A daughter is preparing a big family dinner with her mother. Mom cuts both ends off the ham before putting the ham in their big, spacious oven. The daughter asks, “Mom, why do we cut the ends off the ham?”
Mom says, “It’s the way grandma taught me to do it”. Daughter goes to grandma’s house to ask grandma why we cut the ends off the ham.
Grandma’s reply is, “Oh honey, I only cut the ends off the ham because my oven was so small back then that the ham wouldn’t fit inside it without cutting it”.
We Often Carry Forward Out of Date Ideas and Assumptions
This anecdote is an example of something we all do. We form routines and mental models based on a current reality, or, as in the story, we get them handed down to us. But, sometimes the underlying reality changed and our routines and mental models did not.
Sometimes, these no-longer-correct routines and models can have harmless consequences, like cutting the ends off a literal ham. But, sometimes, these outdated approaches can get us into real trouble.
Failing to See the Possibilities in the New Oven
In 1998 and 1999, investors poured money into new online stores like Pets.com, the “internet pet store”, and eToys.com, the “internet toy store”.
Investors saw the internet going mainstream and believed that online retail would closely mirror traditional retail. Traditional retail was flush with successful niche retailers like Best Buy, PetSmart, and Toys R Us. But, investors were blind to the fact that the world of traditional retail was a world that had been largely shaped by its constraints.
- Traditional retail requires lots of high quality floor space in expensive “prime locations” plus warehousing and delivery to stores. Online retail only requires bare necessity warehouses with delivery direct to the customer.
- Due to space constraints, traditional retailers must be selective about what product they carry and specialize in. Online retailers can stock and sell millions of products for not much more effort, relatively speaking, than is required for hundreds.
- If traditional retail stores get too large and hard to find product in or if retail employees don’t know the products or the store layout, customers can become lost or frustrated. In online retail, customers don’t expect to deal with an employee and any product is one search or click away.
In short, traditional retail has a small oven, online retail has a very large oven.
Having a product niche like toys or electronics makes perfect sense in traditional retail due to the constraints imposed. But, investors still wanted to cut the ham to put the “old world” constraints on the “new world” of online.
A $300 Million Mistake
Pets.com was founded in 1998, promptly raised $300 million from investors, and was completely out of business by the end of 2000. To be fair, Pets.com suffered from a variety of other underlying issues as well that made their fall so sudden and dramatic, but, it’s also now clear that the entire premise was flawed from the beginning.
Very small & inexpensively run niche online retailers are certainly thriving in the Long Tail of the current online economy. But, the rest of online retail is largely owned one internet superstore – Amazon. Amazon finally capitalized on all the “big oven” possibilities and, it turned out, that was what the market craved.
It was a mistake to build a “large scale niche” online store like Pets.com. And, perhaps, there was no way that anyone could have known this. Predicting the consequences of great shifts is complicated and fraught with risk.
But, if we are at least aware of and thinking about this phenomenon, maybe we can give ourselves a chance the next time around.
The next time you see major shifts in any area, ask some of these questions:
- What old restrictions have been removed?
- What new possibilities are now open that were not there before?
- Imagine throwing out the old model completely. You are starting fresh in this new environment. What would the ideal model/routine/way of doing business look like?
- How could I make something better and not simply mirror the old environment in this new one?
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