Friday, September 24, 2010

The Biz School Chronicles :: On Enonomies of Scale and Invention vs Innovation

Today, a friend shared an interesting article. Titled "The Man Who Said No to Wal-Mart", its essence was the story how Jim Wier, CEO of the lawn-equipment company Simplicity stopped selling Snapper branded lawn mowers via Wal-Mart.

"In 2002, Jim Wier's company, Simplicity, was buying Snapper, a complementary company with a 50-year heritage of making high-quality residential and commercial lawn equipment. Wier had studied his new acquisition enough to conclude that continuing to sell Snapper mowers through Wal-Mart stores was, as he put it, "incompatible with our strategy. And I felt I owed them a visit to tell them why we weren't going to continue to sell to them."

Selling Snapper lawn mowers at Wal-Mart wasn't just incompatible with Snapper's future--Wier thought it was hazardous to Snapper's health. Snapper is known in the outdoor-equipment business not for huge volume but for quality, reliability, durability. A well-maintained Snapper lawn mower will last decades; many customers buy the mowers as adults because their fathers used them when they were kids. But Snapper lawn mowers are not cheap, any more than a Viking range is cheap. The value isn't in the price, it's in the performance and the longevity."

This looks like a case study for puritans, correct? Quality over quantity; "value isn't in the price, it's in the performance and longevity". Honestly, I think this is a bit naive in a business perspective. You see, the same article explains the prices of other lawn mowers as well. The ones who think value, in-fact, is in the price. When I read that part, I couldn't help but wonder whether Jim Wier (the apparent hero according to this article) was making a mistake.

"You can buy a lawn mower at Wal-Mart for $99.96, and depending on the size and location of the store, there are slightly better models for every additional $20 bill you're willing to put down--priced at $122, $138, $154, $163, and $188. That's six models of lawn mowers below $200. Mind you, in some Wal-Marts you literally cannot see what you are buying; there are no display models, just lawn mowers in huge cardboard boxes.

The least expensive Snapper lawn mower--a 19-inch push mower with a 5.5-horsepower engine--sells for $349.99 at full list price. Even finding it discounted to $299, you can buy two or three lawn mowers at Wal-Mart for the cost of a single Snapper.

If you know nothing about maintaining a mower, Wal-Mart has helped make that ignorance irrelevant: At even $138, the lawn mowers at Wal-Mart are cheap enough to be disposable. Use one for a season, and if you can't start it the next spring (Wal-Mart won't help you out with that), put it at the curb and buy another one. That kind of pricing changes not just the economics at the low end of the lawn-mower market, it changes expectations of customers throughout the market."

This is where economies of scale come into play. By manufacturing lawn mowers in large numbers, Jim Wier's competitors were able to bring prices significantly down. So cheap that a lawn mover is now a disposable item, with little perceived value in the eyes of customers. Where's "longevity" in this picture? The market will eventually move towards "Use one for a season, and if you can't start it the next spring, put it at the curb and buy another one". In this new market, how can Snapper lawn mowers survive? With diminishing revenues and shareholder value, they will eventually be vulnerable enough for a takeover. That was my initial thought while reading the article. Apparently that's exactly what has happened. When reading the comments section, I came across the following ...

"Not long after this article was written, Snapper was bought by Briggs and
Stratton Power Group. Briggs and Stratton also make Murray and Brute
lawn mowers, the two brands sold nationally in all wal-marts. hopes
this adds some perspective people. economoy's of scale, whether
walmarts or another companys like briggs and strattons will always win
out. thats capitalism for you...
Francis Manning01/31/2010 09:02 PM"

Another example that came to mind was Sun Microsystems vs Oracle. In addition to economies of scale, Sun's demise is a good example how innovation trumps invention always in the business world. So here's the story (I fondly recall this as I come closer to the final semester exams of b-school). One day a lecturer asked "What's the difference between Invention and Innovation?". Since no one else seemed to be volunteering, I gave an answer (I can't remember it today, which I consider as a good thing). The lecturer took a long hard look at me and replied "Now think like an MBA and try again". I couldn't at the time, and according to him, "Invention is the formulation of new ideas for products or processes, while Innovation is all about the practical application of new inventions into marketable products or services". That's exactly where Sun failed and Oracle keeps winning. Sun has(/had?) James Gosling the "inventor" of Java and a platoon of "Computer Scientists". But did they innovate? It seems not. Oracle doesn't seem to have superstar computer scientists (well.. other than Bob Miner of course). You know what they DO have? a leadership team with great business acumen and a sales force on steroids (If I remember correctly Larry Elison has a sales background). Apparently Oracle had generated more revenue by practically applying Java than Sun could ever dream of.

"The objective of a firm is to maximize its value to its shareholders. Value is represented by the market price of the company’s common stock, which, in turn, is a reflection of the firm’s investment, financing, and dividend decisions."

If you want to play the game, you better learn the rules. Otherwise you can always run a non-profit. But you won't be able to employ James Goslings of the world then. Because the pay cut, apparently, was one of the reasons he quit after the Oracle acquisition (read that story here). Oh the irony...