Using Business Model Innovation to Reinvent the Core

Using Business Model Innovation to Reinvent the Core

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Using Business Model Innovation to Reinvent the Core

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  • Don’t Go Out on a Limb—Support the Value Proposition with a New Operating Model

    When an organization has had a series of failed innovations, the problem may not be with the innovations themselves. The real issue may be that the company has gone out on a limb and introduced the innovations without the operating elements required to support them. Established companies are often tempted to apply the same capabilities, channels, and value-chain configurations to new innovations. Changing the operating model—along with the value proposition—is an imperative because it creates the appropriate support system to enable breakthrough value creation.

    In many ways, the operating model is the foundation—the roots—of the business, and it needs to reinforce the new insight that is driving the entire business-model redesign. Without the right root system, new limbs are at risk of withering. The operating model can change in many ways, but shifts tend to involve building new capabilities, leveraging external partners, and redefining interactions with customers.

    Build new capabilities. In Zara’s case, this meant building a lightning-fast supply chain. Zara’s branded stores and trendy apparel are ubiquitous throughout Europe and are rapidly growing in new markets. The retailer pioneered the short-cycle business model in fashion, with a compelling value proposition for consumers: thousands of designs per year, constantly refreshed based on changing customer tastes. This value proposition would not be possible, however, without Zara’s unique supply-chain configuration and corresponding set of capabilities.

    While most apparel retailers outsource manufacturing and logistics, Zara retains the majority of its value chain in-house, including even seemingly mundane activities such as cutting. At the same time, the firm has built a rapid store-to-manufacturing feedback loop, requiring sophisticated logistics as well as close interaction between store staff and designers. These capabilities allow the company to achieve best-in-class lead times: less than a month from design to store shelves, compared with lead times of up to nine months for competitors. Because of this unique model, Zara has enjoyed consistent growth, averaging more than 15 percent over the past decade.

    Zara’s success points to a key lesson for companies: it pays to set an ambitious vision for a new value proposition and break any compromises that stand in the way of achieving it. This type of agenda typically requires a new operating model—with a new set of capabilities. Companies can build these capabilities internally or, as the next example illustrates, make use of external partners.

    Leverage external partners. In the case of chip-maker ARM Holdings, doing better meant doing less. A recent study tallied nearly 4,000 distinct Android models available to customers—and this is just a portion of the overall smartphone market. Phone manufacturers are all competing to deliver maximum performance and battery life in the smallest possible form. Doing so, however, requires customization of microprocessors to fit the dimensions and performance requirements of each unique model, which is a tough task for just one company.

    ARM recognized this Herculean task and decided to create a chip-licensing business and not a chip-manufacturing business. It sells what is essentially the blueprint to the “brain” of a chip to a network of 250 semiconductor partners, which then design customized and integrated “systems on a chip” to support a variety of different mobile devices. By doing less itself and enabling customization from this wide network, ARM has built a model that supports smaller and more energy-efficient chips compared with its competitors’ more standardized—and power-hungry—offerings. ARM’s licensing business created a platform for collaboration with more than 1,000 partner companies, including hardware, software, and design vendors. It helped the organization gain more than 95 percent market share in mobile devices.

    External partners can bring many different assets and capabilities to the table. In the case of ARM, the key was its partners’ thorough understanding and technical know-how, which allowed the company to customize and improve ARM’s blueprint. Regardless of the specific assets and capabilities external partners bring, leveraging those assets requires new ways of operating and delivering value. Companies must reconfigure their value chains, incorporate new elements into their offerings, and think carefully about which capabilities would benefit more from external partners than through an in-house effort.

    Redefine interactions with customers. For The Home Depot, growth required focusing on how to sell as much as on what to sell. The retailer drove many years of strong growth with its innovative do-it-yourself concept—helping consumers do home improvement projects that once necessitated a contractor. The company provided the necessary materials and taught consumers how to get the job done. However, in the wake of the housing crisis, far fewer people were doing renovations. The market for home improvement products and services shrank significantly. The Home Depot recognized that improving its customer-engagement model was critical to capturing a greater share of the remaining demand and driving growth. As Marvin Ellison, head of U.S. stores, said at the company’s 2012 Investor and Analyst Conference, “We sell projects, not just products…. The project nature of our business places an increased level of importance on the engagement between our customers and associates.” The Home Depot deployed a three-pronged approach to address the distinct needs of consumers and professional customers and increase associate productivity:

    • It redesigned the sales associate role with a new customer-centric focus.
    • It leveraged technology to further enhance the shopping experience.
    • It sought to forge deeper emotional connections with customers beyond the in-store experience.

    The Home Depot retrained all its associates in 2008 and again in 2010 to revive commitment to customer service. The Customer FIRST (“find, inquire, respect, solve, thank”) and FIRST for Pro training programs were geared toward making sure that associates understood the distinct needs of consumers and professional customers. In addition, The Home Depot instituted its 60/40 program: a reduction in sales associates’ noncustomer-facing activities through operational improvements and an increase in time spent on customer-facing activities to 60 percent from 40 percent.

    Four technology-driven innovations have further improved customer experience: the FIRST phone, The Home Depot iPhone apps, payments through PayPal wallet, and the customer care resolution team. The FIRST phone, a cross between a phone and a walkie-talkie, can be used to raise alerts to store managers and other associates, to check out customers (especially helpful when there are long lines), and to locate products within the store or at nearby stores in real time. To further improve shopping convenience, separate iPhone apps were designed for consumers and professional customers with features such as a “view it in your home” tool for consumers and a materials calculator for professional customers. Products can be purchased through the app and then picked up in the store. To increase speed and convenience at checkout, a recent partnership with PayPal allows customers to check out using PayPal wallet, a mobile payments solution. Finally, in an effort to drive continuous improvement, the customer care resolution team identifies dissatisfied customers by scanning social-media sources for complaints and reaching out to solve their issues, as well as by providing feedback to management about how to improve customer service processes.

    Going beyond in-store service, The Home Depot engages with the local community with weekend clinics and “do-it-herself” workshops to form a deeper emotional bond with customers. For professional customers, The Home Depot has a special delivery program to bring materials directly to the job site.

    By engaging with customers on a new level, The Home Depot has significantly increased its score on the American Customer Satisfaction Index, boosting it by 11 points from 2007 to 2011. This has helped drive revenue growth (4 percent) and EBITDA growth (11 percent) past Lowe’s, its main competitor, from 2009 to 2012.

    The Home Depot’s story highlights the fact that often the most important element of the operating model is not how the product or service is made but rather how it is experienced by the customer. In today’s market environment, companies must step into their customers’ shoes to understand that the way a product is delivered can have as great an impact as the product itself.