Borrow Business Models to Reinvent Your Industry
Monday, August 24, 2015
Recent research argued for the use of analogies for product or process innovations. Solutions originating from contextually distant but analogous domains (i.e. domains linked by similar problems) score significantly higher on novelty than solutions originating from the target domain (Pötz and Prügl, 2010). As a consequence, concepts based on analogies are likely to be highly innovative while at the same time reducing risk by adopting already proven approaches from other industries (Keinz and Prügl, 2008; Franke and Pötz, 2009).
By transferring other business models to our project, it was often quite easy to come up with good solutions.
Analogies in Business Model Design
Analogies are not only powerful for product or process innovations, they represent also a viable approach to enhance business model innovations: In our longitudinal study of nine innovation teams working on the development of new or the re-configuration of existing business models, it was obvious that the teams capitalized on the fact that business model patterns are successfully applicable across industry boundaries. In designing “new” business models the teams mostly adapted or refined existing business model elements (often taken from other industries) instead of developing completely new models. They used between one and six analogies with other business models to design a new or re-design an existing business model. The importance of considering various other business models as a source for inspiration has also been explicitly expressed by the team members:
“The analysis of similar business models was therefore without doubt essentially helpful to the development of our model” (a member of team C).
“What one knows about a company and the industry limits the imagination of how a business model could look like for the company. Therefore it is hard to invent something completely new to the world but much easier to put together different business patterns in a new way” (a member of team A).
“The main source of inspiration was the combination of an analysis of the competitors and several reference models” (a member of team G).
“By transferring other business models to our project, it was often quite easy to come up with good solutions” (a member of team D).
Most ‘new’ business models are a recombination of existing ideas, concepts and patterns.
Our findings are in line with a study from Gassmann, Csik, and Frankenberger (2012) noting that most “new” business models are a recombination of existing ideas, concepts and patterns. It is reported that 90% of “new” business models are rooted in either:
- a transfer from a business model pattern from another industry to the own domain,
- a transfer from an organization’s successful business model to other domains, or
- a combination of at least two existing business model patterns.
Example: Analogical Application of a Business Model Pattern
A very prominent example of an analogical application of a business model pattern is the “bait & hook” (B&H) business model. The model is built on a relatively low priced or free initial offer that aims at triggering future purchases of related products or services. Very often the initial offer is money-losing or subsidized by the company, but later purchases of related products are eventually generating profits. In general, it is crucial to assure these purchases by closely linking the free or inexpensive initial product with the follow-up item, which earns a high margin for the company. This “lock-in” is vital to the success of the B&H business model.
The B&H business model is more than just a pricing model (as it is often referred to incorrectly). The model requires the establishment of a more or less proprietary “lock-in” platform and keeping control over it. Also (cheap) substitutes must be avoided.
Key factors of a successful B&H model:
- Establishment of a lock-in platform, e.g. through:
- artificially generated technological incompatibilities (e.g., third party spare parts are not compatible with the original product), or
- contracts or legal bindings, such as service or maintenance subscriptions (mobile phones, pay-TV, alarm systems, etc.).
- Product sold at a low price is:
- usually a long-lasting product (>2–3 years)
- needs complementary products/services, maintenance or spare parts on a regular basis
Business model risks:
A B&H business model is “risky when the control over the lock-in platform is shared among more than a handful of other economic actors; or, it may be risky when the underlying technology of the lock-in platform is faced with increasing threat of a substitute”. (Shi and Manning, 2009, p. 54). For example, printer manufacturers have gone through extensive efforts to make sure that printer ink cartridges are not interchangeable.
Moreover, B&H models are vulnerable to unlocking procedures making the product sold at a low price open for other applications or cheaper related products, e.g. SIM-locks of mobile phones are removed to use the phone in other networks, printer cartridges are refilled instead of exchanged.
The B&H business model has become very popular and has been applied in various sectors:
- Consumer goods: e.g., Gilette razors and blade
- Inkjet printer
- Video games (rather cheap consoles and expensive games)
- Alarm systems (including connection to security service center)
- Telecommunication: mobile phones
- Elevators: product codes are concealed in order to prevent third party service companies to offer maintenance plans for the elevators.
- Aircraft engines (service contracts are an important revenue source)
Besides the example explained above, business practice provides various other cases of companies whose business model was inspired by models from other domains. For instance, rising electronic vehicle manufacturer Tesla pursues a strategy of factory-owned retail outletsvery similar to Apple and, as a consequence, quite recently hired former Apple retail executive George Blankenship. Instead of selling electric cars through a franchise dealership program, Tesla operates company-owned showrooms in exclusive locations. Another company that built on business model elements from various industries to design its own model is J. Hilburn, a shirtmaker based in Dallas. As beautifully explained by Tozzi (2010), the company adopted the direct-sales model from Avon, incorporated a supply chain management approach inspired by Toyota, applied customization techniques known from Dell and offers Amazon-like ease of shopping.
A Business Model Database — A Source for Inspiration
Case studies and business model patterns from other companies and industries are an extremely powerful tool to spark creativity.
Research, business practice as well as our experience working with leadership teams around the world provided ample evidence that people are always looking for inspiration and indeed need some inspiration to come up with innovative ideas of their own. Analogies with case studies and business model patterns from other companies and industries are an extremely powerful tool to spark creativity for innovating and reinventing business models. As a consequence, we decided to develop a publicly available database on business models (the “Business Model Gallery”), as a resource for learning about different business model designs. In this database business models from all kinds of industries are explained allowing to learn about various patterns and “borrow” ideas for own business model design tasks. This projects aspires to capture the power of analogies by being a place for inspiration and, thus, foster business model innovation.
Franke, N., & Poetz, M. K. (2008). The Analogous Market Effect: How Users from Analogous Markets can Contribute to the Process of Idea Generation. Working Paper, Vienna University of Economics and Business.
Gassmann, O., Csik, M., & Frankenberger, K. (2012). Aus alt mach neu: EinFahrplan für Innovationen. Harvard Business Manager, 34.
Keinz, P., & Prügl, R. (2010). A User Community‐Based Approach to Leveraging Technological Competences: An Exploratory Case Study of a Technology Start‐Up from MIT. Creativity and Innovation Management, 19(3), 269–289.
Poetz, M. K., & Prügl, R. (2010). Crossing Domain‐Specific Boundaries in Search of Innovation: Exploring the Potential of Pyramiding. Journal of Product Innovation Management, 27(6), 897–914.
Shi, Y., & Manning, T. (2009). Understanding Business models and business model risks. The Journal of Private Equity, 12(2), 49–59.
Tozzi, J. (2010): Borrowing from Avon and Dell to Sell Shirts, Bloomberg Businessweek Enterprise, December 9, 2010
Originally published at www.innovationmanagement.se on November 4, 2013.