Accidentally Created a Novel Business Model

The late 19^th century was a time of massive cultural, commercial and lifestyle change in the United States and Western Europe. Industrialization was in full swing. Railroads were fully formed and providing speedier movement of people, goods and foodstuffs to consumers and businesses. Men such as Thomas Edison, John D. Rockefeller, Andrew Carnegie and J.P. Morgan were transforming commerce and innovation. This was a golden age of consumer product invention.

The opportunity to innovate in the areas of personal hygiene, comfort and safety were being aggressively addressed for the first time in history. The evolvement of a mass consumer marketplace was nascent. The confluence of this new mass market and a slew of new products to address perceived needs created a unique confluence of opportunities.

The daily chore of a man shaving facial hair was just such an opportunity.

Today, when viewing the pictures and images of this age; we are amused by the highly stylized, gloriously cultivated facial hair seen on many male faces. The clean-shaven face is rarely seen. It would seem as if 1890’s men were striving to grow works of individualized art on their faces.

The reason so many men cultivated beards, moustaches and goatees was the difficulty inherent, at the time, in the process of shaving. Water was not always readily available to soften facial hair and lather soap. Warm water was even rarer. Most men, of even limited means, used the barber to trim facial hair. When shaving ones own beard a sharp, steel straight razor was essential. Straight razors needed to be regularly sharpened using a strop, and they had to be very sharp. Many men cut and infected themselves performing this simple act of personal hygiene. Shaving while travelling on a moving train was down right dangerous. The need to address this task was ready to be successfully commercialized.

Into this gaping void stumbled a socialist utopian dreamer named King Gillette. Gillette was considered an under achiever by his family. His father was a successful innovator and his mother wrote a famous cookbook, “The White House Cook Book”, which remained in print for almost 100 years. King Gillette had received several patents but failed in his efforts to commercialize any of them. He earned his sustenance from work as a travelling salesman. His failures embittered him and he became immersed in socialism and preached a type of anti-industrialism.

This most unlikely of capitalists, however, while working as a salesman for the Crown Cork and Seal Company was encouraged by his boss to continue to attempt to invent new products. Specifically, Gillette was encouraged to invent products that required subsequent, regular replacement purchases. His passion became the development of a shaving system that was safe, portable, efficient, cost effective and required the buyer to replace the implement on a regular basis.

King Gillette took his concept for a shaving device, which required an amalgam of metals and metallurgical technology, to the Massachusetts Institute of Technology. Working with engineers at this honored school enabled Gillette to perfect the elements of the safety razor. His patents indicate an appliance of elegant simplicity.

Gillette formed the American Safety Razor Company to market his invention. Initially, owing to limited capital and a high cost of production, sales were slow. As he analyzed the product, sales potential and the virtual absence of competition, Gillette made an inspired decision: he would sell the razors at a loss to encourage sales, use of the portable implement and accelerate word of mouth about his amazing razor. Sales expanded exponentially almost immediately and the Gillette Safety Razor became one of history’s most revered brand names. The term “loss leader” or losing money on the first sale to cement subsequent profits was born.

Gillette quickly realized that his real business was not selling the razors, but selling the blades. Almost immediately he began to give the razors away. To this day, purchasing a new Gillette shaving system includes a free or deeply discounted razor, thus insuring years of consistent, highly profitable repeat purchases of the blades. Product loyalty was insured.

The term “planned obsolescence” classically fits products like Gillette blades. In the 1890’s people threw virtually nothing away. Everything was used until the useful life of a product was thoroughly exhausted. The concept of a product being used and discarded in favor of a replacement unit was novel. It also was key to the evolution of a dynamic consumer product market place. We owe much to King Gillette and the business model he created. It serves us well to this day.

King Gillette was an unlikely capitalist. Even after he had earned millions from his inventions he hypocritically preached a strange anti-capitalist philosophy. However, he possessed all of the essential characteristics so necessary to be a successful entrepreneur. He had vision, drive and courage. Failure did not deter him. He sought and found a need. He addressed that need, driving down costs and prices to make his razors and blades affordable to the masses. He provided a simple solution to a basic human problem: shaving.

King Gillette’s lesson for all striving entrepreneurs is obvious. Innovation that addresses everyday problems through simple product benefits will always be in demand. Look around your home, hobby or workplace. This is where you will find potentially lucrative and important commercial opportunities.

For assistance or consultation on commercializing your opportunity or invention contact the author, Geoff Ficke, Duquesa Marketing,

Mr. Huizenga started as a small time cartage operator for a waste disposal firm in south Florida. He worked his way into sales and ultimately bought a small firm. In the 1960’s waste disposal was a local, independent, mom and pop type of business in the United States as well as in most industrialized countries. There was no scale. Each trash removal firm worked on contracts negotiated with local governments. There was always the fear of political winds changing and effecting a contractors future status.

From his perspective as a small time operator in a highly fragmented industry, Wayne Huizenga knew that he needed a safety net, not wanting to be tied to a sole municipality for his firm’s sustenance. His idea was elegantly simple: he would build a national firm, with appropriate leverage and economies of scale, by buying up key independent garbage hauling firms in strategically important markets. This would provide the strength to expand in every secondary market and standardize this formerly sclerotic industry.

This idea evolved into Waste Management. Mr. Huizenga became a billionaire when his firm, after ascending to the number one spot as an international garbage-hauling firm, with contracts spanning the United States, Europe and Asia, was listed on the New York Stock Exchange. The simple idea of consolidating hundreds of independent firms under one roof and standardizing the service menu was a thoroughly disruptive new business model. Former owners for these independent businesses were induced to sell by offers of stock, options and management contracts.

With a billion dollars in hand, Mr. Huizenga could have retired and collected art, cars, coins or stamps. He could have hung out with the idle rich. Instead, he applied the business model that created Waste Management to a completely different business category: home entertainment. In the 1970’s, with the market introduction of first beta-max, and subsequently VHS technology, and then the rapid descent of retail pricing for home video players, thousands of independent retail stores popped up offering video for rent. The ability to rent a popular movie tape and play it when desired in the comfort of one’s home, was a huge change in behavior and in the method of delivering entertainment to the masses.

Wayne Huizenga was restless, looking for a new challenge and open to any opportunity that offered huge potential upside rewards. He saw it in a small, but growing firm: Blockbuster Video. Today, the consumer recognizes the Blockbuster brand as a generic term for home entertainment. 25 years ago, Blockbuster was one of a handful of movie rental chains, several sold franchises to fuel growth, all were regional, struggling for capital to fund expansion, and competing against locally owned stores. The same fragmented industry distribution channels that existed in the garbage removal business were immediately obvious to Wayne Huizenga. He pounced.

After purchasing Blockbuster Video, Mr. Huizenga began the same type of assimilation program he pursued with Waste Management. Small, local video rental chains were purchased. The Company was listed on the New York Stock Exchange and the funds raised fueled a rapid expansion. The leverage and muscle that Blockbuster gained was utilized in purchasing product from the major Hollywood studios at more favorable terms than any competitor could negotiate. Small locally owned stores could not compete and thousands closed, creating more expansion opportunities for Blockbuster.

Blockbuster Video became a growth company with a huge following on Wall Street. Mr. Huizenga had replicated the success of Waste Management in a completely different industry. While Blockbuster was at its apex, he sold the business to Viacom. Hauling garbage is a highly needed, but largely unappreciated service. Renting movies is a service that is less important, but much more desired by the public. The same business model worked perfectly in two totally opposite areas of opportunity.

Blockbuster Video and Waste Management made Wayne Huizenga one of the most recognizable and successful entrepreneurs of the 20th century.

Seeking another fragmented industry, where the opportunity to roll-up local and regional outlets would enable repetition of the Blockbuster Video and Waste Management successes lead Mr. Huizenga to the world of used car sales and marketing. He immediately recognized the same dysfunctional market forces, absence of scalability and pricing inefficiencies so readily apparent in the video rental and garbage hauling business.

During the 1990’s auto leasing became wildly popular. These cars are leased for a set term, typically returned with average or below average miles and dealer maintained. The problem for the automobile industry was, and is, the inventory glut that occurs as leased cars are returned. This created a unique opportunity for Wayne Huizenga and his favorite business model.

He launched Auto Nation with a public sale of equity on the New York Stock Exchange. Today, Auto Nation is the largest seller of late model used cars in the world. Inventory is vast, offering virtually every popular model in great depth and variety. The scale and national reach of Auto Nation, enables pricing to be very sharp, almost always significantly lower than local dealers. In addition, all prices are non-negotiable and fixed, eliminating one of the major negatives to purchasing a car, haggling over price.

Three times, in three totally differing industries, Wayne Huizenga has applied a uniquely disruptive business model that has streamlined sluggish, non-dynamic business categories. He started very small. He thought very big. This is a perfect template for every prospective entrepreneur to study and utilize. A version of this strategy is often customized and applied to industry specific opportunities. This can be performed on a local, regional, national or international basis.

Entrepreneurial business models come in unlimited varieties. There is no single, linear textbook approach that fits unilaterally for every project. The entrepreneur that will customize a strategy offering beneficial disruptive features applicable to their product has the greatest potential for huge rewards. Innovate, create, and think outside of the box: the marketplace has an unquenchable thirst for new, different, exciting products and business models.

In essence, the Business Model is simply how an enterprise will organize processes to make money. The ability to adjust, change, innovate, learn the lessons of history while looking ahead and streamline systems is the best way to describe this crucial element of business development.

As an entrepreneur, success requires that you identify and perfect a Business Model that will enable your new opportunity to launch, gain traction, grow and keep growing. This is the difference maker for successful and unsuccessful budding entrepreneurs trying to self-market through their own company structure.

Remember that success starts with ideas that initially seem small and grow very big. They didn’t seem particularly fantastic when initially created, but who knew that the transistor, vacuum tube, Coca-Cola, internal combustion engine, laser, or tin can would have such an important place in each of our lives.

Franchising is a Business Model that today we easily understand and recognize. Licensing is another. Kiosk retailing is a style many entrepreneurs utilize to launch their business, gain experience and gauge market acceptance before attempting deeper, broader market penetration.

E-Bay is one of the latest inventors of an innovative market disruptive model. The ability to use the inter-net to construct an online community and establish a huge commercial opportunity for that population is stunning. If E-Bay’s sellers were counted as employers, E-Bay would be among the largest employers in the world. E-Bay takes a small listing fee and sales commission, and caveat emptor reigns. With software, servers and rules, E-Bay has transformed how many people buy, sell and earn a living. The use of a computer and a small supply of saleable product allows anyone the chance to succeed, and earn their daily bread as a “do it my-selfer”.

I encourage entrepreneurs to concentrate on the product or invention that they are attempting to commercialize. The Business Model is only important if they are keen and able to self-market their idea. The innovative product or service idea is more important initially. A better mousetrap or widget can always find a commercial home if properly presented.

A&P

Hudson Motor Car Co.

Montgomery Ward

TWA

Horn and Hardart

Studebaker

Indian Motorcycle

Bonwit Teller

Woolworth

Bethlehem Steel

Polaroid

LTV

These Companies were successful, recognizable brands in their respective categories. They were publicly traded and a number were in the Nifty Fifty in the 1970’s and/or the Dow Jones Industrial Average. The element they all have in common (and with hundreds of other equally recognizable names) is that they did not innovate. They created a static business model and did not anticipate that there were newer, better ways to implement new technology and strategies.

Let’s look at two old, established retail categories and how the ability to innovate has determined contemporary success or failure.

Music Stores

Recorded music retail has always been a competitive market. Tower Records followed the national chain concept, offering a broad range of music styles and competitive pricing. Mass marketers such as Target and Best Buy offer music as well, typically only the more popular artists, narrow and deep. Every city had a local shop, sometimes specializing in a specific area of musical taste. The underlying similarity was that a customer came into the store, made a selection and then purchased the CD or album.

Then along came the inter-net. The ability to protect trademarks and copyrights was believed to trump this technology. Artists and record companies believed that legal protections would enable them to continue as always: selling an album, with one or two hits, for $20 to $30. Software was written enabling the music consumer to cheaply, or for free, download specific hit songs while avoiding the filler cuts. The Napster effect has revolutionized the music industry.

Napster is a disruptive technology. The world of music retail was stood on its head. Legal fights and challenges are still being fought. However, chains like Tower Records are gone. The marketplace did not allow for a rigid system to thrive in the face of innovation. Tower did not stay flexible, anticipating technology advances and changing tastes. Trying to sell albums with 15 cuts, when the consumer only wants to hear and pay for two hit songs, is an obvious loser.

Airlines

Until the late 1970’s the airline industry was protected by Federal Government regulation. This enabled the airlines to artificially inflate fare pricing. Hub and spoke systems were created. Each major carrier had a geographic area of strength (Delta the southeast, USAir the middle Atlantic, American the mid-west and Latin America, etc.) that they dominated. Unions were aggressive and the carriers were profitable so the need to squeeze costs was not urgent.

When de-regulation occurred in 1978 the major carriers did not anticipate the radical disruptive innovation that was just around the corner. An aviation pioneer in San Antonio named Herb Kelleher did. He watched as fares plummeted without government regulation protection. Competition for gates, destinations and expansion resulted in many regional carriers (Republic, Piedmont, etc.) being gobbled up by the majors. Out of the changing landscape for air travel Mr. Kelleher saw opportunity.

Mr. Kelleher created and launched Southwest Airlines to address a gaping need. Southwest utilized a business model that reflected the changing landscape in providing air service. The major carriers utilize complex pricing models that try to maximize seat yield revenues per mile flown. Southwest posted one low price for every seat on a flight. The major airlines were totally union shops. Southwest was non-union. The major carriers flew a mix of plane models. Southwest flew only the Boeing 737 (this streamlined service and parts expense).

Very quickly the flying public recognized that a Dallas to Phoenix flight that was $579 on American, and $149 on Southwest, was a no-brainer. Southwest remains ahead of the curve with standardized policies, simple restrictions, a feel good fun loving staff, hedging contracts for jet fuel purchases and the promise of value for money on each flight.

Southwest capitalized on the changes it recognized was coming in the air travel universe. Today, there are a number of airlines utilizing some or/all of the Southwest model and virtually all are successful. Easy Jet, Jet Blue and Ryan Air in Europe are booming while the old-line giants all over the world are in desperate straits.

Proctor and Gamble is a wonderful example of an old alpha enterprise that is constantly re-inventing itself to reflect changing market conditions. Dell Computer, MicroSoft, Intel, Research in Motion, Nokia and many more are examples of businesses (all little more than 20 years old) that innovate, change, anticipate and succeed. They were all small startups only a few years ago.

For entrepreneurs, the ability to innovate and keep ahead of the field is crucial. When analyzing the potential for a successful market placement the ability to create a cutting edge business model is so important. If your goal is to open a male clothing shop and one already exists in the area you have chosen, you have a problem, unless you can differentiate your unique selling proposition. Maybe this can be accomplished by offering a tailoring operation for hand cut suits, or specializing in formal wear.

Whatever your product or service, define a business model that separates you from your head to head competition. Do not play the price game. Lowest price is almost always a temporary benefit, someone will come along that can produce cheaper, faster, better. Your goal should be the offer of a benefit that the customer will value, desire and not find immediately available. Then back up the benefit with superior service and the promise of continued new cutting edge innovation. Innovate or die!