Business model innovation

Wingarra BMI

Our company has incorporated within its name what is rapidly emerging as one of the most important indicators of successful companies in today’s rapidly-evolving business environment:

business model innovation

Business model innovation (BMI)

In essence, BMI is about finding new ways to add value to the business in the face of rapidly changing circumstances - economic, social, environmental, technological and political, global, national and local, anticipated and unanticipated. People have been devising innovative ways to do business for centuries. The explosion in the breadth, scope and power of communications and other technologies over the past decade, however, and in particular the emergence of the commercial Internet, has opened new business model possibilities which were previously unimaginable. This is so regardless of the nature of the core business.

BMI requires of business owners and managers not just a thorough understanding of the key players in their particular industry, but also a sophisticated appreciation of the likely impacts of emerging global, national and local trends and events. It is no longer enough to simply be aware of what the competition is doing. This is an outdated, reactive approach which completely misses the point that the global business environment is changing in ways, and at a pace, never before seen. It is businesses which properly understand this point which will be able to position themselves to take advantage of the most profitable opportunities these trends and events open up, and to avoid their most adverse consequences.

Why BMI is important

BMI is crucial not just for the sake of maintaining current profitability, but also because the valuation of an operating business is significantly affected by the level of future maintainable earnings. Because of this, any business owner with a future sale in mind must recognise that maintaining business model relevance in the face of rapidly changing circumstances is as crucial to future sale value as it is to current profitability.

This page provides background information on the relatively recent emergence of the BMI concept, and a random sample of some of the most compelling business model innovations in corporate history. For a complete understanding of the topic, it is also extremely useful to consider the precise meaning of its constituent terms – business model and innovation – and the contexts in which they are typically used in business and commerce today. Please visit the Business model and Innovation pages for a brief overview of these.

BMI - the current view

In a recent edition of Fast Thinking magazine (link here ), the leader of Strategy and Change Consulting with IBM Global Business Services, Matt English, observed as follows:

… IBM’s Global CEO Study 2006, which surveyed over 750 CEOs worldwide, concluded that business model innovation is the key differentiator in an increasingly competitive and globalised market place. …

The study had examined three types of innovation which CEOs had identified as being crucial in driving growth in their organisations - products and services innovation, operational innovation and business model innovation. The study demonstrated that organisations with an emphasis on business model innovation generated a higher performance in profit margin.

English went on to outline the four key questions IBM has identified:

... that must be considered when deciding the nature and shape of the business model ... :

What business are we in?

What is the value proposition for generating revenue?

What is our role and place in the value chain?

How will we effectively execute what we need to do well?

He also noted that any consideration of the role of the business model in creating organisational value requires a focus on three main areas:

Revenue model innovation
Enterprise model innovation
Industry model innovation.

He went on:

… The ability to identify and understand these dimensions of business model innovation is essential for organisations to find new ways to structure for growth. By understanding revenue, enterprise and industry model innovation, an organisation is able to make strategic changes to its business model to increase flexibility, reduce cost and open up new markets.

The message is clear that the business model is a key area for innovation in the way organisations shape their businesses and deploy their capabilities. The business model presents strong opportunity for growth, but also provides some challenges regarding collaboration, governance and people processes and technology. …

Langdon Morris, a Senior Practice Scholar at the Ackoff Center for the Advancement of Systems Approaches at the University of Pennsylvania, had this observation in his 2003 paper Business Model Warfare (link here)

... As we examine industry after industry, we see that wherever there is an exemplar, a company that stands head and shoulders above the others, that company is almost always a business model innovator that is applying creativity in dimensions other than technology to become a market leader. ...

... what's happening continuously in the marketplace is competition between business models themselves. ... What this means is the winners at business model warfare have generally applied innovation to create competitive advantages, building stronger relationships with customers by developing business models that fit closely with customer needs and preferences. ...

A random walk through some of the most successful business models ever devised

Set out below are several examples of very successful business model innovations over the past hundred years. In some cases, it could be argued that the particular innovation should be more appropriately categorised as a product or service innovation than true business model innovation. We would argue, however, that all of these cases exhibit the introduction of highly innovative business models, even if this was done in conjunction with the introduction of a new product or service.

Amazon

A pioneer in the use of the Internet as a physical product distribution channel.
Low-cost marketing (email) via a sophisticated and customised system of recommendations based on previous purchase patterns and reader reviews.
Just-in-time printing from digital masters of obscure titles only ordered very occasionally. In this, Amazon was one of the first companies to appreciate the commercial value inherent in the so-called long tail – i.e. the huge numbers of books (and CDs, DVDs, etc) with very small readerships, but which can be profitable to stock when (digital) storage costs are effectively zero.

American Express (Amex) (traveller’s cheques business)

Introduced the concept of the traveller’s cheque as a replacement for the letter of credit for payments while on the road.
By establishing a system under which travellers had to purchase their cheques before they travelled, Amex ensured that this part of the company’s business was always cashflow-positive.

Apple (iPod and iTunes)

Apple pioneered the iPod as the first mass-market, user-friendly MP3 player
Its masterstroke, however, was to then integrate the iPod with the iTunes Internet music download program. This mainstreamed (and legitimised) the music download model and opened up a very significant additional revenue stream, all with the blessing of the major music labels which had, to that point, sought to crush all file-sharing music download services.

Dell Computers

The first company to successfully apply the user-defined customisation model for personal computers via what was effectively a modular assembly system.
The company was also one of the pioneers of the direct-to-consumer distribution model which eliminated the reseller and preserved a much larger share of the consumer dollar.

eBay

Pioneer in the use of the Internet as a platform for peer-to-peer auctions of almost everything imaginable on a global scale.
In this, it opened up a new pathway to sales for millions of people throughout the world which was never before possible.
Together with a number of others listed here, eBay is a classic example of a business model which it was only possible to implement with the emergence of the commercial Internet.

Federal Express (FedEx)

Pioneered the hub-and-spoke model for the overnight delivery of urgent packaged freight.
This was accompanied by the introduction of sophisticated systems for parcel tracking and overall corporate management.
Together with other innovations, this allowed the company to offer the then-radical idea of guaranteed next-day delivery, thereby turning the whole concept of freight movement on its head.

Ford Motor Company

Pioneered the use of assembly lines in mass production, thereby introducing enormous scale and logistics efficiencies which placed the cost of a new vehicle within the reach of ordinary people.
The company also pioneered the franchised dealer network which provided a new model for the distribution of motor vehicles.

The Gillette Company

Founder King Gillette invented the disposable safety razor in the late 19th Century.
Far more importantly, however, he developed the loss leader model by selling the razor frame at a relatively low price in the full knowledge that customers were locked into buying a continuing supply of disposable blades almost indefinitely.
This model was so important it became known as the razor-and-blades model. It is similar to the model used today by many telecommunications companies around the world – give away handsets, or sell them cheaply, while locking consumers into long-term airtime contracts.

IKEA

Pioneered the concept of low-cost, flat-pack, DIY assembly consumer furniture.
In doing so, it opened up huge new revenue streams around the world as post-WWII consumers demonstrated a willingness to embrace a completely new concept in furniture purchase.

McDonald’s

While it did not pioneer the concept of franchising, McDonald’s took it to a new level under Ray Kroc when combined with the formula fast food concept which was at the heart of the early success of the McDonald brothers.
Up-front franchise fees also provided McDonald’s with float on a massive scale, thereby significantly reducing the need to raise additional capital to fund expansion.

Netflix

One of the very first online/mail-out DVD rental services.
After experimenting with a pay-per-view model (i.e. charging a fee per DVD hired, with all of the attendant postage/handling charges and late fees that entailed), Netflix quickly moved to a monthly subscription model under which, for a monthly fee, members can rent unlimited numbers of DVDs (subject to maximum rentals at any one time) with no late fees, postage/handling charges, etc. Newly-ordered DVDs are shipped as soon as old ones are returned. This represented a radical departure from the then-prevalent corner store, walk-in/walk-out, pay-per-view model.

Proctor & Gamble

Collaborative R&D program called Connect+Develop, with a goal of developing half of its new technology and product ideas from outside the company.
This model is now being widely embraced as the Internet opens up access to a much wider talent pool than can be found within the walls of any one company.

Southwest Airlines

One of the pioneers of the low-cost carrier model in the United States which flourished after deregulation in the late 1970s.
Changed from the traditional hub-and-spoke airline model to a point-to-point model which allows higher usage rates for passenger aircraft.

Tupperware

Pioneered the use of direct-to-consumer marketing via a network of independent distributors - the famous Tupperware parties held in customers’ homes.
Credibility and market share built via the exchange of tips among user groups.

Virgin

Brand-based business model under which the Virgin brand is rolled out across numerous different industries and sectors as diverse as music, airlines, telecommunications and finance.
In many cases, virtually all operations are outsourced.

Wal-Mart

Application of the established discount, low-cost, serve-yourself department store model to smaller town settings.
This was done on the basis that the lower prices enabled by the discount model would keep consumers in town rather than driving several hours to discount stores in remote, but larger, towns and cities.
Wal-Mart then also put a relentless focus on reducing costs within its supply chain, something which allowed it to move on bigger players in bigger cities and towns (e.g. Sears) which had not bothered to challenge Wal-Mart’s establishment in smaller towns.

Weight Watchers International

Pioneered a business model under which people would pay to meet regularly to discuss weight problems and offer mutual support.
Founder, Jean Nidetch, reportedly said: I’m going to ask heavy women to drive downtown to a hotel conference room, then charge them $2.00 a head to stand up and tell everyone why they are fat, and at the end of the session, I will sell them products off a table at the back of the room. (quoted in Smart Start-Ups, David Silver, Piatkus, 2007)

Wikipedia

While operated on a not-for-profit basis, Wikipedia has been a pioneer in the online user-generated content space and, importantly, has been the inspiration for numerous other content-driven online business models.
Being one of the first online enterprises to utilise the wiki platform, its overall goal was also novel – to place an encyclopedia in the hands of anyone, anywhere in the world, with access to the Internet.