Strategy Letter I: Ben and Jerry’s vs

AmazonNicolas McMahon

Introduction

Two models for building a company

Amazon model

Ben and Jerry’s model

Their strengths and weaknesses

Factors that determine which model to use

Two Models for Building a Company

Ben and Jerry’s – organic model

Build business slowly over time

Become profitable quickly

Amazon – the “Get Big Fast” or “Land Grab” model

Build a large business as quickly as possible

Spend large amounts of money to build a customer base as quickly as possible

May take years to become profitable

Competition

Industries often have established competitors

Ben and Jerry’s model allows one to displace these competitors overtime

Amazon model will struggle to create a customer base due to “lock-in”

Some industries have no established competitors

Amazon model gets tons of customers quickly

Ben and Jerry’s model will have trouble competing with businesses using the Amazon model

Network Effect

Where the more customers you have, the more customers you will get

eBay

AOL

Metcalfe’s Law: The value of a network is the number of users squared

Strong in the Amazon model

Not in the Ben and Jerry’s model.

Lock-in

Something about the business makes people reluctant to switch

Email provided by Internet Service Providers

Word processors

Stealth Lock-in – Services lock in customers without them realizing it

Often with brief periods of free service

PayMyBills.com

Strong in Amazon model

Weak in Ben and Jerry’s model

Case Study: AOL

Spent a lot of money to grow at a rate of a million customers every 5 weeks in 1998

Chat rooms and instant messaging as stealth lock-in

After finding a group of people to chat with, switching ISPs meant having to find a new group of people to chat with

“Like trying to get all new friends”

Massive amount of people to chat with lead to a strong network effect

Finances

Ben and Jerry’s model starts with a small amount of money

Ben and Jerry’s initial investment was only $11,000 or $12,000

Reinvest profits to slowly grow

Amazon model requires tremendous amount of money to start

Rushing to acquire customers before there is more competition

Substituting money for time

High salaries or starting bonuses to fill openings more quickly

Hiring consultants

Corporate Culture

Important in Ben and Jerry’s model

Mistakes become valuable lessons for new employees

Impossible in Amazon model

Company grows too fast to mentor new employees

Mistakes go unnoticed

Success

Ben and Jerry’s more likely to become successful

Lose less money if unsuccessful

Takes much longer to be successful

Earns less money

Amazon model unlikely to be successful

Lose a much larger sum of money if unsuccessful

Earns a much larger sum of money

Deciding

Amazon Ben and Jerry’s

Expensive Cheaper

Profitability can take a long time Usually profits quickly

Big profits Smaller profits

More likely to fail More likely to succeed

No corporate culture Strong corporate culture

Depends upon lock-ins and network effects

Can succeed without lock-ins or use of the network effect

Only appropriate for non-established markets

Can displace competition and break into already established markets

Big losses on failure Little losses on failure

Deciding

Market has lock-ins, network effects and no established competition = Amazon model

If you don’t, someone else will.

Market is already established = Ben and Jerry’s model

Examine Risk/Rewards

Personal Values

The Worst Things

Not deciding at all

No model to follow

Deciding to be an Amazon company, but behaving like a Ben and Jerry’s company

Amazon model requires substituting time for money whenever possible

Being frugal hurts the business

Conclusion

Amazon model

Good for non-established markets with lock-ins and network effects

Less likely to succeed, but more profitable upon success

More losses upon failure

Aims to grow a business quickly

Ben and Jerry’s model

Good for breaking into established marketplaces

More likely to succeed, but less profitable upon success

Fewer losses upon failure

Aims to grow a business slowly.

The worst things to do are not decide or not stick with the decision