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

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.

The value proposition is the defining moment of any business, not the product or the service you offer. But it is important to realize that it is not of importance what you write in or think up for your business plan but what customers perceive to be your value. And there can be a huge mismatch.

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!

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.

The Swiss private banks are under pressure to change their business model. It is not just pressure from other states that want to fight tax evasion via exchange of information on bank customers but also from employers that try to sell stolen customers’ data  to foreign governments.

The big news in Switzerland is that an informant, crook or thief – whatever you like to call him depends from your standpoint – has offered the German authorities data from 1,500 German customers of Swiss Banks that have allegedly dodged taxes. Last year, another informant stole data on 3,000 French bank clients from the HSBC branch in Switzerland and sold it to the French authorities. And in 2008, Germany already purchased data on German customers of the Liechtenstein Bank LGT. The LGT case cost the German government several million Euro but they received a far higher pay-back on its investment form all the taxes and fines that the busted tax evaders had to pay.

There will be more

And these three data thefts will not be the last. It is not only the authorities of high-tax countries like France or Germany that see their high return of investment if they buy data from informants but also there will be more willing bankers that will sell data of its customers. Why?

It’s the value proposition for the bankers, stupid!

In the business model canvas we see that we need also a value proposition for our stakeholders or partners in a business model. And that is what some banks forgot.

If you hire your bankers via a big salary you get mercenaries not trustworthy advisors to your customers.

If you use incentives that only measures the bank performance and not the customers’ than you transform even your most loyal client advisor into a short-sighted performance optimizer that cares more for its personal fortune than for your clients’ or your banks well-being.

And then you do not have to be surprised if ethics are low and your employers will be attracted by an even higher award when they become informants to government authorities or- less bad – takes your clients to his new employer that offered him more.

If you treat a human being as a mercenary be not surprised if he behave like one.

You need a value proposition for your employees that goes beyond money

The former business model of Swiss private banking relied on trustworthiness, professionalism and banking secrecy. And they had aligned also their total business model to this. Bankers were proud to work for their bank and to protect the interest of their clients. And customers trusted the Swiss banks.

But then came the hubris of the managers in private banking. They wanted to grown and be as well regarded in the banking industry as their friends from investment banking. And to do so, they hired teams from other banks by paying more salary and bonuses and selling complex structured products to their clients. The higher salaries were compensated by the higher margins the banks earned with the complex new products.

With this new game two things changed: First, you got a new kind of employees that were purely money driven and their loyalty was mostly to the money not to the bank anymore. Second, the banks jeopardized with their powerplay the value proposition they business is based on: trustworthiness.

So banks should not be surprised to see more informants (ex-employees) who will  sell data to foreign authorities. And with every new scandal the key value proposition to their current customers – their trustworthiness – will be diluted. The only solution is not to stick to the old business model but to build a new one that incorporates also a value proposition to your employees that is not purely based on money but on meaning.

To be honest, I get a bit bored about the mantra that design thinking will solve the problems of large corporation. Well, when I go through the case studies at Ideo I am extremely impressed by their client list but not about the output. I have seen several design thinking sessions and I am not impressed at all with the output. The results are very often: More-of-the-Same but with fancier design.

Wer hat es erfunden? Novo Nordisk insulin pen

Where is the invention from design thinking that changed the industry? Where is the iTunes or the Kindle of Ideo? The problem with design thinking starts very early in the process with the problem definition phase. And that is where large corporations fail. They define the scope too narrow and than you get nice new things that sustain your current business but not new business models that rock your industry and yourself.

Ideo is a very good (self-) marketing & design firm but not an industry rocking firm. Large firms just love Ideo because Ideo just offers such a well designed process to solve the big problem of “being not innovative”. You hire Ideo for comforting yourself for not using your own common sense and your own customer insights. You just outsource your understanding of the customer to Ideo.

And how innovative are Ideo’s ideas?

Let’s take the example of the insulin pen Ideo describes on its homepage as a case [update 22nd Oct 2010, case is not available on IDEOs homepage any longer due to redesign of page]. They did the work for Lilly in 1997. Well, that is not really outstanding since the Danish firm Novo Nordisk introduced the pen in 1985. So Lilly was just catching up to this formerly unimportant drug firm from Denmark that solved 12 years earlier the problem that Ideo solved for Lilly. Novo Nordisk was a business innovator. Lilly is not.

Another show case of Ideo is the modular shopping cart they did in project for the TV channel ABC. Instead of having one big bulky shopping cart they came up with a modular cart that is better suited for today’s shopping habits. Definitely, the new shopping cart is nice but definitely not industry changing. Industry changing were such firms as Walmart or discounters like Aldi. They changed the retailing industry forever. For fashion retailers examples are Zara or H&M who saw that fashion is as much logistics as it is about fashion.

Adapt the Definition phase of design thinking

We have to watch out that design thinking will not become the next management fad like scientific management. I propose we go back to what God gave us, our common sense or in German “gesunder Menschenverstand” and that we use more our curiosity why the things are the way they are. The business model canvas will help us to understand the business we are in.

The business model canvas by Patrick Stähler

What is great about design thinking that is all about imagination of the unknown. But to really challenge the hidden assumption of any business more time should be devoted to the definition phase and to the unlearning phase. Only, when you challenge the hidden dominant logic of an industry you can rock the industry. If you do so, the design thinking process can be valuable to your company.

Unhiding the hidden dominant logic by looking at the jobs you do for your customers

So the best way to start is to unbundle your current value proposition. Ask questions like which job do you solve for your customers. And quite often, to your surprise, you solve very different jobs for different customers with the same product. And with dissecting the value proposition into job-to-be-done very interesting new problems emerge on which you can apply the design thinking approach.

I have done this several times already in customer projects and it works well. I used this job based unbundling on newspapers in my recent post on “Who says paper is dead?“.

I am interested in your experience with design thinking and business model innovations. Love to hear from you.

In the discussion on business model innovation an important point is missing: the culture in which the business is conducted. A business is all about people “creating” customers.

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.

Dell announced on September 21, 2009 that it will acquire Perot System for $3.9 billion. Dell was the poster child of business model innovation. It had “invented” the direct sales model for PCs. Instead of going via resellers Dell sold its computers directly via telephone or the Internet to its customers. Now, Dell is extending its traditional business into services. Will this work?

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)

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.

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.