Thursday, May 24, 2007

Paul's Burger Shack

My friend Paul is buying a hamburger stand. I think it's cool and plan to be the first in line, though I’m a bit worried since he’s a post-doc at UC Davis studying materials science or molecular biology or biomedical engineering (I can’t keep track). Should foster interesting burgers and other culinary concoctions.

Paul’s business is fairly algorithmic. Burgers, shakes, fries and cokes. The inner workings of running the business – sausage making, as my friend Michael calls it – are a bit laborious but also rudimentary. Paul’s Burger Shack will be in the business of delivering a pleasurable, tasty, efficient, consistent and economical dining experience to customers.

Other businesses are not that simple. Take the railroad industry. In the mid-20th century, the industry almost perished with the advent of passenger automobiles and interstate highways, and airlines. Generalizing, rail companies believed they were in the rail business. In reality, they were/are in the transportation biz, delivering people and freight from here to there. Customers were ambivalent regarding the “how”; they cared about what (does it cost) and when (convenience and travel time).

There are myriad examples of staid industries that failed to understand their business. If you run a power-tool company, you’re in the business of selling tools, right? The late Harvard prof Theodore Levitt sagely disagreed: “People do not want to buy a quarter-inch drill. They want a quarter-inch hole.” It’s the result, the experience, the end that consumers desire, not the means (or the “how”).

The Great Guy Kawasaki shares an apt tale in his commencement address to Palo Alto High School:

Let me tell you a short story about ice. In the late 1800s there was a thriving ice industry in the Northeast. Companies would cut blocks of ice from frozen lakes and ponds and sell them around the world. The largest single shipment was 200 tons that was shipped to India. 100 tons got there un-melted, but this was enough to make a profit.

These ice harvesters, however, were put out of business by companies that invented mechanical ice makers. It was no longer necessary to cut and ship ice because companies could make it in any city during any season.

These ice makers, however, were put out of business by refrigerator companies. If it was convenient to make ice at a manufacturing plant, imagine how much better it was to make ice and create cold storage in everyone’s home.

You would think that the ice harvesters would see the advantages of ice making and adopt this technology. However, all they could think about was the known: better saws, better storage, better transportation.

Then you would think that the ice makers would see the advantages of refrigerators and adopt this technology. The truth is that the ice harvesters couldn’t embrace the unknown and jump their curve to the next curve.
What is the sake of your business? Why do customers purchase your products and services (i.e., what do they seek to accomplish or fulfill)? The better you understand their needs (the what and why, or the value they seek and you deliver) the better equipped you’ll be to successfully develop products and services (the means, including attributes and features) that deliver a desirable end result.

A final anecdote, which we’ve referenced previously: Starbucks is in the experience business, not the coffee biz. Andy Hargadon amplifies Howard Schultz’s concerns about Starbucks’ straying focus in a terrifically insightful post.

(Final anecdote II: Great piece in Barrons a few months ago about Starbucks, their model, challenges, growth strategy, and economics. Quick sip: An average Starbucks generates $1mm/year in revenue. Quick math: That’s $3k/day; 750 or so customers at $4 a pop. Quick logic: With these numbers, the on-every-corner infestation starts to make sense.)

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