Innovation Blog

Behind the Business Model Architecture
May 22, 2015

While product innovations get a lot of attention, that’s not actually where most of the long-lasting innovations come from. They come from within elements of business models, such as distribution channels, core processes, the customer experience and revenue models. Companies interested in creating long-lasting competitive advantage have to look across their business model for innovation opportunities. This post explores the Business Model Architecture and how it can be mined for practical innovation opportunities beyond product and service.

The Business Model Architecture is a method to analyze and design how a business creates, delivers and captures value. It is a form of the business model canvas; however, the BMA’s structure was developed analyzing over five different business model frameworks. This model is comprised of 11 boxes, each integrated together. The combined knowledge developed the framework of the Business Model Architecture.

Value Creation Partners: External people, businesses or resources that are a primary piece of developing value. Without these partners, the value decreases or is eliminated completely.

Enabling Processes and Resources: These processes, resources and activities are what create the foundation for the business to establish a core process.

Core Processes and Resources: These are the key operational processes, resources and activities that the business does that drives the value. Without these, the value simply cannot be created and the business model disintegrates.

Brand Strategy: Brand Strategy is how perceptions are managed and how the business interacts and communicates with the customer. This has a strong connection to Customer Experience.

Core Offering: This is the solution that carries the majority of the value proposition. Without a strong core offering, the business cannot build a sustainable business model.

Complementary Offering: These offerings become in-addition to, or a part of, the core offering. These can be extra features or benefits that the customer may see as value added, thus increasing the value of the overall offering.

Customer Experience: Managing the customer experience is crucial to a successful model. Brand Strategy and the offering have a tremendous impact, and a business needs to manage this experience to be memorable. This can also be a business differentiator that many other businesses may overlook.

Distribution Channels: These channels are how the customer consumes the offering, which can be delivered digitally, physically or in another manner. The easier it is for the customer to find and consume the offering, the better the experience can be.

Customer Segment: This is the end customer. However, an offering can have multiple different customer segments, so it is important to separate out the segments and explicitly identify them. In addition, the business should identify each customer’s Job-To-Be-Done (JTBD). The reason there are multiple segments, or even one, is because a customer needs to accomplish something, and they are looking to use your offering to handle the need.

Cost Structure: Whatever it takes to create, deliver and capture the value can be a cost. Whether it be explicit costs, direct costs, indirect costs or the like, a business model needs to identify the components of costs, because in the end, profit is only created by having a lower cost to revenue.

Revenue Streams: This is all the ways a business is compensated, monetarily, by the end customer by delivering and consuming the offering.

Example: Tesla’s Business Model

Tesla’s business model is derived from a unique strategy: develop high-end expensive electric luxury supercars for the wealthy, use those profits to drive R&D, and in the future be able to develop a $35,000 electric vehicle for the masses. You can read Elon Mosk’s original master plan here. To deliver on that strategy, Tesla flips the current traditional auto market on its head.

The end product is an electric luxury car that combines the best of electrical technology, design and performance. The Tesla Model S, the flagship car, has won multiple design awards and has been proven to be the fastest 0 to 60mph sedan in history. The vehicle’s technology is cutting edge, allowing Tesla to upgrade and remedy many issues remotely, and a battery system that provides over 250 miles per charge is not shabby either, along with free charging stations across the United States, Asia and Europe.

At the crux of Tesla’s business model are two elements: Tesla sells directly from the manufacturer to the customer, so there are no auto-dealer middlemen, and Tesla owns and operates beautifully designed retail stores, similar to Apple, in upscale locations. This setup delivers the best experience and value to the customer, and customers receive unparalleled service. Tesla’s brand strategy hinges here, as Tesla believes the traditional auto-dealer diminishes value and brand image—the exact same reasons why Apple has its own stores. Tesla and Apple can control the customer experience and brand.

Despite the deviation from the traditional dealer model, Tesla still makes money simply by selling cars. Intellectual property is typically another area of revenue, but recently, Tesla has made all of the battery technology intellectual property, among others, public; even though it is keeping some IP to itself, releasing the battery technology is revolutionary to say the least, especially since the batteries are a key element of Tesla’s competitive advantage. Tesla believes this move of making the IP public will help accelerate the adoption of electric vehicles.

Put in the context of the Business Model Architecture, here’s a look at Tesla’s 11 components:

Tags: business modelteslaarchitectureinnovationSection: Business Model InnovationStructure & Methods
Four Takeaways from the Top 10 Most Innovative Companies in India
April 17, 2015

Fast Company just published the list of the world’s most innovative companies of 2015 and the lineup of the top 10 most innovative companies in India is refreshing and intriguing.

Be it IndiGo airlines, which slashed aircraft turnaround times to 20 minutes, or ISRO’s Mangalyaan Mars Mission, which achieved the task of launching the Mangalyaan satellite into space on a budget that was three-quarters the cost of the Hollywood blockbuster Gravity, there are interesting lessons from every company on this list.

Here are four key takeaways, especially for companies that have become huge dinosaurs and lost their nimbleness today.

Takeaway 1: No Innovation Is Complete Until It Is Implemented

A large number of companies have ideas; ideas that are bright and promising. But if it’s important to be the first to come up with an innovative idea, it is equally important to implement and execute the idea properly.

The aviation industry has been unprofitable for decades due to several reasons, like a bloated cost structure, vulnerability to exogenous events and a reputation for poor service. Air Deccan, SpiceJet and IndiGo all knew what to do. Southwest and Ryanair had already done it overseas. But the idea had to be customized and implemented for India. IndiGo proved that not only can you be profitable when others aren’t, but you can also do so with style and without compromising on the quality of the service delivered, as this video shows.

Living true to its tag line—On Time, Every Time—Indigo adopted clever and frugal techniques like quick changeover times, ACARS (aircraft communication addressing and reporting systems) and 48-hour advance check-ins at no extra costs, among various other innovative ideas, to become the country’s largest airline with a market share of 33 percent and the rare profitable one.

Takeaway 2: Innovation Need Not Be a Long Expensive Affair

ISRO’s Mangalyaan mission proved this to the world. Innovation-driven success doesn’t always need huge investments and a lot of time. Sometimes, not having all the resources and funds just helps you innovate faster. Iterations might not always be the best way to improve; oftentimes, you need to adapt and use building blocks from earlier experiments.

India became the first country to put a probe into Mars’ orbit in the very first attempt. At a cost of roughly $73 million for 780 million Kms, the mission cost about 10 cents per Km. This is less than what many auto rickshaws charge in India. ISRO completed the Mangalyaan in just about 15 months, a record that further proves that innovative ideas don’t always need a long time.

Takeaway 3: Customers Buy a “Job-To-Be-Done” and Sometimes Technology Can Be a Key Enabler

Customers want a product that helps them do a job and seldom care about the medium used. Technology can thus prove to be a key enabler and help accomplish that job in a cost effective and convenient manner. In short, technology can substitute a lot of established methods of completing a job.

Be it Perfint healthcare, which is fighting cancer using Robotics; Tata Swach, which removes up to a billion bacteria and 10 million viruses from a single liter of water at a cost of $0.003 per liter using a $20 filter; or Novopay, which uses a smartphone, a fist-size fingerprint reader and a tiny printer to transform a street-corner convenience store to a banking outlet, the one thing that stands in common between these companies is the fact that technology has helped accomplish customer requirements in non-conventional ways.

The way these initiatives have used low-cost technology to solve big problems is remarkable. The important thing is to understand that technology was not the solution, it was a strong enabler.

Takeaway 4: Understand and Deliver the Unsaid!

Ever thought about being able to afford a smartphone for less than $80, accessing social media on the Internet without a data connection or gamifying customer service? These may not be what the customer asked for out loud but was more than happy to receive. A majority of products fail in the market because they don’t understand what the customer might or might not want.

Micromax has whipped global competitors like Apple and Nokia by bringing forward various innovations such as dual SIM phones, QWERTY keypads, and, most importantly, the first budget quad-core smartphone. Today, U2opia has 28 million users in 45 countries, and customers continue to find new uses of using the technology, which lets them access social media without a connection. Freshdesk gamified the whole customer service experience with every support ticket flowing in being a chance for the customer service agents to score. Today, the five-year old Freshdesk has 30,000 customers across the globe. Yes, Micromax, U2opia and Freshdesk created a product or service that they were sure customers would want in the future.

These four simple takeaways can go a long way in ensuring success with your innovation efforts. So, even if you work for a big organization, maybe it is time to learn from these companies and use innovation to drive success—faster and cheaper!

Section: Structure & Methods
Biomimicry in Action: As Strong as Snail's Teeth
April 10, 2015

When we think about innovation, we often think about exploitation and exploration using existing materials. But some of the most exciting and interesting innovations come from materials that don’t even exist yet.

Just recently I read about a new material that was discovered by researchers from the University of Portsmouth. By applying the principles of biomimicry, whereby we seek to learn from nature, scientists will now try to reproduce this amazing material. What is it? It’s the tiny little teeth on the tongue of a certain kind of aquatic snail. The snail uses its tongue to scrap algae off of rocks.

Until this discovery, it was assumed that spider silk was the strongest material biologically produced. But these limpet teeth, as they’re called, appear to be considerably stronger and, perhaps even better, they seem to retain their strength very consistently across a range of sizes whereas most materials, like spider silk, get weaker as they get bigger.

With the amazing microscopes we have today, we can peer into the atomic structure of this material to see what it looks like, and with that insight we can look to reproduce it artificially. Researchers think the fibrous structures found in limpet teeth could be mimicked and used in high-performance engineering applications like race cars or aircrafts.

That’s what biomimicry is all about. Biomimicry is becoming an increasingly valuable approach to innovation. The philosophy of biomimicry is that nature has probably already solved your problem, so why reinvent the wheel? Why not spend your time instead searching for nature’s pre-existing and often elegant solution?

In writing The Innovator’s Toolkit: 50+ Techniques for Predictable and Sustainable Organic Growth, my co-authors and I included biomimicry as one of our techniques. Although biomimicry is often applied by researchers, such as those that discovered the strength of the limpet teeth, you don’t have to do that level of expensive, time-consuming research to reap the rewards of this method. Many examples of nature’s problem-solving abilities are available to the casual observer.

To get started, simply ask yourself: What would nature do to solve this problem?

Tags: biomimicrySection: Structure & Methods
Blockbuster Busted Part 1: An S-Curve Analysis
March 23, 2015

While there are exceptions, the evolution of most technologies and companies can be depicted with the help of an S-curve. Similar to the birth, growth and maturity phases of living organisms, the S-curve analogy shows the rise and fall of companies and industries in terms of growth. Blockbuster is a classic case of the S-curve blues, hitting a stall point, and failing to adapt to the changing environment.

The argument could be made that Blockbuster was disrupted by other more innovative and motivated companies, but the fact still remains that Blockbuster’s management team made strategic decisions that caused more pain than their actual competitors did. In this post, we explore how Blockbuster was busted by taking a historical look at their S-curve and considering—from a strategic perspective—what Blockbuster missed.

 

 

The Blockbuster Timeline

The first Blockbuster store opened October 1985 in Dallas; it started as a small neighborhood business. By the mid-1980s, Blockbuster was acquired by Wayne Huizenga and John Melk. In a relatively short time, Blockbuster grew from 133 stores in 1987 to 3,400 in 1993; in 1994 it was acquired by Viacom, the telecom conglomerate, for $8.4 billion. From 1994 to the early 2000s, Blockbuster was on blockbuster growth, peaking at 9,100 stores in 2004 with revenues upwards of $6 billion. Blockbuster started down a fast slippery slope in 2004 however, from which it would never recover.

Blockbuster’s main growth strategy was based on acquiring independent video stores across the U.S. and internationally. Blockbuster was experiencing massive growth and significant gross margins and growing profits; so, why would Blockbuster even consider new, untested, technology? Why would a company like Netflix, or any online streaming, even be worth a look? Netflix was founded in 1998 by Reed Hastings because, coincidentally, he lost Blockbuster’s Apollo 13 video, and when he returned it was hit with a $40 late fee. As Hastings told The New York Times:

“I got the idea for Netflix after my company was acquired. I had a big late fee for ‘Apollo 13.’ It was six weeks late and I owed the video store $40. I had misplaced the cassette. It was all my fault. I didn’t want to tell my wife about it. And I said to myself, ‘I’m going to compromise the integrity of my marriage over a late fee?’ Later, on my way to the gym, I realized they had a much better business model. You could pay $30 or $40 a month and work out as little or as much as you wanted.”

To make Blockbuster feel even more secure, by 2000, Netflix was losing money—a lot of it; Reed Hastings proceeded to exhaust all options, one of which was to set up a meeting with Blockbuster’s then CEO, John Antioco. Blockbuster was given a chance to buy out Netflix for $50 million, just drops in the bucket for a company that had just raised over $5 billion in an IPO a year earlier. Blockbuster laughed them out of the room, literally, and at the time, Blockbuster was right to do so. Would customers be willing to order DVDs online and wait for their arrival by mail several days later when they can walk into a store and pick up their favorite movie? Netflix did not charge for late fees, something that was a key source of income and profit for Blockbuster. The greatest change was that broadband didn’t exist, only dial up. Did Blockbuster consider the crossroads of broadband and Internet streaming, or how the Internet adoption rate would change or what broadband technology would do in the near future? Blockbuster was right at that time, but not considering the scenario of next-day delivered DVDs with complementary streaming proved to be a critical mistake.

It wasn’t until 2003 when Netflix finally posted a profit, and market competition only became hotter in 2002 with a new rival, Redbox; Redbox started to make waves based on a revolutionary concept of using automated rental kiosks and partnerships with grocery stores and gas stations. In the meantime, by 2004, Blockbuster hit its peak with 9,100 stores, four years after Netflix and two after Redbox. Blockbuster was flying high. In 2004, Blockbuster split from Viacom and introduced Blockbuster.com, the online competitor to Netflix. By the time Blockbuster finally got into the mail DVD market in 2004, Netflix had already grown to $270 million in revenue and 1 million subscribers.

With great success comes challenges, and 2007, little did Blockbuster know, would become its stall point. Revenue had dropped to just over $5 billion and 5,100 stores, compared to 9,100 three years before, though Blockbuster did still have a commanding market share of the video industry with over 50 million members worldwide. Meanwhile, Netflix quietly grew to $1.25 billion with 7.5 million subscribers; Reed Hastings tried again to convince Blockbuster to acquire the struggling start-up DVD rental company, but still was denied. Fierce market competition was taking a toll on Netflix; subscribers were down, it was paying the highest per user acquisition cost to date, just over $48 per user, and the rental market was becoming more saturated. Netflix took the bull by the horns and put in place a complementary business model innovation by adding streaming content in conjunction with the mail order rental market. Both strategies from Netflix and Redbox, online and kiosk, Blockbuster ignored.

The last straw—a CEO shakeup—broke Blockbuster’s back. The new CEO, Jim Keyes, decided to remove Blockbuster from the digital space and focus on the brick-and-mortar model. As quoted from this article, “The new man didn’t understand what business Blockbuster was really in. He started changing the game plan, including pulling out of their Internet efforts. Within 18 months, he had lost 85% of the capital value of the company.”

By 2009, Blockbuster started to feel the consequences of previous strategic decisions. Revenue had dropped to $4.1 billion and 4,500 stores. With a last pitch effort, Blockbuster Express was introduced to compete with Redbox. Blockbuster was now distributing through retail, rental kiosks, and DVD rental. Blockbuster finally busted in 2010 filing for bankruptcy protection in September. Revenue was down to $3 billion and 3,000 stores, with the final nail in the coffin of just under $1 billion in debt. Blockbuster, once a $6 billion company, now was only valued at $24 million.

In 2011, Blockbuster finally jumped into the streaming space, but that market was fierce with Hulu, Amazon and the previous laugh of the town, Netflix. The main strategic advantage Blockbuster saw was the business model ecosystem of online, kiosk and brick-and-mortar. Customers could rent from any of the three platforms, and then return to the local store, hoping to capture a seemingly instant gratification competitive advantage.

By the end of 2011, revenue was down below $1 billion, 1,500 stores, and declining. By 2013, revenue was only $120 million by Q2 and 50 stores and the online mail-service was shut down in December. In April 2011, Blockbuster was acquired in bankruptcy court for $320 million.

Currently, Blockbuster is keeping content live with Blockbuster On-Demand streaming, a part of the Dish Network service package. Non-subscribers are also able to access movie content on any device for $2.99 per movie.

Lessons Learned and the Blockbuster S-Curve

Blockbuster’s rise and fall lends itself to a classic S-Curve depiction. After the initial start-up, acquisitions and positioning, Blockbuster was off and running, growing exponentially from 1987 to 1993 with a compound annual growth rate (CAGR) of 58 percent. From 1993 to 2004, however, growth slowed to a CAGR of just over 8 percent. The long painful decline started in 2004, producing a CAGR of -13 percent from 2004 to 2009 and -59 percent growth from 2009 to 2013.

Looking back, hindsight is always 20/20, but what was it from a strategic perspective that Blockbuster just didn’t get right?

There are three strategic points worth pointing out that had critical roles in Blockbuster’s fate:

  • The obvious: not buying Netflix; of course, if Blockbuster did acquire Netflix, it may have died with the rest of the company in 2011.
  • Not only changing CEOs, but also shedding their total access strategy in favor of a brick-and-mortar retail model focused more on selling add-on items, such as candy and popcorn.
  • The underlying root cause: a company that would never adapt, pivot or modify its existing mental models and biases of what the movie industry was or could be.

Finally, a few questions to ask when contemplating not just what Blockbuster did, but why:

  • Did Blockbuster pay attention to the changes in the external environment or scenarios of how the world could be different in the movie rental business?
  • Did Blockbuster understand the true customer need and the problem to be solved?
  • Did Blockbuster focus any attention on the shifting marketplace trends?
  • Did Blockbuster consider any of the competition seriously?
  • Did Blockbuster not focus on a core business by diversifying itself in too many places?
  • Did Blockbuster employ the best business model to compete in the changing market space?

History has shown that no company should take its position for granted. Every S-curve gets replaced at some point in time. In fact, the only guarantee for success is to re-invent the business to keep relevant within an ever changing market. If you don’t, someone else will.  

By Derek Bennington and Dr. Phil Samuel

Section: Structure & Methods