Category Archives: Innovation

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.

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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.

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:

Constructing Robust Business Models – Spotify

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!

Switzerland, that Small and Hilly Country (2: Nespresso)

The other “Swiss” case that I teach, in addition to Swatch, is the Nespresso Story.  Although, again, this case involves a new product, the Nespresso machine and its capsules, it also contains elements of business model innovation, imported by Nestle to the coffee industry from other spheres.  Nespresso capitalizes on the well-known business model called razor-and-blade model, practiced for instance by Gillette: the Boston-based company has been selling razors at cost while making its profits on the blades.  Other companies have used this strategy, such as printer firms, known for making their profits on the ink cartridges rather than on the printers themselves.  Apple has applied this model “in reverse”, when through the creation of iTunes it made its iPod sales explode.

But who was the first one, the originator? A difficult question to answer in the business world, where imitation thrives in the same industry or across industry boundaries.  In my genealogy of business ideas, I go back all the way to George Eastman.  When he invented first the film roll and then the Kodak camera, he commercialized the new product with an astute and innovative business model: the camera was preloaded with film for 100 exposures, sold to customers, who then had to send the whole camera back to the company to have their prints developed, new film inserted, and the camera shipped back to the customer again (Chandler, 1977: 297). “You press the button, we do the rest” the advertising slogan in 1888 ran.  Thus, Eastman figured a way for Kodak to have a continuous revenue stream, based not only on selling the new product, camera, but on supplying film and developing pictures for its customers.

Similarly, Nespresso sells its machine at cost, while making most of its profits on the capsules.  An ingenious system, for which the first patent was deposited in 1974.  Interestingly, it took the company until 1995 to break even on this R&D project, that first catered to the restaurants, then tried its luck with the office market, before turning to the households as the last resort to sell the new machine.  Although slow, the success has crowned Nestle’s R&D efforts with this “skunk works” project.

Today, Nespresso faces new challenges, due to its success – imitation.  It first started with Senseo, developed by Philips in 2001 for the mass-market, and has continued since, especially annoying for the Nespresso model being companies attempting to supply capsules that can be used with the existing Nespresso machines.  For instance, banking on the Nespresso capsules being made from aluminium and not that environment-friendly, Ethical Coffee Company, led by one of the Nespresso’s own ex-employees, tries to sell recyclable capsules, while ridiculing Nespresso for going to court to try to stop them:

Who is right, who is wrong in this case?  Difficult to decide, but the message remains clear: if successful, any innovator has to carefully consider and anticipate how to prevent imitators from appropriating value from the original innovation.