Wednesday, October 07, 2015

Forget products, innovate your business model

What happens when the largest, most cataclysmic change forces known to business collide with embedded, rigid business structures and models?  Which side wins, the irresistible force or the immovable object?  In my post today, I'm going to answer this age-old philosophical question.  Innovation and change destroy complacent, unchanging business structures and models.  Every time.  Every where.  In every market.

It sounds a bit over the top to argue that everything we know is changing, and many models and structures will soon crumble from the onslaught of new emerging demands, capabilities and technologies, but in short that's what's going to happen, and is already happening.  Product life cycles are collapsing - I was recently in a conference where a camera manufacturer estimated the average shelf life for a new camera was between 3 and 6 months, or less than half the product development cycle time!  For years we've talked about the increasing pace of change, and much like the proverbial frog in the pot we're still sitting in the water as it's reaching the boiling point.  The telephone didn't reach a billion users until decades after its introduction - probably almost a century afterwards.  Facebook, Google and other internet applications reach a billion users in the matter of a few years, and newer, social media driven applications will do so even faster.  Unfortunately for them they'll also burn out and disappear even faster as well.

Do old business models make sense in this new, rapidly evolving environment? Can a business define and "lock in" its business model and hope to merely sustain its business model, thinking it will weather the storm and wait until "things return to normal"?  It's almost trite to say "the new normal is change".  That almost goes without saying.  The race goes to the nimble, the agile and the swift, not to the large and slow.  There is no return to normal, in fact what's normal is more change and a faster pace.  Can slow, rigid business models that were successful in the past, in a much more staid environment offer any solace to a business, or position those businesses for success in the future?  I'm going to argue the answer is:  probably not.

At worst you need a business model that evolves at the rate of change in the environment.  You simply cannot afford to fall behind and become locked into an older business model (hello Blockbuster), no matter how dominant you think the existing models are.  Netflix obliterated Blockbuster but continued to evolve its model into streaming and now content creation.  Why?  Because standing pat on a business model once people understand the value proposition is crazy.  There are simply too many avenues to attack a business model once the value proposition is understood.  Let's look at a couple of ways to attack an existing business model.

Chipping Away
There's what I like to call the "chipping away" model, which is what retail banks in the US are experiencing.  No newcomers want to face all the regulatory burden that the retail banks face in total.  Instead they offer single solutions or products that are equal to or better than what the banks offer, in areas that are more profitable.  These startups are "chipping away" at the bank's value proposition and are much more nimble and flexible.  They can get into and out of features or products in an exceptionally short timeframe, and can attract good customers quickly.  Mint, Betterment and other firms are not subverting the entire business model as much as chipping away at the most valuable parts, while banks are locked into older models more suitable for the 1970s and 80s.

Then there's the bypass model, which is what Netflix did to Blockbuster.  Same value proposition in terms of content, just a different channel.  Blockbuster had every valuable retail corner locked up, and Netflix decided (based on the availability and capability of the web (and the US mail!)) to completely dislocate Blockbuster and its presence model.  Netflix, Uber and Airbnb did what road builders do - they looked at the crowded mess of existing highways and simply "bypassed" the congestion, which freed up consumers and previously stagnant assets.

There's also the consolidation model, which is what I like to think Apple did to the music player, music management and music distribution industries.  Remember Tower Record?  Or how about your Rio MP-3 player?  Apple consolidated a number of valuable pieces and components into a much larger but simpler business model, and drove a number of companies and channels right out of business.  Or, to continue the Apple theme, consider how many devices the iPhone has replaced:  cell phone, digital camera, GPS, music player, calculator, watch, even a slide rule if you have the right app.  Creating platforms that consolidate capabilities that other business models kept apart is exceptionally valuable.

The list goes on and on.  Zara, H&M and others are disrupting the fashion industry through a focus on speed.  Tesla is trying to disrupt automotive sales and distribution, attempting to sell directly to consumers rather than through dealers.  Older structures, business models and channels don't necessarily have to carry forward into the future.  While they may be "carved in stone" these examples and others prove that stone can crumble, or smart companies can innovate their way around, under or through them.

What should we take away from this diatribe?
Product innovation is interesting, and every company should have active, on-going innovation to spawn new products and services.  However, product innovation is easy to do, easy to copy and will require constant updating.  So, we can argue that product innovation needs to become as commonplace and consistent as day to day operations.

It's business model change that is becoming the important focus.  If product life cycles have decreased, so too have business model life cycles.  When whole industries and channels can collapse in a matter of months (Tower Records, Blockbuster as examples) then every industry must examine and understand the sensitivity and viability of their business models.  No business model is inviolate; none will simply resist all of the change that's underway.  This means that corporations should be evolving their business models at a minimum.  Business model innovation is becoming far more important than product innovation, and yet far too many companies don't understand or do product innovation well.  How much more difficult it will be to innovate business models when the skills don't exist to innovate products.  Large corporations with rigid, complacent business models may end up like the dinosaurs, watching the small rodents run around and thinking how small and helpless they are.
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posted by Jeffrey Phillips at 6:28 AM


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