Business Model Innovation

Published: 19-07-2013

Although the man called “King Camp” was a successful sales man in the final years of the 19th century, his mind was never at ease. King Camp had always loved inventing and creating stuff, and after his family lost their properties and were devastated by the famous Great Chicago Fire of 1871, he had developed both the determination and the skills needed for creating something that would make him incredibly famous, as well as rich. But how could any one compete against the titans of business, and the well established companies in one of the fastest growing markets at time, while not having the technology and business ecosystem that is available nowadays?

The idea would come to King Camp years after working for Crown Cork and Seal Company, whose owner has invented bottle caps with cork seal, that would be used only for one time, and then it will be thrown away, and the consumers will come back to the company asking for more. That made him set his mind on inventing something valuable, that can be used for several times only and then thrown away. Years after that, while he was shaving his face in the morning, thinking that how these razors need continuous maintenance and sharpening, and how tiresome and unsafe it is to use them, the idea flashed in his head: Why don’t I make a razor, that is safe, cheap and would only be used for several times only? It took him six years to start his company and gave it his last name “Gillette”. After working hard on making the market accept his new idea of a razor, it paid off and Gillette today is one of the biggest brands with billions spent on R&D and billions more coming from sales.

The story of King Camp Gillette is one of many success stories told to business people worldwide, and like many success stories in business, what made Gillette truly unique was that he didn’t only develop a new product, but a completely new “Business Model” that is called until now “Razors and Blades”. So what is a business model, and how important it truly is?

What is a Business Model?

There are a lot of slightly varying definitions of what is meant by a Business Model, but one of the simplest definitions would be : “The rational or the framework that describes how a business operates to create value to its customers, and receive benefits in return ”. This means that a business model is a comprehensive summarization of how a business “tick”!

To make it more understandable, let’s take the example of Gillette. What Gillette did is known as a “Razors and Blades” business model, or “Bait and Hook”. Operating under the Bait and Hook business model means simply that you offer something people want, mostly at a loss (Razors) because you know they will keep purchasing a related product that you can make a profit from (Blades). Other businesses using this model are companies producing printing products (printers and ink) and cutting edge gaming consoles such as Playstation or Xbox (Game console, Royalty on Games purchased).

To give a different business model type, let’s take that last example (Video Games Industry).

The reason why Sony and Microsoft use the Bait and Hook business model is that they invest billions of dollars in creating the technology for a more advanced gaming console, obviously no small company can compete with such R&D spending, however, these billions of dollars were crushed down (in terms of console sales) by the third competitor in the the market, Nintendo. Nintendo realized they couldn’t compete with the two titans of technology, so what they did was that they developed a new business model. Instead of targeting the segment of hardcore players that are only satisfied with the best gaming graphics and experience, they targeted the segment of family and casual players which is a larger segment of players, and instead of investing billions in developing the device graphics, they only developed a new way of gaming using a motion controller, this meant that the device is cheaper and would give them a profit margin on selling the console itself, rather than loosing in the console price for games royalty profit. Although Nintendo Wii doesn’t appeal to hardcore players, but in terms of business success, it is a hit. (In the past years, Microsoft retaliated to this strategy by developing Kinect, the motion recognition tool for Xbox. Playstation followed too, though not as successful).

Another example is the “Multi-sided” business model, used by Google. Google developed its search engine technology and made it free for all (attracting the regular individual who uses it as one segment) because they want this customer base to serve the second profitable segment (advertisers).

Another one also is called “The Network” business model, which is used in landlines and cellphones companies. Basically we wouldn’t have purchased a land phone if we don’t know anyone with such a product, so this model increases the value of the product by the network of people using it.

The examples are countless, but how can we use such a tool for our own organizations?

Generating Business Models

Generating a business model that would be successful in your field is not an easy task, it needs business knowledge, mind-storming, prototyping and experimenting until a working model is designed.

Here I want to recommend one book that I found the simplest and most practical for people interested in developing their own business models.

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The book is called “Business Model Generation” by Alexander Osterwalder and Yves Pignuer, and co-othered by an amazing number of 470 business practitioners from more than 45 countries! What makes this book a very valuable tool is that it has developed a simple visualized framework for developing a business model called “Business Model Canvas” as shown in figure 2, this canvas summarizes the important building blocks of a business model into nine components: Customer Segments, Value Proposition, Channels, Customer Relationships, Revenue Streams, Key Resources, Key Activities, Key Partnerships, Cost Structure.

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The book takes you through understanding each building block of business models, examples, how to design, prototype, use advanced tools like the customers empathy map, and finally how to integrate a business model with some other business tools like the Blue Ocean Strategy. It is a truly a valuable addition to the arsenal of business tools that each practitioner should have.

Business Models and Non-for-profit Organizations

Another point I want to mention is that one of the most crucial problems in the work and survival of any non-for-profit organization or NGO, is sustainability. Having worked with several non-for-profit organizations, and as I am currently working as “Business Development Manager” for a non-profit, I can say that not having the business mindset while operating is the reason why most of these organizations are not efficient at all.

NGOs worldwide are starting to realize this fact, and several business model practitioners actually work with such organizations to develop an efficient and sustainable model, just by thinking of both donors and people to serve as customers, donations as a revenue stream, and social benefit as a special kind of revenue, then the organizational mind-set would shift in a way that would be beneficial to the organization and society it self.

A modified business model canvas was developed in the book to aid NGOs work, and figure 3 shows an example of the use of the business model tool in a workshop I conducted for a non-for-profit students team in Jordan, which had the effect of shifting the participants way of thinking of what they do from a spontaneous, to a more organized, visualized and structured way of thinking that will surely help them make a better impact in their organizations in the future.

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Finally, that been said, we must understand that although we need a lot time and experiments to reach a working business model, that model won’t be perfect and won’t last for ever! That is why having several scenarios in mind, and reviewing the business model continuously will be a critical factor in your business survival for years to come. That is what makes business model innovation, a true competitive advantage.

Note: This article was first published in the April 2011 issue of the “Leaders Outlook” magazine, a publication by Talal AbuGhazaleh Graduate School of Business, Amman, Jordan. This is a modified and updated version.

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