I had in the last months the chance to apply business model thinking & innovation on several, very diverse industries: the airline and travel industry, the pets industry and some time ago on the media industry, particularly newspaper.

In the upcoming three next posts, I will share some insights I gained from using the business model canvas on these industries. The series will start with the pets industry.

A word of warning to all industry experts: I am not an expert for these industries. I’m not a pet industry expert. I am an expert for the process of re-thinking and re-inventing business models.

Pets Industry – A revolution in the making

The following slide deck is my presentation, I gave on January 27^th, 2012 in Berlin at the Pets International conference. Enjoy some insights in a very interesting industry where the core is all around living creatures and the close relation we have to them.

Enjoy also my new design of the business model canvas I have created together with Gottschalk & Ash, a designer with the support of the Wolfsburg AG, an innovation incubator in Germany. You will see more in the future.

Pets are man’s best and dear friends

Pets are highly emotional and men’s best friends. Pets are members of your family. Sometimes they are treated better then human beings. Pets are for companionship or pleasure and treated with care and affection. The pets industry is very different from the livestock industry where animals are seen as assets.

The pet food industry seems from the outside a cozy industry where a few big firms dominate the shelves for pet food at the largest retailers. Will this last or will we see changes to the current industry structure and the current dominant business models?

Looking as an outsider at the industry, the biggest innovation in pet food seemed to be quite far in history with the emergence of branded pet food like Pedigree, Frolic or Sheba. Pet food is branded and marketed in very similar ways as (human) consumer products. Brands are build and emotions are used to create customer awareness and loyalty. So by applying classical fast-mover-consumer-goods marketing on pet food made pet food a consumer good even when the consumer is only the buyer but not the user. The extreme form is e.g. Sheba where humanisation of pets food is at its extreme. Sheba is made for humans (smell is specially designed for the human nose) and special edition like the Chrismas edition with porcini mushroom address humans not the needs of cats.

The giants of P&G, Mars, Colgate and Nestlé control the market

So it is not a big surprise that the classical consumer goods companies like Procter & Gamble, Mars, Colgate or Nestlé excel in the market for pet food as well. According to Wikipedia, these 4 firms control 80% of the pet food industry. They transferred their marketing know-how to the pet food market. Besides their strength in production and mass marketing, their core strength lies in the power play and negotiation with the large retailers like Carefour, Sainsbury or REWE in order to obtain sufficient shelf space to present their goods.

With their large advertising budgets, the large pet food firms are able to generate the necessary pull in the channels. The large retailers prefer to work together only with a small number of supplier in order to simplify their supply chains. And only the large consumer goods companies can withstand the enormous negotiation power of the retailers since they have must-have products in their large range of products. So large retailers require and cause large pet food firms and vice versa.

This business system is well entrenched in the industry for a long time. However, one can be much smaller than the current biggies to be an efficient pet food manufacturer, so the current industry structure is the result of channel economics and not production economics. Besides the four big ones, hundreds of smaller firms deliver 1000plus varieties of accessories and specialized foods and additives.

A very innovative firm, Royal Canin, was acquired in 2002 bei Mars. Royal Canin concentrates on specialized food for different life stages (puppets, adults, senior), sizes (mini toy, mini, medium, maxi, giant) to breeds (Yorkshire Terrier, Pug, English Bulldog, Cocker Spaniel….)

Fressnapf or Qualipet: Mega stores as game changers

Innovation in the pet food industry came in the last years from the distribution side. On the one hand, retailers like Aldi or Lidl moved into their own pet food via trade brands. On the other hand, new channels emerged with mega stores like Fressnapf or Qualipet. Fressnapf alone has 1.146 shops in 12 European countries.

These mega pet stores are large enough to build their own trade brand into a trusted brand. It is not the privilege of fast-moving-consumer-goods companies anymore to have access to customers and to knowhow to build a trusted brand. The trade brands of Fressnapf or Qualipet are trusted brands in their own rights today.

The Internet as the next game changer

The mega store concept was a typically game changer in many other retail category like books, consumer electronics or sports. However, the next game changer is already well known but less understood, the Internet.

The current industry structure of the pet food industry is the result of the (physical) channels economics and not of production requirements, and the internet is changing the economics of distribution again as did the mega stores. And the changing economics demand and enables different business models.

Often, it is believed that online will be just another channel and that it will help the incumbents to optimize their business model. Of course, the Internet can help the incumbents to optimize their current business model but it also allows new business models as we have seen in the case of Amazon. Amazon started as an online book retailer and industry experts expected that Amazon would be crashed by book mega stores like Barnes & Nobel or Borders. The opposite is true. Actually, Borders is now bankrupt, not Amazon.

Where is the next Fressnapf with the right choice of my pet?

Amazon is not just another distribution channel but also ventured into book publishing and reading devices. Amazon understood early that the Internet is not just another channel but can also change the production of goods as well. You might think that is only true for information goods like books that can easily be sold digitally, but think about the production economics of pet food.

Do you have to be as big as Mars to be an efficient producer? Do you have to be a bulk producer where all dogs get the same food in the same big bags and cans? Isn’t it possible to mix efficiently an individually designed dog food in production? Can you not offer MyDog Food in a similar way as MyMuesli or MyChocolate are doing?

People want the right choice, not more choice!

Yes, the Internet allows to bring individual blended and produced pet food together with a distribution system that allows such an individual distribution and that will, over the long haul, change fundamentally the business models in the pet food industry.

Royal Canin offers today all the different kinds of pet food, but the current physical distribution system is made to handle such a choice. The broad choice in the retail outlets is a tyranny. People want the right choice not more choice.

To make a prediction, which business models will prevail, would be like looking into a crystal ball but you can prepare by understanding your current business model and by understanding where change will happen. And change will happen.

We have a great tool for visualization of a business model: the canvas. There is a hype on visual thinking and business model design. But can the tools deliver?

In the last years, I have seen many uses of the business model canvas to real cases. Some showed astonishing results, others were disappointing. Why? Any tool is only as good as the user. A fool with a tool is still a fool. But also: A genius without the right tool might be a fool. So let’s see, what makes the difference.

Visual Thinking = Thinking with Visual aid

Visual Thinking is often mistaken as nice visualization. A bad idea does not become better by visualization. Visual Thinking is great since you think in pictures. Visualization can help to make your thinking better, to see more options and see the interdependencies among all components. But you still have to think!

There was a reason why god gave us two brain hemispheres: Visual Thinking is the combination of analytical and creative thinking. So do the thinking.

Be precise in your thinking

Due to the limited space, people tend to be pretty imprecise when filling out the canvas. They fill the canvas as if it is just a form, not the master plan for a venture or for the future of your firm. That happens particularly often in large corporations where the people are so stuck in their old thinking.

The more precise the better, since that shows that you have precise thinking. That does not mean you have to know everything at the beginning of your thinking process. Mark clearly areas where you have to do more thinking instead of just filling out just something. If you have not enough space on the canvas then use the white board to draw the component. That is often the case for the production or value steps in your value architecture.

Be precise in your language

People love buzzwords particularly in the value proposition. They write about best-in-class, social something, customer-centric. All empty words (See post on the horror of Newspeak). Start with precisely describing who your customers are. Do not write business customers but identify some business customers that you can check tomorrow your value proposition with.

I force my participants to write down a list of ten names of customers they can call tomorrow to check if the value proposition is appealing or not. That leads to the next and most important point.

Customer Insights as starting point

A good and innovative business model starts with a customer insight, of something what is unsolved or badly solved for the customer. That is what I call a job to be done for your customers. But entrepreneurs love their products and they try desperately to find a need for their offer. They spent hours arguing why people should buy their offer during business model sessions instead of talking to real potential customers. It is important to convince your customers not others during the workshop.

The Art of business model design starts with a deep understanding of customers. So leave your conference room and test your assumptions about the value proposition when you do the business model design. Observe potential customers, ask them about the basic needs, not about today’s solutions, be curious, be adventurous.

The Art of Business Model Design

• It’s all about the customer
• Be specific what you say
• Keep it simple, but not simplistic
• Be self-explanatory
• Focus on the relevant points where you make a difference
• Do not reinvent everything

“What business are you in?” sounds like a simple question. But it’s not. How you define your business determines which direction your firm can go. Based on your answer, you define and limit your strategic options.

In a company, the business model is defined by a dominant group of people. They have a common understanding of what business they are in and how they create value. However, the business model is not an absolute reality. It’s a social construct of dominant opinion makers, e.g. your top management. This is important to understand.

By taking a different look at your business, and thereby challenging your dominant logic, you can identify more and different strategic options for your firm. But beware; by doing so, you are also challenging the top dogs in your firm.

Life is not that simple. Changing perspectives by xkcd.com

How you define your business depends on the dominant logic of your management

Considering the definition of what a business model is, it seems easy to describe the business model of a company. You can use  the business model canvas (Alex Osterwalder‘s or mine) and then you describe how value is created. Often we assume that regardless of who describes the business model, we will end up with the same description. This is a mistake.

Some hard facts like the value chain or the products can be easily identified but as soon as we approach the value proposition, things get a bit more confusing. Why is this? The answer depends on who answers the question.

Take groups close to your firm: Will the board of your company have the same view as your customers? What about your employees and top management?

Hopefully your executive board will answer the question very similarly. However as I have seen in many consulting projects, that is not usually the case. And even the simple question of who your customers are is a tricky one. Are your customers your users or your paying customers? This is a particularly tough question in double-sided business models.

If you sell to end consumers through retailers, are your customers your channel partners like Walmart or the end customers? This is exactly the discussion you might have within your firm.

Ask customers the question of your value proposition. The answer will be different again. Do your customers understand your value proposition? Do you offer the value you promise with your value architecture also? (see post on value perception vs. value proposition).

In well-managed firms, there is a common and dominant logic of your business

In well-managed firms, we see a common and shared view of the value proposition and of the other components of a business model. Management of these firms is much easier because there is a common understanding of what you do and what makes you unique. In such firms, micro management isn’t necessary since everybody understands his or her role in the company. Innovation is still hard work, but since you understand your customer well, you regularly bring out innovations for your current customers.

Caveat!

What sounds like a dream may be a double-edged sword. Dream businesses can exist if technologies develop along known paths, if you have a clearly defined set of competitors, if your customers have stable and predictable needs and if you have found a business model which can thrive in stable conditions. That’s a lot of ifs! If times are changing, you might be trapped in your way of looking at the world.

The better you adjust to stable business conditions (sustaining), the more difficult you will have with disruptions or unpredictable situations. This is what Clayton Christensen calls Innovators’ Dilemma. Your dominant logic works as a filter. Information is filtered and interpreted in a way that fits your view of the world.

Business Model(s) of the Yellow Pages

The best way to illustrate my point that business models are a social construct and not an absolute reality is to take an industry of business directories, like yellow pages. What is the business model of the yellow pages?

1. Yellow pages as publishers of Yellow Pages and other directories (a product based definition)

If we go back some 15 years, we could easily describe the business model of directories as publishers of paper directories in the form of white pages (private addresses) and yellow pages (business addresses). When you subscribe to this view, you might have envisioned an integrated value chain with its own printing facilities. Even the printing faction of the yellow pages businesses has shifted to online directory services. For such companies, going online was a great step forward, even if it meant simply transferring their business model from paper to online.

2. The search & find business

Another way to look at directory services is to look at the jobs or problems they solve for customers. Remember that the job-to-be-done is a core-defining element of the value proposition. Well, which job does a directory service solve for its clients?

Directory services offer the chance to FIND somebody when somebody else SEARCHes for them. So, the business can be called “Search & Find” business. In this view, one defines the business by the end users and the job you help them solve.

If your dominant logic is grounded in the Search & Find business, you probably understand that customers need more than a flat directory of businesses (today called yellow pages). How about adding recommendations to the business listings like Yelp or Qype are doing? How about making specialized sites for certain professions such as craftsmen or doctors like Angie’s List . After all, people are looking for the best doctor in town, not just any doctor.

When you see your business in this way, you move away from a flat search (finding little information about everything) to a deep search (finding specialized information about a niche). Think about it: Google will probably always beat you in flat search so you better go into deep search.

3. The lead generating business

A third way to define your business takes both the end-user and the paying customer into account. In the case of directory services, your customers are small and mid-sized businesses who you sell ads to.

What problem do the SMEs want to solve with an ad or a bold listing in your directory? Well, they want to be found in order to generate more and better leads with the ad. With these glasses on, you are in the Lead Generating Business. This is quite different from the other two perspectives.

What happens if you take this view? You will probably realize that you have one of the best local sales forces for SMEs as a key asset and part of your core capabilities. And why not leverage your key assets to sell a whole range of products to SMEs that help them to generate more and better leads? Why not sell Google Adwords? With this view of the world, Google is a partner and not a mammoth competitor anymore. Google’s weakness in local business is its weak sales force. They are a technology firm. You have a great local sales force and you will never beat Google in search. Why not join them? Google can be your partner.

In the lead generating business, you suddenly see fresh competitors that compete for the same job and for the same clients’ budget. Groupon and its clones are exactly doing this: Competing for the lead generating business.

4. The Address source

A fourth way of defining what kind of business you are starts by looking at the core competencies. As a directory company, you have or had the best address material for individuals and businesses. You could call yourself an address business.

Potential strategic options would include moving into identity and address management for businesses and individuals. In this situation, you would sell addresses to business and keep the main address of individuals. Unfortunately, it’s a bit late for this kind of business because new directory services have appeared in the form of social networks like Facebook, LinkedIn and Xing. Now, individuals or business maintain their own profiles on these sites.

Conclusion: A business model is a social construct

All four perspectives of the business model are logical and supported by facts. They are totally different descriptions of the same business. Each view allows for very different strategic options. Even the competitors change with each different view of the business. of the business.

It is very important to understand that your business model is not a static and fixed model, it’s the construct of a dominant group of people in your firm.

Challenge the dominant logic with the business model canvas to see new strategic options

You see very different strategic options if you define your business differently. A great way to do this is to better understand the problem you solve for your customer.

Different perspectives open new options by xkcd.com

I illustrated this two years ago in a post on the newspaper industry. The classic business model of a newspaper consisted of three different businesses brought together by a shared medium: paper.

1. The first kind of business you are in concerns the reader. You provide news, background information and entertainment in exchange for the reader’s attention and a small amount of money (just 30% of total revenues, but even less of a contribution margin).
2. The second business you are in is to sell the reader’s attention to advertisers. And this is where the margins were made in the past.
3. The third is the classifieds business. Here, a paper functions as a market place. As we see on the Internet, you do not need content to sell advertising or classifieds. Google and Craig’s List have proven this.

The pity for the newspaper industry is that most of the costs come from the first business, the content, but the revenue comes from the second and third businesses (here a post on the changing economics of newspapers). In this case , the jobs-to-be done analysis is a frustrating one since you see that just moving your content online will never be a profitable business.

Ways to define your business model and starting points for innovation

Taking the yellow pages example, we can identify four defining elements

• The product you offer
• The problems and jobs you solve for your users
• The problems and jobs you solve for your paying customers
• Your core competences

But there are even more elements that you can define your business around.

• The core input or raw material used in your production. This is the way how the plastics industry defines itself. The oil industry and other traditional commodity industries do, too.
• The core production process. Food processing industries focus on this.

Reconstructing your firm by taking another perspective will allow you to see fresh, strategic options which will lead to business model innovations. Take the business model canvas and play with the components. You will see there are more options than you can handle. So please never say that you have no idea how to reinvent your business. Ideas come easily, but executing these ideas is the tough part.

Regardless of which definition you choose, be aware that it is only a construct able to be changed. Competition will not care about your definition. Your success will come from new ways of solving a problem for your customers. And do not complain of unfairness when a competitor enters the arena and breaks all of the rules that you thought were holy. All of these rules made sense in your way of looking at your business, but your competitor, who defines his business totally differently, is acting in a totally fair and just manner. This is what we see in the moment between the content industry which is being challenged by Google in the search and find industry.

Particularly on the web, we see a lot of copies of successful business models. How many clones are there of Groupon? How many competitors and incumbents wanted to copy Amazon in the late 1990s and failed? The core question is: Is it possible to copy a business model? In this post, I will elaborate on this topic.

During a recent interview for a bachelor thesis, I was asked: Under which circumstances is the transfer of a business model e.g. from a different country or from a competitor a useful strategy?

I must admit, I am skeptical about the outright transfer of business models from one firm to another. The reason is very simple. A business model is more than its technical components like your value chain, revenue model, your product etc. The business model also includes soft factors like the value proposition, your values and corporate culture or your core competencies. Remember the definition of core competency: core competencies have to be rare, difficult to copy and valuable.

Many strategists, VCs and purely analytical people think that it is easy to copy a business model. What they forget is that a business model is not just a technocratic combination of components, in fact, humans are involved with their values, cultures and hidden assumptions. You can copy the hard components, but the human aspect of a business model –values, culture, tacit knowledge – is difficult to copy.

Business Model transfer from Start-ups to Start-ups

The case is different for startups where the human aspect is not as developed as in more mature firms. To copy a business model that is not based on technology is easy. To copy a business model of a startup, whose uniqueness is based on proprietary technology is difficult.

Case: Business Model Innovation Groupon and its clones

An interesting case is Groupon and all its clones. Groupon is a deal-of-the-day website which allows consumers to shop for certain services or products for a large discount when a  sufficient number of users sign up for the deal within a short window of time. The value proposition for the user is simple: Get great deals for a hefty discount.

The value proposition for the businesses that offer the deals is less obvious. Why would businesses give discounts of over 50%? Well, Groupon offers local small businesses a fresh way to generate leads for their business. Traditionally, this task “lead-generation” was offered by the Yellow Pages, classifieds or more recently, by Google Adwords. Now, there is a new way to achieve this task: a typical business model innovation.

The value proposition for the businesses that offer the deals is less obvious. Why do businesses give discounts of over 50%? Well, Groupon offers local small businesses a fresh way to generate leads for their business (job-to-be-done by Groupon). Traditionally, the job “lead-generation” was offered by yellow pages, classified advertising or more recently by Google Adwords. Now, there is a new way how to solve this job: a typical business model innovation.

The traditional methods of “lead-generation” require the business to pay upfront without knowing what revenues would be generated. At the same time, businesses might be reaching people who are not interested in their goods and services. Google Adwords is already innovative. You only have to pay Google if a user is interested in your ad and clicks on it. So your ad is already much more targeted.

Groupon goes even a step further. With the Groupon model, the business targets and reaches only users that are willing to pay for their products and services, at, of course, a steep discount. Groupon’s value proposition is particularly well-suited for businesses that have a high contribution margin for every customer they serve. This is the case for beauty salons or massage parlors. Every customer via Groupon brings in business. That is quite an innovation in the “lead-generation” business where you usually pay money to get leads. With Groupon, you get leads and get business at less than 50% of the normal price.

The value proposition sounds very convincing but the big question for businesses is if they can transform Groupon users into regular clients who pay regular prices or if you just get one-time discount hunters.

Groupon’s History and its clones

Groupon started business in 2008 and rose to the attention of other entrepreneurs worldwide in 2009. In 2010, Forbes counted over 500 clones worldwide, with more than 100 such firms in the US alone.

In Germany, CityDeal rose to prominence when the Samwer brothers (well-know cloners of US internet business models) went from zero to 700 employees in half a year and then sold the firm to Groupon. This is a typical revenue model for investors of some copycats. Instead of earning money with its customers, the basic idea is to be acquired by the originator of a business innovation during their internationalization spree. For the Samwar brothers it already worked twice: First with their eBay clone and now with Citydeal.

Other clones focused on smaller markets that are less attractive than the big markets. E.g. DeinDeal works successfully in Switzerland.

Summary on startup business models

Yes, you can copy a business model from one market to another if the value proposition is also attractive to customers in other countries. If the business model is protected by core competencies or patents you cannot transfer the business model easily.

Business Model Transfer from Startups to Incumbents: Can they dance?

To take the Groupon case further, why did we not see copycats from firms that are already in the “lead generation” business like the Yellow Pages. These companies already have one of the core assets for the Groupon business model: Local sales teams for SMEs. So it would be easy for them to build successful clones.

But they didn’t. Why?

One reason is that they did not define their business by lead generation for SMEs, the job they solve for their customers. If you define your business by the product or around the value proposition for your users like local search, you do not see the threat your business models faces by Groupon. You believe you are in the search [] business but, actually, Groupon competes for the same bucks that you do. It is good that Groupon and all its clones [] are not taken serious, at least in the beginning.

So in the case of incumbents, the human aspect in their business model is the limiting factor to transfer the startup business model.

Amazon vs. Barnes & Nobels vs. BOL vs. Otto-Versand

Another great example is Amazon. Amazon was very easy to copy in the late 1990s. It was just an online book reseller. That is easy to copy. The incumbents were [] well aware of Amazon early on. They waited to see if Amazon could prove the business case of online book selling. When the incumbents saw that the take-up rate of online book shops was great, they responded with clones. Barnes & Nobel, an innovator in stationary book selling, entered the market, as did Bertelsmann in Germany with BOL. Were they successful?

Well, not really. Although they ventured into online book selling, the human factor in their traditional business model impeded success in their new venture. The incumbents always had the problem of cannibalization threatening the existing business that they wanted to protect. So the move into online book selling was seen as a defensive move. It was halfhearted. Meanwhile, Amazon was fully committed to being online; they had no other business.

And why did Otto, the largest mail order house in Europe, not react? Or the now defunct QuelleKarstadt? Again, it was the human factor of their traditional business model. If you are the king of the mail order business why should you be afraid of an online book seller like Amazon? In hindsight, Amazon is more than books, but the label “books” still sticks to Amazon. The incumbents in mail order never thought it would be possible for a newbie to build an infrastructure of warehouses and support systems they had until Amazon did it [] even better. The same is true for IBM or HP. Amazon is a big player in cloud computing, not the incumbents.

Summary

Incumbents can easily copy business models from startups. But often they do it only halfheartedly in order to protect their current business model. Here, the human factor on the side of the traditional business is the impediment for the successful transfer of a business model from one firm to another.

Business Model Transfer from mature firms

So what about transferring business models of successful, mature companies? Why do we not see more IKEA clones?

Here, yet another factor plays against the clones. The longer a company works under a successful business model, the more difficult it is to beat that company on their own turf. They have learned so much from their customers, they have gained so much tacit knowledge in how they run the firm that it is difficult to copy the business model. This is particularly true when the business model is based on a strong value proposition for customers and partners – like suppliers.

The Geberit case: a Business Model Innovation in the building industry

Geberit is a Swiss firm involved in plumbing and maintenance. Quite a commodity business, you might think. That is true if you think that you sell plastic pipes and other products. But they have developed a business model innovation. They do not sell pipes or other products but they sell you smooth and easy bathroom renovation and building. That is quite a different value proposition. So they have developed a system where everything is pre-assembled in a behind-the-wall system.

Of course, you can copy the installation systems of Geberit. There are just products. But what you cannot copy is the relationship Geberit has developed with its key partners, plumbing professionals. 30.000 professionals are trained every year on Geberit technology; these professionals plan their client projects with software from Geberit; they have been working successfully with Geberit products for years. In fact, the sanitary professionals know only Geberit nowadays.

So, Geberit is not just a product innovator but a business model innovator. It generated a lock-in with the most important influencer, the plumbing professionals. Geberit has developed a great value proposition for and some core compentencies around its partners like partner management or knowledge management.

Summary

To copy a business model of a well entrenched and successful business innovator is very difficult. The innovator has developed so many competencies and so much tacit knowhow that it is almost impossible to copy the business model. Of course, you can transfer the business model to other countries, but remember it will take time for you to build up knowledge and it also takes time to develop customers for a fresh business model. Customers do not adopt innovation quickly as they also have to learn new things about this innovation.

Summary: Transfer and Portability of business models

Today, we have much discussion going on about copying and transferring successful business models. What sounds so easy in theory and from consultants, is much more difficult to implement. A good business model is by definition difficult to copy. A good business model is not defended by patents or high-tech but by the excellent interaction of all its components and, particularly, by the human factor.

I just had the pleasure to spend sometime with two passionate freaks and both have built a business around their uniqueness and idiosyncrasies. The idea behind this post is to inspire you to find YOUR business model for YOU. Do not copy somebody else but find something that fits YOU and YOUR unique skills.

I spent the last week ski mountaineering in Italy in Valle Maira (south east of the piedmont region, east of Cuneo). It was a very enjoyable vacation with lot’s of fun, work and pleasure but also with learnings I want to share with you.

I learned from two people, Lucas Iten, our mountain guide and chef Enrico Crippa from the two Michelin star restaurant Piazza Duomo in Alba. Both are passionates. Both are freaks.

Mountain guide Lucas Iten

The first freak I encountered was our Swiss mountain guide Lucas Iten also called Mountain Geier. Actually, Lucas is not really customer-oriented; he is just the best in finding the best run under the present circumstances. And the best run is not really defined by the customer but the possibilities of the day. And if that means to climbed 1700m than you better ascend.

You have to fit to Lucas. When you do, you have one of the best times possible in the mountains. He loves the runs; he is like a child with all his enthusiasm and joy. He is childlike but very professional in regard to planing and the risk of avalanches. He loves the days out in the mountains and loves to share his enthusiasm. We found runs local alpinist were surprised that you could make them.

Early in life, Lucas knew that the mountains will be his life. In a young age, he climbed the Eiger Northface and did everything to avoid things he was not the best at like school.

Lucas has joined forces with a Bergpunkt, mountain experience travel agency. And like Lucas, the business model of Bergpunkt is not focused on end-customers but at their partners, the mountain guides. Remember that you need a value proposition not only for your customers but also for your key partners. Take a look at the canvas.

Bergpunkt’s business model targets creative and crazy mountain guides. For these kinds of mountain guides, Bergpunkt is a perfect partner, taking over all the things a mountain guide tries to avoid like administration and booking of guests. And by that, they get the “best” mountain guides and thereby Bergpunkt’s program is very attractive for end-customers like me. Lucas is not the only freak at Bergpunkt. All mountain guides I have experienced are just exceptional and in a very positive way out of the norm. They are freaks!

Chef Enrico Crippa

The other freak is the chef of the restaurant Piazza Duomo in Alba. I do not know much about him personally but his kitchen is that of a passionate freak. Since he is 16 he is into gastronomy. Now, he is just under 40 and has 24 years of experience and still has the passion needed. Starting his own restaurant Piazza Duomo in 2005 he got his first Michelin star after two years, the second after another two years. So let’s see if he will get the third.

As a youngster he started his career with the first Italian chef with three Michelin stars, Gualtiero Marchesi, considered to be the founder of modern Italian Cuisines. Other stations of his professional life were at other three Michelin star chefs like Antoine Westermann. To learn more, he left for Japan to learn a different style of cooking and the result at Piazza Duomo is breathtaking.

We had a perfect dinner with 11 courses they called Tradizione e Innovazione, a perfect blend of traditional ingredients and very innovative but still tasty preparation. Enrico Crippa combines the tradition of the Alba region with the molecular cooking style in a very good and creative way.

And also Enrico has developed a very good business model which allows him to focus on what he is best at, cooking. He joined forces with the Ceretto family to open his restaurant in Alba. The Ceretto family, a well-know winery family, wanted to put Alba on the gourmet map and with Enrico they found their partner. A perfect combination of business sense and culinary delight.

Conclusion

We see here a very special business model, the model of freaks and passionates. This model has some idiosyncrasies that makes the model so special like the freaks themselves:

• Either take it or leave it. Both have in common that you either like what they do with passion or you leave it. They do not bend themselves for customers that do not fit.
• You cannot copy it: You cannot copy their business model since they have unique competences and strengths.
• Focused on strengths: Both have worked on their strengths and not on their weaknesses.
• Complementaries needed: Both have found partners that supplement their skills. They concentrate on what there are good at and leave the rest to others that understand and foster their uniqueness.
• Not scalable: Such a business model is not scalable. The uniqueness is build around the persons and their competencies. But as long as you can live well from it, why must everything be scalable?

The most important point is that there are so many different business models around. There is not one fits all. Find the business model that suits you.

Architectural innovations are often what customers do not see immediately but there are core of any good strategy. While in the last years we saw a trend toward concentration on core activities like marketing and branding, some companies take the opposite route. And that is good.

I was recently in Egypt to give a workshop on business model innovation. I received an invitation from the Executive Institute, a young and upcoming executive education institute based in Cairo. I was absolutely intrigued by the participants and their entrepreneurial drive. We can all learn from them in the so-called developed countries since they are true entrepreneurs and risk-takers. Participants came from different backgrounds ranging from food and telco, real estate development to plumbing and fixings.

Concentrate on the core

The traditional view on the value chain is to concentrate on the core activities. So almost all consumer electronics, computer or mobile equipment firms have outsourced their production to specialized manufacturers, so-called contract manufacturers or electronics manufacturing services (EMS). The western firms like Apple, Dell or IBM concentrate on the design, R&D, marketing and sales of the devices and leave the manufacturing to EMSs like Flextronics(165.000 employees) or Foxconn (113.000 employees).  Outsourcing manufacturing to specialized firms is the norm in their industries. Foxconn manufacturers for Apple and Intel while Microsoft is a customer of Flextronics.

This architectural or operational model looks very convincing since the story line “Concentrate on the core” sounds very plausible. By concentrating on your core capabilities, you focus on what you are strong at. In the case of Apple, that is design, usability, marketing and branding.

The perils of the “core”

However, there is a peril in this model as well, particularly when you are not as strong in core capabilities. E.g. Hong-Ta Corporation was the manufacturer of the innovative Palm Treo 650 or of the Compaq iPaq, one of the first smartphones.  Today, HTC as the firm is known today is very strong in smartphones and was one of pioneers in phones with Google’s operating system Android. Interestingly, Palm and Compaq are today irrelevant in the growing markets for smartphones. And both former pioneers are now part of Hewlett Packard.

Backwards Integration: You can do the opposite as well

At the same time as the IT and electronics industries are following the mantra of “concentrating on core competencies” other firms in other industries do just the opposite. Let’s look at food companies.

Gozour moving into farming

In Egypt fresh milk is a hot topic, but to guarantee the quality of fresh milk is difficult. Therefore, Gozour, a regional multi-category integrated agro-food company, acquired Dina farms, the leading producer of fresh milk in Egypt with a capacity of 45,000 tons and more than 6,000 heads of cattle. At the same time, the firm seized the largest farm in Sudan for sesame seeds to provide a safe and sustainable source for its core supply for some of its products. Both acquisitions are an example for a classical backward integration into real physical assets. The reason for the second acquisition was to hedge its supply from price increases due to speculation in raw material.

This trend towards backwards integration into farmland is widely spread in the food industry. The reason is secure basic food supply. E.g. China is investing heavily into Africa to secure its growing food demand. Interestingly, western companies still divest some of the farmland they own like Unilever that sold its palm oil plantations in Congo in 2009.

Backwards and Forward Integration: American Apparel as a control freak

American Apparel is a strange kid on the block in the fashion industry. While most fashion companies concentrate on the core of its brand (design, branding), American Apparel is a wholly integrated fashion retailer AND manufacturer. American Apparel does not only manufacturer its cloth in its own factories in Los Angeles but also owns and operates its own dye house and knitting facilities in the USA.

Most analysts would call American Apparel crazy to produce in the US and paying an hourly wage of 12 USD vs. .40 USD in China. But, this alleged disadvantage is exactly their biggest advantages for American Apparel. While other fashion companies are just design and branding agencies American Apparel’s value proposition of genuine and fair produced American goods appeal to its customers without too much advertising spending. Producing in the US and treating their workers fair is the unique positioning other fashion companies cannot copy. American Apparel walks its talk. Something very special in an industry that mostly depends on creating illusions (empty brand promises).

Forward integration: Luxury goods companies move into retailing

While American Apparel is wholly back- and forward integrated company, other fashion companies establish their own retail channels. When you scroll through the largest cities in the world, you see that more and single branded shops appear. While in the past, jewelers had a wide choice of the top brands, more and more single branded jewelers appear on Main Street. IWC, the Swiss top watch manufacturer, has its own shops, as do Cartier or Chopard. Or look for Montblanc, Gucci or Hermes shops. They are all copying the concept of Mango or Zara, the Spanish fashion manufacturers and retailers. Even brands for the middle class move into specialist, mono brand shops like Beldona or Triumph in women’s underwear. Or take a look a mono branded shops from Puma, Adidas or Nike.

At the same time, these companies broaden their offering. E.g. Montblanc, once known for its classical writing instruments, moved into watches, jewelry, leather, eyewear and even fragrance to become just an “ordinary” luxury goods company.

The reason why these firms forward integrate is simple: First, they want to control and guarantee the customer experience and their brand promise end-to-end, including in the distribution channel. Secondly, they want to participants in the margin they can earn in retailing. In some industry, retailing contributes to 50% of the end price of a good.

Lessons-learned

• The longer I work with business model innovation, the more I get bored by “one solution fits all” in a specific industry. The art of management and entrepreneurship is exactly to find a solution that makes you positively unique in the eyes of your customers. By the way, at the same time, I get bored by the mono brand stores and shop in shop concept in large department stores, but that is just my personal opinion
• In management, we believe too often that there is just one right way to do business. And analysts pressure firms into what everybody else is doing.
• Actually, the opposite is true, as long as you have a good reason to do so. If you do what everybody else is doing in your industry, you are no different. You have no value proposition your customers will love since they cannot even see a difference between you and your competitors. Be different and have profile. Be brave and accept that being different means also that you expose yourself to criticism.
• Learn less from your competitors in your close industry but from other industries.

How do brands and business model work together? That is a key question for successful companies because if they do not align brand and business model it will backfire, probably not in the short run but surely in the long run.

Branding is a hot topic. Brands give products the magic touch. With branding regular, normal products morph into highly desired status symbols customers are willing to pay a premium for. Branding worked very well in the last years but is branding sustainable?

Brands are not sustainable if the foundation is missing

Branding is not sustaining when you have a business model that does not support your brand or vice versa, your brand promises something you cannot fulfill. If you focus too much on branding you create over the long run, a perception gap between what you promise and what you deliver. It is like the icing on the wedding cake. It looks great but very rarely does a wedding cake taste as good as it looks.

Let us look at one example.

The Ergo Insurance Case

The German insurance company Ergo Gruppe is the holding company of the well-know household brands Victoria Insurance and the famous Hamburg Mannheimer Insurance. Lately, Ergo decided to consolidate its brands under the fresh brand Ergo. Ergo tapped into people’s discomfort that insurance companies are great in sales but very bad when it comes to ease to understand the policy condition and in the case of a claim.

From this customer insight of discomfort with traditional insurance companies Ergo created the claim “Versichern bedeutet verstehen.” or in English “To insure means to understand”. Ergo used all communication channels and very well made commercials to establish the brand Ergo among German consumers. In the ads, people ask why it is so difficult to get insured, why the agents do not take them serious.

In one ad, the customer states: “I will versichert warden. Nicht verunsichert”. In German, that is a great pun or wordplay. Versichert means to insure and has the same root as verunsichert meaning to alienate or make insecure somebody. So Ergo wants so position itself as the insurance company that is easy to do business with, where you do have to study law to understand letters, where claims are handled in a fair way and customers understand the general terms and conditions. I think personally that this claim is great if Ergo can really fulfill its promises because insurances are a nuisance.

So let us look behind the façade of Ergo.

Can Ergo fulfill its promise?

So let us look at the general terms and conditions of Ergo insurances. First, I did not find any directly on the website. Therefore, I cannot inform me independently before I have a meeting with a sales agent. Well, that behavior does not support their claim that they are the insurer who understands customers.

After some goggling, I found some general terms and conditions for the liability insurance on the website of the direct insurer Ergo Direct. The GTC are 8 pages long and in fine print. Below, you find the section with all the liabilities that are not covered in the contract.

Altogether, 24 bullets cover these important points. Does Ergo fulfill its fresh claim not to make its customers insecure? That is up to you to decide if reality matches the claim.

The business model is the foundation of all branding

Klaus-Dieter Koch of brand trust who pointed out the Ergo case uses the metaphor of an iceberg for the brand. The tip of the iceberg is the brand and what we see but it has to be supported by the business model. In the case of Ergo, just pure branding will backfire as it did in the case of Vodafone that claimed to be the provider for the “Generation upload”.

Well, when that generation checked the claims vs. the reality, they got angry (FAZ Online in German). In the case of Vodafone, the firm withdrew the campaign since their business model did not support the claim. And that is better than pretending something you are not.

To develop trust you need a business model that makes you unique and valuable in the eyes of your customers. Then condense your positive uniqueness and reason why people love you in your brand statement. With such a brand (and business model), your customers will love you, your employees know how to act, how to handle customer complaints and your advertising or branding agency will not get nuts to sell something what is not there.

Be honest. That is what a great business model and brand is all about. It is all about the value you create not what you pretend to be.

The brand is the icing of the cake (business model). Icing is great but it is the cake that gives you satisfaction.

Following my blog article on Design Thinking and business model innovation, a vivid discussion about design thinking and business model thinking started. Lately, Scott Underwood joined the discussion. For over 20 years, Scott worked in the Palo Alto and San Francisco offices of IDEO, the global design and innovation firm.

During the last dozen years, his role involved writing, editing, speaking, and teaching about design thinking and the company’s history, culture, and processes. Scott is not IDEO’s spokesperson but a person with insights into the design thinking process. I would like to share his insights with you on the importance of the problem

definition phase and of challenging the assumption of your thinking. Below, you find what Scott wrote in his comment. I have added some emphasis to what Scott wrote.

Scott Underwood, formerly with IDEO, on Design Thinking

Patrick, I can’t give an answer that applies to all of IDEO; I’m not a spokesman, so this is my opinion: Despite definitions that we see in books and websites, design thinking remains a fairly fuzzy and dynamic concept — the phrase “nailing Jello to a wall” comes to mind. However, the problem definition phase of a project is a key component, and this is where not only big corporations but individuals like me fail.
People and teams are measured by what they get done. Design thinking asks that, before we try to *do* things, we spend a significant portion of time at the start of a project questioning assumptions. This can look a lot like doing nothing important. It might look like shopping, or visiting a theme park, or interviewing grandmothers, but it doesn’t look like design, and it doesn’t seem to get the project closer to completion.

It’s only when the team gets an insight that helps turn their project in a new and valuable direction that that initial investment of time and energy becomes clear. “Remember that thing we saw? What if we…”

So, I absolutely agree with you: It is crucial to ask the right questions, and I think Design thinking helps give people who are used to solving problems quickly a method (and permission) to slow down and determine whether they are solving the right problems. This may go against corporate culture, because it may mean questioning your boss’s assumptions.

Other aspects of design thinking also have trouble at large companies, like collaboration across departments, and rapid and iterative prototyping, and messy dedicated project spaces, etc., etc. All of these things have been around for decades under a variety of labels. And it’s probably true that both IDEO and design thinking suffer from hype.

But underlying that, everyone I know there is practicing design thinking principles because they are effective, and there’s an honest enthusiasm in promoting them to others — especially to people who don’t see themselves as designers, but who are called upon to “design” in their jobs (whether planning a significant project or improvising an on-the-spot solution) every day.

Open innovation is a big trend today in innovation management. Where are its strengths and limitations? A discussion with Atizo.

Today, I had a long chat with Isabel Steiner and Sabine Hofer from Atizo, an entrepreneurial platform for open innovation. Atizo is a platform where companies can post a question to a crowd to get more and better solutions. This is called open innovation since you are not looking inside your own firm for ideas but to a broader spectrum of people. Some call it crowd sourcing for ideas.

The idea behind open innovation is fascinating. With Atizo, you can address more than 8.000 people with ¾ with academic background to look for fresh ideas. The biggest advantage besides the size of crowd of the “innovators” is the fresh viewpoint on the problem. You take advantage that the innovators do not know the way you always have solved the problem in the past; they are not stuck with your dominant logic.

Atizo’s platform allows companies to generate ideas, evaluate ideas and develop the ideas into marketable concepts.

The idea funnel from Atizo

Depending from your scope you want to use, you can use either the whole crowd, a subsection of your customer and clients if you are a business or you can just invite your closest community for the innovation project.

The different crowds to source from at Atizo

Due to these strengths, open innovation became a huge success in the last years. Well-regarded firms like Swisscom, Mammut, Google or BMW have used Atizo’s platform for open innovation to find new solutions.

So, is Atizo a success?

Success Story Atizo

Yes, since most customers were positively surprised about the quality of the solution. The open innovation idea works. The open innovation platform is fast and cheap to generate idea.

However, as every innovator knows, having even great ideas is not enough. Ideas have to be implemented in the firm AND adopted by the customers. First, implementation in the firm is already difficult since so many impediments like lacking resources; different priorities of top management, wrong corporate culture, Not-invented-here syndrome etc. can and will mostly likely kill the idea.

Secondly, an innovation is not what you think it is, but what the customer adopts. Therefore, from the many great ideas only few have seen the market. The classic dilemma of all innovators.

It is the question, stupid!

Moreover, what Atizo also figures out is how important it is which question you ask. Quite often, the question is very closed and so narrowly defined that the ideas are typical MOTS ideas (more-of-the-same). Nevertheless, do not criticize the ideas and solutions. The problem is with the questions. These questions are so framed by the dominant logic of the current business that really break-through ideas cannot be found. This is the same criticism I have already raised in the case of “Design Thinking”. If you ask the wrong questions, you get irrelevant answers.

Solution anybody?

So we discussed how better questions can be asked. One option is to amend the open innovation process with a phase where the crowd can deliver insights into unsolved problems they see with a current solution. They could deliver insights in the jobs that are still unsolved. Moreover, with these fresh insights even better solutions and ideas could be found. Any other idea?

Thomas Middelhoff was the CEO of the now insolvent German retail conglomerate Arcandor formerly known as KarstadtQuelle. Thomas Middelhoff has a good sense for timing. He left Arcandor in March 2009 just 3 months before the company had to file for bankrupcy in June. What made his stint at Arcandor so remarkable was not that he turned around the business of Arcandor but his ability to benefit personally from his position at Arcandor.

I am following the Arcandor business case for a while and I have written about the failure to innovate its business model in the past. So a recent  article of Süddeutsche on Arcandor grabed my attention.

The German daily Süddeutsche Zeitung reports (in German) that Middelhoff is by far better of than his former employer Arcandor and its employees that have lost their jobs. Süddeutsche Zeitung cites a confidential report of the auditors from Deloitte that acted on behalf of the German Federal Financial Supervisory Authority (BaFin).

Middelhoff opens his accounts to Süddeutsche Zeitung

Middelhoff had strong ties with the former German private bank Sal. Oppenheim that lost its independence in the aftermatch of the crisis of Arcandor. Mr. Middlehoff and his wife had loans of Euro 107 million with Sal. Oppenheim. With this loan, Middelhoffs financed their participation in a real estate fund of Josef Esch. Süddeutsche writes that in the wake of the insolvency of Arcandor Sal. Oppeheim wrote down the Middelhof-loans by 37.4 million since the financial situation of the Middelhoffs were “inadequate” and that the bank needed more collateral.

Confronted with the report Middelhoff revealed his financial situation to Süddeutsche. And here it becomes interesting. We can learn a lot from Middelhoff if you believe greed is good.

Prior to his assignment at Arcandor Middelhoff was already well-off. At Bertelsmann, he received a bonus of Euro 40 million from late Bertelsmann’s owner Reinhard Mohn for selling their share in AOL Europe for exorbitant price. Later, Middelhoff got a compensation of Euro 20 million for having to leave Bertelsmann due to a dispute with Reinhard Mohn.

Due to his good contacts with Arcandor’s majority shareholder Madeleine Schickedanz he started to work in June 2004 for KarstadtQuelle, the predecessor firm of Arcandor, first as chairman of the supervisory board later as the CEO. Here, he had the chance to rebuild the business model of department store Karstadt and of the dated mail-order house Quelle AG.

Budybody Middelhoff or financial engineering cannot fix your business model

Well, he was very busy as a manager but not with fixing the core problem of the dated business model but with M&A and financial engineering. He acquired parts of the touristic group Thomas Cook and sold the department stores to external investors. And the sales of department stores become a bommerang to Arandor since its rent payments climbed substantially for its stores. And the dated business could not generate suffient cash to pay for the higher rent. The sale of the property was a relief in the short term, but death in the mid term.

And who were the investors. “By chance” one of the investors was Middelhoff’s financial advisor Josef Esch. Actually, the Middelhoffs were invested in exactly these Oppenheim-Esch fonds that bought parts of the department stores.

Honi soit qui mal y pense or you scoundrel, when you think badly of this.

The Süddeutsche states: “What helped the private person Middelhoff harmed the CEO Middelhoff”. Actually, the prosecutors in German started an investigation into the opaque business practices of Mr. Middelhoff and so the last word of justice will be with the courts.

Even better – consulting for the financially stricken Sal. Oppenheim

You might think that this is already a good business for somebody who led a firm into insolvancy. Just wait. Sal. Oppenheim who financed parts of Arcandor and some months later lost its independence due to Arcandor’s bankrupcy offered Middelhoff an advisory contract for Euro 4 million a year. The remarkable agreement was disbanded after a few months. But as the duration of the contract was three years with an option for another year, Mr. Middelhoff got compensation of Euro 10 million from Sal. Oppenheim according to Süddeutsche Zeitung.

That is quite a remarable renummeration for somebody who failed as the CEO of Arcandor.

Take-aways from the Middelhoff story

• Look at the management less for what they announce but what they achieve.
• Do not be dazzled by financial engineering or corporate strategy moves! If the business model is broken, you have to fix or sell it. Financial tricks do not help you but can even harm the future of your business.
• Culture and values are an important part of any business model. If you as a shareholder accept behavior like this, you cannot expect your employees to follow the management in a dire situation.
• A bad business model is a bad business model. Use your common sense! Management is not a magic science but all about creating and exciting customers that are willing to pay. If you do not understand the business model, stop investing in it.