Bringing it all together
The authors insist that successful business models bring the five elements together, albeit in varying degrees of emphasis. They complete their analysis with three stars of the last decade
Zara, the Spanish fashion goods retailer, established in the 1960s, passed the €5 billion sales mark in 2006. Its success was due to astute revenue, gross margin and working capital models. On the revenue side, it appealed to customers who wanted the latest fashions by focusing on what was selling well and producing in short runs. Customers would come frequently to the store, knowing that otherwise they might miss out on the product. On the gross margin side, producing what was selling well meant fewer markdowns than its competitors (as a former vice president of Gap, John Mullins is particularly well placed to point this out as important). And finally, thanks to its tight inventory management and generous terms from its loyal suppliers it developed a healthy working capital model.
Amazon is the author’s textbook example of a company whose Plan A did not succeed initially but evolved to a successful business model. While Amazon’s initial revenue model was successful ($1.6 billion in its fifth year of existence), its operating model and working capital models were not. A first iteration addressed those two models - a vice president of operations (Jeff Wilke) was brought in from the outside and focused on reducing inventory and picking mistakes, thus bringing operating expenses and working capital requirements down. The next iteration concerned the revenue model as Amazon started accommodating third parties (small and large retailers). One advantage of serving as a platform for these third parties was the opportunity of a low (eBay-like) cost of goods sold model. Amazon’s success is, in the authors' view, due as much to iteration as to innovation.
The third example is the African mobile communications provider Celtel. Looking at the sub-Saharan African market, Mo Ibrahim, an Egyptian who studied telecommunications engineering in the UK, saw potential where everyone else saw huge risks. Ibrahim used the Western revenue model as an antilog: rather than offer a monthly calling plan he would offer a more affordable pay-as-you go plan; rather than providing a fancy handset with a costly plan, he sold basic, relatively inexpensive handsets that a family or community could afford. Ibrahim then purchased relatively inexpensive telephony licenses in more than a dozen countries. Both his revenue, operating, working capital models proved successful. Average revenue per user was around $300, not far from European levels. On the operating cost side, there were no large costs associated with sophisticated billing systems, typical of Western providers. And on the working capital side, the customers used prepaid scratch cards, there was virtually no inventory as is often the case with a service business and the company was able to draw out its accounts payable.
