Many business thinkers have noted that today a prerequisite for success is to prepare yourself for the end of your success. Rita McGrath in her seminal book, which I reviewed in the column, argues for the idea of a “temporary competitive advantage” instead of a sustainable one. A business will only be successful if it reviews its fundamentals regularly. Are we still doing the right thing? The answer is usually, temporarily.
All this is unarguable. The critical question is what do you change to, and, how do you discover that change?
The “Business Model Navigator” offers a compelling answer to this question. Its author, Prof. Dr. Gassmann is among the most cited professors in business management. He has taught at Berkley, Stanford, and currently teaches at St. Gallen in Switzerland.
In the past, innovation was the primary driver of business growth and competitiveness. Your new technological solution and your amazing new product were the drivers of your success. Business today makes achievement from these sources less likely.
The alternative, the authors argue, is to innovate your business model as an alternative to your technology or products. In fact, “14 of the 25 most innovative companies in the world are business model innovators,” not technology or product innovators.
Why choose business model innovation rather than product or technology innovation? Firstly, products and technologies are getting harder to innovate because of the great progress in these areas. Secondly, not all businesses lend themselves to this type of innovation. Business model innovation, in contrast is applicable to all industries.
A startling fact is the outcome of Gassmann’s research. “We have analysed the most revolutionary business model innovations over the past 50 years to determine which predictable and systematic patterns were at their core. We discovered that over 90 per cent of all business model innovations simply recombine existing ideas and concepts from other industries.” That fact hold enormous potential for devising a winning business for your company.
Your company’s current business model is described by four key dimensions. Who are the customers with whom you do business and wish to do business? What is the value you offer customers? How do you develop this value for the customer? How do you make profit from this process?
You will have a significant innovation if you can change any two of these.
Of the 55 business models, consider these two: “Direct Sales” and “Razor and Blade.”
Selling directly allows for a more intimate and personal sales experience with the customer. It helps the company better understand the customer’s needs and allows for a more dedicated relationship. The company can keep more accurate sales information, and owns the customer. None of this is possible when the business outsources the selling to a middleman who might well be representing their competitors as worst, or have a distracting inventory of other goods, at best. There is usually a saving by going direct to the customer that could be passed on to the customer.
Tupperware is well-known for selling their kitchen and household products direct to the customer. Brownie Wise, a Tupperware sales representative, is credited with the twist Tupperware gave to this ancient business model. She organized parties where friends sold Tupperware directly.
Hilti, a company selling anchoring systems in the construction industry, also uses a form of direct selling to other businesses. Three-quarters of the company’s 22,000 employees sell to customers (not end-users) on daily basis.
Both Tupperware and Hilti use the same business model in different ways, and for different purposes.
The “Razor and Blade” business model offers a basic product (the razor,) to customers inexpensively or even free. It then sells disposables (blades,) that are necessary to use the product at a very high margin. To ensure that the customer only uses the company’s disposables, barriers to exit are set up in the form of patents, for examples. Your razor can only fit your a particular shaped blade, and no one else can manufacture them without permission.
Apple sell music inexpensively though iTunes for use on their expensive iPod, where the real money is made.
Once you have accurately described your current business model you are in a position to play with any of the 55 business models described in the book. Discovering a new business model for your company entails combining, modifying or substituting any or some of the existing models to your industry.
Nespresso combines both the “Razor and Blade” as well as “Direct Selling.”
Their espresso machines sell for a reasonable price for their quality level, but the coffee capsules you needed for the machine cost five-times as much as regular ground coffee (Razor and Blade.) They have also chosen to open Nespresso stores dedicated to providing a high quality shopping experience for the machines as well as the coffee capsules (Direct Selling.)
There is more to the Nespresso model, but this does serve as sufficient example of the power of Gassmann’s business model method.
This very valuable book provides a solid alternative to the more widely used innovation models. Gassmann believes that “business models can be constructed through creative imitation and recombination… (While they) cannot guarantee a flawless outcome, they certainly increase the likelihood of success.”
A large part of this book focuses on implementing the model making it a superb example of research rigor applied.
Readability Light ---+- Serious
Insights High +---- Low
Practical High --+-- Low
*Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Strategy that Works.
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