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 / Second Quarter 2000 / Issue 19(originally published by Booz & Company)


Jay Walker: The Thought Leader Interview

This explains why such people don't understand WebHouse Club. WebHouse Club is just Costco reinvented. Journalists and early adopters have never been in a Costco or a Wal-Mart. So convenience, to them, seems to be the ultimate driver of Internet commerce. And if your commercial interpretation of value is a convenience model, then Jeff's Amazon approach, driven by convenience, makes sense.

S+B: But it sounds to me like a catalog shopping model — which could be a good business, but it isn't terribly earth-shaking.

WALKER: It's a richer catalog-shopping model. But it has a terrible flaw: No business revolution in the history of our country, no commercial revolution in the history of our country, has ever taken absorbed costs and put them into the non-absorbed sector. None.

An absorbed cost is when I drive to the store and use my own gas, labor, and car depreciation. I absorb that cost. When UPS, on the other hand, has to drive in the other direction to my house, it's an explicit cost — gas, Teamsters, and depreciation. Guess what? None of those things scale. Not only that, there now have to be, explicitly stated in the transaction, shipping and handling costs. Convenience-based businesses are transforming costs that were once absorbed into explicit costs. They play against the mass customer desire for savings.

S+B: So you're saying that the best businesses are built on the fourth of the value-creation sources you enumerated before: savings? Or to put it another way, are you suggesting that profitability in this new medium is predicated on figuring out how to take the costs out of an industry's value chain?

WALKER: Not at all. It's about a balance among those sources of value creation. The opportunity of the Internet is to reinvent the value equation around an information movement. It's not about taking costs out of the system. Putting costs in the system could turn out be more valuable. Disney didn't take costs out of Disneyland. It revolutionized the theme-park business by injecting costs into the business. Network television didn't take costs out of programming; it injected costs into making an entirely new model. Business is about sustainable value; it's not about cost reduction. Don't fall into the engineering trap. Engineers take costs out of things. Businesspeople engineer value equations. And they don't care whether it's about more or less cost: They only care about whether there's more or less value. And if they can charge for the value they create, that's where the successful business lies.

We don't look back and recognize as heroes people who took costs out of the electric distribution system. We recognize as heroes people who understood that electricity had the power to change our lives in every possible way, and figured out how to bring it to everybody at a cost everybody can afford. The real value creators are rarely engineers. You've been tricked into thinking that the Internet is an ERP model of pulling costs out of an economy that somehow is bloated. The economy is actually massively efficient. Cutting costs is a trap. It is a limited-thinking trap.

S+B: But cost-cutting underlies this year's infatuation with reintermediating the business-to-business marketplace.

WALKER: That represents a total misunderstanding of business principles. There is no long-term sustainable value in getting between a professional buyer and a professional seller. They are incredibly good at making sure nobody between them makes any money. I don't care if you're trading T-bills or steel, nobody gets rich between professional buyers. You may for a period of time make money while you help depress their costs, because you have some advantages. But, very quickly, professional buyers and professional sellers don't need your help. And unless you've got a proprietary system in the middle, you can't possibly add value long-term.

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