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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: J-B US non-Franchise Leadership
- Sprache: Englisch
Game-Changing Strategies explains the reasons behind this puzzle and presents practical ideas on how established firms could not only discover new radical business models but also grow them next to their existing business models. The challenge for established firms is not the discovery of a new business model?the real challenge is how to make two business models coexist. This book offers advice on how established firms can implement structures and processes that make the new business model less conflicting and more palatable to the existing business.
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Seitenzahl: 331
Veröffentlichungsjahr: 2013
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Contents
Introduction
1. The Innovation Is in the Business Model
What Is a Business Model?
What Is an Innovation?
Characteristics of Business-Model Innovations
Who Wants to Be a Business-Model Innovator?
Summary
2. Discovering New Business Models
Redefine the Field—What Business Am I In?
Redefine Who Really Is the Customer
Redefine What You Are Really Offering This Customer
Redefine How You Play the Game in This Industry
Questioning Is Not Enough: Create a Positive Crisis
Creating Positive Crises
Two Caveats
Summary
3. Creativity Is Not Enough: From Discovering to Implementing New Business Models
Discovering New Customers
Offering New Value Propositions
Putting in Place New Value Chains
Protecting the Business Model by Scaling It Up Quickly
Common Behaviors Toward Technology
Summary
4. Using Dual Business Models to Compete: Is a Separate Unit Necessary?
What to Do About Conflicts
Is Separation Always the Solution?
Four Strategies for Managing Dual Business Models
No Single Best Way
Summary
5. Separation Is Not Enough: How to Achieve Ambidexterity
Achieving Ambidexterity
A Framework for Ambidexterity
Summary
6. Responding to Business-Model Innovation
Response One: Focus on My Business Model
Response Two: Ignore It—“This Is Not My Business”
Response Three: Disrupt the Disruptors
Response Four: Embrace the New Business Model and Play Two Games
Response Five: Migrate to the New Business Model but Scale It Up
When to Do What
Summary
7. When Would Established Firms Discover New Business Models?
Migrating from a Failing Business Model
New Market Entry in Established Markets
Scaling Up New Markets
Who Scales Up New Markets?
Summary
8. Rethinking Innovation in the Big Firm
Conflicting Skills and Attitudes
What to Do with Business-Model Innovation
Appendix A: Examples of a Few Less Well-Known Business-Model Innovators
Appendix B: How to Enhance Corporate Creativity
Appendix C: How to Measure Relatedness Between Two Markets
References
Acknowledgments
The Author
Index
Copyright © 2008 by John Wiley & Sons, Inc. All rights reserved.
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Library of Congress Cataloging-in-Publication Data
Markides, Constantinos.
Game-changing strategies : how to create new market space in established industries by breaking the rules/Constantinos C. Markides. — 1st ed.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-470-27687-7 (cloth)
1. Creative ability in business. 2. Organizational change. 3. Corporations—Growth. I. Title.
HD53.M364 2008
658.4’012—dc22
2008009622
First Edition
To the memory of my friend and colleague,
Professor Paul Geroski
Introduction
Common sense as well as academic research argues that attacking bigger competitors will most likely lead to failure. For example, a series of studies undertaken at London Business School in the early 1990s examined how new market entrants in several U.K. industries fared against much bigger established competitors.1 Not surprisingly, the failure rate of new entrants was quite high—more than 85 percent of them failed within five years of entry. The established competitors had few difficulties repelling these smaller attackers: the studies found that the top-ranked firm in a particular industry had a probability of about 96 percent of surviving as No. 1—a near certainty.2 For the second-ranked firm the probability of survival was 91 percent, and for the third-ranked firm 80 percent. In fact, most of the turnover that occurred among the top five in an industry was due to mergers rather than smaller entrants outcompeting market leaders.
Yet, without disputing the statistics, we all know of examples of companies that attacked much bigger competitors with great success. In several instances, not only did the smaller firm survive, it managed to emerge as one of the leaders in the industry! IKEA did it in the furniture retail business, Canon in copiers, Bright Horizons in the child care and early education market, MinuteClinic in the general health care industry, Starbucks in coffee, Amazon in bookselling, K-Mart in retailing, Southwest, easyJet, and Ryanair in the airline industry, Red Bull in the carbonated soft drinks industry, Lulu in publishing, Enterprise in the car rental market, Netflix and Lovefilm in the DVD rental market, Honda in motorcycles, Wit Capital in investment banking, Skype in telephony, Priceline in the travel agent market, Casella in the wine market, Metro International in newspapers, and Home Depot in the home improvement market. The list could go on!
The Secret of Success: A New Business Model
What explains the success of these outliers and what can we all learn from their experiences? After studying more than seventy such firms, I believe that the answer to this question is simple enough: successful attackers do not try to be better than their bigger rivals. Rather, they actively adopt a different strategy (or business model) and aim to compete by changing the rules of the game in the industry. Over and over, what I have observed is that significant shifts in market share and company fortunes took place not by trying to play the game better than the competition but by playing a different game—in a sense, by avoiding head-on competition. The box lists a number of such business-model innovators from a variety of industries—both high-tech and low-tech, growing and mature.
Consider, for example, Enterprise Rent-A-Car, the biggest car rental company in North America. Rather than target travelers as its customers (as Hertz and Avis did), Enterprise focused on the replacement market (that is, providing cars to customers who’d had an accident). Rather than operate out of airports, it located its offices in downtown areas. Rather than use travel agents to push its services to end consumers, it uses insurance companies and auto mechanics. Rather than wait for the customer to pick up the rental, it brings the customer to the car. In short, Enterprise built a business model that is fundamentally different from those of its biggest competitors. This allowed it to start out in 1957 as a new start-up firm in the industry and grow into the biggest competitor in less than fifty years.
Consider also the case of MinuteClinic, a company founded in 2000 and already an industry leader in the retail-based health clinic industry in the United States. The company is based on the premise that certain simple health problems can be more quickly and cheaply diagnosed and treated at a walk-in clinic than in a doctor’s office or an emergency room. Unlike traditional clinics that treat a wide variety of health problems, the company treats only common ailments such as strep throat and ear infections. It employs nurse practitioners armed with software that helps them test for and treat a handful of medical conditions. The software has the most up-to-date medical guidelines for diagnosis and treatment and applies strict rules that help ensure consistency of service. A doctor is generally available for phone consultation only. Prices are posted for all to see. Patients who come in with complaints not on the list or symptoms that indicate something more serious are referred to a doctor or an emergency room without a fee. The service does not require an appointment; it is quick (about fifteen minutes from start to finish), and it is cheap—a visit to test for strep throat costs $44 versus an average of $109 at a doctor’s office or $328 in an emergency room.
Both examples highlight a generalization at the heart of this book: without the benefit of a technological innovation, it is extremely difficult for any firm to successfully attack bigger competitors or to successfully enter new markets where big established players rule. The strategy that seems to improve the probability of success in these situations is the strategy of breaking the rules—of discovering and exploiting a different business model from the one that the current leaders employ in a given industry.
So What?
Obviously this is not the first book to proclaim the virtues of this kind of innovation, and this is not the first time that managers have been encouraged to seek and exploit a new business model in their industry. Numerous books have been written and many ideas have been proposed on how firms could innovate in this way. For example, Kim and Mauborgne (2005) developed the beautiful concept of “blue ocean strategy” and formulated a number of analytical techniques (such as the “Strategy Canvas” and the concept of the “Value Curve”) to help companies identify ways in which they can create new market space for themselves through business model innovation. Similarly, Christensen (1997) and Christensen and Raynor (2003) developed the concept of “disruptive innovation” and then used it to advise companies on how to develop new growth businesses using disruptive innovation as a platform.
Other authors have proposed even more radical ideas. For example, Hamel (1996, 1999, and 2000) proposed ideas such as making the strategy process democratic and bringing Silicon Valley inside the organization as ingredients to business-model innovation. Markides (1997, 1998) argued that corporations could learn from the success of the capitalist system by importing into their organizations those features of capitalism (such as decentralized allocation of resources and experimentation) that promote innovation. And Markides and Geroski (2005) suggested that big firms should help start-up firms create new business models and then use a “fast-second” strategy to acquire the start-up firms and scale up the new ways of competing. In short, the list of ideas on how to discover new business models is rather long; interested readers are also referred to the work of Charitou (2001), Gilbert (2003), Gilbert and Bower (2002), Hammer (2004), Kuhn and Marsick (2005), Mitchell and Coles (2003), and Slywotzky (1996).
But here’s the catch—and the reason this book has come about. Despite all the advice and despite the wealth of ideas, it is very rare to find a business-model innovation that originated from an established big company. According to the available evidence:
The majority of business-model innovations are introduced by newcomers in an industry (rather than established competitors).
Not only do established competitors find it difficult to innovate in this manner, they also find it next to impossible to respond to such innovations in an effective way.
Most of the time, the established firms’ response is to imitate the innovation (rather than consider ways of neutralizing it or even destroying it).
The majority of the responses fail because the established firms find it difficult to manage two different and conflicting games at the same time.
Why—despite all the ideas and advice—do big, established firms fail to pioneer new business models in their industries? These firms have the resources, the skills, and the technologies to do a much better job at innovation than the new start-up firms. Furthermore, the advice that has come their way on how to do so is good advice coming from some of the best academic minds. Yet they continue to allow new firms to take the initiative when it comes to business-model innovation, despite the obvious benefits of this type of innovation. What can explain this?
Creativity Is Not Enough
The purpose of this book is partly to explain the reasons behind this puzzle but mainly to use the insights from that explanation to develop practical ideas on how established companies could not only discover new, game-changing business models but also implement them next to their existing business models. As it turns out, all business-model innovations display certain characteristics that make them particularly unattractive to established firms. This suggests that giving more and better advice to established firms on how to become more creative so as to discover new business models is pointless. The issue is not discovery. The real issue is organizational, and the only advice that can prove helpful to established firms is how to overcome the organizational obstacles that hamper the implementation of new business models. This is exactly the emphasis of this book—not on discovering new business models but on implementing them.
At the same time, it should be obvious to all that despite all of the wonderful advice to the contrary, most new business models will be introduced by newcomers rather than by established firms. This is not because the established firms are stupid or bad at innovation. Rather, it’s a reflection of how many companies inhabit an industry at any given time compared to how many potential entrants could invade that industry. For every established company trying to develop a new business model, there may be thousands of entrepreneurs attempting to do the same thing. Simple probability theory indicates that the chance that it will be a new entrant that discovers the new business model is much higher than the chance that it’s going to be an established firm.
What this implies is that in addition to telling firms how to innovate, perhaps we also need to tell them how to respond if somebody else introduces a business-model innovation in their industry. This is another differentiating characteristic of this book—rather than dealing only with how firms can develop new game-changing business models in their industries, it also explores how firms can respond to this kind of innovation. Just as new entrants have advantages over the big firms when it comes to generating new business models, so do established firms have advantages over new entrants when it comes to responding to these invasions. The book will explore this theme.
This book has a third differentiating element. Over and above the fact that business-model innovation is an interesting phenomenon that deserves careful treatment, and over and above the fact that this kind of innovation is different from all other kinds of innovation, another major motivation behind this book is the desire to clarify a number of misconceptions and mistaken beliefs that have developed in the last few years about business-model innovation.
As I explain in the first chapter, business-model innovations tend to be disruptive to established firms for a number of reasons. As a result, many people have equated business-model innovation with disruptive innovation, as defined by Christensen (1997). This is a mistake. In his original formulation, Christensen focused primarily on technological innovation and explored how new technologies came to surpass seemingly “superior” technologies in a market. Over time, he widened the applicability of the term to include not only technologies but also products and business models. For example, Christensen and Raynor (2003) list as disruptive innovations such disparate things as discount department stores; low-price, point-to-point airlines; cheap, mass-market products such as power tools, copiers, and motorcycles; and online businesses such as bookselling, education, brokerage, and travel arrangements.
Although I agree that all these innovations are “disruptive” to incumbents, treating them all as one and the same has actually confused matters considerably. This is because a disruptive technological innovation is a fundamentally different phenomenon from a disruptive business-model innovation or a disruptive product innovation—these innovations arise in different ways, have different competitive effects, and require different responses from incumbents. Lumping all types of disruptive innovation into one category simply mixes apples with oranges.
This confusion can be seen more clearly if you compare the effect on incumbents of disruptive technological innovations to the effect of disruptive business-model innovations. A key finding in Christensen’s work is that disruptive technological innovations eventually grow to dominate the market. Christensen and Raynor (2003, p. 69) make this point forcefully by arguing, “Disruption is a process and not an event. . . . It might take decades for the forces to work their way through an industry but [they] are always at work.” Similarly, Danneels (2004) summarizes the existing theory on disruptive innovation by pointing out that “disruptive technologies tend to be associated with the replacement of incumbents by entrants.” If correct, such a “fact” carries a serious implication for incumbent firms—namely that the only way to respond to the disruption is to accept it and then find ways to exploit it. Christensen and Raynor suggest that established companies could exploit a disruption only by creating a separate unit.
Yet, as I argue in this book, the evidence on business-model innovation does not support such an extreme position. What often happens in the case of a business-model innovation is that the new way of competing in the business grows (usually quickly) to a certain percentage of the market but fails to completely overtake the traditional way of competing. For example, Internet banks and Internet brokerage firms have grown rapidly in the last five years but have captured only 10 percent to 20 percent of the market. Similarly, budget, no-frills flying as a way of business has grown phenomenally since 1995 but has captured no more than 20 percent of the total market. In market after market, the new ways of playing the game grow to a respectable size but never really replace the old ways. Nor are these innovations expected to grow in the future to 100 percent of their markets.
If that is the case when it comes to business-model innovation, then some of the “accepted wisdom” on disruptive business-model innovation needs to be modified. First, new business models are not necessarily superior to the ones established companies employ. This implies that it is not necessarily an optimal strategy for an established company to abandon its existing business model in favor of something new or to grow the new business model alongside its existing business model. The decision should be based on a careful cost-benefit analysis of the specific circumstances of the firm as well as on the nature of the innovation.
The truth of the matter is that established companies simply find most business-model innovations unattractive. This is not for the reasons articulated in Christensen (1997)—though these reasons undoubtedly play a role. Rather, most business-model innovations simply do not make economic sense for established companies. In its efforts to grow, the established firm has many other alternatives to consider—including investing its limited resources in adjacent markets or taking its existing business model internationally. Given its other growth options (and given its limited resources), the decision to invest in the disruption may rank low on a firm’s priority list. In any case, the decision to invest in a new business model is not (and should not be) an automatic one.
A second sacred cow about disruptive innovations is that the best way for an established company to adopt and exploit such innovations is through a separate unit. Presumably, this is the best way to overcome the inherent conflicts between the established business and the innovation. Yet as I explain in Chapters Four and Five, established companies could exploit disruptive business-model innovations in a number of ways—and they don’t necessarily have to use a separate unit to do so.
Finally, even if the disruptive innovation is not superior to the established business model, incumbents need to find a way to respond to it. However, this does not necessarily mean that they have to adopt every innovation that comes along. They could respond to an innovation not by adopting it but by investing in their existing business to make the traditional way of competing even more competitive relative to the new way of competing. They even have the option of counterattacking the innovators by trying to “disrupt the disruptors.”
Thus, to summarize what I have argued so far: this book emphasizes the implementation of new business models rather than their discovery. It tackles not only the issue of introducing new business models but also that of responding to them, and it dispels a few misconceptions about this type of innovation along the way. Whether all this justifies the writing (or reading) of yet another book on innovation is for the reader to decide. Suffice it to say that the content of this book represents the summary of more than fifteen articles and chapters on this topic that I have published over the past ten years.
A Very Specific Type of Innovation
It is important to stress from the very beginning that what I say in this book applies only to a very specific type of innovation—the discovery and exploitation of a game-changing strategy (or business model). I want to alert the reader to this simple point because it has become common lately for all of us to talk about innovation in general as if all types of innovations are one and the same. Nothing could be further from the truth. Business-model innovation is not the same thing as product innovation. And it is certainly different from technological innovation. Treating them as one and the same is misleading.
Every company wants to achieve growth and profitability; what better way to do so than by creating totally new market space through innovation? Who wants to get messy and bloodied by fighting battles for market share with aggressive competitors in existing markets when there’s virgin territory to discover and colonize? Therefore, discovering (or creating) new market space (that is, innovation!) should be the goal and ambition of every company.
While this is obvious and noncontroversial, the devil is always in the detail. For example, what exactly does the phrase “create new market space through innovation” mean? As we all know, there are different types of innovation with different competitive effects, each one capable of producing huge new markets. Which of these should a company then pursue to create new market space? And are the prerequisites for achieving one type of innovation the same as those for achieving another type of innovation?
New markets could be created in a variety of ways. For example, Apple, 3M, and Nestlé created new market space by discovering the iPod, Post-It note, and Nespresso, respectively. This is what we traditionally call product innovation. On the other hand, Enterprise Rent-A-Car created the huge replacement market in the car rental industry without even introducing a new product—instead, it creatively segmented the market in a new way. Similarly, Schwab and Amazon created new market space by using the Internet to grow online brokerage and bookselling, respectively—this is what is now called business-model innovation. And Canon, Honda, and P&G did it by using innovative strategies to scale up existing product niches—the copier, motorcycle, and disposable diaper markets, respectively—and convert them into mass markets.
All these companies employed innovation to create new market space, but the type of innovation that Apple used is fundamentally different from the type of innovation that Enterprise used. The point is that innovation is not one thing. It comes in different types—product, technological, business model, and so on—all of which are capable of creating new market space. And it should come as no surprise to hear that what a company needs to do to achieve one type of innovation is totally different from what it must do to achieve another type of innovation. This implies that simply asking, “How can I make my company more innovative?” does not make sense! A useful prescription cannot be given without first specifying what specific type of innovation a company aspires to achieve.
Imagine going to the doctor because you don’t feel well. How would you react if the doctor prescribes a medicine without first identifying what you are suffering from? It sounds silly, yet this is exactly what most of us do when it comes to prescribing advice to companies on “how to become more innovative.” Given the number of different types of innovation that a company could aspire to achieve, prescribing the same “medicine” for all is like taking the same medicine for whatever disease one has!
Business-model innovation is unique in that it has certain characteristics, gets created in a certain way, grows in specific ways, and displays certain attributes that make it very difficult for big, established companies to create or grow. To fully appreciate why this kind of innovation presents such an enormous challenge for established firms, it is necessary to first understand its unique way of entering established markets, its unique way of growing, and the features that characterize it. Only then can we offer meaningful and useful advice on how established firms could exploit this kind of innovation.
Like technological and product innovations, business-model innovations can also create huge new markets. For example, the next table lists a number of markets that have been created through innovation—those on the left came about through radical product innovation while those on the right came about through business-model innovation. Both types of markets are important, but the innovation process that created those on the left is fundamentally different from the innovation process that created those on the right. By implication, the “medicine” that a company needs to take to achieve business-model innovation is different from the medicine that it needs for radical product innovation. Our objective in this book is to explore how companies achieve business-model innovation and create new markets on the periphery of their existing markets.
The Structure of the Book
To appreciate why business-model innovation is so difficult for most firms to achieve, Chapter One provides a precise definition of this phenomenon and describes its main characteristics. Specifically, business-model innovation is defined as the discovery of a different business model in an existing industry. If successful, new business models enlarge the overall market by attracting nonconsumers into the market or by encouraging existing consumers to consume more. Thus they can be the source of tremendous growth for a firm.
This point is so important that it needs reemphasizing. Other researchers have pointed out that the discovery of a new, game-changing business model could prove very profitable for a firm. Yet the real reasons behind its profitability are not fully appreciated. Yes, it is true that the new business model is so unorthodox that it confuses competitors and constrains them from responding quickly or aggressively enough. It’s also true that the new business model conflicts with the existing business models in the industry and this prevents established competitors from reacting aggressively. However, the main factor behind the profitability of this kind of innovation is that it enlarges the market. It does so either by attracting new consumers into the market (like Southwest and easyJet) or by encouraging existing ones to consume more (like Amazon). I will say more about this in the next chapter but for the time being suffice it to say that business-model innovation can be very profitable for the innovators.
However, new business models invade existing markets by offering different value propositions from what the established players are offering. As a result, they attract different customers from the ones who go to the established firms. To serve these different customers, the innovators need to develop a business system that is not only different but also conflicts with the business systems used by the established players. All this means that established firms would find these kinds of innovations extremely unpalatable and would have few incentives to pursue them.
This point needs to be appreciated because it implies that it is not enough to simply proclaim the virtues of business-model innovations and expect established firms to “just do it.” It’s only when the firm puts in place organizational structures that make the new business model less conflicting and more palatable to the existing business that it makes sense to actively pursue this kind of innovation. Therefore, the task must be to explore what these organizational solutions are.
I do so in Chapters Two through Five. First, Chapter Two examines how established firms discover new business models. This is all about enhancing corporate creativity, and numerous other books have explored this topic. My emphasis, therefore, is not so much on the analytical techniques that a firm could use to dream up innovative new business models as on the organizational constraints that prevent established firms from becoming creative. Specifically, I propose that a prerequisite to creativity is a fundamental questioning of the firm’s existing business model. However, real questioning will take place in a firm only after a positive crisis has been created. I explain what this is and how to create one.
But discovering new business models is the easy part! One of the most difficult aspects of business-model innovation is to implement such radical strategies in the marketplace so as to deliver real value to customers in a cost-efficient and profitable way. Chapter Three argues that information and communication technology (ICT) is a key enabler in the successful implementation of radical new strategies. Specifically, I show that ICT enables firms to reach consumers that most competitors cannot serve profitably, offer radically new value propositions to consumers that other firms cannot deliver in a cost-efficient way, and put in place value chains that no other firm could do efficiently. ICT also allows business-model innovators to scale up their business models quickly and so protect themselves from competitive attacks.
Another key problem for established companies is how to manage a new business model next to their current one. According to existing academic theories, the challenge with attempting to manage two different business models in the same market is that the two models (and their underlying value chains) would conflict with one another. The existence of trade-offs and conflicts means that a company that tries to compete in both positions simultaneously risks paying a huge straddling cost and degrading the value of its existing activities (Porter, 1996).
The primary solution offered in the literature on how to solve this problem is to keep the two business models (and their underlying value chains) physically separate in two distinct organizations. This is the “innovator’s solution” that’s primarily associated with Clayton Christensen’s work on disruptive innovation. Chapter Four challenges this view and proposes a contingency approach to the dilemma. I argue that there are circumstances when the firm needs to create a separate unit for the new business model, but there are also circumstances when such a separate unit is not necessary. The trick is to balance the benefits of keeping the two business models separate while at the same time integrating them enough so as to allow them to exploit synergies with one another. The chapter describes four possible strategies that companies could use to achieve such a balance.
Simply deciding when to separate and when to keep a new business model inside the existing organization is only part of the solution. Some companies separated their new business model and were successful (Singapore Airlines), but other companies did the same thing and were unsuccessful (Continental Airlines). Similarly, some companies did not create a separate unit for their new business model (that is, they kept it integrated in the existing organization) and succeeded (SMH and Swatch) while other companies (such as the Indian tractor manufacturer HMT International) did the same thing but failed . Therefore, having decided which of these strategies a firm will adopt (based on its own circumstances) the key question that must be addressed is: “What else do I need to do to make each strategy successful?” Chapter Five explores this issue and describes how established firms can achieve ambidexterity.
Of course, in the majority of cases, it is not the incumbents that pioneer the new business models but the founders of new start-up firms. In such cases, the issue for incumbents is how to respond to the invading business model. But, as noted earlier, this response does not necessarily involve adopting the new business model; they can improve their current business model or use it to disrupt the innovators. Chapter Six explores the various response options available to established firms and discusses when a firm should do what.
The discussion in the first six chapters has assumed that the established firm is pursuing a new, game-changing strategy in its own industry. However, it is important to appreciate that business-model innovation could also take place in markets that differ from the established firm’s main market. In fact, the use of a radical new business model becomes an absolute necessity for any firm in at least two instances, both of which involve a different market from the firm’s main business:
Entering another established market, in effect attacking entrenched competitors in that market
Scaling up a new market that is in its early formative years
In both these instances, the established firm will have the proper incentives to pioneer a business-model innovation. Chapter Seven explores these instances in more detail.
Finally, Chapter Eight tries to bring everything together by proposing that even though business-model innovation is difficult for established firms, they still have to be proactive about it rather than simply respond to it. The chapter explains how they could do so and proposes a solution that encourages established firms to treat business-model innovation differently from all other types of innovations they may be promoting.
1. S. Davies, P. Geroski, M. Lund, and A. Vlassopoulos, “The Dynamics of Market Leadership in UK Manufacturing Industry, 1979–1986,” Centre for Business Strategy, London Business School Working Paper No. 93, 1991; and P. Geroski and S. Toker, “The Turnover of Market Leaders in UK Manufacturing: 1979–1986,” mimeo, London Business School, 1993.
2. There is only one major exception to this generalization: in cases when the attacker employs a dramatic technological innovation, seven out of ten market leaders lose out—see the fascinating study by James M. Utterback, Mastering the Dynamics of Innovation (Boston: Harvard Business School Press, 1994).
CHAPTER 1
THE INNOVATION IS IN THE BUSINESS MODEL
When Roger and Linda Mason decided to start a child-care company in 1987, they couldn’t have chosen a less attractive industry! The child-care industry in the United States was run as a commodity business, characterized by low margins, no barriers to entry, few economies of scale, massive labor intensity, and no brand distinction. Yet the Masons succeeded in building their new company—Bright Horizons—into the world’s leading provider of employer-sponsored child care, early education, and work-life solutions, operating more than six hundred centers for the world’s leading employers in the United States, Europe, and Canada. Plus, they did all this while delivering high returns—on average, a 50 percent return on invested capital per center. How did they do it?
The secret of their success lies in the business model that they developed to compete in this market.1 Rather than target parents as prospective customers (as all other child-care centers did), Bright Horizons’s founders focused on employers. Rather than build their own centers at locations of their choosing, they formed partnerships with employers who financed the building of centers on their premises. Rather than compete on cost, they differentiated themselves on quality. Rather than pay their teachers an average salary to control their costs, they offered 20–30 percent above average compensation along with comprehensive benefits. And rather than offer a standardized curriculum in every center, they customized the centers so that their design, hours of operation, and age-group configuration matched the requirements and needs of their clients. In short, Bright Horizons built and exploited a business model in the day-care industry that was fundamentally different from the business model that the established competitors were using.
Note that Bright Horizons did not discover a new product—what they offer is still child-care services, very much like all other competitors in this market. But they do so in a fundamentally different way and to a fundamentally different customer from the one all other competitors address. In other words, Bright Horizons innovated in its market, but the innovation is not in discovering new products or technologies—it is in discovering a new business model.
Numerous other companies that innovated in this manner spring to mind. For example, when Jeff Bezos founded Amazon in 1995, he introduced a new business model in the book retailing business that was manifestly different from the business model that traditional players like Borders and Barnes & Noble employed at the time. Similarly, companies such as Charles Schwab, easyJet, IKEA, Netflix, Home Depot, and Dell are all examples of innovators who attacked their competitors in their respective industries not by introducing new products or technologies but by applying different business models. New business models have been invading existing markets with increasing frequency, and Table 1.1 lists just a few of the industries that have been affected. Appendix A at the end of the book describes the stories of some less well-known business-model innovators of the last twenty years.
Table 1.1. Examples of Business-Model Innovations.
Source: Adapted from Slywotzky, 1996.
Industry
New Business Model
Innovator(s) and Date of Introduction
General retailing (U.S.)
Online distribution
Books
Music
Amazon.com
:
July 1995
June 1998
Car rental industry (U.S.)
Focusing on a different type of customers, and operating an extensive network of car rental offices located in cities, rather than at major airports
Enterprise Rent-A-Car: 1957
Computer industry (U.S.)
Selling computers directly to customers
Dell Computer: 1983
Retail brokerage industry (U.S.)
Online trading
Aufhauser & Co.: 1994 E-Trade, Charles Schwab: 1996
Retail brokerage industry (U.S.)
Operating an extensive network of single-broker offices across the country as separate profit centers
Edward Jones & Co.: 1972 (when the company formally adopted the new business model)
Steel industry (U.S.)
Introduction of minimills (a low-cost production method to make flat-rolled sheet steel, a high-end steel product)
Nucor Corporation: 1969 (introduced the world’s first continuous thin-slab casting facility for sheet steel)
Automobile industry (Europe)
Mass-customized cars
Smart car (by DaimlerChrysler): October 1998
Used car business (U.S.)
