In several previous podcasts, I have talked about business model innovation. I have given some examples. I’ve talked about its power. In this podcast I want to take a deeper dive into this very important form of innovation. In the last decade it has been associated with some of the biggest and most successful innovations.
To share with you best practices on business model innovation I am drawing from multiple sources including a Boston Consulting Group paper on the subject – they are often, as it is in this case, a very good source of best practices.
Let’s start by defining what is business model innovation.
There is a two-part answer to the definition – a value proposition and the operating model that delivers the value proposition.
The value proposition defines what you’re offering to whom.
You identify a target group of customers that you choose to serve and what needs they have that will be served by this business model.
You define what products and services you are selling and what benefits they have to meet specific target group customer needs.
Lastly, and importantly, you define how you will be paid.
The operating model defines how you will deliver the product/service, what costs and assets this requires, and the organization needed to make all this happen.
Business model innovation is always an option for virtually any kind of business and any kind of economic conditions. Having said that, there are some situations where it can be especially valuable and needed.
Intense and threatening competition – when competition becomes especially aggressive with their own innovation, it can threaten both short and long-term viability of your business. If you are not prepared with a competitive product/service of your own, considering business model innovation may be a way of responding. Done right, it can change the rules of the game and even threaten the economic viability of the competitive threat.
Negative economic times – when customers are tightening their spending, keeping the same business or economic model may not be exactly what customers need. This can involve a reconfiguration of an existing business that brings cost savings and potentially new pricing models.
One study made a compelling case that business model innovation is far more successful from a shareholder return perspective than product or process innovations. A survey conducted by the Boston Consulting Group and BusinessWeek concluded “business model innovators earned an average premium that was more than four times greater than that enjoyed by product or process innovators. Furthermore, business model innovation delivered returns that were more sustainable; even after 10 years, business model innovators continue to outperform competitors and product and process innovators”.
Again, Apple is a great example of highly successful business model innovation. When they started with their series of what I call “i” products – like the iPod, iPhone, iPad, and iTunes, they also had tremendous business model innovation.
Instead of just offering a single hardware or software product, they offered an integrated system of products and services. The hardware products, like iPhones and iPads, were highly innovative in their own right and quickly captured customer attention and market share leadership. The software – both the operating system and apps – created tremendous additional value and functionality for the hardware.
Lastly, they integrated iTunes into their system. ITunes answered a major challenge the music industry was facing – how to generate revenue in the digital age. The new marketplace allowed customers to quickly search the music they wanted and buy only the music that they wanted – single songs instead of entire albums. All of this worked seamlessly with one Apple ID.
The result was that Apple successfully expanded into a market that was 30 times larger than their computer only market. And by the way, it helped them to grow their computer business also. Let’s start by taking a look at a couple of examples
When the Virgin group entered the Australian airline market, they came in with low fares and a strong brand name. Not too surprisingly they quickly gained a 30% market share, primarily at the expense of Qantas, an Australian airline. Qantas quickly realized it was not going to effectively compete with the Virgin group under the Qantas brand name. Their response was to go one step further than the Virgin group when it came to low-cost airlines. They introduced an ultralow cost airline, Jet Star, as a separate division that had lower fares than the Virgin group. Jet Star was so successful that it gradually expanded and entered international service as the world’s first low-cost, long-haul airline. Its business model was to bundle services à la carte. With this consumers were able to have greater control and customization of their onboard experience with different options for food, comfort, and entertainment. It was so successful that Virgin blue eventually backed out of the discount positioning and shifted their focus to business travelers.
Another example JC Decaux which is the number one street furniture company in the world. A major focus of the company was signing exclusive agreements for outdoor advertising on highly desirable public spaces, for example in Paris. They often did this in exchange for returning some of the advertising revenue to the city or covering some of the furniture costs such as public toilets. When their decade-long contract with Paris came up for review, the city made some different requests that resulted in a new business model. They wanted the company to create the world’s largest free or nearly free Paris wide network of bicycles and bicycle racks that could be used both by tourists and residents. There were bumps in the road like vandalism that required more cost than initially estimated, but the basic new model was successful and expanded to other cities. It’s a good example of bundling different types of services and associated revenues to create a new and successful business model that competitors find very difficult to overcome.
The Boston Consulting Group report shares an interesting story about IKEA entering Russia. When they opened a new store they discovered that the surrounding real estate greatly increased in value. Recognizing this they created a new division they called megamall. They now create malls around their retail outlets. This new way of making money – a new business model – now makes more money than their standalone stores to in Russia.
So how can you apply these insights to your business and your innovation program?
Remember that the heart of business model innovation is your value proposition. There are a number of ways that you can consider changing your current value proposition into a win for your customers and you.
First, you can bundle additional customer wanted services -like the Paris bicycle system – into a new pricing model. Think of Apple with their hardware, app, and iTunes integration.
Second, you can add a new line to your business that is better equipped to compete with existing or emerging competitor – what Qantas did with Virgin blue.
Third, you can move from a selling price model where the customer buys your product and the relationship pretty much ends at that point. You can move to a lower selling price bundled with a longer-term service contract where the immediate economics get even more attractive for your business. Some of the major software companies are doing both of these. Of course, you need to have a product that has these additional needs – for example, this would not work for Tide detergent.
Lastly remember that this form of innovation in one survey significantly outperformed product and process innovations by a wide margin.
From where you sit today there may appear to be few if any business model innovation opportunities. When you engage in the quantum idea generating process, with all of its internal and external diversity, you may very well find world of options to be far greater than you ever imagined.