This post is an extract of my forthcoming book on business model innovation. The innovation book looks at why business model innovation is needed and how it works. You can read more about it here. These posts are early drafts of planned content and I’m putting them out to get feedback. Please do comment below, or subscribe to these pages to get each new section as it is published. In today’s post, we will be looking at finding opportunities in this new world.
Let’s have a look at an example.
In the late 1880s, inventors and engineers discovered that if you started with a cart and put an engine on it, you could remove the T and turn the cart into the car. As news of this insight spread, thousands of engineers and inventors, and businessmen started building and then selling cars to the general population.
Entering the Market
When we look back a hundred years later, with only a few major car companies in existence, it is surprising to see how many companies there were, entering the car market. When I ask my students about this, they often think there were twenty, perhaps fifty. Occasionally a brave soul would go out on a limb and suggest that there were 100 car manufacturers in the US in 1900. He is not a lot closer than the students who chose 20 or 50. There were over 1300 car manufacturers.
This is not unusual. There is a huge boom as a lot of people see a new market opening up. Early in its life, there are far fewer barriers to entry. You don’t need a billion dollars or two to build a factory. You don’t need to spend years getting the car’s safety-approved or complying with environmental health regulations. None of these have been written yet. All that it takes to succeed is ingenuity, luck, and hard work.
No Business Model?
In the early days of the car industry, there wasn’t a business model that worked. There were dozens of approaches – many technological. Just on the engine side people considered having cars powered by charcoal, steam, electricity, diesel, petrol, and more. In the end, business models powered by petrol for cars and diesel for trucks seemed to work best. There were similar wars when it came to steering, gearing, suspension, and more.
It is a huge mess. Nobody knows what is going to work. And just like our forest glade where a tree has fallen, evolution sends up a thousand new blooms in the hope that one or more will triumph and reach the sun.
The vast majority of these new business models fail. And fail rapidly.
1300 to 3
Ford was the first company to figure out a differentiated business model that worked. Low-cost assembly line manufacturing provided cheap cars which expanded the market, which allowed him to build bigger factories to reap larger economies of scale of supply, and the virtuous cycle repeated itself for several decades.
Chrysler and GM developed slightly different models, at GM Sloan focused on management, making his business model far more efficient than many of his competitor’s models.
That 1300 shrunk to 3 in just a few decades.
My Family Cars
When I was a child, one of my grandfathers would always come round to our house in a grey morris car. It wasn’t a Morris Minor, it was squarer, blockier than that.
It was a bit uncomfortable, and I didn’t like going in it. Then my Dad gets an allegro. It had roll-down windows, and it was better than Grandpa Clarke’s car. A few years later, we got a Fiesta, and that had a sunroof. Then my dad got a Ford Sierra, and I remember telling a friend, on the way to cub scouts, a great long list of all the amazing things that it could do – all so much better than the Fiesta.
These were the years of product innovation. Every new car that you bought was a big step up from the last. It could do more, go faster, be safer, and so on.
The car companies have settled on their business models of big car plants that assembled the components supplied by thousands of small suppliers added more and more features to make sure that they stayed ahead of the game. The business model became optimized.
My Dad is amazing. One of his many skills is an awareness of risk and the ability to take action to prevent or mitigate it. In the 1970s and 80s, one of his favorite tools was the annual subscription to the AA.
The AA, or automobile association, would, when, your car broke down, bring out a tow truck and get your car to the nearest garage, where it could be fixed. As my Aunt lived in Portishead, just south of Bristol, we would drive down to see her a couple of times a year. I remember counting 13 broken-down cars on one trip – just on our side of the road. I was too small to see the other side. Our car never broke down. Dad always checked the manual before long trips as he knew that cars were unreliable.
I can’t remember the last time I saw a broken down car – apart from when my sister-in-law lent me an old car with a broken gasket that stranded us in the desert. I digress.
This crap workmanship – I have heard of workers at both GM and BMW using sledgehammers to get car doors to fit because they were manufactured so badly – started to be a huge concern. It was great to have a car full of gadgets, but if it kept breaking down then what use was it?
Business Model Cycle
This started the next phase of the business model cycle. A focus on the process of building the car and making the car work well, making a quality car. In the jargon, that meant making the car that you had designed, not something that looked superficially like the design but didn’t really work.
An American in Japan, Deming, came up with this idea, and it was taken on board at Toyota. They and other Japanese manufacturers used it to supercharge their business models and turn the US from a three-car oligopoly to one where every year the Japanese sold a few more cars, making life harder and harder for the big bloated car companies.
Quality management, ISO9001, Kaizen, Kanban, Lean, and Six Sigma, all came from this period when car companies fought to get their processes right for competitive advantage.
And after a while, they got it right, cars stopped breaking down, and the AA had to come up with a new business model – it started selling car insurance, but never really recovered its glory as the original problem had disappeared.
How to make your car indistinguishable?
This was good, but now that safety regulations had arrived. The fuel economy was becoming more important, all cars started looking the same. What made one stand out? Why was it better than another? Were car manufacturers doomed to become makers of indistinguishable products that just got people from A to B?
As a result of historical accidents, some cars gathered reputations – Volvo for safety, BMW for speed, Mercedes for comfort. These were emergent qualities. This is what people said about them. Rather than what the car companies said about themselves. Then, some clever salesmen (and the new marketing men) thought could we use these ideas to give the business model a boost? They thought about it and developed the name of the car company and the models into brands that meant something.
They stopped focusing on the products that distinguished the car, the quality of its construction and focused instead on emotional intangibles. If you drive a BMW, you are dynamic and confident “Assholes” my Dad would have said if he had ever used the word, as they swerved in and out of the traffic in their ‘ultimate driving machines
Sometimes people missed the branding – I bought a girl’s car because it was cheap and had an electric sunroof. Lots of people laughed at my Nissan Micra, but I loved it. Different car manufacturers fought over the middle market, but many owned their own emotional niches populated by eccentric stereotypes.
What was next? Every few years I’d go into the Nissan garage to look at the new Nissan Xtrail, and it would be much the same as the one before. There was never a compelling reason to buy a new one, and the build quality was good enough that mine ket rolling despite my total ignorance of basic maintenance procedures.
In the business model cycle, the car companies had come to a long period of maturity and stagnation. There were continual incremental improvements, but these changed little. How long could this have gone on?
Al Gore and Elon Musk changing the scene
Al Gore and Elon Musk changed that. An Inconvenient Truth pointed out that cars were really bad for the environment. A few years later, Elon Musk, flush with cash, thought about that and looked back at some of the early business models – electric cars, and asked, “Why has nobody been thinking about this?”
They hadn’t because the existing business model worked well enough, and normally generated good profits. So there was no reason to go back a hundred years. Elon Musk saw things differently and saw how an electric car with a totally different business model could change the industry entirely. So, now much of the industry plummets towards death.
VW for example, flip-flops between talking about going electric, but only 30% over the next 50 years. A friend of mine is already working with his government on using electric lorries to disrupt the great container ships sailing from China to Europe, bringing containers overland at a price that cannot be matched by conventional diesel-driven trucks.
There are at least 1,000 entrepreneurs like my friends looking at how the transport industry is going to change. We come full circle now we are tinkering with the car and seeing what we can turn it into. As we do, there will be a huge bloom of new models, most of which will die.
If You Want to Read More
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