How has Jeff Bezos built a company worth over $100 billion in one of the world's most competitive industries? While Amazon wins plaudits for its grasp of the user experience, on a strategic level the company keeps triumphing because it attacks competitors asmmetrically. The $199 Amazon Kindle Fire is a case in point. The formula underlying the Fire, as well as Amazon's other business model innovations, boils down to four components. Read about them in my post for Forbes.
Stephen Wunker is the Managing Director of New Markets Advisors and the Author of Capturing New Markets: How Smart Companies Create Opportunities Other's Don't (McGraw-Hill, 2011)
Walgreens, the American drugstore giant, is a 110-year-old institution in a very well-established industry. But that hasn't stopped it from upending the competitive game by using under-exploited assets to create new markets. In doing so, it has built defenses around profitable core businesses while generating high-potential sources of growth. Read more in my Financial Times article (subscription required).
Stephen Wunker is the Managing Director of New Markets Advisors and Author of Capturing New Markets: How Smart Companies Create Opportunities Others Don't.
Faced with an existential threat, many companies simply freeze. The migration of media to digital formats has vanquished former industry titans in newspapers, video rentals, and more. Yet Barnes & Noble is fighting back boldly and strategically. Read more about its smart response at my Harvard Business Review post
Long tail business models sell small quantities of a very large number of items. They are the antithesis of blockbuster business models, which sell large quantities of a few items. The idea, first popularized by the authors Clay Shirky and Chris Anderson, has been exemplified by the book retailing of Amazon.com. As an Amazon employee once stated, "We sold more books today that didn't sell at all yesterday than we sold today of all the books that did sell yesterday." (Amazon was never known for its pithy marketing).
This week, Amazon took its long tail strategy in a totally new direction, offering its Prime customers (those who pay a $79 annual fee for free 2-day shipping) a wide selection of streaming movies and television shows, for free. The move is a direct slap at Netflix, a company that started with a focus on renting hard-to-find, long tail DVDs but which has moved increasingly toward popular blockbusters as its video streaming operations ramp up. Amazon will not have nearly as many recent and popular releases in its free offer as Netflix, but for people who are open to Amazon's viewing suggestions it's hard to beat free.
Amazon can make this model work because its long tail selections are much less expensive to license than blockbusters. It also has a totally different business model than Netflix, gaining a substantial bump in sales of physical products from people who sign up for Prime. The video offer entrenches Prime with customers and entices new customers to sign on to Prime. It targets people who may not watch enough videos to justify a monthly Netflix subscription, or who just haven't gotten around to signing up for a video service. It is a classic disruptive innovation -- catering to people over-shot by existing offerings with an inexpensive and highly accessible service that excels on a totally distinct set of performance criteria.
While Amazon plays this creative offense, it finds itself ironically on defense in its core book retailing business. Even as traditional rivals such as Borders implode due to antiquated business models, the sleepy public library poses a threat. E-books are continuing their rapid ascent in publishing, and public libraries are moving quickly to offer patrons this option. Because the number to be lent is limited, library e-books are a poor alternative to Amazon for reading hot new releases, but they may be a cost-effective way for libraries to offer patrons access to hard-to-find books. Tellingly, Amazon refuses to make its Kindle e-book reader compatible with the format used for most public library lending. Public libraries do not have marketing muscle to make readers aware of this option, and they may move more slowly than Internet giants, but as Amazon knows with its video offering, it's hard to beat free.
There are three morals to this story:
- Long tail business models create new markets, especially if they can make experimentation with unfamiliar purchases easy and if they can leverage new purchase occasions. Amazon is doing both these things with its video offering, thereby expanding the overall size of the video streaming industry.
- Disruptive innovation occurs in unstoppable waves. Just as Netflix disrupted Blockbuster, Amazon disrupts Netflix. Just as Amazon disrupted Borders, public libraries disrupt Amazon. Market incumbents can try to delay disruption, as Amazon has done with its Kindle, but ultimately the new business model wins over a set of foothold customers that empower its further growth.
- To avoid being swamped by waves of disruption, companies should watch out for becoming vulnerable as they march up-market into blockbuster territory. As Netflix became increasingly focused on big hits, it exposed a flank for attack. The company is now facing a tough choice -- it can ignore Amazon's advance on the theory that it does not appeal to Netflix's most important customers, or it can create a parallel business model to defend itself. Given that Netflix's CEO Reed Hastings is a fan of disruptive innovation, we might expect the company to choose the latter course, but there are many executional and positioning challenges to overcome in the dual-track approach.
Long tail business models are compelling territory for disruptive innovation, but like any other business model they have a life cycle. If it does not stay fleet-footed and watchful, the disruptor can become the disruptee.
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"It's a different product. Expenses will outweigh revenue on the product for this time, and some dealers may not want to make the investment." This honest opinion, expressed by the President of the New Jersey Coalition of Automotive Retailers, sums up a key challenge that has been lost in the excitement around electric vehicles. Sales channels are essential to successfully creating new markets, yet they often lack motivation to push new offerings. Their influence can be neglected, but it is massive.
As often happens with new markets, the technology of electric vehicles (EVs) has received tremendous attention. Huge budgets are dedicated to improving battery capacity, charging times, and vehicle weight. The industry is focused on end users' demand, and estimates of their speed of adoption range vastly. In the midst of this hubbub, the comparatively dull endeavor of moving EVs through dealerships seems straightforward. It is not. Channels frequently squelch innovation due to their short-term orientation, focus on costs, inability to train customers, and adherence to traditional business models.
Each of these factors threatens EV take-up. The pay-off from unleashing demand for EVs will come as sales grow in a few years, not immediately. With margins already thin, many dealers will not have that patience. They also may not have the stomach to take on the costs of training staff, financing expensive inventory, and dealing with extensive questions from buyers who may well go back home to ponder the decision before taking the plunge. Their staff may be ill-suited to training customers, and they may calculate that other firms should do the customer education first before the dealer gears up to reap the rewards. To cap it all off, they see their current profits being generated largely through their service operations, and EVs should require less service than internal combustion alternatives. So, why sell a Leaf when you can sell an Altima?
It is easy to hope that dealer resistance will be neutralized by buyer enthusiasm. Certainly that is likely to be true for the very first wave of sales. The customers pre-ordering 20,000 Nissan Leafs did not need dealers to persuade them. But this is a sliver of the market. A huge proportion of customers walk into dealerships uncertain of what they will buy, or whether they will buy at all. As banks, insurance companies, cellular firms, and many others have found, a face-to-face channel can be essential for sales, despite all the channel's inefficiencies. Dedicated EV dealers may help to address some of the initial hurdles, but given the crowded dealer landscape they may struggle to find a long-term customer base.
To circumvent the roadblocks, auto manufacturers will need a multi-threaded strategy that addresses financial concerns, provides staff training, and reaches out directly to end customers like never before. Super Bowl ads are great fun, but they are unlikely to create committed purchasers. BMW's Mini has stood out as one brand that tightly integrates direct marketing with a distinct dealer experience. We shall see if others adapt that playbook.
New products are typically created by enthusiasts who like new technology, and they tend to focus on the technical side of the offering. But ultimately market creation is about sales. If sales channels are not fully on board, they can cause havoc for even the most elegant technical solutions.
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