The newspaper industry is suffering these days. Besides the economic crisis that leads to less advertising spending the traditional business model is under attack by the Internet. The large papers have reacted with large Internet activities that attract a lot of traffic. But the revenues of the online ventures are not sufficient to compensate for the decline in print. So what shall they do?
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.
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.
Good news for all the evangelist of business model innovation. McKinsey has developed an innovation performance score (IPS) that shows that “a significant degree of business model innovation seems to be necessary for superior innovation impact.”
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.
The question what a good strategy is is difficult to answer. With hindsight it is easy: A good strategy is one that works. But in foresight? Many formulated, intended strategies are plain boring, generic and not customer centric, but focused on investors. Many business model innovators on the other hand have clear strategies that are focused on customers and on the value proposition.
“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.
I lately wrote a blogpost in German on the poor chaps in advertising. I argued that advertisers are always coming too late with their creative ideas. If the business model they are going to advertise is bad they can’t do much anymore. They are just too late to fix the problems in the business model.
I made the provocative statement that you either have to be extremely creative to make good advertising for bad products or you must be schizophrenic.
The blogpost spured an interesting discussion. One advertiser sent me an ad from Bob Levenson, a guy from an agency called DDB. The ad is from the late 1960s. It is a manifesto for good products and against tricking people with advertising for bad products.
I want to share this ad with you since it is so true also for bad business models. If you have a bad or dated business model you have to change or die as department store Karstadt did. And it is not the fault of a bad economy or because of your competitors.To use the words from the ad. You die from your own skilled hands. It is the fault of your strategy skills.
Here comes the original text of the ad. Thanks to Serge Deville for the text.
DO THIS OR DIE
Is this ad some kind of trick?
No. But it could have been.
And at exactly that point rests a do or die decision for American business.
We in advertising, together with our clients, have all the power and skill to trick people.
Thinking in business models helps you in change projects, particularly in the unlearning of unwanted tacit assumptions and knowledge of the past. Forgetting what made you successful in the past is the key challenge in any change project, learning new things actually the easy part.
I am currently involved in a large change project. The company involved was living in a cozy environment. Demand was stable, predictable; project cycles were measured in years to decades and due to high entry barriers the firm was sure to “win” all business from its customers. Quality was so defined that the products lasted for eternity, most of the time longer than they had to last. Due to the heavy duty nature of its customers’ business everything was engineered to customers standards and very little of the components were bought off the shelf. Cost was not a major issue as long it was in budget.
And now the world has changed. Their customers had to change due to pressure from their clients. So the world of my firm will never be the same but since the change is coming slowly, there is time to adapt. The question is now: How can the firm change? How can it forget the habits that made it successful in the past but impede the future?
I teamed up with a coach that has a background in social psychology and constructivism. We had long discussion together but also with the customer’s management that was new on board. The question was where to start the change process.
Should we just have McKinsey, BCG or any other top consultancy fly in to have them develop a new market oriented strategy and then implement it? Our question was: Can you just implement a strategy into the heads of people that were not involved in the process? I think you can in certain cultures but not in nordic cultures. The danger is that you lose the strength any company has and particularly lose the commitment of the employees that make up the difference between a mediocre and a good to great company. You just losethe soul of the business and get mercenaries as employees. So that was not an option.
The other approach often used in change management is soft, typical HR driven. Management does some seminars on change, culture and innovation; and, what a miricale, people then will understand the need for change and then they will change. Unfortunately this is an illusion but big business for trainers and coaches. The problem here is that it sounds so right but people will consume not engage.
The problem and also the chance for our client was that they still have cash and time to change. Some units are in trouble others still earn money with the traditional way of doing business. So there is little sense of urgency (bad) but also time for a deeper change (good).
Understand your business model as a start, Understand what business are you in
The German retail and travel conglomerate Arcandor AG formerly known as KarstadtQuelle AG filed on June 9th 2009 for insolvency. It claims that the financial crisis is the reason. It had asked the German government in May for state aid but the government refused. But is the financial crisis the real reason for the dire situation? I do not think so. The business models of its retail activities (Karstadt and Quelle) are just dead. The management did not innovate on its business model and that is the reason for failure.
Most writers and bloggers take the music industry as a prime example for an industry that failed to innovate its core business model. But there are many other industries where failure to innovate its core business lead to their decline. A sad prime example of missed innovation is Karstadt, a large department store chain in Germany and Quelle, a German mail order powerhouse.
The Karstadt case is typical for a corporation that business model is dated. Instead of rejuvenating its business model or finding new business ideas the old business model is defended and by consolidating the industry even reinforced.
The next lesson is that all activities at corporate level like selling non-core assets do not solve your problems of an ailing business model. The solution must be found on the business level not on a corporate level. If you cannot fix it, than sell or close it early. Success in business is not defined on corporate level but by its business model!
In May 2009, the CEO of Arcandor, Mr. Eich asked for “a state guarantee to temporarily bridge the gap of the currently non-functioning financial markets.” [update: link no longer available] Arcandor did not want to have any handouts nor a state participation in the company. It promised that it will repay the loan “to the last penny.” It claimed that the credit crunch is the main reason for its financial stress.
But is this really true?
The only constant in retailing is business model innovation
Retail markets in general are dynamic markets where new business models destroy old ones and create new fortunes. Zara, Aldi, H&M, IKEA or Carefour all reinvented their retail category and made their owners rich. But since the whole market did not grow as fast as the newcomers, the incumbents suffered losses in market shares and sales. Continue reading Karstadt: Death of a legend (business model)
The typical answer from managers to the question “What is the purpose of your business?” is: “to make money”. Well, that is to some point right but the money comes from customers and therefore the purpose of a business is to find profitable customers. And financing your sales to your customers is only sustainable when you see the cash in your pockets in the end. That basic purpose got lost over the last years of shareholder value thinking.
I gave last week a workshop on business model innovation for a large Swiss technology firm. The firm is well entrenched with its customers, you can almost call the firm a purveyor to the court for some customers. But times are changing and therefore did the new management arrange a workshop on customer centric business model innovations.
That is of course right but: Where is the money coming from? How can you earn money for your shareholders without somebody who pays you? Where is your salary coming from? Is it really the company or where is the cash coming from?
It’s the customer, stupid!
It is amazing how few say it is to create and keep profitable customers.
It is simple, it is a hard fact:
“It is the customer where all the money comes from.”
It is the customer who helps you to pay your salary. It is the customer who finally pays the dividends to your shareholders. Without a customer you can not have the top line (revenue) in your profit & loss statement to pay for all other items that come under the revenue line. Continue reading It is the customer!
Business model innovations sound great as a strategy and if successful you can create a new market and escape the traditional competitors in your ex-industry. But the most important point in any innovation is not to have an idea, is not great execution, but the adoption of the innovation by customers. And that is the crux of business model innovation: The diffusion of the innovation. The TiVo is a perfect example.
Ten years ago the TiVo digital video recorder was presented at a broadcasters’s convention in Las Vegas. People expected that the TiVo as an easy time-shift machine would change the TV industry for ever. The great opportunity for TiVo’s users was to watch a show whenever they wanted and without commercials since they could skip that annoying part. The latter was seen as the death of the TV industry as we know it today since their revenue model is based on these commercials that nobody needed to see anymore with a TiVo. As predicted the TiVo sold well particularly as the price fell. But since 2007 the user base has fallen and the the TV industry is still existing as we know it.
It is the customer, stupid!
The Economist from April 25th, 2009 summarizes the problem with the TiVo very well: “Just because technology enables people to do something does not mean they will, particularly when it comes to a medium as indolence-inducing as television.” Continue reading TiVo: Failed Expectation