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 Chase Volume—Reorchestrate the Business Model to Capture Margins

    When company leaders decide that prices need to decrease, a complex problem arises. It is a common strategy to reduce prices and try to make up for lower margins with increased volume, but chasing volume is also a dangerous choice: companies risk significant declines in profitability if the increased volume fails to materialize.

    Organizations that succeed in reaching this new price point while maintaining—or even increasing—margins embrace the complexity and recognize that it is a delicate task that requires changing not just the price but several elements in the business model. Reaching a lower price point might involve a new offering, operating model, revenue model—or a combination of all three. BMI can enable profitable value creation by reorchestrating the business model elements around the new price point. This often involves redefining the basis of differentiation, developing a new cost model, and finding new ways to monetize a low-cost (or even free) offering.

    Redefine the basis of differentiation. For GE Healthcare, redefining the basis of differentiation meant creating a unique offering at a low price point. In the 1990s, the company served the Chinese ultrasound market with sophisticated machines that had primarily been developed for hospital imaging centers in the U.S. and Japan. GE soon found out that the $100,000-plus devices were too expensive for the vast majority of its customers in China—rural hospitals and clinics—and they were not portable enough to be brought to the patients that were typically unable to travel to an urban hospital. GE responded by developing a compact, portable ultrasound machine that combined a regular laptop with sophisticated software—and sold at nearly one-fifth the price of the full-scale versions. Although the imaging quality was not as high, the compact machine served the rural clinics sufficiently well; doctors used it for applications such as spotting stomach irregularities and enlarged livers and gallbladders. The company has seen dramatic growth of these machines not only in China but also in other developed markets around the world.

    There are many ways for companies to redefine how an offering is differentiated to support a lower price point. Swatch repositioned its traditional watches as low-priced fashion accessories with plastic bands and flashy designs, while Redbox shifted from selection to convenience by offering a limited range of new-release movies in kiosks. The key is to understand the different sources of customer value and pick one that, while still enhancing that value, can be delivered more cheaply.

    Develop a new cost model. As airline Qantas faced the challenge created by low-cost carriers (LCCs), it realized that making incremental changes in cost structure would be insufficient. It needed to launch its own LCC with competitively superior economics. Many incumbent airlines had tried to introduce LCCs, but virtually all failed—leaving companies such as Southwest and JetBlue to dominate this space. For many LCCs of established airlines, connection to the parent and its traditional cost model hampered efforts to reduce costs, despite changes such as greater seat density and more limited on-board offerings.

    In 2004, Qantas introduced its LCC, Jetstar Airways, with an entirely new cost and operating model. It features a single and separate plane type in its domestic operation, point-to-point flights, separate commercial systems, and a heavy mix of online-generated sales. Jetstar also has autonomy from Qantas on most business functions.

    Qantas recognized the importance of creating a new model that was not burdened by old ways of operating. Many companies may be tempted to adjust their existing cost models when faced with fierce competition. But when the business model is challenged by truly disruptive change, what is often required is an entirely new approach.

    Jetstar has been an enormous success, expanding its domestic operations to include long-haul international business flights and establishing a number of short-haul franchise businesses in Asia (Singapore, Japan, and Vietnam). Annual revenues now exceed $3 billion, and Jetstar earns higher margins than does its more premium-­focused parent airline.

    Find new ways to monetize. Mint.com, an online personal-finance service offering from software company Intuit, creates value for multiple customers—but extracts it only from some. Mint helps users, as the company says, to “simplify the business of life” by offering a free service that allows them to track cash, checking and savings accounts, credit card transactions, investments, and loans all through a single-user interface. Mint gives users a clear and complete picture of all their finances in one place. With Mint, there is no local software to install, and it is a service that can be accessed through any Web browser or mobile device. This allows for quick and easy access to finances on the go. Mint makes money from this free service by offering targeted recommendations for ways to save on credit cards, home loans, insurance, and other services. Mint also gets paid a commission when users switch their accounts to a new bank. Mint not only offers a value for individuals but it also uses information about individuals to create value for financial institutions.