Gennaro Cuofano's Blog, page 196

Hambrick and Fredrickson’s Strategy Diamond

Hambrick and Fredrickson’s Strategy Diamond is a simple means of illustrating how the different parts of a strategy fit together. The diamond creates a strategic direction for the future operations of a business by looking at five elements: arenas, differentiators, economic logic, vehicles, and staging and pacing.

Understanding Hambrick and Fredrickson’s Strategy Diamond

Developed by researchers Donald C. Hambrick and James W. Fredrickson, the strategy is fundamentally a practical approach to strategic plan creation. Importantly, it seeks to determine a profit-centric strategy by providing a solid foundation of “sub-strategies” which make up the diamond. 

The strategy itself applies to any industry or organization where managers need guidance on key strategic decisions. To assist with these decisions, Hambrick and Fredrickson identified five elements of strategy where a business should focus its efforts. 

These elements are:

Arenas 

Arenas describe where a business should be active. This includes products, markets, technologies, geographic areas, and value-creation strategies.

For example, Nike and New Balance operate in the same product and geographic arenas, but their value-chain arenas differ. New Balance manufactures its shoes in the United States, while Nike shoes are predominantly manufactured in China, Vietnam, and Indonesia.

Differentiators  

Differentiators describe the factors that dictate how the business will achieve success in a given market. Factors may include price, image, customization, styling, or product reliability.

Differentiators may be tangible, where a golf course with ocean views has a competitive advantage over a course that is further inland. But they may also be intangible, such as logos, patents, or even brand equity.

Economic logic 

Economic logic explains how the business will achieve a return on investment. Larger companies may rely on economies of scale to see a return, while others may rely on vertical integration or proprietary product features.

For a business to possess positive economic logic, its differentiators must be in alignment with its arenas. This ensures that financial profits keep investors interested in the continual funding of operating costs.

Vehicles 

Vehicles describe how a business can enter the arenas that it determines the most profitable. Potentially, this may include internal development, franchising, acquisitions, or joint ventures.

Toyota and Mazda came together to jointly own and operate a new car assembly plant in the United States. Each company will contribute 50% of the establishment cost, and each will share certain technologies to reduce the cost of manufacturing.

Staging and pacing

Staging describes the sequence and speed of potential moves. In other words, how fast can the product be taken to market? When is the right time to begin marketing, advertising, or product expansion?

When a Tex-Mex restaurant chain wanted to expand beyond the city of Austin Texas, the company knew that it would be difficult to manage restaurants that were far away. Ultimately, cities earmarked for expansion were those that were connected to Austin via a short, direct Southwest Airlines flight. This allowed managers to freely travel between new restaurants in a shorter amount of time.

Key takeaways:



Hambrick and Frederickson’s Strategy Diamond is a useful strategic tool in a wide variety of markets, industries, and organizations.A core belief of Hambrick and Frederickson’s Strategy Diamond is the cohesive and harmonious interaction of five elements: arenas, vehicles, differentiation, staging, and economic logic.The strategy diamond provides a framework with which a business can envision future success. Importantly, the strategy guides how this success might be achieved in actuality.

Read also: Porter’s Five Forces.

Other strategy frameworks:

AIDA ModelAnsoff MatrixBalanced ScorecardBCG MatrixDesign ThinkingFlywheelLean Startup CanvasOKRPestel AnalysisTechnology Adoption CurveTotal Addressable Market

Additional resources:

Market SegmentationSuccessful Types of Business Models You Need to KnowThe Complete Guide To Business DevelopmentBusiness Strategy: Definition, Examples, And Case StudiesWhat Is a Value Proposition? Value Proposition Canvas ExplainedMarketing Strategy: Definition, Types, And Examples

The post Hambrick and Fredrickson’s Strategy Diamond appeared first on FourWeekMBA.

What Is Marketing Myopia And Why It Matters In Business

Marketing myopia is the nearsighted focus on selling goods and services at the expense of consumer needs. Marketing myopia was coined by Harvard Business School professor Theodore Levitt in 1960. Originally, Levitt described the concept in the context of organizations in high-growth industries that become complacent in their belief that such industries never fail.

Understanding marketing myopia

Theodore Levitt used the American railroad industry to illustrate his point. Despite the booming popularity of cars, trucks, and planes in the 1960s, rail tycoons remained resolutely confident in their industry. However, the railroad industry soon fell into decline because these companies believed they were in the train business and not in the transportation business.

Indeed, myopic businesses are those that believe that their product is their business. They either neglect consumer needs over time or fail to create a buyer persona in the first place.

The primary causes of marketing myopia



Growth industry assumptions

Growth industries have caused some of the more famous stories of marketing myopia. Successful businesses in growth industries are often lulled into a false sense of security. In other words, they assume that whatever they produce will meet consumer needs.

While this may be true for a time, consumer needs invariably change. Blockbuster believed that its VHS and DVD movie rentals were immune to the rising presence of Netflix, who provided a cheaper and more convenient for consumers to access their favorite titles.

A belief that there are no competitive substitutes

A business that operates as the sole producer in a market can become complacent. With no impetus to continually improve, it stops investing in research and development and product quality suffers as a result.

Levitt’s initial example of marketing myopia in the railroad industry is a prime example of a belief in no competitive substitutes.

Shifting consumer trends

The only constant in the world is change, and consumer trends are no different. Technology in particular is a volatile industry where only the most adaptable businesses survive.

Nokia’s marketing myopia meant that it failed to identify the future needs of its consumers. The company was quickly overtaken by Apple and Samsung, who had correctly predicted that consumers wanted more functional and aesthetically pleasing smart devices.

A belief in mass production

The belief in mass production and its ability to drive down manufacturing costs is also a form of marketing myopia. Here, businesses become obsessive about reducing product costs at the expense of determining whether the consumer wants to buy the product.

American car companies assumed that if they manufactured a certain amount of cars per year, they would sell. While this held true for a while, the focus on mass production blinded the American car industry to new cars released by Mazda and Toyota that were better suited to consumer needs.

Avoiding marketing myopia

Avoid marketing myopia is perhaps easier said than done. However, all businesses should:

Provide value. A product or service must provide value, particularly if it is going to be successful long term.Create buyer personas. These are semi-fictional representations of an ideal buyer. Importantly, they guide product creation that keeps the consumer’s best interests at heart.Anticipate future changes. While some consumer needs remain constant, they will likely want these needs in a faster, higher quality, or more convenient fashion in the future. Businesses must refrain from insular myopic marketing and instead look externally to changing trends and consumer preferences.



Key takeaways:



A business with marketing myopia is more concerned with its own needs than it is with the needs of its target audience.The primary causes of marketing myopia include shifting consumer trends and an obsessive focus on mass production. Myopia can also set in when a business that enjoys dominant market share becomes complacent and fails to innovate.Marketing myopia can be avoided by understanding the consumer and then providing value to them as consumer preferences evolve.

Read also: Harvard Business School Business Model, Netflix Business Model, Brand Building.

Additional resources:

Market SegmentationSuccessful Types of Business Models You Need to KnowThe Complete Guide To Business DevelopmentBusiness Strategy: Definition, Examples, And Case StudiesWhat Is a Value Proposition? Value Proposition Canvas ExplainedMarketing Strategy: Definition, Types, And Examples

The post What Is Marketing Myopia And Why It Matters In Business appeared first on FourWeekMBA.

What Is Buzz Marketing And Why It Matters In Business

Buzz marketing leverages the power of word-of-mouth advertising to create products or services with enough novelty that they go viral. In many cases, buzz marketing leverages on versatile content that can easily scale and be readapted to various contexts and fear of missing out (FOMO) to amplify the effect of word-of-mouth campaigns.

Understanding buzz marketing

Buzz marketing is particularly effective because it is a form of word-of-mouth advertising. Marketing agency Nielsen report that 92% of consumers trust recommendations from friends or family when making a buying decision.

This form of advertising is also one of the most cost-effective. In other words, consumers spread the good word about a brand for free without the business having to invest in other marketing strategies.

Aside from being cost-effective, buzz marketing has numerous applications in both the online and offline spaces. Done correctly, this form of advertising drives large amounts of traffic to an offer and can increase sales revenue in a very short period.

Why is buzz marketing so effective?

Buzz marketing is effective because it gets consumers excited. 

Here is how it achieves this:

Versatile content – most marketing strategies focus on a specific channel. For example, some may be Instagram-specific while others are better suited to email marketing. With buzz marketing, however, a single piece of content can generate large amounts of organic referrals across multiple channels simultaneously.Fear of missing out (FOMO) – buzz marketing taps into FOMO because people feel they need to be a part of the conversation. This is particularly true if the conversation is generating buzz and virality.Baader-Meinhof phenomenon – otherwise known as the frequency illusion, the Baader-Meinhof phenomenon describes a situation where after encountering something new, the consumer starts to encounter it repeatedly. Eventually, a consumer has enough interactions with a brand or product that it becomes embedded in their thoughts.



Creating a successful buzz marketing campaign

Generating buzz is easier said than done, but most successful campaigns possess one or more of the following attributes.

Visibility

Visibility is perhaps the most important aspect of buzz marketing. Super Bowl commercials are a prime example of visibility, with companies spending millions of dollars in development and placement with the hope of creating something viral.

Visibility can also be enhanced when high-profile figures become involved in a campaign. When Bill Gates participated in the Ice Bucket Challenge to raise awareness for motor neuron disease, he then nominated Elon Musk to do the same. This marketing campaign – arguably one of the most successful in recent times – raised important funds for disease research.

Substance

Buzz marketing must also have substance to be effective. Consumers will not get behind a campaign that is gimmicky or shallow, instead preferring something new and interesting that actively connects with them on some level.

For example, bra company ThirdLove created a buzz by running campaigns focusing on inclusivity. The brand was one of the first to pioneer a range of products suitable for a diverse range of women of all shapes, sizes, and skin tones.

Humour

Humour is another attribute that encourages people to share content with their friends and family.

American airline Delta uses humor in its flight safety videos, incorporating animated cartoons with tongue-in-cheek content relevant to the quirks air travel. This encourages consumers to share Delta’s content with friends, no doubt encouraging them to choose the airline in the future. 

Key takeaways:



Buzz marketing is a marketing technique leveraging on virality to enhance word-of-mouth advertising of a product or service.Buzz marketing is a cost-effective means of driving sales through organic referrals in a relatively short period of time. It achieves this through versatile content that takes advantage of certain aspects of human behavior.Most successful buzz marketing campaigns rely on visibility, substance, and humor as the main drivers of virality.

Additional resources:

Market SegmentationSuccessful Types of Business Models You Need to KnowThe Complete Guide To Business DevelopmentBusiness Strategy: Definition, Examples, And Case StudiesWhat Is a Value Proposition? Value Proposition Canvas ExplainedMarketing Strategy: Definition, Types, And Examples

The post What Is Buzz Marketing And Why It Matters In Business appeared first on FourWeekMBA.

What Is A Brand Hierarchy And Why It Matters In Business

Brand hierarchy, otherwise known as brand architecture, refers to the brand strategy behind the relationships between various parts of a business. Broadly speaking, this strategy is best summarized by grouping products and services according to their associated similarities and differences.

Understanding brand hierarchy

As companies grow, so too do their product ranges. Brand hierarchies help businesses and indeed consumers communicate vital brand elements and feature differences between individual products in a range.

Brand hierarchy is important for the simple fact that many businesses overlook the strategy entirely. These businesses tend to have a preoccupation with releasing products and services without first thinking about the relationship between them.

As a result, the association between offerings is vague and not reflective of the wider brand. Consumers then become confused and unable to make a purchasing decision, which negatively impacts on revenue and profits.

Establishing a robust brand architecture is not difficult and can be performed at any stage of business development. However, those who focus their efforts on product development at the expense of brand hierarchy may encounter a costly rebrand in the future.

The three types of brand hierarchy



Corporate, umbrella, and family brands

The highest level of the hierarchy is corporate, family, or umbrella brands. This level uses cohesive and consistent naming and identity structures, ensuring that individual products and services are homogenous throughout the range. The corporate strategy is particularly useful for large parent companies that have many divisions or subsidiaries.

For example, Heinz Cream of Tomato Soup and Heinz Tomato Ketchup both share similar visual branding on their labels. They also feature the corporate brand Heinz in their names, reducing confusion among consumers, and increasing brand equity in the process.

Endorsed brands

Endorsed brands are those that have been endorsed by a parent brand that is either a corporate, umbrella, or family brand itself. In theory, the endorsement from the parent brand adds credibility to the endorsed brand in the eyes of consumers. In this approach, products are linked or grouped according to brand identity itself. They do not rely on homogeneous naming or aesthetics.

For example, parent company Microsoft lend their brand identity and credibility to Office, Xbox, Windows, and Bing. But each endorsed brand in isolation is distinct in the sense that it is not immediately recognizable as being owned by Microsoft.

Individual

Individual brands are consumer-facing brands where no explicit link between the product and its parent brand is promoted. In many cases, there is also no link between individual brands themselves. 

This is a common occurrence when parent brands acquire smaller brands with high equity among consumers. Here, the parent brand is irrelevant and often detrimental to brand equity compared to the individual products it takes ownership of.

Coca-Cola uses this strategy to their advantage, having acquired brands such as Fanta, Sprite, and Dasani that were successful in their own right. Further investigation will reveal the connection to Coca-Cola, but these brands continue to exist in original, recognizable forms.

Benefits of incorporating brand hierarchy strategy



Reduces customer confusion. Businesses offering a line of unrelated products confuse consumers as to the brand they are trying to create and convey. Establishing proper brand hierarchy lessens this confusion, establishes consistency, and leads to increased brand equity.Reduces competition. In some cases, sub-products achieve such popularity with consumers that the weaker core brand loses popularity. Brand hierarchy strategies focus on strengthening the primary brand so that products under its “umbrella” do not compete with or undermine each other.Provides clarity. When brands are visually or otherwise segregated with a hierarchy, it allows businesses to develop a marketing strategy for each. Since each brand will have its own target audience and brand story, clarity reduces the chances of brand dilution or improper messaging.



Key takeaways:



Brand hierarchy is a means of organizing different brands and their associated products under a larger, parent brand.Brand hierarchy can be divided into three main types: corporate, endorsed, or individual. Each has a different organizational structure based on real or perceived relationships between a parent company and its various brands.A brand hierarchy strategy is most effective when implemented as a foundational element of business operations. It clarifies the future direction of a brand and avoids individual products within a brand potentially undermining each other.

Read also: Microsoft Business Model, Brand Pyramid, Brand Essence, Brand Building.

Additional resources:

Brand BuildingMarket SegmentationSuccessful Types of Business Models You Need to KnowThe Complete Guide To Business DevelopmentBusiness Strategy: Definition, Examples, And Case StudiesWhat Is a Value Proposition? Value Proposition Canvas ExplainedMarketing Strategy: Definition, Types, And Examples

The post What Is A Brand Hierarchy And Why It Matters In Business appeared first on FourWeekMBA.

What Is A Brand Voice And Why It Matters In Business

The brand voice describes how a brand communicates with its target audience. The exact style of communication is based on the brand persona or the collection of personality traits and values that a brand embodies regularly, and it needs to communicate the brand’s essence to the desired target audience.

Understanding brand voice

A core component of brand voice is the personification of a brand. A surf shop adopts the vocabulary and care-free attitude of surfers in their advertising campaigns. A clothing company selling blue-collar workwear embodies the tough, rugged exterior of deep-voiced construction workers.

Importantly, brand voice must be consistent wherever a brand “speaks” to its target audience -whether that be radio, television, social media or email newsletter. Consistency ensures that a brand does not give mixed messages to consumers, who may have difficulty determining whether the values of a brand align with their own. 

Developing a brand voice

While methods vary, this five-step process will help businesses establish, create, and then maintain a consistent brand voice for future success.

1. Assess a representative sample of content

A business should first critically assess the content it has released thus far. Does the content accurately reflect what the business wants to communicate? Or conversely, is the content more closely aligned with the brand of a competitor?

The business should set aside content it feels is an accurate representation of its brand, grouping them according to the emotions or feelings they conjure. 

2. Describe brand voice in three words

Here, the business should review the set-aside content and have a group discussion on the common themes or values present in each. Then, it is important to link these themes and values to personality traits. To get a better idea of the personality traits a brand embodies, it may be helpful to assign personality traits to competitors also.

For example, one brand may be authentic if a competitor tends to imitate others. Another may be passionate and joyful if the competitor is calm and austere.

3. Create a brand voice chart

With the personality traits identified in the previous step, briefly describe each and then list actions that do and don’t support these traits in marketing initiatives. Visually represented in the form of a table, this chart will be an invaluable reference tool in ensuring that content is consistently aligned with brand voice.

4. Liaise with content and marketing teams

Arguably the most important step involves obtaining buy-in from any employee who will be involved in brand messaging. To achieve this goal, personality traits and examples of on-point content should be made available as these employees create future marketing content.

5. Revisit and revise

While the core traits of brand voice should never change over time, elements of brand messaging will need to be tweaked in response to a new competitor or other fluctuating market conditions. For example, the current pandemic has forced most brands to incorporate empathic, understanding, and community-minded messaging. 

In any case, it is a good idea to evaluate strategies quarterly to ensure that brand voice is sensitive to wider societal and organizational contexts.

Key takeaways:



Brand voice is the communication of particular personality traits and values to a target audience that represents a specific brand. Brand voice must be consistent across all marketing channels. Otherwise, a consumer may become confused as to the alignment of brand values and their own values.Brand voice can be developed in an iterative, five-step process. Among other things, the process ensures that a business does not adopt the voice of a competitor.

Additional resources:

Brand BuildingMarket SegmentationSuccessful Types of Business Models You Need to KnowThe Complete Guide To Business DevelopmentBusiness Strategy: Definition, Examples, And Case StudiesWhat Is a Value Proposition? Value Proposition Canvas ExplainedMarketing Strategy: Definition, Types, And Examples

The post What Is A Brand Voice And Why It Matters In Business appeared first on FourWeekMBA.

What Is A Brand Essence And Why It Matters In Business

Brand essence is defined as the core characteristic of a brand that elicits an emotional response in consumers. Brand essence is unique to every business, and the most successful businesses use it to create a reliable feeling in their target audience that builds loyalty over time.

Understanding brand essence

Fundamentally, brand essence is the emotional reason behind a consumer choosing one company over another. Since it deals with human emotions, brand essence is intangible. In other words, it is felt. 

It’s important to note that brand essence is not a company slogan, tagline, or mission statement. By its very definition, brand essence is driven by consumers – it is not something a business can deliberately communicate. 

In the most successful brands, brand essence is described in just a few short words. Here, there is power in brevity.

Consider the following global brands and the characteristic emotions that consumers experience just by thinking about them:

Volvo – safety.Disney – magic.Harley Davidson – freedom.BMW – driving pleasure.Apple – simple elegance.



Creating a brand essence

Brand essence is about striking a balance between authenticity and ambition. To gauge the perception of their brand, businesses should seek the input of internal and external stakeholders. Consumers should of course be consulted first and foremost, but employees, clients, and industry peers should also be consulted.

Once the relevant stakeholders have been assembled, they should brainstorm the answers to a list of questions. These include:

If the business in question was a car, what make and model would it embody, and why?How does the business perceive itself and does this perception align with those of customers or clients?What does a business contribute to the world and how does this make consumers feel?

With the answers to these questions, stakeholders can further refine brand essence by ensuring that descriptive words are

Authentic – does a business deliver on its promises? Brand essence must be in alignment with what the customer experiences.Relevant – is the brand essence statement relevant to the customer? Does it resonate with them to the degree that emotion is felt?Consistent – consistency is key because it informs others of what to expect from a brand. McDonald’s became a powerful global force because its restaurants are consistently branded regardless of the country they operate in.Sustainable – brand essence is a long term strategy. As such, it must be sustainable in the sense that it must maintain relevancy as a business grows. For example, a car manufacturer whose brand essence is “handmade engineering” may run into trouble as they shift toward production line manufacturing to meet growth targets.



Benefits of brand essence to businesses



Increased focus and clarity

Businesses who develop a brand essence are more focused on their core goals and attributes. This enables them to make better decisions and communicate with consumers in a way that reinforces brand recognition and awareness.

Market differentiation

Tying emotions to a particular brand are important in creating meaningful and sustainable differentiation, particularly in oversaturated markets. Apple has not drastically changed the design of their products in many years, but it maintains a competitive advantage through clear and consistent communication of its brand message.

Key takeaways:



Brand essence is the reliable feeling that consumers come to expect when interacting with a brand.Brand essence relies on the power of brevity and should be ascertained by consulting internal and external stakeholders.Brand essence must be authentic. That is, it must deliver on its promises and resonate with customers through consistent and sustainable communication.

Additional resources:

Brand BuildingMarket SegmentationSuccessful Types of Business Models You Need to KnowThe Complete Guide To Business DevelopmentBusiness Strategy: Definition, Examples, And Case StudiesWhat Is a Value Proposition? Value Proposition Canvas ExplainedMarketing Strategy: Definition, Types, And Examples

The post What Is A Brand Essence And Why It Matters In Business appeared first on FourWeekMBA.

What Is A Brand Pyramid And Why It Matters In Business

A brand pyramid is a representational framework that answers fundamental questions about a brand and market positioning. The framework is particularly useful for new brands to enter a market for the first time. It moves from bottom to bottom with these elements: features and attributes, functional benefits, emotional benefits, brand persona/core values, and brand essence.

Understanding brand pyramids

Brand pyramids help a business clarify its brand essence – or the emotional feeling that consumers come to expect from interacting with a brand.

Here, it’s important to note that developing a brand pyramid should be an internal process. In other words, the business must define the external face of its brand by first looking inwards. What does a business stand for and how does it want to be perceived? This is a question that only a business can answer, and should never be left for others to decide.

Ideally, the brand pyramid should assist in developing a unique selling proposition, brand story, and overall marketing strategy. It can also serve as a standard that businesses can refer to in gauging whether its actions are aligned with its core values.

Establishing a brand pyramid

A brand pyramid can be created by using a triangle divided into five tiers. Marketing teams must start at the base and then move upwards.

Let’s look at each of the tiers in more detail.

1. Features and attributes 

Features and attributes describe the basic purpose of the product in the market. In other words, what does it do, and how does it do it? For example, a messaging app may have custom emojis, group chat, and video chat features.

2. Functional benefits

Functional benefits delve a little deeper. This tier seeks to determine the problems that a product or service is attempting to solve. Put differently, functionality describes the reason a consumer uses a product. It also describes their expected outcome after consumption. The messaging app solves the problem of free, instantaneous communication allowing consumers to express themselves through video and custom emojis.

3. Emotional benefits

What emotions do consumers tie to the usage of a product or service? The user of an instant messaging app may feel connection, anticipation, joy, and acceptance. 

4. Brand persona/core values



[image error]Marketing personas give businesses a general overview of key segments of their target audience and how these segments interact with their brand. Marketing personas are based on the data of an ideal, fictional customer whose characteristics, needs, and motivations are representative of a broader market segment.

Brand persona simply describes the personification of a brand. What values are important to this person? How does the brand persona influence or reinforce marketing strategies and product development, and vice versa?

For example, insurance company Geico uses a gecko as representative of its brand persona. The gecko calms the typical fear and distrust of insurance companies by appearing curious, approachable, and friendly.

5. Brand essence



[image error]Brand essence is defined as the core characteristic of a brand that elicits an emotional response in consumers. Brand essence is unique to every business, and the most successful businesses use it to create a reliable feeling in their target audience that builds loyalty over time.

Brand essence is the apex of the brand pyramid, and for good reason. Brand essence is the heart and soul of a business and is a culmination of the previous four tiers. It is a reason for existing that guides everything a business does. Importantly, brand essence is felt by customers in the form of positive emotions.

Volvo’s brand essence is safety. That is, safety is a core function of their brand which determines how they invest in the manufacture of safe cars. This focus on safety is decades-long and is best exemplified by Volvo’s invention of the three-point seat belt in 1958. The company was also ahead of the curve with the introduction of airbags over 30 years later.

Key takeaways:



Brand pyramids help businesses define the very essence of their brands by way of visual representation.Brand pyramids are divided into five tiers that a business must move through to reach the top: features and attributes, functional benefits, emotional benefits, brand persona/core values, and finally, brand essence.Brand pyramids provide a systematic means of clarifying brand essence, which determines the emotions consumers associate with a brand. These pyramids also guide marketing strategy and business operations.

Additional resources:

Brand Building Market SegmentationSuccessful Types of Business Models You Need to KnowThe Complete Guide To Business DevelopmentBusiness Strategy: Definition, Examples, And Case StudiesWhat Is a Value Proposition? Value Proposition Canvas ExplainedMarketing Strategy: Definition, Types, And Examples

The post What Is A Brand Pyramid And Why It Matters In Business appeared first on FourWeekMBA.

Thras.io Business Model In A Nutshell

Thras.io follows an acquisition entrepreneurship template, by surfing the Amazon third-party ecosystem. The company acquires Amazon sellers’ businesses and it scales them up. It follows a fast acquisition template to offer an exit to Amazon sellers. Thras.io also follows a multi-brand and multi-product strategy, focused on consumer-brands.

Understanding Amazon third-party business

Of the products sold on Amazon, a majority of those products are the third-party sellers. While Amazon also has its own labels, the third-party ecosystem is still strong.

[image error]Amazon runs a platform business model as a core model with several business units within. Some units, like Prime and the Advertising business, are highly tied to the e-commerce platform. For instance, Prime helps Amazon reward repeat customers, thus enhancing its platform business. Other units, like AWS, helped improve Amazon’s tech infrastructure.

The Amazon business model moves around a few key segments. The consumer e-commerce platform is the core part of the business.

And it is divided into first-party (Amazon‘s own products) and third-party (independent sellers building their stores on top of Amazon).

From there, it starts the story of Thras.io, a company almost worth a billion, thanks to a business completely built upon Amazon third-party sellers’ ecosystem.

Leveraging the third-party Amazon business



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In an interview, Ken Kubec from the Thras.io team highlighted the opportunity that would help the company get started. It was back in 2018 when launching a business on Amazon had become harder, compared to just a few years before.

In addition, Amazon sellers, in most cases would hit a ceiling with their businesses when approaching the $3-5 million in revenues. In order for them to grow, it required capital, usually coming from loans or personal debt.

That created the opportunity for Thras.io who offered an exit strategy to Amazon sellers. Once the Amazon third-party seller has been acquired by Thras.io the company uses its scale, capitals, and expertise (by 2019 the company had acquired more than 25 Amazon sellers’ businesses) to further grow the operations.

Indeed, as Thras.io launches new products it can use the brand equity from those sellers (the reviews rating, ranking) and the branding of that business on Amazon to scale up.

The process is fast, and it gives within a few weeks the option for Amazon sellers to exit their business:

[image error]The workflow of a business that goes through that Thras.io acquisition process (source: Thras.io).



How does Thras.io make money?

Thras.io founder, Carlos Cashman explained that the company buys leading products, usually category-leading products, which become the basis of the acquisition process. As those products are solid and have decent margins,

The company that raised over 250 million dollars and it raised also debt to finance its operations. According to Cashman, by 2020, the company was low to mid-nine figures revenues range.

Therefore, Thras.io follows an acquisition entrepreneurship path, where the company acts both as an entrepreneur, and a venture capital.

[image error]Acquisition Entrepreneurship (AE) starts by buying an existing business instead of starting one from scratch. Therefore, an acquisition entrepreneur masters the process of acquiring existing businesses to shorten the path to success. In short, the acquisition entrepreneur thinks like an investor in the process of buying an existing business and acts as a CEO once the deal has been closed and he needs to run the company to bring it to the next level.



What makes up a good Amazon business for Thras.io? The R Cubed Model

As Ken Kubec from the Thras.io team highlighted, the company starts with a broad research approach, and it starts narrowing it down to what they call the R Cubed (Reviews, Rating and Rank).

And from there, they start asking questions with a drill down approach, starting from the reviews:

Do they have reviews that should establish them as a leadership position?

If so, it goes a level down and look at product/rating:

Do they have their rating, the product quality to back up and sustain their position?

And lastly, about ranking:

...and then rank: are they ranking organically on high keyword volume?

Thras.io looks at what they call “simple everyday hard-good objects.”

The buying process is primarily focused on businesses which revenues span from 1-30 million dollars, and that are private labels.

Thras.io also looks for Amazon businesses with a lower amount of SKUs (fewer products but more sales). Indeed, for Thras.io the most valuable businesses are those that hit over a million in sales with the fewer SKUs.

How does the valuation process work?

The valuation process and the modeling part is pretty straightforward. Thras.io starts from the Amazon Seller’s last twelve months carried profits, to that it adds back the Amazon seller’s salary, to get the so-called seller’s discretionary earnings.

On that number, once a multiple has been agreed and negotiated, the business gets sold. Usually on the seller’s discretionary earnings is applied a 2-4 valuation multiplier.

In short, imagining a business making a million dollar per year, at 20% profit margin, this means the business makes up $200K in net profits. Assuming the Amazon seller pays himself a $50K salary, if we add it back, we get a seller’s discretionary earnings of $250K.

From there the business can be valued 2-4x its discretionary earnings, therefore in the range of $500K to one million dollars.

Key takeaway



Thras.io’s business model surfs Amazon’s third-party seller ecosystem. Started in 2018, with the acquisition of a few sellers’ brands, it created a template for acquisition entrepreneurship on top of the Amazon marketplace. Thras.io acquisition process starts by looking at businesses in the range of $1-30 million in revenues and from there it looks at the R Cubed (reviews, ratings, and rankings) to assess whether the product is a leader in its category and if it has enough brand equity.From there the acquisition process is fast, giving Amazon’s sellers the option to sell their business. Thras.io acts as an investor in the process of sourcing and acquiring Amazon businesses. And once acquired it runs them.

Read next:

Amazon Business ModelWhat Is the Receivables Turnover Ratio?What Is Cash Conversion Cycle?Why Is AWS so Important for Amazon Future Business Growth?Amazon Flywheel: Amazon Virtuous Cycle In A NutshellAmazon Value Proposition In A NutshellWhat Is the Cost per First Stream Metric?Jeff Bezos Teaches You When Judgment Is Better Than Math And DataAmazon Mission Statement and Vision Statement In A Nutshell

Related resources:

Successful Types of Business Models You Need to KnowBlitzscaling Business Model Innovation Canvas In A NutshellWhat Is Business Model Innovation And Why It MattersBusiness StrategyMarketing Strategy

The post Thras.io Business Model In A Nutshell appeared first on FourWeekMBA.

Crowding-Out Effect And Why It Matters

The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Breaking down the crowing out effect



The crowding-out effect describes the way government spending reduces private spending.Public sector spending is accommodated by increasing taxes or the level of borrowing itself. This reduces available capital and decreases consumer confidence.In the long term, the crowding-out effect inhibits economic growth and, in some cases, can exacerbate pre-existing fiscal issues.



Understanding the crowding-out effect

Governments engage in spending to increase demand for goods and services among consumers at a given time and price – otherwise known as aggregate demand. However, such public spending is theorized to decrease aggregate demand instead of the reverse.

How governments finance this increased spending explains the crowding-out effect and how it can reduce consumer confidence in spending. 

Spending is usually financed by:

Increasing tax – taxes imposed on consumers and businesses reduce the amount of discretionary income, thereby reducing demand for goods and services.Increased borrowing – governments finance borrowing by selling bonds to the private sector through pension funds, investment portfolios, and private individuals. With private sector capital invested in government bonds, there is less to invest back into the private sector itself.

Fundamentally, the crowding-out effect reduces the total amount of savings available for investment. As public spending increases, so too does the demand for available capital. However, the total amount of capital remains constant. This has the effect of increasing interest rates to a level where only governments can afford to service loan repayments. When this occurs, individuals and businesses of all sizes are forced, or “crowded-out” of the market. 

Consider the case of a company looking to borrow $100 million to build a new headquarters. Before government spending, the company was offered an interest rate of 6%. But after the government announced it would offer business loans to stimulate the economy, the company finds the interest rate is now 8%. With a 33% rise in the interest rate, the company cannot afford to service the loan. They are in effect prohibited from entering the market, and the resultant jobs and consumer spending that would have occurred from construction are also lost.

Why does the crowding-out effect matter?

Decreases in private sector spending on goods and services ultimately slows economic growth. When governments borrow money to stimulate consumer spending during a recession, consumers are fearful of being crowded out and subject to higher taxes or interest rates in the future. As a result, they tend to save the stimulus money instead of spending it. This, in turn, renders fiscal stimulus packages ineffective.

The cyclical nature of the crowding-out effect

Government spending has the potential to backfire and reinforce the problem it was designed to address. This can be observed in the following examples:

Economy – governments that spend more to address shortfalls in tax revenue may create a negative cycle where they spend more and more capital to try to stimulate a private sector that becomes increasingly crowded-out of the market.Welfare – with more consumers turning to welfare during a recession, the government must spend more money to accommodate them. This spending is derived from borrowed capital that is serviced by governmental raises in private sector interest rates and taxes. This then reduces discretionary income and makes consumers more reliant on welfare.

More resources:

Types of Business Models You Need to KnowBusiness Strategy: Definition, Examples, And Case StudiesMarketing Strategy: Definition, Types, And ExamplesPlatform Business Models In A NutshellNetwork Effects In A NutshellGross Margin In A Nutshell

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Google Data Supply Chain: AI Supply Chains In A Nutshell

A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distributed to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

Traditional supply chains



[image error]The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.

In a traditional, and physical supply chain, we move from upstream to downstream, as we go from raw materials to the finished good, distributed in the hands of customers and consumers.

While the physical supply chain is structured by starting from sourcing, manufacturing and logistics. Distribution (intended as the finished product ready to be sold) comes at the end of this process.

There is another kind of supply chain, which for tech and AI companies is integrated within their business models, that is the data supply chain.

From physical to data supply chains

Let’s take a simple example. When Google manufactures its phone, the Pixel, while the phone is designed by Google, its manufacturing is outsourced in China (even though Google is moving it to Vietnam).

This means that up to sourcing and manufacturing, the process is outsourced, where Google instead takes control of the process as the phones produced are shipped to Google and ready to be distributed, either through its online stores, through carriers or other indirect channels.

So the whole physical supply chain might look like the following:

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Yet, if we flip the perspective and look at the data side of Google, as an AI company, the whole “data supply chain” changes.

Data supply chains: flipping upside down the physical supply chain



[image error]In a data supply chain the closer the data to the customer the more we’re moving downstream. For instance, when Google produced its own physical devices. While it moved upstream the physical supply chain (it became a manufacturer) it moved downstream the data supply chain as it got closer to consumers using those devices, so it could gather data directly from the market, without intermediaries.

Where the Pixel phone moves from upstream to downstream, as we saw, it follows a classic supply chain path.

However, once the device is in the hands of customers/consumers/users, they suddenly become the sources of data, and the whole supply chain flips upside down.

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A few things to notice here:

In the Google’s Pixel case, the whole data supply chain is controlled by Google. Customers become also the sources of raw data. As the raw data move downstream it gets refined by Google’s algorithms and it gets used for several purposes (from products’ personalization, to monetization of its assets through advertising).That data gets stored in the Google data centersAnd the Google data centers will need to source renewable energies and materials to maintain, and run its facilities, that keep the whole infrastructure going.



From traditional supply chain to AI supply chain



AI supply chains start with the sourcing of data. This flips them upside down.Where a traditional supply chain would start with sourcing and manufacturing with a top-down approach, an AI supply chain starts bottom-up.The source of raw data is the customer/user, as the raw data moves downstream the supply chain, it gets processed, refined and stored.

Read: Google Business Model

Read next:

Horizontal IntegrationVertical IntegrationWhat is a Moat?Types of Business Models You Need to KnowBusiness Strategy: Definition, Examples, And Case StudiesMarketing Strategy: Definition, Types, And ExamplesPlatform Business Models In A NutshellNetwork Effects In A NutshellGross Margin In A Nutshell

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