For the Largest Profits Cover the Biggest Lily Pond You Can

" . . . She saw the water lily bloom . . . ."

-- Alfred, Lord Tennyson (The Lady of Shalott, 1832)

Many natural processes lead to rapid growth, until some important resource is exhausted. For the potential of water lilies, the surface size of the pond itself usually first limits their expansion. Start the same water lilies in a larger pond, and more of them will eventually grow. The combined effect of even more blooms in one location will make that larger pond even more desirable to visit and enjoy.

If you start with same number of water lilies, in the beginning the growth experienced in the small and in the larger ponds will look similar. The business plan that considers and makes use of the larger pond from the beginning will earn greater benefits to be shared with stakeholders, as well as having more stakeholders to provide support.

Almost every business person has had an idea for expanding the use of the company's offerings. Make it smaller, less expensive, or tidier, and many more customers will purchase. Or so the theory goes. Yet, the vast majority of such new offerings fall far below their expected potential. How can you avoid having this problem with your business model innovations?

Would you rather be a huge fish in a small pond or the biggest fish in the largest pond?

Most business people would probably prefer the latter. Yet, many more businesses end up as big fish in small ponds than as the biggest fish in the largest pond. Some of the difference is due to talent, effort, and perseverance. But a lot of success has to do with the business models that they each pursue. Some businesses start without thinking about the size of the pond, while others look for the biggest ponds first. Depending on where you start, vastly different business models emerge.

Let's begin by looking at the cutting edge of technology businesses in the past to locate clues for how to proceed. Supercomputer makers have always had this challenge. Many calculations take too long unless they can be done by very large and very fast computers, such as those used for codebreaking by governments and simulating the effects of changed conditions for weather forecasts.

Since the first computers were very large, bulky, expensive, and slow, it was clear that anyone who built a faster computer could immediately sell them for those applications. Also, the intellectual challenge was very great, so people enjoyed doing the design work. Each supercomputer could be sold for many millions of dollars. So the excitement and rewards of a new sale were large.

Unfortunately, there were two problems with this business model. First, today's ordinary computer can perform tasks at the same rate as the best supercomputer did a few years earlier. The bulk of the benefit from designing a better supercomputer was eventually gained by those who sold ordinary computers, because that market was much larger in economic terms. Ultimately, the speed, capacity, and capabilities of a supercomputer were available on a personal laptop computer just a few years later.

Now, that trickle-down aftermarket for future supercomputing at ordinary prices was a huge market. Unfortunately, supercomputer makers did not concern themselves with creating business models to supply these other customers as the technology matured, and became smaller and cheaper.

Second, it became possible to tie together millions of individual computers to perform any conceivable calculation using unused processing time and capacity. The SETI (Search for Extraterrestrial Intelligence) project pioneered this approach. As a result, the economic benefits of designing faster supercomputers began to disappear.

It was as though the pond had a hole in it. Actually, the shift was like having a large, shallow physical depression just below the initial, unlined pond. Eventually, all the water from the original pond had to leak out into lower depression, turning it into a new, wider pond that can support more water lilies.

By contrast, Michael Dell, even while working out of his room as a college student, always looked for how to serve the most people in the best way. Early-on, Dell's business model emphasized providing the best features for each computer user by customizing the machines in ways that improve the computer's usefulness while reducing its cost.

He refined and improved the way that model was applied, but his perspective was the right one from the beginning. Although Mr. Dell never completed his college education, his business model yielded profits in the company's best years that exceeded the revenues enjoyed by supercomputer makers employing the country's top Ph.D. designers during those companies' best years.

Copyright 2008 Donald W. Mitchell, All Rights Reserved