Common Sense Living

The Future of Business

Companies like Amazon.com are putting many established businesses out of business.  Bookstores such as Borders have gone under, while Barnes & Noble, once unstoppable, struggles.  Sporting goods retailers have been decimated by the internet giant.  And soon, grocery chains will be challenged with Amazon’s recent purchase of Whole Foods.  What does Amazon do differently than their competition?

Amazon’s success starts with their different thinking.  Traditional retailers incorrectly thought they were in the retail business.  This incorrect thinking allowed Amazon to bury them.  Logistics companies like FedEx and UPS incorrectly think they are in the business of moving packages.  This incorrect thinking is allowing both Amazon and Uber to catch up and soon overtake them.  Auto companies like General Motors and Ford incorrectly think they are in the auto manufacturing business.  Their incorrect thinking has allowed Tesla to put a significant dent in their sales.

So how does the leadership at Amazon, Tesla, Uber, Netflix, and Apple think?  Modern companies no longer think they are in business to produce a product or service!  Instead they are in business to produce a system that produces a product or service.  If you are in business to produce a system, then the entire way you do business changes……from your mission statement, to the people you hire, to the way you finance your company, to the way you respond to customers.  This is the future of business.

In June 2016, Elon Musk, Founder and CEO of Tesla, discussed his new factories as if the factory is the product he is producing.  He described the factory as “the machine that makes the machine”.  https://electrek.co/2016/06/01/elon-musk-machines-making-machines-rant-about-tesla-manufacturing/.  The factory is the system he is building which produces the car.  If he gets the factory right, the car just happens!

When you build systems that do things, instead of just doing things, your world changes.  Everyone you hire needs to be a systems-thinking type of person, from the CEO on down.  What is common about Amazon, Uber, Netflix, Apple, Facebook, Lyft, E*Trade (which disrupted the securities brokerage industry), Tesla, PayPal, and other Wall Street darlings like them?  Every one of these companies was founded and led by a former programmer!  Yes, a geek!  They are the best equipped people to know how to structure an efficient system, in this case their company.

Just last August, Jeff Immelt, CEO of General Electric, announced an edict that stated all new hires will learn to code software!  http://fortune.com/2016/08/05/jeff-immelt-new-hire-coding/.  Goldman Sachs, the prestigious investment banker, announced a similar edict, requiring all traders to code.  http://www.businessinsider.com/traders-need-to-know-how-to-code-2015-9.  If the company is a system, then everyone in the company works on the system.  That means everyone needs to know how to code software.

Financial thinking is also different in modern companies.  They take BIG risks!  Traditional CFO’s are normally risk-adverse, withholding capital until an idea is tested on a small scale, and then only incrementally adding capital if the idea works.  When you build a system, the entire system must be in place to output even so much as one widget.  This implies a complete and large capital outlay up front!  Tesla cannot half-build the factory, and expect to produce the car!

In the old days, you loaded lug nuts with manual labor.  To expand, you added more people to the line.  And when business contracted during a downturn, you had a layoff.  When a machine loads lug nuts, the entire machine must be purchased up front, and the operator must be hired from the start.  When business is great, you operate at full capacity.  When things slow down you cannot lay off half of the machine, or half of the operator.  Everything is at risk if you don’t run enough volume through the machine to pay for the financing.  Machines and labor become fixed costs in the modern world.

Modern companies also call into question the idea of outsourcing.  If you buy your lug nut machine from the same vendor your competitor buys theirs, you operate with equal efficiency.  As such, you have no competitive advantage in this area, and will be competing on price.  It will be a race to the bottom with no winners.  A CEO’s role is to maximize competitive advantages, and by not exploiting the opportunity to build a better mousetrap or machine, the CEO in this case is not serving their shareholders.  All of these modern companies patent, trademark, design, and build their own equipment and software.  They don’t want their competitors copying them.

At modern companies, the cash flow statement is more important than the income statement.  They want to know the “burn rate” of cash, as compared to the “generation rate” of cash.  Oddly, this is not unlike Warren Buffett’s approach to intrinsic valuation when he buys stock.  He also focuses more on the cash flow statement than the income statement.  Jeff Bezos, CEO of Amazon, said years ago that he tries to run Amazon such that the income statement shows no income!  http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works.  This thinking is heresy to traditional chief financial officers!  But….IT DOES WORK!  Proven by the fact that Amazon made Jeff Bezos nearly the richest man in the world and Amazon nearly the largest company in the world in just 20 years!

Sports Authority was once the 2nd largest retailer of sporting goods behind Dicks Sporting Goods.  They had a very traditional mission statement that looked like that of many other retailers, full of generic meaningless words.  Suppose this retailing giant had a mission that stated, “Sports Authority is in business to build a system which efficiently moves sporting products and services from supplier to customer”.  What could be more clear than a statement like that?  If they did that well, they would succeed.  If not, they would fail.  With the word “efficiently” in there, it addresses the 5 “P’s” of marketing of having the right Product, in the right Place, correctly Promoted, correctly Priced, and properly Positioned in the market.  Without the 5 P’s, you will not be efficient.  Unfortunately, Sports Authority invested too little and too late in their technologies and system of business, and suffered the fate of bankruptcy.

As you can see, very different thinking pervades companies like Amazon, causing them to do very different things.  Their thinking is long term, and systems-oriented.  They do not think about providing products and services, as that is too expensive.  Instead, they think about building systems that provide products and services.

Regardless of your industry, if you can think of your company as a system and act properly on those thoughts, you will be 75% of the way toward successfully competing against Amazon or companies like them!

 

 

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