Friedrichshafen, December 10, 2009

Paper »Entrepreneurship«

Entrepreneurial Risk Reduction Threadless – A community-based perspective
Christian Rudolph matriculation number 9200192 (1. Semester) Jan Schmiedgen matriculation number 9200251 (1. Semester)

Paper »Entrepreneurship«

Table of Contents
1 Introduction ........................................................................3 2 Risk Framework..................................................................4 3 Methodology ......................................................................7 4 Threadless ..........................................................................8
4.1 4.2 4.3 Business Model Canvas .............................................................................9 Deconstruction........................................................................................ 11 Findings ................................................................................................. 17


Conclusion ..................................................................... 18

References ............................................................................. 19 Appendix ............................................................................... 23



Paper »Entrepreneurship«


As a cornerstone of entrepreneurial success and organisational survival, the reduction of risk has been subject to the scientific community ever since. By elaborating on the theory of risk from different fields and perspectives, this paper shows why today’s reduction of entrepreneurial risk can effectively be reduced when focussing on organisational risk reduction potential which can be found in innovative business models. By applying the ontology of Osterwalder we deconstructed the business model of Threadless, a (internet) community-based apparel store and identified those factors (building blocks) that reduce organisational risk. Apparently, the (pro)-active implementation of a usercommunity reduces organisational risk too the extent of activities taking over by the community itself; thereby reducing risks that are attributed to the “outsourced” functions.


By the end of the day, the consequences of failures and misperceptions within firms exclusively affect individual actors. Luhmann (2005, S. 163) points out that the risks [f.e. within organisations] adhere to the modules, the enterprises and households that decide on the uses to which money is to be put. The economy can thus be regarded to as a “gigantic market of risks” (Luhmann, 2005). Why do so many new ventures fail? The risks of failure facing a new venture are derived from several sources: including the costs of learning new tasks (Stinchcombe, 1986); the characteristics of the new product (Aldrich & Auster, 1986); the strength of conflicts regarding new organisational roles (Stinchcombe, 1986); the presence or absence of informal organisational structures (Gulati & Puranam, 2009); the stability of links with key stakeholders (Stinchcombe, 1987); and the degree of organisational stability/inertia (Hannan & Freeman, 1989). Stinchcombe introduced the concept of the liability of newness to explain why more new ventures failed than did established businesses (Stinchcombe, 1987). Risk taking is an important property of entrepreneurship. Since Cantillon (Winch, 1980), who can be considered as a founder of the term entrepreneur, defined the entrepreneur as a person that bears risk of profit and loss, risk taking has been seen as a defining element of the entrepreneur and entrepreneurship (Hisrich, 2009; Knight, o. J.; McClelland, 1961; Schumpeter, 1982). Entrepreneurial endeavour in terms of new venture creation can be considered risky since the failure rate of new firms is substantial. Consequently entrepreneurs assume psychological, social and financial risk, when they form new ventures (Hisrich, 2009). Early research on entrepreneurial behaviour concluded that under the assumption of economic rationality in people behaviour, in equilibrium, more risk-averse in-3-

Paper »Entrepreneurship«

dividual become workers while less risk-averse individuals become entrepreneurs (Kihlstrom & Laffont, 1979, S. 719). This conclusion, however, was disproved by findings of the study Brockhaus (1976), who found that risk-averse behaviour cannot be considered a distinctive characteristic of entrepreneurs because it does not differentiate them from other people. His findings showed that risk should not be approached in terms of an enduring psychological characteristic (trait). Rather, it can be considered as being related to entrepreneurial behaviour, where possibility of failure or loss related to that behaviour exists. In efforts to answer the question, whether entrepreneurs have a different attitude towards risk than others scholars tested whether the risk propensity of entrepreneurs was greater than that of managers. (Simon & Houghton, 2000, S. 114). The propensity for risk taking is defined as the perceived probability of receiving the rewards associated with success of a proposed situation, which is required by an individual before he will subject himself to the consequences associated with failure, the alternative situation providing less reward as well as less severe consequences than the proposed situation. Such a definition might best describe the situation that faces the potential entrepreneur when he decides to establish a new business venture (Brockhaus, 1976, S. 513). In other words, risk propensity is the tendency to take actions that one has judged to be risky (Sitkin & Pablo, 1992, S. 9-38). Surprisingly, research found that this trait did not differentiate entrepreneurs from others (Brockhaus, 1976). In response, some scholars suggested individuals take risky actions (i.e., actions that have a high possibility of disappointing outcomes) because they perceive less risk than most (Brockhaus, 1976; Kahneman & Lovallo, 1993; MacCrimmon & Wehrung, 1990). Even when individuals evaluate identical situations, some people conclude the situation is very risky, whereas others believe it is not (Nutt, 1990, 1993). Even if they do not have a high-risk propensity, individuals who perceive less risk than others might unknowingly take risky action. Either way, all these models and theories see the reduction of risk as a desirable objective.


Risk Framework
Janney & Dess (2006) tried to capture this atomised view by setting up a risk construct from a functional point of view distinguishing between risk reduction as variance, downside loss or opportunity.1 Risk as variance deals with all activities where monetary streams have a high variability or spread (f.e. variability of revenues). Risk as downside loss and opportunity are comparable to the metaphor of


Figure 3: , p. 22 (Appendix)


Paper »Entrepreneurship«

“sinking the boat” and “missing the boat”, introduced by Dickson & Giglierano (1986b). Risk as downside loss focuses on the likelihood and magnitude of potential losses, while risk as opportunity focuses on the upside potential. But how can possibilities for this risk reduction/potential be detected, analysed and applied in an already existing business model? During the process of research for this paper it became salience that to analyse this further and understand the concept of risk in entrepreneurial studies fully, the distinction between risk and uncertainty has to be to clear.

Risk can be defined as an attribute to all those activities where the likelihood of possible outcome is known and calculable based on experience gained from previous or comparable activities. Schon (1985) describes the risk of an action as the likelihood that it will produce an unwanted result. Activities where there is no calculable likelihood of possible outcome or even no certainty about the exact number or extent of outcome are considered as being uncertain. Respectively, uncertainty can be found when a situation requires action but resists analysis of risks (Knight, o. J., S. 12).

Our paper elaborates on risk; and its reduction through an innovative business model (see chapter »Threadless«). As easy the distinction between risk and uncertainty is in theory, as difficult it is in reality. Observations of organisational activities and therefore entrepreneurial behaviour show constant transitions of risks to uncertainty (and vice versa). As an illustrative example one could think of an existing firm introducing a CRM-software to its Human Resource department for the first time. As no experience data of a comparable project exist, the likelihood of failure (risk) cannot be calculated. The outcome of the activity in terms of costs and expected returns is therefore highly uncertain. If the same organisation would later implement the same or similar software to another department, it would be able to at least some extent calculate the likelihood of failure based on previous experience with the software. This second implementation thus has a certain risk involved. Uncertainty (to some extent) became calculable; became risk. Assuming the general economic motivation of an individual to reduce the risk of its activities in business ventures, one has to face different levels of risk. Ventures in this context contain all those activities that are entrepreneurial. Besides the fundamental activity of starting up a business, entrepreneurship can also be found within existing organisations (intrapreneurship). This chapter elaborates on dimensions of risks that can be found in both cases of entrepreneurial activity. In the following we generally distinguish between two levels of risk, entrepreneurial and organisational.


Paper »Entrepreneurship«


Entrepreneurial risk puts the individual within an organisation in the focus of being the one affected. Hence, entrepreneurial risk predominantly deals with personal risk (f.e. financial) that result from business-related activities. Dickson & Giglierano (1986) defined entrepreneurial risk as the probability of failure and personal loss when doing business. Organisational risk focuses on the risk for the firm and its business activities. Under the premise of survival and/or growth as primary objective of a firm, organisational risk describes all dimensions and factors that may either lead to the inability to maximise profits or the disappearance of the firm. In other words, organisational risk defines the likelihood of mortality of an organisation (Dickson & Giglierano, 1986a).-

When focussing on the interrelation of entrepreneurial and organisational risk in daily business, one has to consider that consequences of organisational risk-taking ultimately affect the individual within an organisation. Although we are speaking of organisational risk, the risk involved, simultaneously embodies an entrepreneurial risk. In case of a start-up this becomes even clearer, as the entrepreneur sometimes even equals the organisation. As a consequence, to identify those factors that reduce risks for the entrepreneur [employee] we foremost have to focus on the reduction of organisational risk. In the rise of information technology in today’s’ knowledge society, internet community based ventures have become of increasing interest to the scientific community. This paper adds value to this line of research by focussing on organisational risk-aspects in a recent community-based venture from the apparel industry. Moreover we highlight those factors of the business model that distinguish it from the traditional apparel industry business model in respect to organisational risk reduction; thereby we define organisational risks as those activities ultimately causing too much costs/lack of revenues, causing lack of profits, leading to risk of mortality. Consequently, this paper elaborates on and tries to find an answer to the question:

How to reduce organisational risk using an internet community-based business model? We will bear that in mind when analysing the case study. But first, some words concerning the methodology applied in the following.


Paper »Entrepreneurship«


Regarding the two facts, that a) – as shown above – the term risk in organisational contexts is very broad and complex and b) that we wanted to examine it related to community-based approaches, we opt for a research method that was suited to “explain the presumed causal links in real-life interventions that are too complex for the surveyor or experimental strategies [and the like] “. (Yin, 2002, p. 15) We needed a method that allows retaining the holistic characteristics of real-life events; in our case organisational processes (Yin, 2002, p. 2). Therefore we decided to perform a single case study research. This type is most suitable if „the case represents an extreme case or a unique case“ that is „worth documenting and analyzing“ (Yin, 2002, p. 40 f.). As we choose Threadless – due to extraordinary growth and press coverage in the last years – we thought this distinct example of a user community would serve well as research object. As the case study „does not represent a »sample« [...], [our] goal will be to expand and generalise theories (analytic generalisation) and not to enumerate frequencies (statistical generalisation) “ (Yin, 2002, p. 11) According to Yin (2002) several components are needed to properly conduct a case study research. Besides the clarification of the research question and its propositions he emphasises one criterion that is crucial for a structured examination: the unit of analysis (Yin, 2002, p. 21). As organisational risk is distributed throughout the whole organisation we decided to analyse and deconstruct the whole business model (as unit of analysis) of Threadless with regard to risk reduction. We therefore decided to use the business model ontology proposed by Alexander Osterwalder (2009). His ontology provides a structured way to decompose and analyse a business models components in detailed but as well in a holistic manner – depending on the focus of the analysis. As it is an elaborated synthesis of the latest research in this field, his framework provides a solid foundation for our purposes. Osterwalder terms the visual representation of his ontology the Business Model Canvas (Figure 1: The Business Model Canvas). It consists of nine building blocks and provides a structured way to analyse the particular and overall risks of Threadless.


Paper »Entrepreneurship«

Figure 1: The Business Model Canvas (Osterwalder et al, 2009)

In the following, we analyse the several blocks of Threadless’ business model with regard to our organisational risk reduction focus. Simultaneously we will – if reasonable – compare our findings to the traditional apparel industry, respectively to »traditional« online retailers.


Threadless is a community-centered online apparel store that started with $1,000 in seed money won by the founders in a web t-shirt design contest. Inspired by that experience and motivated by their success they decided to start up their own business. In substance, the website works like a never ending design competition. Members of the community submit t-shirt designs online, which are put to a community vote. The winner design is then printed and sold online. In return, the winner receives a prize of cash and store credit for his/her own purchases on the platform. „Threadless encouraged community members to actively participate by critiquing submitted designs, blogging about their daily lives, posting songs and videos inspired by the designs, and, most important, purchasing t-shirts that have won the weekly design competitions. All printed designs typically sold out, and were then retired from the active catalogue to make room for new designs. In 2007, Threadless was well on its way to selling more than a million and a half t-shirts. “(Kanji & Lakhani, 2008, p. 1) On average, around 800 designs compete in any given week and prizes worth $6,000 are rewarded. Today (2009) Threadless has a user stock of over 500,000 community members and a turnover of $50,000 million, tendency increasing.


Paper »Entrepreneurship«


Website Established Founders 2000 Jake Nickell (Chief Executive Officer), Jacob DeHart (Chief Technology Officer), and Jeffrey Kalmikoff (Chief Creative Officer) > 500,000 (2007) / > 900.000 (2009) 30 $16 more than 1.5 million $23 million 133,000 68,547

Community members population Full time employees Average t-shirt price T-shirts sold Revenues1 Designs received since 2000 Designs voted and scored since 2000

Figure 2: Threadless – facts and figures (Kanji & Lakhani, 2008) → list is not exhaustive.

4.1 Business Model Canvas
"[The] apparel industry is characterized by short product life cycles, volatile and unpredictable demand, tremendous product variety, and long and inflexible supply processes. (Sen, 2008, S. 1)" therefore it has been under constant pressure since the early 1990's, with all the known consequences; global supply chains, manufacturing in lowincome countries and extremely complicated and expensive foresight / trend research activities. In order to now fathom out Threadless’ obvious outstanding success compared not only to the traditional fashion industry, but also to other online apparel suppliers we need to have a closer look on its activities. In the following we will examine how Threadless circumvented the typical problems in his branch of industry and how it reacted to challenges, especially in regard to risk prevention. Therefore we deconstruct its business model following Osterwalder by comparing the elements to the corresponding »industry standard«, or respectively other online apparel stores.

1 Operating margins for firms in the casual designer retail space were as follows: The Gap 9.5% (2008) ; Urban Outfitters 14.9% (2008); Inditex (Zara) 17.5% (2008) and H&M 23.7% (2007). Source: Google Finance.


Paper »Entrepreneurship«


The fashion and apparel market before Threadless was characterized by either large players1 or so players called »boutique or fashion-led houses«2. The former had to take care of a certain mass-compatibility boutique fashionof their offering, which did not allow for experimenting with seemingly unprofitable niche trends. The latter had not to react but to better create or at least adept new trends as soon as they emerge and could therefore also specialize into niches. However, both were not able to offer customized and affordable fashion to a larger market. When the first online apparel shops emerged in the mid and late 90's, they usually focused on custom-designed fashion items (mostly t-shirts or hoodies), that users could order in small quantities either with their own uploaded designs or by choosing from a predefined set of the latter offered on the platform. Although having developed more and more sophisticated over time, this rough description is true even today for most of the online apparel fashion stores like,, and many more. Threadless »combines the best of the two (or better three) worlds«. On the one hand it offers a wide variety of designs ranging from »mass taste« to special design niches that even expensive boutiques couldn't offer. On the other hand it relieves his users of the burden to design their own subject if they are not capable doing this. Rather it helps them to influence design processes performed by others in order to get what they want in a quality they couldn't get elsewhere. That is the big difference in comparison to other online apparel stores and one of the main arguments, when arguing that it is the current »best practice example« of online apparel retailers. How this affects Threadless' risk diversification will – as already mentioned – now be examined in the following. When possible the authors will compare the risks of the »traditional« and the current »online apparel business« to Threadless.


Usually with scale economies, sophisticated logistics, low labour cost and assembly operations as well as advanced retail and distribution networks. Usually with an emphasis on design, quality and customisation as well with customers who are prepared to pay respectively


high prices for these attributes.

- 10 -

Paper »Entrepreneurship«

4.2 Deconstruction

Figure 1: Threadless’ business model canvas (following Osterwalder, 2004, 2006, 2007; Osterwalder & Pigneur, 2009; Osterwalder, Pigneur, & Tucci, 2005)

In the following we elaborate on the case of Threadless with the help of the particular building blocks pictured in »Figure 1«. Because of the interrelations of certain building blocks, some risks will be (partially) dealt with in several blocks. As Threadless represents a very progressive community-driven business model we chose to have a closer look on the customer block at first. CUSTOMERS The customer base of threadless is very diverse. It ranges from professional graphic designers to semi-professionals and amateurish users up to ordinary and just consuming users1: „There is the simple consumer who wants to go to our Web site and buy new shirts. There is the designer, perhaps a college student or someone who likes to

1 Which interestingly have a strong feeling of commitment and co-creation influence as well, because of having the opportunity to vote and comment the designs. In a way they feel as co-creators of the designs, other people are refining with help of their contributions.

- 11 -

Paper »Entrepreneurship«

design t-shirts in his or her free time, which uses the site to practice design skills and get feedback from fellow artists. There are also just a lot people who like the idea of Threadless and enjoy interacting with consumers and designers and participating in our blog section“ (Threadless Founder Jacob DeHart in Kanji & Lakhani, 2008, p. 3). Aside from the shopping function, nearly all users share the same goals, for instance »intellectual« challenge, enjoyment of the task, strong sense of identity and community belonging (Lakhani & Panetta, 2007) and concrete motivations to use the platform (Making Money, Improving creative skills, Freelance Opportunities, Community Love, Addiction (Brabham, 2009, S. 7-12). Thus, when every user is motivated to contribute to the further development of the platform one can say that Threadless is in the comfortable situation to be able to broadly disperse its »shared risks« (Clemens, 2008). Nevertheless, its »cost of coordination risks« (Grossman & Hart, 1986) as a consequence thereof increases. This becomes more apparent when looking a bit more in detail at the building block of »Relationships«. RELATIONSHIPS One of the greatest risks in traditional fashion business is to miss a certain trend or equal worse being too late in taking up. Due to the fact, that the community itself produces and ranks the emerging trends via voting, Threadless is able to predict which designs will sell and which ones not. This reduces the »risk of new product development« (Becker & Perters, 1998) dramatically. With the data collected from its customers it can serve a few mainstream trends (in a figurative sense, the mass market) as well as many niche trends (long tail) as long as there are enough preorders collected. This has several positive side-effects: Threadless knows exactly what customers want and when they want it. Therefore it can react more quickly to changing preferences what in turn helps to serve the heterogeneity of demands and makes micro segmentation possible that is far too expensive for traditional ventures, because of their inability to forecast the exact specification and potential sales volume of a specific item. Threadless owns this data and therefore benefits from two advantages. On the one hand, it overcomes the limitations of traditional market research (also see → »Cost Structure«, p. 116) what can be subsumed in a lowered »financial risk«. On the other hand it faces no »risk of overstocking« (Ogawa & Piller, 2006) that in the traditional market often leads to the so called »lost sales risk« (Gernaat, 2006; Sen, 2008). Another risk concerning high-value fashion items is being copied too fast. In the traditional fashion industry designs are created by highly skilled and therefore expensive designers, either in-house or with a contracted partner (Sen, 2008, S. 6). Thereby, Threadless reduces not only »financial risk« by reducing costs as it rewards just those winning designs which will sell but also by not only outsourcing »IP-loss- 12 -

Paper »Entrepreneurship«

risks« like being copied to its users "there is also the risk of submitted ideas inspiring others to create related but different designs that might outperform the designs that inspired them. Most designers will also need to be psychologically prepared to lose in public, as very few designs are converted into t-shirts. Finally, whereas non-winning designers retain all rights to their work, winning designers, in exchange for the cash prize, assign the copyright for their work, and exclusive use of the design on t-shirts, to Threadless." (Lakhani & Panetta, 2007, p. 108). Furthermore, by utilising the attention of the community concerning their design, Threadless is even reducing the risk of unknown »plagiarism « Recently for example, issues of copyright infringement over a winning design were identified and rectified through direct involvement of the community. Threadless retains sufficient rights to IP to ensure the viability of its business model, but leaves rights to all other uses to the designers. While in the traditional industry this monitoring would require heavy monetary efforts, Threadless gets it for »free«. The utilisation of the user community reduces even more risks; for example, valuable cues on how to improve its whole business: "That Threadless management has embraced openness and transparency is reflected in most decisions about the interaction platform, voting and selection rules, and even manufacturing strategy being taken openly and in consultation with the community, which has on many occasions provided direction and guidance unanticipated by Threadless management." (Lakhani & Panetta, 2007, p. 108). The other side of the coin however is reflected in the literally »customer integration risk« (Enkel, Kausch, & Gassmann, 2005). Customer integration might lead to insufficient IP-protection (e. g. regarding the common development of new tools), involuntarily transfer of first-mover knowledge towards competition or simply a loss of control due to increased transparency (cf. »Distribution & Acquisition Channels«, p. 16). PARTNERS As the Threadless community is not only customer but also its most important partner, too, from the partner-perspective (see p.11, Figure 1: »Partner«) a whole set of risks has been shifted towards them. The community forecasts what and at what volume they plan to buy on the platform, meanwhile performing critical key activities1 (cf. »Key Activities« on the next page). In the traditional apparel industry as well as in other current online apparel shops, these activities, which include »planning risks« have to be assessed by the organisation itself and often solely. The integration of a user community into the actual business model leads to the fact that the majority of activities in the operating business are performed by the


Such as (product-)design, product R&D or even marketing and Sales.

- 13 -

Paper »Entrepreneurship«

user community itself. Therefore every risk reduction or increase mentioned so far seems to be caused by this fact. (also see: p. 15, »Key Activities«). In traditional industries as well as in other online retailers, the organisation itself or at least a contracted partner that is part of the internal supply chain, fulfil this obligation. It also shows that the community-based approach does not limit itself to the building blocks. Exemplary reduced risks connected to the role of the community as partner are the »financial risk« or the possible »costs for learning new tasks«. Notably, the latter is predominantly one of the key risks when launching a business (Stinchcombe, 1986). Consequently, it can be concluded that the community-based configuration at the time of launch had a big impact on the reduction of »market entry risks«1 that traditional business models face. Some of the other online apparel retailers certainly have similar approaches implemented partly2, but they didn't instutionalised it that rigorous from the beginning, because they just transferred the old real-world business to the web enabling users to buy small customised quantities. However, Threadless managed not only to fully integrate a user community it also outsourced other critical and costly activities to »regular« business partners. Threadless outsources 1) the t-shirt production (organised within a special contract with a bangladeshian supplier3) of several co-created and special shirt-designs that are only available at Threadless. 2) the printing, respectively finishing (which is done in the domestic market and therefore enables fast reaction times and therefore reduces »time-to-market risk« and »time-to-react«) that is also organised within a special bulk-order contract4 and therefore shapes another essential competitive advantage/barrier, that is hard to copy by other market-players. Furthermore, they outsourced 3) delivery logistics (UPS, FedEx, etc.), 4) credit management (VISA, Mastercard, etc.) and 5) hosting services which are performed by partners. When looking at all the outsourced activities quickly, the questions arises what functions then Threadless itself performs at all? The next section will shed light on that.

1 One example would be the market entry risk of new players to heavily invest in market research or building up customer loyalty 2 For example Spreadshirt with their »Shop-in-shop«-Offer (enabling users to open their own independent shops, where they can sell apparel with their own designs → the difference to threadless is: the design(shop)-categories are not that easy accessible as they are on the Threadless-site) or their Open Logo-Competition (as described in Reichwald & Piller, 2009, S. 5). 3 The risk of being dependent from that one supplier is reduced due to the fact, that Threadless can easily switch back to its old suppliers like »American Apparel«, »Fruit of the Loom« or the like. 4

Due to its massive printing volume, Threadless contracted a special deal with its domestic printer. It collects even small (re)orders to a bulk and prints them in one batch of e. g. 1,000 items, when enough orders have been placed. This creates a competitive advantage, that is hard to copy for other competitors.

- 14 -

Paper »Entrepreneurship«

KEY ACTIVITIES A key focus of the operating business of Threadless is the community support. Thereby we think of all activities related to maintaining and moderating relationships (cf. »Relationships«, p. 12) with the users. Examples are print- and pre-press support, general mail and post order mail support, mediating discussions in forum and blog, development of common rules for collaboration and catalysing platform promotion. Summed up, they all reduce »stakeholder-risk« as well as »lack of customer loyalty-risk«. The stronger identification of the community with Threadless, the more difficult it will be for competitors to overcome their loyalty towards Threadless. Although new entrants or current competitors might copy new functions or features of the Threadless system, they will not be able to copy the businessspecific experience that developed and strengthened over time. Threadless evolves with its users. The downside of a community-based model online, that every innovative company faces, remains »technological risk« that is linked to the maintenance and further development of the platform and their likelihood to influence trade activities, like a temporarily server break-down. (Shepherd & Douglas, 2000). The second important aspect one has to consider when examining the risks inherent in this building block is the way Threadless handles its supply chain management. We cannot elaborate this in detail here, but we just want to highlight the fact, that the most important activities that require speed and flexibility are integrated horizontally in a way, that reduces risks, players in traditional fashion business with their (over)complex value-chains (Christopher, Lowson, & Peck, 2004; Doeringer & Crean, 2006; Gernaat, 2006; Sen, 2008; Taplin, 1996) usually have to cope with. KEY RESOURCES Affiliated with the key activities are the critical key resources. At Threadless the most important asset obviously is 1) the user community, that is, as mentioned above, hard to copy (compare advantages and risk above, »Key Activities«) and 2) the brand itself. Both are the main components building a market entry barrier (respectively a barrier for »copy cats«) and are therefore reducing Threadless’ »plagiarism-risk«.1

1 The wealth of the Threadless community lies in the network ties between all members and the organisation. This so-called „Social Capital“ is described by researchers in the field of social sciences, for instance in the studies of french post-structuralist Pierre Bourdieu.

- 15 -

Paper »Entrepreneurship«

COST STRUCTURE The cost structure block elaborates on the cost pools of Threadless. Fixed costs are the running costs of the platform, wages of the employees as well as rental of stock and office accommodation. Variable costs arise by production on demand and therewith connected expenses (e.g. intercharge fees, printing and logistics). Compared to the conventional apparel industry Threadless has dramatically reduced its cost pools, because it has not to take care of a difficult to plan stock/inventory, own production plants and printer and therewith connected labour cost. It also saves expenses for the design process and rights of use or critical activities like advertising and marketing (see also p.116, »Distribution & Acquisition Channels«). That means, Threadless needs less staff and less money than its competitors to keep its business running. Even other online apparel stores are usually not independent from huge efforts in paid affiliate marketing and targeted (keyword) advertising. Especially word-of-mouth diffusion makes sure that Threadless has an even lower »investment risk« than its progressive competitors. REVENUE STREAMS The inspection of the revenues in our case is rather simple. Threadless' earns money 1) by regular asset sales (fashion items like shirts, hoodies and the like as well as with art prints) and 2) subscription fees from the »12 club« (a premium membership for monthly t-shirt shipment for »heavy users«). The advantages of its forecasting capabilities have been described already and can (from a revenueperspective) be completed 3) by the special pre-order prices, which also lead to predictable and stable revenue streams and a solid cost calculation causing a reduction in different aspects of »planning risk«, for instance cost-,budget or stockplanning. In comparison to the traditional industry and its online competitors Threadless has a relatively high profit margin of 30% (Rowe, 2006). The high margin is caused by the high number of loyal customer in a customised environment with low investments by Threadless at the same time. DISTRIBUTION & ACQUISITION CHANNELS Unlike the traditional apparel retailers, Threadless needs no chain stores or a similar “physical” distribution network (although it recently opened two flagship retail stores). Its main distribution channel is the Website with the dedicated voting, forum, blog, shop sections and e-mail support. The same usually applies to other online apparel retailers, but regarding the acquisition channels there are big differences again. While online apparel retailers as described in »Cost Structure« usually buy themselves into (pay per lead) affiliate networks, Threadless benefits from reasonable word-of-mouth recommendations. This in return has led to a remarkable press coverage and nearly cost-free PR.
- 16 -

Paper »Entrepreneurship«

It needs to be mentioned that the disadvantage of outsourcing (f.e. parts of the mentioned marketing activities) leads to certain new risks with regard to sensible actvtities that are no longer in control of the firm and its community users. Due to a system-inherent lack of control in communities, Threadless faces a certain »reputation risk«. It could for example be the victim of a defamation campaign or users could ask inconvenient questions concerning the factors of production in Bangladesh, thus forcing Threadless management to react.1

4.3 Findings
As shown above, Threadless circumvents a lot of risks in a clever way. Between these diverse types of risks there exist many interdependencies that weaken and reinforce each other and whereas effective directions are hard to predict. Nevertheless two of the building blocks obviously became crucial: partners and customers. Often the other blocks and their inherent risks have strongly been connected to these two. As Threadless actually considers them as the same, one can say that the user community is the main driver in Threadless’ risk reduction setting. With respect to the initial research question of how to reduce organisational risks using an internet community based business model, we can now sum up: Community-based business models like Threadless reduce their organisational risk by an (pro)-active implementation of their internet-community, which maintains traditional apparel industry competences (designing, producing and distributing) on its own; thereby taking over those organisational risks that are attributed to the functions. Contrary to the traditional apparel industry, the main focus of operating business thereby shifts from design, production and distribution to the maintenance of the user community platform.

The only ultimate threat an organisation faces, is its own mortality (Shepherd & Douglas, 2000).

1 As an informal reference we recommend the unoffical Threadless blog that lists certain downside points for Threadless customer.

- 17 -

Paper »Entrepreneurship«


In the beginning we theoretically concluded that the variety of risk-aspects within an organisation is caused by the fact that every activity in an operating business has certain likelihood to fail. Failure in this context is considered as an outcome that does not benefit the organisations’ primary objective to survive (stay profitable). Consequently, every attempt to minimise risk within an organisation tries to reduce the ultimate risk of organisational mortality. In the descriptive part of this paper we highlighted the dimensions of risk and different approaches on how to construct a holistic understanding of the term risk in entrepreneurial activities. The elaboration on the use of the attribute and concept of risk showed, that the distinction between entrepreneurial and organisational risk becomes obsolete when focussing on the risks involved in a business model. If we break down the consequences of organisational risk, we ultimately end up at the entrepreneurial (individual) level. Therefore, we conclude, that to reduce entrepreneurial risk within an organisation the focus of risk reduction has to be on those activities inheriting organisational risk. By applying a deconstruction framework to analyse the business model of Threadless, we were able to identify those risk-reducing aspects of the business model that make Threadless competitive successfully. The analysis revealed that Threadless’ community-based approach is the most important factor for their risk-reduction. The reason for the resulting risk reduction lies in the combination of the two building blocks of partners and customers. Due to the fact that Threadless community users design the goods they later purchase themselves, the supply chain of Threadless’ business is extremely simple. By also outsourcing production, the organisation can fully concentrates its human- and financial capital on the maintenance and maximisation of its social capital, meaning the user community. Due to the fact that activities with a potential of organisational risk are now executed by the costumer itself, Threadless not only outsources activities like product design, market research or production, but also “outsources” the specific risk attached to these activities (risk of new product development, market entry risk and risk of overstocking). The question remains, whether the reduction of organisational risk in some building blocks of the business model goes along with the increase of risk in other building blocks. To what extent can the community itself become a risk to Threadless? Consequently, the foremost question that needs to be answered by further research is: “Does a community-based business model absorbs/eliminate organisational risk or does it just transfer it to other parts (building blocks) of the organisation?

- 18 -

Paper »Entrepreneurship«

Aldrich, H., & Auster, E. R. (1986). EVEN DWARFS STARRED SMALL: LIABILITIES OF AGE AND SIZE AND THEIR STRATEGIC IMPLICATIONS. Research in Organizational Behavior, 8, 165. doi: Article Antoncic, B. (2003). RISK TAKING IN INTRAPRENEURSHIP: TRANSLATING THE INDIVIDUAL LEVEL RISK AVERSION INTO THE ORGANIZATIONAL RISK TAKING. Journal of Enterprising Culture, 11(1), 1. doi: Article Antoncic, B., & Hisrich, R. D. (2000). Intrapreneurship Modeling in Transition Economies: A Comparison of Slovenia and the United States. Journal of Developmental Entrepreneurship, 5(1), 21. doi: Article Becker, W., & Peters, J. (1998). R&D-COMPETITION BETWEEN VERTICAL CORPORATE NETWORKS: MARKET STRUCTURE AND STRATEGIC R&D-SPILLOVERS. Economics of Innovation & New Technology, 6(1), 51. doi: Article Berg, A. (2005). What is Strategy for Buyout Associations? Academic Readings on Private Equity (1st ed.). Berlin: VWF. Brabham, D. C. (2009a). Moving the Crowd at Threadless: Motivations for Participation in a Crowdsourcing Application. SSRN eLibrary. Retrieved October 31, 2009, from Brabham, D. C. (2009b, August). Moving the Crowd at Threadless: Motivations for Participation in a Crowdsourcing Application. Paper presented at the annual meeting of the Association for Education in Journalism & Mass Communication, Boston, MA., . Retrieved from Brockhaus, R. H. (1976). Risk Taking Propensity of Entrepreneurs. Academy of Management Proceedings (00650668), 457-460. doi: Proceeding Christopher, M., Lowson, R., & Peck, H. (2004). Creating agile supply chains in the fashion industry. International Journal of Retail & Distribution Management, 32(8/9), 367-376. doi: 10.1108/09590550410546188 Dardis, R. (n.d.). FASHION BEHAVIOR: A CONSUMERIST VIEW. Advances in Consumer Research, 1(1), 484-487. doi: Article Dickson, P. A., & Giglierano, J. J. (1986). Missing the Boat and Sinking the Boat: A Conceptual Model of Entrepreneurial Risk. Journal of Marketing, 50(3), 5870. doi: Article Doeringer, P., & Crean, S. (2006). Can fast fashion save the US apparel industry? Socio-Economic Review, 4(3), 353-377. doi: 10.1093/ser/mw1014 Enkel, E., Kausch, C., & Gassmann, O. (2005). Managing the Risk of Customer Integration. European Management Journal, 23(2), 203-213. doi: 10.1016/j.emj.2005.02.005

- 19 -

Paper »Entrepreneurship«

Gernaat, M. J. (2006). The impact of lead time on the fashion apparel supply chain (Dissertation). Cranfield University. Gulati, R., & Puranam, P. (2009). Renewal Through Reorganization: The Value of Inconsistencies Between Formal and Informal Organization. Organization Science, 20(2), 422-440. doi: Article Hannan, M. T., & Freeman, J. (1989). Organizational Ecology. Harvard University Press. Heijden, K. V. D. (1999). Scenarios: the art of strategic conversation (Reprint.). Chichester [u.a.]: Wiley. Hisrich, R. D. (2009). International Entrepreneurship: Starting, Developing, and Managing a Global Venture. Sage Publications, Inc. Janney, J. J., & Dess, G. G. (2006). The risk concept for entrepreneurs reconsidered: New challenges to the conventional wisdom. Journal of Business Venturing, 21(3), 385-400. doi: 10.1016/j.jbusvent.2005.06.003 Kahneman, D., & Lovallo, D. (1993). Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking. Management Science, 39(1), 17-31. doi: Article Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263-291. Kanji, Z., & Lakhani, K. R. (2008). Threadless: The Business of Community. Harvard Business School Cases, 1. doi: Case Study Kihlstrom, R. E., & Laffont, J. (1979). A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion. Journal of Political Economy, 87(4), 719. doi: Article Knight, F. H. (n.d.). Risk, Uncertainty & Profit. Harper Torchbooks. Lakhani, K., & Panetta, J. A. (2007). The Principles of Distributed Innovation. Innovations: Technology, Governance, Globalization, The Berkman Center for Internet and Society Research Paper No. 2007-7, 2(3). Retrieved October 31, 2009, from Luhmann, N. (2005). Risk: A Sociological Theory (Paperbacktion.). Aldine Pub. MacCrimmon, K. R., & Wehrung, D. A. (1990). CHARACTERISTICS OF RISK TAKING EXECUTIVES. Management Science, 36(4), 422-435. doi: Article March, J. G., & Shapira, Z. (1987). MANAGERIAL PERSPECTIVES ON RISK AND RISK TAKING. Management Science, 33(11), 1404-1418. doi: Article Martin Christopher, Robert Lowson, & Helen Peck. (n.d.). CREATING AGILE SUPPLY CHAINS IN THE FASHION INDUSTRY. McClelland, D. C. (. M. D. C. (. B. (1961). The Achieving Society. Free Press.

- 20 -

Paper »Entrepreneurship«

Nutt, P. C. (1993). FLEXIBLE DECISION STYLES AND THE CHOICES OF TOP EXECUTIVES. Journal of Management Studies, 30(5), 695-721. doi: Article Nutt, P. C. (1990). STRATEGIC DECISIONS MADE BY TOP EXECUTIVES AND MIDDLE MANAGERS WITH DATA AND PROCESS DOMINANT STYLES. Journal of Management Studies, 27(2), 173-194. doi: Article Ogawa, S., & Piller, F. T. (2006). Reducing the Risks of New Product Development. MIT Sloan Management Review, 47(2), 65-71. doi: Article Osterwalder, A. (2006). Business Model Design and Innovation: Business Model Template - designing your competitve edge. Business Model Template - designing your competitive edge. Blog, . Retrieved August 28, 2008, from Osterwalder, A. (2007). How to describe and Improve your Business Model to Compete Better. Entwurfspapier v.0.8 (beta), Genf. Retrieved July 9, 2008, from Osterwalder, A. (2004). The Business Model Ontology: a proposition in a design science approach (Dissertation). Université de Lausanne, Ecole des Hautes Etudes Commerciales. Retrieved from Osterwalder, A., & Pigneur, Y. (2009). Business Model Generation - A Handbook for Visionaries, Game Changers & Challengers. Zürich: Self Published. Osterwalder, A., Pigneur, Y., & Tucci, C. L. (2005). Clarifying Business Models: Origins, Present, and the Future of the Concept. Communications of the Association for Information Systems, (Vol. 16), 1-25. Palich, L. E., & Bagby, D. R. (1995). USING COGNITIVE THEORY TO EXPLAIN ENTREPRENEURIAL RISK-TAKING: CHALLENGING CONVENTIONAL WISDOM. Journal of Business Venturing, 10(6), 425. doi: Article Prahalad, C. K., & Ramaswamy, V. (2003). The New Frontier of Experience Innovation. MIT - Sloan Management Review, (Summer 2003), 12-18. Reichwald, R., & Piller, F. (2009). Interaktive Wertschöpfung: Open Innovation, Individualisierung und neue Formen der Arbeitsteilung (2nd ed.). Gabler. Reichwald, R., & Piller, F. T. (2006). Interaktive Wertschöpfung. Open Innovation, Individualisierung und neue Formen der Arbeitsteilung (1st ed.). Gabler, Betriebswirt.-Vlg. Rowe, J. (2006, June 15). Crowdsourcing: Pure, Unadulterated (and Scalable) Crowdsourcing. Crowdsourcing: Pure, Unadulterated (and Scalable) Crowdsourcing. Retrieved November 13, 2009, from Schon, D. A. (1985). Uncertainty & risk. Harvard Business Review, 63(6), 110. doi: Excerpt Schumpeter, J. A. (1982). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Transaction Publishers.

- 21 -

Paper »Entrepreneurship«

Sen, A. (2008). The US fashion industry: A supply chain review. International Journal of Production Economics, 114(2), 571-593. doi: 10.1016/j.ijpe.2007.05.022 Shepherd, D. A., & Douglas, E. J. (2000). NEW VENTURE SURVIVAL: IGNORANCE, EXTERNAL SHOCKS, AND RISK REDUCTION STRATEGIES. Journal of Business Venturing, 15(5/6), 394. doi: Article Simon, M., & Houghton, S. M. (2000). Cognitive Biases, Risk Perception, and Venture Formation: How Individuals Decide to Start Companies. Journal of Business Venturing, 15(2), 113. doi: Article Sitkin, S. B., & Pablo, A. L. (1992). RECONCEPTUALIZING THE DETERMINANTS OF RISK BEHAVIOR. Academy of Management Review, 17(1), 938. doi: Article Stinchcombe, A. L. (1987). Constructing Social Theories. University Of Chicago Press. Stinchcombe, A. L. (1986). Stratification and Organization: Selected Papers. Cambridge University Press. Taplin, I. M. (1996). Rethinking Flexibility: The Case of the Apparel Industry. Review of Social Economy, 54(2), 191-220. doi: Article Winch, D. (1980). Essay de la Nature du Commerce en Général (Book Review). Economic Journal, 90(357), 209. doi: Book Review Zahra, S. A. (1993). Environment, Corporate Entrepreneurship, and Financial Performance: A Taxonomic Approach. Journal of Business Venturing, 8(4), 319. doi: Article

- 22 -

Paper »Entrepreneurship«


Figure 2: Threadless Innovation Model (Kanji & Lakhani, 2008)

Figure 3: Summary of the risk construct (Janney & Dess, 2006)

- 23 -

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.