Or Why Gadgets and Gizmos Don’t Make for Sound Businesses
I liked this cartoon. To me, it spoke of many business models that are bound to fail. Sometimes, we think we are getting fitter when, in fact, we are just setting ourselves up for failure.
Dumb Business Models and Dumb Businesses Get Eaten
A lot of students seem to think that every business model they design needs to be brand new, never before seen or done. It turns out that, sure, the Business Model needs to be good but execution needs to be even better…
I always like to refer to my experience with the Starflyer: a great consumer product, backed by a superstar athlete (Wayne Gretzky) that failed to generate significant revenues. The business model was based on the fact that it was new, it was well designed, it flew really well and ‘Gretz’ was endorsing it.
Starflyer
This was a ‘great’ product when it was first introduced to the marketplace in 1983. It had everything going for it:
1. The endorsement of the greatest hockey player ever (at least in my view)—Wayne Gretzky.
2. A good design—it had a patented (by me) aerodynamic shape (it used a dimpled surface on the flying disc which, much like a golf ball, resulted in superior performance). The industrial design was inventive and useful in terms of playing with flying discs, distances traversed, accuracy and so on.
3. It used persistence of vision to create a halo effect so that the flying disc could be thrown and caught at night.
4. The small camera sized batteries were neatly tucked away and lasted a long time.
5. Throwing ‘Frisbees’ was ‘catching’ on in a big way. Ultimate was in development.
6. There was just one tiny problem. It turns out that no one wants to play ‘Frisbee’ at night and there was zero demand (or close to that) for the product.
Student entrepreneurs need to know that the market is always right even when it is wrong. The planet is littered with neat products for which there is no demand. So, one of the simple rules of business is to introduce products or services that the market actually wants. Don’t necessarily substitute what you think is great for what the market actually wants.
Most successful startups are not based on e = mc**2; they are usually small improvements of existing products or services—someone has identified a niche not being filled now or a way of doing something that is already being done but they see a way to do it better.
There are very few startups like Priceline.com (where the customer names his or her own price), Google, eBay, Fed/Ex (Fred Smith invented a whole new category of overnight package delivery), Apple Computer, Digg.com … where the founder(s) are really breaking wholly new ground and they are successful.
It is essential to understand whether you have a gadget or gizmo type of idea (mostly developing into marginal businesses at best) or something substantial. Gadgets and gizmos make great hobbies but that’s all. Entrepreneurs should be trying to create more value than that.
Here is an example of a gadget introduced to the marketplace about twenty-five years ago. It is a neat analog device that allowed a consumer to turn off the bell or ringer on his or her telephone. In those days, phones in Canada and the US were rented from the Bell companies or purchased through them. The Bell companies did not want you to turn the ringer off—it would tie up their networks with longer answer times and more redialing. So you could turn the ringers down but not off. For folks who wanted a quiet dinner—tough luck.
Controlling Bell
The ‘Bell Control’ allowed people to plug their phones into the device and the device into the wall and turn off their ringers (a safety light would flicker instead of the phone ringing). It was a cute device—there were only a couple of problems: a) because the Bell group of companies controlled the market, there was no obvious channel to market these devices, b) not too many people really wanted to turn off their phones.
These problems occur over and over again with gadgets and gizmos—neat ideas with no real potential to find a market. The best you can do with these types of things is make a J.O.B. for yourself—there is really no way to create a lasting business with substantial value creation with these types of things.
The problem is how to find a market. The toy, game and electronics markets are dominated by huge industrial players with enormous marketing budgets.
There is no effective way to gain entry to shelf space—retail chains will ask the entrepreneur how he or she will support shelf space with national roll-outs. The answer will be: “Uh, actually, we don’t have one.”
Well-capitalized companies with huge marketing budgets and strong management are a formidable group to compete with. Even if the entrepreneur has great ideas, indeed, possibly much better than existing toys and games, gizmos and gadgets, they will find it tough going.
It is true that the Internet today makes it possible to compete on a more even footing but the entrepreneur with a gadget is still highly likely to do no more than create a J.O.B.
Even a whole series of neat ideas usually can’t create a sustainable business model—often they don’t even use the same distribution channels so it becomes nothing more than a grab bag of stuff with close to zero synergy. Try instead to Get the Business Model Right so the harder you work the more money you make.
(Just in case you think you have the next Hula Hoop, Trivial Pursuit or Air Hog, read: Why Large Companies Buy Cashflow Not Ideas, http://www.eqjournalblog.com/?p=431).
Below is a graph from Business Week on why most businesses fail. I’ll bet you that the top five reasons (too much debt, inadequate leadership, poor planning, failure to change and inexperienced management) are in fact related to number six on their list: not enough revenue; i.e., business not generating enough revenue is probably by far the biggest cause of business failure and they are not generating enough revenue because of inadequate leadership, poor planning, failure to change and inexperienced management, which also means they can’t meet their debt obligations.
From Business Week August 25, 2003
If you have enough revenue, you will get financing, not the other way round. This is the lesson of the false boom of the late 1990s when VCs and others financed startups with interesting business models but no revenue prospects. This has never worked, in any age.
If you have enough revenue, you can meet the cashflow demands of debt servicing costs so a focus on revenue growth is vital. One needs to not only generate the revenue but collect it too. This seems self evident but a lot of startups don’t do billing, invoicing and collecting very well.
How long do you think mighty IBM would last if it didn’t collect its receivables? IBM sells around $85 billion worth of goods and services a year (one customer at a time, btw) so that means around $7 billion a month. If they don’t collect for two months that means that they would have a cashflow shortfall of $14 billion so my guess is that even IBM would be in serious trouble in less than 60 days.
So we need to be cautious in how we interpret the above Seton Hall University Stillman School of Business graph. In my experience, the number one reason for failure is the absence of buoyant revenues. I mean how many businesses have you heard of folding if their revenue numbers are going up and up?
Prof Bruce
(Frisbee is a trademark of the Wham-O Corporation.)