The Power of Business Model Innovation: Interview with Professor Jay Bal, Part Two
Our interview with Dr Jay Bal continues in part two which is rich with examples and varied case studies showcasing how businesses have turned the most unassuming products into winning experiences and market-changing services – all through business model innovation. The conversation proved that a creative business model can be found for every product and the way to find this is by understanding the real needs of customers. Dr Jay Bal also explained how business model innovation is a useful tool to help start-ups achieve legitimisation, which is critical to build trust. And finally, in the closing stages of our interview, he shared his thoughts on the future of business model innovation and how community-based business models and technology will come together to bring about meaningful change for consumers.
Does the kind of business model you use differ depending on whether you are a product or service-based business?
There’s a trend there, so part of what we do is we try and persuade product-based businesses to also provide services and we persuade service-based businesses to also provide products and I think that’s really important. There’s been a huge increase in product-based businesses providing services associated with those. Quite often data is the element that adds a service element to a product-based business. So, for example we did some work with a company that provided an app which let fleet managers manage the tyres on their trucks. And basically, the app recorded how much, where and what brand of tyre was on each axel and each wheel in the axel. Typically, you might get 24 tyres on one truck, so their app really helped fleet managers manage the tyres on their vehicles and there’s legal requirements associated with it, so they needed an app to do that. But from the data that they were able to see and gather, they got a really good understanding of which brands of tyres and which type lasted better on which wheel of a particular 24-wheeler truck and hence they were able to then provide a consultancy service to tyre manufacturers with that data. So, almost always with a product-based business there’s an opportunity to generate a service support capability and it’s almost an essential thing to consider. Similarly, service businesses need to switch to doing products.
Free is a good model, we all like free. So, if you’re a product-based business you have a choice. Either you can create a fully featured product and then face the marketing and selling costs of making customers aware of it. Or what you can do is produce a more minimal product, make it available for free or for a very low-price and there you’ve then built up a group of customers who you know data about and you’ve built up reputation and a brand in the market. So, what you’re basically doing is switching marketing, advertising costs from the standard model into a free model.
A common model is to give a cheap or free version and then sell accessories to it. Companies have done it with razor blades and razors, that’s a classic case study nowadays – in the US, Dollar Shave Club and in the UK, Bearded Colonel. And these companies started up around three years ago to address the razor and blades model mainly because the market was dominated by a couple of very large international companies that spent huge amounts on promotion. So, these companies came along but with a different business model, it was not a purchase-and-use model, it was a subscription model.
None of us wants to go out shopping for razor blades and what they recognised was that the real value was not in the razor blade, the real value was in the removal of another thing that you have to think about. People value being able to focus on the things that are really important, rather than conventional things.
Products have more value if they’re delivered when the need is highest. If you just think of a bottle of water when you’re at home, it has very little value. But, take the same bottle of water and put it in a situation when you’re in very hot weather and you’ve done a long hike and the value increases. And similarly, for almost every product there’s a situation like that where it has the most value.
“We try and persuade product-based businesses to also provide services and we persuade service-based businesses to also provide products”
Jay offered another example of successful business model innovation…
Let me give you another example of a company that’s really succeeded by changing the business model in an industry. I think it was Steve Jobs and other people like him who’ve said that the worst industry to possibly be in could be providing concrete, it’s a fairly commodity product that’s made all over the place. But there’s a small Mexican company called CEMEX and they are now the world’s third-largest supplier of cement. A lot of the cement plants in the UK are now owned by CEMEX.
How did they change the business model for cement? So, imagine a construction site, the old model was you would go to the cement company, you’d say to them, I need 200 cubic metres of cement delivered at 3 o’clock on Thursday 1st July. And that was the business model, that’s how customers and the cement business provided cement to construction sites. CEMEX came along and said you can have as much cement as you like within half an hour of you calling us. Now that’s totally changed the business model. Now, customers loved that proposition, they changed what was being offered to customers. It wasn’t an amount and a date and a time, it was any amount and within half an hour. You can see how appealing that would be to a construction company.
Then, the issue becomes, how do you deliver on that? How do you create a business model that can deliver cement within half an hour or an hour (whatever you decide as a policy)? And, what they had to do, was to look at other industries. Not so much here in the UK (because we have the NHS), but in most other countries where they have private hospitals, what they do is send out ambulances that sit around particular locations in the city. Rather than just being based at base and waiting to go out, they are already sent out to locations around the city, where maybe accidents are most likely to happen. And as soon as an accident happens the nearest ambulance goes there, picks up those people and takes them to the hospital. And that’s what CEMEX did. They sent out their trucks in the morning, filled with concrete, they waited at key locations, waited for a call asking for cement, rushed to the location when they got a call, delivered the cement and if they wanted more than that lorry could do, the next nearest lorry was sent to deliver the additional supply. And this little Mexican cement company is now the world’s third largest cement business, because they changed the business model; they understood that customers had been forced by volume at a date and time, but what they really wanted was cement when they needed it.
“Then, the issue becomes, how do you deliver on that?”
As you were saying at the beginning of the interview, consumers want a solution that has actually thought about their situation. Do you think this is becoming increasingly important for product-based business to consider?
Another interesting way of looking at this is that there’s a trend going on with virtualising products. So, an example I use is when you eat a bar of chocolate, what do you get from that bar of chocolate? Imagine that you’ve got a bar of chocolate that we’re going to have at the end of this discussion, what are the things you get from that? You get some calories; you get some endorphins released in your brain to make you feel better, you get the satisfaction of the chocolate melting in your mouth. But which of those things can we make virtual in any way? The other thing is you’d get friends, suddenly Gethin and I would be wanting to hang around with you at the end of the session, because we know you’ve got some chocolate. The friends and also there’s the anticipation, those things can be partly virtually delivered, if you could go online now and order a bar of chocolate to be available at the end of the meeting, the friends, and the anticipation elements of all those value propositions have been delivered to you, virtually. One of the things that any product-based business needs to look at is what are the key benefits that the customer gets from this product and which of those can actually be delivered virtually, in advance of maybe having the physical product?
‘There’s a bit of a trend going on with virtualising products”
In terms of return on investment for innovating with your business model, in comparison to say, trying to modify a product, what does the difference look like? If you are innovative with your business model, how might that add revenue streams or be fruitful?
It’s easier to do business model innovation than product innovation. But the learning is that product innovation often doesn’t work unless you add business model innovation to it as well. Another case study example that people always use is Nespresso coffee pods. So, they almost gave away the machines, the machines were very lowly priced, but you could only buy the coffee pods at that time initially from Nespresso, they created a special company. And Nespresso’s owned by Nestle and for Nestle this was a major change because normally, they shipped large quantities of coffee to wholesalers. But now, they had to ship smaller deliveries of coffee pods to consumers. But the fact was the real money was in buying the consumables. And you see the same model with razor blades.
I think there’s so much that can come with that, I’m thinking of a friend who has one of those Nespresso machines, and it’s become almost part of their identity in a way, they’re a coffee lover, they have one of those machines, they buy the pods and have their favourites. So, there’s a whole additional experience that comes just because of how they’ve made their business model.
You’ve just described in that example all of the things that we’ve been talking about, how it’s about building experiences, building relationships, understanding the deeper needs that people have.
“It’s about building experiences, building relationships, understanding the deeper needs that people have”
Moving onto a slightly different topic, we wanted to talk about circular business models. If businesses make the additional investment now to become more circular, will they benefit in the long run?
A lot of companies are using the idea of green and recycling purely as a marketing leverage, but once you claim that then you obviously have to find ways of delivering that, otherwise, you’ll get caught out. So, there are a number of different models which can help you deliver that; as I was saying, one of the more recent models that is become very trendy and popular is open. The fact is that you can incentivise people – almost in the same way that you described your friend with the coffee pods. So, what if we created a scheme whereby, they sent the coffee pods back to us every time they got a new one. And then we can claim we’re totally and 100% recyclable. So, the question then is how do we motivate them, or what do we have to do to motivate them? This is where you make your customers almost part of the company and you can give them titles, like ambassador or something else that makes them feel proud, they can boast to their friends that they’re a Nespresso ambassador. And as a result, they get first test of the new flavours that are produced. This is building affinity and relationships with the company, and you’re achieving recycling.
It’s something that we’re really interested in, how can you bring customers in through a product, so it isn’t just a transactional relationship, but actually there’s a lot more to it.
Building lifelong relationships, the whole point of a brand or a company is to build trust in people – and sustainability and these things can help build that trust – but what people then want to do is buy everything they need from that trusted partner. This is where Amazon succeeds for example, they’re a trusted partner. I buy from Amazon because I know I won’t get fakes. Companies look at it the wrong way round, they think their job is to create a product that customers want and need and will buy. Whereas, what they want to do is create a trusted relationship and if that relationship is good enough then customers will buy everything from them. Particularly for start-ups, one of the theories of this and one of the phrases we use is called legitimisation. When you’re a start-up business, you’re not legitimate and the question and really the path from start-up to being successful is a process of legitimisation, being trusted and secure in society, in the customers’ minds, legally and financially etc. And another way of mapping the progress of a start-up to success is measuring their rate of legitimisation.
“Create a trusted relationship and if that relationship is good enough then customers will buy everything from them”
How can the business model come into that legitimisation?
There’s a whole bunch of ways like achieving quality standards and ticking off the red tractor symbol in your product – so that’s one way, but another way to bootstrap yourself into legitimisation is through partnerships. If you join partnership on a particular area with a well-known, branded company then your level of trust and confidence in potential customers is hugely increased and that’s the real barrier that you have to overcome for customers to buy from you.
“Another way to bootstrap yourself into legitimisation is through partnerships”
On the topic of scalability with business models, this comes up in a lot of conversations we have with investors; they want to understand how quickly and how much that business will scale. So, are there certain types of business models that are inherently more scalable than others?
Yes, there are, but also, they bring their own problems. Generally, investors want to invest in scalable business models, so for example, of the standard business model patterns, marketplaces. If you look at where the huge successes have been, we go back to Airbnb and all of these examples we took, they are all examples of marketplace business models because they are very easily scalable. But also, one of the disadvantages of a marketplace business model is the fact that it has no value until it gets a certain number of suppliers and users on it. And that’s often the thing, that’s where the money is spent, so that’s why you need investment.
So, for example, I created a marketplace for manufacturing capability, and we had to spend £2,000,000 to get up to about 350/400 companies. I had to hire a team of twelve people that went out knocking on doors persuading companies to sign up, but after that, once we got past 400ish, we didn’t put in any more effort, companies just came in at a rate of about 20-25 companies a week, signing up by themselves. So, marketplace models are probably the most scalable, but they have this high initial burden and that’s where investors are particularly important for marketplace models; most other models I would try and resist investors as much as possible.
“Marketplace business models are probably the most scalable, but they have this high initial burden”
We’ve talked about the need for business model innovation being driven by the huge choice that consumers have, but you’ve also talked about the impact of data and there’s also sustainability as a motivation. What do you think will be the next big driver or big change that will affect business models? Will it be artificial intelligence? What do you think will have a big impact in the next 10 years or more?
I think when I talked about drivers before, where we talked about zombie businesses and black swan events and things, one of the things I didn’t highlight in that was technology. Technology allows us to create new business models. You know, for example, people have been talking about it, but drone deliveries. You know I was talking about how the value is highest when you need it most, well in essence drone deliveries give us an option to implement that business model in some way.
I think community-based business models is where the big growth is going to be because community-based business models really support this kind of legitimisation and trust-building that’s really important. So, some examples of those are things like towns getting together to negotiate energy supply. I was quite intrigued and observant about what happened in my neighbourhood with Covid-19, so they created a WhatsApp group and suddenly the level of sharing and discussion and community-feel enhanced our neighbourhood.
I think, what I see is micro communities that are self-sustainable; they have their own incubators, they have their own repair shop, they have their own processes for buying best value, so they do group negotiation. That’s the model I see coming along. That deals with this problem that I talked about where I’ve got a lawn mower and a raker and a load of gear and I only use it twice a year – I don’t buy it anymore, the community buys it and I borrow it from the community. That also addresses the other key thing: that we’ve lost contact with where we live and the people around us. You talked about sustainable business models, so leftover food, the cost of leftover food, wasted food, expired-date food is huge, 4 billion a year or more. And once you’ve got community, people can track what’s coming near the end of date, the community app can tell you how you could combine the leftovers from a number of different families and create a great meal for everybody. So, I think these are the really interesting new business models, which affect products, which affect services, which increase, as an individual, our ability to negotiate. Our buying power has been vastly reduced compared to large organisations, if we group together as communities, that increases our buying power, it gives us some more leverage. And I think these kinds of business models are where I see some of the really big developments coming.
I think for me, it evolves from a lot of the work on smart cities, but I think this is actually different because this focusses more on the human element. For example, another problem that this kind of community element can address is care in the community. Now, when you’ve got a connected community where everybody knows each other, and this is again what’s happened as a result of Covid, everybody looks out for each other. This is where a lot of the technology – you know, people talk about what 5G can do and what AI can do and what Internet of Things can do – and these all really come together to be able to deliver new business models, ways of doing things that we haven’t been able to do in the past.
“what I see is micro communities that are self-sustainable”