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.
When companies talk about innovation, they often talk about innovation in their products and services.
I was at the Diageo headquarters in London a few years ago talking to some of their leading marketers and innovators. Diageo is a big brand, making some of the world’s most loved alcoholic drinks.
Their big success in the last few years was coming up with a new herbal gin that was selling in significant amounts in West Africa. They were so over the moon about it that it came up in almost every presentation that they gave. I can’t remember the figure, but my memory is that it had boosted their sales by about 5% – a huge deal for a multi-billion dollar company.
Why we should be following product innovation?
Let’s step back a bit from the marketers doing new product development and look at what is happening. The marketers have developed a new product that is doing well. Their competitors aren’t daft, and in a few years or less, there will be a dozen other brands of herbal gin on the market. Diageo’s may come out on top due to a couple of extra years of brand building behind it, or it may not. Over time it will become part of the company’s stable, of brands to be reinvented, promoted, and traded with other drinks companies when it no longer fits the portfolio.
This is how most companies treat their brand/products and services. GE was notorious for only taking part in an industry if it could be in the top three. If it couldn’t win, it didn’t ply.
This innovation drives companies forward – trying to make better products for consumers and businesses. It was this approach that put brakes, ignition motors, and sunroofs in cars – and made our lives safer and easier.
This innovation swallows up 90% of all corporate innovation. There are reliable approaches to de-risking innovation (though FMCG companies can spend $70m on a new product, that has < a 20% chance of spending more than 5 years on supermarkets shelves.)
The Secret to Innovation in FMCG
Essentially what we are doing is using the same factory to make a slightly different product. At its simplest, the toothpaste tube is squeezing out green paste instead of blue past. You still have a toothpaste tube with the same design and shape.
In a static market, this is ok. The toothpaste colour switching business model works. As markets change, being able to come up with striped, wavy, or rainbow coloured toothpaste matters far less than being able to come up with a toothpick or dental floss. The business model that produces new products becomes a constraint on innovation.
If that is product innovation, what is business model innovation, and how does it differ?
At its simplest, it can do two things. First, it changes the product that is being made. Imagine whisky pills. Or perhaps IV whisky that is injected straight into the bloodstream – and is even better than the real thing. There we have changed the product so thoroughly – and how it enters the market – that everything has to change.
Business model innovation is also about changing the product – but in slightly different, more subtle ways.
Secondly, we change how the whisky is made. Instead of having a distillery and maturing the barrels for years, we do something very different – crowdsourcing whiskeys from a million living room distillers in Edinburgh and blending them. The old production process is totally disrupted.
Both of these suggestions seem daft to me and no doubt seem daft to most of you (inevitably there will be a genius for whom the above connects some dots, and that will make a difference though). That’s not the point. If either came true or if both came true, you simply could not and would not keep making whisky in the same way again. Similarly for herbal gins are destined for West Africa.
That’s business model innovation, and that is why it is different from product innovation.
Let’s go back to the car industry for a minute.
What Tesla is doing is business model innovation. The car that they make (the product) isn’t a lot different from all the other cars out there. True, it is electric and has some autonomy, but 98%+ of its function is the same.
What is different is that huge battery and electric motor. You can express the difference in one word. Simpler. There are far few components. So assembly is easier. That means cheaper and faster because you can automate it a lot more. At the same time, you strip out the old distribution networks that car manufacturers used and sell your own cars (vertical integration). Suddenly you have a business model that makes cars for a lot less and captures a lot more profit. That’s a business model innovation.
If You Want to Read More
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