Wednesday, March 28, 2007

Innovation Tools Part 3: Access Denied

When I was in High School, I wanted to join the GAA (Girls’ Athletic Association). I read the by-laws of the club and it said that the GAA was for girls. Well, as it turns out, I’m for girls too, so a few of us guys got together to figure out how to join the GAA.

The problem was that in order to join the GAA you had to have participated in girls’ athletics (I guess that’s how it got its name). So a girl we knew got us the paperwork so our group of guys could form a team in the girls’ field hockey program. Things were working fine until the girls’ gym teachers figured out that we were boys. Then the plan started to fall apart.

We were sent to the principle’s office. The principle was actually very nice about it. He said that if we really wanted to play field hockey that badly, he would see what he could do about setting up a boys’ field hockey program. But the principle missed the point. The only reason why we wanted to play field hockey was so that we could get access to the GAA.

Needless to say, we never were able to join the GAA.

One of the main reasons why I wanted to join the GAA was because access was denied to me. The more exclusive the membership, the more I wanted to join. Business models can work this way as well. Depending on how one sets up access into the business model, one will get different results. I was trying to redefine how access was granted into the GAA. You can try to redefine access in your industry.

We are in the middle of a series of blogs on how to think about ways to create new business innovations. One of the ways to innovate is by changing the way access is defined in an industry. By changing the access rules, you can also often end up rewriting the rules for how the profits are divvied up—presumably in your favor.

There are three ways in which one can alter the rules of access:

1) Open Vs. Closed Platforms
2) Limited Vs. Unlimited Supply
3) Democratic (customer determined) Vs. Hierarchical (seller determined) Inclusion

We will now look at each of these individually.

1) Open Vs. Closed Platforms
These days, technology is often an integral component in a business model. The technology platform for the business model can be defined in two ways, either open or closed. In a closed system, one company tends to own the proprietary technology and they do not share it. This denial of access creates profits when the technology becomes popular and you are the only one that can supply it. By not sharing it, the company will create a monopoly and reap all of the benefits of any success.

This has been the primary strategy of Sony for years. In the video tape wars, they built a monopoly around the beta format and lost. They built a monopoly around playstation technology and won. They are now trying to create a semi-monopoly with Pioneer around blu-ray DVDs. Apple has had only limited success with a similar strategy for its computers, but great success using this strategy for ipod. This monopolistic closed access strategy is higher risk, but it is also higher reward.

Sometimes an open system has greater success. By sharing access to a technology, one can get more companies onto that technology bandwagon. The more firms behind a product technology, the more likely it will create enough critical mass to get customers to prefer it. After all, people want to be associated with winners, and if that many firms are supporting the technology, it must be the winner technology that is going to survive. That is how VHS won over Beta in video tape.

Usually, there is room for both open and closed systems: Microsoft Windows (closed) vs. Linux (open); Playstation (closed) vs. PC games (open). The key tends to be how many profit streams are produced by the technology. The more there are, the better it is to be open. The fewer there are, the better it is to be closed.

2) Limited Vs. Unlimited Supply
Sometimes access can be controlled by how much of a resource you are willing to supply. An offering supply can be limited by a number of factors: the number produced (limited amount versus unlimited amount), the amount of time allowed (limited time to purchase versus always available), and the amount of variety offered (limited variety versus carrying it all). One can be successful at either end of these spectrums.

Take, for example television home shopping channels. Usually the variety is limited to one item at a time, the quantity is limited to only a small number available, and there is a small limited time in which to call in and order the product. All of these limits create excitement. They also cause one to act quickly to purchase before the quantities and the time run out (and before you realize how foolish some of the purchases are).

On the other hand, supercenters carry just about everything, they are open 24 hours a day, and they try to always have items in stock all the time. This creates the assurance that if you shop there, you will be able to find what you need and not have wasted a trip. Limited assortment stores, like Aldi and Save-A-Lot, provide access to fewer items and are open fewer hours, but this allows them to charge lower prices. As Bill Moran, the founder of Save-A-Lot explained it to me, it’s amazing how much more profitable you can be if you can convince the customer to accept access to a more limited selection, allowing you to sell only the profitable items.

Limited availability can create a greater cache around a brand. High fashion items often loose their appeal once they become too available to the masses. On the other hand, the more access, the more opportunities to sell. Coke talks about their WAR strategy…the goal of no matter where you are, there is an opportunity to purchase Coke Within Arm’s Reach.

Fast Fashion retailers like Zara and H&M cycle through their clothing styles so quickly that they sell out the limited quantities a full price, before there is a need for heavy markdowns and clearances. Yet others find success sticking to one product and pushing it year after year, like WD-40.

3) Democratic (customer determined) Vs. Hierarchical (seller determined) Inclusion
Sometimes access is determined by the customer and sometimes it is determined by the seller. Take, for instance, restaurants. McDonald’s has a very democratic, customer-driven approach to access. Anyone who wants to come in is allowed to come in and they are served in the order in which they arrive. Contrast this with a snooty trendy restaurant, where only people on the “A” list determined by management are allowed to make reservations. If someone higher up on the list wants to get in, the owner may cancel the reservation of someone else, allowing the more prestigious guest preferential treatment. “Commoners” have no access and are kept out by a bouncer. This would be a seller-determined access, using a hierarchy to make access different depending on the customer’s status.

The same thing can occur with airlines. Some airlines treat everyone the same and it is first come, first served. Others have complex frequent flyer memberships with various levels of platinum, gold and silver, and different preferential access based on the type of membership.

In many industries, about 80% of the profits come from about 20% of the customers, and about 50% of the customers are unprofitable to serve. This is especially true in high service businesses, like banking. Some banks are acting on this knowledge by trying to discourage low profit customers from banking with them by giving them less access to banking services (and giving more service access to the profitable customers). This is called an “intelligent loss of business,” discouraging access to customers that are unprofitable to serve (or limiting your offering to them so that they become less unprofitable).

In an unusual reverse twist, Progressive Insurance uses increased access to get rid of potentially unprofitable customers. Progressive believes that their insurance quotes are as low as one can be and still be profitable. If another insurance company can offer a lower rate, Progressive believes the other firm is taking on an unprofitable customer. By offering people access not only their own quotes, but access to competitive quotes, Progressive is encouraging the loading up of unprofitable customers onto their competition.

Although we were able to just scratch the surface, one can see that there are a variety of ways in which one can alter the access to goods and services in a business model. There is no single best approach. People can make a profit rearranging the access elements in a variety of ways. If you feel that the marketplace is stacked against you under the current rules of access, perhaps you can create a greater piece of the action by operating under a different set of access rules.

Again, as mentioned in the last two blogs, sometimes the most revolutionary innovations are not about creating an entirely new product. Instead it may just be about tweaking the rules of access in an industry.

Managing access is vastly different from discriminating against people based on race, ethnicity or religion. This is not about hatred and bigotry. This is about choosing a market to serve and developing the access rules which best serve that market.

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