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Business Model Innovation for Growth and Renewal

Posted by Jeffrey on Apr 22, 2010

Innovation_InnosightPostMark Johnson, Principle of Innosight Consulting gave a talk at the Rotman School of Management where he led off the talk with a discussion of the Music industry- a common story which leads to a well known conclusion: others started the industry but couldn’t capitalize because they were trapped in their old modes of thinking. Apple really won the war because they understood that customers didn’t just want a cool device (although that helped) but a whole package (including software) that helped make the process of downloading and listening to music easy and painless. Except that Apple didn’t originate this solution: Tony Faddell brought it to them after he had been kicked out of many other companies up and down the 101.

But I digress…. The traps that most established businesses find themselves in is that they can’t grasp the fact that in contrast to their existing business (where their knowledge to assumption ratio is high) in a new business venture it is low and the metrics, processes and norms that surround their existing business don’t apply in the new.

With some examples he illustrated that there are 3 traps that established businesses find themselves when trying to create new businesses. (Note that this doesn’t [shouldn't] apply to start-up businesses (unless you have real problems.)]

Trap 1- failure to allocate resources. Basically this is the “Holy crap! Is this thing as big a disruption to our model as we think? Better not pay too much attention as we don’t want to rock the boat.” Think DEC and the personal computer.

The second trap is in trying to graft new technology onto an old business model. How to develop a digital camera? Make it work the same as a film camera. At least this is what Kodak thought in the early 90s when they released the $30,000 DCS-100 that had the same quality as film. (Except users didn’t want the hefty the price tag!)

The third trap is companies don’t let these new innovative businesses mature and are impatient for growth. In this case because HP was a multi-billion dollar company, they wanted their newly developed HP Kittyhawk 1.3 inch hard drive to be a $100M business within 12 months, because that’s the growth rate established by the rest of the company. They didn’t allow the product a “Test and Learn” that would have made it apparent that the main market that they were targeting with this device was wrong and they needed a different business model to succeed where the device would have the most traction.

At this point, one asks, “What is the problem with these companies? Cant they see that you have to be aware of all these “traps” to succeed?” Where it really becomes a challenge is around culture and operational norms. In the rigidity of rules, norms and metrics established business find they are “trapped” in how they evaluate new opportunities and how they fit into existing business models. They really need to step back and think about how they currently make money and what needs to change if they are to really take advantage of a new opportunity. In a lot of cases, the whole business model has to change.

Think about the Tata Nano. It was created not to compete against other cars but as an alternative to a scooter. They had to change everything about the model (supply chain, distribution, manufacturing) in order to compete on that level.

Or what about MinuteClinic? Its not a competitor to existing medical services but meant to take care of many routine health care issues that can be treated by rules-based procedures.

The biggest problem comes from the inevitable commodification of business models as new entrants come in once and attractive market is carved out. You can ignore it to your peril or do what innovative companies like Hilti have done. They’ve created a new business that realizes that one source of frustration to contracting companies is tools and tool failure. Rather than simply selling tools they now sell a “tool fleet management service” with a monthly fee covering leasing of the entire tool category. They had to completely rethink their model. Rather than selling through distributors, now they sell direct. Before they had to think of low cost manufacturing, now they need IT systems to track inventory and repairs. They had to really think about the stakeholder and the job that needed to be done and how they could serve that stakeholder.

Finally the example of Better Place was raised. With the advent of the true electric car close to fruition, a key problem still exists- the long charging cycle of current batteries. Shai Agassi, the entrepreneur behind the company thought, What if we could reinvent the whole model so that we didn’t actually sell cars, but we sold “miles?” Their target is not other new cars, but used cars- they need to be competitive to someone who might not consider a car at all! Their model is similar to the cell phone where the initial cost of the vehicle is subsidised by an ongoing distance contract.

For me the real takeaway once again was getting to the heart of the job to be done that the customer needs. This leads to a clean sheet thinking about what the appropriate model is to serve that customer and how to integrate that model into a system. The ever-present question is whether this can truly ever happen in an established company with and established model and established ways of thinking. Time will tell if there are ways of breaking out of established patterns, but given the above examples of very competent companies, the jury is out on if this journey is one that has a happy ending.

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