Wednesday, February 10, 2016

Why business model innovation is so compelling

There's a real sense that we in the corporate world are standing on the brink of an amazing transition, moving from relatively older, static models of competition based on corporate size and mass, to new competitive realities dictated by speed, agility and innovation.  For at least a couple of centuries, as we look back over the dominant corporations of the past, we can see that size and scale were the predominant factors.  Whether we think about some of the original corporations (like those that governed the tea trade in India and England) or more modern corporations like the US automobile companies or banks, the prevailing wisdom has been to grow large and use size, mass and reach to defeat other competitors.  Embedded in this thinking, or perhaps even dictated by this thinking, is an inherent business model:  size matters.  By growing large you can distribute costs more effectively, serve more customers from the same basic set of products, scale revenues and introduce efficiencies and command market power and dominate sales channels.  In a market where size matters, only a few players dominate and the rest compete for the leftovers.

But as we know, large companies become defensive, complacent and inert, held in place by investments and past performance, overly risk averse.  Their size and their business model ultimately becomes a barrier for new innovation and new growth.  The very thinking and models that helped them grow become barriers for further development.  And, of course, the models that got them to a specific position aren't necessarily relevant as tastes, consumers and channels change.  It's strange to think that Sears was once the largest retailer in the world, and actually made a significant transition from a catalog company (in many respects the world's first Amazon) to a company that based its model on presence in shopping malls. Now that Sears is relatively undifferentiated, and consumers are no longer spending time at malls, the model based on stores in malls and a highly distributed assortment of low and mid range products doesn't work.  But Sears is locked into a business model that is exceptionally difficult to change.  They can't pull out of mall stores overnight.  What was once promising as a model is now driving Sears toward a disaster.

This is both the promise and the danger of business model innovation.  Commenters and consultants talk blithely about business model innovation as if existing companies can readily and rapidly change their business models on the fly.  For existing companies, business model innovation is important, if for no other reason that change is more frequent and more disruptive, which leads to the invalidation of old models.  Existing companies must learn to balance the efficiencies gained from existing models and the ability to constantly evolve their models to new competitive realities.  As we like to say when we talk to clients about innovation, we've got to build the plane while we are flying it.  There's no other option, and this is especially true for business model innovation.  Sears cannot suddenly change its business model, abandoning stores, abandoning faithful customers and vendors.  If you want to see how that plays out, go look at JC Penney's attempt to innovate its stores and eliminate coupons and discounting.  That experiment lasted only a year or two before Penney's brought back its former management team.

Penney's experience doesn't suggest that you shouldn't innovate your business model, only that you can't suddenly change it and lose good, faithful customers who don't understand the change.  Business model innovation is something every company should be constantly experimenting with, and communicating to its employees and customers why these experiments are taking place and what changes they are expecting and planning for.

Business model innovation is so compelling because it is so unusual (at least to date) and so powerful.  We can look at examples like iTunes, NetFlix and Airbnb as real business model disrupters.  We can also note that every one of these was a new entrant into an existing industry, not bound by convention or past investments in the industry.  Does this mean that incumbents should ignore business model innovation and simply wait to be disrupted?  Absolutely not.  In fact many of the "innovations" that these disrupters introduced were opportunities that existing incumbents could have addressed but ignored.  Take for example Airbnb.  What Airbnb offers is a reservation system to allow you to rent a vast array of properties, none of which they manage or own.  But Marriott and Hilton don't own many of the buildings they brand, and their reservation systems work just fine in those locations.  What would have happened if Marriott or Hilton had expanded the definition of accomodations to include renting rooms or condos in the same way that Airbnb does?  After all, the hotel chains have a captive audience who trust their branding and want points.  It's not such a stretch to think that Marriott or Hilton or other trusted, established brands could have done what Airbnb did.  And this is only an example of a business model change that expands the opportunities, rather than a change like Netflix that completely disrupts the existing model and market.

Business model innovation is so compelling because it is so difficult for existing companies, but that's not a reason not to do it.  Existing companies should be examining their business models and understanding the impacts of business model innovation.  Which innovations expand the market and model (like Airbnb)?  Which disrupt or destroy the market (like iTunes)?  What can/should we do to evolve, adjust, modify and move our models?  Where are the testing grounds?  How do we experiment with new models before the old models come under attack or become obsolete?

The real challenge is that most companies are barely cognizant of product innovation, which has its own challenges but isn't as difficult or compelling as business model innovation.  This is akin to going directly to high school, skipping elementary and middle school, foregoing the education and experience.  Again, that doesn't mean business model innovation should simply be ignored, because the pace of business model innovation is increasing as we get better and better connectivity, better payments tools and platforms and better information management and data analysis.  These platforms will allow completely new business models, and will shift existing competition very quickly. 

In fact, business model innovation is a lot like a terrible accident on the road, so heartbreaking and sad that you can't look, and so compelling and awe-inspiring that you can't help but watch.  We need to get off the sidelines and get involved with business model innovation, but not in the way you've been told.  Every company needs to start defining its existing business models, understanding potential weaknesses that can be exploited.  They need to start experimenting with new business models and understanding new technologies and platforms.  It's naive and wrong to assume that established business models will sustain.  Those that understand the impending changes and put in place the capabilities and mechanisms to experiment, learn and adapt will be the ultimate winners.
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posted by Jeffrey Phillips at 6:46 AM


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