Cultivating an Ecosystem

The metaphor of industry as 'the jungle' of capitalism is an apt one. Building a successful business requires cultivating a thriving ecosystem where your customers' demands are met, your suppliers' needs are met, and your company thrives in a sustainable manner. Just as in nature, a parasitic relationship in a business's ecosystem is a long-term risk to the system as a whole, whereas symbiotic relationships allow the entire chain to thrive. We love negotiating win-win partnerships with vendors, customers, and business owners. This week, we wanted to highlight the beauty of Costco's symbiotic approach with its suppliers to build the Kirkland brand and help you explore similar possibilities within your business. 

Leverage your distribution and customer base - Costco only sells roughly 3,700 SKUs in inventory, but has millions of subscription-based customers who fill their stores annually to buy items in bulk. After building its brand and customer loyalty, this opened new opportunities for partnership - like building the Kirkland brand.  If you have a stable base of customers or a distribution network in place, there are potential partnership opportunities with suppliers waiting to happen.

Consider supplier incentives - This was the key piece behind the Kirkland private label. Costco was able to supply the Kirkland brand at a lower cost by eliminating marketing expense for its suppliers. Because Costco had a built-in distribution network and customer base, it was able to partner with its suppliers to eliminate an expense to the supplier, pass on the savings to its customers, and enhance the value of the entire Costco ecosystem.They could cut out brand's need to market, give brands guaranteed access to millions of captive (membership paying) customers, and ensure higher unit volumes through their partnership. As we wrote in edition #9 of The Weekly:

"If you have a solid understanding of how your industry's ecosystem works, you can bring third parties into the deal and align their incentives with yours which can potentially increase the value created for everyone."

Great brands take years to build - The Kirkland brand was started in 1992. But there was a flywheel effect built into the win-win of lowering prices for customers and ensuring a steadily increasing volume of business to suppliers, which led to the brand growing into the behemoth that it is today. If your business can align value and incentives between all parties in your industry ecosystem, the flywheel effect can be powerful indeed.

Symbiosis ensures a healthy, growing ecosystem while parasitic relationships eventually lead to a dwindling value chain in the jungles of industry. There is opportunity to increase your business's momentum by answering one simple question: where do symbiotic relationships not yet exist between your business and your customers, your suppliers, and your employees? Your business is an ecosystem, so cultivate it.

How Costco convinces brands to canabilize themselves (Napkin Math)

+ "Kirkland’s success defies our intuition and experience. Shouldn’t lower prices lead to lower quality products? How can they offer rock-bottom prices but still have some of the best products around? The answer is this: they get the best manufacturers in the world — who already have products on Costco shelves — to make Kirkland products."

Practicing medicine in the era of private equity, venture capital and public markets (Forbes)

+ "In the last decade, there has been a remarkable shift in ownership of healthcare delivery.  Previously independent, physician-owned medical practices have been acquired by private equity firms and publicly traded corporations. The rationale for these acquisitions is typically two-fold. First, the acquiring entity can streamline cost structures and implement management practices to lower the overall cost of delivering care. Second, these firms can use their consolidated position in the marketplace to extract more favorable rates from third-party payers.  In addition to private equity and publicly traded companies, venture capital firms have invested heavily in healthcare hoping to reap rewards from new models of care delivery. Contrary to others observers of these trends, I believe this change in ownership of healthcare is not intrinsically good or bad."

The inside story of how the Ricketts family schemed and feuded their way to owning the Chicago Cubs (Deadspin)

+ "The Cubs were officially put up for sale shortly after billionaire Sam Zell purchased the team’s parent company, the Tribune Co., in April 2007. Zell took control through a leveraged buyout—a technique that allows the buyer to borrow heavily in order to make a purchase and then saddle the existing company being purchased with the resulting debt—worth $8.2 billion, leaving the Tribune with $13 billion in total debt. Once the purchase was complete, Zell went about completing the second step of the leveraged buyout playbook: stripping the acquired company down to the studs and selling off whatever assets still hold value. Thus, the Cubs were suddenly for sale."

The collapse of the ad industry by the numbers (Marker Media)

+ "52,000: That’s how many jobs U.S. ad agencies are expected to lose in 2020 and 2021, with half of those jobs projected to never return, according to an analyst at the research firm Forrester, as reported in the New York Times. With advertisers making severe, pandemic-induced budget cuts, Forrester also predicted that ad spends will decline 25% in 2020, not recovering until 2023."

Buying a bike during coronavirus? Expect a long wait. (New York Times)

+ "In March, nationwide sales of bicycles, equipment and repair services nearly doubled compared with the same period last year, according to the N.P.D. Group, a market research company. Sales of commuter and fitness bikes in the same month increased 66 percent, leisure bikes jumped 121 percent, children’s bikes went up 59 percent and electric bikes rose 85 percent."

A founder's guide to writing well (First Round Review)

+ "I’ve witnessed how well-chosen words can alter the troubled paths on which executives find themselves. In my early days at Google, Sheryl Sandberg led a rapidly-growing operations team that was chronically deprioritized from an engineering perspective, resulting in exponential growth of manual work for her teams. Realizing that Larry and Sergey valued engineering-oriented efficiency and keeping Google “lean and mean,” she penned a famous document called “How not to hire 10,000 people,” making the case for investing engineering resources in her operations. Sure enough, Larry and Sergey soon let Sheryl hire as many engineers as she wanted."

The second wave of layoffs and furloughs is well underway (RIWI)

+ "- Of workers who were placed back on payrolls after being initially laid off/furloughed as a result of the COVID-19 Pandemic Crisis, 31% report that they have been laid off a second time, and another 26% of those placed back on payrolls report being told by their employer that they may be laid off again. These results were surprisingly higher for workers in states that have not been experiencing recent COVID-19 surges, relative to those in surging states.

- 37% of respondents employed by third-party employers (i.e. not self-employed) have been laid off/furloughed – at least once – since March 1, 2020.

- 57% of those initially laid off/furloughed reported being put back on payroll sometime after their initial dismissal, but 39% of such respondents say they were put back on payroll yet were not asked to return to actual work."

Meet the company that sells your lost airplane luggage (The Hustle)

+ "Every year, 4.3B bags are checked by airlines around the world. Around 25m of them  (5.7 per 1k bags checked) end up lost or misdirected. The 0.03% of bags that are still not reunited with their owners after 90 days are sold by the airline. Chances are, they are purchased by a company called Unclaimed Baggage."

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