Working together with companies on various innovation projects and reshaping their Business Models it is often the case that a new project explicits a need to move into a different part of the current value chain. With Value Chains in this case I mean different organizations and enitities, consisting of resources and knowledge stream, all involved in the creation and delivery of value to customers (source: ValueChains.org).
Moving up ahead of the current value chain and tap into it requires organizations most often to work together with different parties, already present in the chain. Strange situations occur that organizations that are presently treated as customers, become in fact new channels for approaching end-users further down the chain. The current customers need to become partners with which driving business is taken to the next level. Of course this sounds more simple than it in fact is. Existing relations need to be re-shaped in way that also for the current customer, so the new channel, the still is a sound basis for doing business. Thinking win-win is key here. In establishing new partnerships companies try to reduce risks as much a possible, preferably in a early stage. Concentrating on possible financial benefits, this results in trying to create a position in which most of the value created together with the partner is heading in your direction. In contrast with this real partnerships first try to build maximum value together, and then divide this between them.
Many people are interested in how a new Value Proposition is created. Of course, understanding this process and being able to execute it, provides a basis for continuously staying ahead of competitors; it would be the Holy Grail of business. In workshops I have used various methods such as Blue Ocean and TRIZ. These methods help to frame thoughts and give directions. What they do not do is provide you with a new Value Proposition gift wrapped.
Creating a new Value Proposition can be done in several ways, each of which differently partitioned into stages. Here is an example of how the creation process is broken down, brought in a very creative way; in an animated Chinese painting style. The movie clip is by Ada Kwok and is presently really popular on youtube. Clicking tot Ada’s website it is clear that the company does graphic business design. Ada has used succesfully as a mechanism to draw traffic to her site. This is yet an other example of how youtube can significantly boost the number of potential customers.
I really like how each of the creation phases is broken down and expresses in the video:
- Imagination
- Visualization
- Formation
- Transformation
- Bring to life
[pro-player]http://www.youtube.com/watch?v=ce9f0JP6eks&feature=fvst[/pro-player]
Recently Business Models and Business Model Innovation received increased attention. The term devaluated during the high rise of the Internet Bubble, when all you needed to get venture capital was a new type of Business Model, without any sanity check.
Now in an era of ever increasing competition from emerging markets, re-thinking your Business Model seems very appropriate as being an incumbent player in your market. Difficulty is maintaining the relationship with your current customers while achieving growth. Key is consistently managing your identity.
Traditionally companies focus on technology when driving innovation. This is not strange from a R&D perspective, but what to do with the great new technology created? Will this sell itself?
The answer is NO. Look at examples history provides us with such as Philips’ Video2000 system. With the hindsight from today many people state that Philips did have the superior system, but lacked the capability to successfully sell it, loosing the battle to set to standard to VHS.
This presentation shows the necessity to take Business Model Innovation into account as well as Technology Innovation. Building a portfolio which contains provide a sound basis for future growth and success.
Recently HBR published an article about the difference in competition between the US and Europe and emerging markets, China in the article. Where in the US and Europe most customers demand excellent quality in China the largest segment is the “good enough” segment (62% share of market in 2005). The good enough segment is defined as “products of good quality, produced by local companies for a rapidly expanding group of value-seeking consumers with mid level incomes.” Distinguishment is made between premium, good enough, and low-end market segments.
The difference between “good enough” products and premium products is that “good enough” comes with only a limited number of features, rather than the full range, at a price significantly lower that foreign brands.
The shift in China towards “good enough” comes from two directions: Consumer that see their incomes grow shift from low-end products to the “good enough” segment, and consumers with a higher income move away from expensive foreign brands, towards locally produced products at an acceptable quality level.
What should multinationals seeking way into the Chinese market do when entering the market in China? When the market segment’s state is strong, companies should either maintain their premium status by holding of the “good enough” segment by lower costs and innovating to create a niche position. More interesting is the situation where the premium segment is weak or eroding. Then companies can choose to enter the market either from above, enter the market segment in order to hold off local competitors and the erosion of the premium segment, or enter the market from below. Entering from below means seek an alliance or even merger with a Chinese partner or even develop new products specifically for the Chinese market, applying new business model tailored to the Chinese situation. Doing so they can steel share from Chinese players and become market leader.
This all seams quite far away. After all it is about China. Why would “good enough” not apply in non-emerging markets? A large company like Philips now uses “Sense and Simplicity” for a slogan. Underlining the fact the company produces technological products that enhance life, without the hassle, complexity and frustration. The story goes that the company came to this shift in strategy when managers were given a DVD recorder to try at home. Most of them were no able to install it, let alone use it.
It is probably only a matter of time until more and more customers in the US and EU crave for simplicity, cutting out all features they will not use at a lower price, making the “good enough” market segment expanding far out of China. Consumer Vigilantes are already on the rise when their products and services bought are too complex to install it themselves.
During the Internet Bubble Business Model was one of the buzz words. Companies did not need a real strategy, a special competence, or even customers. The only thing needed was a web-based Business Model making vague promises about wild profits in a distant future (source Joan Magretta, HBR, 2002). Not strange that the term itself lost most of its power.
Now years further and wiser we know a business model definitely matters. Without a sound Business Model firms can launch as many new products and services they want to, only confusing customers more.
Companies with a sound Business Model know the value proposition, what the target client group is, which channels to use to approach them, what kind and type of relationship to maintain, what capabilities are required in-house or at a partner, how value is configurated, and of course how cost and revenue stream flow.
Having a proper Business Model not only clarifies things for you as a company; it helps to build and manage your reputation among your current and future clients.
Last week news spread that Ryanair’s profit could be halved due to ever risen fuel cost and a weaker UK pound. Last quarter 2007 net profit dropped with as much as 27%. This is not news that is typical for Ryanair. Applying the Southwest business model it is well know for being a “no frills airliner” generating sound financial figures. The business model is mainly focused on the price sensitivity of customers. On the one hand this is created by cutting costs out of the traditional airliner model; use Internet for reducing channel costs, no food served and additional charges for luggage, use of smaller airports and a single model aircraft. On the other hand the business model focuses on stimulating revenue streams by maximise utilisation of air crafts (as much air time as possible with heavy loads of passengers) and yield management pricing strategies (price discrimination or price targeting to maximize revenues from passengers) (source).
The ever rising fuel prices drive costs, but not in the parts of the business model Ryanair controls. And a weakening position of the Sterling has its negative effect on the utilisation of the air crafts, where possibly the cheaper seats will still sell out, but the more expensive ones will become harder to sell. The combined effect in addition to the downturn on the whole industry of these recent developments result in weakening profits and possibly what Ryanair’s CEO Michael O’Leary calls “a perfect storm.”
But is the business model defeated then? According to the financial analysts it is not. Yield maybe flat for next year, or even drop 5%. Budget carriers are most vulnerable to broad economic dips.
Low cost carriers are used by the most economically sensitive travelers, but probably Ryanair’s yields will survive the dip.
According to O’Leary Ryanair now considers hedging of its fuel if oil dips below $80 a barrel in order to be less vulnerable in case of very volatile oil prices. So hedging makes the business model survive in these turbulent times.
Recently I stumbled upon an interesting article which states that we should not focus on the things we are good at, but concentrate on the areas we are not so great at. The theory behind it is based on researching to-be chess masters. Of course this differs 180 degrees from our common sense.
Applying this line of thinking to business it even becomes more interesting. Most companies have a strong focus on what they are good at, mainly because here the largest part of the cash flow is generated. In the excellent areas firms want to become ever more excellent, with trajectories such as Six Sigma. Nothing wrong here, unless you want to stay on top of business and innovate. Then you have to be aware of your current strengths, and more important where the room to grow is.
In the presentation I have plotted this concept on different Business Model areas.
Growth is something which can be realized in many different ways: operational excellence with Six Sigma trajectories; product or technology innovation, either incremental or radical; business model innovation; or plain old mergers and acquisitions (M&A). Of course calling it plain old does no justice to the complexity of these kinds of transitions. But fact is that when you only focus on bringing value which directly shows in your balance sheet M&A can provide you with a quick fix. The real challenge start then with Post Merger Integration (PMI), so after the purchase. According to Strategy Business to road to successful PMI goes by the cities Vision, Architecture of Change, Architecture of the New Company, and Leadership. Further research has shown that when success of M&A is compared to industry peers only 48.7% resulted in increased value. Most of the times M&A is quite costly, so how to increase the success and value?
In many cases failure of PMI is said to be based on things such as cultural differences, not only between companies, but also countries of origin. When failure is due to cultural aspects the new organisation lacks a common language which normally grows quite organic during years and of course a company’s leadership. Cultural differences can only be resolved through long, extensive projects in which everybody needs to get to know everybody and all have to agree, basically not an option when the goal is to increase value on the short run. Setting up a new business model, based on competencies and capabilities, does provide such a common language. Moreover PMI is the moment to set a new business model. Due to the central position of a business model in the ways business is done, this also reflects on the culture. Cultural differences can be overcome by creating a new common language, and culture, by setting a new business model.
Googling the internet “Blue Ocean” was already quite popular (12,900,000 hits). “Business Model Innovation” is a risen star here (6,800,000 hits). Combining the two only generates 75,400 hits. A bit strange… Not only do the two serve the same purpose, deliver growth and innovation to a company. The first can serve as a means of achieving the second.
Nowadays it is not just about mastering one approach; it is about mastering the ability to combine multiple and deliver growth. Perhaps a bit late, but why not… 2008 will bring more mixed models. Let me be the first to kick it off with a combination of the Blue Ocean Strategy as a methodology to come to Business Model Innovation.
For the snowboarder or skier who is seeking the cookie cutter winter wonderland megaresorts there is a alternative: Echo Mountain, Colorado. When caught in a bruising sustaining battle that gives clear advantage to powerful incumbents, other players looked for new business models that might enable them to beat the market in new ways – by satisfying underappreciated dimensions of performance. In the world of winter sports, smaller resorts do well to consider the disruptive new business model developed by Echo Mountain Park in Colorado.
The lift tickets at Echo are priced for teenagers on a lawn-mowing budget, and the cuisine is spartan even by cafeteria standards: energy bars and nuke-able burritos from vending machines (source: NY Times). The concept of Echo was not aimed at competing with the large resorts operated by companies as Intrawest and Vail. It focusses on delivering a great experience by offering excellent snow park facilities without having to pay for many thing the visitor does not use, all within driving range of a metropolitan area. It is all about the basics: newest, closest, cheapest.
