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BUSINESS MODELS

A Better Way to Define Your Company (Used By McDonald's, Starbucks, and Apple)

Ask yourself: What business am I really in? The big guys do, and they find unique ways to expand their business.
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McDonald's is about to become the largest children's book distributor in the U.K., according to reports in The Bookseller and The Wire

Here's how it will work: For a limited time in each Happy Meal, Mickey D's will offer a code for a free e-book in a children's mystery series. The e-book provider is not Nook or Kindle but Kobo, an e-reader maker and e-book seller headquartered in Toronto. Projecting to sell 15 million Happy Meals while the promotion lasts (until June 17), McDonald's would briefly be the largest children's book distributor in the U.K.

Never mind how or whether this move, themed around children's literacy, fits in with various McDonald's initiatives about healthier menus and social responsibility. You could be optimistic, suspicious, both, or neither.

Instead, consider the distribution of e-books in strictly business-model terms. Remove McDonald's from the equation and ask yourself, in the abstract: In an era of dying book stores (and record stores, for that matter), what power does any established retailer have as a potential distributor of products that are not, traditionally, in its wheelhouse?

The Distribution Power of Retailers

Think of Starbucks. It began selling music in 2004, more than 30 years after its founding. Today, its in-store soundtracks and at-the-register displays of one artist or another are practically part of the company's DNA. Every so often, Starbucks is the exclusive retailer of a new CD featuring prominent musicians. 

Now think of Sears. How else might its 2,400 US locations (1,300 Sears plus 1,100 Kmarts) be put to use? As Robin Lewis argues in a superb thinking-out-loud piece on Forbes, those locales would be ideal for Amazon to acquire and use as distribution centers:

The acquisition becomes Bezos' answer to omnichannel and the proven revenue synergy of consumers' ability to shop online and off; the convenience of proximity for pick up and returns; and facilitation of even greater delivery speed. So just as Walmart’s 4,500 stores double as distribution centers, so would Amazon's acquired Sears/Kmart stores. 

Let's say, then, that large retailers of all stripes are in the midst of redefining themselves as multi-purpose distributors. What's the lesson here?

Above all else, it's a reminder to ask yourself that most provocative--and vexing--of business model questions: What business am I really in? 

Define Yourself by Capabilities, Rather Than Products

Had Starbucks, at any point, convinced itself that it was strictly in the coffee business, it might never have ventured into the realm of music. Likewise, had Apple, at any point, convinced itself that it was solely in the computer business, it too might never have ventured into the realm of music. And Amazon, as we all know by now, has become far more than a book retailer. In fact, the Wall Street Journal has reported that Amazon is working on a pilot program to do its own deliveries in the so-called "last mile" from distribution centers to consumer/business addresses.

In other words, Amazon might attempt to compete with UPS and FedEx in the delivery business. 

In all of the above examples, the companies are thinking broadly about their capabilities. They are not limiting themselves by stubbornly adhering to previous definitions of what "type" of business they are in. They are not making the mistake that the railroad industry made, as described by Theodore Levitt in a legendary 1960 Harvard Business Review article:

The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because that need was filled by others (cars, trucks, airplanes, and even telephones) but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry incorrectly was that they were railroad oriented instead of transportation oriented; they were product oriented instead of customer oriented....

And if you think that such business-model evolution is strictly an issue for large corporations, think again. Big Ass Solutions, a 2013 Inc 5000 company, recently changed its name from Big Ass Fans, mainly in the interest of redefining itself around multiple engineering capabilites (rather than just fans, as a product). "Simply fans is not a vision," says founder and CEO Carey Smith. "I do not want to suggest that the fans are not going to be a part of what we do. But 50 years from now, it’s probably not going to be mostly a fan company.

"You can't put blinders on like that."

Last updated: May 2, 2014




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