Rethinking your industry logic: Cross Industry Business Model Innovation

Business Structure

’Our industry is unique and should not be compared with other industries!’ This is a common phrase I have heard countless times throughout my consulting career.

But is it true?

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Karstadt: Death of a legend (business model)

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.

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It is the customer!

The typical answer from managers to the question “What is the purpose of your business?” is: “to make money”. Well, that is to some point right but the money comes from customers and therefore the purpose of a business is to find profitable customers. And financing your sales to your customers is only sustainable when you see the cash in your pockets in the end. That basic purpose got lost over the last years of shareholder value thinking.

I gave last week a workshop on business model innovation for a large Swiss technology firm. The firm is well entrenched with its customers, you can almost call the firm a purveyor to the court for some customers. But times are changing and therefore did the new management arrange a workshop on customer centric business model innovations.

The first question I asked was the classical Peter Drucker question: What is the purpose of your business? And I got the typical answer from the senior managers: “To make money or to make a profit.”

That is of course right but: Where is the money coming from? How can you earn money for your shareholders without somebody who pays you? Where is your salary coming from? Is it really the company or where is the cash coming from?

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Money as the only differentiator

“We have to pay so high salaries otherwise we don’t get the right people” is often heard from firms even in the crisis.  Particularly the failed banking industry was very good in this salary death spiral. Salary was seen in this market as the only differentiators with great results.

I always wondered why the so highly paid managers could not find other reasons than money. Are they so uncreative that they had only the pricing mechanism as the only marketing tool in their recruiting process? Did they ever think about who they hired when money is the only reason why one should work for a particular bank? Can you develop a long-term oriented, customer centric bank when you have soldiers of fortune as employees? Have they every thought about what kind of culture they have created in this process? Have they ever thought about the customer experience they have created with a recruiting policy like that?

Well, the bankers will tell you they were driven by the short term orientation of the investors and the financial market in general. They will tell you that everybody was doing it so they had to do it as well.

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How large companies react to the crisis

The current crisis could be a great start to rethink your business, but large companies do the opposite. Besides the usual and essential task to save cash they push their business units into more controlling and reporting of the existing business.

Today, I had a long chat with an executive from a business unit in a large company. We talked about the reaction of the headquarters to the financial crisis which is hitting his business hard. He is very busy in the moment to cut unnecessary costs and to save cash wherever possible. At the same time he is spending a lot of time with customers to find new projects. Besides pressure on the margin customers have canceled orders but his position is still better than of his competitors due to his excellent customer relation.

At the same time he feels that his business model is too similar to the strategies of his competitors.

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