Sample of Verne's Executive CEO Newsletter:
Weekly Insights

HEADLINE: Warren Buffet, Wayne Huizenga, and others have dominated industries because they've found what I'm calling the 7000-pound engine within their industry and replaced it with something weighing 170 pounds. I'm playing with a new thought tool for driving strategic thinking within firms and it seems to be creating some real breakthrough thinking. In fact, several recent CEOs have told me they've found the 7000-pound engine in their industry, creating some of the most important breakthroughs they've had in years!

Hang in there and read below. This is likely one of the more important thought tools I've created in awhile and hopefully it will spark some important conversations within your firm. FSB has me writing a major piece on it this fall and I'm introducing it at the YEO International University this Saturday - wanted you to hear it first.

DETAILS: If you've dreamed of owning a private jet, check out www.eclipseaviation.com. Eclipse represents the perfect example of how a new firm can disrupt an entire industry and turn the economics upside down. The fundamental problem, and why most of us don't have use of private jets, is that to move 6 people from point A to point B (weighing 1000 - 1200 pounds) at 400 mph requires two jet engines weighing a combined 7000 pounds. Add the fuel and infrastructure necessary to power and support these engines and you have a situation where all the engine, fuel, and infrastructure is needed to move all the engine, fuel, and infrastructure!!! The people are insignificant.

Then along comes Vern Raburn, ex-Microsoft executive, who joins with Sam Williams, the pioneer of small jet engine technology, and they solve the problem (it was unveiled a few weeks ago and flies for the first time within the next few weeks). In essence, they build a private jet using two jet engines weighing a combined 170 pounds! Now the economics turn completely upside-down. Costing less than a fourth than the nearest competing private jet ($837,500 vs. $5 million) and with a per mile operating cost of a mere $.56 (some of your SUVs cost more J), Eclipse is revolutionizing an industry. With over $2 billion pre-sold (most sold to new air-taxi services that will be able to utilize the other 10,000 airports most of us can't use), Eclipse is off to a great start.

The key is finding a 10 - 20 times advantage. Here are some examples to get you thinking about your industry:

1) Warren Buffet is at it again. Of all the industries, he's jumping into telecommunications. What has been the 7000-pound engine in that industry? The interest charges on the infrastructure investment - which is why the industry invented EBITDA - which stands for "earnings before everything that matters!" With $1 trillion spent on infrastructure, the interest alone to the major banks almost equals the mere $100 billion in revenue the entire industry generates (now you see why the banks liked it!!). How can an industry survive when the interest costs equal revenue - not profit, but revenue. Then along comes Buffet a few weeks ago. Starting with a $500 million investment in Level 3 Communications, it's clear he's going to acquire the 20% of the infrastructure that really matters for pennies on the dollar. You do the math. 20% of one trillion times pennies and all of a sudden your interest costs are 2% of revenue instead of 80%. Now you can make lots of money, which seems to be Buffet's talent.

2) Wayne Huizenga looks at the mom and pop video rental business. Where was the 7000-pound engine? The movie studios were selling copies to rental places for $65. At this price, the mom and pop's could only purchase 1000 copies, had to charge upfront fees to fund inventory, only allow you to keep for one night, and they frequently ran out of copies - the classic definition of a stupid business! Then along comes Huizenga. In essence, he cuts a deal with the studios to get copies for $6 instead of $65 plus a revenue sharing arrangement. Now everything works. Sure, the mom and pop's sued and it was recently thrown out of a San Antonio court a few weeks back, but by the time it reached a decision (years) Blockbuster is now too big to stop. Again, over a ten times advantage.

3) What is the 7000-pound engine in the Starbucks example? It's almost like deploring reverse thrusters. The key to Starbucks' success is that they were bold enough to sell a $.50 cup of coffee for $4.00. Without this kind of economic leverage, everything else they have accomplished would not have been possible. Again, we're not talking about a 10% or even 50% advantage, we're talking about magnitudes of advantage.

And it's such an important advantage when found that entrepreneurs necessarily want to keep it quiet, so giving a lot more specific mid-market examples is difficult. Without giving away companies or industries, one firm in the information business thinks they can get people info in 24 hours what takes 30 days standard in their industry. Another, after playing with the concepts, scribbled out how to move their product for a fraction of the cost of conventional means.

Where is the 7000-pound engine in your industry? Find out, cut it by factors of 10 - 40, and revolutionize your business. Call me with what you discover - I promise to keep it quiet!

Verne
vharnish@gazelles.com