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The best type of business to be in
Thursday, 22 June 2006
In the 1967 film, The Graduate, an experienced and successful Mr McGuire gives the main character Benjamin a piece of advice on what type of business to pursue - "Plastics". This sums up many people's attitude to business. When starting, they decide what's the best industry to be in and set out to make themselves a success in that industry. Perhaps they see a bright future in finance, or construction, or software or retail, or Web 2.0.
Glamour industries are the ones which seem to attract the most young people. How many millions of twenty-somethings want to go into sport, fashion, entertainment or technology?
But legendary Wall Street investor Peter Lynch, whose record shows he knows a thing or two about business, generally shuns investing in such industries. The ones he likes best are boring, disgusting, and operating in shrinking markets. That way, you get less competition, which often means juicier profits.
For most people money - and specifically profit - is the main reason they want to be in business. Sure, they get some satisfaction from having built something great, employed people, and serviced customers. But ultimately, if your goal isn't profit, you're probably running a vanity project, not a business enterprise.
The biggest threats to profit are usually similar whichever industry you operate in. Competition, government regulation, market cycles, fashion and so on dictate the way an industry flows at any particular time. Relying on fashion or market-cycles to prop up your business isn't a good strategy for long-term success, so what is?
I spend a lot of time studying and thinking about various enterprises, and the thing I've discovered about most market leaders is this - they're almost all in the same type of business. They're not in retail, fashion, technology, food or consulting - but in templates.
This is the area Mr McGuire should have advised Benjamin to go into.
For most people, and particularly start-ups, the template business is the one you want to be in, barring exceptional circumstances. It's where the best chance of sustainable profit is usually found.
But what exactly is the template business?
It all boils down to having a design for something that you can reproduce easily and at a healthy profit, for which there is likely to be a good level of demand.
An obvious example of such a business is Nike. Most of their profit comes from the templates of shoes and clothing they produce. It's the design of the shoe and the marketing campaign behind it that produces value, not the leather, rubber and stiches.
Microsoft is another good example. They spend a lot of money up front producing a "template" operating system which they can reproduce for next to nothing and sell at a high-level of profit. Drug companies do the same thing. The value isn't in each of the chemicals or the packaging, but in the "template" for the drug that brings the result.
But the template business can be much more than just a design for a product.
Think of the restaurant business. What problems do the owners generally have to deal with? The general approach is to find a good location, design high-quality dishes, try to get good reviews, find the best-trained staff and so on. Most restaurant owners spend their days immersed in nitty-gritty problems such as staff disagreements, customer complaints, kitchen cleanliness, cash-management and so on. They're so busy putting out fires, that they never think about their business as a template.
But the top-people in world's most successful restaurant business - McDonald's - don't concern themselves at all with any of these individual concerns and incidents. Instead, McDonald's bases its business on creating a template of a profitable and easy to run restaurant. It systemizes everything down to the finest level of detail and produces a blueprint for a successful restaurant, which can be rolled out profitably across the world.
Like Nike with its shoes, McDonalds is in the production business from a well-designed template. In this case, the end product is restaurants.
Walmart, the world's most successful retailer, follows a similar pattern. There are lots of retailers in the same kind of business as Walmart, yet none seem to do as well. Why not?
Because Walmart sees itself as being in the template business. They've fine-tuned a highly-profitable blueprint for a successful discount store - warehouse size, near a busy intersection, lots of automated systems, cheap goods etc.
Once Sam Walton had worked out the original design, he simply mass produced it across North America. It's the template, not any of the individual strategies or stores, that creates the most value.
The basic idea in building a good template is obviously first to discover one that generates customer demand. Then, you fine tune it and systemize every detail to the point where anybody can use it to produce your good or service at a profit. The ultimate template is one that even an idiot could make money from. It's a money-making machine - which you can eventually sell for a huge profit.
Ebay and Google have gone one step further. They've created templates that need almost no human intervention whatsoever. Their systems can produce hundreds of millions of the same product - auctions, advertisements, or search results - at virtually zero cost per copy. The machine runs the carefully-designed system, and the owners mostly just have to sit back and wait for the money to roll in.
Of course, like all businesses, the template business isn't ever really done. No matter how good your template is, you always have to be refining and improving on it. But you get huge economic benefit from doing so. Once the template's been improved, you can use it to improve the products you produce, and the profits you receive.
So if you're in business, or considering going into business, don't think of yourself as being in any particular industry first and foremost. Instead, see yourself as being in the template business - producing a more successful blueprint for a product or service that can easily be reproduced to fill a demand at a profit.
Approaching your enterprise in such an abstract way will help build a firm foundation for success.
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