The strange business model of airlines

The airline business is a strange business and in desperate need for business model innovation. On the one hand, more people fly than ever to prices lower than ever. IATA, the industry body, states that the real cost of travel has fallen in the last 40 years by about 60% and the number of travelers increased tenfold. Air freight has grown in this period by a factor of fourteen. (See IATA Vision 2050) That sounds like a very successful industry. Is it? However, on the other hand, airlines are notorious to not even earning their cost of capital and producing unhappy customers.

 

During the 2000s the average airline generated an EBIT margin of just 0.7%. Taken a longer perspective, the figures are as drastic. From 1970 to 2010 the airline industry generated over USD 12,000 billions of revenues in today’s prices, but only a total of USD 19 billion of net post-tax profits; a margin of only 0.1%.

Another dull figures: Around USD 500 billion of investors’ capital is tied up in the airline industry. Normally, investors would expect a return on capital of around 7-8%. Taken the 500 billion that would mean a return of 40 billion annually to cover the cost of capital. But what did the airlines earn? 20 billion or 20 billion less that the capital would have earned elsewhere. The airline industry is a big capital destroyer. Interestingly, other firms along the travel value chain like airports or computer reservation systems earned excess returns. So there is profit in the travel industry but not with the capital-intensive airlines. Airlines are a dismal industry.

So are customers at least happy? Just type in Google the search “airline experience” and enjoy all the customer stories about flights. And watch the film “United breaks Guitars” like 12 million others did on Youtube.

What went wrong and is there a solution to it? And think about it why we all hunt of low prices on traveling while we spent USD 5 for a latte at Starbucks. Why are we so price conscious on travelling and not on coffee?

Here are some thoughts I presented at the 17th international airline conference last fall in Seattle. Thanks to Nawal Taneja, Dietmar Kirchner and Rob Solomon for the kind invitation.

Thesis 1: Airlines are masters of transportation economics, not customer experiences

It seems that all airline managers are great students of economics but not of entrepreneurship and marketing. Since they have a perishable good (empty seats on an upcoming flight are like perishable goods), they believe strongly in variable pricing by exploiting the maximal price customers are willing to pay.

That sounds very reasonable at first, since who wants to argue with economists and their theoretical models, but what airlines have forgotten over time is, that if you treat customers like rational customers then you will get rational customers and extremely price sensible customers in the end.  However, there is a good reason why economics is called a dismal science. So if you follow economists, Continue reading The strange business model of airlines

The hidden cost of Apple’s Business Model

Apple is the poster child of business model innovation. Apple has reinvented several business like music with itunes and the ipod, the telecommunication industry with its iphones and currently, the publishing/news/information industry with the ipad. But success is also associated with costs we should consider.

Apple has a market capitalization of 576.79 billion USD. There are 43’400’000 search results at Google when you look up Apple Business Model Innovation. Apple is the household name for innovation for sexy products and services for which people camp in front of stores to be the first to get the latest gadgets.

But it is also interesting to look at the cost associated with Apple’s success. Take a look at infographics made by mbaonline.com.

Fighting for the next business model in the pets industry

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 27th, 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. Continue reading Fighting for the next business model in the pets industry

Top 10 in 2011

Here are the Top 10s of this blog in 2011. I hope they give you some insights. More than 45.500 visits and 72.458 pages impressions were recored in 2011 (12/26/10-12/25/11) on this blog. Thank you very much!! All of you are a great motivation to me and inspiration to the field of business model innovation and business model design.

I have prepared my personal highlights and the Top 10 of post you have visited during 2011. The other Top 10s are about the search terms around my blog and the countries where all the visitors come from.

Personal Highlights

  1. It is amazing how knowledge dissemination has changed over the last years thanks to the internet. Today, relevance counts more than pure marketing or brand power. A big thanks to Google that made it possible that readers find the blog. Today, knowledge disseminates from students to professor, from lower ranks to CEOs. A revolution in knowledge management.
  2. Thanks to the blog and its readers, I got assignments all over the world.  This year, I loved particularly to work in Seattle, Singapur and Cairo (shortly before the revolution). Good luck to all my friends in Egypt and keep up the free and entrepreneurial spirit I felt there.
  3. Thanks to all my readers and clients, 2011 was a very exciting year. 2012 will be exciting as well. I have found with with the innovation campus of the Wolfsburg AG, a public private partnership between the city of Wolfsburg and Volkswagen AG, a sponsor for a tool box for entrepreneurs. The tool box will be out by mid 2012. The tool box will be in German and is targeted at all entrepreneurs that what to make a difference in life.
  4. fluidminds has launched a new product, a five day workshop for intrapreneurs in large corporations. First pilots in 2011 and more to come in 2012. It is fantastic to see how fast you can find customer insights and then develop great business and growth initiatives on top of them.
If you are interested in the Toolbox, please subscribe here. The news will be in German.


Continue reading Top 10 in 2011

Four core questions you need to answer for any great business

Thanks to the business model canvas people are enthusiastic to build new business models and find business model innovations, but often they get lost in technocratic details. They just see building blocks but they forget the overal logic every great business needs.

Actually, you as an entrepreneur have to answer just one core question: Why should your firm exist on this planet? You need a Daseinseinsberechtigung (right to exist) for your firm. This is a very philosophical question. To be more operational, you can break down the Daseins question into four core questions. But still the answers will not come with a pure analytical process but with creativity and lot’s of empathy for your customers and their jobs they want to have solved. 

The technocratic approach is useless for finding love (source: http://xkcd.com/55/)

The four core questions on your business model canvas

  1. Why should customers be excited to do business with you? That is the value proposition. You could almost go as far as asking: Why should customers love to do business with you?
  2. How do you create the excitement of your customers in a productive way? That is the value architecture or operating model. Here you describe how you fulfill your value proposition.
  3. How do you earn money? That is your revenue model or the profit formula and here you should be able to explain why you as the owner should be excited about the business.
  4. What are your values you live up to in your team and with your customers and partners? That is the human side of the business and of utmost important, since it is the most difficult part to copy. I call it the culture and values of a business.

For these questions, you need compelling answers and the nine or elven building blocks are very helpful in answering the questions but do not get lost in details but look at the broader picture and see the interdependencies.  If you can answer the questions you have a great strategy that is customer-oriented, profitable and sustainable.

The bad part for any mediocre business is that you cannot answer the questions. Please all mediocre business, why don’t you try harder and work on “why should your customers be exicted about you?” instead of optimizing a dull business.

Markets vs customer driven business model design

Do you have to be market-oriented or is this again one of the buzz words that hides more than its reveals? Or should you be customer driven? Let’s take a look at the two words and concepts and see why Alex and I have chosen not the term market but customers for our canvases.

I just return from a workshop for entrepreneurs in Wolfsburg, the birthplace of Volkswagen. We used the business model canvas to focus the entrepreneurs and their coaches on the core building blocks of a business models.

Interestingly, most participants of the workshop always talked about markets, that we need to be more market oriented, that we have to conquer new markets. But is this true?

Customers pay your bill not "markets"

Markets, top-down approach

Markets are the sum of customers that spent money and therefore have shown a demand in the market. But a market is abstract and impersonal. You can not sell your product to a market. There is no Mrs Market to write a bill to and that is exactly the problem for entrepreneurs. You might be in a great, growing and profitable market but that does not mean you have one single customer who pays your bills.

Markets is a top-down approach very well suited for analyst and consultants. The market is great for analysis but not good to sell something to.

Customers, bottom-up approach

Let’s take a look at customers. As a business you need an individual client that is willing to pay for the service or product you offer. Continue reading Markets vs customer driven business model design

The Art of Painting on the Business Model Canvas

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. Continue reading The Art of Painting on the Business Model Canvas

What business are you in? Business models as social constructs

“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.

Continue reading What business are you in? Business models as social constructs

Can you copy a business model? Groupon and its clones

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.

Business Model Copycats

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 Continue reading Can you copy a business model? Groupon and its clones

The Beauty of freaks: A special business model of chefs and mountain guides

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. Continue reading The Beauty of freaks: A special business model of chefs and mountain guides