Strategy Innovation Takes Imagination
by Robert B. Tucker

Dejected leaders of bankrupt dot-com firms were often quoted as saying, "we just couldn't seem to get our business model worked out, and we finally ran out of cash." Not surprising. Even the best-known dot-coms must be considered business model experiments, since their "path to profitability" is still before them.

Yet while dot-com firms are under extreme pressure to prove the efficacy of their business models, existing firms face a challenge that is no less daunting: how to sustain their business models in the face of unrelenting change and competition.

The fact is, no matter how bulletproof your firm's current business model, it will be challenged by new business models. Over time, it will also be imitated, and thereby diluted and commoditized (see sidebar article "An Idea Whose Time Has Gone?"). Upstarts may or may not have staying power, yet collectively they can render today's method of creating value for customers passe, or worse. The new reality is that business models have shelf lives, like loaves of bread at the supermarket. Companies must constantly attempt to discover new business models if they hope to survive and grow.

Hatching new business models can conjure images of well-financed whiz kids inside business incubators hovering around whiteboards, excitedly brainstorming billion-dollar breakthroughs. Yet if the dot-com crash has lessons, they may be that native genius is less than what is called for, nor can piles of venture capital insure market acceptance.

Instead, it's useful to have deep understanding of the customers who will be expected to buy the toys, financial services, beauty products, furniture, or whatever it is that the business model purports to deliver. Indeed, case studies of successful business model innovations show that evolutionary, rather than revolutionary, tweaks may have the best chances of success.

The Evolution of Tyson Foods

When Donald Tyson took over the family poultry processing business from his father in l971, it wasn't doing badly. With $71 million in annual sales, the business consisted of buying chicks from local farmers and raising the birds until their eleventh week. After dressing the broilers, Tyson trucked them to grocery stores in Arkansas and neighboring states.

As Tyson sought to grow the business, it became a question of how and where. Answers came cackling forth in the form of a motto that somebody tacked up on the bulletin board at the company's modest, cement-block headquarters in Springdale, Arkansas: "Do more with chicken."

"We were just processing raw chickens when we first started," Tyson told this author in a 1998 interview. "Then we started making chicken patties and that opened up a whole new area of business for us because people could have chicken sandwiches. We tapped a new market is what we did. Then, of course, we evolved into doing all sorts of things."

All sorts of things indeed. Tyson led the industry in figuring out ways to sell chicken in more forms (not just fresh, whole fryers, but also chicken pieces, marinated chicken, and frozen prepared dinners). The company then began aggressively inventing new products (chicken tenders, chicken nuggets, even a ready-to-eat chicken snack, Buffalo Wings). Actually, invent is not the right word; "borrow" is more accurate, as was the case with Buffalo Wings, which Tyson scouts learned about on a visit to Buffalo, New York, to learn why the company was unexpectedly selling so many chicken wings in that football-crazed city.

Tyson scouts quickly discovered that sports bars in Buffalo had created a new way to use chicken wings, because they could be purchased so cheaply. By adding flavorful sauces and serving the wings during "happy hours," the taverns kept patrons around longer. Tyson adopted this idea, expanded it nationally, and created demand for a chicken part that had previously been virtually unmarketable.

Process innovations enabled the company to standardize a product that had always been inconsistent in taste and texture. Introducing factory-style farming methods, Tyson Foods was one of the first to create fresh chicken with consistent enough quality and size to carry a national brand name. The biggest breakthrough occurred when the company went all out to sell chicken into venues far beyond the grocery store channel.

Noticing that Americans were eating outside the home more and more, Tyson Foods early on realized that doing more with chicken meant making it available where people were eating--fast food outlets, fine dining establishments, airlines, and hospitals. Tyson himself made a now-famous sales call on McDonalds Corporation in the early 1980s to persuade the company to add chicken to its menus. The result was a breakthrough for McDonalds--Chicken McNuggets--and a growth explosion for Tyson, which grew annually at rates of 36% for the decade that followed.

While Tyson Foods may not have consciously set out to become a strategy innovator, the company's relentless drive to "do more with chicken" transformed it into just that.

Successful Strategy Innovation

To be considered strategy innovations, initiatives that alter a firm's business model must first turn a consistent profit. No amount of venture capital money or advertising "buzz" can substitute for that fundamental necessity. Strategy innovation has always been about solving problems for customers in ways that they, not the sponsoring company, perceive to be superior or unique from their present way of addressing those problems. Strategy innovation can be incremental, involving minor changes to the firm's business model. Or it can be a radical departure, as when a firm decides to market its existing products and services to new customer groups.

When defense contractor Hughes began its DirecTV division in the early 1990s, this was a radical departure from its existing business model, which focused on selling and servicing satellites for governments and industry. But Hughes decided to "do more with satellites" after witnessing the shrinking of defense budgets upon which it had largely depended. Hughes redeployed its expertise with satellites to pioneer a new direct-to-consumer business of beaming cable channels and movies to home satellite dishes. By 2001, DirecTV contributed 77% of Hughes' profits.

Strategy innovations can occur in your customer service, marketing, advertising, selling methods, or in how you distribute your offerings to end customers. Whatever their source, successful strategy innovations have one thing in common: They result from discovering new ways to create value for customers, as measured by bottom-line results to the sponsoring company. Strategy innovation may be spurred by a desire to grow ("what's in it for us"), but this desire should never be allowed to overshadow what the proposed new way of doing business will do for the customer ("what's in it for them").

Strategy innovation is, first and foremost, an act of imagination--the ability to see how something could work better from the customer's standpoint, in a way that in turn profits the sponsoring firm. New business models present themselves when companies and their leaders imagine opportunities to do more with their products and services than they have in the past.

What follows are six places to jumpstart your search for imaginative new business models for your firm.
1. Look for Opportunities in Market Positioning
What aspect of your market is not being adequately served and what might you do about it? Very simply, the imperative here is: How can you hit 'em where they ain't? In many markets, commonly used terms such as "we're high end" or "we're a discounter" point to how your firm and its product/service offerings are positioned in the marketplace, and how others who sell what you do differ on the dimensions of quality, service, and price.
Motel 6 in no way compares to Four Seasons Hotels, save for the fact that both offer guests a place to lay their heads for the night. The stripped down version of the Korean import Hyundai is incomparable to the latest model Mercedes or BMW except for the fact that both offer a means to transport human beings from one place to another via streets and roads and highways. Looking for gaps in competitor positioning involves rethinking often long-held assumptions about a company's positioning, and either adding unique or exceptional value to one's current position, or entering a different position in the following market segments:

Less-for Less. Southwest Airlines, from its inception, offered customers less and charged them less for it. The "less" came in the form of a scaled down level of service (no in-flight meals, no pre-assigned seating, no travel agents, no coast-to-coast nonstops). Hyundai did it with new product offerings at the very lowest end of the market. Dollar Stores and Dollar General, both of which have prospered at the less-for-less end of the market, did so by carrying products, many of them imports, at prices even lower than Wal-Mart, K-Mart, or Target stores. Costco has pioneered ways of making this market positioning attractive to the middle class. They offer less selection breath, less convenience, less consistency of offerings, and instead sell on volume a limited, opportunistic selection, and eschew service in the traditional sense.

More-for-More. Here, the strategic focus is on giving the customer more, meaning more service and more quality, and charging more in the process. Examples abound, from Maytag's Neptune washing machine to Tiffany to Sam Adams Beer, from Rolex watches to Dove soap to Dove Bars, from Ritz Carlton and Four Seasons to Mercedes and BMW. There's no question that this positioning strategy relies greatly on appealing to customer wants, rather than merely satisfying needs. And therein lies the biggest challenge of maintaining success while playing in this arena: You will be expected to be a leader in adding unique and exceptional value, just as you will be expected to continuously redefine "customer wants." Woe unto those that do not have the finest market-sensing antennas, who are trend followers rather than trend leaders.

Same for Less. The extreme ends of the market aren't the whole story in positioning. Two additional positioning strategies are not only viable, but are advisable, especially for new entrants in existing markets, and those desiring to establish and enlarge market reach. Same for less is just such a positioning strategy. While this is the traditional appeal of the "sale," it is the very viable strategy of Men's Wearhouse, the Fremont, California, men's clothing retailer. While many men's suit retailers have shuttered their doors in recent years due to declining sales of business suits and the trend toward more casual dress, Men's Wearhouse has aggressively expanded and has, in some cases, taken advantage of huge drops in the cost of retail space. Men's Warehouse also provides more for less by including free pressing and follow-up calls to determine the level of satisfaction. Highly visible television advertising raises the company's profile.

More for Same. When Virgin Atlantic started up in the early 1990s, the airline knew it had to offer a noticeably superior value proposition to get travelers to switch from then-dominant British Airways. Why would passengers, especially business travelers accumulating frequent flyer miles on BA, want to try a different brand? Virgin introduced the attention-getting Upper Class service, which offered the larger seats and leg room of traditional first class at the price of business class service. Virgin further enhanced its value proposition by offering to pick up and deliver Upper Class passengers from and to their destinations. And it continues to freshen its value-added extras, most recently with onboard masseuses.

2. Look for Opportunities in Customer Outsourcing
The operative strategy here is look for opportunities in meeting customers' ever-expanding desires to outsource their chores, tasks, and responsibilities to focus their time in more productive and meaningful ways elsewhere. This driving force of change shows up in both business-to-consumer and business-to-business relationships. The advance of the service economy in general, and service businesses in particular, is the story of companies and entrepreneurs imagining ways of creating customer value via outsourcing tasks consumers formally had to do themselves.

Take the chore of changing the oil in your car. In l980, American car owners either changed their own or brought their cars to dealers or local mechanics, an often time-consuming chore. Ten years later, 70% of car owners outsourced this ritual to a newly-created service business, the quick lube industry.

The industry was invented in the late 1970s by a former Baltimore football coach who grew frustrated with the inconvenience existing solutions. Jim Hindman designed Jiffy Lube to give motorists a way to solve their problem that was quick--a 10-minute time guarantee--and inexpensive. Result: Jiffy Lube grew quickly into a national chain.

Having discussed how consumers gladly outsource their chores and responsibilities when the value is perceived to be attractive, contradicting this trend has potential also. Value innovator Home Depot avoided the category killer dukeout by focusing on the unmet and unarticulated needs of homeowners. Home Depot easily undercut local hardware stores on price, while offering greater selection and knowledgeable associates who, in some cases, have real-world experience in carpentry, tile-setting, etc.

Home Depot did not achieve its phenomenal growth merely by taking market share from mom and pop hardware stores, however. It created a larger market for its wares by tapping pent up demand. People wanted to make repairs on their homes, but often lacked either the skills to do it themselves or the funds to outsource such projects to contractors. Home Depot's strategy innovation was to empower customers through knowledge-exchange: giving them the know-how and confidence that they could regrout the kitchen tile, or paint the living room, or install that drip irrigation system in the yard.

3. Look for Opportunities in How Customer Needs Are Currently Understood
All too often, competition in an industry tends to coalesce around accepted notions of market positioning from high end to unbundled low end. But these commonly accepted assumptions often extend to the basis of appeal of a product category, as either providing entertainment and/or emotional-support value, or problem-solving value. Such definitional rigidity does two things: It keeps us from imagining alternative possibilities for our offerings, and it keeps us from anticipating the emerging needs and unarticulated desires of consumers, which lie dormant, waiting to be addressed.

In developed countries, most basic consumer needs are largely satisfied. A hierarchy of wants supplants psychologist Abraham Maslow's oft-cited hierarchy of needs. The quest for survival gives way to a quest to improve your standard of living, which morphs into a quest for a higher quality of life. In probing for consumer wants rather than needs, new possibilities present themselves all the time.

Say, for example, that you run a mid-sized dental practice and you are faced with declining revenues because of fewer patient visits. Americans have fewer cavities these days than ever before, which is good news for them, bad news for you. Do you look for ways to attract more customers? Or do you try to "do more with dentistry"?

One new strategy might be to get into teeth-whitening. Already a $600 million industry, it is growing at 20% a year, according to the American Academy of Cosmetic Dentistry. BrightSmile is a fast-growing chain of stand-alone teeth-whitening centers. "There's a whole movement taking place from fix-me dentistry to transform-me dentistry, from fill-my cavity to change-my-smile," says a spokesperson for the American Society for Dental Aesthetics in New York City, an international organization for cosmetic dentists.

4. Look for Opportunities to Reinvent Your Business Model
Frustrated with the high prices, bureaucracy, and poor customer service of the auto insurance industry, California's voters passed Proposition 103, mandating auto insurance premium roll-backs and introducing other reforms. The l988 measure forced insurers to rebate millions of dollars to customers, and forced drastic survival measures on an embittered industry.

One company, Progressive Insurance, turned this voter-tossed lemon into lemonade and used it t reinvent their very business model. "It was a wake up call," said Peter Lewis, CEO of Mayfield Village, Ohio-based Progressive Corp. "I decided that from then on, anything we did had to be good for the consumer--or we weren't going to do it."

Progressive responded by reinventing auto insurance from the ground up. Before, Progressive claimants waited weeks while their paperwork languished in some adjuster's in-box. These days, Progressive settles the claim with its client on the spot, no matter when the accident happens, 24 hours a day, seven days a week. The company often settles claims before other companies even know there's been an accident. Progressive's 1 800 AUTO PRO service quotes the firm's rates to potential customers--along with the rates of competitors, even if competitors' rates are cheaper.

And Progressive continues to think unconventionally in seeking to make its business model more alluring. In one pilot program, Progressive customers pay for insurance based on when, where, and how much they drive. Normally, prices are based on risk posed by a driver's age, record, marital status, and other criteria. But Progressive maintains those factors are less important than things like how much a car is used and where it is driven. "A mile driven at eight in the morning is safer than a mile driven at midnight," says a company spokesperson.

So now Progressive has been monitoring the miles--and routes--of participating Texas drivers via a tracking box affixed to their cars. The device uses cellular phone and satellite technology to monitor miles and times the car is driven each day. Billing works much like a home's gas meter. The company says premiums for Houston drivers have dropped an average of 25%.

Whether or not this experiment becomes Progressive's business model remains to be seen. But it is exactly this willingness to question long-held industry assumptions that has put Progressive in the driver's seat. Progressive is growing six times faster than the rest of the industry, and enjoys profit margins of 8%, whereas the industry as a whole has run at an underwriting loss over the past five years.

5. Look for Opportunities to Redefine Value-Added
Before J.D. Power & Associates came along, the research industry defined the market for information research, and "the way we do business in this industry" in one way. Market research companies would call upon customers to obtain research contracts, which they would then go out and conduct on a proprietary basis.

Power turned the equation upside down. Bearing all the costs himself upfront, he found out what their customers' experience had been, then sold his findings to the car companies for a hefty price. Customer satisfaction standouts were given the right--for an added fee--to advertise the results. Only if they paid for the research did they have the right to claim, that they were "number one in customer satisfaction." A typical J.D. Power study includes 40 makes of cars, but Power publishes only the rankings of the brands that score above average. Those that finish below average are listed alphabetically in the results that are released to the public.

6. Rethink How Your Product or Service Gets Into the Hands of Customers
L'eggs pantyhose built a market for itself by distributing its product in non-traditional outlets such as supermarkets and convenience stores. Amway, Mary Kay, Tupperware, and Avon all in their own way, innovated new business models in distribution. And the dozens if not hundreds of new multi-level marketing companies that are started each year ride this wave.

Dell Computer did not follow the traditional two-step distribution, but pioneered a new business model. Dell chose not to distribute its products through the then-standard channel--to wholesalers or resellers, who sold to retailers, who then sold to end-customers, but instead sold directly to end-customers. Other innovations rounding out Dell's unique business model were strategic in nature as well: From the beginning, Dell didn't manufacturer a single computer until it received a customer's order. Because it manufactured products to order, Dell didn't have to create an inventory of standardized products to be stored until sold in one warehouse or another.

Similarly, e-Bay represents strategy innovation when compared to the way in which people searched for odd items such as used John Deere tractor seats and early 20th century toothbrushes.

Jumpstarting Strategy Innovation at Your Firm
While these and many other strategy innovations relied on technology to change the game, not all strategy innovation is based on technology, nor does it need to be. Viable business models require imagination and passion in seeking to solve customers' problems in superior ways, rather than simply pumping up our own balance sheets. While it is all too easy to dream about creating value for ourselves, successful strategy innovators with names like Ford and Walton and Tyson seem to think deeply about creating superior value for customers.

To jumpstart strategy innovation in your firm, first you must foster a willingness to rethink with your understanding of how your customer receives value from you. Your business model is simply a description of how your company creates value for customers that in turn generates revenue and profits for your company. Use these six to jumpstart your search for new ways to strengthen your firm's business model, and be prepared for growth, increased profitability and sustained competitive advantage.

Sidebar: An Idea Whose Time Has Gone?
Fifteen years ago, the "category killer" business model was all the rage. New superstores such as Office Depot and Toys R Us collectively decimated the traditional mom and pop business model, which relied upon three-step distribution: from manufacturer to wholesaler-distributor to retailer to customer. The result was that thousands of small, independent retailers of stationary supplies, toys, hardware, sporting goods, and other products did not survive.

But today, it is the category killers themselves whose business model is being battered. At first, consumers were attracted to the huge specialty stores, with their promise of deep discounts and large selection. Over time, customers wearied of making special trips to individual specialty stores, which were often located in out-of-the-way areas. Consumers expected product knowledge from specialty store salespeople. What they found were vast empty aisles of merchandise and clueless clerks. Many left disappointed.

For the stores, maintaining a comprehensive product selection boosted inventory costs. The spread of category copycats made it impossible for stores to guarantee the lowest prices. When two or more stores in the same category competed in the same local market, there was little to differentiate them except price. Result: In one category after another, profits dwindled as competing specialty chains duked it out for survival.

"Category killers will be a diminishing force," Richard W. Latella, senior director of the retail group at real estate marketer Cushman &Wakefield told the Wall Street Journal. Latella predicted that another business model, represented by Wal-Mart's supercenters, will be the fastest growing segment of retail in the coming decade. "When they build their superstores, they incorporate a lot of the categories, and they're good at execution," Latella noted.

Whether category killers will be supplanted by supercenters, or whether the supercenters themselves will be supplanted by some new business model, remains to be seen.

What is clear is that enduring business models, or at least those that last longer than a fortnight, spring from seeking to fathom the unmet and unarticulated needs that people have in a given arena of their lives, and responding with imaginative solutions.

Robert B. Tucker is president of The Innovation Resource, a research and consulting firm in Santa Barbara, California. He is the author of Driving Growth Through Innovation: How Leading Firms Are Transforming Their Futures (Berrett Koehler, 2002). Details: rtucker@innovationresource.com

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