Frederick August Otto Schwarz (October 18, 1836 – May 17, 1911) was a toy retailer who started FAO Schwarz in 1862 in Baltimore. In 1870, Schwarz moved his toy shop to New York City, and for the last 145 years, the FAO Schwarz flagship store on Fifth Avenue in New York City has been a popular tourist destination. Sadly, FAO is shutting its Manhattan doors this week.
Who could forget the iconic status FAO received for its floor piano and cameos in movies, like “Big” where in 1988 the Zoltar Machine transformed Tom Hanks’ character, Josh Baskin, into an adult who then viewed the world from the eyes of a child? With this new child-like perspective, Josh Baskin brought new opportunity and success to an old business. Why? Because he was able to understand the “customer” from within, from the child’s point of view and could identify what products and services kids wanted – ultimately creating new marketable ideas and experiences.
What can middle market business owners learn from John Baskin and FAO Schwartz? Several important lessons about what we call ‘business definition’ where product lines, offerings or businesses are analyzed based on the sharing of customers and costs. Basically, the framework works like this: If there is high sharing between customers and costs, two different products should be run as a single business. If not, they should be run as separate businesses. Like Tom Hank’s character in “Big”, business definition is about the “lens” you look through to make decisions about your business. The adult Josh Baskin saw the world through the eyes of a child, yet, the world perceived him as an adult. This ‘inside-outside’ perspective allowed him to identify new opportunities to offer customers value by understanding what products a ‘child’ customer wants to buy together. For middle market business owners, the learning is to ‘get a fresh perspective’ on your business by understanding what products your customers buy together or would like to buy together. What are your customers looking for that is more than just the obvious?
A well-defined middle market business is a more successful one but it is sometimes difficult to focus and be disciplined. A good place to begin is to work on determining the fundamental reasons why your customers shop with you and to understand what products and services they tend to buy together. A good place to start for middle market business owners is to analyze and map existing and possible expansion opportunities against a business definition framework and then to brainstorm and test with employees and customers to identify new sources of value. Basically what you are doing is 1) identifying where there is either high customer sharing (like selling a new product to existing customer base) or 2) high cost sharing (like producing a new product through an existing manufacturing facility).
A simple 2×2 Matrix can be used to facilitate the discussion and further analysis. Exhibit 1 shows Customer Sharing on one axis and Cost Sharing on the other axis. Lines of business/services that have high degrees of customer sharing and high degrees of cost sharing are very well aligned and should be further reviewed for opportunities. Those that only share one, are considered adjacent businesses and should be recognized as good opportunities, but since they are a little further from the core business, will be more difficult to implement. If there is no overlap at all, they should be considered separate businesses and operated as such.
Based on what customers were looking for from FAO Schwartz and how they interacted with the iconic brand, couldn’t one argue that this flagship store is not simply a toy retailer, but rather an entertainment business? After all, what is a tourist attraction if not entertainment? Also, with toys becoming more virtual, is the definition of a toy moving from more physical to more virtual? Should FAO Schwartz have reconsidered its offering more from the “lens” of a theme park than the “lens” of a toy store? While most New Yorkers and visitors would balk at paying admission, there are many other creative ways to charge for the ‘entertainment’. They already started by adding a café, candy store and photo’s for purchase. Through defining their business differently, might they have been able to provide options that the millions of tourists drawn to their flagship location each year, would appreciate and more importantly, pay for?
The closing of the flagship FAO Schwarz store in NYC is a sad day. Maybe what they needed was their own Zoltar machine. Go out and find yours.