The First Step Of Business Model Innovation: Focus17 January, 2018 / Articles
When we talk about innovation, we often discuss companies such Google, Tesla, Uber and Amazon – awe-inspiring firms in turbulent, hi-tech industries that have really invented and built something new.
However, there are ample industries that are not hi-tech, fast-changing and turbulent; ones where there are not new business models that appear and dissolve rapidly, but which are quite stable and homogeneous. Take the consulting industry: decades ago the top firms consisted of McKinsey, the Boston Consulting Group and Bain, and they still do. Moreover, these firms still do pretty much the same thing as they did thirty years ago (although they will now be putting their bullet points in PowerPoint instead of on overhead slides). Similarly, the hotel industry is remarkably stable and homogeneous: whether you are staying in one hotel chain (e.g. a Westin) or a similarly priced other (e.g. a Hyatt) really is hard to tell once you’re in it. And that too wasn’t much different thirty years ago.
Even in industries that have seen change over the past decades – retail banking, for example – the difference between the main competitors are minimal. And those type of industries are often a wonderful place to bring about innovation – or otherwise eventually witness someone else do it to you.
That is because customers are often more heterogeneous than the companies who serve them, who often try to be a one-stop-shop in their attempt to appeal to a wide spectrum of customers.
Consider the innovative hotel chain citizenM. Founded in the Netherlands in 2008, citizenM decided to focus on one particular group of customers only; people whom they referred to as “mobile citizens”: travel-savvy individuals who are looking for some affordable luxury. This meant no corporate contracts or renting out rooms for conferences, no airline personnel and, frankly, no people who step into an airplane once every few years or so. Instead, if focused solely on people who would travel to London, Paris, Amsterdam or New York multiple times per year, for shopping, business, visiting friends and just for the fun of it.
citizenM realized that those people would be willing to make a few trade-offs: no separate hotel bar, restaurant, spa facilities or concierge service, not even a front desk. Instead it offers one very funky, comfortable open space downstairs, where you can hang out, eat sushi or sip a cappuccino, and a rather small but very comfortable hi-tech bedroom upstairs. And all that for a reasonable price in the heart of New York City or in Central London.
citizenM realised that their small rooms and lack of traditional facilities would not be to everyone’s liking but, in the words of co-founder Michael Levie: “we are perfectly fine with that”. That’s because they did not want to appeal to everyone, but aimed to be perfectly geared to one particular group of customers only.
This is an example of a business opportunity by breaking the mould of similarity. When you are in an industry where most firms are alike, and the norm seems to be that you have various facilities and offerings in your value proposition that appeal to a wide spectrum of customers, I predict that at some point – maybe not too far into your future – someone will start disrupting this industry by developing a superior value proposition for a very particular customer segment. It is in those industries where innovation is at least as feasible and plausible.
There are similar examples of the South African consumer bank Capitec (voted “Best Bank in the World” for two years running), who initially aimed for “financially illiterate people” only – who were neglected by the traditional banks in the country – by offering one simple account, for saving, transactions, and lending – and nothing else. Yet, after it had firmly established itself in terms of their brand and network, it gradually but decidedly moved up higher and higher in their industry’s customers segments.
Another example comes from the consulting firm Eden McCallum, originally founded in London, who developed an innovative business model aimed at recruiting experienced consultants who were fed up with not having control over time, having to travel continuously or doing a lot of internal work in their companies. By signing them up as freelancers, Eden McCallum allows them to specify the times they want to work (in terms of months of the year or days of the week), where in the country they want to do projects and what sort of assignments they want to work on. Again, this does not appeal to all consultants in the industry – some like the arrangements of the traditional firms just fine – but there was a sufficiently large group of seasoned advisors who do value it.
The point is that focusing your value proposition – whether it is the one for customers or the one for employees – on a specific group of people can enable you to make innovative trade-offs. It can enable you to give up on particular traditional trappings, that are no longer to everyone’s liking, and therefore do better on different dimensions. Thus, you are using the homogeneity in your industry to stop doing and offering certain things that no longer make sense for everybody in it. This opportunity for innovation is not about emulating the awe-inspiring hi-tech of the likes of Silicon Valley, but about making more clever use of the heterogeneity in your business.