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October 19, 2006

The Inspiration -- Pyramid Scheme, Part II

Yesterday I started to tell the story about being recruited into a pyramid scheme by my so-called "friend" (with friends like that, who needs con artists?) Darren. I have already described our meeting, so today I'll relate what I have learned about Darren's organization, TEAM, which is owned by Alticor, the parent company of Amway.

I'll begin with a disclaimer: it is very difficult to get any real information about this company, so what follows is my own synthesis of the research I have done over the past few days.

TEAM combines and builds on three different business models, those of Amazon.com, Wal-Mart, and McDonald's. I'll briefly describe the innovative aspects of these three businesses and how they make money:

Amazon.com is one of the most successful businesses that operates solely online, with no real-live stores. The innovation here is virtual centralization. In the beginning, Amazon's operations were centralized. From one warehouse, they shipped books all over the country, saving all kinds of money on distribution and passing that savings along to its customers. As Amazon expanded beyond books, it partnered with manufacturers to move products directly from the manufacturers to the consumers. For example, if I were to go to Amazon to buy a toaster, that toaster doesn't come from Amazon's warehouse, but rather from Kitchen Aid's warehouse. By selling me a toaster through Amazon, Kitchen Aid saves on distribution, warehousing, and advertising. It passes some of that savings along to Jeff Bezos, who passes it along to me. I buy a toaster from Amazon rather than going into a store to buy it because I get a better price.

Wal-Mart's contribution to the business world is the economy of scale. Wal-Mart is the world's largest retailer, and its size gives it leverage over its suppliers. Just like Amazon, Wal-Mart doesn't sell anything you can't get somewhere else. But also like Amazon, it gains a following by offering its shoppers the convenience of buying everything they need in one place. Furthermore, it sells in such quantity that it can leverage low prices from its suppliers, and it achieves customer loyalty by sharing that savings with its customers. People buy at Wal-Mart because, let's face it, Wal-Mart is cheap. Economy of scale, however, is not the only innovation that has enabled Sam Walton to offer his customers such low prices. He also engages in highly unethical business practices, such as forcing employees to work unpaid overtime, hiring part-time workers rather than full-time workers in order to avoid having to provide health benefits, and simply refusing to pay its suppliers for the goods. What makes Wal-Mart even more dangerous is that it has achieved monopsony status, which allows it to dictate what goods are actually produced. As the world's largest retailer, it can put manufacturers out of business by refusing to buy items that don't meet its specifications. This means that Wal-Mart has the power to determine not only what is sold in its own stores, but what is sold period. Again, Wal-Mart's innovation is size, which it has achieved by offering a substantial savings to its customers, thus building their loyalty.

McDonald's is (in)famous, not for inventing burgers and fries, or even for inventing the drive-thru, but for popularizing the franchise as a business model. Franchises are great for people who want to own a business but don't have the intelligence or creativity to come up with their own product, service, or business plan. They simply buy the right to operate a new location of an existing business. In effect, they are buying a system: everything they need, from the advertising, to the employee training, to the raw materials, to the storefront itself, is provided by the franchising company. This is, in effect, what McDonald's is. The McDonald's Corporation doesn't sell burgers; it sells burger stores. The individual stores, each owned by an individual franchisee, then sell the burgers. I won't get into the dark side of franchised businesses here, but Eric Schlosser does a good job of it in Fast Food Nation. Suffice it to say that the least evil of the fast-food companies he discussess are corporately owned and not franchised.

Now that I have described the inspiration for TEAM, it is time for me to eat breakfast. But stay tuned for Part III, when I will reveal how TEAM's founders combined these three business innovations and built on them in a truly evil way!

Posted by eklanche at October 19, 2006 09:06 AM

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