Posts Tagged ‘retail industry’

Architectural Innovation: Taking control of the value chain

Tuesday, January 4th, 2011

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. (more…)

Karstadt: Death of a legend (business model)

Friday, June 12th, 2009

The German retail and travel conglomerate Arcandor AG formerly known as KarstadtQuelle AG filed on June 9th 2009 for insolvency. It claims that the financial crisis is the reason. It had asked the German government in May for state aid but the government refused. But is the financial crisis the real reason for the dire situation? I do not think so. The business models of its retail activities (Karstadt and Quelle) are just dead. The management did not innovate on its business model and that is the reason for failure.

Most writers and bloggers take the music industry as a prime example for an industry that failed to innovate its core business model. But there are many other industries where failure to innovate its core business lead to their decline. A sad prime example of missed innovation is Karstadt, a large department store chain in Germany and Quelle, a German mail order powerhouse.

The Karstadt case is typical for a corporation that business model is dated. Instead of rejuvenating its business model or finding new business ideas the old business model is defended and by consolidating the industry even reinforced.

The next lesson is that all activities at corporate level like selling non-core assets do not solve your problems of an ailing business model. The solution must be found on the business level not on a corporate level. If you cannot fix it, than sell or close it early. Success in business is not defined on corporate level but by its business model!

In May 2009, the CEO of Arcandor, Mr. Eich asked for “a state guarantee to temporarily bridge the gap of the currently non-functioning financial markets.” [update: link no longer available] Arcandor did not want to have any handouts nor a state participation in the company. It promised that it will repay the loan “to the last penny.” It claimed that the credit crunch is the main reason for its financial stress.

But is this really true?

The only constant in retailing is business model innovation

Retail markets in general are dynamic markets where new business models destroy old ones and create new fortunes. Zara, Aldi, H&M, IKEA or Carefour all reinvented their retail category and made their owners rich. But since the whole market did not grow as fast as the newcomers, the incumbents suffered losses in market shares and sales. (more…)