Profitable (but Unusual) Business Practices

In 1889, George Eastman founded the Eastman Kodak Company based on his patent for the next generation of cameras. The camera consisted of a roll that was housed in the back face of the camera and was a consumable.  Kodak started following the razor blade strategy popularized by Gillette in which the constant (the camera body) was priced for a fairly small profit margin and a bulk of the profits came from the film which cost little to manufacture. This business strategy was followed right up to their sad bankruptcy in 2012. They got displaced into oblivion despite being the inventors of the disruptive technology of digital cameras because they were hesitant to endanger their profits. Their hesitation to change their business model served a death blow.

With the changing consumer perception nowadays, it is necessary to be open to change. If you have seen any television in the past couple months, you must have seen Gillette’s advertisement in which they send a man across the globe who then proclaims “the only things that didn’t change was my razor”. This statement is very bold considering that never before has Gillette ever claimed how long their razor lasted. This ad bites into their theoretical profits by proclaiming that their razor can be reused for a long period of time.  However, with brand loyalty and market dominance being endangered, they recognized the need for such action.

Similarly, in 2011, Valve released their critically acclaimed FPS Team Fortress 2 to anybody who wanted to play. They made the game free to play after 4 years of its existence. This drew a large number of people to the game and increased the popularity of the “microtransaction” economy for gaming in which everybody has access to the games but if you want special hats or weapons, you need to pay for them. This was a relatively new phenomenon which really caught on and is now a popular form of video game economy.

In late 2011, when AMD laid off over 10% of its workers, ARM Holdings was celebrating a 22% increase in total revenue for that quarter compared to the previous year. ARM was founded as a joint venture between VLSI, Apple, and Acorn Computers in 1990. Unlike traditional semiconductor companies, ARM does not manufacture anything; instead, it deals exclusively with intellectual property. ARM licenses circuits and layouts for processors to big manufacturing companies such as NVIDIA, Texas Instruments, STMicroelectronics, etc. Despite their lack of manufacturing capabilities, they have enjoyed a healthy profit for several years as smartphones and tablets have emerged on the market. Their novel business model is indicative of ongoing trends in dealing with IP exclusively as a commodity.

Such examples clearly show the importance of the fairly plastic force of the market. Often, a large corporation tends to stagnate and this serves as the death blow to many of them. It is imperative that when the profits of a business are being endangered by an external factor, it be addressed with an open mind. In Kodak’s case, it was the disruptive technology of digital cameras; in Gillette’s case, it was brand competition, and in Valve’s case, it was piracy. Business models are designed to be optimal at the particular point in time for that particular mood and that particular society. Any of these perturbing factors can cause a massive disturbance in the profits of a company and it is essential (especially in the rapidly evolving economy of the 21^st century) that a company revise their business plan as and when necessary.