This ensures that our clients achieve ustainable compettlve advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 81 offices in 45 countries. For more information, please visit bcg. com. Zhenya Lindgardt and Charles Hendren March 2014 AT A GLANCE Improving Core Growth Core growth is a critical driver of performance. As markets become saturated and new competitors emerge, however, traditional approaches that have driven growth successfully for years are reaching the point of diminishing returns.
Business model innovation (BMI) is a powerful but underleveraged tool that can drive breakout rowth In a company’s core business. The BMI Opportunity: Same Goal, Different Results The ability to change multiple elements simultaneously”and in a coordinated manner”is what allows BMI to offer the same advantage as traditional growth levers but avoid the accompanying pitfalls. Leading companies have used BMI to move beyond product innovation and redefine the basis of competition.
They have combined new products with new pricing strategies, partnerships, cost models, and a 50 to 70 percent of companies with large but slow-growing cores, now is likely the time to consider BMI. 2 Doing Something New with Something Old w hat do microprocessors, power tools, and air transportation have in common? On the face of it, not much. But dig a little deeper and you’ll find that each of these industries has followed a similar pattern over the past 20 years. Each has a large number of established companies. Each has seen an accelerating pace of product innovation.
And each industry has also, unfortunately, seen a decelerating pace of growth. In response, leading companies in these industries have moved beyond product innovation and redefined the basis of competition. Companies such as ARM Holdings, Hilti, and Qantas have combined new products with new pricing strategies, partnerships, cost models, and a multitude of other changes to their businesses. They have achieved impressive results, and they are not alone. This is business model innovation (BMI): a powerful but underleveraged tool that can drive breakout growth in a company’s core business. Core growth is a critical driver of performance.
Even as industry boundaries blur and the shift to emerging markets increases, most companies”around 60 percent in our sample”still derive a majority of their revenues from their core markets and businesses. And those that succeed in increasing the size of their core”as well as noncore”businesses tend to enjoy a shareholder return premium more than two times larger than those growing strongly in noncore businesses alone. Achieving core growth, however, is challenging. Over the past five years, the average growth rate in core businesses and regions was less than half that of noncore ones.
This should come as no surprise. As core markets become saturated and new competitors emerge, traditional approaches that have successfully driven growth for years” product innovation and pricing strategy, for example”are reaching the point of iminishing returns. For leaders of companies facing this reality, now may be the time to move beyond traditional strategies and explore new solutions, Just as ARM, Hilti, and Qantas have done. Starting on this Journey raises a number of important questions: Are there signs that traditional levers that worked in the past are now falling short? BMI is a powerful but underleveraged tool that can drive breakout growth in a company’s core business. What alternative solutions can drive superior performance? How can leaders successfully implement these solutions? When Traditional Levers Fall Short: Three Pitfalls Companies have historically relied on a handful of tried-and-true tools to drive organic growth within the core. Three of the most common are product enhancements, new-product introductions, and pricing strategies such as discounts and promotions.
While these levers should still play important roles in a company’s overall growth tool kit, they may not be enough to stimulate strong core growth. Most large companies have operated in the same core business for years”or even decades” and these levers inevitably hit a point of diminishing returns. As customer needs change and new competitors emerge, incremental approaches may not be nough to sustain a growth trajectory. Companies facing these challenges tend to act in similar ways. We have synthesized these into the following three pitfalls, each of which corresponds to a traditional growth lever. See Exhibit 1 . ) Just add a blade. Incremental product enhancements”such as improving a razor by adding another blade”stop producing results when customers derive most of the value from a service, experience, or outcome related to the product and not Just from the product itself. When this is the case, companies that focus on a product-based alue proposition will limit their own potential, make innovation investments that are not valued by customers, and risk becoming obsolete because the true customer need lies outside what the product can provide.
Until very recently, pharmaceutical companies faced this challenge after developing better drugs that targeted only a small portion of the overall treatment pathway without addressing broader health Go out on a limb. When companies make innovative changes to a product or service without adjusting its supporting partnerships, capabilities, and distribution channels, the results can be disappointing.
Even breakthrough innova- Exhibit 1 | Traditional Growth Tools Have Three Common Pitfalls Just add a blade Go out on a limb I can sell additional services to my customers My starting point for something new is often based on my existing products and not changing customer needs My customers care more about results and not what gets them there I would like to make a quantum leap, but I worry about execution Outsiders are better at certain things we do My channels are too specialized for one type of customer Chase volume My margin is under pressure I cant Justify investing in this product anymore I sell things once, and that is the customer Source: BCG analysis. 4 tions”with fundamentally different customer-value propositions”often fail if they aren’t accompanied by the right operating model. An extreme example is LA Gear, a shoe brand that was popular in the 1980s and 1990s.
The company changed its value proposition from “fashion” to “performance” to enter the men’s basketball shoe market, but it failed to enhance its suppliers’ manufacturing capabilities accordingly. The shoes literally fell apart on national TV. Chase volume. Many companies are tempted to reduce prices or find other creative iscounting approaches in the hope of driving increased sales volumes. However, price reductions alone”without corresponding changes to other elements of the business model”can quickly lead to significant margin erosion. Premium offerings, traditional revenue models, and a high cost structure can all limit companies’ ability to reduce prices profitably.
Retailers frequently suffer from this pitfall when they discount products heavily; they see an initial increase in store traffic, but ultimately margins plummet. How can companies pursue the same objectives of traditional growth levers” nhancing customer value, developing a fundamentally new value proposition, and lowering the price point”but avoid the associated pitfalls? The answer for many has been to move beyond these traditional tools and consider innovation across the entire business model. To be sure, BMI is less familiar than traditional growth levers are and can be perceived as riskier. But as the examples below illustrate, the returns more than outweigh the risks.
The key advantage of BMI over traditional growth levers is that it affords businesses greater degrees of freedom. It can create more value because an orchestrated set of hanges across the value proposition and business model can create a new basis of advantage that is harder for rivals to match. The traditional tools, including product innovation and pricing strategy, typically involve changes to one, or perhaps two, dimensions of a business. With a new product, the manufacturing process may change; with a price discount, there may be a new way to communicate with the customer. By contrast, BMI involves changes to a much broader set of dimensions. We have broken these down into six key business- target segment, and revenue model.
Three define the operating model: value chain, rganization, and cost model. manner”is what allows BMI to do the work of traditional growth levers but avoid the pitfalls. Consider the chasing-volume pitfall. Rather than Just reducing the price, companies could also redefine their offering (such as a simplified product with cheaper materials), build a new cost model (such as greater automation and outsourcing), or fundamentally change the revenue model (such as a shift from one-time purchases to The Boston Consulting Group 5 Price reductions alone”without corresponding changes to other elements of the business model” can quickly lead to significant margin erosion. maller, ongoing fees).
Or they could do some combination of all three. By using this essence of BMI, we have developed nine particularly high-impact BMI solutions for avoiding typical growth-strategy pitfalls. (See Exhibit 2. ) These solutions, and the examples we provide to illustrate them, can lead to a fundamentally new business model. Don’t Just Add a Blade”Redefine the Value Proposition When product innovation is leading to diminishing returns”when new blades no longer offer the profit lift they used to”customer needs are not necessarily completely satisfied. What is more likely is that unmet needs cannot be addressed imply by improving products. Think about compact discs.
The fact that creating a thinner, lighter CD added little value did not mean that customer music needs were completely satisfied; it meant that needs had to be satisfied with entirely new offerings: digital music and accompanying devices. If customer value goes beyond the reach of traditional products and services, it may be time to redefine the value proposition in order to recognize that the product is not the main source of customer value. Start by considering the following questions: What else besides the product has an impact on customer experience? What objective is the customer trying to achieve by using the product? Answers to the questions above often reveal a new value proposition, frequently one that shifts from a product to a service, an experience, or an outcome.
Exhibit 2 | High-Impact BMI Solutions to Common Pitfalls Shift from product to service to experience to outcome Hilti Whole Foods Market Servicesource Support the value proposition with a new operating model Build new capabilities Leverage external partners Redefine interactions with customers Zara The Home Depot Reorchestrate the model to capture margins Redefine the basis of differentiation Develop a new cost model Find new ways to monetize GE Healthcare Jetstar Airways Mint. com Don’t Just add a blade Redefine the Don’t go out on a limb Don’t chase volume 6 Shift from Product to Service. Sometimes customers don’t value the product as much as they value getting the Job done. For example, competition in the construction tools industry has typically been based on product features and innovation.
Contractors to the next project. These customers have several pain points that have not been addressed by traditional product-based value propositions. Tools are expensive and require significant up-front capital. Tool inventories have to be managed regularly to ensure that the tools are not stolen and that they remain in proper working order. There is no efficient way to share tools because employees often move from one Job to another. And finally, contractors are forced to buy several particularly expensive tools that are necessary but used only in rare situations. Hilti, whose core business is tool manufacturing, picked up on these unaddressed pain points.
In response, it shifted from selling tools to selling a tool management service aimed at alleviating the burden on contractors so they could focus on getting he Job done. Hilti now leases tools to contractors, guarantees availability of the right tool at the right time, and automatically upgrades customer fleets with the latest equipment. It also provides theft insurance. Its service is accompanied by a new revenue and operating model. Many contractors, who in the past had purchased a small share of their tools from each competitor, dramatically increased their share of business with Hilti in order to obtain the full benefits of the company’s tool- management service.
Hilti’s success depended on possessing a deep understanding f how the customer uses tools and what causes them frustration. Based on this understanding, the company expanded its view of the role it could play in delivering value to customers. This was a shift from a purely product-based mind-set to one that also included supporting services and solutions. Shift from Product to Experience. Sometimes customers are looking for an emotional connection and not Just a product. Whole Foods Market, for example, has found an innovative way to differentiate itself in the highly competitive grocery-store sector, providing customers not Just with groceries but with a unique shopping experience.
Whole Foods Market has leveraged high-quality natural and organic products, strong customer service, and attention to corporate social responsibility to give shoppers the experience of a healthier lifestyle. First, the company’s decentralized structure gives store managers significant autonomy to discover local sources for products, ensuring that high-quality goods meet unique needs of customers in each store location. Second, Whole Foods Market has made an effort to inspire its employees through a common set of values, leading to effective customer service in an industry traditionally known for employee indifference. Within each store, employees are trained to be knowledgeable and friendly, helping customers select the best items to meet their needs.
Third and finally, staying true to the third tenet of its mission statement, “Whole Foods”whole People” Whole Planet,” the chain engages in “green initiatives,” such as reducing its own environmental footprint and giving 5 percent of profits to community and nonprofit organizations each year. Customers can gain the experience of living a healthy, re- 7 customers are looking for an emotional connection and not just a product. sponsible lifestyle when shopping at Whole Foods Market”both by buying healthy roducts and supporting a company that contributes to sustainable practices. In this way, the company delivers customers the whole package, allowing it to charge premium prices. The Whole Foods Market business model has driven breakthrough growth and high margins in a traditionally low-margin industry.