Fast Moving Consumer Goods (FMCG) companies are masters at avoiding commoditization. Think of Coca Cola selling sugared water at high prices or Gillette charging a premium for razor blades.
Coca Cola is worth around $182 billion and is one of Warren Buffet’s core “forever” stocks.
What is Coca Cola’s secret sauce?
Coca Cola looks like a physical product-based company; consumers buy physical cans and bottles. Yet Coca Cola is as light in business model terms as Google, eBay or Facebook. Coca Cola is really a licensing business, like a software business. The way they have done licensing points the way to the future of the software business (and with “software eating the world”, we are all software businesses with different skins).
Of course, Coca Cola is not revealing their secret sauce. Could it be, shock horror, cocaine? The technical “secret” is probably totally banal. There may not be any secret at all. The secret is really a business model secret. The secret is how Coca Cola turned the concept of a secret ingredient into a massively scalable business with a huge competitive moat.
Coca Cola’s secret is business model innovation.
Coca Cola’s innovation was to combine two strategies that are rarely combined:
- Sold through channels (bottlers in their case).
- Created a consumer brand.
Doing one is normal. Doing both was unusual when Coca Cola pioneered it (it is less unusual now that Coca Cola is such a well-known success story).
However that art of combining is more unusual in technology. It’s like cooking. You have lots of components that go into a dish. You might even have a secret ingredient that defines it. Yet the whole is obviously more than the parts.
Consider the greatest entrepreneur the tech world has ever seen – Steve Jobs.
When Steve Jobs innovated, he did so using multiple components.
At one level he did that to create a device like an iPod, iPhone and iPad with lots of components sourced from all over the world. However, if he had only created “insanely great devices”, Apple’s business would be more vulnerable to competitors like Samsung and Xiaomi. The reason that Apple is so valuable is that Steve Jobs combined great physical devices with digital services like iTunes and AppStore into a combination that still mints money long after he died. That is why Apple has massive amounts of Unfair Advantage (aka moat, aka competitive differentiator).
Think about how the software business is evolving through Past and Present to the Future:
- Past = Perpetual Licensing. Close a sale and send a disk with the software. The software was the secret sauce by itself. This is like selling yeast to people who want bread; yeast is the active ingredient, but it is useless on its own.
- Present = SAAS. You add hardware to deliver the software over the Internet. In cooking terms, you add water, salt, flour (commodity ingredients) to offer a loaf of bread.
- Future = Software Enabled Business Services. This includes hardware – that is now the baseline. Software Enabled Business Services also typically include, 24/7 guidance by experts and business process innovation and digital media that attracts customers to your customers and co-branding partnerships and proprietary data. To stretch the analogy, this is now a restaurant where bread is one item (given free while waiting for your appetizers).
As an example, think of a payment network such as Visa, Mastercard and Amex. These are Software Enabled Business Services. Yes, these payment networks have software at the core. Yes, they own the hardware servers that the software runs on. Yet they don’t license that as a SAAS product to banks. They wrap it into other services to deliver transactions to consumers via Banks. That is how Visa, Mastercard and Amex turn their secret sauce into Unfair Advantage.
What Coca Cola, Apple, Visa, Mastecard and Amex have in common is the art of the chef – to combine commodity ingredients into value.