Business models need more innovation
Why you should be creating value through business model innovation as opposed to product or process innovation
Model behaviour: Apple CEO Tim Cook presents a new iPod Nano recently – by creating the iPod and the associated iTunes, Apple introduced a radical innovation of its business model and changed the market for music
Why do people with 10 items or less get to go through the express lane at supermarkets? It means the people who spend the least amount of money in store are fast-tracked through the tills, while everyone else has to stand queuing for ages with their trolleys.
University of Michigan professor Gordon Hewitt believes it’s about time supermarkets were a bit more innovative in their business models.
“There should be an express lane for people spending €100 or more. The supermarkets should look after their high value customers and reward them for spending a lot of money in store,” he says.
Mr Hewitt, who is considered a world authority on business and corporate strategy, says there are three types of company in the world: those who make things happen, those who watch things happen, and those who ask what the hell just happened.
He says the latter two company types are too often focussed on product and service innovation, when they should be aiming for innovation in their business models.
“The traditional agenda for innovation is problematic. Everyone focuses on new products, services, features or systems. This type of innovation has a short shelf life and can be short-sighted.
“You need to have innovation in your business model and market concept. For example, develop a whole new market for yourself that didn’t exist before. Instagram did that. And they were bought by Facebook for $1 billion in the same week that Kodak filed for bankruptcy.”
Another example he gives is Apple. For decades, Apple was focused on the production of hardware and software, mostly personal computers. By creating the iPod and the associated iTunes, Apple introduced a radical innovation of its business model.
“Apple was a fledgling computer company for years. It knew nothing about music or telephone but it has created the global standard.They didn’t take on Sony in computers, they challenged it in the area of music with the iPod.”
Someone might come up with a better MP3 player than Apple’s tomorrow, but few of the millions of consumers with iPods and iTunes accounts will be open to switching brands.
Thus, business model innovation has helped Apple stay ahead in the product innovation game, as a good product that is embedded in an innovative business model is less easily shunted aside.
Hewitt cites hotels as a business focussed on product innovation. They put their time and energy into developing high tech, innovative products to allow guests to check in on an app, remotely control everything in their room and be their own concierge. Yet the simplest of things, such as check-in times, are ignored when it comes to innovation.
“Hotels all over the world make you check in at 3pm and check out at noon. That isn’t exactly helpful when you’ve just spent 12 hours on a flight from Singapore for business, landing at 5am.
He believes hotels suffer from the dominant logic that housekeeping directs all other functions in the hospitality industry. Thus what good are all the hotel product innovations, if you can’t have a room when you arrive.
Visiting Ireland for an American Chamber of Commerce event, Mr Hewitt said companies can pay a hefty price by not innovating in their business model, citing Sony as a case in point.
“For 10 solid years Sony achieved systematic improvements in price competitiveness, operational efficiency, product features and performance. It was worth $130 billion. It’s now worth $18 billion.”
Why? Because Sony failed to embrace the shift towards software and the internet, keeping the same business model despite being one of the most innovative companies in the world.
Yale professor of finance Matthew Spiegel agrees with Mr Hewitt that there is an increased need for innovation in the business model.
“Just because you have an innovative product, that doesn’t mean it will do anything. There are more flops than successes in innovation.
“Equity sharing mortgages were an extremely innovative product when they were introduced in the US. If a home buyer didn’t want to have a huge mortgage they could give the bank a stake in their property, and in return the bank would put up some money to buy the property.”
For example, instead of taking out a mortgage for $100,000, the buyer could take a mortgage out for $90,000. The bank would put up the remaining $10,000 and they would get a 10 per cent stake in the house. When the house was sold, even if it was 50 years later, the bank would get 10 per cent of the proceeds.
“They were a flop as consumers hated the idea of the bank owning a stake in their home. No one went for them.”
Rules and regulations
However, Spiegel says it is very hard for the financial sector and banks to innovate in their business model due to government rules and regulations.
“When you take out a mortgage you have to sign stacks of papers that are completely unintelligible. The ordinary consumer cannot understand all the jargon on mortgage documents.
“It would be innovative and a success if a bank introduced a mortgage that was only two-pages long, and written in simple language. However, the reason they have to have mortgage documents that are pages and pages long is because the government told them to. Nothing will change unless the government changes the rules.”
Prof Spiegel, who was in Ireland last week visiting Dublin Business Innovation Centre clients with Yale’s School of Management MBA class, said competition is forcing banks to innovate and change their entire model to one based on electronic payments and online banking.
“Competition is forcing banks to make sure you can go to the bank less often. Not having to go to the bank is an innovation that people like.
“My wife’s bank allows customers to take a photo of a cheque they received and email it to the bank. They can take the photo with their phone. The money is then lodged to their account. She no longer has to go to the bank to lodge cheques.
“Innovations at a customer level like that are convenience-based and improve the customer experience.”