24 August 2010

the rise of starbucks and its business philosophy

One of my primary goals on Atma is to write about the intersection of sound philosophical principles with successful emerging business models. Its my core belief that business, grounded by moral values, is the most efficient way to improve society.

Starbucks is prime model of this philosophy. With the rise of the gen-y (and beyond) generation into the business world, you see profit as not the sole motive behind corporate actions (this could also be a cause of the free business model trend). Starbucks has taken the lead in many of the arenas - and they did it earlier than others and in a very old distribution medium.

First - let's commend starbucks on creating an innovative fast food concept. In a world of value menus and homogenous offerings, Starbucks brought the cafes of Verona to Hillsboro, TX (and even adopted it for drive-thrus). Somehow they were able to create a brand new successful fast casual concept that convinced the masses of the "third" place after work and home. Since perhaps Subway or some of the other sandwich chains, many have tried and few have been successful creating a large-scale sustainable business in this arena. They also taught us that a "tall" is really a "small".

Second - They did it right (see caveat below). They kept an uber-focus on quality from raw material sourcing to the end to end customer experience. They successfully balanced an offering that could be replicated throughout the country with an individual customer experience. They didn't compete on price, they made coffee shops cool everywhere, and grew the entire industry. Indepedent coffee shops actually grew 40 percent during 2000-2005 (the starbucks boom period). They never franchised (which would have helped profit), used only cash from operations to open new stores, and grew solely through word of mouth (didn't spend a dime on advertising until recently).

Third - They did good. They instilled the NW vibe throughout their business. They were the first company to offer health care to all employees (including part-time). Although expensive (particularly starting out, VCs didnt like it), they never wavered on this point. All of their beans are bought at prices HIGHER than commodity rates through fair trade (and generally direct from producers); they spend alot of time and effort to help the small plantations throughout the world. They have a foundation thats fairly large in helping the communities they impact.

Overall - I think Howard Schultz did good job of taking care of their employees, community and building a game changing business. CAVEAT: Sure there were issues that people can point to during their expansion years (reports of predatory pricing,etc..), but by in large, the benefits they created far outweigh the negatives. And I know that in the present, from a business standpoint, they face tremendous challenges (over expansion, increased competition). But at the end of the day - they built the business soundly from a business and cultural standpoint, and I think they will endure.

Let's hope Google truly "does no evil" and the next generation of big business embraces the Starbucks way. I think its a model that can work and hope its the rule and not the exception.

06 August 2010

my favorite emerging business model......free

LinkedIn and Facebook are the next blockbuster IPO candidates. LinkedIn's recent equity investment valued them somewhere around $2B an (on reported revenues of $200M). Facebook is worth around $35B based on a recent private transaction on revenues less than $750M. So with eyepopping valuations resembling the late 90's, guess what is most startling to me ?

The fact that LinkedIn has $200M of revenues. Or Facebook makes a dime on the topline. How ? Where does linkedin make money? It's not from me. I dont know anyone that has a premium membership or even knows what services it provides. How many web marketing people that you know pay for advertising on Facebook ? Profiles and chats and most of the useful marketing tools are free. Even for corporations. Really ? $200M?

As i've watched web businesses mature and the market move from internet bubble to web 2.0, i've wondered how all of the things we use most are..well free. As a consumer, its great. Ten years ago, i could never have imagined all of the information and services I have at my fingertips -- all real-time, and all free.

GPS? No need to attach one to your car thanks to Google. Mail ? Gmail and FTP sites. TV ? Justintv. Product Reviews? C-Net. Stock quotes? Name your site. Found my house on zillow. Movies and Music ? Uh - my attorney won't let me answer that one :). Just think of all the tools you use on a recurring basis and how much money you spend on these items. My guess is that you won't need both your hands to count the outflows.

Craigslist was the first to puzzle me. How in the world could they displace the entire classified ad industry (which was actually the only place newspapers made money) for free ? It took down most of the local newspapers and really got nothing in return. Ebay bought a stake years ago, tried to make money, and Craig and company sued them. They actually sued them for trying to make money! EBay backed off.

Wikipedia. I have no idea the level of accuracy that Wiki offers, but I don't think it matters. It's the most used reference source in the world. No need for encyclopedias. No reason to pay for some specialized website to attain what you are looking for.

I love it. It still never ceases to amaze me. But to all my readers out there (because i have so many), this is the best its going to get. Get ready to reach for your wallets. NBC, part-owner of Hulu.com, implied they are going to start charging for content. Google and Verizon are in talks on how to priortize net traffic (see my post on net neutrality). Facebook and LinkedIn will get some serious pressure from either private or public investors to monetize their huge membership base. Google will start charging for some of its services once their near-monoplistic search ad rates come down.

But until then, let's consume as much free content and services we can. If only there were a free site that turned my stock portfolio into something recession-proof...