Home Future-Proof Business Business model innovation: Moving from products to services and solutions (video+article)

Business model innovation: Moving from products to services and solutions (video+article)

A move to a service/solution focus requires a new business model, that can simply be a better organizational design and culture to better fulfill a value proposition or a more radical business model overhaul.

Your company strives to innovate and differentiate, but do you have a sneaking suspicion that your buyers see less and less meaningful differentiation between your offer and that of your competitors?

This experience is becoming increasingly common as competitors replicate one another’s product value propositions more and more quickly.

According to professor Michael Yaziji, many firms across industries are beginning to realize that they cannot maintain significant product differentiation. Any product differentiation is quickly noted and matched by competitors.

So, companies are looking to move from products to services, or even better,  to solutions.

The move to services/solutions has its benefits.

  • First, it provides a company with relational and informational advantages in terms of its customers. It enables a supplier to better understand and meet its customers’ needs.
  • Second, establishing deep and efficient service/solution relationships takes time and effort for both parties, thus creating switching costs for customers.

Both of these advantages are essentially defensive in nature.

They are a way of holding on to existing customers, a way of locking in the status quo.

  • A third benefit of moving to services and solutions is  that  it  provides  a  longer-lasting  source  of competitive advantage (both for gaining and retaining customers).

 

Business model innovation

Successfully moving from a product-focused organization to a services/ solutions organization requires a very different business model.

Since business models involve every central aspect of organizational design and often require a new organizational culture, they are even harder to replicate than products or even individual firm competencies.

As a result, companies’ value propositions will be meaningfully and sustainably differentiated from those of competitors that are operating with a product- focused business model.

 

A different business model yields a more sustainable competitive advantage

Let’s look at an example of a more radical business model adopted by Desso, a mid-sized European carpet tile manufacturer.

Desso was seeing very modest 1% EBITA margins on its 15% market share. Most of the players had similar business models – selling weakly differentiated carpet tiles to contractors and often competing heavily on price.

Desso decided to ctransform the business model of the firm around Cradle-to-Cradle (C2C) design.

C2C is a concept of designing products made of pure subcomponents to allow for easy disassembly and endless recycling without loss of quality. 

 

Business model components

 Old business model

 New business model

Target market

•Industrial contractors

•Architects

•Interior designers

Value proposition

•Similar to competition

•Focus on price

•More differentiated design

•Health benefits

•Sustainability  benefits

•Taking up of old carpet and new carpet at end

of life

•Higher end-of-life value

Key activities

•Industry-comparable

manufacturing, marketing, R&D, production, sales.

•C2C production processes

•Higher R&D

•Deeper marketing

•Advanced production processes

•Deeper customer service

Key resources or competencies

•Undifferentiated

•Unique understanding of C2C implementation

•Strong co-design with suppliers and

customers

Key partners

•None

•Deep co-design with suppliers

•Certifying organization

•Co-design with architects and interior

designers

Customer relationships

•Transactional

•Ongoing, with product replacement and end-

of-use product pick-up

Distribution channels

•Contractors

•Architects

•Interior designers

Revenue streams

•Sale of carpet

•Sale of carpet

•Rental of carpet

•Paid by customers to take used carpet

 

All of these changes required a transformation along most of the dimensions of the organization’s design, from core organizational processes (e.g., deeper co-design of inputs with suppliers, tighter integration of the R&D and marketing departments; a fundamentally new design of the production processes), to new skill requirements across R&D, production, marketing and sales.

As a result, Desso grew its 1% profit margin to over 9% and increased its 15% market share to 23%. It is seen as an innovative, fit-for- the future industry leader in design.

brainstorming for a Unique Business Model

The following examples from different industries could provide some inspiration:

  • Google: Non-paying users. The advertiser- pays model is being tried in a wider range of industries. Can you develop a business model starting with the assumption that your end user will not be the one who pays?
  • Apple:Ecosystem competition. Only the computer, the iPhone, iTunes and the huge app developer community together can create the powerful value proposition of Apple. Could you create a more fully integrated ecosystem – either through tighter integration across the value chain or by more effectively fostering and bundling complementary products? Note: This strategy works for dominant industry players; small players end up in ecosystem ghettos.
  • easyJetandSouthwest Airlines: Radical yield management. It seemed impossible until it was done. Could your firm incorporate yield management to approach 100% asset utilization?
  • REI: Customers as owners. Employee- owned cooperatives increase performance by increasing the loyalty of the key stakeholders. Research suggests that employee-owned firms, contrary to common assumptions, generate greater total value than capital- owned firms. Could your firm evolve its ownership structure? Could you take an intermediary step of customer capital investment and profit-sharing as a kind of super-charged loyalty program? Could you add employee or customer representatives to the board?
  • NetJets:  Fractional   ownership.   Having a percentage share of  costly  assets  such as  small  jets,  cars  and  real  estate  can offer a less expensive value proposition to customers/owners. Variations of this model are spreading across a number of industries. What would fractional ownership look like in your industry?
  • Skype: Freemium offering – network effects. When network effects are critical, it is particularly important to build a user base, perhaps by giving away your basic offering for free and then charging for additional services. Can you imagine such a model in your industry?
  • Mobility CarSharing: Automated customer interface. Airlines,  hotels,  car  rentals, travel  agencies,  insurance,  grocery  stores, container shipping and many other industries are seeing the rise of this lower-cost and sometimes lower-hassle value proposition. This model is spreading across industries. Has it reached yours? Could you envision this being attractive to certain customer segments in your industry?
  • Intrade: Market-making – network effects. Intrade is an internet-based betting system. It builds a more liquid, lower transaction-cost, simplified market mechanism and takes  a cut on every transaction.  Can you identify incomplete or inefficient markets somewhere in your industry system that your firm could address?
  • P&G Children’s Safe Drinking Water Program: Cross-sector collaboration. This business model is especially interesting in bottom of the pyramid contexts where basic needs are going unmet because no single player can meet the need. Companies that can take the lead in building successful cross-sector partnerships can create markets for their products and services that would not have existed otherwise. Note: Building cross- sector partnerships is especially challenging, but is also extremely difficult to copy.
  • Holcim alternative fuels for cement manufacturing: Multiple revenue streams. Suppliers pay. With the increasing cost of raw materials as well as the increasing cost of waste stream disposal, more and more companies across multiple industries are looking to get paid for taking other industries’ waste streams and using them as a negative cost input to their own products. Try imagining a profitable business model in which your customers do not pay.

Overall, many of the moves to services and solutions are based on developing new “service” competencies within a historically “product” industry.

And a move to a service/solution focus requires a new business model, that can simply be a better organizational design and culture to better fulfill a value proposition or a more radical business model overhaul.

http://thinkingahead.uk.com/2017/04/06/customer-success-value-adding-strategies/


http://thinkingahead.uk.com/2017/04/06/from-product-to-service-navigating-the-transition-videoreport/