The next wave of online business models must focus narrowly, rather than blindly pursuing scale.
An excerpt from an interesting article at Business+Strategy by Tim Laseter.
During the early days of the Internet, popular wisdom highlighted the power of the new virtual business model that could reach a mass market without the bricks-and-mortar constraints of the “old economy.” Venture capitalists threw money at the lucky startups and encouraged them to get big fast before competitors could gain a foothold. Operating strategies were all about “scalability.” Although that model worked fine for a few companies, like Amazon and eBay, it proved a dead end for most. Today a simplistic approach built around mass markets and scalability is a near-certain recipe for failure.
That’s not to say that we won’t continue to be amazed by growth phenomena — like Facebook and Google — that expand quickly by creating fundamentally new business models. But most Internet businesses are simply offering a new twist on an old business idea and, accordingly, seek to displace existing companies. No longer expecting every new idea to transform the old economy, entrepreneurs (and even venture capitalists) are beginning to realize that scale is the result — not the cause — of business success.
A careful look at some past successes and failures as well as a few emerging Internet stars reveals that a clear focus on distinct capabilities has led to success. And, perhaps surprisingly, the old model of mass-market scalability is being turned on its head by a new local focus. Instead of using the virtual nature of the Internet to reach a geographically unconstrained mass market, new companies are building distinct capabilities at a local level to attract loyal customers. Those capabilities — not scale — provide the barriers to entry that allow these companies to outperform their competitors. Much as in the old economy, leading Internet businesses are gaining scale by replicating their success rather than pursuing scale as the key to success.
Many of the recent success stories of the Internet demonstrate the value of focus over scale. Two of the best examples are Zappos.com Inc. and Quidsi Inc., both high-profile acquisitions by Amazon over the last two years. In 2009, Amazon closed a $1.2 billion acquisition of Zappos, its biggest deal ever. Zappos, founded in 1999, focuses on shoes, a tough category to sell on the Internet because customers want to try shoes on to ensure proper fit, and they often return them. So Zappos focused not only on shoes, but more importantly on building a set of capabilities to attract and retain loyal customers.
Focus on Local Capabilities
The latest trend on the Internet takes to the extreme a focus on capabilities rather than scale. Instead of seeking to serve the mass market from a virtual node on the Internet, independent of geography, companies are starting to leverage the Internet at a local level, turning the scale-based model on its head — and perhaps putting the final nail in the coffin of the original Internet model.
The clearest example of turning the old model on its head can be found in the grocery industry and the infamous “last mile” terrain that Webvan sought to tackle with the “get big fast” model of scalability and a mass-market focus. Unlike Webvan — or even the largely successful FreshDirect — Retail Relay Inc. seeks to minimize capital investment and avoid the pursuit of scale economies and mass-market consumers by building uniquely local capabilities. Instead of targeting major metropolitan markets, Relay scales its operations to smaller cities and towns. It can afford to serve these less-dense populations by offering a mix of pickup locations throughout the area rather than seeking to serve all customers through a home delivery model.
Focusing on developing loyal customers and unique, local capabilities does not guarantee success on the Internet. Companies must inevitably fend off the competition by executing their strategies well. The mass market can be quite fickle.
A constant reminder: competitive advantage can be fleeting and scale isn’t everything.
For most aspiring Internet entrepreneurs in today’s online environment, the most likely paths to success will start with focus, build on success, and then — and only then — lead to scale.
Full article @ http://www.strategy-business.com/article/11204?pg=all
- Raven Tools Launches “Weapons of Mass Marketing” Monthly Radio Series on WebmasterRadio.FM (prweb.com)
- Made.com Raises £2.5m to Launch Designer Furniture Business that Uses the Internet to Cut Out the Middle Man (uk.prweb.com)
- Will Google & friends out-coupon Groupon? (tradingfloor.com)
- Zappos Founder Launches New Retail Rewards Site (blogs.wsj.com)