Wednesday, February 11, 2009

A Metaphor is Not a Business Strategy. Save it for Literature Class.

We will become a financial supermarket.
We are capturing strategic beachhead.
We are giving away the razors to sell the blades.

Over the past 5 years, businesspeople and entrepreneurs have evoked numerous such bad metaphors to articulate why their ventures will become successful.

Well, I have some very unfortunate news.

A metaphor is not a business strategy. It is a literary device that belongs in the high school classroom.

And the next time you hear someone evoke a metaphor to describe their business, you should run for cover.

Because it usually means that business is headed in one direction. And it's not up.

Take for example, the idiotic metaphor of the financial supermarket. This single metaphor has been responsible for possibly the greatest shareholder destruction and economic crisis the world has known to date. Citigroup, Merrill Lynch, UBS all justified their catastrophic strategies on the quest to become a financial supermarket, without even asking what this metaphor meant.

Well guess what ... people do not want to go to a supermarket where they get constantly ripped off. If you look at history, people shifted from mom and pop grocery stores to supermarkets because these supermarkets offered every day low prices on virtually all of their items. Compare this to banks like Citibank who try to foist ridiculous products and services onto you just because you signed up for a checking account. A supermarket who tried this on their customers would soon go bankrupt.

Or take the metaphor of strategic beachhead. If you know anything about war, you would know that most attempts to capture any type of beachhead ended in enormous casualty for the attacker. Not that different from many Internet companies who have no business model but think that they can create one after burning millions of dollars of venture capital.

A metaphor is not a business strategy. It is a literary device that belongs in the high school classroom.

A business strategy is an articulation of how you will consistently make money.

So how can a business make money? It's no big secret. There are only four ways to make money.

  1. You can grow your revenues. You can do this by selling more stuff, selling to more people, having these people buy your products more often and selling at higher prices
  2. You can lower your costs. You can lower your fixed costs or your variable costs.
  3. You can play around with your capital structure. You can try to get cheaper financing, and you can try to leverage your capital and take oversize bets. Of course this can come to bite you big time.
  4. You can pay lower taxes.
That's it. There is no secret formula. No fancy metaphor.

Just 4 main levers you can pull.

So the next time you read on Techcrunch article after article on companies with no business model, you should ask yourself, is this a real business, or just a bad literary device?