Tuesday, August 14, 2007

Business Model Innovation

I was reading recently about a new electric car company in Scandinavia which is planning to release a new car shortly. There were two telling points in the story:

  1. The technology used by the company was owned by Ford at one point but discarded when SUVs were making so much profit
  2. The real innovation is the plan to disrupt not only the internal combustion engine but also the automotive business model.
The first point goes to the fact that no matter how well you are doing, only one or two significant changes in your operating environment can dramatically change your market. In fact we use this concept to help our clients think about ways to disrupt the market. What would happen if oil moved from $10/barrel to $80/barrel? Answer - demand for more fuel efficient vehicles. Ford acted as though oil prices would always remain low, even as China and India were growing their economies at unimagined rates. Face it, we'll compete with these growing economies for oil and even if new oil is discovered we've probably seen the last of oil below $50 a barrel. Why didn't Ford place more emphasis on investments in concepts that were going to help them when the price of oil inevitably rose? Once it appeared that the automotive industry could reduce or ignore the zero emissions standards in California, Ford sold the division.

The second point I think is even more interesting. According to the article, the firm in question plans to disrupt the business model - taking on a Dell approach and acquiring the materials as you order the car, rather than building a significant dealer lot inventory of finished automobiles. They will become a just-in-time assembler. While this poses some challenges and may initially limit where the automobiles can be sold, most of the market for autos in the US is on the East Coast, large cities in the Mid-West and the West coast. Demand for an electronic vehicle will be highest initially in "green" locations where people may be willing to trade off some comforts, and in places with short commutes and high population.

There are two business model stories embedded in this: first, don't assume that your existing business model is infinitely sustainable and ignore the opportunities to disrupt the market. Ford, and all of the Big Three, are guilty of that. Second, a small player without the infrastructure and investments that the Big Three have can disrupt the sales and distribution portion of the model, just as Dell did with PCs. What firm is eying your value chain and seeking to disrupt your business model?
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posted by Jeffrey Phillips at 1:20 PM

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