Here is a short video where I discuss my research at the 2014 AOM meeting in Philadelphia. Thanks to Andrew and family for filming and posting!
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.
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:
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 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:
In my research, I theorize about designing robust business models. One example of such a design is Spotify. The Swedish start-up followed up on Apple’s revolution in the music industry, by instead of downloads offering a streaming service, based on a monthly subscription fee for listening to Spotify’s music library. Spotify offered listeners an improved experience by enabling them to almost instantaneoulsy access millions (over 13M actually) of songs without ever downloading them to their computer (and thus reducing the urge for piracy).
Spotify designed a robust business model by not only solving the music fans’ problem of legitimate music access across devices, but also by involving the record labels in a profitable formula. Indeed, music labels report Spotify to be the second-biggest, and in some countries like Sweden or UK, THE biggest source of revenue from digital music. Moreover, Spotify also provides these partners with very useful and very detailed data about the evolving music tastes, something few other distribution channels can easily offer. Furthermore, Spotify smartly partnered with Facebook to generate positive network effects for both parties by sharing your Spotify activities with friends. By relying on these very legitimate partners, Spotify, a start-up, quickly gained rapid proliferation in Europe, where granted less competition exists, – and has also recently entered the US market, a harder nut to crack due to the much higher competition and the prevalence of iTunes there.
It would be interesting to see which business model will become the dominant design in the future for the music industry – owning your songs through downloads on iTunes or subscribing to a streaming model developed by Spotify? Apple has already retaliated by launching “Apple Radio”, implicitly recognizing the threat this challenger might be posing to the incumbent…the saga to be continued!
I have begun discussing learning from failure in a previous post this spring – and now I have successfully taught a class during my Introduction to Entrepreneurship course on WebVan, a case of as an impressive failure as they get from the Internet bubble times of the early 2000s.
Similar to Prodigy I discussed in the past, WebVan also erred on the side of too much too early, although its game was over much quicker. Offering users the possibility to do all their grocery shopping online in 1999 was a precursor new business model in the retail industry then, as it still remains so to this day. But WebVan founders did not stop there – they wanted not only to be an online Wal-Mart, but also to combine the capabilities of a Fed-Ex and an Amazon all in one as well. The company managed to convince several investors about its idea feasibility and assembled over $800M in investment from both venture capital and an early IPO in 1999. However, the good fortunes and investor credibility did not last long – by July 2001 the company was bankrupt and had to fire all of its 2 000 employees.
As discussed when teaching this case, several lessons can be learnt from both WebVan’s ambition and the execution thereof. The below video of their distribution center in California gives a more tangible idea about both:
Today, 15 years later, it is still difficult to encounter perfect grocery shopping solutions online, although several companies are experimenting with new business models in this space. One successful model has been pioneered in Sweden, where customers are not only offered their grocery shopping, they receive a full bag of ingredients with cooking instructions for their working week. This model has been penetrating Europe through different shapes and forms, with HelloFresh in the UK or QueRico experimenting in Spain. On much lower scale and with much fewer fixed costs, maybe these models will be more successful where WebVan’s Napoleonian vision failed before?
I have recently finished reading Ron Adner’s book on ecosystems, the Wide Lens. As luck would have it, during one of my research presentations on business models, an audience member asked me to clarify the difference between business models and ecosystems. I found it an interesting question, and that is what I will attempt to answer in this post.
Ron’s main argument in the book is that in order to innovate firms have to apply a wide lens, not only considering their customers’ needs and implementing their ideas well, but they also have to be aware of what their complementors and competitors are working on – that is considering the whole ecosystem instead of looking only at their own strategy. Ron used several examples of innovation failures that I found useful and informative – for instance, he explained how Michelin failed to implement new run-flat tires, or how Nokia rushed too quickly with the launch of its first 3G phone. Here is a video where he explains what happened to Michelin:
Interestingly, Ron also used several successful (or expected-to-succeed) examples about which I also talk in my business model classes such as Apple, M-Pesa, and Better Place. So coming back to the original question of this post – what is the difference or the link between business models and ecosystems? Basically, Ron’s point is that ecosystems matter in today’s business world. The premise is also similar in the business model research – given the more complex world we live in today, more novel business models are introduced in addition to simple product innovation seen in the past (Zott and Amit, 2010; Teece, 2010). Whereas ecosystem research takes the “wide lens”, business model research keeps the strategic focus on the focal firm. Although the assumptions are similar, the locus of attention is different in these two burgeoning research streams.