Business Model Alchemist

Recently I tried to conceptualize different types of business model innovations for a white paper I participated in together with a team of MBA students at the IMD management school and other people across the globe. I studied a number of business models by describing them through 9 business model building blocks in order to find communalities and differences in their degree and type of innovation. I came up with the following rough distinction:

First of all, there is supply driven business model innovation and demand driven business model innovation.

1. Supply-driven innovation is achieved by doing things in a new way or by applying new technologies to an existing business model. Dell is a nice illustration of both. Dell innovated in the business model by selling directly to customers, but also by applying a new technology, the Web, as a distribution channel to reach the new customers.

2. Demand-driven innovation is customer driven, based on new or changing customer needs, tastes, and preferences. The music industry came under pressure to come up with a more innovative business model in r4sponse to the development of file sharing platforms such as Napster and Kazaa allowed people to download music for free en masse (illegally).

Furthermore, by studying different examples I found it useful to distinguish between three types of business model innovation: innovative business models (where companies do similar things in a new way and change industries as a consequence), extended business models (where companies build on the existing), and new business models (where companies create an entirely new business model).

1. Doing similar things differently means offering similar value propositions in an entirely new fashion. Skype is a company that offers a value proposition that is roughly similar to phone companies: phone calls (of course this is very simplistic, yet it serves the purpose of illustration…). But because its business model allows it to use the Internet as a free telecom infrastructure/network it has extremely low variable costs and can reach customers worldwide. Skype’s business model offers the same thing, but differently because it uses different resources, needs different competencies and uses different distribution channels.

2. Extending an existing business models means building on the current building blocks by adding new ones. A current example is the so-called quadruple play in the competing telecom and cable industries where competitors from both industries aim at offering mobile and fixed communication, Internet broadband and TV all in one package.

3. Sometimes entirely new business models pop up when new markets emerge. Downloading ring-tones for mobile phones is a nice illustration of what can happen when entrepreneurs find ways of exploiting new technologies and trends.

Please drop me an email if you want the entire collaborative IMD white paper on business model innovation.

Quite a while ago Clayton Christensen of Harvard has mainstreamed the term “disruptive innovations”. For strategists this has become a hot topic in today’s rapidly evolving markets. However, in order to make the concept more useful in my consulting work I distinguish between different categories of disruptive innovations that all have unique characteristics and consquences:

Disruptive Technologies: some technologies have displaced other technologies to offer a whole new sphere of possibilities at lower prices. In the computer industry, CD-ROMs have displaced disk drives because they allowed storing much more information at lower prices. In the telecommunication industry, Internet telephony (VoIP) is another example of a technology that is steadily replacing older telecommunications technologies. With time disruptive technologies often become enablers for disruptive products, processes and business models.

Disruptive Products: these are products or services that replace similar existing products or services based on their superior attributes or lower price. As an example, mobile phones have become an important complement and often substitutes for fixed line phones. Digital music players, such as the Apple iPod have disrupted similar products like the CD-based walkman.

Disruptive Processes: processes that are of disruptive nature often outperform the traditional ways of working and give the adopting company a competitive advantage due to superior performance or lower cost. When Dell adopted just-in-time delivery for the electronics parts of its computers, it substantially cut warehousing and depreciation costs and outperformed its competitors. Similarly, integrating supply chain management from the customer all the way to the supplier has given Cisco a competitive edge in selling Internet routers.

Disruptive Business Models: Business Models that are disruptive do business in new and innovative ways in established and sometimes new areas. In the airline industry, so-called no frills airlines emerged with their low-cost business model and strongly competed with traditional flag carriers. In Europe, for example, EasyJet designed a business model that allowed them to offer low-cost flights directly online to their customers. Similarly, Google.com has disrupted online advertising and created a new revenue stream by placing highly targeted text ads besides the search results of its search engine.

Managing these different types of disruptive innovations and detecting them early enough in one’s competitive landscape is definetly an art. Companies that excel at one or several of these disruptive design areas will be the leading innovators of the years to come…

Recently I worked on a whitepaper on “doing business at the bottom of the pyramid” with a team grouped around a discussion platform of the IMD business school. The expression “bottom of the pyramid” was coined by C.K. Prahalad and Stuart Hall and refers to the potential market of four billion people in the developing countries living on less than $1,500 per year. They state it as follows:

“The real source of market promise is not the wealthy few in the developing world, or even the emerging middle-income consumers: It is the billions of aspiring poor who are joining the market economy for the first time.”

I found the topic quite interesting and welcomed the opportunity to contribute to a whitepaper on the subject. So after some weeks of discussion and sharing of examples on the platform I was wondering how I could best contribute to the topic. I decided that it could be interesting to look at the shared examples through the business model lens, which I explained in an earlier post (what is a business model). In this blog (which I am writing from Yaoundé, Cameroon) I will simply share an interesting business case for each of the nine business model blocks I usually use to describe a business model. What I learned was that doing business at the bottom of the pyramid is really nothing else than real

There are examples of business model innovations in each building block. The most obvious is innovating in the value proposition. When mobile phones appeared in the market they offered a completely different value proposition than fixed line phones. In developing countries where fixed telecom infrastructure is weak and waiting lists for phone lines unbelievably long, mobile services were destined to thrive. In Nigeria MTN, a South African Telco set up a successful venture to tap into the 130 million person market.

Regarding target customer segments and distribution channels, Arvind Mills Ruf n Tuf Jeans (www.arvindmills.com) is a particularly interesting case. The entrepreneur Arvind Mills saw a niche market in stylish jeans at an affordable price that was not being filled by any company. Target customers are Indians who cannot afford conventional jeans but still wish to purchase them. So Ruf n Tuf offers a jeans kit at $6/pair to local tailors who function as a distribution channel to reach the final local customers. Due to the large scale Arvind Mills manages to make a profit on the low margins per jeans.

Anand Milk Union Limited (www.amul.com) is an interesting case of how a business innovation can change the fortunes of the poor in a developing country like India by integrating local skills and local activities into its business model. India was a country with milk shortfall and imported milk every year in form of milk powder. Then AMUL built up a huge milk industry from scratch together with local farmers. Today India is the world’s largest milk producer and it even exports milk. AMUL products are found on the shelves of Walmart in the USA and many other retail giants in the world.

A nice example of how partnerships can lead to BOP success is the case of GrameenPhone (www.grameenphone.com) in Bangladesh. Its founder, Iqbal Quadir, realized that if a woman could be given a micro-credit to buy a cow and sell milk then the same could be done for phone services. GrameenPhone was born. Supported by the multinational company Telenor he bought a mobile network license and set up a mobile phone network. Then he partnered with Grameen Bank, an established micro-credit institution in Bangladesh who brought in the knowledge on credits and a database of potential customers. The bank started offering women in villages a credit to buy mobile phones, which they used to sell phone calls to the villagers, repay their debts and make a daily living. Grameen Bank expanded its lending and GrameenPhone harvested a network of women reselling phone calls through their network.

Hindustan Lever Limited (www.hll.com) has been able to create new revenue streams by being proactively engaged in rural development in India for nearly 30 years. It set up Project Shakti (www.hllshakti.com) in 2001 with the objective of creating income-generating capabilities for underprivileged rural women, by providing a sustainable micro enterprise opportunity, and improving rural living standards through health and hygiene awareness. With working capital provided by HLL, Shakti women entrepreneurs sell HLL products to their local village. This gives HLL access to large markets that would not otherwise be easily accessible. 70% of the Indian population lives in villages, of which there are around 627,000.

Regarding the cost structures of BOP business models there is often a huge pressure to produce extremely efficiently, because products usually have to be cheap enough for Tier 4 customers. In general BOP cost structures are kept low by selling very large volumes and thus profiting from economies of scale. In addition many of the BOP business models described above make use of affiliation and entrepreneurship to shift parts of the costs to other partners in the business model. GrameenPhone, Arvind Mills and Project Shakti are just three examples of how tapping into local entrepreneurship by promoting micro business ownership can give access to powerful free distribution networks of incredible reach. This could have never been achieved by the companies themselves.

For a copy of the full white paper on “Turning Poverty into Opportunity as a Means for Prosperity simply drop me an email.

You may also want to join the discussion group on the topic at:
http://groups.google.com/group/Bottom-of-the-Pyramid

Westerners know India as the global force of IT outsourcing and growing modernity. This might be true, but if you are a young Indian boy or girl with modern Internet-savvy parents, then chances are high that they will try to find you the perfect companion in life through the Web.

I don’t really know how I would have reacted if my parents had tried to find me my wife – and then even through the Internet But when I read about it in the Economist I was really attracted by this 20th Century Business Design which meets age-old Indian traditions that are simply normal in Indian culture. The Economist wrote a quite amusing piece on e-marriage match making in India. The most successful company offering online marriage match making in India is Bharatmatrimony.com. Let’s have a look at this company’s business model:

Value proposition> helping your parents find the perfect wife with the best fit. Criteria include religion, language, origin, age, height, looks and not to forget: horoscope.
Target customers> your parents (if you are an Indian single), because they are the ones that want to get you married.
Distribution channel> Well, it’s not yet possible to deliver to your parents your future better half through the web, but the match making can be done online. However, in such a traditional business Bharatmatrimony also maintains a “retail” network across India.
Customer relationship>Bharatmatrimony will be your best trustee in marriage questions. With its third-party verification service they will make sure no potential bride or groom will pull a fast one on you. After that it’s less a customer relationship than one between man and wife. But then again your parents are the real “shoppers” here and you might have brothers and sisters…
Core capacities> Help your parents find you a wife or husband .
Activity Configuration> Build-up a database with candidates that are worth having a thought. In fact, according to the Economist Bharatmatrimony already claims to have 7.5m members.
Partners> VeriSign and your third party verifyer. Hopefully all those pictures and promises are true!
Revenue streams> The money flows in from a number of different membership schemes varying in depth and functionality. If you are an easy “sell” I recommend the “3 month Classic Package” for 39$. But if the months fly by without result your parents might want to invest in a “9 month Classic Super Package” for 125$.
Cost structure> As an online matrimony service all you need is a good IT department. OK maybe that’s an oversimplification and you will have to add a bunch of lawyers if things go wrong between the freshly married couple…

So who ever said the Internet destroys tradition or reduces social interactions? This business model is simply fascinating… By the way, this text was not menat to be offensive against Indian culture!