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LEAD Innovation Blog

Read our latest articles on innovation management and innovation in a wide range of industries.

Date: 30-Apr-2018
Posted by: Franz Emprechtinger

3 famous business model innovations and what you can learn from them

 

Future competition no longer occurs between products or processes, but between business models. Using three companies, we show you how business model innovation can be successfully implemented.

Rolls Royce

One of the best-known examples of successful business model innovation is the "power-by-the-hour" business model of the British aircraft turbine manufacturer Rolls-Royce. Before the introduction of the innovation, the construction of engines for Rolls Royce was exclusively a product business: For a comparatively large one-off sum, the engine became the property of the aircraft manufacturers.

The new business model does not sell engines, but thrust hours to the airlines: The airlines pay only for the operating hours of the engines and are no longer obliged to buy the turbine engines. The engine remains the property of Rolls-Royce, and the company is also responsible for the maintenance and repair of the engines.

The Rolls Royce business model is based on a performance-based contracting approach, i. e. performance-related remuneration. It is not the value of the engines per se that is calculated, but the flight performance hours that can be achieved with the engine. Cost factors such as operation, maintenance and repair are already included in the price. With this innovation, Rolls Royce has not only created advantages for itself and its customers, but also made it possible for low-cost airlines such as Southwest Airlines.

If you look at business model innovation from the perspective of the Business Model Navigator, there are changes in three dimensions:

  • Who are the target customers: no change
  • What is the benefit for customers? The airlines only pay for the operating hours of the engines and are no longer obliged to buy the engines.
  • How is the benefit created and delivered? The engine remains the property of Rolls-Royce, which is responsible for the maintenance and repair of the engine.
  • How does the company earn money: Rolls Royce generates constant revenue streams by invoicing flying hours and can reduce costs through an efficient service concept.

Case Study Business Model Innovation

The XEROX business model "Pay per Copy" is based on the same principle. The customer does not pay for the photocopier, but for each copy made. Similar business models are also increasingly common in plant engineering, e. g. for building elevators (payments to transport people) or paint shops (payment per painted vehicle).



Dow Corning

Dow Corning, the U. S. chemical company, is a supplier of silicone products for a wide variety of industries. The business model was geared to the sale of products with extensive consulting services and high margins. However, sales of some products stagnated due to the commoditization of the markets.

Dow Corning realized that further growth would only be possible by adjusting its business model and began to investigate the cause of sluggish sales. It turned out that certain customer groups no longer need support, but are looking for large quantities at reasonable prices.

On the basis of this insight, Dow Corning developed a cost-based "no frills" business model parallel to the existing value-based business model. The aim is to offer products at low prices for the mass market, even if the quality suffers from this (e. g. no consulting services).

The implementation took place through the foundation of the new independent brand Xiameter, which specialized in the sale of standardized offers at best prices via the Internet. Although the business model is exactly the opposite of what was Dow Corning's original success, the strategy worked out well. The changes in the individual dimensions give the following picture:

  • Who are the target customers: Customers with low service and consulting requirements who are looking for high volumes at low prices.
  • What is the benefit for the customer: Standardised offers that can be purchased in large quantities at low prices.
  • How is the benefit created and delivered: Customers order conveniently via the Internet. R&D, sales and extensive support have been replaced by a strong IT system that enables maximum process automation and cost reduction.
  • How does the company make money: higher sales by selling at low prices and dispensing with consulting services.

The two business models also did not cannibalize, quite the contrary: Xiameter's low prices enabled the reduction of excess capacity in production and brought an improvement for Dow Corning as a whole. The new customers also pushed industrial capacity to its limits, which boosted prices and improved the profitability of the core business.

 

ALD Vacuum Technologies

ALD Vacuum Technologies GmbH is the world's leading supplier of systems and services in the field of vacuum process technology. In addition to classic plant sales, the business model "Own & Operate" was initiated a few years ago in order to serve changed customer needs in the area of modular process, construction and process technologies.

With this operator model, ALD as a service provider directly addresses the needs of those customers who require heat treatment in the further processing of their components but do not themselves have the know-how and technology for adequate processes. With this business model, ALD not only supports the customer in product development, but also takes over part of the value added.

In this way, the company bundles its own know-how at the customer's premises and can also operate sensitive systems optimally. This enables the company to achieve higher levels of plant utilization than its competitors and to offer better quality at lower overall costs. The four dimensions of the Business Model Navigator are as follows:

  • Who are the target customers? Customers who need heat treatment in their production process but do not have the know-how and technology for adequate processes.
  • What is the benefit for the customer? Comprehensive range of services based on sustainable, long-term cooperation. The customer benefits from state-of-the-art equipment and the extensive material knowledge and experience of ALD Vaccuum Technologies (? cost savings and quality improvements).
  • How is the benefit created and delivered? ALD Vacuum Technologies GmbH completely relieves the customer of heat treatment by operating its own systems, so that they do not have to invest in the purchase of their own systems or need to provide qualified personnel.
  • How does the company earn money: The pricing of the services included in the business model is based on its own costs, competition and the added value created for the customer (customer value-oriented pricing).

With the addition of the Own & Operate business model, ALD has transformed itself from a plant manufacturer to a manufacturing service provider. The company responded successfully to the low differentiation potential in mechanical and plant engineering and repositioned itself in the market with a comprehensive range of services.

 

Conclusion: 3 famous business model innovations and what you can learn from them

In order to survive successfully in the competitive environment of the 21st century, it is often no longer sufficient to simply develop new products and services. Increasingly, companies are also having to modify or completely redesign their entire business model. Business model innovations create competitive advantages by enabling a more comprehensive differentiation and greater influence on a company's sales and costs than product or process innovations. A systematic approach using proven methods and tools ensures the generation of sustainable business models - be it by involving lead users, transferring know-how from analogue industries, imitating business model patterns or customer experience design.

Business Model Innovation

Franz Emprechtinger

Born in Ried im Innkreis. As former Head of Innovation, he was responsible for the entire project management and specializes in the areas of fuzzy front end and business model innovation.

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