November 11th, 2011
The following article by Patricia Cox is a worthwhile read, as it applies to our quest to change the way people shop as a Social Shopping King and as a model combining entrepreneurial people power and the internet with a foundation of one to one marketing. We identify what each customer wants and try to provide them what they want at the best possible price – matching product to people and people to product. What we do proves what works, and proves the future is created by making it work. Paradigms shift when you have a better way that makes the old way obsolete. We are staying ahead of the curve, and leading the parade – rather than following.
Break On Through
By Patrick Cox
10/21/11 Marco Island, Florida – One of the most naive idioms of all time is that the world will beat a path to your door if you build a better mousetrap. In fact, you’re more likely to be charged with endangering some previously unknown subspecies of rodentia.
Readers of my investment letter, Breakthrough Technology Alert, know that historically, the media, the public and the financial community have resisted big changes. Great ideas have a way of succeeding, but they do it without the help of “the world.” Inventors and scientists routinely spend more time and effort defending their ideas than they spent making their discoveries.
A good example comes from this year’s Nobel Prize for chemistry. The recipient, a scientist at Israel’s Technion Institute in Haifa, used electron microscope technology to discover an entirely new molecular structure now known as quasicrystals. In 1982, while on sabbatical at Johns Hopkins, Dan Shechtman discovered metallic quasicrystals. For nearly three decades, however, he was mocked for saying so. The very notion of metallic, five-sided, nonrepeating crystal structures was ridiculed.
Nobel Laureate Linus Pauling mounted what has been described as a personal “crusade” against Shechtman. “There is no such thing as quasicrystals,” Pauling claimed, “only quasi-scientists.” The scientific team Shechtman was working with gave him the boot for “bringing shame” to his colleagues.
Today, however, scientists all over the world are exploring the potential of nonstick, rust-free, heat-resistant quasicrystals.
Other breakthroughs are even more difficult to recognize. They may involve an unproven superior marketing, distribution or presentation technology. Sometimes, breakthroughs happen when something new is applied to an older and seemingly dated technology. We’ve written here, for example, about new materials that have radically improved flywheels. These energy conservation devices are currently used in high-end race cars and have the potential to save energy and add automobile performance in a more cost-effective manner than batteries.
This is just one example of a new technology revolutionizing an old design and industry. Consider a somewhat less obvious example, Amazon.com.
Healthy retail mail-order businesses existed long before the founding of the Seattle-based company in 1994. Over a hundred years ago, Sears, Roebuck and Co. built a successful business based upon rapidly improving mail delivery service and printing technology. Sears, Roebuck catalogs were common in urban as well as remote rural homes.
Customers all over America bought mail-order tools, piano rolls, coca wine and even tape worms for weight loss.
In the ’90s, I was consulting at Netscape, where the truly interactive and open Internet came into existence, along with the encryption technologies that enable secure e-commerce today. In retrospect, Amazon.com’s success seems almost inevitable given the emergence of those tools, but that’s not how people saw it at the time. Enormous skepticism about the practicality of the new technology existed.
Mockery was far more evident than belief that the world would change radically due to network technologies.
If the potential and benefits of the Internet and e-commerce had been obvious at the time, we could assume that Sears and other existing mail-order businesses would have taken advantage of the opportunities.
With plenty of capital and established supply and distribution networks, it would have been far easier for Sears to build a Web version of their catalog.
The “smart money,” however, considered the Internet a fad with limited practical application. “Trust us,” the experts said, “the real action will always be in the catalog business model.”
Amazon astutely exploited both the shortsightedness of established businesses as well as the emerging electronic communications technology, eclipsing catalog marketers by pushing retail where it had never gone before. Creativity and vision proved more important than the advantages held by pre-existing mail-order businesses. Today, Amazon is the world’s largest online retailer and the premier online shopping destination. Recently, they have even begun to compete with television networks and movie rental businesses via online streaming.
Amazon.com, however, ranks well behind the world’s largest retailer, Wal-Mart. The success of Wal-Mart Stores Inc. is worth discussing here for a number of reasons. One is that Wal-Mart’s stock has increased in value more than 160,000% since its public offering in 1970. It is widely reported that $1,000 of that IPO equity would be worth more than $1.5 million now. Another reason is that it is not obvious that Wal-Mart is even a breakthrough transformational company.
From the outside, Wal-Mart appears just like any other big-box brick-and-mortar retailer. It is not. Inside the wrapper is the founding vision of the Eagle Scout and entrepreneur from Kingfisher, Okla., Samuel Moore Walton. Very early, he realized the power of emerging information technologies. Rather than wasting time telling others about this potential, he implemented it himself.
Walton leveraged emerging IT to boost the efficiency of his logistical supply chain. Other retail companies wasted resources by warehousing goods and then delivering them to stores as need was perceived. Walton did something entirely new. He bought goods only when they were needed imminently and had them shipped exactly where they were needed. He could do this because he had computerized his entire enterprise.
Goods on shelves are not simply idle. They cost money. They tie up capital and shelf space, consuming and wasting resources. Walton realized that he could sell goods for less not just by negotiating better wholesale prices. With new inventory and data mining tools, Walton was able to determine precise location-based needs. He could determine even where within the store a product sells best.
He lowered his real price of the acquisition of goods by reducing storage, financing and transportation costs via IT. Because of those better prices, he sold more. The sales volume he generated then allowed him to negotiate better wholesale costs. Because of superior in-store computerized communications, he could spread information throughout his corporation and deal with problems in record time.
In each of the examples cited above, pioneers of industry were ridiculed and mocked for their ideas…ideas that would become revolutionary breakthroughs in their respective fields. As investors, we can learn a lot from their successes.
Change, after all, is nurtured at the fringe. Embrace it.
for The Daily Reckoning