Reinventing Business Models in a Time of Crisis

Philippe BaumardProfesseur, Univ. P. Cézanne

UC Berkeley, Institute of Business and Economic Research

Centre de Recherche en GestionEcole Polytechnique 16/10/2009

Why did innovation become so critical?

• Even first rank companies can be quickly outpaced

A) Commoditization of generic “services bricks”• Economy digitalization + High mobility of intangible assets + Rise of expertise of new entrants

B) Small margins due to commoditization force companies to enter adjacent or “complementors” sectors

• E.g. automotive industry into financial services, telco into contents, aerospace into information security, etc.

C) Customers are becoming faster learners• Barriers to mobility collapse equally upstream and downstream• New generations of customer have learned to “self-integrate” (Ikea, software culture,

disaggregated media content consumption, etc).

• Don’t expect “generic answers” to work– “Integrated Business Models”, Economics of functionality, etc…– Building your own better business model is better than getting to market first

How being “first” create blind spots

• Seeing our core beliefs everywhere:

– Firms seek to reproduce their successes. – They create behavioral programs, buffers,

and slack resources, and they focus their information gathering and communication to make them efficient.

– They believe they know how to succeed in their current environments, firms attempt to block environmental changes.

Beware of repeated success!

• What being leader for too long does to a corporate culture– People search where previous searches have succeeded– Organizational learning over-samples successes and under-samples failures– Over time, firms tend to emit the standardized responses even though they are

dealing with unstable and changing stimuli

• Success plants the seeds of future failure. – lengthy periods of success foster

• (a) structural and strategic inertia,

• (b) extreme “process” orientations,

• (c) inattention, and

• (d) insularity.

Superior Learning = New Business Models

Professeur Philippe Baumard CRG - Ecole Polytechnique – 16 Octobre 2009

Superior learning creates loyalty and

higher yields

FRONT-END : A LEARNING CUSTOMER

Agir

PRODUCTION :

FROM GENERIC TO ADAPTIVE

Enriched InformationSame information

SameInformation

EnrichedInformation

Consumers locked-in by their lack of expertise

Personal listening (deezer.com)

Google Search

Personal contents (YouTube, garageband.com)Fiber Broadband (personal servers)

Portals : « push » contents philosophy

Channels (Yahoo)

Triple-Play

Disagreggated selling of music (Apple Itunes)

P2P VoIP (Skype)

A case study: The telecom industry

Locking customer through their own learning…

Reward customer’s learning to increase revenues

3 key-points when “re-inventing” a business model

• Adopt the “rival’s perspective”– Think of what you would do if you had to capture your own business

• Think “demand” first, and “demand innovation” second– Start by analyzing customer experience, and its major faults– Demand can be “innovated”, i.e. customer’s experience can be radically

changed by altering very few of its attributes (ex: CDs => Itunes)

• Consider the customer as an active, clever, involved participant in the transformation

– 60% of world new revenues in the 2000 - 2007 period comes from customer’s involvement in firms’ business models

– That means re-defining the customer’s experience

The new challenge : customer bondingIncreasing value

DominantLogic

Customer lock-in

Competitor lock-out

Desired Proprietary

Learning

Product

Clients

Product

Clients Clients

Suppliers

Distributors

Product

Clients

Product

Complementors

Product

First mover advantage•Features•Service•Price

•Customer learning•Customized product•Collateral assets•Brands•Pricing structure

•Distribution ‘ shelf space ’•Brands•Relentless innovation•Patents

•Develop network of third party complementors to enhance products ’appeal

•Leverage position as market share leader in attracting complementors

•Customers seek products with most complementors

Lock-in

Adapted from Hax & Wilde, The Delta Project, 2001

New strategic roads :ecosystems competition

Best ProductTotal customer solutions

System lock-in

Low cost

Differentiation

Redefining customer experience

Horizontal breadth

Customer integration

Restricted access

Dominant exchangeProprietary standard

Business Cases

Best ProductTotal customer solutions

System lock-in

Low cost SouthWest, Exodus

Differenciation Rolls-Royce, Google

Redefining customer experience Saturn, Disney

Horizontal breadth WalMart, Amazon, Yahoo!

Customer integration EDS, Dell

Restricted access Coca Cola, Walmart

Dominant exchange eBay,Visa, Pages Jaunes

Proprietary standard Microsoft, Intel, Cisco

The Demand Innovation Process

• The Origins– A concept put together by Weber, Wise & Slywotzky, in “How to grow when

markets don’t” (Warner Books, 2004)– Most companies seek growth in expensive reorientation strategies, and they

overlook the reserve for growth in their current business lines

• What is “Demand Innovation”– The strategy that consists of re-inventing and re-shaping the demand for an

existing service or product• Examples:

– From “PC + MP3” to “Itunes + Ipod” (US$ 890 Million sales + 100 millions Ipods sold)– From “GPS + Mobile Phone + 411 in car” to “GM OnStar” (US$ 1 billion sales)– From “self-publication” to “CD-BABY” (14% US market share in 2 years)

• What “talents” does it take?– Most of the time, Demand Innovation is performed by customers themselves– Putting “customers” talent at work is a challenge (i.e. Linux, Skype)– Internal Talents that articulate and provoke unlearning can be trained

Where to Renew Growth?

MoveStronghold

Maintained or reduced scope

Changed or re-invented scope

Cost cuttingCost cutting- increase control- chase under-utilized capacities- reduce overheads- sell assets-outsource!- cut low value activities

Economics of scopeEconomics of scope- chase redundancies- Eliminate unnecessary coordination- Shared accountability of divisions- communal use of assets

DDemand innovationemand innovation- Find critical liabilities- Determine unsatisfied demand- Reduce customer’s self-integration

Re-focus strategyRe-focus strategy-concentrate of fast growth segments- simplify offers- suppress « value dissipation »

Value-Chain reconfigurationValue-Chain reconfiguration- Moving upward or downward- Developing solutions with complementors- Redefining processes

A Case Study: Levi Strauss... Coping with Diesels & Khakis

MoveStronghold

Maintained or reduced scope

Changed or re-invented scope

2004:Levi’s “Engineered” Jeans

(customer-customized)

Since 1873:“Empathy Originality Integrity Courage”

Campaign around the 501

1986: To containthe shift to casual

clothing at work (khakis)

2003:Low-cost line to contain

substitutes in Big Box stores

Demand Innovation?Demand Innovation?

What’s Next for Garment?

• Critical Liabilities– In competition with other “life equipment”:

phones, PDAs, Blackberries– Looking for the phone when it rings...

• Demand Innovation– Garment - Communication convergence– RFIDs, optic fibers that replace the rings,

sensors

Communicating Scarf,France Telecom R&D 2002

Communicating Fiber,France Telecom R&D 2001

Customers’ Involvement in the Demand Innovation Process

• Typical customer behavior: “I’ll fix it, or ignore it”– Customers who fix enters a strong adoption curve– They can also end up creating something better... (http://www.wigiwigi.com/) ,a Skype

customer– Customers who ignore a liability will seek for a full solution replacement

• The Labs are in the streets– Intel - Berkeley Research Center on RFIDs (

http://www.intel-research.net/berkeley/)• “Familiar Strangers” Project:

http://berkeley.intel-research.net/paulos/research/familiarstranger/• Objective: To develop “sensitive” terminals for interpersonal

telecommunication, that are aware of the “familiarity” ofof users’ environment

• What’s next?– Critical Liability: My phone cannot predict if I’m going to like

the incoming call (that’s why I put “special ring tones” for peopleI like

– Demand Innovation: Embedded Artificial Intelligence ProfilesIncoming Calls and warns me by changing the color of my terminal(warm yellow to very cold blue...).

How Does “Demand Knowledge” becomes obsolete?

• Winners’ Curse– In Demand Innovation, losers takes all. Develop a culture that pays attention to

failing, and organize “soft places” (where people can talk freely)

• Too many rents– Historical rents can be a curse for demand double loop learning

• What the telecom industry missed: VoIP, SMS (late entry), GPS+Phone, e-mail (FT’ Minitel, 1982)...

• Misleading business models– Volume-driven, lack of qualitative data in performance measurement

• Lack of customer’s involvement– Give them responsibilities and reward them

Focusing on demand innovation

A) Determine unsatisfied demand– There is place for growth if critical liabilitiescritical liabilities in your current offers prevent (a)

current customers to upgrade; (b) prevent new customers to be willing to try your services and products

• Examples : impossibility to directly transfer MP3 from PC to hi-fi; non availability of a plug-and-play ADSL for consoles; lack of essential tools in the software suite for small & medium business; excessive « self integration » preventing unskilled users to upgrade; etc.

B) Look for unused intangible assets (i.e. “Knowledge Brokering”)– Assets that customers might be willing to pay for, if they could access them

• Assets that are developed internally, and could be sold to customers (information, services, tools)

• Assets that we have historically or because we occupy a privileged space on one of the components of the value chain

How to determine unsatisfied demand?

• Detecting the critical source of non-satisfaction– Through focus group studies, on-line complaints, churn-motivation studies– A critical liability (extremely negative attribute) generally destroys the overall

perception of the quality of service (ex: long paying delays on call centers)

• Non-desired ‘self integration’ is a critical liability– Benchmark self-integration levels with competitors– Desired self-integration is a plus

• Bringing a new solution to a recurrent unsatisfaction of customers, by changing the rules or the way a product is consumed and used

– Cases: Multiplex theaters (cinema); 7/11 night opening stores; airline shuttles

• A terminal transaction cost can destroy a whole proposition– Lack of skills of customers (learning barriers)– Too heavy collateral liabilities (e.g. inefficient parental filter on ISP)

Our one and only preoccupation: disruptive thinking!

• An innovation is disruptive when it brings to the customer an experience that defy market rules and trajectories’ prediction:

• Either because it brings unforeseen functionality at a better cost (“Ipod’s wheel)

• Or, because the innovation deeply changes the competitive positions of historical incumbents, although they hold a lesser performance than previously dominant technologies on this market. For example, the Small Messaging System (SMS) was a disruptive technology in the mobile communication market.

No recipes… But some strategies that work

• Innovation in the “services industry”– Previous experience of any kind in “engineering” innovation may well be useless– Ethnography, anthropology, sociology, astute social observation are more in the

range of skills we need

• Definition of a “service”– A human or machine delivery of processes that achieve a desire task or goal for

a third party• Being pampered is as much a service as being left alone

• Becoming knowledgeable, or having the freedom of remaining ignorant, are both services

• Services can be highly cumulative (and simultaneous). It makes it difficult to create a “lock-in” environment, as competitive services can always fit in your own environment

Planning For New Business Models

• Be aware of classic traps– Simplistic bundles do not develop new demand– On the contrary, look for singulars. If you saturate the demand with quantity, you’ll end up

developing “non curious” customers

• Launch a « deep dive » into customers’ unsatisfaction– List critical liabilities, and fix the less costly ones ASAP– Assess the level of « self integration » and work with complementors to decrease customer’s

complexity– Each point of contact with customers is an opportunity to learn their unsatisfaction and

cooperate with them (e.g. Call Centers = Demand Innovation Learning Centers)

• Check-out intangible assets and assess what can be done (Knowledge Brokering)

– Identify assets with the strongest mobility and strong attractiveness– Look for buyers before moving any assets– Exploit every single externalities into each intangible asset.

How to successfully fail in services innovation

• Taking for granted that people want more services– The “elegant waiter” principle: Presence is deployed with discretion, only when

needed, and without disturbance– “Therapeutically harassing” customers does not make a better service

• Running after the “do all, do whatever” integrated business model– People distrust exaggeratedly integrative selling propositions

• Integrated Operator: “Someone who can delivers cross-segment, cross-unit, services, building on economics of scope and cross-fertilization”

• The rationale: when the customer will discover that you can offer a seamless continuity of service, keeping his or her knowledge, configuration, preferences, he or she won’t bother looking for an alternative.

– Forgetting the beauty of simplicity• “Where is the wisdom we lost in all this knowledge, where is the knowledge we lost in all

this information?” T.S. Eliot.– My little getway in Carolina last week with Hertz: A GPS, “Never get lost”, a Help Line, 24/7 but a

passenger seat that would not move back.

Step #1 : Re-defining the customer experience

• What do I sell as an insurance… broker?

• Consultant? Underwriter? ..

Ignorant, but backed-up by a knowledgeable help

Knowledgeable, and taking the risk of balancing my knowledge and risk

Ignorant, andnot wishing to know

more

Step #2 : Positioning your Business Model

Ignorant, but backed-up by a knowledgeable help

Knowledgeable, and taking the risk of balancing my knowledge and risk

Ignorant, andnot wishing to know

more

Knowledge Broker

Risk Mitigation Coach

Insurance Model(financial)

Assistance ModelFacilities Management

Teach me, and let me handle

Increase my risk taking and returns

Progressive Performance Models

Increase my risk taking and returns

Strategy #1 : Playing with Time

• A business model can become disruptive when “playing with time”, i.e. take the same service and try to distort it along all possible time lines:

– compressing it (getting in and out of the service very quickly – “commoditize more than the commodities player”)

– triggering it (on demand, on the spot, on occasion, on relation, etc)– fragmenting and specializing it (“there is a time for being highly safe, and a

time for taking more risks, and that’s ultimately my choice”)

– See what would happen if you made your service “event triggered” and purely “contextual”:

• for example, what do I need to negotiate a credit, even on-line, when I am eligible to it?

• Couldn’t I benefit from an embarked robot in my payment system that negotiate a micro spot credit line, i.e. of the price of that suit, when I am purchasing?

Five Strategies to Innovate in Services

Strategy #2: Playing With Logic (i.e. Reverse the Value Chain)

• Most services are “delivered”, and therefore, we tend to think of services as production lines, with a start, a middle and an end.

– Self-integrate: let’s the customer design and integrate the services in reverse, i.e. let’s the customer reverse-engineer and design its own insurance services, and provide him or her with all the toolbox to play with (e.g. IKEA)

– -Des-integrate and virtualize : Think about the elegant waiter: discontinuity has also a commercial value. Customers are not systematically seeking an opaque, all eventualities, all jurisdictions “service universe”. Triggering off on the go, or using discretionary possibilities can also be a source of service innovation. It’s a service itself to be able to discontinue and switch on and off a particular service.

Five Strategies to Innovate in Services

Strategy #3: Finding the Critical Liability

• Critical liabilities are telling of an “unsatisfied demand”– A critical liability is a feature, or “absence of feature” that prevent a customer of

accomplish a desired objective of task

• Critical liabilities lead to innovation for several reasons:– They motivate churn. How many of us have just decided to drop a service

because we were just upset by 1 single liability? People happily disengage from a whole universe of services, just because one little liability has been denied a satisfying solution.

– Liabilities call for creativity. They encourage imaginative solutions because they constitute annoying bugs that challenge individual’s creativity.

– They force inventors and designers to think “empirically”, i.e. to get their hands on the processes themselves, and talk to (unsatisfied) customers.

Five Strategies to Innovate in Services

Strategy #4: DYOB Destroy Your Own Business

• This approach has been put together by GE, with Jack Welsh, when GE was fearing that the Internet “revolution” might be a threat to their traditional lines of business. The idea is pretty simple: practice empathy, and borrow the seat of your worst and feared enemy… and try to destroy your own business.

• It’s a very similar approach than the “critical liability” one, except that it is more synoptic, as you do not only focus on product or services characteristics, but also on taking over your business segment from another industry.

– What would destroy my “insurance model”? (full perfect knowledge?)

Five Strategies to Innovate in Services

Strategy #5: Move the Value

• You can move the value generation point on the value chain, upstream, downstream, collateral, in joint-wealth exploitation, in knowledge versus risks, etc.

– The first step is to ask: “where is the value?” In the fact that I can remain ignorant and still knowing that my ignorance will be covered by a better expertise than mine (“I am insured”), or on the contrary, in gaining new knowledge that reduces the need for the insurance premium, but creates a market for this immediately available knowledge?

– The second step, is try to move the value around until it escapes your reach, or grab. When it happens, you are close to a disruptive innovation.

Five Strategies to Innovate in Services

OBRIGADO MUITO!

33Professeur Philippe Baumard CRG - Ecole Polytechnique - 28 janvier 2008