This article is part of a series, The Seven Innovations That Will Change the World.
Servicization is a recent and growing trend. So recent, in fact, that Microsoft Word is trying to convince me that it does not exist by underlining the word in red. Typically, companies make products with a particular function. After selling the product, the company wipes its hands and moves on to its next customer. For instance, Whirlpool sells washing machines, and the function of these machines is getting clothes clean. Save warranties and guaranties, Whirlpool has no other contractual obligations to the buyer once the company sells the machine.
Servicization focuses on what consumers really want: the function. Instead of selling washing machines, Whirlpool could sell clothes washing as a service. The company could install washing machines in consumers’ homes and charge consumers based on how much they use the machine. The machine could have an attached smart meter that transmits the number of washes back to Whirlpool. The company would send you a monthly bill, just like your electric utility. Whirlpool, remaining the owner of the machine and simply the purveyor of a service, would be responsible for maintenance and would have an incentive for the machines to be reliable. After all, they would not get paid if the machines break down and the consumers can not wash their clothes.
Whirlpool could actually increase its revenue if it changes to a servicization model. Currently, washing machines cost around $2,000 and can last around 11 years (Consumer Reports). In contrast, a wash at the laundromat costs around $2. If a family of four does 500 washes a year, that’s 5,500 washes over the life of the washing machine, or the equivalent of $11,000 at the laundromat. If Whirlpool were to price its new service at par with the laundromats and Whirlpool’s weighted average cost of capital is 10%, then the value to Whirlpool is $7,145.
The consumer benefits in a servicization relationship because they do not have to invest in a depreciating asset and recoup the value of their purchase over time by washing their clothes. Besides the increase in revenue, Whirlpool would receive a large tax benefit as well. Since they do not sell the washing machines to the consumer (it just sits at the consumer’s house), they can keep the washing machines on their books as a depreciating asset and offset their income with the depreciation. Over the last four years Whirlpool’s average cost of revenue exceeded $17 billion. Even if only 5% of that is taken as depreciation on an annual basis it would have a sizable, if not transformational effect on Whirlpool’s tax bill.
In addition, new people would be able to afford washing machines in their homes, since they only pay by the wash, not for the whole washing unit up front. In this scenario, production would increase, and the company would be more resilient in downturns because people are more likely to continue washing their clothes and paying a small amount each wash rather than making large ticket purchases. Whirlpool benefits, its employees benefit, and its customers benefit as well.
For me, washing machines are a simplified example of servicization, but there are countless more applications of servicization beyond home appliances:
PRODUCT – SERVICE or FUNCTION
Computers – Digital computation
Automobiles – Mobility
Clothing – Warmth, style, status
Food – Nourishment, enjoyment
Copy machine – Printing
Aircraft engine – Thrust
Lightbulb – Illumination
Furnace – Heating
Voice-enabled digital assistant – Connectivity, convenience
Books – Knowledge, information, stimulation, storytelling, graphics, enjoyment, posterity of knowledge
Health care – Health, wellness
Hard drive – Storage, posterity, retrieval
Circuit breaker – Current, safety
Some of these products have already been servicized, but I can conceive of some sort of servicization scheme for all of them. Xerox has servicization contracts with offices. Instead of simply selling copiers it sells contracts that allow offices to use copy machines and pay by the copy (or more likely, for tiers or block-quantities of copies). Xerox is responsible for maintenance of the machines. Defense contracts are also servicized to an extent. Fighter jet engines have to guarantee a certain number of flyable hours to the military. The manufacturer is on the hook if downtime for maintenance puts the jets out of service for too long. One of the first commercial examples of servicization was for office flooring and carpeting. The concept was not very successful because facilities managers had a hard time shifting capital budget expenditure to operating costs. Consumers may be more willing to make the shift.
I could imagine Amazon switching to a subscription model for Alexa. Right now, the product is actually called an Echo, but many people refer to it as their Alexa anyway. Why not just make Alexa that actual product? Amazon could simply give people the device (or enable it over other devices that we use, such as our phones, televisions, and computers) and have us subscribe to various levels of service from Alexa (number of requests per week, music access, advanced information access, additional “Skills”, etc.). Undoubtedly one of Amazon’s objectives with their Echos is to increase engagement between consumers and all of the company’s products and services. Certainly, this new service-based model would incite more interaction and engagement with Amazon. One of the reasons I personally do not use Alexa is because I do not want to pay for one of the devices, especially when I already have a Bluetooth speaker that I am fairly fond of. If Amazon lowered the monetary barrier to access, I may be more inclined to become a user of the service.
Health care, for the most part, is already a service, but we pay for its delivery rather than its function. I could imagine a very different health care system in which we compensate providers for what we actually value: mainly wellness, as well as restoration in certain situations. We could actually wind up paying more the healthier we are rather than the sicker we are! Many people would appreciate that change, especially the government, which is the largest buyer of health care in the world.
The largest market in the world is the market for labor. Most labor, especially in developed economies, is full-time. Our time is bought as a product by our employers, but what the employers actually want is the function: applied strategic thinking, computation, applied engineering, customer consultations, treating patients, servicing vehicles, etc. In the current economy, in which there is extremely low unemployment, there is less risk to having salaried employees. Labor is in tight supply and companies are able to meet payroll by generating regular revenue. However, during downturns, when consumption decreases, full-time employment becomes a critical problem and companies wind up laying off employees, only exacerbating the downturns. Without guaranteed salaries no one would ever be laid off and the economy would have a natural hedge against severe downturns.
Freelancers have already servicized their labor, but nearly all professions could conceivably be servicized. Sales roles are partially servicized through the paying of commissions. The problem is matching service providers to customers. It’s typically easier to work with garages than for every person who needs an automobile repair to find a mechanic with some free time. The same goes for companies. It is difficult to find and contract on a continuous basis doctors, pilots, drivers, construction workers, bank tellers, data scientists, store managers, and nearly all other jobs, so they are usually just hired on at least a semi-permanent basis.
Aggregators have begun to servicized labor by ushering in the “gig” economy. An aggregator usually just replaces the old employer, but with none of the risk of having to pay salaries. For instance, Uber facilitates an income for all of its drivers, but Uber does not directly pay any of them, so in a downturn Uber would not be responsible for making sure any of them earn an income. For a truly equitable system to emerge the intermediaries would have to disappear and workers and companies (or the buyers of any service) would have to be able to directly contract with each other. Blockchain is one innovation that offers a solution to this problem. Blockchain allows for direct peer-to-peer transactions, so no aggregator is necessary to facilitate matching. In a way, all participants would own the matching algorithm and they would all benefit from it.
Maven car sharing, by GM
Another market that we may soon find to be servicized is automobiles. Automobiles are vastly under-utilized assets, spending most of their time taking up space in our garages or sitting outside of our workplaces. Instead of buying automobiles for personal use, imagine receiving an automobile on-demand from an auto marker or a fleet operator. Rental companies do this on a small scale now, but as autonomous driving technology develops, the scope of on-demand car service can expand. People will no longer have to own their own vehicle to guarantee themselves mobility. No matter where you need to go, a car will be available to you and you will pay based on how far you go and how long it takes you.
In the example of the Whirlpool washing machine, the consumer may very well pay for the electricity to operate the machine on her own. However, it is possible that for items like air conditioners, home furnaces, and automobiles, the manufacturer would pay for the utilities. In this arrangement, the manufacturer would save money the more efficiently the machine operates. Servicization has an opportunity to create a more sustainable economy. Carbon efficiency would be aligned with the financial incentives of manufacturers. No matter what the miles per gallon requirements legislated by the government it would always be beneficial for an auto manufacturer to exceed the standards. They could still charge the customer based on mileage, but the manufacturer would save money on gasoline.
Many developing countries do not have access to technology and machinery because purchasing them are too expensive and there is less access to credit in emerging markets. This leaves most low-income countries dependent on exporting raw materials to earn dollars and then spending those dollars on imported foreign goods. Servicization could change this. Farm machinery, manufacturing equipment, and construction machinery can all be servicized by the original equipment manufacturer. The amount of capital needed for new projects would be much lower, allowing for more development.
Around the world, many people buy big ticket items, like washing machines and automobiles, on credit. Servicization presents a large threat to consumer lenders around the world. Consumers would receive access to machines like washers for free and then just pay a little bit for each use. There would be far less need for consumer loans and credit cards. Consumers would be able to escape downward debt spirals, and finance ministers would be glad to see capital being deployed to more productive sectors of the economy.
Think of all of the items you use and rely on every day to go about your life. Sitting here at my desk (1) now there is a window (2) in front of me. I’m writing on a laptop (3). I’m listening to music from Spotify (4) of a Bluetooth speaker (5). The lights (6) are on, the air conditioning (7) is running, and my laptop is plugged into a socket to receive electricity (8). My food comes from a stove (9), I use a stationary bicycle (10) at the gym, and my cell phone (11) is never far from me. I enjoy cold water from a dispenser (12), and my clothes are washed in a washing machine (13). I take medicine (14) every morning to prevent malaria. We have an economic relationship with all of these items or services, but the terms of the relationship can easily be changed, both for the benefit of the consumer as well as the purveyor. The computing power of this laptop and my smartphone sit idle for most of the day. I have no way of knowing how efficient the air conditioning or the stove are, and I’m going to be quite upset if I get malaria despite having paid for the prophylaxis and adhering to the regimen.
A few miles west of Chapel Hill, North Carolina, there is a raised wooden pavilion with tables and chairs, surrounded by acres of farmland. On these fields they grow berries, herbs, and even tea leaves, which are steeped and served at Honeysuckle Tea House, an establishment inside the breezy open-air structure.
The farm and Honeysuckle Tea House are part of a large ecosystem of corporate entities that work together to reinforce each other and enrich the local community.
Honeysuckle and the farm are owned by EastWest Organics, a farm management company that owns or leases 227 acres of farmland and food producing forest land in Orange County, NC. They produce agricultural products that are used in beverages, such as berries, nuts, tea leaves, and honey.
In addition to the farms, EastWest owns the aforementioned tea house, as well as the Looking Glass Café in Carrboro, NC and the Honeysuckle Meadery and Wine Bar, also in Carrboro. Looking Glass is a traditional coffee shop which is attached to the meadery’s tasting room. Here you can sample Honeysuckle’s meads as well as other local beverages, such as wines, ciders, beers, and fermented beverages like kombucha. The meadery makes Honeysuckle’s meads, with ingredients sourced from EastWest’s farms.
EastWest is 20% owned by Unique Places to Save, a local non-profit. Unique Places (“UP2Save”) conserves unique social, cultural, natural, and agricultural places around the United States, and has a lot of assets in North Carolina. One such is the Keith Arboretum and Forest, in Chapel Hill. The arboretum was founded by a University of North Carolina professor over 40 years ago, and now has more than 4,000 species from temperate forests around the world. The core arboretum is buffered by additional protected woodlands and the Keith family farmstead which is available for private rental.
UP2Save has allowed Bee Downtown, a local startup, to house their beehives at the arboretum. Bee Downtown places beehives on the premises of corporations and other institutions who pay to sponsor hives. In exchange, the corporations receive educational content, have a new method of engaging with their employees, and get the honey from the hives. Bee Downtown is a successful, growing company that is now expanding to Atlanta from the Research Triangle region of North Carolina. The arboretum is also one of the farms for EastWest Organics. The company cultivates botanics from the forests and fields and also uses the bees’ honey for its meads (Bee Downtown also has hives at the tea house location farm. The bees pollinate the plants at the farm which produce the crops, such as berries). Given the extreme biodiversity of the arboretum, the honey from these hives is arguably some of the most unique in the world!
The number of large corporations that Bee Downtown works with is remarkable. Just in the Research Triangle area they have hives at IBM, SAS, Murphy’s Naturals, North Carolina State University, and even Burt’s Bees. Although many of its customers are large companies, it partners with other local companies as well. They have designed t-shirts with Durham, NC-based apparel company Runaway. Local companies that sponsor hives can also take the honey they collect and sell it under their own brand name (as Runaway has done).
One of the interesting aspects of these strong ties between entities is that UP2Save is a non-profit. Nevertheless, it sits as an anchor and facilitates a lot of commercial activity. Another revenue generating activity for UP2Save (beyond the proceeds it receives from EastWest Organics) is mitigation banking. The US Army Corps of Engineers requires new developments to offset their impact on wetlands by purchasing mitigation credits. These credits are created by mitigation banks. The “banks” are conserved wetlands which conform to Army Corps of Engineers environmental standards. UP2Save is able to meet its conservation mission, generate revenue, and help facilitate the development of new properties in local communities.
All of these interconnected activities also create educational opportunities. The various entities offer educational programs as well as have spaces for formal or informal educational events. Bee Downtown educates its corporate clients about the importance of bees to the world, and they also host school groups at the arboretum. The arboretum doubles as an educational and research laboratory, given the array of species that it houses. Honeysuckle’s beverages educate consumers about agricultural practices and beverages and wellness. Furthermore, the agritourism promoted by Honeysuckle Tea House, the arboretum, and Bee Downtown grow interest in conservation and agribusiness, and all of these entities offer internships and other practical experiences for students from all of the local universities.
Local business is not an ideal in and of itself. The economics of local and small business is more nuanced than money staying in communities. However, local businesses that offer unique and superior value are worthy of our praise and patronage and can certainly strengthen communities all around the United States. Ecosystems of local businesses, such as the one highlighted here centered around UP2Save, promote culture, provide sustainable products for consumption, offer employment for individuals of varying levels of skill, and integrate with the society and education system. Importantly, they also offer partnerships and platforms for new local businesses to start up and grow. Perhaps the best argument for supporting local is that strong local business promotes income equality, whereas big box retail continues to consolidate wealth in the hands of a few wealthy individuals.
Strong local economic ecosystems also enhance service companies, and tech and platform companies. Many of the logos above were designed by a local creative agency called The Splinter Group. ROMR, a local tech company that allows individuals to book recreational access to private land (kind of like the AirBnB for conservation), has the Honeysuckle farm and the Keith Arboretum on its platform. However, these local economic ecosystems also rely on one-to-many companies for a variety of critical business services, and I continue to believe that one-to-many companies have an important role to play in the national economy and our local economies.
Splinter Group’s work
For instance, all of these local companies and non-profits have websites, so they hosting and domain name registration services from companies like GoDaddy and Digital Ocean (I use these providers for my company). Splinter Group probably relies on Adobe for its design software. Nearly all of the companies promote themselves on a combination of Facebook, Twitter, Instagram, and Pinterest. Some also use LinkedIn for certain services. In addition, the local companies use payment services like Square or Clover to take payments and keep track of their finances. Companies that cheaply provide important business services to many companies will continue to play an outsize role in our economy. However, they need to proactively support the country’s economic values, or they run the risk of becoming vilified by the country, as we have recently seen with Facebook and other large tech companies.
Over my years (well, year and a half) at business school, I’ve been asked a handful of times, in formal interviews and informal settings, who my favorite entrepreneur is. I didn’t have an answer. However, over the last few months I’ve become increasingly impressed by David Chang. I’m now prepared to formally declare him my favorite entrepreneur.
David is a restauranteur. He opened Momofuku Noodle Bar in the East Village of New York City in 2004. It served Asian buns and noodle bowls. It gained a reputation for serving tasty food, and David opened another restaurant nearby. It did not take on quite as well, and was at risk of closing. David and his team scrapped the kooky Korean dishes for a more inventive late-night menu, and people began to show up in droves. He also fostered a friendship with a New York Times food writer, Peter Meehan, and in 2009 they published a cookbook inspired by Momofuku.
The cookbook was not David’s last foray into media. With Peter, he started a magazine called Lucky Peach (it recently published its last edition), and they have a new show on Netflix called Ugly Delicious. David’s restaurant business has proliferated into an empire, with approximately 13 properties around the world. In addition to the restaurants, he has a fast-casual fried chicken sandwich chain called Fuku and co-owns a chain of soft serve ice cream and cookie joints known as Milk Bar. David is also prolific on Instagram, with far north of one million followers across his personal and professional accounts. He has made #uglydelicious one of my favorite hashtags. He was just in South Korea (David is a first-generation Korean-American) working with NBC on the Winter Olympics.
https://www.instagram.com/p/Be72rXNDxzd/?taken-by=davidchang
David’s work has always had a hint of the digital to it. Momofuku Ko is David’s two Michelin star restaurant. You can dine there by online reservation only, and it only has a tasting menu. Reservations become available 30 days prior to the day of service. David extended this online-only idea into a food delivery concept in New York called Ando. It was a delivery only company that aimed to use technology to revolutionize the food delivery space. It received millions of dollars in funding, but always had rocky business fortunes. In January, Uber Eats acquired Ando and will be integrating Ando and its technologies into the Uber Eats platform.
David did not stop at food service, media, or technology. He has also dived into food research. This has sparked a line of packaged food products that take seemingly off-kilter approaches to traditional Asian staples. David sells a miso made from chickpeas, sunflowers, or pistachios that he calls hozon and a grain-based soy-type sauce called bonji. I think my friend Dave (not Chang) even had a bonji Old Fashioned at Momofuku Má Pêche when we went there back in November. That meal remains my only Momofuku dining experience (although I did get a Compost Cookie at Milk Bar upstairs after the meal).
In addition to the packaged foods, David has partnered with a food lab called Booker and Dax to sell kitchen appliances. They have a special blowtorch for food, a food centrifuge, and a special tumbler for cocktail shakers. Booker and Dax is now also a bar inside one of David’s restaurants.
So why is he my favorite entrepreneur?
Sure, he is successful, but there are plenty of successful entrepreneurs, even more so than David. What I admire about David is that he has used different types of business to ever-expand his empire further outward, but has always kept a connection to his roots. It’s all food related, and shares similar themes of experimentation, and even the melding of the culinary and the technological. I value narrative as a high art form, and David seems to always have a narrative – whether it be literally telling stories on television shows or speaking about Asian gastronomy through his dishes.
https://www.instagram.com/p/BVNiU12Dn24/?taken-by=davidchang
I’m also excited to see how David can use his knowledge, experience, and funding, to make a positive impact on the world. He talks about improving the quality of life for food service employees. Booker and Dax is about finding solutions to food problems. Ando was about innovation in food delivery, and Ugly Delicious tackles issues of culture, politics, and place in the world. I hope that David, his team, and his posse expand the empire a little bit further and strive to make a persistent, positive impact that uses good business sense and a positive narrative to leave the world better off.
In a past life, I had a job as a Credit Analytics consultant with Ernst & Young. I whipped up more than my fair share of spreadsheets and coded up a few SAS analyses here and there for the banks I worked with. However, the most important part of my work was the documents I wrote. Distilled into one sentence, my job as a consultant was to synthesize analytical work into model validation reports and model methodology documentation. At one bank I wrote over 500 pages of text, and over my more than two years with EY I produced more than 1,000 pages of analytical documentation.
However, my true love for writing and a passion for technology both blossomed while I was a Volunteer in the Peace Corps.
Writing seems like something that naturally goes with Peace Corps service. Volunteers have tons of meaningful experiences and tons of time for reflection. That lends itself to writing. I did plenty of writing, mostly on my two blogs, both of which I continue writing on to this day. However, technology is more of a non-sequitur with Peace Corps service. I did not have much access to technology, so how did I become so interested in it?
Me being Nicaraguan
Along with time to write, Peace Corps service gave me a lot of time to read. I had to tell my mom to stop sending me links to articles. I had inevitably already read them. I read most of the NY Times on a daily basis, and my parents got me a digital subscription to The Economist. I also devoured much of Wired, and whatever else popped up around the internet and on my Facebook feed.
Digesting all of this information led me to realize that technology could go a long way to solve many of the problems that Nicaragua and other lesser-developed countries around the world face. Even more so than ‘technology,’ which is a word typically associated with something tangible or engineered, there is a thirst for innovation in lesser-developed countries. New ideas, new ways of doing things, and connecting disparate ideas to come up with novel solutions to problems can all be used to solve the problems of international development. Even a staid and old idea in one culture might be embraced as new and promising in another.
When I completed my Peace Corps service I entered business school intent on learning about global business, operations management, entrepreneurship, and technology and innovation.
Midway through business school, during the height of my summer internship with UPS, I felt confident that I had the skills to try to tackle some of the problems I encountered in Nicaragua. I founded a startup in July 2017 called ChickenBus. It is a socially minded tech startup dedicated to improving access to public transportation in lesser developed countries. The MVP is under development, and I hope to ship in Q1 2018.
Read the continuation here on my other blog, Incidents of Travel …
Think back forty years to how businesses used to operate and grow. Someone would cook up a good idea for a product. A company would be formed around that idea to manufacturer it, warehouse it, and then distribute it. Supporting these functions were a sales, marketing, and finance workforce. If you invented something, you then had to get machinery to manufacture it and hire a sales force to get it into the hands of customers. There were few other options.
Since then, businesses have evolved considerably. If someone has a good idea for a product they design it and market it. That’s it. Manufacturing is outsourced, often offshore. Sales are facilitated through e-commerce marketplaces. Fewer and fewer companies are bothering to have their very own websites, let alone a brick-and-mortar store. Logistics are handled by third-party logistics providers. Going asset-lite is the way to go. That lets you rapidly scale scale scale if you want to.
The other side of the coin is the companies that are providing all of these support functions. Since they have to own the assets – whether they be warehouses, vehicles, servers, machines, or financial capital, they have an incentive to be very large companies. Scale is their friend. In fact, it is imperative for success.
What has emerged is a dumbbell economy: On one side, you have many small weights that all add up to a hefty load of economic activity. There is a bar connecting these weights to the other side, which is comprised of a few heavy weights. Summed together, the few heavy weights equal the weight of the smaller weights on the other side, but there are far fewer heavy weights than there are small ones.
The dumbbell economy can be best illustrated through these two graphs. While companies with 1,000 or more employees make up just 0.21% of all companies in the United States, nearly 40% of all privately employed workers in the United States work for one of these companies.
I’m not the only person to have made this observation about the shape of the economy. The Economist reported on it in 2016. Deutsche Bank also wrote a report on the matter.
In this dumbbell economy, the few heavy weights represent large service corporations that provide services and other knowledge-economy goods to other companies. These include Microsoft, Dell, IBM, Amazon, the Big 4 accounting firms, UPS and FedEx, Google, Maersk, Delta, Caterpillar, John Deere, and Salesforce.com. The many smaller weights represent small and medium businesses. These include mom and pops and specialty stores, but they are not only brick and mortar. Growing online brands, artists, and many other private companies are on the lightweight side of the economic dumbbell. To complete the metaphor, the bar connecting the two sides of weights represents infrastructure. Roads, airports, cables, and public utilities, which are essential for commerce to be able to function. Government is the arm that curls the dumbbell and makes it move. If the government is not exercising then iron won’t get pumped – the economy will not function properly and grow.
The heavyweight companies invest in assets and then sell them as a service to the lightweights. Without the heavyweights, the lightweights would not be able to grow as fast and expand their reach as wide. The most successful heavyweights are those that are most valuable to the lightweights. Those that can help the smaller, growing companies the most while pinching the lightweights’ bank accounts the least will find themselves with the most demand, as well as investors willing to provide cash to allow them to invest and grow.
While the dumbbell is a useful analogy to understand this phenomenon, I think that it is most appropriate to call this one-to-many. One company can support activity for many others.
It may be best to provide a hypothetical example. For the sake of illustrating my point, I will bold all of the heavyweight companies that I mention in my narrative:
Imagine that I am an engineer, and with the assistance of Autodesk design software I invent a great new device that I want to start selling. I’ve drummed up a lot of support for my nascent product by creating an Instagram account for the device, but I do not have any capital to start production, so I start a crowdfunding campaign on Indiegogo. I raise enough money to begin production, and I hire a contract manufacturer in Asia to begin batch producing the device. I pay FedEx as my freight forwarder to get the batches from Asia to the United States, where I will offer the device for sale. My primary sales channel is Amazon.com, although I store the units in my home and ship them upon receiving an order using UPS and the US Postal Service.
I do have a website which is hosted by GoDaddy.com. It’s basically just a landing page for people who find the device through Indiegogo. It forwards them to the Amazon product page so they can make purchases. However, as sales continue to grow, I continue to design, and support grows for my ideas, I raise some additional money from a venture capital firm. With this money, I hire some employees, and we move into an old industrial area in my city that has been repurposed as a business campus. It’s perfect for my small business that needs a lot of space for industrial design work.
As we launch new products and have a steadier flow of inventory crossing the ocean from Asia, we make a concerted effort to strengthen our brand and diversify our sales channels away from Amazon.com. We build out our website and hire a third-party logistics provider to warehouse our inventory. We want to be able to take orders online and receive payments so we pay for some third-party software plugins and also work with Paypal. We also use some third-party digital marketing software services and pay for adds on websites like Google and Facebook.
The beauty of the one-to-many economy is that it allows new ideas for products and services to be born, grow, and be distributed to consumers who find them appealing and valuable. The problem, some may say, is that we continue to feed the “heavyweights” and cede more and more economic power to them as a result.
One-to-many supports a vast number of growing small and medium businesses, but it also necessitates the existence of a few large third-party providers – the heavyweights. Many people dislike the control of these large companies. In the wake of Amazon’s acquisition of Whole Foods some people said that there were anti-trust concerns. Goldman Sachs has been described as rather tentacular. The EU just slammed Google with a multi-billion Euro fine.
“[Goldman Sachs is a] great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”Matt Taibbi, “The Great American Bubble Machine,” Rolling Stone, July 9-23, 2009
To ease some of the discomfort that we have with the heavyweights having more and more control over the economy, we have to think about ways that we can leverage the one-to-many economy to nurture the economic activity that we most value. Use the heavyweights to make the lightweights as attractive as possible.
What exactly are the elements of capitalism that we value, particularly in the United States?
The heavyweights need to proactively ensure that they are not hindering the attainment of any of these values. They may also go a long way in earning widespread public support if they are proactively supporting these values. Aligning themselves with these values may also strengthen their businesses. However, just creating a foundation and donating to community causes is not enough when it comes to the heavyweights. Their core business functions need to keep these values in mind.
My hypothesis here is far from original. Michael Porter, Harvard professor of Porter’s five forces fame, called this concept, “creating shared value,” in his 2011 HBR article with Mark Kramer. I’ve simply contextualized it here using some new data and appended my proposals to the “shared value” idea.
Here are some examples of companies that I think are going a good job:
Autodesk, which creates and sells software for design (AutoCAD is one of their hallmark products, but they have countless other programs which are used in 3D design and printing, animation, architecture, and more fields), has heavily invested in education (primary through university), entrepreneurship, sustainability, and medical innovation. Students, entrepreneurs, and teachers actually receive free access to Autodesk software. They figure that by advancing these fields they will build goodwill, train practitioners that will in the future become loyal customers, and the company may even position itself to capture a lot of business in emerging fields, such as Internet of Things and augmented reality/virtual reality.
UPS has gone one step further and has come up with a way to help the customers of their customers. Rio Grande (whose parent company is Berkshire Hathaway) is a manufacturer of speciality jewelry equipment. They ship with UPS. This year, Rio Grande created a membership program for their customers called Rio Pro. UPS became a partner with Rio Pro and offers discounted shipping services to Rio Pro members. In this relationship structure, everyone wins. Rio Grande’s customers are pleased because they get access to discounted shipping. Rio Grande wins because their customers are more satisfied and more successful. UPS wins by bolstering its relationship with Rio Grande as well as building a trusted relationship with a number of growing small businesses.
DHL, one of UPS’s main competitors, particularly outside of the United States, is creating an online marketplace for brick and mortar retailers in its headquarters city of Bonn, Germany. The marketplace is called Allyouneedcity, and I highly doubt that DHL is doing this just altruistically. They certainly hope that it will help support the retailers, but it also opens up opportunities for them. For example, they could use this marketplace to launch a pilot of same-day delivery, or they could expand the marketplace to compete with increasingly powerful e-retailers and expand DHL’s own revenue channels.
Amazon launched an interesting program this year, in which families on government assistance (SNAP and TANF) can receive a discounted membership to Amazon Prime. Prime is a large sales channel for retailers selling on Amazon’s marketplace (third-party e-commerce sales are actually growing faster than traditional e-commerce), so this will give those retailers more access to lower-income earners. On the face of things it might just seem like Amazon is shooting across the bow of Walmart, or even that they are trying to exploit lower-income individuals. With Amazon forging more and more into e-groceries, different kinds of merchandise, and value-added services, this discounted Prime service may actually improve access of lower-income individuals to products that they need for their health, nutrition, well-being, and income generating activities. Access, particularly in areas known as “food deserts” where there are no nearby grocery stores, is a serious problem for lower-income individuals. Amazon’s new service may be beneficial to its bottom line and help its customers as well.
In my opinion, Facebook may be the heavyweight that is most struggling with its vaunted position. It grew to prominence by facilitating a kind of social interaction that had never been conducted before. However, these sharings are increasingly being pushed to other platforms in the Facebook ecosystem, such as Messenger, Instagram, and WhatsApp. That’s left Facebook with a free speech billboard. At its most benign, people would say that Facebook is just a dumping ground for useless videos, blurry photos, and pitiful updates on people’s lives. At its worst, it’s a hate-littered echo chamber that is being used to manipulate people into believing things that are patently false.
Facebook is far from doomed. It remains a very successful company, and I believe that it offers a lot of value to society, despites the criticisms. However, to remain relevant, it needs to start focusing more on economic values. For instance, I could imagine Facebook launching an AI assistant (a la Siri or Alexa – it’s so in vogue these days) that focuses on social connections (I’m partial to the name Joffrey, but that’s up to Mark).
“Joffrey … when was the last time I talked to George?’
“It’s been six years since you last heard from George. Would you like to contact him now?”
“No, that’s alright, he’s probably busy.”
Meanwhile, in George’s house:
“George, I see it’s been awhile since you spoke with your friend. Would you like to contact her?”
“Yes, I would.”
“How would you like to contact her?”
“By e-mail.”
“Would you like a summary of your friend’s activity since the last time you spoke to her before we write an e-mail?”
“Yes I would Joffrey.”
There are various permutations of how Joffrey could facilitate meaningful interpersonal interactions around the world, and help with networking, friendships, tourism, mental health, and education. Facebook would benefit as well, because the more activity that takes place within their network, the more opportunities it has to monetize the activity.
There are countless more examples of how heavyweights can focus on economic values. Imagine if AT&T offered a comprehensive telecommunication plan for refugees arriving to the United States. Even more so, they could offer a special plan to refugees starting new businesses. AT&T would make great strides in facilitating communal integration for some of the neediest people in the world and helping them become successful members of society. If AT&T could expand this plan to include additional social support services, educational and NGO partners, as well as language assistance (Rosetta Stone or DuoLingo) then even more value could be created, and at little additional cost to AT&T (I only choose AT&T because it is one of the largest telecommunication companies in the country).
For instance, banks
As one-to-many companies begin to support more and more smaller businesses, and the connections among firms become more and more complex, I begin to see the economy less traditionally, with individual companies making one-off transactions of goods or services. Instead, I see an economic mesh. Every transaction is distributed among many different firms in the economy, and these transaction could not be successfully completed without all of the firms working together. The heavyweights may continue to grow, and some people may get very rich as a result, but so long as they are supporting opportunity for millions of other people and in-line with our economic values then it is a win-win outcome.
Joffrey: “Catelyn, I noticed that your sister Lisa just posted a photo on Instagram from near you. Would you like to send her a message?”
Catelyn: “No Joffrey, that’s ok, thank you.”
Aug 11
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My MBA internship this summer is with UPS, so that makes me a venerable expert on the small package shipping industry. Let’s dive in: Lots and lots of people and companies don’t ship enough to fill trucks and get those trucks to every corner of every country in a short amount of time, so they […]
The Economics Of ... 