The airline business is a strange business and in desperate need for business model innovation. On the one hand, more people fly than ever to prices lower than ever. IATA, the industry body, states that the real cost of travel has fallen in the last 40 years by about 60% and the number of travelers increased tenfold. Air freight has grown in this period by a factor of fourteen. (See IATA Vision 2050) That sounds like a very successful industry. Is it? However, on the other hand, airlines are notorious to not even earning their cost of capital and producing unhappy customers.

During the 2000s the average airline generated an EBIT margin of just 0.7%. Taken a longer perspective, the figures are as drastic. From 1970 to 2010 the airline industry generated over USD 12,000 billions of revenues in today’s prices, but only a total of USD 19 billion of net post-tax profits; a margin of only 0.1%.

Another dull figures: Around USD 500 billion of investors’ capital is tied up in the airline industry. Normally, investors would expect a return on capital of around 7-8%. Taken the 500 billion that would mean a return of 40 billion annually to cover the cost of capital. But what did the airlines earn? 20 billion or 20 billion less that the capital would have earned elsewhere. The airline industry is a big capital destroyer. Interestingly, other firms along the travel value chain like airports or computer reservation systems earned excess returns. So there is profit in the travel industry but not with the capital-intensive airlines. Airlines are a dismal industry.

So are customers at least happy? Just type in Google the search “airline experience” and enjoy all the customer stories about flights. And watch the film “United breaks Guitars” like 12 million others did on Youtube.

What went wrong and is there a solution to it? And think about it why we all hunt of low prices on traveling while we spent USD 5 for a latte at Starbucks. Why are we so price conscious on travelling and not on coffee?

Here are some thoughts I presented at the 17th international airline conference last fall in Seattle. Thanks to Nawal Taneja, Dietmar Kirchner and Rob Solomon for the kind invitation.

Thesis 1: Airlines are masters of transportation economics, not customer experiences

It seems that all airline managers are great students of economics but not of entrepreneurship and marketing. Since they have a perishable good (empty seats on an upcoming flight are like perishable goods), they believe strongly in variable pricing by exploiting the maximal price customers are willing to pay.

That sounds very reasonable at first, since who wants to argue with economists and their theoretical models, but what airlines have forgotten over time is, that if you treat customers like rational customers then you will get rational customers and extremely price sensible customers in the end.  However, there is a good reason why economics is called a dismal science. So if you follow economists, you get a dismal industry.

Thesis 2: Price differentiation across channels annoys good customers

While customers more or less have accepted that the price differs depending how early or late you book, Airlines have established a system of price differentiation for different channels. For a flight to Hamburg to Zurich I have different prices across channels but even different prices in one channel depending how the flight is labeled due to cross-sharing agreements.

To give you an example from last fall: At eBookers the same flight was 25% more expensive if it was sold under the Swiss brand alone compared to the same flight under Lufthansa and Swiss brand. Finally, the booked price was even 50% lower compared to the highest price. So what do customers think about this strange pricing across channels? At least, I lose even more trust and now I shop around for a even better price for the same flight because I know there is a better price around. So I spent to a lot of time for the feeling of not being ripped-off because I chose the wrong channel. And unfortunately, you get ripped off if you chose the wrong channel.

Thesis 3: Now, customers take revenge. The digital customer is knowledgeable

While in the past large IT systems to optimize the profit per customer (yield management) were only available to airlines, with the Internet customers have even more powerful tools to optimize their travel costs.

The systems of Google, Expedia, etc. can never be matched by the airlines. The airlines started a war on the yields with superior weapons, now the customers take revenge with systems the airlines can never beat or even match. Instead of yield management, airlines got bleeding management.

The digital customer is a knowledgeable customer due to all the information he has. So if airlines treat him still like the stupid customer of the past when he had no access the information, customers will feel even more exploit by the airlines as profit maximizers. The bad joke is that the airlines short-term profit seeking behavior is exactly the reason why there is no profit in the airline industry.

Thesis 4: Airlines have trained customer to hunt for bargains not value. That backfires

Airlines have trained their customer to look for the best price and not for value, and now the customers look via comparison engines for the best price and not value.

Airlines have conditioned their customers in the past on price, now that backfires, since customers have to be retrained about value. And as we all know, unlearning is impossible. Airlines have trained customers for a long time on price to be the sole criteria so value strategies will have serious problems to even reach the customers.

Actually, the same happened in German retailing. “Cheaper, cheaper!” was always the claim and now Germany has the cheapest food prices in Europe but also not the quality you would expect from one of the richest countries in the world.

Thesis 5: Airlines will become even more of a commodity unless they create business models that customers love

That sounds easier said then done due to all restrictions of the past (locations of hubs, contracts with unions, aging fleet, etc.) and the increasing computing power of firms like Google or Expedia.

However, airlines without the impediments will create innovative business models as the Arabic airlines like Emirates or Copa, Southwest or Ryanair did.

Copa attacked the Latin American market with fresh strategic assets (hub in Panama), making flights between Latin American countries much easier by using a hub that is closer to the markets than Miami, the classical hub. The same is true for Emirates. While they profit from deep pockets of their owner, a favorable tax regime and lower fuel prices in the region, the most important part is their hub around which 4.5bn people live within an eight-hour flight. They became the hub between Europe and Asia.

To find business model innovations, you have to question every aspect of your business model including your current hubs, your supply chain (Do you want to backward integrate into airports?), etc.

However, all the former national carriers are not as free as they need to be but the competitors do not care. So either they start to innovate in their business models or they will parish in the current form.

Thesis 6: Airlines can learn from firms that have customer value and trust build into their business model and even beating economics

Airlines should look less at their current competition but at firms that have masters beating economics. The core is to understand that your business is not a commodity – which is ruled  by the dismal science of economics – if you add value and trust into your business model.

How about having a every day low price policy like Walmart has. Therefore, the customer does not have to shop around to find a cheaper place. The same is true for Aldi. Customers trust Aldi, that they have low prices everyday therefore you do not have to shop for the next bargain.

The SBB, the federal railway in Switzerland, has an interesting pricing as an example. They have just one price to go from A to B. The ticket is valid for all rides to your destination and there are no reservations needed for your ride. You can take any train (fast, slow) to your destination, it is always the same ticket. You can take any train any time with your ticket. From an economic point of view that sounds stupid as if the managers have no idea about transportation economics. That might be true on short term, but the SBB is beloved by the Swiss since it is such a comfortable and easy-to-use transportation means that it even riding a car is even more complicated than using trains in Switzerland. In the end “stupid” managers might in deed be very clever.

Here you find the full presentation also for download:

P.S. I wrote this post on a long distance flight to and back from the US. I still enjoy flying with my favorite airlines Swiss and Lufthansa. Not because they are cheap, but reliable and of reasonable quality. That’s all I expect plus some 5 cm more legroom in the economy class since I am almost 2 meters or 6’6″ What really annoys me about both airlines that I have to check several websites (their own, ebookers and billigfluege.de to get the best price). As I have shown in the presentation, the difference for the same flight from the same airline can be up to 50%. How can I trust the corporate site, if they want to rip me off? It is not the 50 CHF that annoys me but this feeling of being “ripped-off”.

Apple is the poster child of business model innovation. Apple has reinvented several business like music with itunes and the ipod, the telecommunication industry with its iphones and currently, the publishing/news/information industry with the ipad. But success is also associated with costs we should consider.

Apple has a market capitalization of 576.79 billion USD. There are 43’400’000 search results at Google when you look up Apple Business Model Innovation. Apple is the household name for innovation for sexy products and services for which people camp in front of stores to be the first to get the latest gadgets.

But it is also interesting to look at the cost associated with Apple’s success. Take a look at infographics made by mbaonline.com.

I had in the last months the chance to apply business model thinking & innovation on several, very diverse industries: the airline and travel industry, the pets industry and some time ago on the media industry, particularly newspaper.

In the upcoming three next posts, I will share some insights I gained from using the business model canvas on these industries. The series will start with the pets industry.

A word of warning to all industry experts: I am not an expert for these industries. I’m not a pet industry expert. I am an expert for the process of re-thinking and re-inventing business models.

Pets Industry – A revolution in the making

The following slide deck is my presentation, I gave on January 27^th, 2012 in Berlin at the Pets International conference. Enjoy some insights in a very interesting industry where the core is all around living creatures and the close relation we have to them.

Enjoy also my new design of the business model canvas I have created together with Gottschalk & Ash, a designer with the support of the Wolfsburg AG, an innovation incubator in Germany. You will see more in the future.

Pets are man’s best and dear friends

Pets are highly emotional and men’s best friends. Pets are members of your family. Sometimes they are treated better then human beings. Pets are for companionship or pleasure and treated with care and affection. The pets industry is very different from the livestock industry where animals are seen as assets.

The pet food industry seems from the outside a cozy industry where a few big firms dominate the shelves for pet food at the largest retailers. Will this last or will we see changes to the current industry structure and the current dominant business models?

Looking as an outsider at the industry, the biggest innovation in pet food seemed to be quite far in history with the emergence of branded pet food like Pedigree, Frolic or Sheba. Pet food is branded and marketed in very similar ways as (human) consumer products. Brands are build and emotions are used to create customer awareness and loyalty. So by applying classical fast-mover-consumer-goods marketing on pet food made pet food a consumer good even when the consumer is only the buyer but not the user. The extreme form is e.g. Sheba where humanisation of pets food is at its extreme. Sheba is made for humans (smell is specially designed for the human nose) and special edition like the Chrismas edition with porcini mushroom address humans not the needs of cats.

The giants of P&G, Mars, Colgate and Nestlé control the market

So it is not a big surprise that the classical consumer goods companies like Procter & Gamble, Mars, Colgate or Nestlé excel in the market for pet food as well. According to Wikipedia, these 4 firms control 80% of the pet food industry. They transferred their marketing know-how to the pet food market. Besides their strength in production and mass marketing, their core strength lies in the power play and negotiation with the large retailers like Carefour, Sainsbury or REWE in order to obtain sufficient shelf space to present their goods.

With their large advertising budgets, the large pet food firms are able to generate the necessary pull in the channels. The large retailers prefer to work together only with a small number of supplier in order to simplify their supply chains. And only the large consumer goods companies can withstand the enormous negotiation power of the retailers since they have must-have products in their large range of products. So large retailers require and cause large pet food firms and vice versa.

This business system is well entrenched in the industry for a long time. However, one can be much smaller than the current biggies to be an efficient pet food manufacturer, so the current industry structure is the result of channel economics and not production economics. Besides the four big ones, hundreds of smaller firms deliver 1000plus varieties of accessories and specialized foods and additives.

A very innovative firm, Royal Canin, was acquired in 2002 bei Mars. Royal Canin concentrates on specialized food for different life stages (puppets, adults, senior), sizes (mini toy, mini, medium, maxi, giant) to breeds (Yorkshire Terrier, Pug, English Bulldog, Cocker Spaniel….)

Fressnapf or Qualipet: Mega stores as game changers

Innovation in the pet food industry came in the last years from the distribution side. On the one hand, retailers like Aldi or Lidl moved into their own pet food via trade brands. On the other hand, new channels emerged with mega stores like Fressnapf or Qualipet. Fressnapf alone has 1.146 shops in 12 European countries.

These mega pet stores are large enough to build their own trade brand into a trusted brand. It is not the privilege of fast-moving-consumer-goods companies anymore to have access to customers and to knowhow to build a trusted brand. The trade brands of Fressnapf or Qualipet are trusted brands in their own rights today.

The Internet as the next game changer

The mega store concept was a typically game changer in many other retail category like books, consumer electronics or sports. However, the next game changer is already well known but less understood, the Internet.

The current industry structure of the pet food industry is the result of the (physical) channels economics and not of production requirements, and the internet is changing the economics of distribution again as did the mega stores. And the changing economics demand and enables different business models.

Often, it is believed that online will be just another channel and that it will help the incumbents to optimize their business model. Of course, the Internet can help the incumbents to optimize their current business model but it also allows new business models as we have seen in the case of Amazon. Amazon started as an online book retailer and industry experts expected that Amazon would be crashed by book mega stores like Barnes & Nobel or Borders. The opposite is true. Actually, Borders is now bankrupt, not Amazon.

Where is the next Fressnapf with the right choice of my pet?

Amazon is not just another distribution channel but also ventured into book publishing and reading devices. Amazon understood early that the Internet is not just another channel but can also change the production of goods as well. You might think that is only true for information goods like books that can easily be sold digitally, but think about the production economics of pet food.

Do you have to be as big as Mars to be an efficient producer? Do you have to be a bulk producer where all dogs get the same food in the same big bags and cans? Isn’t it possible to mix efficiently an individually designed dog food in production? Can you not offer MyDog Food in a similar way as MyMuesli or MyChocolate are doing?

People want the right choice, not more choice!

Yes, the Internet allows to bring individual blended and produced pet food together with a distribution system that allows such an individual distribution and that will, over the long haul, change fundamentally the business models in the pet food industry.

Royal Canin offers today all the different kinds of pet food, but the current physical distribution system is made to handle such a choice. The broad choice in the retail outlets is a tyranny. People want the right choice not more choice.

To make a prediction, which business models will prevail, would be like looking into a crystal ball but you can prepare by understanding your current business model and by understanding where change will happen. And change will happen.

Here are the Top 10s of this blog in 2011. I hope they give you some insights. More than 45.500 visits and 72.458 pages impressions were recored in 2011 (12/26/10-12/25/11) on this blog. Thank you very much!! All of you are a great motivation to me and inspiration to the field of business model innovation and business model design.

I have prepared my personal highlights and the Top 10 of post you have visited during 2011. The other Top 10s are about the search terms around my blog and the countries where all the visitors come from.

Personal Highlights

1. It is amazing how knowledge dissemination has changed over the last years thanks to the internet. Today, relevance counts more than pure marketing or brand power. A big thanks to Google that made it possible that readers find the blog. Today, knowledge disseminates from students to professor, from lower ranks to CEOs. A revolution in knowledge management.
2. Thanks to the blog and its readers, I got assignments all over the world.  This year, I loved particularly to work in Seattle, Singapur and Cairo (shortly before the revolution). Good luck to all my friends in Egypt and keep up the free and entrepreneurial spirit I felt there.
3. Thanks to all my readers and clients, 2011 was a very exciting year. 2012 will be exciting as well. I have found with with the innovation campus of the Wolfsburg AG, a public private partnership between the city of Wolfsburg and Volkswagen AG, a sponsor for a tool box for entrepreneurs. The tool box will be out by mid 2012. The tool box will be in German and is targeted at all entrepreneurs that what to make a difference in life.
4. fluidminds has launched a new product, a five day workshop for intrapreneurs in large corporations. First pilots in 2011 and more to come in 2012. It is fantastic to see how fast you can find customer insights and then develop great business and growth initiatives on top of them.

Thanks to the business model canvas people are enthusiastic to build new business models and find business model innovations, but often they get lost in technocratic details. They just see building blocks but they forget the overal logic every great business needs.

Actually, you as an entrepreneur have to answer just one core question: Why should your firm exist on this planet? You need a Daseinseinsberechtigung (right to exist) for your firm. This is a very philosophical question. To be more operational, you can break down the Daseins question into four core questions. But still the answers will not come with a pure analytical process but with creativity and lot’s of empathy for your customers and their jobs they want to have solved. 

The technocratic approach is useless for finding love (source: http://xkcd.com/55/)

The four core questions on your business model canvas

1. Why should customers be excited to do business with you? That is the value proposition. You could almost go as far as asking: Why should customers love to do business with you?
2. How do you create the excitement of your customers in a productive way? That is the value architecture or operating model. Here you describe how you fulfill your value proposition.
3. How do you earn money? That is your revenue model or the profit formula and here you should be able to explain why you as the owner should be excited about the business.
4. What are your values you live up to in your team and with your customers and partners? That is the human side of the business and of utmost important, since it is the most difficult part to copy. I call it the culture and values of a business.

For these questions, you need compelling answers and the nine or elven building blocks are very helpful in answering the questions but do not get lost in details but look at the broader picture and see the interdependencies.  If you can answer the questions you have a great strategy that is customer-oriented, profitable and sustainable.

The bad part for any mediocre business is that you cannot answer the questions. Please all mediocre business, why don’t you try harder and work on “why should your customers be exicted about you?” instead of optimizing a dull business.

Do you have to be market-oriented or is this again one of the buzz words that hides more than its reveals? Or should you be customer driven? Let’s take a look at the two words and concepts and see why Alex and I have chosen not the term market but customers for our canvases.

I just return from a workshop for entrepreneurs in Wolfsburg, the birthplace of Volkswagen. We used the business model canvas to focus the entrepreneurs and their coaches on the core building blocks of a business models.

Interestingly, most participants of the workshop always talked about markets, that we need to be more market oriented, that we have to conquer new markets. But is this true?

Customers pay your bill not "markets"

Markets, top-down approach

Markets are the sum of customers that spent money and therefore have shown a demand in the market. But a market is abstract and impersonal. You can not sell your product to a market. There is no Mrs Market to write a bill to and that is exactly the problem for entrepreneurs. You might be in a great, growing and profitable market but that does not mean you have one single customer who pays your bills.

Markets is a top-down approach very well suited for analyst and consultants. The market is great for analysis but not good to sell something to.

Customers, bottom-up approach

Let’s take a look at customers. As a business you need an individual client that is willing to pay for the service or product you offer. You need to address somebody who is willing to buy something from you. A market can not buy something from you, regardless how great the market is. A market does not create revenue or sales for you. It is your customer who buys from you, who provides you with the cash-flow you need to run your business.

And you need not one customer but enough to make a living from. That is also important for entrepreneurs. Do you have enough potential customers? How many customers do you need for breakeven? Is this figure realistic? How many customers do you need for a very happy life? But first, you have to excite the potential customers so that they become paying customers.

The customer driven approach to business model design is bottom up vs. the top-down approach of the market. And even in mature and declining markets you can make a good living if you have the right business model.

Please, write business plans for customers

So, please write your business plan around customers and how you will excite them with your offer. It is the value proposition that makes the difference and, of course, the value architecture to fulfill the value proposition. It is great to start with a product idea but it is the value proposition that counts. Think about the job you solve for your customers.

Customer centric business cases

And please, write your business case accordingly. A VC told me recently that he checks all business cases he wants to invest for a little dirty secrete. He makes a small crosscheck between sales figures and sales & distribution costs.

First, he tries to understand the buying cycle of customers. That is how long it takes a customer from the first sales pitch to the final sales and payment. Most of the time, that takes much long than entrepreneurs expect.

The second calculation is how many customer do you have to pitch to in order to get an opportunity and later the lead. He is doing the classical sales funnel. What is in the pipeline and how long does it take a bid to go through your pipeline.

And than his little trick comes in to place. He calculates than how many sales guys you need in order to fill the pipeline with the needed leads to achieve the sales you have used in your business case on the top line. And than he compares this to the sales costs. And most of the time there is a huge mismatch between the sales figure (too high) and the sales costs (too low) and the number of sales you want to hire (too low).

For this successful VC this shows him that you are not customer driven and not sales driven but a victim of the wrong assumption of what a market is. For a business you have to find customers that are willing to pay. So think about customers in the future, not markets.

We have a great tool for visualization of a business model: the canvas. There is a hype on visual thinking and business model design. But can the tools deliver?

In the last years, I have seen many uses of the business model canvas to real cases. Some showed astonishing results, others were disappointing. Why? Any tool is only as good as the user. A fool with a tool is still a fool. But also: A genius without the right tool might be a fool. So let’s see, what makes the difference.

Visual Thinking = Thinking with Visual aid

Visual Thinking is often mistaken as nice visualization. A bad idea does not become better by visualization. Visual Thinking is great since you think in pictures. Visualization can help to make your thinking better, to see more options and see the interdependencies among all components. But you still have to think!

There was a reason why god gave us two brain hemispheres: Visual Thinking is the combination of analytical and creative thinking. So do the thinking.

Be precise in your thinking

Due to the limited space, people tend to be pretty imprecise when filling out the canvas. They fill the canvas as if it is just a form, not the master plan for a venture or for the future of your firm. That happens particularly often in large corporations where the people are so stuck in their old thinking.

The more precise the better, since that shows that you have precise thinking. That does not mean you have to know everything at the beginning of your thinking process. Mark clearly areas where you have to do more thinking instead of just filling out just something. If you have not enough space on the canvas then use the white board to draw the component. That is often the case for the production or value steps in your value architecture.

Be precise in your language

People love buzzwords particularly in the value proposition. They write about best-in-class, social something, customer-centric. All empty words (See post on the horror of Newspeak). Start with precisely describing who your customers are. Do not write business customers but identify some business customers that you can check tomorrow your value proposition with.

I force my participants to write down a list of ten names of customers they can call tomorrow to check if the value proposition is appealing or not. That leads to the next and most important point.

Customer Insights as starting point

A good and innovative business model starts with a customer insight, of something what is unsolved or badly solved for the customer. That is what I call a job to be done for your customers. But entrepreneurs love their products and they try desperately to find a need for their offer. They spent hours arguing why people should buy their offer during business model sessions instead of talking to real potential customers. It is important to convince your customers not others during the workshop.

The Art of business model design starts with a deep understanding of customers. So leave your conference room and test your assumptions about the value proposition when you do the business model design. Observe potential customers, ask them about the basic needs, not about today’s solutions, be curious, be adventurous.

The Art of Business Model Design

• It’s all about the customer
• Be specific what you say
• Keep it simple, but not simplistic
• Be self-explanatory
• Focus on the relevant points where you make a difference
• Do not reinvent everything

“What business are you in?” sounds like a simple question. But it’s not. How you define your business determines which direction your firm can go. Based on your answer, you define and limit your strategic options.

In a company, the business model is defined by a dominant group of people. They have a common understanding of what business they are in and how they create value. However, the business model is not an absolute reality. It’s a social construct of dominant opinion makers, e.g. your top management. This is important to understand.

By taking a different look at your business, and thereby challenging your dominant logic, you can identify more and different strategic options for your firm. But beware; by doing so, you are also challenging the top dogs in your firm.

Life is not that simple. Changing perspectives by xkcd.com

How you define your business depends on the dominant logic of your management

Considering the definition of what a business model is, it seems easy to describe the business model of a company. You can use  the business model canvas (Alex Osterwalder‘s or mine) and then you describe how value is created. Often we assume that regardless of who describes the business model, we will end up with the same description. This is a mistake.

Some hard facts like the value chain or the products can be easily identified but as soon as we approach the value proposition, things get a bit more confusing. Why is this? The answer depends on who answers the question.

Take groups close to your firm: Will the board of your company have the same view as your customers? What about your employees and top management?

Hopefully your executive board will answer the question very similarly. However as I have seen in many consulting projects, that is not usually the case. And even the simple question of who your customers are is a tricky one. Are your customers your users or your paying customers? This is a particularly tough question in double-sided business models.

If you sell to end consumers through retailers, are your customers your channel partners like Walmart or the end customers? This is exactly the discussion you might have within your firm.

Ask customers the question of your value proposition. The answer will be different again. Do your customers understand your value proposition? Do you offer the value you promise with your value architecture also? (see post on value perception vs. value proposition).

In well-managed firms, there is a common and dominant logic of your business

In well-managed firms, we see a common and shared view of the value proposition and of the other components of a business model. Management of these firms is much easier because there is a common understanding of what you do and what makes you unique. In such firms, micro management isn’t necessary since everybody understands his or her role in the company. Innovation is still hard work, but since you understand your customer well, you regularly bring out innovations for your current customers.

Caveat!

What sounds like a dream may be a double-edged sword. Dream businesses can exist if technologies develop along known paths, if you have a clearly defined set of competitors, if your customers have stable and predictable needs and if you have found a business model which can thrive in stable conditions. That’s a lot of ifs! If times are changing, you might be trapped in your way of looking at the world.

The better you adjust to stable business conditions (sustaining), the more difficult you will have with disruptions or unpredictable situations. This is what Clayton Christensen calls Innovators’ Dilemma. Your dominant logic works as a filter. Information is filtered and interpreted in a way that fits your view of the world.

Business Model(s) of the Yellow Pages

The best way to illustrate my point that business models are a social construct and not an absolute reality is to take an industry of business directories, like yellow pages. What is the business model of the yellow pages?

1. Yellow pages as publishers of Yellow Pages and other directories (a product based definition)

If we go back some 15 years, we could easily describe the business model of directories as publishers of paper directories in the form of white pages (private addresses) and yellow pages (business addresses). When you subscribe to this view, you might have envisioned an integrated value chain with its own printing facilities. Even the printing faction of the yellow pages businesses has shifted to online directory services. For such companies, going online was a great step forward, even if it meant simply transferring their business model from paper to online.

2. The search & find business

Another way to look at directory services is to look at the jobs or problems they solve for customers. Remember that the job-to-be-done is a core-defining element of the value proposition. Well, which job does a directory service solve for its clients?

Directory services offer the chance to FIND somebody when somebody else SEARCHes for them. So, the business can be called “Search & Find” business. In this view, one defines the business by the end users and the job you help them solve.

If your dominant logic is grounded in the Search & Find business, you probably understand that customers need more than a flat directory of businesses (today called yellow pages). How about adding recommendations to the business listings like Yelp or Qype are doing? How about making specialized sites for certain professions such as craftsmen or doctors like Angie’s List . After all, people are looking for the best doctor in town, not just any doctor.

When you see your business in this way, you move away from a flat search (finding little information about everything) to a deep search (finding specialized information about a niche). Think about it: Google will probably always beat you in flat search so you better go into deep search.

3. The lead generating business

A third way to define your business takes both the end-user and the paying customer into account. In the case of directory services, your customers are small and mid-sized businesses who you sell ads to.

What problem do the SMEs want to solve with an ad or a bold listing in your directory? Well, they want to be found in order to generate more and better leads with the ad. With these glasses on, you are in the Lead Generating Business. This is quite different from the other two perspectives.

What happens if you take this view? You will probably realize that you have one of the best local sales forces for SMEs as a key asset and part of your core capabilities. And why not leverage your key assets to sell a whole range of products to SMEs that help them to generate more and better leads? Why not sell Google Adwords? With this view of the world, Google is a partner and not a mammoth competitor anymore. Google’s weakness in local business is its weak sales force. They are a technology firm. You have a great local sales force and you will never beat Google in search. Why not join them? Google can be your partner.

In the lead generating business, you suddenly see fresh competitors that compete for the same job and for the same clients’ budget. Groupon and its clones are exactly doing this: Competing for the lead generating business.

4. The Address source

A fourth way of defining what kind of business you are starts by looking at the core competencies. As a directory company, you have or had the best address material for individuals and businesses. You could call yourself an address business.

Potential strategic options would include moving into identity and address management for businesses and individuals. In this situation, you would sell addresses to business and keep the main address of individuals. Unfortunately, it’s a bit late for this kind of business because new directory services have appeared in the form of social networks like Facebook, LinkedIn and Xing. Now, individuals or business maintain their own profiles on these sites.

Conclusion: A business model is a social construct

All four perspectives of the business model are logical and supported by facts. They are totally different descriptions of the same business. Each view allows for very different strategic options. Even the competitors change with each different view of the business. of the business.

It is very important to understand that your business model is not a static and fixed model, it’s the construct of a dominant group of people in your firm.

Challenge the dominant logic with the business model canvas to see new strategic options

You see very different strategic options if you define your business differently. A great way to do this is to better understand the problem you solve for your customer.

Different perspectives open new options by xkcd.com

I illustrated this two years ago in a post on the newspaper industry. The classic business model of a newspaper consisted of three different businesses brought together by a shared medium: paper.

1. The first kind of business you are in concerns the reader. You provide news, background information and entertainment in exchange for the reader’s attention and a small amount of money (just 30% of total revenues, but even less of a contribution margin).
2. The second business you are in is to sell the reader’s attention to advertisers. And this is where the margins were made in the past.
3. The third is the classifieds business. Here, a paper functions as a market place. As we see on the Internet, you do not need content to sell advertising or classifieds. Google and Craig’s List have proven this.

The pity for the newspaper industry is that most of the costs come from the first business, the content, but the revenue comes from the second and third businesses (here a post on the changing economics of newspapers). In this case , the jobs-to-be done analysis is a frustrating one since you see that just moving your content online will never be a profitable business.

Ways to define your business model and starting points for innovation

Taking the yellow pages example, we can identify four defining elements

• The product you offer
• The problems and jobs you solve for your users
• The problems and jobs you solve for your paying customers
• Your core competences

But there are even more elements that you can define your business around.

• The core input or raw material used in your production. This is the way how the plastics industry defines itself. The oil industry and other traditional commodity industries do, too.
• The core production process. Food processing industries focus on this.

Reconstructing your firm by taking another perspective will allow you to see fresh, strategic options which will lead to business model innovations. Take the business model canvas and play with the components. You will see there are more options than you can handle. So please never say that you have no idea how to reinvent your business. Ideas come easily, but executing these ideas is the tough part.

Regardless of which definition you choose, be aware that it is only a construct able to be changed. Competition will not care about your definition. Your success will come from new ways of solving a problem for your customers. And do not complain of unfairness when a competitor enters the arena and breaks all of the rules that you thought were holy. All of these rules made sense in your way of looking at your business, but your competitor, who defines his business totally differently, is acting in a totally fair and just manner. This is what we see in the moment between the content industry which is being challenged by Google in the search and find industry.

Particularly on the web, we see a lot of copies of successful business models. How many clones are there of Groupon? How many competitors and incumbents wanted to copy Amazon in the late 1990s and failed? The core question is: Is it possible to copy a business model? In this post, I will elaborate on this topic.

During a recent interview for a bachelor thesis, I was asked: Under which circumstances is the transfer of a business model e.g. from a different country or from a competitor a useful strategy?

I must admit, I am skeptical about the outright transfer of business models from one firm to another. The reason is very simple. A business model is more than its technical components like your value chain, revenue model, your product etc. The business model also includes soft factors like the value proposition, your values and corporate culture or your core competencies. Remember the definition of core competency: core competencies have to be rare, difficult to copy and valuable.

Many strategists, VCs and purely analytical people think that it is easy to copy a business model. What they forget is that a business model is not just a technocratic combination of components, in fact, humans are involved with their values, cultures and hidden assumptions. You can copy the hard components, but the human aspect of a business model –values, culture, tacit knowledge – is difficult to copy.

Business Model transfer from Start-ups to Start-ups

The case is different for startups where the human aspect is not as developed as in more mature firms. To copy a business model that is not based on technology is easy. To copy a business model of a startup, whose uniqueness is based on proprietary technology is difficult.

Case: Business Model Innovation Groupon and its clones

An interesting case is Groupon and all its clones. Groupon is a deal-of-the-day website which allows consumers to shop for certain services or products for a large discount when a  sufficient number of users sign up for the deal within a short window of time. The value proposition for the user is simple: Get great deals for a hefty discount.

The value proposition for the businesses that offer the deals is less obvious. Why would businesses give discounts of over 50%? Well, Groupon offers local small businesses a fresh way to generate leads for their business. Traditionally, this task “lead-generation” was offered by the Yellow Pages, classifieds or more recently, by Google Adwords. Now, there is a new way to achieve this task: a typical business model innovation.

The value proposition for the businesses that offer the deals is less obvious. Why do businesses give discounts of over 50%? Well, Groupon offers local small businesses a fresh way to generate leads for their business (job-to-be-done by Groupon). Traditionally, the job “lead-generation” was offered by yellow pages, classified advertising or more recently by Google Adwords. Now, there is a new way how to solve this job: a typical business model innovation.

The traditional methods of “lead-generation” require the business to pay upfront without knowing what revenues would be generated. At the same time, businesses might be reaching people who are not interested in their goods and services. Google Adwords is already innovative. You only have to pay Google if a user is interested in your ad and clicks on it. So your ad is already much more targeted.

Groupon goes even a step further. With the Groupon model, the business targets and reaches only users that are willing to pay for their products and services, at, of course, a steep discount. Groupon’s value proposition is particularly well-suited for businesses that have a high contribution margin for every customer they serve. This is the case for beauty salons or massage parlors. Every customer via Groupon brings in business. That is quite an innovation in the “lead-generation” business where you usually pay money to get leads. With Groupon, you get leads and get business at less than 50% of the normal price.

The value proposition sounds very convincing but the big question for businesses is if they can transform Groupon users into regular clients who pay regular prices or if you just get one-time discount hunters.

Groupon’s History and its clones

Groupon started business in 2008 and rose to the attention of other entrepreneurs worldwide in 2009. In 2010, Forbes counted over 500 clones worldwide, with more than 100 such firms in the US alone.

In Germany, CityDeal rose to prominence when the Samwer brothers (well-know cloners of US internet business models) went from zero to 700 employees in half a year and then sold the firm to Groupon. This is a typical revenue model for investors of some copycats. Instead of earning money with its customers, the basic idea is to be acquired by the originator of a business innovation during their internationalization spree. For the Samwar brothers it already worked twice: First with their eBay clone and now with Citydeal. [update March 2nd, 2012 Business Week writes about the Samwar brothers and their management & investment style. Definitely worth reading. You will not like the guys more after reading the article.]

Other clones focused on smaller markets that are less attractive than the big markets. E.g. DeinDeal works successfully in Switzerland.

Summary on startup business models

Yes, you can copy a business model from one market to another if the value proposition is also attractive to customers in other countries. If the business model is protected by core competencies or patents you cannot transfer the business model easily.

Business Model Transfer from Startups to Incumbents: Can they dance?

To take the Groupon case further, why did we not see copycats from firms that are already in the “lead generation” business like the Yellow Pages. These companies already have one of the core assets for the Groupon business model: Local sales teams for SMEs. So it would be easy for them to build successful clones.

But they didn’t. Why?

One reason is that they did not define their business by lead generation for SMEs, the job they solve for their customers. If you define your business by the product or around the value proposition for your users like local search, you do not see the threat your business models faces by Groupon. You believe you are in the search [] business but, actually, Groupon competes for the same bucks that you do. It is good that Groupon and all its clones [] are not taken serious, at least in the beginning.

So in the case of incumbents, the human aspect in their business model is the limiting factor to transfer the startup business model.

Amazon vs. Barnes & Nobels vs. BOL vs. Otto-Versand

Another great example is Amazon. Amazon was very easy to copy in the late 1990s. It was just an online book reseller. That is easy to copy. The incumbents were [] well aware of Amazon early on. They waited to see if Amazon could prove the business case of online book selling. When the incumbents saw that the take-up rate of online book shops was great, they responded with clones. Barnes & Nobel, an innovator in stationary book selling, entered the market, as did Bertelsmann in Germany with BOL. Were they successful?

Well, not really. Although they ventured into online book selling, the human factor in their traditional business model impeded success in their new venture. The incumbents always had the problem of cannibalization threatening the existing business that they wanted to protect. So the move into online book selling was seen as a defensive move. It was halfhearted. Meanwhile, Amazon was fully committed to being online; they had no other business.

And why did Otto, the largest mail order house in Europe, not react? Or the now defunct QuelleKarstadt? Again, it was the human factor of their traditional business model. If you are the king of the mail order business why should you be afraid of an online book seller like Amazon? In hindsight, Amazon is more than books, but the label “books” still sticks to Amazon. The incumbents in mail order never thought it would be possible for a newbie to build an infrastructure of warehouses and support systems they had until Amazon did it [] even better. The same is true for IBM or HP. Amazon is a big player in cloud computing, not the incumbents.

Summary

Incumbents can easily copy business models from startups. But often they do it only halfheartedly in order to protect their current business model. Here, the human factor on the side of the traditional business is the impediment for the successful transfer of a business model from one firm to another.

Business Model Transfer from mature firms

So what about transferring business models of successful, mature companies? Why do we not see more IKEA clones?

Here, yet another factor plays against the clones. The longer a company works under a successful business model, the more difficult it is to beat that company on their own turf. They have learned so much from their customers, they have gained so much tacit knowledge in how they run the firm that it is difficult to copy the business model. This is particularly true when the business model is based on a strong value proposition for customers and partners – like suppliers.

The Geberit case: a Business Model Innovation in the building industry

Geberit is a Swiss firm involved in plumbing and maintenance. Quite a commodity business, you might think. That is true if you think that you sell plastic pipes and other products. But they have developed a business model innovation. They do not sell pipes or other products but they sell you smooth and easy bathroom renovation and building. That is quite a different value proposition. So they have developed a system where everything is pre-assembled in a behind-the-wall system.

Of course, you can copy the installation systems of Geberit. There are just products. But what you cannot copy is the relationship Geberit has developed with its key partners, plumbing professionals. 30.000 professionals are trained every year on Geberit technology; these professionals plan their client projects with software from Geberit; they have been working successfully with Geberit products for years. In fact, the sanitary professionals know only Geberit nowadays.

So, Geberit is not just a product innovator but a business model innovator. It generated a lock-in with the most important influencer, the plumbing professionals. Geberit has developed a great value proposition for and some core compentencies around its partners like partner management or knowledge management.

Summary

To copy a business model of a well entrenched and successful business innovator is very difficult. The innovator has developed so many competencies and so much tacit knowhow that it is almost impossible to copy the business model. Of course, you can transfer the business model to other countries, but remember it will take time for you to build up knowledge and it also takes time to develop customers for a fresh business model. Customers do not adopt innovation quickly as they also have to learn new things about this innovation.

Summary: Transfer and Portability of business models

Today, we have much discussion going on about copying and transferring successful business models. What sounds so easy in theory and from consultants, is much more difficult to implement. A good business model is by definition difficult to copy. A good business model is not defended by patents or high-tech but by the excellent interaction of all its components and, particularly, by the human factor.

I just had the pleasure to spend sometime with two passionate freaks and both have built a business around their uniqueness and idiosyncrasies. The idea behind this post is to inspire you to find YOUR business model for YOU. Do not copy somebody else but find something that fits YOU and YOUR unique skills.

I spent the last week ski mountaineering in Italy in Valle Maira (south east of the piedmont region, east of Cuneo). It was a very enjoyable vacation with lot’s of fun, work and pleasure but also with learnings I want to share with you.

I learned from two people, Lucas Iten, our mountain guide and chef Enrico Crippa from the two Michelin star restaurant Piazza Duomo in Alba. Both are passionates. Both are freaks.

Mountain guide Lucas Iten

The first freak I encountered was our Swiss mountain guide Lucas Iten also called Mountain Geier. Actually, Lucas is not really customer-oriented; he is just the best in finding the best run under the present circumstances. And the best run is not really defined by the customer but the possibilities of the day. And if that means to climbed 1700m than you better ascend.

You have to fit to Lucas. When you do, you have one of the best times possible in the mountains. He loves the runs; he is like a child with all his enthusiasm and joy. He is childlike but very professional in regard to planing and the risk of avalanches. He loves the days out in the mountains and loves to share his enthusiasm. We found runs local alpinist were surprised that you could make them.

Early in life, Lucas knew that the mountains will be his life. In a young age, he climbed the Eiger Northface and did everything to avoid things he was not the best at like school.

Lucas has joined forces with a Bergpunkt, mountain experience travel agency. And like Lucas, the business model of Bergpunkt is not focused on end-customers but at their partners, the mountain guides. Remember that you need a value proposition not only for your customers but also for your key partners. Take a look at the canvas.

Bergpunkt’s business model targets creative and crazy mountain guides. For these kinds of mountain guides, Bergpunkt is a perfect partner, taking over all the things a mountain guide tries to avoid like administration and booking of guests. And by that, they get the “best” mountain guides and thereby Bergpunkt’s program is very attractive for end-customers like me. Lucas is not the only freak at Bergpunkt. All mountain guides I have experienced are just exceptional and in a very positive way out of the norm. They are freaks!

Chef Enrico Crippa

The other freak is the chef of the restaurant Piazza Duomo in Alba. I do not know much about him personally but his kitchen is that of a passionate freak. Since he is 16 he is into gastronomy. Now, he is just under 40 and has 24 years of experience and still has the passion needed. Starting his own restaurant Piazza Duomo in 2005 he got his first Michelin star after two years, the second after another two years. So let’s see if he will get the third.

As a youngster he started his career with the first Italian chef with three Michelin stars, Gualtiero Marchesi, considered to be the founder of modern Italian Cuisines. Other stations of his professional life were at other three Michelin star chefs like Antoine Westermann. To learn more, he left for Japan to learn a different style of cooking and the result at Piazza Duomo is breathtaking.

We had a perfect dinner with 11 courses they called Tradizione e Innovazione, a perfect blend of traditional ingredients and very innovative but still tasty preparation. Enrico Crippa combines the tradition of the Alba region with the molecular cooking style in a very good and creative way.

And also Enrico has developed a very good business model which allows him to focus on what he is best at, cooking. He joined forces with the Ceretto family to open his restaurant in Alba. The Ceretto family, a well-know winery family, wanted to put Alba on the gourmet map and with Enrico they found their partner. A perfect combination of business sense and culinary delight.

Conclusion

We see here a very special business model, the model of freaks and passionates. This model has some idiosyncrasies that makes the model so special like the freaks themselves:

• Either take it or leave it. Both have in common that you either like what they do with passion or you leave it. They do not bend themselves for customers that do not fit.
• You cannot copy it: You cannot copy their business model since they have unique competences and strengths.
• Focused on strengths: Both have worked on their strengths and not on their weaknesses.
• Complementaries needed: Both have found partners that supplement their skills. They concentrate on what there are good at and leave the rest to others that understand and foster their uniqueness.
• Not scalable: Such a business model is not scalable. The uniqueness is build around the persons and their competencies. But as long as you can live well from it, why must everything be scalable?

The most important point is that there are so many different business models around. There is not one fits all. Find the business model that suits you.