Posts Tagged ‘resource allocation theory’

Changing financials, changing economics, retailing and business model innovations

Wednesday, March 3rd, 2010

In the discussion on business model innovation the focus is often on the innovations regarding the value proposition or on the value architecture but it is interesting to look at the revenue model as well for starting points for an innovation.

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

One example: department stores vs. discounters

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

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