Innovative business models

Business model innovation is an important lever for value creation. Another reality: it is the outsiders who have used it to overthrow the competitive hierarchies. In other words, it’s good news for entrepreneurs. But beware, no business model innovation without subversion!

PWC CEO pulse raises 5 significant questions that are likely to affect the development of business models:

  • How to respond to customers who are more demanding, more volatile, better informed and less loyal to a brand. (The Internet has changed all habits)
  • How to deal with the growing number of young, more efficient and agile companies that disrupt all parts of the economy (the development of start-ups has dusted off hierarchical systems, factors of immobility)
  • How to seize the opportunities offered by the multiplication of channels, connected objects, artificial intelligence, big data and the sharing economy. (The need to understand a new way of communication)
  • How to adapt processes and production methods by integrating new technologies to accelerate the development of products and services. (Adaptation to any evolution that has taken place is a survival factor)
  • How to adapt to the new, stricter rules to which many sectors are subject (finance, energy, transport, etc.) (Borders are permeable and rules become a real headache)

Dell, Zara and Easyjet have been benchmarks in terms of value creation and growth in recent years. These companies of different size, sector and geographical origin have in common that they have designed and implemented a radical innovation in their sector. This innovation did not concern the product itself, nor does it lie in a groundbreaking technological breakthrough. These companies have been innovative in the way of building and capturing value, they have each achieved a business model innovation.

A new continent of innovation that extends beyond technology

As these few examples show, business model innovation was not born with the digital economy and digitization, it is not even necessarily associated with technological innovation. Business model innovation can apply to both products and services, regardless of technology level, regardless of organization size. Thus the Freemium model which offers to go from free to pay with high added value. This freemium strategy is to get as many people as possible to join a free service and then lead them to a more complete paid service, with high value-added features. Many software or digital platforms work this way: Facebook, Dropbox, Hootsuite, Hubspot, LinkedIn, Skype, Prestashop, etc. Similar to the subscription model, which offers to pay for access. It is no longer the product that has value, but its use. We pay for the actual use of a product that is always up to date.

A business model is much broader than a revenue model

We often limit the model
economic to the revenue model: freemium, subscription, pay-per-purchase, free and therefore economic model innovation to a new way of putting a price on a product or service. The economic model is certainly a revenue model, but above all it is a good synchronization between this revenue model, the value proposition offered to customers on the one hand and the organization put in place to achieve it on the other. The innovation done by Dell, Zara or Easyjet has a lot more to do with the value proposition (choosing your configuration, changing clothes more often, traveling cheaply) and organization (locating production near consumption areas, increasing the number of daily rotations of an aircraft, manufacturing as needed) than the way of formulating their price.

How is this good news for entrepreneurs?

This means that innovation (and thus value creation) is not reserved for large companies or tech startups. All companies, regardless of size or industry, can implement innovations that will create value as long as they question the right match between the value proposition, the revenue model and the organization. L’atelier des chefs is a very good example of business model innovation in a mature industry. What are the two important expenses of a restaurant in the city? The doorstep and the salaries. The answer from L’atelier des chefs is to go into the backyard and get customers to work. Excellent business model innovation in catering: a new value proposition supported by an innovative organization, where it is the customers who create part of the value.

How to get there?

The good news is that innovation in the form of business models is available to everyone! Make no mistake, however, that driving business model innovation is a daunting task that requires considerable effort and a subversive attitude. Going against the rules: no economic model innovation without challenging accepted rules in an industry (air travel is an outward sign of wealth, low-cost countries are the only relevant places to produce mass-produced goods, you have to admit the fixed cost of the store).
Experiment: Plans and expectations are inconsistent in terms of testing customers’ appetite or ability to provide the service. You need to do a lot of small scale testing to find the right value proposition – revenue – organizational fit. Tolerate failure: When you experiment, you seek to learn, not to succeed, and to learn, you have to make mistakes. Have a cross-cutting vision: To find the right match between value proposition – revenue – organization, you must also think about supply, organization, price, partnerships, procurement.

Focus on the example with DELL

Dell has built its success by establishing a model that breaks with the dominant model in the computer hardware industry. Three points are particularly interesting in this model:

  • A new value proposition : While the computer industry is structured around a standardized offering, Dell offers its customers to define the configuration they want when purchasing the product.
  • The change of order : While the industry rule is to sell after mass production, Dell sells first and then collects. This development has many benefits. In terms of cash, improvement of WCR (Dell collects before mobilization of assembly resources), in terms of revenue, increase in sales by better living up to expectations, in terms of cost, reduction of unsold goods.
  • Live distribution : distribution is done directly through the website, which is used for the first time as a specific sales channel, traditional distributors are out of the game. This direct distribution allows Dell to capture additional value to its competitors.

These three points work together: The value proposition is not conceivable without a direct distribution and without an operational order that is different from industry rules. To keep its promise and especially that of short delivery times, Dell has set up an industrial tool that is radically different from its competitors: internalized distribution, assembly plants located near the points of consumption (whereas the factories were all located in Asia for the benefit of from low labor costs) and particularly efficient factories to keep costs in line with competition.

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