Henry Ford, famous for using the assembly line in his car factories, neither founded the world's first car company nor invented the assembly line. Borrowing an idea originally used in the meat-packing industries, Ford was able to go after a new market in his industry to great success. It goes to show that in the dog-eat-dog world of business, it's often not as much about the product as it is about the process.
Business strategy may not be a science, but using the right method with the right materials in the right place at the right time can create explosive results. We've gathered some examples of the most successful business models that have gone on to make lasting impacts on industry, consumers and the world at large. What's particularly fascinating is how each of the following companies rode to success largely on the strength of their business models. Sure, McDonald's has a great-tasting burger, but it was the business model that catapulted the company (and ultimately the fast-food industry) to widespread popularity and renown.
Keep in mind that the following list isn't exhaustive and is in no particular order. Rather, the purpose of this list is to offer a smattering of some of the most interesting, influential business models and the major companies that implemented them successfully.
With that said, let's get down to business.
Priceline, a travel site, distinguished itself early during the travel wars of the '00s by introducing their name-your-own-price concept, in which vendors bid to meet the prices customers set for hotel stays and air tickets. While the company offers conventional travel planning as well, the name-your-own-price option continues to intrigue companies in other industries.
Bookings offered under the name your own price program are not disclosed by name (or itinerary, in the case of airfares), which protects suppliers by not linking them to the discounted quotes that would otherwise change the prices they regularly charge. By concentrating on hotel bookings and high-end overseas travel, Priceline also protects itself from the risks of putting too much emphasis on products in the volatile air travel market -- fares which attract users to the site and get them interested in higher-margin hotel bookings.
Although airline Web sites have, in recent years, begun to outperform most regular online travel agency bookings -- since they don't have to add profits with booking fees -- the customized hotel options added into travel bundles have helped Priceline to continue in their success.
On the downside, customers are gambling without some fairly important information: The provider, the itinerary and exact times of travel aren't available under the name your own price option until you've already committed to your non-refundable trip. However, going in with these assumptions can mean unbeatable prices and a fairly straightforward agreement. While a business traveler may not have the time or leisure to book partially unknown flights with unknown carriers, regular travelers can take advantage of great deals.
While Priceline pioneered the "reverse-auction," brokerage model of travel deals, many different industries and sites now work on the opposite standard: By listing deals and prices from around the Web, customers can be assured of getting the lowest price on any specific product or package they desire. Kayak searches the Web for all travel offers -- airfare, hotel, transportation -- based on trip specifications you select, then produces a list of options for the customer to compare. If you don't like a particular air carrier or seating option, for example, you can compare other similar packages to find the one best suited to your preferences and needs.
Likewise, installable browser add-ons like Invisible Hand -- or simple shopping results inside some search engines, such as Google -- can automatically show you the lowest prices for any product the second you begin searching for it. While there are often showcase or featured suppliers who've paid an incentive to come out on top of these lists without regard to whether their prices really are competitive, it's simple enough to compare top results and find out for sure.
While eBay has made offer aggregation and price comparisons a major part of its online auctions and buy-it-now sales, bringing the concept into the mainstream, Amazon has combined regular and offer-aggregate sales into its pricing for every product: Search for a book, and you'll get prices for other online retailers, used booksellers, and even private individuals selling single new or used copies at a stated (non-auction) price.
While incentives exists for consumers to use Amazon's own trailblazing fulfillment setup (including Amazon's shipping discounts and reliable customer service), if you're simply looking for a low-priced, used copy of a book, this internal price aggregation can be a lifesaver. After all, even "Super Saver" shipping isn't always as cost-effective as paying a simple $4.00 for one of millions of books. That's 1 cent for the book, $3.99 shipping -- and it's a price you'll see on tons of books all over Amazon's site.
Woot, until recently, was the gold standard in one day, one deal -- they even use that phrase as their tagline. But as other services entered the picture, Woot's simple idea -- making a limited amount of one product available at an amazing price each day -- began to transform. First diversifying into minisites offering daily Woot deals in specific areas (wine, toys, T-shirts), Woot has now begun delving into the social networking interests of its customers, playing with ideas like simple online adventure games to "earn" the deal info.
Taking the one day, one deal model to a new extreme, tipping point sites like Groupon, LivingSocial and Moolala all provide discounts on meals, products and services with local merchants. In different ways, each of them use crowd-sourced buzz to make sure the deal is worthwhile for merchants and the site itself. The deals only become active and purchasable after a certain number of people have expressed interest.
Recently, this particular industry sector has come under heavy fire, both from those who compare the setup to pyramid or Ponzi schemes, and often from researchers and analysts who question whether the business model may even be detrimental to the vendors it's attracting. Any deeply discounted deal like these is going to work as a loss leader for the local merchant, and if it doesn't result in repeat customers -- or if the people buying the deals are already customers -- then the loss is never remunerated by future business.
In fact, some merchants seem to be financing previous deals like these by entering into future deals within the same model -- behavior that some critics compare to our recent credit and mortgage crises. This social online coupon model, while clearly influential, is a bubble that could soon burst.
"A huge inventory!" You hear companies boast this on commercials, and it sounds like a great thing. However, for many businesses, inventory is a bane. Until Dell came along, a vast inventory was considered a necessary evil for computer companies, who watched as their shelves of pre-ordered parts grew outdated by the second.
Dell adopted a process Toyota used first in the 1960s called the Just-in-Time (JIT) method. Under this process, Dell no longer had to predict the right parts to order. Instead, it almost completely eliminated inventory. At one point, this meant keeping one week's worth of inventory on hand, and later as little as two hours' worth of supplies [source: Holzner].
The JIT method combined with Dell's direct-to-consumer process made for a dynamite business model. In the end, Dell was able to cut out the retail middleman and instead sell its products directly to the consumer. This cut down on costs (resulting in a competitively low price for the consumer), and it also contributed to faster service.
Customers order what they want, and after they pay, Dell orders the necessary parts from suppliers and builds the custom PC. Dell can wait up to a month before paying its suppliers, so the company earns interest on customer payments in the meantime.
Dell raised consumer expectations for good, fast service in the PC industry -- and companies such as Apple are following suit. The Dell business model paved the way by streamlining and increasing efficiency on the supplier end [source: Breen].
In the mid-1990s, entrepreneurs were scrambling to find ways to take advantage of a tool emerging from infancy and bound for great things: the Internet. Although it was thought to be a considerable gamble at the time, Jeff Bezos's plan was one of the few that ultimately worked. His business model proved the axiom "slow and steady wins the race" -- even on the information superhighway.
Challenging brick-and-mortar bookstores, Bezos started Amazon, an Internet company that sold a wider collection of books than stores could carry. Bezos bought warehouses to hold a vast inventory so Amazon could offer direct-to-consumer service. The catch? He and his investors had to postpone seeing profits [source: Roncal]. Bezos allowed readers to criticize products through reader reviews, and he built a faithful community of users. And like Dell, Amazon earned interest on immediate customer payments before paying its suppliers.
Although it didn't see profits until the early 2000s, Amazon survived the burst of the dot-come bubble. It began offering products ranging from CDs and electronics to apparel. Amazon also fueled profits by acting as a portal for third-party affiliates, who handled the warehousing while the company took a share.
Putting off profits for the sake of growth earned Bezos plenty of critics, but his model ultimately paid off. By creating a business that sought customer convenience first and foremost, Bezos defied the odds and came out swinging.
Two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame-seed bun: That's good food. But speed, quality, consistency and real estate? That makes for a great business model. When the McDonald brothers had the brilliant idea to incorporate the assembly line into the restaurant business, they created fast food -- and it was a match made in business heaven.
However, it wasn't until a salesman named Ray Kroc came along that this new industry discovered its full potential. By partnering with the brothers and eventually taking over the business, Kroc started the McDonald's Corporation, a company dedicated to franchising the restaurant. Franchising wasn't a radical idea: McDonald's and other restaurants had been doing it before Kroc came along. But Kroc took a different slant on the concept.
Kroc kept strict control over his franchises, making sure that every restaurant across the country upheld his business practices and standards of cleanliness. His business methods turned off large investors, and the cost of leasing land made it hard for Kroc to turn a profit. So he adopted a policy of subleasing his properties to the franchisee. Real estate provided the cash flow Kroc needed for more down payments on additional land for his growing franchises.
Whether you love it or hate it, you can't deny that Microsoft has had a sweeping impact. At the emergence of the computer age, the company got a head start by developing the operating system (OS) for IBM's personal computer (PC) in 1981. Since then, Microsoft's ability to adapt to new developments and challenges has kept it at the top of the industry.
In the race to develop software for the non-techie community, Microsoft used its OS to dominate the market -- specifically, its Office suite of applications for word processing (Microsoft Word) and spreadsheets (Microsoft Excel). What's more, any other company that wants to develop software that's compatible with the OS has to pay royalties (licensing fees).
This market dominance allowed Microsoft to get in on the rising Internet phenomenon in the 1990s. Though Microsoft was a relative latecomer on the scene, the company developed a Web browser, Internet Explorer (IE), and pitted it against Netscape, which was considered a superior browser [source: Marks]. But by attaching IE to the rest of its successful applications in the Office suite, Microsoft gained a stronghold in the information superhighway and beat out its competition.
In "Business Darwinism," author Eric Marks explains that Microsoft's business model is strengthened by the company's forays into other markets [source: Marks]. And as Microsoft spread its software influence, the company outpaced competitors in other arenas, which today includes not only operating systems and Internet browsers but also gaming.
While Apple and Google may appear at first to work in very different ways -- Apple as a consumer products and software manufacturer, Google as a suite of free online services -- they share one pioneering interest: you.
Apple, in practice, is more like three different kinds of companies working in concert: software engineering, hardware manufacturing and retail. Each of these gets to consumers in a different way, but they all work around the same core concepts of suiting the consumer's needs before he or she can even anticipate them: products for the home, business and entertainment, in-home and portable, for young and old, at price points high enough to make their products aspirational, but just low enough they're still attainable.
Apple brands itself, software and hardware alike, as the standard for quality, innovation, design aesthetic and usability. Each Apple product is created, in part, to sell the Apple brand and create Apple loyalty throughout the home. And if a household isn't fully Apple-supplied, chances are it still contains at least one or two iPhones, iPods or iPads.
And what Apple accomplishes in the world of retail, Google has created online. By offering the majority of its products and partnerships -- search, Gmail, Google Docs, blogging software, online photo collections, etc. -- for free, Google creates a similar 360-degree feeling of comfort and familiarity that engenders consumer relationships across its divisions.
In fact, the only real difference between the companies' approach is in terms of revenue. While we're giving our money to Apple, Google's getting money from other companies for its rich stores of data about us. Either way, they're making money off us, but Google does this indirectly, by putting advertisers in front of us, in more and more intelligent ways. Privacy concerns aside, Google's consumer data creates connections between individuals and companies that was previously unimaginable. And Google, like Apple, does this by knowing us better than we know ourselves.
Like Henry Ford, Sam Walton was a businessman who recognized a good idea when he saw it and, more importantly, knew how to apply it in a way that would have the biggest impact. As a result, the company he founded, Walmart, is now the largest retailer in the world.
The advent of supermarkets in the 1930s proved to the business world that cutting costs to deliver low prices can turn a profit. Retailers brought this logic over to general stores soon afterward. By sparing the frills and getting back to the bare necessities, stores could save money on presentation. They also saved money by cutting back on personnel, which meant less personal service. But saving money in these areas meant the store could charge competitively low prices, which drew customers in despite the bare-bones setup.
Walton saw that general stores were turning a good profit, but he found a way to perfect the business model. Instead of catering to heavily populated areas, which conventional wisdom would advise, Walton started building stores in rural areas. Specifically, he built stores in towns with populations of 5,000 to 25,000 people [source: Magretta]. Customers preferred to shop at these stores rather than drive to the nearest city. Because Walton was the first to go after these small markets, he had a significant advantage over any competitor that dared enter that terrain afterward. Today, Walmart wields so much power that a company's survival may depend on landing a deal with the retailer.
In opposition to Walmart's global hegemony and financial power -- the highest expression of basic corporate success to date -- we have the newest and in some ways most fascinating business model of all: the personal, customizable, one-on-one transactions of sites like Etsy and the most basic, early operations of eBay-type sites.
What the Internet gives us is the possibility of linking up with one other person, who is willing to sell us one custom or specific product, at an agreed-upon price. Add up those transactions, or aggregate them like Etsy, and you end up with more business than with one simple high-volume, high-demand product. When people refer to the "long tail," that's what they're talking about: While a bestseller may do brisk business for an online bookseller, for example, on any given day the bookseller is making way more money on the total of items they're selling for which there is less demand.
Sites such as the one-of-a-kind craftseller aggregator Etsy, the T-shirt design site Threadless and micropayment sites like Kickstarter and Donors Choose all operate on this concept: Even a single, customized, one-of-a-kind piece of art is worth enough, in the long tail, to make the sites worthwhile. That means doing business with likeminded, single individuals and knowing where your money is going.
Never before in human history have we had this capability to shop, pay for, ship and deliver such a grand assortment of merchandise. Even 10 years ago, the idea of a person-to-person (p2p) economy of art goods or books that is commonplace today would have been unheard of. Thanks to the Internet, p2p commerce is now a real idea, and one that is quickly becoming the most influential of all, as other business models begin to change and shift to incorporate its qualities into their own.
Without the threat of person-to-person sales, for example, would businesses ever have gotten so obsessed with involving themselves in our social networking? Something worth thinking about.
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More Great Links
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