By Robert B. Tucker
Today, defunct firms ranging from Kodak, to Circuit City to Blockbuster are under extreme pressure to prove the efficacy of their business models in the face of unrelenting change and competition.
No matter how bulletproof your firm’s current business model seems, it will be challenged by new business models. Over time, it will also be imitated, and thereby diluted and commoditized. Disruptors 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. Organizations must constantly adapt new business models if they hope to survive and grow.
Hatching new business models or even altering existing ones isn’t something to be done only once a year at strategic planning time.
Instead, it’s a mindset that one carries about at all times. It’s essential 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 your 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 1971, 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 once told this author in an 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 percent 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” helped it become one.
Successful Strategy Innovation
To be considered successful strategy innovations, initiatives that alter a firm’s business model must first turn a consistent profit. No amount of capital 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 solving those problems. Such innovations can be incremental, involving minor changes to the firm’s business model. They can be radical, as when a firm decides to market its existing products and services to new customer groups.
In the early 1990’s, defense contractor Hughes launched its DirecTV division, since spun off into an independent company. At the time, this was a radical departure from Hughes’ existing business model, which focused on selling and servicing satellites for governments and industry. 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 percent of Hughes’ profits.
Strategy innovations can occur in your customer service, marketing, advertising, pricing, 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 business model 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 turns profits in 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 ways 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. Until recently, American car owners either changed their own or brought their cars to dealers or local mechanics, an often time-consuming chore. Today, 70 percent 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 of 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.
While 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 one’s 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.
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 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 to 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 monitors the miles–and routes–of participating drivers via a tracking box affixed to their cars. The device uses cellular 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 some drivers have dropped an average of 25 percent.
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, Power 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 rely 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 one’s 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, it’s necessary to foster a willingness to rethink, coupled with a deep 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.