These are my run notes from an address by James Andrew, Sr. Partner, MD BCG, Head of Global Innovation Practice, to the 2009 SAMA annual meeting.
I learned about strategic accounts from an early age. My father sold grease and oil for forty years. I remember my introduction to big accounts and how not all accounts are created equal and what it takes to serve them.
I remember sitting at dinner one night. My father had this territory that was the greater Chicago area and the phone rang. It was US Steel in Gary. His largest account.
If you know Chicago and what it took to get from the north of town to Gary, it’s not a pleasurable trip. This meant he was going to be gone well past my bed time. I made some remark like a ten hear old would do.
He pointed to my plate and said, “Do you like what’s on my plate?”
“Yes”
“Do you like your room?”
“Yes”
“Who do you think pays for that?”
My father, who was about to drive two hours both ways to fix a problem that wasn’t due to his product, taught me a lesson about selling that has always staid with me.
Selling is an honorable profession. There are accounts that are more lucrative than others. Those are the ones that have to be managed differently.
I wanted to talk with you today about some of BCGs insights into business model innovation . . . from both our work with clients and our research.
Innovation
Innovation is a word that means many things to many people. It is not synonymous with creativity, though creativity is a good thing. People can be creative but not get business results.
Innovation doesn’t mean great ideas. We’ve all been in sessions where we’ve had those. Most companies don’t have an idea deficit. The problem is getting things done.
It’s not inventiveness or coming up with great products. It’s not coming up with something once. It’s a process that uses new knowledge to generate a payback. It could be products, services, processes, customer experience, or business model.
Business model innovation is radical approach, a transformative approach, for changing the basis of competition. It’s a dramatic leap forward.
What is a business model? There are two main elements. One is your value proposition: segments, product/service offering, and your revenue model. The other element is your operating model: value chain, cost model, and organization. How you support and deliver.
Business model innovation occurs when a company innovates two or more of those elements. Let’s look at some examples and some patterns.
Some companies decide to innovate the value proposition.
One is to change from offering a product to a service. Xerox is an example. GE.
Another is to move from product to selling an experience: Apple iPod and iTunes. DHL (the experience of doing business).
Another is to sell a trust premium by offering superior quality or safety. For example Whole Foods. Successful due to the name on the front door in getting obscene prices on apples.
Another is to sell something free to generate profits elsewhere. Google. Velib (bikes free of charge in France but makes money on Advertising).
Apple iPod story has been told many times. In 2006 I was interested in chasing down the iPod story. You can identify three or four earlier versions of hard drive based MP3 units. By coupling the hardware with software, a catalog, and a pricing model, Apple brought the first easy to use, legal way to listen to your favorite music. We take that for granted, but if you had an early version of a competitor, you remember how hard it was. Today they control over 70% of the market.
The second type of innovation is where the focus is on the operating model.
The first is Deconstruction. Tearing apart the value chain. Thinking differently about what I’m going to do and what others will do. For example, a virtual value chain that exists for something made in Asia. Li and Fund.
Second is supply chain integration. This could be done horizontally or vertically. An example is Zara.
Third, alter value chain to alter costs radically. Low cost. Tata in India is an example.
Move direct distribution of a product to a group that never had it before. For example nespresso.
Let’s look at Tata. Moved into passenger cars from trucks with traditional revenue model: standard dealer distribution, sell the cars, sell the parts. Today, Tata sells cars and SUVs to 500,000 middle class consumers. But there are 50 million people who use bikes and smaller vehicles. An affordability problem. Have to get the price point down.
In a major play they decided to build the world’s cheapest care, the Tata Nano. $2,500. The people’s car. A transformative step change for the business and Tata. Even in India, selling a car for $2500 is not simple. They had to do an end-to-end rethink on value prop and operating model.
One innovation is working with supply chain partners to build modules that can be assembled anywhere, including in the field. Makes it easier and cheaper. Anyone with mechanical skills can put the car together. This gives dealers, who will now do maintenance, a crash course in maintenance. If you can build it, you can fix it.
This highlights an innovation which is collaboration. They’ve brought together a whole cast of people together who have never been involved in the auto business and made them part of it.
Key Factors
The most important is to break customer compromises. The first thing is to look at major, not minor, unmet customer needs. The key word is major. This is the place where I see a real opportunity for strategic account managers who interact with customers and non-customers.
The second important factor is to challenge established practices. The way things are supposed to be. The Tata Nano is being built in ways that cars aren’t supposed to be built.
Remember Google. Something that we needed to do but nobody could make money doing it. You have to be able to take on your industry’s dogma if you want to innovate your business model.
Another success factor is having strong leadership. Why? Innovation requires making decisions, vision, courage to make changes, and the ability to motivate. Passionate and committed enough to see it through to completion.
Finally, you have to expand your market by scaling aggressively and capture value. Your competitors won’t sit still. We all know how big Google is thinking.
Challenges
The company remains stuck in the past. “Our business is different! Why do we need change?”
Business models have a finite life. Things change. Customer needs change. Competitors change. The pace of technology is speeding up. Increased transparency.
The other challenge is missing the source of the entrance of a new competitor. Often competitors you’ve never seen before. A role of strategic accounts people is to help spot them.
Role of Strategic Account Manager (SAM) in Innovation
There are two times you play a vital role. One is when your customer is involved with business model innovation. The second is when your company does.
In the consumer fashion industry, trends change all the time. But it takes six to 18 months for a fashion company to change their lines. Zara, a Spanish retailer, was one of the first and largest to align production with the needs to the consumer. They can go from design to in the store in five weeks. They implemented their supply chain, demand tracking, and cut way down on supply chain. The key to their operational and sales success is speed. By producing clothes quickly., they don’t have to project sales. They make something, put it in the stores, and see if it works. Design, make, test, reorder.
An example with their partnerships is with a partner called PTC to use something called Windchill that links together all stages of sore design and building. Before Zara, Windchill was used for manufacturing. PTC, by working with Zara, understood that Zara would need to build stores in many places with different footprints very rapidly, as well as refresh stores. So they build a customized version of Windchill to meet their needs.
Benefits to Zara are clear: Faster and cheaper. Now PTC has a whole new customer base. The person who visualized what Zara needed and did it has a customer for life.
Another example is the airline industry. Low cost, low margin, it’s hard on existing players and new entrants. From an investor standpoint, it may be the world’s worst industry. That said, there are people still in it.
Southwest and Ryanair have changed the market. Qantas had to redo their entire model to compete. The created Jetstar Not the same as Ted or Song. This is a low cost entrant to look after the Australian leisure market. It was a change in operating model.
They have grown 10% a year without cannibalizing Qantas traditional business. The in-flight catering company called Gate Gourmet won the initial catering contract against the catering arm of Qantas.
The value prop of a low cost airline is straightforward: rock bottom prices for no frills experience. Jetstar wanted to offer a broad array of services they could offer onboard. So they needed an end-to-end approach to low cost catering onboard. Fresh AUS food, high quality, that tastes pretty good.
Food, comfort items, and entertainment items are all available for purchase onboard. You can preorder them as well. To do this, your products have to be low cost, airplane ready, and attractive. The cart that goes down the aisle isn’t just servicing, it’s a wheeled merchandising machine. It drives a large amount of profitability of every flight. The more stuff you sell, the more profit for that particular flight.
As we all know the things that we get on the plane in the US are not things we would willingly buy.
So in addition, Gate Gourmet provides suggestive selling techniques to the onboard personnel. In 2004 the relationship started. It went so well that Jetstar asked them to partner with them in international flights. There is only one low cost international airline in the world. Jetstar. They’ve crated comfort packs (blanket, pillow, earplugs, etc.). Coach class customer aren’t used to getting these tings on a seven hour flight to Bali.
Gate Gourmet is now sourcing, purchasing, packaging, and helping sell new products. GG’s ability to work with Jetstar on their new model has helped GG become the number one catering company in AUS and are now moving internationally to work with EasyJet.
The other way: When your company implements business model innovation.
Mercedes borrowed an innovative business model from another industry. They had always been a big player in long haul trucking. Sell trucks at low prices and make money on spare parts and repair. This was an incentive to make bad trucks and give them away.
MB looked at what GE had done with engines. Sell low and make money on repair. GE’s solution was power by the hour. Harder to execute than the literature would have you believe. Instead and maintain and charge by the hour. So now MB sells by the kilometer. Customers can now variablize the costs. That’s not an easy value prop to communicate . . . selling metal on wheels vs. selling owners a low risk package of ownership where the customer isn’t buying trucks at all.
When MP launched the brand, Charterway. It was a dramatic change. They sold a “per kilometer” offering through fleet sales offices and dealer network. They changed the compensation from the sale of the truck to sale of kilometers. Enhanced their ability to ensure that the fleet evolves with customer needs. Most customers don’t want to run a truck fleet, they want to move things around.
Some key learnings
First, you have to be watching for and anticipating unmet and evolving customer needs. If it’s a big enough innovation, it’s a catalyst for making changes in your own company. People want utility, not the stuff.
When your company engages in business model innovation, take it seriously. Companies don’t go back.
SAMS need to be adaptable to selling in the new business model.
The change presents risks, but it’s essential. It opens up opportunities for those who adopt quickly.
Specific Suggestions
1. Anticipate where business model innovation is going to occur. Look at customer who are most aggressive and those who are in the most trouble. Look at your employer in the same light.
2. Ensure customers know what you can do for them. We’re often pigeon-holed.
3. Push your company to build needed capabilities.
4. Manage the second order effects. The less obvious implications of business model innovation. Changes in areas like training, compensation, business skills, etc.
Tags: JimAndrew, BCG, SAMA, Strategic Accounts, Mercedes Benz, JetStar, Gate Gourmet, RyanAir, Qantas, Tata, Apple, iPod, DHL, Xerox, Velib, Zara
