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Friday, November 19, 2004

Ben and Jerry's vs. Amazon

A friend of mine was narrating how he was getting torn apart at sometimes ( I told him that he just needs to be amused) as his recent jobs between varying degrees of corporate culture and asked some simple views - not the David Maister, Tom Peters, Jim Collins variety( No Pun Intended - I adore them). I was trying to first explain to him the extremes of corporate culture and this is the first of the series of articles that I want to point for getting a perspective. Joel Sposky needs no introduction. He has recently published this Strategy Letter , part of the change this manifesto. The Theme runs like this:

Joining/ Building a new company/Division? You've got one very important decision to make, because it affects everything else you do. No matter what else you do, you absolutely must figure out which camp you're in, and gear everything you do accordingly, or you're going to have a disaster on your hands. The decision? Whether to grow slowly, organically, and profitably, or whether to have a big bang with very fast growth and lots of capital.

The organic model is to start small, with limited goals, and slowly build a business over a long period of time - let's call this the Ben and Jerry's model, because Ben and Jerry's fits this model pretty well. The other model, popularly called "Get Big Fast" (a.k.a. "Land Grab"), requires you to raise a lot of capital, and work as quickly as possible to get big fast without concern for profitability. Let's call this the Amazon model, because Jeff Bezos, the founder of Amazon, has practically become the celebrity spokesmodel for Get Big Fast. All these comparitive factors, i told my friend also applies to cultures that exist between divisions within the company.

The differences between these models.

A.The first thing to ask is: are you going into a business that has competition, or not?( You may also read this as - are you accountable individually or not -part of a huge gang/crowd/dignified gentlemen and women and generally live on others work.)

- Ben and Jerry's - Lots of established competitors New technology
- Amazon - no competition at first

If you don't have any real competition, like Amazon, there is a chance that you can succeed at a "land grab", that is, get as many customers as quickly as possible, no matter who, where they come from, or how you get them, so that later competitors/peers will have a serious barrier to entry. But if you're going into an industry where there is already a well-established set of competitors, the land-grab idea doesn't make sense. You need to create your customer base by getting customers to switch over from competitors/ you need to find customers out of your defined landscape/customer space.

B.Another question about displacing competitors has to do with network effects and lock-in:

Ben and Jerry's - No network effect; weak customer lock-in
Amazon - Strong network effect, strong customer lock-in

A "network effect" is a situation where the more customers/patrons/friends/ego suckers you have, the more customers/previlages/customers that you will get. It's based on Metcalfe's Law : the value of a network is equal to the number of users squared.

"Lock-in" is where there is something about the business that makes people not want to switch. Nobody wants to switch their Internet provider, even if the service isn't very good, because of the hassle of changing your email address and notifying everyone of the new email address. People don't want to switch word processors if their old files can't be read by the new word processor. People do not want to switch loyalties, Godfathers are always there for long - to support you in the swings and help one to trample on others - ofcourse the onus of responsibility lay on the trampled to wriggle out and behave as a "good corporate citizen".Even better than lock-in is the sneaky version - stealth lock-in: services which lock you in without your even realizing it in public life. In corporate life - it is stealth attack - no action from enteprises when you wnat response, trampler shall get additional horsepower.

If you are going into a business that has natural network effects and lock-in, and there are no established competitors, then you better use the Amazon model, or somebody else will, and you simply won't be able to get a toehold.

C. Ben and Jerry's - Little capital required; break even fast; (in corpurate life - play on an existing market - currency and local market conditions to one's benefit)
Amazon - Outrageous amounts of capital/Efforts required; profitability can take years; (in corportate life -work four times more hard and show one seventh the result and still hope to be rewarded, of course count yourslef lucky if you get a kick.)

D. Ben and Jerry's companies start on somebody's credit card.

Amazon companies raise money practically as fast as anyone can spend it. There's a reason for this. They are in a terrible rush. If they are in a business with no competitors and network effects, they better get big super-fast. Every day matters.

Ben and Jerry's companies just can't afford to do this, so they have to settle for growing slowly.

E.Ben and Jerrys - Corporate culture is important
Amazon - Corporate culture is impossible

When you are growing faster than about 100% per year, it is simply impossible for mentors to transmit corporate values to new hires. Ben and Jerry's exists because of the values of the founders, who would not accept growing faster than the rate at which that culture can be promulgated.

F. Ben and Jerry's - Mistakes become valuable lessons
Amazon - Mistakes are not really noticed

A company that is growing too fast will simply not notice when it makes a big mistake, especially of the spend-too-much-money kind. Amazon buys Junglee, a comparison shopping service, for around $180,000,000 in stock, and then suddenly realizes that comparison shopping services are not very good for their business, so they just shut it down. Having piles and piles of cash makes stupid mistakes easy to cover up.( In corporate life, so long as you have patrons, you can cover yourself with layers and layers of support as an insurance for all cultural and procedural violations - Godfathers are there - they have some jobs to do right!!)

G. Ben and Jerry's - It takes a long time to get big
Amazon - You get big very fast

H. Ben and Jerry's - You'll probably succeed .. You certainly won't lose too much money
Amazon - You have a tiny chance of becoming a billionaire, and a high chance of just failing.

Read a couple of corporate histories - Ben and Jerry) and Ben and Jerry's for starters, echances of doing that make the lottery look like a good deal? Ben and Jerry's companies( Amazon ) are not going to do that for you.

Probably the worst thing you can do is to decide that you have to be an Amazon company, and then act like a Ben and Jerry's company (while in denial all the time). Amazon companies absolutely must substitute cash for time whenever they can. (In corporate life -Ben and Jerry shall always substitute good work, procedures an adherence to corporate culture very scarosant).

I told him, that both models work, but you've got to pick one and stick to it, or you'll find things mysteriously going wrong and you won't quite know why. Joel Sposky's really deserves all the pat for expressing himself so well and my intespersed thoughts are just ramblings of an unorganised mind. For good measure, I told my friend that I have published two articles on Professional Service Firms Excellence Part 1 and Part II - After all Tom Peters said that "The professional service firm is the best model for tomorrow's organization in any industry"

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"All views expressed are my personal views are not related in any way to my employer"