Business model innovation at Netflix (again)

Netflix has announced it is going to release its first official movie in 2015. This is a nice example of what together with Chris Zott we define as business model innovation – introducing a new business model in its industry. Netflix was started by Reed Hastings originally innovating the business model in the movie rental industry, dislodging Blockbuster as the reference for home video rental by organizing a new way to distribute the same product, movie rental, through sending DVDs by mail to customers instead of making customers go to a video rental shop.

Netflix thus replaced the established brick-and-mortar movie distribution system based on rental shops as practiced by such companies as Blockbuster, developing instead an online catalog and instituting a partnership with the U.S. Postal Service to ship movies with a pre-paid return envelope directly to user homes after burning DVDs just-in-time as the customers passed their movie orders through the Internet.  By offering unlimited rentals for a low-priced monthly subscription and enhancing user experience with a highly sophisticated recommendation system based on member ratings, Netflix quickly gained a competitive advantage in the movie distribution industry despite being a latecomer.  Customers flocked to this new company that offered a much more convenient experience of ordering movies online as compared to the trouble of having to physically go to the competitors’ rental shops and paying late fees each time they forgot to return a movie on time.

Netflix innovated again, moving its business model into streaming services, and today it is in a way not surprising to read about Netflix’s efforts to also control the content provided to its customers. One has to keep in mind though that Netflix is rather an exception than a rule, as from research on established firms we know that it is actually very difficult for incumbents to change and adapt their business models, when inertia is generally the rule and organizational routines determine the future. Many companies, such as Kodak, illustrate this. Business model innovation is not a panacea though, as it has to be designed very carefully due to several constraints, faced by both new, but also established firms trying to innovate. Netflix has managed this feat successfully several times now, and can probably offer several lessons to careful observers.

Business Model Innovation at Tesla

After the demise of Better Place, I have picked up the Tesla case to teach in my business model innovation course. I think it illustrates nicely how a start-up can try to compete in a very difficult and mature industry by focusing on very particular choices that differentiate it from others. These choices are what enables business model innovation at Tesla. Contrary to Christensens’s claims about disruptive innovation coming from the lower-cost competitors providing for unsatisfied customers, Tesla started from the top, first serving the top of the market, while nourishing its dreams about expansion into the mass market (for more recent criticism of the disruption theory check here).

Another part of Tesla’s business model innovation is the development of key partnerships with several high-status organizations such as Daimler, Toyota, BMW, Panasonic, etc. Developing a network advantage, as argue Greve, Rowley and Shipilov in their new book, is definitely becoming more and more important to gain a competitive edge. Mastering networks is more challenging for new firms, however.

At the same time, partnerships with Renault as well as Israeli government and energy utility companies did not save BetterPlace from bankruptcy. Maybe consumers will have the last say on this (as well as many other up and coming innovations) – and Model S seems to find more acceptance than Renault EV models these days.

Interesting industry to continue following for BMI enthusiasts in any case. For more about Tesla, check out this National Geographic (a bit bombastic) reportage about the company here:

Winner of the Heizer Award

This summer has been very productive for me, involving a lot of  research and travel work. Particularly, I have been pleasantly surprised to win the Heizer award from the Entrepreneurship division of the Academy of Management. It is a great honor and promise for the future (not to say responsibility) as this award makes one part of a select researchers’ club, joining other prominent scholars such as William Gartner, Patricia McDougall, Harry Sapienza, Ron Mitchell, Gary Dushnitsky, Denis Gregoire, or Nathan Furr, who, among several others, won the award for the dissertation in their time. I have also learnt a lot more about the Academy this year, due to the doctoral consortium for the junior faculty, kindly (and well) organized by Kim Eddleston and Franz Kellermanns, and especially while reading the book edited by Ron Mitchell about “Research Excellence”.

Below is the picture immortalizing myself with Skip Heizer and his wife Lynn, receiving the award at the AOM conference in Philadelphia.

Heizer-2

I also learnt more about the history of venture capital as Ned Heizer (1929-2009) was actually one of the founders of the industry in Chicago, funding several startups in the 1960ies and 1970ies, including Federal Express and Intel, while unfortunately saying “no” to Steve Jobs’ fledgling Apple. Interestingly, Ned Heizer’s background was very diverse. He majored in chemical engineering as an undergraduate, then got a law degree from Yale, worked for Arthur Andersen to become a certified public accountant, then for Kidder Peabody & co in investment banking, and then at Booz Allen and Hamilton to finish off with management consulting. This experience apparently equipped him very well for his ambitions as a venture capitalist thereafter. The importance of broad experience in Ned Heizer’s case relates very nicely to the findings of my dissertation, where I explain how the diversity of founders’ experience, in combination with power to execute, enables them to innovate business models. Based on a single observation in this case, for Ned Heizer diversity of experience also helped to succeed in venture capital.

Although the prescription might be clear – get a lot of diverse experience before trying to innovate when starting a business (or funding one), things are not as straightforward unfortunately. To be successful in our society, there are strong pressures not to venture outside one’s field of expertise during one’s career, which might proceed in different firms, but often constrained to one or two industries. Thus, entrepreneurs with diverse experiences from various distinct fields such as finance, chemistry, healthcare, technology, accounting, or cultural industries combined are rather an exception than the rule. Despite finishing my dissertation, I continue to find this topic fascinating and would love to learn more about it in the future.

Entrepreneurs in Different Countries

Entrepreneurship is one subject, regrouping insights and many strands of wisdom under one big umbrella. However, the fate of entrepreneurs as well as their ventures are both very different across countries. I was recently reading about the story of Durov, the Russian founder of Facebook clone VKontakte. The article highlighted the parallels, but also made clear the differences between Durov and other well-known entrepreneurs, such as Mark Zuckerberg or Steve Jobs. While the latter are usually celebrated in their countries, told stories (or movies) about, and generally admired (while publicly discussing character details in the proper American style), the former are asked to leave their creations half-grown and apply for a different passport.

Other countries, such as France or Spain, are different again, characterized by a generalized silence, often replaced by pure ignorance about own entrepreneur role models. Despite startups being founded in these countries, few know the names of the founders for such companies as Vente Privée (Jacques-Antoine Granjon), Free (Xavier Niel), eDreams (Javier Pérez-Tenessa de Block), or JazzTel and Fon (Martín Varsavsky). Different contrasting models across the countries reflect the realities on the ground – maverick (and probably fleeting) entrepreneurs in Russia getting ousted by the government, whereas European Union decries the absence of ‘engouement’ for entrepreneurship on its own soil. While Richard Branson, Anita Roddick, Ray Kroc, Sam Walton, and others are celebrated, others fall into oblivion. Good luck to you, Durov…

For more information on French entrepreneurs in particular, check out this video:

http://www.bbc.com/news/business-28194256

 

Learning from Failure – Alberto Santos-Dumont and Nespresso

This is a short English version of my original post at HBR France about how to innovate after failure (in French). The post has been inspired by my research into business model innovation as well as the adventures of Alberto Santos-Dumont. Alberto was a French-Brazilian aviation pioneer from the early 20th century. Passionate about aviation, Alberto spent several years of his life, using up much of his father’s fortune, amassed at the coffee plantations in Brazil, to build a perfect flying machine.

After numerous experiments with the smallest balloon in the world in 1898, Alberto embarked on the development of airships or dirigibles (balloon with an engine). Alberto built eleven airships, which he financed and flew himself until 1905. He was especially motivated to win the competition launched by the French industrialist Henry Deutsch de la Meurthe, offering 100,000 francs to the constructor of an airship that could travel in less than 30 minutes the distance between Saint-Cloud and the Eiffel Tower in Paris. It was only after several failures and near-disasters with different models that Alberto managed to win the prize in 1901. With each new model, Santos-Dumont changed and experimented with several parameters of his airship, and it was only after several years that he managed to build a perfect airship, and then an airplane.

I argue in my HBR post that systematic experimentation is important not only to build airships but also to introduce new products and to innovate business models. In a more contemporary example, Nestlé has experimented with many markets and business models before finding success for the Nespresso system. In the early 1980s Nestlé first tried to sell automatic machines to make high-quality espresso to restaurants. After failing with this market, the company decided to change in 1982, trying to sell Nespresso to offices instead. After another failure, and before the final closure of the project by management, Nestlé decided to give the last chance to selling Nespresso machine and capsules to the households in 1987. Despite these inauspicious beginnings, the rest of the story is history.

Experimentation and systematic learning from failure are very important components of the innovation process. In addition, the role of time is significant. Innovation is a process, a state of mind rather than an outcome . After launching the first balloon in 1898, Alberto spent several years building and destroying his airships before starting the first industrial manufacturing plant for airplanes with Adolphe Clément in 1908. It was his plane Demoiselle No. 19 , which became the world’s first aircraft produced in series , with a production time of 15 days per aircraft.

Similarly, Nestlé bought the first patents for Nespresso, originally developed at the Battelle Institute in Geneva in 1974, launched the product to the household market during the late 1980ies, and reached break-even on the project in 1995, more than twenty years later.

Innovation can require several years to bear fruit. It might be wise to follow Jacques Prévert’s advice for executing innovative tasks (about how to make the portrait of a bird in this case):

“do not become discouraged
wait
wait for years if you have to
the speed or the sluggishness of the bird’s arrival
has no effect
on the outcome of your painting”.

For more information about Alberto Santos-Dumont, check this movie:

Firms, names, and identity

Starting to work on a new project about firm identities, I came across this list explaining the origins of some of the well-known firms’ names. It has been reposted in several blogs, thus I am not sure about the origin or the veracity of some of these stories. Suffice it to say they make for an entertaining read. So what is the relationship between firm name, its origins and founders, and firm identity? Naming is a very human and a very social activity, names help us make sense of people, things, and firms. Some argue that names actually enact the reality we perceive around us. What’s in a name? If you are entrepreneur, how should you name your business? So far more questions than answers for me, an interesting reflection to be continued.

Adobe  – Came from name of the river Adobe Creek that ran behind the house of founder John Warnock.
Apache – It got its name because its founders got started by applying patches to code written for NCSA’s httpd daemon. The result was ‘A PAtCHy’ server -– thus, the name Apache.
Apple Computers – Steve Jobs was three months late in filing a name for the business because he didn’t get any better name for his new company. So one day he told to the staff: “If I’ll not get better name by 5 o’clock today, our company’s name will be anything he likes…” So at 5 o’clcok nobody come up with better name, and he was eating Apple that time… so he keep the name of the company ‘Apple Computers’.
CISCO – Its not an acronym but the short for San Francisco.
Google – The name started as a jokey boast about the amount of information the search-engine would be able to search. It was originally named ‘Googol’, a word for the number represented by 1 followed by 100 zeros. After founders – Stanford grad students Sergey Brin and Larry Page resented their project to an angel investor, they received a cheque made out to ‘Google’
Hewlett-Packard (HP) – Bill Hewlett and Dave Packard tossed a coin to decide whether the company they founded would be called Hewlett-Packard or Packard-Hewlett, and the winner was NOT Bill…the winner was Dave.
Hotmail – Founder Jack Smith got the idea of accessing e-mail via the web from a computer anywhere in the world. When Sabeer Bhatia came up with the business plan for the mail service, he tried all kinds of names ending in ‘mail’ and finally settled for hotmail as it included the letters “html” – the programming language used to write web pages. It was initially referred to as HoTMaiL with selective upper casing.
Intel – Bob Noyce and Gordon Moore wanted to name their new company ‘Moore Noyce’ but that was already trademarked by a hotel chain, so they had to settle for an acronym of INTegrated ELectronics = INTEL
Lotus (Notes) – Mitch Kapor got the name for his company from ‘The Lotus Position’ or ‘Padmasana’. Kapor used to be a teacher of Transcendental Meditation of Maharishi Mahesh Yogi.
Microsoft – Coined by Bill Gates to represent the company that was devoted to MICROcomputer SOFTware. Originally christened Micro-Soft, the ‘-‘ was removed later on.
Motorola – Founder Paul Galvin came up with this name when his company started manufacturing radios for cars. The popular radio company at the time was called Victrola.
ORACLE – Larry Ellison and Bob Oats were working on a consulting project for the CIA (Central Intelligence Agency). The code name for the project was called Oracle (the CIA saw this as the system to give answers to all questions or something such). Acronym for: One Real A****** Called Larry Ellison??
Red Hat – Company founder Marc Ewing was given the Cornell lacrosse team cap (with red and white stripes) while at college by his grandfather. He lost it and had to search for it desperately. The manual of the beta version of Red Hat Linux had an appeal to readers to return his Red Hat if found by anyone!
SAP – “Systems, Applications, Products in Data Processing”, formed by 4 ex-IBM employees who used to work in the ‘Systems/Applications/Projects’ group of IBM.
Sony – From the Latin word ’sonus’ meaning sound, and ’sonny’ a slang used by Americans to refer to a bright youngster.
SUN – Founded by 4 Stanford University buddies, SUN is the acronym for Stanford University Network.
Xerox – The inventor, Chestor Carlson, named his product trying to say dry’ (as it was dry copying, markedly different from the then prevailing wet copying). The Greek root `xer‘ means dry.
Yahoo! – The word was invented by Jonathan Swift and used in his book ‘Gulliver’s Travels’. It represents a person who is repulsive in appearance and action and is barely human. Yahoo! founders Jerry Yang and David Filo selected the name because they considered themselves yahoos.