The Profitability Maze
At the beginning of the last century, if a company had a product or service that it could sell for more than it costs, the CEO had a straight road to profitability. After decades of branching off into monopolies, conglomerates, disintermediation, globalization, strategic alliances and then value chains, we enter the 21st century with the consumer often behind the steering wheel, and a convoluted maze from product or service to profitability. Now a company’s selling strategy even needs to take into account how consumers buy. Although this statement may seem obvious, many companies are stuck in old ways of marketing and selling.

Examples:

• Dan Tapscott suggests that vertical integration no longer works, and that it is in a company’s best interest to outsource expense areas that can be derived at lower cost. Cisco is a classic example of this; its b-web is like an “Internet ecosystem,” where all suppliers perform like one firm.
• Corporate R&D is bogged down in many large companies, so some venture capitalists are encouraging the development of separate R&D companies to avoid bureaucracy.
• There are new variations in supply chain optimization. Dell has aligned the supply chain with its direct sales model. Manufacturers are working towards a model where every piece of factory equipment will have its own IP address and be linked directly to a supply chain management system that adjusts supply and demand accurately in real time.

Competition is driving companies to create new ways for people to buy:
• Banks are aggregating the roles of lender, title search, insurance, etc., and are going into the real estate agency business as a way to simplify processes for the homebuyers.
• New types of customization are being introduced, such as customized cereal by General Mills, and customized CD’s by the Free Record Shop.
• There is an increase in digital out-of-home media, such as elevator advertising, giving consumers alternate points of contact since their lives are so hectic.
• Progressive Insurance Company has created “all-you-can-drive auto insurance.” It sets premium through the use of GPS technology that tracks the duration someone is driving, the time of day and location.
• Increasingly, buying and conducting business via handless wireless devices is going from novelty to reality.

The centralized exchanges of B2B are being replaced by P2P (peer-to-peer) networking. This reduces the expense of networking, eliminates fees of the exchanges, and facilitates direct exchange among individuals, such as buying and selling on eBay.

The media and entertainment industries are undergoing significant structural changes, largely due to Internet influences:
• Newspaper revenues are declining as print classifieds compete with Internet classifieds.
• The broadcast industry is adapting due to interactive uses of audio and video on the Internet.
• Conceptual pay TV is in use in Holland where viewers pay to see close ups of the soccer ball in games broadcast on TV.
• The gaming industry is creating masses of new consumers through new products as the Sony Playstation.

Monopsony, which aggregates the power of many buyers into one large buyer, is driving down prices on the Internet. This power will increase as technology allows for even easier communication and access. We have seen aggregated groups of consumers have power in the past; now technology intensifies their power.

Consumer buying decisions are increasingly emotion-driven. For example, we have seen a steady building of an “addictive” buying model, starting with home shopping and spreading to the Internet through such sites as eBay. Other emotion-driven examples are:
• Consumers want to know everything about the company behind the product. Creating an emotional connection between a company and customers – trustmarks and lovemarks – is the next step beyond branding.
• Customers want more than mere functionality. The emotional dimension transforms products and services into a concept (such as Nike sneakers).
• As tech gadgets overwhelm consumers, simplicity appeals to a calmer, saner consumer emotion.

Implications:
One of the fundamental implications of the profitability maze relates to the continued heightened importance of intangible assets. John Perry Barlow comments that free access increases commercial value and should be encouraged. He says that there is, in effect, no property in cyberspace, leading to “DotCommunism.” He emphasizes the importance of free distribution: when you give it away, you will ultimately sell more anyway, because more people know who you are or what you’re selling. The examples given, ranging from the “Internet
eco-system” of Cisco’s b-web to manufacturers assigning IP addresses to each component of
a manufacturing process, to the increase of P2P networking, to increasing prominence of monopsony all support this premise.

There are also global accounting implications for profitability, ranging from billing in multiple currencies (such as telecoms based in Bermuda), or the increased frequency of U.S. dollar purchases in Latin America. A new international Accounting Standards Board has been created, and its members are responsible for serving as liaisons with U.S., British, French Canadian, Australian, Japanese and German officials. The creation of a global standard will have a direct impact on profitability, in particular for multinational businesses.

NTT DoCoMo’s purchase of 16% of AT&T Wireless gives AT&T the right to use DoCoMo technology in its mobile networks. This is an interesting metaphor reflecting what might be perceived as desperation on AT&T’s part to navigate through a profitability model that works.

Organizations need to examine their profitability models along with how businesses, consumers or constituents buy from them, to make sure they are not stuck in old methods. Consumers know this; they even discuss it amongst themselves. Catalogue users, for example, tend to “buy” any number of things from their catalogues in real time by dog-earing the pages or circling the items. But then, they put the catalogues aside and, weeks or months later, they review their “purchases” and make the few that they still want. Internet shoppers may do the same, by leaving unpurchased items in their “shopping cart,” but because their movements are recorded, it looks like incomplete or unsuccessful shopping experiences.

A blueprint may be to evaluate the level of innovation, timing, and tasks that can be outsourced, studying new ways of marketing and selling along with creating new ways of buying for the end user. The concept of creative destruction is more relevant than ever to finding one’s way as revenue models morph.

Issues Analysis provided by: Weiner, Edrich, Brown, Inc.
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