05 Aug From Services to Products to Finance
There is a natural evolution in the business models companies have taken in recent decades which bespeaks an opportunity for many would-be entrepreneurs and start-ups. In one of the first accounting courses I took as an undergraduate student, I learned about products vs. services businesses. For most, starting a business means you choose between selling a product or selling a service. As part of the natural evolution of things, here’s how I’ve seen many companies evolve over the course of time. In many instances, we see companies evolve from services, move into products and then graduate to financing internal or other corporate growth through acquisition or new intellectual property. As companies grow, they move up-line, down-line and side-line as vertical and horizontal integration makes sense. In most cases, that means products businesses branch into services businesses and visa-versa.
Let’s take a few examples so we can be clear as to how this process has worked in the past.
When Bill Gates dropped out of Harvard to start Microsoft with Paul Allen, he didn’t yet own DOS nor did he have a single product to sell. He has a service, a skill he and Allen had acquired through years of geekish tinkering on computers. Fortunately for him, the skill he had acquired was gained at a time when the world would have the greatest demand for a veritable revolution in computing. At first, Bill and Paul had started a services business where they charged high prices for developing software for custom needs of clients around the globe. The products they generally produced were not owned by Microsoft, but were custom-built products built specific to the customer.
Microsoft’s explosive success came after the purchase of Seattle Computing’s QDOS (Quick and Dirty Operating System) for $50K (thanks to a loan from Bill Gates Sr.) and its subsequent rebrand to MS-DOS (Microsoft Desktop Operating System). The results were explosive. Since then, the Microsoft story is generally well-known and follows an extreme course of massive software mergers and, until recently, internally-grown new business opportunities. Thanks to all this, the company is essentially a producer of dollar bills which are now used for things like malaria in Africa and so many random projects that its impossible to completely follow the trail.
Amazon has become the world’s largest internet portal/ecommerce site all rolled into one. From it’s initial start, the company was selling products, but the real genius has been the service. They weren’t manufacturing or creating anything, except for the code on the site pages. What Amazon perfected was a darn good service–a service that continues to improve with faster and less expensive shipping costs. It wasn’t until cash flows really were bolstered that the company could spend R&D dollars creating the world’s best e-Readers and tablets. Since the tablet products have been created, the company now makes more revenue from the digital versions of its books than the physical counterparts.
Thanks to the product–>service and service–>product shifts within Amazon, the company has been able to gather massive revenues and impressive profits on razor thin margins. And, true to Amazonian form, the company finances its growth mostly from internal profits via reinvestment and building out its ever-growing digital architecture and processes.
Even tech giant Google started out with a simple service: online and internet search which has morphed into such products as tablets and smartphones–products which further strengthen the company’s position as the master of internet search. Other physical products now provided by Google include its hundreds of online and mobile applications, hardware devices (Chrome OS laptops, Nexus tablets, Nexus phones, Google Glass etc.) and even financial services–which as we’ve said before is the last step on the path.
Servicing a customer or selling a product should produce a profit. When that profit is gained, companies and individual owners tend to have greater flexibility for reinvestment and growth capital. All-too-often integration is a difficult component of corporate growth. Making the transition for many firms has proven extremely difficult. Understanding where growth opportunities exist is perhaps the greatest missing piece to your business puzzle. It’s not that the core focus has to change, but growing companies are able to leverage and use capital to expand into similar markets which helps to diversify revenue-driving opportunities.