During the internet boom, the phrase "new paradigm" was passed around like a flask at the prom, leaving everyone exhilarated but slightly muddled. Although many of the business models from that heady era proved unsustainable, we have seen significant shifts in business models over the last century. In this article, we will look at four new business models that are here to stay.
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Mass P Vs. JIT
Although it sounds like a freestyle rap battle, the move from mass production to just in time delivery (JIT) has been a huge shift. Back when companies like Ford (NYSE: F) and GM were dominating the vehicle market, the most important thing was to have tons of product out there for consumers to buy. This meant storing excess production, and often selling old inventory off at a loss if too much was produced. When the economy is roaring and everyone is buying, the extra costs of mass production aren't noticeable. When things slow down, inventories grow and plants are mothballed, then problems start.
JIT addresses these problems by keeping production closer to actual demand. Inventories don't build up and there is less excess product going to waste in slow downs. This system is more responsive to change than mass production. Toyota brought this concept to the automotive sector in the U.S., but Sam Walton, the founder of Wal-Mart (NYSE: WMT), was using JIT inventory management long before then. Both of these companies turned their inventory advantages into huge competitive edges. (Learn more about finding winners in the retail industry, read Measuring Company Efficiency.)
Standardization Vs. Customization
This is one business model war that is far from over. Standardization made mass production possible, and the concept of copying a good thing over and over again makes sense. That said, the pitfalls of standardization – a cookie-cutter product – open the market to customization. This is true in many industries, but the most compelling example is Dell Computers (Nasdaq: DELL). Dell's model is based on allowing consumers to customize their computer within certain overall standards.
Dell's success has spread customization throughout the industry, even bringing some flexibility to Apple's (Nasdaq: AAPL) production. Apple has traditionally taken the Henry Ford approach of "consumers will like what I tell them to like." The integration between Apple's products is very attractive, but it remains to be seen if their inflexibility will one day be a weakness. Then again, too much customization can lead to a consumer backlash against featuritis. As mentioned, battles between these business models are won and lost in different industries, but the war rages on. (For more on the Ford approach to business, read Henry Ford: Industry Mogul And Industrial Innovator.)
Shopping Vs. Browsing
Touching again on the theme of customization, there is a shift in shopping habits between brick and mortar versus online buying. Traditional retailers have long sought to make their stores as broadly appealing to the most customers possible because they want to maximize foot traffic. The idea of designing a store to meet a particular customer's taste is impractical and ridiculous. Online retailers, however, can pinpoint a specific browser's interests and design a page around them. This increases the chances of impulse buys, as anyone who uses Amazon (Nasdaq: AMZN) can tell you.
The internet has made certain types of shopping much more enjoyable and efficient when done from home. Amazon is the current leader in this area, but there are other examples. The troubles facing Blockbuster (NYSE: BBI) have a lot to do with the success of Netflix (Nasdaq: NFLX). With so many choosing Netflix's direct-to-home model, Blockbuster was forced to open an online shop while closing many of their brick and motor locations.
As of right now, the attraction of online shopping seems limited to smaller consumer items with lower prices – books, DVDs, etc. – rather than large, expensive items like furniture, appliances and cars. This may change as the more internet-savvy generations push brick and mortar retailers out. Or it just might be that people will always want to physically sit on a couch or try on a shirt before buying it.
In-House Vs. Outsourcing
One war that is clearly over is the choice between doing it in-house or outsourcing. A company or individual gets the most benefit from focusing energy in areas that provide the best return. The idea of a brain surgeon spending a week rebuilding his engine instead of going to a mechanic is plausible if that's the surgeon's hobby. As a society, however, we're best served when the surgeon performs brain surgeries – an area of specialization he is highly trained and highly paid for – and leaves car maintenance to a mechanic – an area the mechanic is highly trained and paid for.
The same is true for companies. An accountant's office benefits when it outsources carpet cleaning and maximizes the time employees spend practicing their specialty. Every company outsources to some extent. In the past, all elements of production were internal to guarantee steady supply and quality. Now, higher quality and more consistency can often be found by outsourcing. A company can take a low priority part of its business and outsource it to a company that specializes in it – that is, a company that considers that part the only priority. This shift in models has led to cheaper, higher quality goods for consumers, and better profit margins for producers.
The Bottom Line
Business models are always in flux, especially when it comes to the mechanics of production and distribution. There will always be people that argue that nothing has changed. They rightly point out that the only business model is providing a quality product or service at a reasonable price - and the rest is mere details. That said, it is how the details are handled that decide whether a company moves ahead of its competition or falls behind into obscurity.
Find out what else is making news this week in Water Cooler Finance: Everything Old Is News Again.