|| Defining Your Business Model
|By Ahmed Saad, Technology Matrix Group - © Copyright
During the dot com boom of 1997-1999, many dot com start-ups
were going online just about everyday. This was followed by a period of time where
just as many dot coms went out of business. Most of these companies either did not
have an appropriate business model, or they did but changed it during their short lived
life span to appeal to a broader base of customers, suppliers, and investors and in their
inappropriate attempt to grow they went out of business.
The most important component in defining your business model is defining the
industry that you are in. A perfect example of this is the American railroad system
in the early 1900s and how they killed their business potential by thinking that they were
in the railroad industry as opposed to the transportation industry. By not
appropriately recognizing themselves as part of the transportation industry they did not
see the threat of the booming automobile segment and the introduction of passenger
airplanes as a threat until it was just too late. Another example is the fellow who
wanted to have his website retail light bulbs to everyone on the planet and thought that
bulbs.com will be the place to get all your "light bulb" needs. Needless
to say, very few people noticed the site going online. Such a site is neither
suitable for B2C (product offering is too narrow), nor for B2B (too small of a player in a
market dominated by huge conglomerates).
An example of a distorted business model (again influenced by a mistaken identity
with the appropriate industry) is Amazon.com. When the company started it clearly
put itself out to the public as an efficient book retailer utilizing the latest technology
to make itself more efficient and price competitive. Amazon accurately felt the
threat of Barnes & Noble, the giant book retailer, going online. It was a
retailing competitor with a healthier balance sheet competing in the same area as Amazon.
Amazon was the underdog and used it to their advantage by pointing out how the
corporate Barnes & Noble was copying their technology, and continued to compete with
better prices and services to emerge as the winner.
When Wall Street investors voted for Amazon by buying its stock at astronomical
prices Amazon was pressured to reinvent its business model, "tweaking" it in
order to sustain the growth rate that Wall Street investors demand for the premium that
Amazon commanded. Amazon believed itself to be, as many Wall Street analysts had
called it, a high tech company or an internet company. They therefore started looking to
sell anything and everything they could utilizing the technology infrastructure they
already had in place. Amazon went from an efficient low priced book retailer to
"the biggest selection on earth". At one time Amazon's product offerings
included packs of nails for home improvement projects!
While they dropped many of the extras in the beginning of 2001 (including the nail
packs) there is no doubt that the biggest selection on earth concept provided a major
distraction and was very detrimental to their financial situation during 2000 and 2001.
While it is not clear how well Amazon will do in the future it is as clear to us as
it is to the Amazon executives that it was a mistake to think that their business model
could include every item on the retail market including the infamous nail packs.
Amazon was not the only retailer that took this route but it was the most known
one. ValueAmerica did exactly the same thing and went from an efficient electronic
retailer in 1998 to declaring bankruptcy in the year 2000, just a few months after they
started selling just about everything including beauty supplies and food. There are
a multitude of issues involved in retailing products including issues with branding,
fashion, technology, customer perception, "the need to touch", the appropriate
niche, shipping, refunds, ...and the list goes on. Each product, or line of
products, has its own nuances as it relates to the various retailing issues and often
times an efficient retailer in one product line is usually not a formidable contender in