Already in May, I have heard that Long Range Planning had published a Special Issue on Business Models. Today, I got hands on it thanks to Andres Sundelin from The Business Model DataBase.

You can access the article via http://www.sciencedirect.com/science/journal/00246301 as a guest. Very interesting topics like “Business Models as Models” by C. Baden-Fuller and M. Morgan or “Business Models, Business Strategy and Innovation” by D.J. Teece are included, so the Special Issue is definitely worthwhile reading.  That is the happy part of the Special Issue.

C. Baden-Fuller, M. Morgan, Henry Chesbrough and business model

What makes me sad about the issue is the closed and self-referential world of the academia in Strategy Research. The topic was broadly covered in early 2000 at least in two Ph.D. theses, I know. However, so far I have found only two citation to Alex Osterwalder’s work in the article “Business Model Innovation: Opportunities and Barriers” by Henry Chesbrough and in the article by Wirtz & al.. Thanks Henry, that you take your open innovation approach also your research. Thanks Bernd.

I hoped to find some background on Business Models in Baden-Fullers and Morgan’s article. Negative. They seemed to have not heard from Osterwalder before, they do not cite him. They are not mentioning ideas of Gary Hamel on business concept innovation from 2000, a concept very close to business model innovation. They cite only their own kind. They still live in their closed community where it is extremely important from whom the idea is coming, even when the original idea is 10 years old and not even cited. That is what I call a long latency!

Origin of business model thinking

The origin in business model thinking dates back to the information management researchers that were building information systems. To do so, they needed models of the reality. They talked about data models, process models, enterprise models and later about business models. When the first Internet entrepreneurs were talking about their strategy, they talked naturally about their business model since that was a language familiar to them. From there, the term transcended to Strategy. E.g., I wrote my Ph.D. thesis exactly at this crossing of information systems and strategy. My supervisors were Prof. Beat Schmid, background in computer science and Prof. Georg von Krogh, a strong researcher in Strategy. Quite a balancing act.

Business model is just a model of a business

When I was writing my Ph.D. thesis, Prof. von Grogh told me that I needed a unit of analysis for my research. I know the traditional culprits like industry or firm but they did not fit into what we saw in the New Economy. Industry boarders become meaningless; competition came from competitors you had not even heard before.

Therefore, my answer to Georg was very simple: I used the business model as my unit of analysis. He said fine. Just define it. Well, easy said difficult done. I was positive at the beginning that there must be something since we all got Masters of Business Administration so Business should be defined. Nope. Not really.

And again, it was Peter Drucker who had worked on this. He asked the simple questions “What business are you in?” and “What is the purpose of a business”.  And this is exactly what a business model should answer when used for strategizing.

Chesbrough and Rosenbloom (2002) explain the antecedents to the business model concept in their article “The Role of the Business Model in Capturing Value from Innovation: Evidence from Xerox Corporation’s Technology Spinoff Companies”. It is interesting that it was not the academic world that saw the necessity to have the business in focus for strategy but the real world. The business is where the competition is. Welcome to the real world.

The classic business plan is a plan of promises. On paper the value proposition almost always sounds promising but in reality the customers have quite often a different perception of the firm, of its products or services. There is a mismatch between value proposition and value perception, the perception gap:

Why: Simply put!

1. you do not get the message across to your customers since your distribution and marketing channels are too weak or
2. you do not fulfill the value proposition you offer with your business model you actually have.

The Perception Gap

In most cases, managers will say that the first reason that they just don’t get their message over to the customer is the main cause why they cannot close the perception gap. So in their belief they spent more money on communication and sales and try to persuade potential customers that they offer the best value.

This is the typical behavior of the past where big marketing spending was having a huge impact on customer’s adaption of a new product or services. The rules was: Your business model might be mediocre but when you push your brand message long and heavily enough your potential customers finally  will buy your product. If you grab enough attention.

Unfortunately, it is not the first reason. The second reason is probably true in most cases. You got a problem in your business model. Your value architecture and revenue model does not fulfill what you describe in your value proposition. You got a mismatch between your value proposition and your customers’ value perception. You just do not deliver the value you propose.

So instead of just increasing marketing spending you should carefully analyze where you have a mismatch, were you have the perception gap and then close it.

Another Business Model Bites the Dust

During a recent GDI seminar on social media a Swiss manager complained about bad comments on the web about his firm. He asked how his firm could avoid being so exposed to criticism. A manager of amazon just answered: “If the complain is justified just make your product better.”

I can second the guy from Amazon. If you have a perception gap close it with a better business model but not just with one-way push communication. Build your whole business model around the value proposition where all components support your value proposition.

The value proposition is not a marketing term but your mission. It guides the experience you create for your customers. In German we use the word “durchgängig” to describe a perfect customer experience that is supported by all components of a business model. To create such a “durchgängiges” or consistent customer experience all components of the business model have to support the value proposition without any disharmony.The business model has to work like a Swiss clock. This is the art of business modelling! It is not a one time management activity but a continuous process to achieve perfection.

If you do not do it, your business model will be another business model that bites the dust like Blogbuster, Karstadt, like Dell or other bad business models. Better be prepared and close the perception gap!

The articles goes well along my analysis of the newspaper market, where I argue that just a transfer of the paper business model to the Internet does not work since the business model of traditional papers is unbundled by the Internet. A newspaper is three businesses (content, advertising (selling of readers’ attention) and classifieds (bringing demand and supply together) bundled together by paper. And on the Internet, the glue of paper does not exists any more. So the revenue model of newspapers will not work on the Internet.

Varian argues that newspapers actually never earned money with news from their frontpages but from special interest sections like Automotives, Travel, Home & Garden or Food & Drinks. These sections attracted contextually targeted advertising which is much more effective than non-targeted advertising like you have in the news section.

And in the Online world, special-interest sites attract the search-engine traffic and not general-interest sites like the Internet pages of newspapers.

Well, when you follow his arguments than a mere transfer of the traditional business model to the web will never work for newspapers.

Simply put. The Internet is different. It has different economics and therefore you have to adapt your business model to the changing economics. Either you do it or you die! And this not only true for newspapers but also for other industries.

update 29th march 2010: Seth Godin writes in his blog what it means when the economics are changing in the publishing industry. He highlights the possibility that great authors have the potential to lead their own tribe. They will not be bond to the paper publishers any more. The text is worthwhile reading since it shows new business opportunities for authors.

Anders Sundelin in a recent blog post reflected on net working capital and the influence of the business model on it.  I can only recommend his post to anyone. He shows how this important financial figure (net working capital)  is influenced by the business model. Actually, almost all innovation in the retail industry change the economics of the industry. They all start by minimizing the working capital needed in the operation. Since the traditional business model in retailing is very capital intensive due to inventory, all disruptive innovations help to reduce the capital tied to inventory. And interestingly, at the same time as the working capital is decreased or in same cases, it even becomes negative the margins on sales go down.

One example: department stores vs. discounters

In the 1960s managers in department stores were having a good time. Department stores ( marked with a 1) went well and their economics were great with gross profits of 40% on sales. Imaging you would have worked at let’s say Karstadt, a German department store. You have a great idea. You believe that the future of retailing will be different and you have the idea a discounter retail outlet with limited stocks and less choice for the clients. You do your economics and you end up with a gross profit of 23% on sales (marked with a 2).

Would you have gone to your top managers and say: I have a great idea: It is called discounter: We will offer our customers less choice and we will be able to make a gross margin of 23% on sales. Do you think your top management would have supported this idea?

Definitely not. Why earn only 23% when in the traditional business you can earn 40%. And probably, you would have never brought such a proposal to the board since you wanted to climb the ladder into top management and such a silly idea would have spoiled all your chances.

Digging deeper into the economics

Ok, let’s do a bit of a deeper analysis of the case. First question, is gross sales the right figure. Even when a lot of firms use this figure it is not the right figure to look at. The better figure is return on capital employed or return on investment (ROI). And here comes in the working capital Anders has written about.

Traditional the definition of ROI is:

ROI (Return on Investment) = Profits / Total Assets

But with some transformation it becomes

ROI = Profit Margin x Asset Turnover

and with some more transformation it becomes

ROI = (Profits / Sales) x (Sales / Total Assets)

And then it becomes interesting. How often do you turn our assets over is important for the business. And this is exactly where innovation in retailing start. All retail innovation improved dramatically the turnover of the inventory (that is were in retailing the capital is employed in). And in retailing the working capital is the figure where the cost of the inventory is included. So a reduction in working capital and higher asset turnover the key to business model innovation in retailing.

And now, let’s go back to the example and do the maths with the asset turnover.

And the winner is: the discounter with lower gross profits

And after doing the math, the winner is not the business with the higher gross margin but the business with the low gross margin but with the higher asset turnover. In a department store you sell your inventory three times a year, making 3 times 40%. A discounter makes 23% but it turns the inventory over 5.5 times. So the clear winner is the discounter.

But bad luck for the managers of the department stores. For them, it was unbelievable to earn only 23% on their sales. They rejected the case or did never receive a proposal like this. For the startups like Aldi the business case worked well. Today, Karstadt is bankrupt, and Aldi is the king of retailing.

And all this because of some changing economics. So what can we learn. Always look at the economics or revenue model of a business model and identify the drivers of profitability. They are often not the once you think of. And for the others who are not firm in economics, the Dupont System of Financial Control. It is from 1919 but still very valuable to understand the changing economics of a business.

The Dupont System

in German, click to enlarge. The slides are taken from a lecture I gave at the Leuphana University Lüneburg for Executives of the OTTO Group. Figures are taken from Christensen, Raynor (2003), The  innovator‘s solution, p. 106

Businesses are not a technical machine with input and output factors. Businesses are places where human beings work together for a common goal and therefore the culture in a business is a defining part of a business and therefore also for the business model.

Most definitions of what a business model is are rather technical. We talk about components, patterns, building blocks. We make a lot of fuss about how we rearrange the components as if they were just Lego bricks. We believe that having in mind a great new business model is already a business model innovation.

Where are the people?

Ups, no! That does not work. Somehow the most important “building block” of a business is missing: The human being that designs, shapes and makes the business work and the customer who has to buy into the new value proposition and pay. And here again we have the human factor. “[I]nnovation is not what innovators do but what customers adopt.” We always have to remember what Michael Schrage is saying. It is the customer acceptance that makes an innovation.

Zappos and its core values as a business model innovation

A great example to see how the culture and values can be the uniqueness and differentiation factor in its business model is Zappos . Looking from a technocratic point of view, Zappos is just an eShop for shoes with a great customer services.

But with this limited view you forget that it is not just the great customer service that makes the difference. You need people that can provide this great service. You need values in the firm that helps you to make the right decision in favor of your customers. And your values should be reflected in your controlling systems since otherwise people just do what they are measured for.

Zappos gives a great example that culture and core values is more than just having an HR department with marketing material for recruting. Check out what Zappos is saying about its culture. This culture was Amazon worth almost $1 billion when it announced it wants to by Zappos in July 2009.

Culture and values are part of the business model

I use in change project where big corporations are looking for a better business model an adapted business model canvas. The canvas uses besides the main components value proposition, value architecture and revenue model also a box for culture and values. Together with my colleague Dr. Harry Wiener who is a psychologist by training we have developed three categories that make together the culture and values of a business.

• Leadership style answers the questions: How do we lead people? How much freedom do we give them in their daily work?
• Relationship style answers the question: How do we work together with our customers? How do we work together with our peers in the firm?
• Values answer the questions: What value governs our overall behavior? What values do we pursue?

I do use the adapted version of the business model canvas not in all cases since it must fit the task.

And the more components you have the less the people really try to grasp the complexity of the business. In cases where a cultural change is not needed I sacrifices  the culture for simplicity but add the culture and value dimension as soon as the new business model is designed and the implementation process is planned.

Unlearning and cultural change

From my work experience (having been a line manager for 7 years) and consulting experience the changes in the culture and values are by far more difficult than changing the business model since the traditional business model is so impeded in the heads of all people. Culture and values have to be unlearned and unlearning is the most difficult task as we see from all big American car firms or from the bankruptcy of retail conglomerate Karstadt/Quelle aka Arcandor.

[update:] Via netzwertig.com I found the following blog post of disgruntled journalist from the German media group WAZ. Unfortunately, the article is in German but it shows extremely well how people can react to changes. The journalist discuss if – as print journalist – they can be forced to take a camcorder with them when investigating a story. That sounds ridiculous for outsiders but the traditional culture of journalist is very class oriented and a print journalist is a print journalist and therefore he/she has nothing to do with pictures or even video.

So in the case of the WAZ their strong journalistic network in the Ruhrgebiet is not only an asset for their online venture (DerWesten.de) but also a huge libility due to its traditional core values.

Even when you have the best new business model you will fail if you cannot change the traditional values that impede change. So the culture should be included on the business model canvas if you do a business model innovation in a traditional firm. Otherwise, your business transformation will fail.

I feel very ambivalent about the announced deal. First, Dell pays a premium of a 61% for Perot Systems. That is a huge premium and from my time as an investment banker at Lazard I know it is very difficult to recoup and justify such a premium. But even more problematic is that with the purchase Dell does not solve its problem with its current business model.

The deal makes sense from a corporate strategy perspective. Dell is suffering in its core business a steep fall in prices. For many years Dell was the price leader but now HP tries to undercuts Dell. The first time in the history of PCs, the new Microsoft operating system Windows 7 will need fewer resources than the previous version, Windows Vista. That is bad news for computer makers that usually expect a big boost in sales from a new operating system.

Dell’s former business model innovation

In the past Dell’s value proposition was to sell individually configured PCs and servers at a low price. Dell’s PCs were the workhorses but never art like Macs. Low-price and custom-made were possible due to Dell’s special value architecture, a classical architectural business model innovation. Dell had besides its direct sales model a manufacturing process that allowed a made-to-order production. Together with its suppliers Dell had optimized its supply chain so a just-in-time production was possible. Therefore it had a small inventory of parts and an almost non-existing inventory for finished products.

So very little capital was tied to inventory and even more important in fast industries like the computer industry where new products come to market every month, it had low write-offs on its (very low) inventory. Another plus of this business model is that Dell has had a negative working capital. Normally, you have to pay your suppliers before you get the cash from your customers. With this very special business model Dell became for a time the largest seller of PCs and servers. Now, it is No. 2 behind Hewlett-Packard.

Pressure on Dell’s business model

Dell’s business model came under pressure from different sides. On the consumer market, Apple made a great come-back with its well designed and easy-to-use computers. On this blog, Mac users have a share of 14.10%. At the same time a new product category enter the market. the net book. Net books are mini notebooks or subnotebooks that are well suited for the mobile worker that looks for a digital companion.

The net book is good for email, writing short text and surfing the Internet. Net books are even cheaper than a regular Dell, so Dell’s value proposition in its traditional business became weak and not appealing anymore to customers. Net books are a typical disruptive innovation since the traditional products overshoot the demand of normal customers. Net books are just sufficient for most tasks a normal user is performing on its computer. In the enterprise market the computer became more and more a commodity where the service component is more important than just the price.

Faced with this situation Dell used parts of its $ 12 billion cash to buy into a potentially higher margin business of Perot. Perot System is an IT service provider with a strong foothold in outsourcing in the health care industry. So from a corporate perspective the deal makes sense even when it is expensive.

Perot does not solve the problem of Dell’s business model

But from a business perspective? Will Dell now solve its problems in the computer hardware business, its core business? Will there be potential synergies to pay for the deal? Why is Dell a better owner of Perot Systems than the previous owners? Will Dell’s customers be better served by the New Dell? Will Perot’s customers be better served with Dell computers?

Well, from a business level perspective the deal is not as easy to explain. Actually, the deal looks like a signal that Dell has no ideas how to solve its issues with its classical business. Dell was once a business innovator but now the others have learned their lesson and are as or more efficient as Dell. Dell is now in the midst of a red ocean and in a red queen race. Dell cuts costs in its core business but it will not escape the fierce competition in the hardware industry unless it finds new way how to differentiate itself from its other competitors.

Dell is just in the midst of a red ocean

Actually, the purchase makes Dell even more similar to the other big computer companies. Dell is just a follower. It follows Hewlett-Packard that purchased EDS last year for $13.2 billion. It follows IBM that moved totally into services and sold its PC business to Lenovo in 2005.

Dell is not a strategic leader but a follower with an overpriced and small acquisition. And now Dell’s management is busy integrating two very different cultures, too busy doing their home work in their core business.

That is definitely not a great strategy and does not solve the problems of Dell.

And the solution

But what can Dell do? In the consumer and SME business it could move into automatic services like online backup, online recovery, and other services that are today still a hassle. And by moving in this direction Dell could also benefit from recurring revenues. In their server business why not offer combinations of cloud computing and servers, so that Dell’s customers never run out of disk space or computing power but still can control which data is in the cloud and which is local?  Automatic services and cloud computing are another disruptive technology to hardware producers. These trends usually start in the consumer and SME market and move later into the corporate market.

Lessons-learned

One can derive several lessons learned from the Dell-Perot case.

1. Business model innovation is not a position you can rest on. Your competitors will try to copy you or circumvent your competitive advantage with new business model innovations. The competitive advantage is always limited in time.
2. Once the business model innovator is the No. 1 in a saturated market the growth potential is just like the market growth. So there can be no hyper-growth business for ever.
3. Corporate strategic moves like acquisitions of a new business do not help to rejuvenate your dated business model. Even when you argue from a shareholder perspective it is easier for the shareholder to diversify his portfolio than for a corporation.
4. The solution of a dated business model innovation is not to follow your competitors since that will be a cruel red ocean. You just create more competition when everybody is following the same strategy.
5. Instead of diversifying look at the core competencies you have and look if you can apply them to new products and services that your current customers value.

I am interesting in your view of the acquisition. Please share your opinion on this deal with us. Since Dell is such well discussed case in our community it is worthwhile to discuss the change in business model. Thanks in advance!

(Question mark in the picture is by Stewf under cc license)

I had the pleasure recently to be invited back to my university, the University of St. Gallen, to give a speech on business model innovation in the media industry. Prof. Martin Eppler was so kind to sponsor the discussion. I used 8 theses to present my thoughts. Below you find the slides of my presentation.

Tradition is not a business model

The media industry is an interesting case since their traditional business model is under attack by new technologies. I use the music and the newspaper industry as cases to make my points. Although both are affected by the Internet, they face very different challenges.

For the music industry the digitalization of the music led to disembodiment of the piece of music from the carrier medium like the CD or the LP. Unfortunately, the business model of the music industry is based on the sale of physical carriers of media. And with the disembodiment the emotional impact of the carrier medium like the LP’s cover vanished. And due to the easiness of digital distribution the value of owning a piece of music diminishes for the customer. Today, we have more music around then we can ever consume, we have thousands of songs on the hard drive, on the iPod. There are thousands of radio stations on the web. So music is around but not as a physical piece anymore.

The music industry reacted with the traditional way all endangered species do. They do not adapt, they just do more of what they did in the past. They publish even more CDs than ever before. And of course, they started to sue their best customers. But it did not work. The sales of music is still decreasing and the most interesting new business models like iTunes, LastFM, Spotify or Nokia’s “It comes with music” come from outsiders. At the same time people listen all the time to music and they spent fortunes to go to live concerts but they do not spend money for physical pieces of music anymore.

The newspaper industry faces a different set of challenges. Newspapers were in the last five years very active in the digital space and launched large digital sites that attracted users in great numbers. According to a PwC study the newspapers could double their online revenue share to 3-20% of total revenue.

Source: PwC newspaper publisher survey

The NY Times Corporation with all its newspaper sites (NYTimes.com, Boston.com, etc.) and also sites like About.com claims to be No. 13^th in America regarding traffic on the Web. The belief was that the digital business will compensate the loss in their traditional business, so they invested heavily.

But, it did not.

The revenue model on the Internet for traditional newspapers like the NY Times or Neue Zürcher Zeitung does not work. The digital space does not allow sufficient revenues to pay for the content. The newspapers reached millions of users but they could not monetize the users. Online might offer a contribution margin to the content production but print still pays the majority. The NZZ is loosing CHF 3 million on sales of 7 million.

Particularly in Germany, the publishers reacted by attacking the one firm that makes a fortune from the Internet, Google. The publishers claim that they provide the valuable content Google lives from. Again, a typical behavior of an industry under attack. Instead of changing their business model they attack somebody else. It is much easier to blame somebody else and play the victim instead of blaming oneself for not being innovative and for holding too long to a dated business model.

You can see easily from the two cases that there is not such a thing as ONE media industry and therefore not ONE solution. Music industry and newspapers have very little in common, except the traditional business model is challenged by the Internet. But the challenges are very different and just enforcing the copyright does not give the media companies their revenue sources back.

The problem does not lie in the copying of valuable content but in the weak value proposition. Times have changed but the business models have not.  So, dear politicians, please think first before you act.

Print is three completely different business models hold together by paper

I will elaborate in more detail about the newspaper industry and how they can change their business model. To start with it helps to understand the business model of today’s business and how they have reacted to the Internet. Let’s start with the former.

Let’s talk first about the value proposition of a traditional newspaper. To identify the value proposition we have to identify the customers. Newspapers have three very distinct groups of customers they serve. The first is the reader, the second the marketeer and the third is a person/company that places a classified. So what is the value proposition for them? And very closely related what is the revenue model associated with the value proposition?

• The reader is interested in the content in form of news, comments, insights and background stories that help him to stay informed about the world. At the same time the newspaper can be a past time and enjoyment to the reader. The classical newspaper serves also as a guide to local entertainment offerings like theater, museums, galleries or parties. The important function of the newspaper is to filter and classify which news and information are relevant for the reader. The reader trusts the paper that it makes the right choice for him. For the content and the classification the reader is willing to pay in the traditional world a price either in form of a subscription (great since you get the money for one year in advance) or just for a single copy at a newsstand. The subscriber gets the extra benefit of house delivery. Brand is in this context extremely important since you cannot test how much the information is worth to you beforehand since as soon as you have read the information the seller cannot charge you anymore since you have obtained the information without having to pay for the physical medium newspaper.
• The marketeer wants to reach its potential customers with his advertising message. In times before the Internet newspapers were a great medium to reach a great number of your potential clients. The biggest competitor in mass communication was TV that reached even a larger audience than newspapers. Newspapers were an efficient medium particularly, when the readers belonged to the groups of decision makers most marketeers wanted to address. The marketeers were willing to pay for the reach the papers had. The currency for the marketeers was how much they had to pay for thousand contacts or CPMs (cost per thousands contacts). Actually, the newspapers were selling the attention of the reader to the marketeers even when the readers did not buy the paper for being bombarded by ads. Readers accepted advertising as long it was not too intrusive.
• The third group of customers where people or corporation that wanted to close a transaction like selling a used car, filling a job opening, renting out a flat or offering sex services. These advertisers just want to find a counterparty for a transaction. The classified market works well with just text ads in papers. The value proposition of the papers was to bring buyers and sellers together. The reach of the newspapers was important since the chance to find a counterparty is much bigger if you reach thousands of readers. The price for a classified depended from the size and length of the text.

These three different value propositions of a newspaper were tied together by the physical medium paper. The classical newspaper is a bundle of three different business models that needed each other. No content without the income from classifieds and advertising and no reach without the content. All three businesses needed the other. Very simple! The classical revenue mix for subscription based newspapers is 30% from subscription fees and single copy sales and 70% from ads and classifieds.

Newspapers transferred their print content model to the Internet

So what happened with the advent of the Internet. Skeptical at the beginning the newspapers invested heavily into the new medium and build up large digital domains on the Web. Besides their content from the print edition they added video, blogs and comment functions to the Web. They connected to social networks like facebook and used user generated content from youtube et al. From their point of view the newspapers had transformed their content model to Web 2.0. Some newspapers like the NY Times wanted to play at the forefront of the development and opened their own R&D divisions to shape the development.

The online content model of newspapers is very much an information portal with news, information and background stories about everything and for everybody. The NY Times covers international, national, state news, culture, business, investing, gardening, you name it. And the newspapers are successful in their traditional metrics of success: reach. In America the NYTimes.com is No. 1 for content according to a Nielson study mentioned in the annual report of the NY Times Corporation.

So, the world could be great for newspapers. But it isn’t.

The Internet is not paper with multimedia and some interactive features

Newspapers managed to attract users (not just readers like with the print model) they lost two of their revenue sources. First, the subscribers turned their back on them. The willingness to pay for information is very low on the Web. The next free news site is just a click away. So, the first revenue flow vanished.

As did classifieds. What once needed the reach of the newspaper does not need editorial content anymore. To close a transaction you do not need thousands of readers but the few that are really interested in the transaction. And the Web is very good at matching even the most eccentric interests together. The Web is just made for longtail markets and most classifieds are longtail markets. To close a deal you just need one interested party not millions. So new marketplaces like Craigslist evolved and “nuked” the once very profitable business of the newspapers.

Ok, subscription fees and classified were lost on the Web but there is still the attention of your users you can sell. Right?

The newspaper makers believed that they could sell again the attention of their users to marketeers. But again, the Internet showed that having lot’s of readers does not automatically translate into a high income stream from ads.

Why? The Internet showed that it might be very efficient to reach thousand of users with banner ads but it also showed that this form of advertising is not very effective, meaning that banner ads lead to very few leads or actual sales. That might have already been the case in the print version but due to lack of more effective advertising marketeers had no other choice. But now, they have.

Internet advertising can be measured with click-through-rates or CTRs. So you see how effective your ad is and in the case of performance based advertising systems like Google Adwords you just have to pay when people click on your ad (pay-per-click).

Unfortunately, the reader of a news site is not really interested in anything else when reading an article on Obama than on Obama. He is not interested in health care insurance even when Mr. President talks about his health care reforms. With Google search it is another case. If you search for health care, you have a shown interest in the subject and therefore you might be open for ads about health care plans.

So the Internet proved to be very damaging for newspapers. They attracted millions of users but found no way to monetize their reach. And at the same time, their traditional print business model was under attack. In print they lose subscribers and readers. The classifieds have migrated totally to the Web and marketeers look for more effective ways of advertising.

Solution anybody?

So what shall they do? I have no shrink-rapped solution or one solution fits all. This is exactly what business model innovation is not about. Business model innovation is all about understanding your business and finding a solution that makes you distinct from your competitors. If everybody does the same nobody will profit.

Still, it is interesting to look at examples that work. First, there is a paper that has doubled its circulation in the last 10 years and that has increased its global impact. Well, it is not a daily newspaper but a magazine that does exactly what the dailies (should) do: Filter information for relevant news, provide insights, give background, analyse the global events, and give you information on areas most newspapers think are irrelevant to their local readers.

Any idea which magazine I have in mind? Well, it is The Economist. The Economist has a highly successful magazine on paper and it advertising market works as well. The Economist still calls itself a newspaper, not a magazine. Interestingly, their Internet version of The Economist does not work that well. Somehow it seems that the success of The Economist is bonded to paper. The content The Economist provides is very well suited and adopted to paper. The stories and analyzes just have the right length and style for paper. Will it work forever? Who knows, but it still works today very well.

Free commuters’ newspapers as a business model innovation: Using a clear customer insight

The second example is daily papers for commuters. The value proposition is very simple and is based on the customer insight that commuters that use public transport have time to read in the train or bus. But if they do not bring a paper from home or buy a paper at a newsstand, they have no easy access to a paper. Why not change that and use the attention you get from the commuters and sell it to marketeers? And since commuters are always in a rush the only revenue model that works is to give it away for free. Well, from this insight the free commuters’ papers were developed.

2 commuters' free dailies: 20 Minutes and Metro

The typical reaction of traditional publishers was to blame the “free” for the success of the new dailies. They argued that it is not difficult to launch a paper successfully if you do it for free. For them the free dailies were the ugly duckling in their industry. But it was the customer insight that commuters have time that made the commuters’ dailies successful. The brands of free dailies show exactly this insight: You have 20 minutes to read the paper in the Metro.

Solution: Understand the characteristics of the medium and look for fresh customer insights

So how can the newspapers escape their dire situation in print AND online? Well, the first tip is to understand what each medium can better than the other and than design your offering around the characteristics. We will see that the news will move online but the analytical background story and insights are well suited for paper. But the archive is again better hosted on the Web.

The second tip is to look at the behavior of your potential readers and users. When do they have time? When do your readers really read the paper? On the same day of the publication or when they have time? When are they not distracted by other media? Look not just at your current readers but at your non-readers. The commuters’ dailies attracted the young which were long lost to subscription newspapers. A generation of non-readers became readers again.

We will see daily newspapers that will be published not daily anymore. Sales on Mondays and Tuesdays are already low. Why not publish the “dailies” just on Tuesdays, Thursdays (with a big “must-have” section of the upcoming weekend events), Saturday and Sunday? Besides the commuters’ dailies the biggest winners in the German speaking press are the Sunday papers that focus on the news of the week. And of course, change the content: away from the daily news to background stories and analytics.

Is the loss of the daily paper a cultural disaster? No, when newspapers started the started quite often as weeklies and later with the advent of better dissemination of news via telegraph paper even had several editions per day. So we just go back to former times.

The Internet is not just another channel!

And what to do with the online version of the papers? The Internet is not just a new channel for the print content. And not just the traditional content with some Web2.0 features. The Internet has some characteristics that changes also the economics of the content business.

On the Internet you can reach users from little niches that were unserved in the past due to lack of medium that made it possible to reach tiny, dispersed interests for an acceptable price. The Internet is all about these longtail niches. You can serve the local community super local news and create a online community for the local community. [Update: Jeff Jarvis and his team have developed some interesting ideas and working business models on these hyperlocal news.] Some other interesting thoughts on how publishers should address the Internet provides Andreas Göldi, founder of namics, a large Internet consultancy in Germany and Switzerland.

Or you can create communities with a sharply cut interest. How about girls that are going to marry? Weddings are highly emotional and excellent made for exchange of tips and gossip. Why not give girls a platform for this important event? And important, weddings are expensive and therefore the marketeers of weeding related goods like rings, jewelry, hotels, restaurants, wedding planers would just love such a Website where they could address soon-to-become-brides without much loss.

And of course there is already such a site: Weddingbee.com where 20 real brides write in blog form about their weeding, their planning, their emotions. And the site attracts around 1.33 Mio. Unique visitors per month that is just 0.2 mio less than the Tagesanzeiger.ch, one of the biggest dailies in Switzerland. And what about the cost? The 20 brides do it part-time vs. the 150 plus journalist at the Tagesanzeiger. Do the economics!

Sure, it is unfair to compare a quality daily newspaper with a “gossip” page for brides. But it just shows how the economics of the business have changed. And the advertisers do not think in categories of unfair or fair, just what suits their needs the best.

Chance for newspapers

Newspapers have a chance if they understand what paper can do better than the Internet and if they start designing a paper that uses these characteristics of paper.

Newspapers have to understand better the changing customer behavior and find a customer insight on which they can base their offering. Commuters’ dailies or Sunday papers are examples.

And the Internet is not another channel for content plus some Web 2.0 features. So transfering your content online and adding some blogs and comments function will not work. Today’s online portals (online version of a newspaper) attract a high volume of users but cannot monetized on their great reach. So design an offering that uses the special idiosyncrasies of the Web. It might be the best local super local offering, it might be another niche but it will not be a portal about everything which you charge for.

Update: The presentation was summarized in French by Le Figaro. And Anders Sundelin from the Business Model Database just posted a summary of the New Business Models For News Summit at the University of New York. It is a great summary of all the fresh ideas for business model innovation in the field of media. Still, nobody has found so far the solution for this fighting industry.

The majority of managers still believe that their traditional business models will hold in the future. But the way we communicate is changing. You can call it Web2.0, you can call it what ever. The fact is, that things are changing. And the fact is that most business models stem from a time where we just had human beings and paper as the main medium.

And it is not just that people use the Internet to communicate. More and more devices start to communicate with each other with no website in between that a human being can see. Previously dumb devices get some intelligence and can communicate with each other.

The video is a great summary of all the chances happening. Although the video is only about convergence in the media industry, think about what the changes will mean to your business model, to the way you advertise, the way how you address your customers, to the way how your customers can exchange information between each other.

The idea of business model innovation was not developed at the large consultancy companies like McKinsey, BCG or booz. Probably they were too busy optimizing the current business of their current clients. And usually their clients are the incumbent in their respective business. Probably, the large consultancies are trapped what Clayton Christiensen calls resource dependency. Christiensen and others argue that you are dependent in your strategic decision from your main sources where you get your resources from and most of the time it is from your existing clients. In the case of the large consultancies the customers are the incumbents that lose the most from business model innovation.

Business model innovation as new strategy type

The idea stems from researchers like Alex Osterwalder, Gary Hamel (business concept innovation), W. Chan Kim and Renée Mauborgne with their blue ocean strategy or me. In stead of looking at the incumbents we were looking at entrepreneurs/ outsiders that created industries or changed their industries forever. While Alex and I came from New Economy side where we saw that new media allows new business models, Hamel, Kim and Mauborgne came from the traditional strategy schools at universities.

Measuring the impact of innovation is old subject but most measurement systems had severe shortcomings. For example input factors like R&D spending of a corporation were measured. Besides the flaw that input has little to do with output particularly in R&D, business model innovation do not get measured since you do not spent R&D on them. R&D is all about product innovation. Other studies measure the output of the R&D process like patents. Again, patents do not measure business or process innovation. Patents are just a sign of technological innovation. In Europe, you can not protect business models with patents.

So McKinsey started their research on an innovation performance sorce (IPS). McKinsey is still in an early phase but they say that the first results are promising. They use objective outcomes that take a broad view on innovation and take a long-term perspective. And instead of focusing on coporations they focus on business segments which in my opinion is key since the unit of competition is not the corporation but the business.

Business model innovation matter

And the results for us are promising. They state that they “found that business model innovation tended to generate bigger gains than product or process innovation, probably because the innovation was harder for competitors to copy and the advantages was therefore longer lasting.”

That is great news and we are waiting for more empirical evidence from the mighty McKinsey.

Boring strategies

“We earn a premium on our cost of capital”

“We form the best team in industry”

“We help our customer to be more successful”

“We ensure sustainable development”

Have you found out which company has these pillars for its strategy?

Probably not. The strategy is so generic and interchangeable that it fits for almost any large company.

Are you attracted as a customer to this company?

Probably not, since so many companies claim to help customers to be more successful.

Does this spur emotions in you?

Definitely not! It is just plain boring!

How about this company: It claims that it is driven by “passion of success” that rests on “four cornerstones”: “superior brands”, “superior supply chain”, “superior talent in lean organizations”.

Do you know which company it is?

No, since it is so generic. It could stand for many companies in many industries. It is boring. It does not give the company any real purpose to exit.

Value centric strategies

So how about this:

“to organize the world’s information and make it universally accessible and useful.”

Do you think this is interesting for you?

Probably yes, if the company can fulfill its high aims.

Do you have any idea which company is behind this statement?

Probably, yes.

So how about this: “The [firms] Concept is based on offering a wide range of well designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.”

Interesting?

Yes, if you do not go for overpriced designer furniture.

Do you know the company behind it?

Yes!

All quotes are taken from the strategy section of the homepages of the corporations. So here is the solution.

Company 1 is BASF, one of the largest chemical companies of the world. Company 2 is Beiersdorf with its world-famous Nivea brand and with its daughter company tesa which produces the famous tesa tape (for Americans it is the European version of Scotch tape).

Company 3 you might have guessed is Google and Company 4 is IKEA.

You don’t win customers with your corporate strategy

Interestingly, all companies are well-know and have a record of success in their respective industry. But why did we think that the latter are inspiring and the former plain boring?

The latter are customer centric. These corporations put in their strategies customers first. Their business strategies focus on the value proposition to the customer. They describe what value they create for their customers and what makes them unique.

The former are corporate strategies that have an internal point of view and addresses investors and shareholders. The former are also good companies but their strategies are boring.

What can we learn from this?

• There are different layers of strategy in a corporation. All levels are important. Besides a corporate strategy, which explains which business the firm is in, business strategies must exist. In the business strategy it is where you explain your business model and try to find points that make you unique to your customers. Then the product strategies follow your business strategy. On top is the corporate strategy, then comes the business strategy and product strategy.
• It is the business strategy that makes you successful in the market place not the corporate strategy. You find customers not with the corporate strategy but with a great business model as the outcome of your business strategy! And remember Peter Drucker. For him the purpose of a business is to create profitable customers. A good business strategy is customer focused and explains the benefits in doing business with the corporation. A good strategy should not be generic but tangible for the customer. A good strategy explains your business model and what makes your business model unique for the customer.

Large corporations focused in the last years too much on their corporate strategies and forgot their business strategies. They entered new markets, bought new divisions with new businesses but too little focus was on the business aspect of the strategy of what makes the firm unique to their customers. In today’s recession the pendulum is back on business strategies since it is there where you earn money.