Innovation Blog

Break Free of Innovation Mediocrity with Structured Innovation and Methodology Experts
August 27, 2015

The phrase “companies don’t innovate, people do” holds as true today as it always has. But how do we get our people to innovate more effectively and efficiently? Is it through systematic pursuit of opportunities or flash of genius? Flash of genius can happen, but this is mostly considered optimistic bias. We need a reliable system that builds mind-blowing concepts on a consistent basis and does not leave innovation to chance.

Every System Requires Structure

The esteemed Professor Peter Drucker said innovation occurs in business through “systematic pursuit of opportunities.” For me, that pursuit takes the form of a structured innovation process. Every system requires some modularity or structure to function effectively, according to Clay Christensen in his 2012 TED Talk. Innovation is no different. The famous saying “if you can’t measure it, you can’t fix it,” also comes to mind. Aggregation is one form of measure. We aggregate all the time, when we reflect, when we manage our businesses and when we navigate our lives. We have a finite mind and without aggregation of the data in our life, we will battle to measure success.

Complexity and Overcoming Psychological Inertia

The other reason structured innovation is so appealing is because of the level of complexity and overcoming psychological inertia. Psychological inertia implies an indisposition to change. It represents the inevitability of behaving in a certain way because that way has been indelibly inscribed somewhere in the brain (James Kowalick, Human Functions: The Source of Psychological Inertia). This human programming affects our ability to come up with radically different solutions.

Overcoming psychological inertia is a key battle in innovation and affects time to market. A structured method will go a long way to overcome psychological inertia. But besides overcoming psychological inertia, a structured method is repeatable and reproducible and hence allows certain steps to be repeated and iterated, thereby strengthening the ideas and concepts generated. Most importantly, a structured method allows for a common language in your team which is critical in fostering innovation in a corporate setting.

Cement a Methodology That Works for Your Company

So if your company is battling with stale ideas, week concepts and a poor team synergy, a structured methodology is exactly what you need in order to be released from these shackles of innovation mediocrity. To be successful, you need to walk the path that many are not prepared to take. This may involve working with an innovation coach who will enable you to cement a methodology that works for your company. In short, if you don’t have the skills, seek the best methodology expert to take your company to next level.

Look for a methodology expert who has invested many years of research in testing and proving tools and methods for building the innovation capability of an organization. If there is something the sports stars have taught us it is to always seek the best mentor we can find. Tiger Woods and Roger Federer, for example, are top of their class in their respective sports, yet they make use of a coach to learn the finer points and get the right balance. They use a mentor strategically to refine their approach and challenge their methods.

It is a huge task for any organization to roll out innovation and build internal capability whilst still meeting its operational targets. Select a methodology expert and make them a strategic partner in the roll out of structured innovation in your company. It will be the best move you can make in maximizing your organizations innovative potential.

Dimitri Markoulides is the innovation practice lead in South Africa and senior client partner at BMGI. He brings more than 15 years of experience to his role as an innovation facilitator and leader at organizations across the country and abroad. You can follow him here on LinkedIn.

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Tags: structured innovationmethodology expertsinnovation coachSection: Structure & Methods
Blockbuster Busted Part 2: A Business Model Analysis
August 18, 2015

Most people attribute success or failure to a product, service, or even technology. However, one of the most common thieves of a successful business is the business model. A business model is not just how you make money, or reach a customer, but everything in between—it is the entire value chain of how you develop the good or service and deliver it to the targeted customer segment.

In Blockbuster Busted Part 1: An S-Curve Analysis, it was evident that Blockbuster failed for multiple reasons—everything from strategic decisions to underestimating Netflix. Business models are often another reason a business suffers, and unfortunately it’s sometimes the last place leaders look to innovate. In Blockbuster’s case, the business model didn’t change fast enough and by the time it did, it was too late.

In a recent post, we looked at the Business Model Architecture, its 11 components and how they can be mined for innovation opportunities; the architecture and its components are key to staying relevant to your customers and to financial well-being. In this post, we’ll revisit our story of Blockbuster Busted, specifically in the context of how its business model didn’t keep up with customers’ needs or the competition.

Over a 30-year period Blockbuster went from a dominate force in the movie industry to nothing more than a brand name. Netflix was a reason for that, but not the only one. Blockbuster’s business model not only attributed tremendously to its initial success, but also to its demise in 2013. The Blockbuster and Netflix business models are dissected here over four stages, each at a chunk of time where each company developed, modified, or innovated their model to become that much more competitive.

Stage 1: Blockbuster Rules the Roost

Back in its heyday, Blockbuster was a formidable force, owning much of the movie and entertainment market. Once a movie left the theater or new video game was released, Blockbuster was the first to have it, in stock and ready to provide hours of entertainment in the comfort of your home. At its peak, Blockbuster had over 9,000 stores and millions of customers.

Not only did Blockbuster provide the entertainment, but also the rest that completed the experience, including beverages, candy, popcorn, movie posters, video players and game consoles. Blockbuster was a one-stop shop that had it all, at thousands of locations just minutes away from home. Things were looking green, and Blockbuster felt no reason to think otherwise.

At the core, Blockbuster’s success was focused by three business model patterns: brick-and-mortar stores with thousands of titles, cross-selling other merchandise, such as beverages and candy, and rent over buy. Many other patterns emerged that enhanced the experience, but without stores, merchandise, and rental programs, the Blockbuster experience wouldn’t have been the same.

At the time, Blockbuster’s business model was pretty standard, yet incredibly robust. It delivered a strong core offering—renting movies—with an even stronger complementary offering—all the stuff: candy, pop and popcorn. You could even say this was part of the customer experience; for many it became tradition to rent a movie and popcorn on Friday night.

We have all been into a Blockbuster at some point and most likely rented there. I know I did, everything from movies to games to game consoles (my parents wouldn’t let me have one growing up so I rented one). The Blockbuster experience wasn’t complete, however, without one thing—late fees. Truth be told, late fees was a huge revenue stream (at one point Blockbuster eliminated late fees, and later reinstated them because it lost too much money!). Between rentals, the concessions and late fees, Blockbuster made good money, and the back of the business, processes and resources, allowed it to keep operations fairly low-cost.

However, as the saying goes, don’t bite the hand that feeds you. In this case, late fees bit hard. It was a ridiculously expensive late fee on Apollo 13 that made Reed Hastings, just a customer at the time, ask one simple question: Why is renting a move, late fees…the whole model just a hassle? There has to be a better way to give people access to movies without this. Thus, Netflix was born.

Stage 2: Blockbuster On Top, But Not for Long

Netflix was simple: a flat fee, subscription-based service that allowed customers to select movies online and have them delivered to their door. Each movie came with a pre-paid envelope. Just order online, watch at home, return from home, and receive the next one in just a couple days.

Netflix, no matter how creative the idea was, struggled mightily to stay afloat in the beginning. It was just a blip on Blockbuster’s radar, seen as a small movie rental company with a new, crazy idea to ship movies to customers at home. Netflix developed a unique business model, but it didn’t catch on right away, as most things take time, which the diffusion of innovation will tell you.

While Netflix provided movies directly to your home, there was something that Netflix did not provide, the one thing that had made every Blockbuster customer, at one time or another, angry: dreaded late fees. There was a logical reason Blockbuster didn’t want to lose the late fees. In 2000 alone, Blockbuster’s revenue was just shy of $5 billion, with $800 million, or roughly 16 percent of revenue, due to late fees. In 2004, Blockbuster finally established a “no late fees” program in many markets, but rescinded the program six years later citing significant revenue losses, some estimating $300 million a year. Late fees were just a part of Blockbuster’s DNA.

Leading up to 2007 proved to be the defining years for Blockbuster; its grave was being dug by both Netflix and a small rental kiosk outfit called Redbox. Redbox, started by just a handful of locations in 2002, didn’t have all the accessories and candy, but it did do a much better job satisfying the true customer’s Job-To-Be-Done—renting a movie. By 2007, Redbox had more locations around town than Blockbuster, but the real estate was quite different. Redbox was a 20-square foot kiosk while Blockbuster still ran massive video supermarkets.

For Netflix, 2007 was a turning point; it had tried to sell out to Blockbuster in the early 2000s. Luckily for Netflix, Blockbuster had wanted nothing to do with it. Soon after, however, Netflix started to cash in, and big. Customers were leaving Blockbuster in droves to the new movie rental delivery companies that promised so much more for less.

Netflix’s core business model hinged on delivering rental movies to homes with a tasteful promise: no late fees, ever, and very quick delivery turnaround. Customers could keep the movie as long as they wanted and just send it back. Customers could simply keep a profile online, update their “que” and keep getting movies delivered as long as they kept paying the flat rate subscription service. For $6 to $15 a month at the time, you could have as many discs as you wanted with no late fees. I remember watching 10 plus movies a month. At Blockbuster, that would cost over $40, not even including late fees, which were just inevitable. With Netflix and Redbox, the world just didn’t need Blockbuster’s old school brick-and-mortar solution.

There were many reasons for Blockbuster’s demise, including CEO leadership and strategic decisions but a huge factor was the mind-set of retail brick-and-mortar video warehouses scattered across the world. This was a huge sunk cost that Redbox and Netflix just didn’t need to worry about. Everything for them was either digital or central fulfilment centers that serviced millions of customers. The multi-millions of real estate that Blockbuster had in the balance sheet didn’t exist for the new solutions, and it never would.

Stage 3: Netflix on Top

Netflix was on a tear. From 2004 to 2013, Netflix grew, on average, 31 percent a year, revenues were up 16 fold while subscribers, Netflix’s core revenue generator, grew from 1 million to 36 million. Blockbuster was feeling the opposite. Blockbuster peaked in 2004 with 9,000 stores, and then declined from 2004 to 2013 at a rate of -59 percent. By the end of 2013, Blockbuster had revenues around $120 million and declared bankruptcy. The difference in business models was primarily responsible.

In 2007, Blockbuster ousted the current CEO and brought on Jim Keyes. He believed Blockbuster’s focus should not be in the digital space, but focusing on the brick-and-mortar model of physical stores with a core offering of renting movies and games.

Prior to this strategic shift, Blockbuster was positioned, at least on paper, to compete with Netflix. It had established a kiosk presence, Blockbuster Express, to compete with Redbox and an online rental portal similar to Netflix. Blockbuster at the time even had a unique value proposition that Netflix or Redbox couldn’t have competed with—the ability to rent online, at a kiosk or at a store, and then be able to bring the movie or game back to a store. For many customers, this was valuable; instead of having to wait two days to receive the next movie in the mail, a customer could simply take an online rental to the store and get another right then and there—instant gratification. However, customers didn’t really care, and it was a little too late. People had attached to the new shiny world of Netflix, being able to rent for a flat fee, watch whatever whenever, and return at will with no worry of late fees. Blockbuster’s fate was sealed, and Netflix was the new king.

Netflix’s core focus was on improving technology—more movies, better service and faster delivery. The only change between Netflix then to Netflix now: streaming content. People obviously loved Netflix for the ease and cost of rentals, but when streaming made its debut, droves of new and existing customers signed up. Content and options were limited, but it was another layer Netflix could use to penetrate new customers and markets, and to find new ways to stretch the value proposition even farther.

All of this was still driven around one revenue stream at the time: rentals. The difference between Netflix and other providers was that Netflix innovated a new way to put the pieces together that in the end created more value for customers. It had reached the level of critical mass and adoption; now it was up to Netflix to build on the model customers fell in love with.

One critical piece that made this possible was the dramatic improvements in broadband infrastructure. Without it, streaming wouldn’t exist. Could you even imagine trying to stream Avatar or House of Cards over dial-up? Painful.

Stage 4: Netflix Stands King of the Mountain

With Blockbuster out of the picture, the competitive landscape had changed. The war wasn’t fought on physical ground anymore, but in a digital space that was even less forgiving and harder to compete in. Netflix, and any other new entrant, would have to be smart, fast and innovate repeatedly to stay alive. And Netflix continued to do just that.

Streaming continued to grow and Netflix became not only a distributor of content, but also a creator. Original programming has become a strong keystone of success. Netflix and Amazon have both started to deliver original content, but even to date, Netflix is ahead of the game. Series such as House of Cards, Marco Polo, and Orange Is the New Black all became hits. Streaming, both licensed and original programming, became the core offering, and rentals became a complement.

To support this change, Netflix’s business model had to change dramatically. The existing rental piece stayed the same, but distributing and creating digital content came with different needs. Starting with the customer, Netflix innovated distribution channels by partnering with equipment manufacturers to integrate Netflix as part of the Smart TV experience and ISP providers to increase broadband speed and reliability. With streaming increasing, infrastructure has been key in enabling customers to watch shows and movies on demand. Digital content has also meant new resources, new talent and logistics knowledge, all of which were critical pieces to delivering value to millions at the end of the line.

The Takeaway: Don’t Overlook Your Business Model for Innovation

So what does all this mean for your business? Just count your blessings now because soon another younger, stronger, riskier you will make you suffer and eventually put you under? No! What it means is this: Nothing is sustainable; you can only improve your business so much; how you do things now most likely will not be relevant in the future; the world changes, and so should you.

It comes down to reinventing yourself. If you don’t, someone else will do it for you, and that probably won’t end well. Business model innovation is not the silver bullet, but it is one of those things that most overlook and can have the biggest impact.

Think about the following: Would these businesses still be around today if…?

  • If Amazon still only sold books
  • If Netflix only rented movies
  • If IBM only sold hardware
  • If (insert your favorite company here) only (did this one thing)

A few questions to consider here:

  • How does my business model create, deliver and capture value now?
  • How will my model need to change in the future?
  • How can I do more with less?
  • When do I need to start thinking about innovating my model instead of simply improving it?
  • How do my competitors do it?
  • Where in the model do most of the innovations within my industry occur?
  • Where can I innovate and receive the greatest impact?

The point is, every great company innovates in multiple areas, but one thing in common within all of them is the business model, and for one simple reason—business models are the foundation of how a business creates, delivers and captures value. If your business model cannot do that, what do you think your odds are of survival?

Derek Bennington is an associate at BMGI, supporting research and development of strategy and operational initiatives. He is an Advanced Kirton-Adaption-Innovation (KAI) certified practitioner and holds a TRIZ Associate certification from the Altshuller Institute. He is also the managing director of The TRIZ Journal.

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Tags: BlockbusterNetflixRedboxbusiness model architectureSection: Business Model InnovationStructure & Methods
Got an Innovation Strategy Yet?
August 11, 2015

So, why do you want to innovate?

If you cannot give a good answer to this question (and, "because innovation is crucial to our organization" is not a good answer), your innovation initiative is unlikely to go anywhere useful. Instead, it is likely to flounder on ideation tools that capture ideas and stifle real innovation.

Good answers to this question include:

  • "Because we want to release a steady stream of new products that define the cutting edge of our industry."
  • "Because our company wants to provide 100% renewable energy to the entire country."
  • "Because I want to provide the very best innovation methodologies to global organizations like yours."

Ultimately, your reason for wanting to innovate should become your innovation strategy.

If you are not clear on why your company wants to innovate, do not panic! I am here to help!

Align with Strategic Vision

If you do not have a ready answer to the question of why you want to innovate, you should start with your company's strategic vision. Your reason to innovate should always be in line with strategic vision. Unfortunately, a lot of organisations have ridiculously fluffy strategic visions, like "providing the best products at the lowest prices"—as if their competitors strive to provide mediocre products at ridiculous prices.

If your company does not have a concise vision statement, you may want to put the innovation strategy aside and work on that vision statement. If you do not know what the vision statement is, you should probably have a word with senior management who are presumably doing a terrible job of communicating the vision statement.

However, assuming you do have a vision statement, you may find it is virtually an innovation strategy statement as well. Although, if the vision statement is fluffy, you will probably need to de-fluff it and make it more precise. For example, if your vision statement is to "Build the best cars in America" you will need to define "best" rather better. Does it refer to quality, engineering excellence, comfy seats or something else?

Values

Your corporate values must also play a part in your innovation strategy. Does your company employ only local craftspeople? If so, outsourcing production to a developing country in order to reduce costs should never be a part of your innovation. Does your organization strive for environmental sustainability? If so, your innovation strategy needs to reflect that.

Corporate values define the nature of your organization and upholding them should be a matter of pride. Moreover, keeping values a key part of the innovation strategy discourages overly ambitious managers from crossing the line of ethical behaviour in order to pursue innovation-fueled growth.

Reflect Reality

Last, but not least, your innovation strategy needs to reflect the reality of your operations. You cannot expect to build cutting edge products that define the state of art in your industry if you are stingy with your research and development budget—or if senior management will not approve risky new product ideas. You cannot expect to deliver the ultimate in social media marketing if your Twitter feed is boring and your Facebook page is full of empty slogans.

Unfortunately, the reality of your operations is often a major stumbling block to defining and succeeding with a cool innovation strategy. If this is the case in your organization, you have three choices in declining order of desirability.

  1. Change the reality. Invest in research and development or buy a competitor with a strong research and development vision. Defang approval committees—or better still defenestrate them. Do what needs to be done to get reality behind your innovation dream.
  2. Tone down your innovation strategy so it fits with reality. If you cannot deliver cutting edge products in your sector, let another company do that and focus on something more realistic, like more affordable products using tried and tested technologies.
  3. Ignore reality, define an innovation strategy that is super sexy and blame others when it does not work. (I do not recommend this option.)
Do It

With this information, it should be an easy matter to draft an innovation strategy statement for your organization. Do it. Get it approved and communicate it across the organization and to all stakeholders.

An innovation strategy statement will make it easy to define actions you need to take in order to pursue innovation successfully in your organization. It also provides a ready means for evaluating ideas that colleagues propose.

Best of all, once you have an innovation strategy statement, you can stop thinking about the word "innovation," which gets bandied about way too much these days, and start focusing on the words in that statement.

Thanks to Jeffrey Baumgartner for this guest blog post! Jeffrey is the author of the books, Anticonventional Thinking: The Creative Alternative to Brainstorming and The Way of the Innovation Master as well as Report 103, the Internet's longest running newsletter-blog on business innovation. This article originally appeared in Report 103 and is reprinted with permission.

To receive Chief Innovator Online in your inbox, please sign up for our newsletter. We only send out a notice when a new blog is posted. You can also join us on LinkedIn at our Chief Innovator Online Group where you'll find the latest posts and can query the group or start a discussion.

Tags: innovation strategystrategic visionvaluesSection: Structure & Methods
Celebrate Failure? Please Don’t!
June 15, 2015

The myth of failure and risk sounds good: celebrate failure, embrace failure, fail fast. But this is misleading at best.

We think we need to celebrate failure because we believe eventual shipwreck is a price we must sometimes pay for innovation and progress. Stuff happens and we can’t punish those who try or they won’t try at all.

Many experts are happy to expand on why failure drives innovation, even splitting people into “Type I” and “Type II” mind-sets (Silicon Valley versus the rest of us). Others say that we need to fail even faster.

Let’s be honest: Do you really want your innovation to fail—fast or slow? Who truly wants to celebrate that failure? Shouldn’t we rather learn and move on?

Interestingly, in amateur risk management, we find similar thinking. Many companies don’t want their project managers to “play it safe.” Risk taking may even be part of their appraisal. Yet, whose money are these project managers putting at risk? At worst, their career path takes a kink. What they gamble is their company’s money, however.

Are we asking the right question at all?

Tony Ulwick, CEO of Strategyn, has been battling this idea for a couple of years already. As far as I can see, research institutions like Argonne National Labs, CERN and many others don’t work that way either. They don’t ask win-lose questions. The answer to such questions has an information content of one bit anyway: success – failure, yes – no, 1 – 0. These are not good questions to ask.

Let us have a closer look at how scientists work by looking at the recent development of a novel technique to read classical texts. It’s not about whether or not we can read those old scrolls without unfolding (which would destroy them). The researchers at ESRF were asking how to bring to best use their own core capabilities. For example, parchment and ink have different absorption and refractive indices, and those two even change with the wavelength of the probing radiation. Which is the required spatial resolution? Using X-ray tomography, can a 3D-model for the distribution of the refractive index be built? Would that allow reading the scroll without unfolding?

You can indeed launch many good research projects with such questions. And of course: All that had been done long before the ESRF researchers were actually reading the scrolls. Only the sum of many such investigations culminates in such a breakthrough—and brings with it a long tail of other learnings, which certainly were not “failures” at all.

Is the mantra of “celebrate failure” coming from two worlds clashing?

Back to business…in the world of daily management, we know the relation between input and output: The number of staff ill is x, therefore production will lag behind plan by Y where Y is a function of x, Y = f(x).

In the world of innovation, it’s different. Cause and effect are often not clear. Minor changes can lead to major differences in outcomes. For example, what happens if Tempo, a German company selling facial tissues, decides to branch into toilet paper? Technically they master it all. And few innovations fail because of technical issues. Yet, they might stumble over some unsuspected cause-and-effect relations. In the case of Tempo, the company learned their brand stood for facial tissues and not their core competencies. Toilet paper sold under the same brand name severely damaged their brand perception. When companies start such a new business line “full-blown” they might indeed need to “celebrate failure”—but is that what they truly want?

When it comes to innovation, we have less knowledge about cause and effect. Therefore, we need an approach different from our take on daily management.

Managing Today’s Business vs. Creating Tomorrow’s Business  

Managing today’s business

Creating tomorrow’s business

Focus

Getting stuff done

Testing hypotheses

Cause and effect

Well known

Little known

How to steer it

Projects and performance goals

Experiments and learning goals

Hold people accountable for

Results

Learning

Foundation

Perfection as only benchmark
All are one team
Scientific approach

Perfection as only benchmark
All are one team
Scientific approach

Almost by definition in the domain of innovation, the effects to causes can’t be predicted. We don’t want to fail fast with a full-scale trial run. We rather want to learn fast. Which causes are driving desired and undesired effects? How can Tempo test their hypotheses prior to launching the new product on the market? The distinction between projects and performance goals on the one hand and experimentation and learning on the other may sound subtle but it makes a tremendous difference

As a consequence, you should not hold your people accountable for the results they have achieved in their innovation endeavors. You rather need to hold them accountable for how carefully they have researched their hypotheses, set up their experiments to test them, and how much learning they generated along the way. No doubt, a professional such as Brian Joiner might say: Besides your striving for perfection and making sure all are one team and not playing against each other, also a scientific approach is key to success in both worlds, when managing today’s and when creating tomorrow’s business.

Beyond winning or losing in innovation

The art and craft of experimentation help us to grasp innovation opportunities. Not least, the important chance findings are made much more likely when your teams are used to carefully formulating their hypotheses and then designing and conducting with equal care the experiments to test them before your new offering reaches the market. You want to learn a lot. You want to open as many doors as possible. You want to raise new issues and new challenges. That may not be easy. But it is so much richer than just coming to a result such as “mission accomplished – yes or no” and the need to celebrate regardless

You should indeed celebrate:

  • How many most-cherished hypotheses you “killed.”
  • How you have set up your experiments.
  • How much you have learned with them.

But please! Don’t celebrate failure, fast or slow. Because then, most likely, you haven’t formulated carefully enough the task you want get done.  

Tags: innovation strategyfail fastexperimentationSection: Culture & Teams
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