
- Get exclusives on hot new products. Imagine if Best Buy would have secured an exclusive on Beats headphones when the company was desperate for distribution.
- Take Geek Squad up a notch. The perception of the talent level of the Geek Squad is that of your tech savvy neighbor. He can fix that virus or stubborn issue you can’t quite seem to get. However, the Geek Squad kid isn’t perceived to be talented enough to fix a business computer network. How about Geek Squad Elite? Get some $100,000 a year, highly talented technicians to work on the more complex and higher ticket jobs in addition to the current $20/hour a little better-than-you-are techs.
- Go member’s only. Customers are obsessed with great deals. Give them great deals, if they are members with different levels, e.g., $25/year for price level 1 and $50/year for even better prices at level 2. Costco has proven that you don’t need to make much margin on the merchandise if you can sell enough memberships.
- Instead of going to smaller stores, go big. Cut the number of total stores by two thirds, but double the square footage of the remaining stores. Turn these mega stores into the holy grail of electronics. These mega stores would act like a magnet to shoppers. Make up for the lost sales from closed locations with online pricing that rivals Amazon’s.
What do you think Best Buy should do to revive profits?
An interesting question from Marsha Campbell, HR Officer at National Commercial Bank Jamaica Ltd landed in my inbox the other day:
I noticed on your website you explained the difference between a model and a business plan. I would like to know what is the difference between the model, framework and architecture. Most sites that attempt to answer this question tend to be IT specific. Would you be able to shed some light?
Our business model research specialist, Huss Sadri, came up with the following answer.
A business model describes the rationale of how an organization creates, delivers, and captures value (economic, social, or other forms of value). The process of business model construction is part of business strategy and the design of organizational structures. Thus the essence of a business model is that it defines the manner by which the business enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit: it thus reflects management’s hypothesis about what customers want, how they want it, and how an enterprise can organize to best meet those needs, get paid for doing so, and make a profit.
Ultimately, the business model of a company is a simplified representation of its business logic. It describes what a company offers its customers, how it reaches them and relates to them, through which resources, activities and partners it achieves this and finally, how it earns money. The business model is usually distinguished from the business process model and the organization model.
A business model can be described by looking at a set of building blocks such as for example:
- Market Attractiveness of the Business
- Value proposition
- Revenue Distribution
- Sales Performance
- Competitive Advantage
- Key resources
- Cost structure
- Pitfalls & Risks
- Exist Model
- Customer Value
Business architecture is a part of an enterprise architecture related to corporate business, and the documents and diagrams that describe that architectural structure of business. Business Architecture articulates the functional structure of an enterprise in terms of its business services and business information. The key views of the enterprise within the business architecture context are:
- Business Strategy view: captures the strategic goals that drive an organization forward. The goals may be decomposed into various tactical approaches for achieving these goals and for providing traceability through the organization.
- Business Capabilities view: describes the business functional abilities expressed via business services of an enterprise and the sections of the organization that would be able performing those functions.
- Business Knowledge view: establishes the shared semantics (e.g., customer, order, and supplier) within an organization and relationships between those semantics (e.g., customer name, order date, supplier name).
- Business Operational view: defines the set of strategic, core and support operational structures that transcend functional and organizational boundaries. It also sets the boundary of the enterprise by identifying and describing external entities such as customers, suppliers, and external systems that interact with the business. The operational structures describe which resources and controls are involved.
- Organizational view: captures the relationships among roles, capabilities and business units, the decomposition of those business units into subunits, and the internal or external management of those units.
Business frameworks Operationally, the business framework generally describes the corporate organization or management structure or may generally outline company policies or an organization might develop a framework to achieve a particular goal or An innovations framework may outline policies, procedures and management changes the company will use to achieve innovation and growth etc.
Effective leaders provide a business framework in which people and business partners can work efficiently and effectively, both individually and collectively, and succeed for mutual benefit. A framework comprises:
- goals and strategies,
- organization and culture,
- relationship contracts and arrangements,
- business processes,
- objectives and
- Measures and incentives.
A good business framework creates an organizational environment in which people think and act for themselves, yet collaborate to achieve common goals and objectives.
Many Fortune 500 companies have shown us that you can make more profit with fewer sales. Sealy Mattress’ second quarter 2012 sales down 2.9%, profits up 1.5%. MillerCoors’ domestic first quarter sales to retailers was down 1.6 percent but net income rose 16.6 percent. 3M’s second quarter sales were down 1.9 percent while income rose 3.75 percent. DelMonte Foods swung from a loss of $73.5 million to a profit of $89.3 million while sales declined 1.7%.
However, does cutting expenses to the bone increase the competitive advantage of the business? I say “no.” Here’s why. If you figure out how to shave ten percent off your shipping costs, today you have a competitive advantage. But how long does it last? Within a few months your competitors have figured out the same ways to shave costs and you are back to square one. In order to create a meaningful advantage you must do better than simply cutting costs.
Cost cutting does not provide competitive advantage or an improved business model. However, if you can find a method to strategically realign costs, you can create competitive advantage. What’s the difference between simply trimming costs and strategic cost realignment?
Here are some examples of strategic cost realignment:
- Amazon’s no retail stores approach to retailing
- Wal-Mart’s proprietary logistics methodology and scale
- EBooks vs. paper books
- Retailers who completely remove salespeople vs. change sales practices
- ATMs vs. bank tellers
- Moving a call center to the Philippines vs. trying to hire cheaper and cheaper local workers
- Using software or technology to change a business process and significantly lower cost.
Typically, these radical changes are disruptive innovations rather than simply improvements to an existing system. If you are looking to radically change your cost structure, don’t think about improving things; think of starting over with a clean whiteboard and redesigning everything. This type of radical disruption creates meaningful competitive advantage that is hard to match.
Here are some easy ways to know if your innovations are strategic or simply cost cutting:
- Working harder for less is rarely indicative of innovation. Cost cutting is painful and typically involves more work for less money for both employees and the company. If you are caught in one of these “race to the bottom” situations, find a radical way to realign costs rather than simply cut, cut, cut.
- Innovations typically involve painful people or process changes. If your changes can be quickly implemented or aren’t too painful, they are probably not strategic.
- Cost cutting usually provides immediate savings. Innovation frequently takes financial investment in the short term but pays off in the long term. The immediate payback of cost cutting is one of the reasons it is so appealing. However, once you jump on the non-strategic cost cutting treadmill, you will find yourself in a painful downward spiral.
- Cost cutting typically does not scare the daylights out of you, radical innovation does. For instance, all the changes Sears is making to spin off divisions, sell assets, and attempt to cut costs the old-fashioned way are not working. Until Sears tackles the root issues with some radical ideas, expect the continued death by paper cuts.
In summary, most businesses need to cut costs now and again. However, do not let cost cutting substitute for the important work of innovating your business model.