David Wanetick’s new book, “Business Model Validation: What Makes Business Models Work?” covers a wide range of business theories. Wanetick gives them memorable names, such as the Las Vegas Conundrum (That it’s hard to make a business offering services that other businesses provide for free as loss leaders), and the Icarus Paradox (that fast-growing, high-flying companies suffer problems as a result of their success), and provides an impressive array of real-life examples for each. It also analyzes business trends in light of these concepts, such as the sharing economy, the “freemium” business model of video games, and drones. The book is available at www.businessmodelvaluation.com and Amazon.com
Wanetick grew up in California with his father, a physician, and his mother, a physicist. Now living in Princeton and Concord, California, with his wife and three children, Wanetick is the CEO of Business Model Validation, a research firm with expertise in assessing the investment merits of emerging companies.
The author also offers business courses based on his work. His next appearance in the Northeast, on “Devil’s Advocate Auditor Training,” takes place Monday, June 1, in New York. For more information, visit www.bdacademy.com.
Excerpted below is the book’s chapter on internal consistency.
Most of the discussion revolving around business model validation throughout this book has focused on assessing how external factors will impact a company. We should not forget to consider how internal dynamics will impact a business model. Customer consistency, values, inertia, culture and internal cooperation and competition are important factors in the business models that firms adopt.
Customer Consistency. It must be determined if a firm’s product offerings and sales efforts are consistent with its target customers. For instance, it appears that the message at the Noodles restaurant chain is muddled: with the presentation of its wines and wine glasses, the ambiance strives to be classy but its staff often sports the grunge look.
Also, the merger of insurers Unum Group and the Provident Companies got off to a rocky start. Unum was a group disability insurer that sold its coverage to groups of employees based on statistics and actuarial tables. These sales were typically made to human resources managers. On the other hand, Provident’s policies required much greater knowledge about its individual customers who operated businesses in a wide variety of industries and who made their own insurance buying decisions.
Name Consistency and Relevance “What’s in a name? That which we call a rose by any other name would smell as sweet.” — William Shakespeare in Romeo and Juliet.
When it comes to naming emerging companies and new products, I disagree with Shakespeare: names matter.
Names of emerging companies should be easy to pronounce, related to the business at hand (after all, names are a marketing tool), and suited to the community that the business is designed to serve. Names can be cute if the business is directed to children, cool if directed to teenagers, but must carry some degree of gravitas if directed to professionals.
Upon their introduction in the late 1940s, potential customers’ receptiveness to photocopying machines was hampered by the use of the term “copy.” The Oxford English Dictionary makes it clear that during earlier centuries there was an aura of deceit associated with the word; indeed, “copy” and “counterfeit” were nearly synonymous.
In the more recent past, I have used SurveyMonkey to conduct surveys. However, I stopped using SurveyMonkey because the name of that company is very unprofessional and ill-suited for the people that I wish to recruit to participate in surveys. My sending requests for participation in SurveyMonkey surveys would reflect poorly on me and my business. This is a shame as SurveyMonkey is a very good tool.
It is best if a name of a company translates worldwide. For instance, Kodak is pronounceable in just about every language. On the other hand, it was a mistake to call an automobile “Nova,” which means “doesn’t go” in Spanish.
It is an advantage to use names that begin with the letters at the beginning of the alphabet because such names will be listed at the top of directories and trade show listings. Trademark issues notwithstanding, names — such as Google or Venmo — that could morph into verbs, help diffuse brands.
Since domains will invariably be acquired to support the brands, it is important to consider a few issues that could result in discounts being applied to domain name valuations. With these issues in mind, the names should not be difficult to spell, should not be hyphenated, not be too lengthy and should not use symbols (for instance, “accelerate” is preferred to “acceler8”).
Values: A business’s revenue growth will be impeded to the extent that selling products is incongruous with its values. For instance, healthy food or natural food stores do not want to sell cigarettes or beer in view of the obvious contradiction in values.
Recently, CVS/pharmacy decided not to sell cigarettes because that drug store chain is becoming more active in providing medical services such as flu shots. McDonald’s restaurants decided not to allow Redbox to install its movie dispensing kiosks at its stores because the “R” rated movies in Redbox kiosks were inconsistent with the fast-food chain’s children-friendly mandate.
Cracker Barrel Old Country Store tried to repel investor Sardar Biglari’s efforts to obtain a board seat, in part, because Mr. Biglari’s acquisition of the racy men’s magazine Maxim was inconsistent with that restaurant’s family-friendly image.
Inertia: Most managers dedicate themselves to achieving the goals set out for them by their firm’s senior executives. Thus, it is difficult for businesses to pivot every time it is confronted with an opportunity. Virgin Hotels miscalculated banks’ willingness to diverge from their business models when executives of that hotel chain thought it would be able to scoop up real estate held by delinquent borrowers at fire sale prices. This plan did not materialize as most banks opted to roll over debt as opposed to foreclosing and then selling real estate on the cheap.
Culture. The rate of decision making at a firm is not likely to change greatly in the short-term. In industries governed by voluminous regulations or shaped by prevailing cultural proclivities to hierarchy, a pensive decision-making process should be expected.
On the other hand, decision-making should be much more rapid in industries (such as mobile advertising) that are unregulated, populated with young people, and fueled with venture capital investment. Separately, there is a risk that companies driven by the founder’s or CEO’s ego may not be well-managed since these self-absorbed leaders sometimes tend to recruit less talented managers.
Internal Cooperation and Competition: Another issue along the lines of assessing a firm’s internal dynamics is the extent to which employees compete against one another. Restaurants have generally done a better job of managing this issue than automobile dealerships.
Many casual dining and upscale restaurants have adopted a policy of having each store’s wait staff pool and equally distribute the tips they collect at the end of each shift. I believe that this policy leads to a better dining experience for the patrons as well as a pruning of less competent servers. If a customer needs another napkin or fork and their server is not in sight, the closest server will be motivated to look after the customer. And the servers will detect which of their colleagues are contributing the least to the tip pool and will likely apply subtle (but effective) pressure on those lower performers to improve or resign.