Category Archives: Teaching

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:

WebVan and Learning from Failure

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?

How to attract resources?

One of the pressing questions for any burgeoning entrepreneur is how to attract the oh-so-needed resources for her venture?  Family and friends are the usual suspects, but often it is far from enough.   In the entrepreneurship research, two answers focus around symbolic management and bricolage before turning to the “real” investors such as business angels or venture capitalists.

Symbolic management is basically about using symbols to persuade your audiences about your credibility and legitimacy.  Why should your future customers, partners, or employees trust a newly minted start-up with a lot of ambitions and a laptop?  An office in a good neighborhood, a suit for the occasion, an award or a good recommendation can all do the trick.  Being skillful in symbolic management might be very helpful if other resources are missing, argue Chris Zott and Quy Huy in their research on the topic.

Taking a different road, Nelson and Baker picked up the old Levi-Strauss concept of bricolage and wrote a compelling story about how entrepreneurs can use various scrap resources to fulfill their needs at much lower costs than you would expect.  These are people that refuse to accept limitations their environment puts on them.

Finally, when talking about resource mobilization in the classroom, I use the following video by Amanda Palmer, who has her own very personal view on the topic – and some advice to share as well, especially given her recent successes raising money (a lot of money!) on Kickstarter for her own entrepreneurial projects.

Learning from Failure

I am thinking about developing a course or at least integrating cases into my current teaching to explore failure, in contrast to the more often touted successes.  Failure is one of the understudied areas in academic research in general, and entrepreneurship in particular, despite its recognized prevalence throughout business history.  Although it is well-known that many entrepreneurs fail, as usual understanding why this happens is the interesting challenge.

When presenting my research on business models, I discuss several examples of less successful companies – Prodigy is one of them.  Result of a joint venture between IBM, CBS, and Sears founded in 1984, the company was a predecessor to what became known as the Internet portals fifteen years later.  Beginning in the 1980s it offered its customers such services as weather, news, banking, electronic commerce, email, and message boards, similar to the concurrent Minitel proliferation in France.  My first contact with Internet actually occurred through a Prodigy account when I was a high-school exchange student in Florida.  I was very far from realizing then the impact this new technology would be having on the world as we knew it for the years to come.

Prodigy erred on the side of “too much too early” though – customers were not ready to buy on the Internet in the 1980s, they thought they might actually be paying a premium for buying online, transactions over the Internet were not secure, “shopping cart” was not yet introduced to the online world (Amazon came up with that 10 years later), and overall legitimacy of the Internet was very low during those days.  Unfortunately for Prodigy and their pioneering technology, the innovation failed to adjust to customer needs and understand how exactly various services such as email might be used.  Despite investment and managerieal effort, the company lost its first-mover advantage.  Hargadon and Douglas (2001) discuss this example in more depth.

Other cases of failure that might be interesting for entrepreneurship students to examine are the cases of Internet start-ups such as WebVan, ChemDex, or Boo.com.  HBS cases are available about the first two, and can be discussed profitably in the classroom.  More interesting thoughts about entrepreneurial failure in the recent post by Andrew Hargadon here.

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.

Switzerland, that Small and Hilly Country (1: Swatch)

In my teaching on innovation I use two cases that both originate in Switzerland, which Douglas Adams used to call “small, hilly country. Tiresomely neat.” in ‘Mostly Harmless’.  Although stereotyped as a conservative land of financiers and remote alpine villagers, Switzerland has provided a sweet home to several innovative companies and imaginative entrepreneurs.  It is also home to CERN, and several good business schools and universities, such as IMD and EPFL in Lausanne, that are supposed to foster and nurture innovation.

One of the cases is Swatch, or the story of how Nicolas Hayek transformed the dying Swiss watchmaking industry, bringing it a second youth through the creation of Swatch, a brand, a new consumer product category, and a new business model of selling watches as fashion accessories rather then “family jewels” or pragmatic “time-keeping devices”.  Through this act of innovation, but also imagination, Hayek and his company renovated the dormant Swiss watch industry and cemented the market share for what became the Swatch Group, the biggest watch-making portfolio of brands in the country.

Hayek was actually asked to conduct a liquidation of two ailing Swiss watchmakers by their bankers in the early 1980ies while he was a successful management consultant in Zurich.  Facing fierce competition from the Japanese and the Americans after the quartz technology was originally pioneered by the Swiss, the industry was in dire straits.  Still today, Switzerland remains, ahead of the US, one of the top watch-manufacturing countries, selon the Economist.  Hayek was also the entrepreneur behind the original concept and then design of the SMART car, whose name stands for Swatch+Mercedes+ART (originally known as the Swatch-mobile, before the JV with Mercedes).

The story of Swatch is an interesting example of a turn-around through innovation that changed the fate of not only one company, but the whole Swiss watch-making industry, despite the high challenge of commoditization that threatens so many and spares so few.  Successful introduction of a new product, redefining the existing categories, and changing the consumption patterns of customers, is a big achievement.  I also believe that it would not have been possible without these significant elements of business model innovation – for instance, introducing in-store Swatch boutiques or partnering with well-known designers at the Swatch brand level, and centralizing production still carried out mainly in Switzerland and exploiting significant economies of scale for both low-priced and high-priced brands, while decentralizing brand marketing efforts at the Swatch-group corporate level.

I will discuss the other case – Nespresso – in a future post soon.

TED talks for Entrepreneurship Class?

I have been looking for interesting TED talks to use during the entrepreneurship class.  I found these two, the first one by Steven Johnson:

I especially like the emphasis on the social origin of ideas.

And here is the second one by Seth Godin, focusing on “remarkable,” a different approach to convince students of the differentiation strategy merits in Porterian jargon:

I also used to have a session on leadership where I would build on Jim March’s film extracts about Don Quixote’s Lessons for Leadership as well as this TED talk where Itay Talgam, an Israeli conductor, talks about different conductors and their styles:

Why the music analogy, you might ask? As Itay says, “Music making embodies knowledge and innovation, individual effort and collective achievement.”  For more musical inspirations, this is a very good example of a successful performance led by Gustavo Dudamel, the Venezuelian star conductor, that might serve as an “analogous inspiration” for the entrepreneurs:

Any other recommendations? I am sure there are many more interesting videos out there!