January
21 -- Amazon CEO Jeff Bezos created quite the stir when he announced plans for
drone package delivery on 60 Minutes. However, as exciting as commercial
applications for drone technology might be, the true innovation lies in Amazon
once again reinventing its business model and finding new ways to create value,
conduct business and get paid for it.
The
essence of business model innovation (BMI) is not a new concept. Indeed,
creating disruptive new business models is at the heart of many entrepreneurial
start-ups. However, in most large companies and corporations, business models
take a back seat to brands. BMI should command more attention as business
models, above products, services or brands, are the basis of competitive
advantage in the 21st Century.
The
implications to this are significant. Over time, the companies that fail to
reinvent their business models to challenge outmoded assumptions about their
businesses, renew their customer value propositions and change the competitive
dynamics of their industries in their favor can quickly become vulnerable to
commoditization, obsolescence or business failure.
The
trends towards business model-driven strategy are encouraging. According to the
Economist, over 50 percent of executives believe that business model innovation
will be even more important than product or service innovation. Yet, the
American Management Association determined that no more than 10 percent of
innovation investment at global companies is focused on developing new business
models.
Finding
the business model sweet spot can help companies generate both incremental
growth from optimizing existing businesses and transformational growth from
generating entirely new sources of revenue and value creation. Rather than
simply figuring out more efficient ways to operate in existing markets, the
components of business models can, individually or collectively, be reinvented
to create entirely new markets, new opportunities and structural competitive
advantages.
Conceptualizing
business model innovation in a framework of four specific actions (W. Chan Kim
and Renée Mauborgne, Blue Ocean Strategy) can allow companies to systemically
scrutinize how it creates value, challenge prevailing industry logic, legacy
assumptions and the existing model.
Let’s
explore Amazon through this Eliminate-Raise-Create-Reduce framework and their
pathway to becoming the most dominant retailer on the web.
Eliminate:
Which elements are taken for granted in your business and can be eliminated?
Amazon
found a new channel to the customer through technology by eliminating the
traditional retail distribution channel and developing direct relationships
with suppliers. Further, such features as “1-click check out” accelerated
transaction times by eliminating the need for the manual input of billing and
shipping information for every purchase.
Raise:
Which elements can be raised above the industry’s standard?
Amazon
wasn’t the first online store, but the company recognized the potential to
transform the way we shop by building the next generation platform and
infrastructure that gives customers unprecedented choice, scope and value. By
building the online shopping platform, Amazon radically reinvented the
traditional retail business model and the fundamental dynamics of how consumers
shop.
Create:
Which elements can be created that the industry has never offered?
The
Amazon Web Service (AWS) offering, built from the company’s core technology
infrastructure, makes web-scale cloud computing cheaper and more accessible.
Leveraging Amazon’s vast experience, AWS is an entirely new business model that
created a first-mover advantage, and the high growth that goes with it, for the
company.
Reduce:
Which elements can be reduced below the industry standard?
Perhaps
the most controversial element to Amazon’s business model is the element that
it has elected to “reduce” – its’ profitability. By design, the company has
reduced its short-term profitability with the hopes of capturing the massive
market share and scale that will allow them to drive down costs and increase
profitability in the future. This innovative approach has the potential to
create high switching emotional switching costs for customers and extremely
high barriers for competitors in the future.
Amazon’s
business model innovation certainly allows it to deliver a diverse portfolio of
customer value propositions that serves as its main competitive advantage.
Culturally, a continuous focus on business model innovation keeps the company
connected to its entrepreneurial roots — an advantage that should be coveted by
even the largest of companies.
At
the end of the day, “It’s all about customers.” As Amazon demonstrates, even
when customers have many choices, with business model innovation, it is possible
for revenue and growth opportunities to flow from the basic way a business is
put together — even without the use of drones.
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