Sunday, January 28, 2007

The New Fashion Show — Innovative Business Models

Staring at the massive central chilling plant before him one evening five years ago, David Turner says he couldn’t escape the symbolism. His employer, York International, sold billions of dollars worth of commercial cooling equipment annually. But almost all of its products were hidden, woven deeply into customers’ facilities.

This looming plant couldn’t have been more different. It stood alone, towering, on what had been a parking lot. It was distinctly apart from the dozens of other structures on the Savannah River Site, a sprawling U.S. Department of Energy research and nuclear material production complex that covers 310 square miles in South Carolina.

That stark image struck Turner as he walked nearby. A project manager for York with a background in construction, it dawned on him that the refrigeration equipment wasn’t really part of Savannah River, it was just the means to an end.

Plenty of companies didn’t really want to own and operate chilling equipment. They just wanted cool air. To Turner, that insight led to an astonishingly simple idea, a new business model that better served the real needs of York’s customers. Why not separate that need for cool air from the acquisition of costly equipment? Why not sell cool air as a service?

“All the ideas started trickling down from there,” says Turner, 43, now the director of advanced utility solutions for Johnson Controls Inc., the new owner of York International. Soon after, a team of six York employees began mapping out YorkSource, an outsourcing service providing chilled air. York retains ownership and maintenance of the air cooling equipment.

The team spent two years grinding through the financial contracts that form the heart of service businesses. Today, YorkSource has three customers and expects to sign another half dozen this year. The average contract value is $8-$10 million. Turner projects the service will bring in $100 million over the next few years.

The new business model created more than a new revenue stream. Faced with tough competition from larger U.S. competitors, York needed a strategy that went beyond incremental product features or cost-cutting. It had to embed itself into its customers’ long-term planning and operating environments. And it had to do so in a way that precluded penetration by competitors.

YorkSource delivers on these goals. The new service enables the company to leapfrog into clients’ decision-making pipelines much earlier than equipment procurement. As a supplier of a vital service, YorkSource becomes a key player in the enterprise’s physical plant operating strategy. “You become part of their business, their infrastructure,” explains Turner. “At that point, any further [building] development is going to be yours.”

Change the game
Turner’s story reflects the stark reality facing U.S. businesses: Making money by peddling more of the same is no longer an option. Once upon a business case, companies could stick with what worked and rake in tidy profits. Every now and then, they incorporated a wow feature or two into their products. Buyers kept buying.

But modest product improvement via feature iteration is passé. The big bang of business-model change is in. Bold companies facing competitive challenges have decided to change the game. They are pumping up the volume on commercializing promising ideas — not just line extensions and incremental improvements, but inventive new revenue streams.

Starwood Hotels peddles its Westin chain Heavenly Bed furnishings through Nordstrom department stores and recently appointed its first head of retail sales. Coffeehouse giant Starbucks Corp. has emerged as a potent force in entertainment through partnerships in music CDs, satellite radio and movies. Eyeing the low overhead of direct selling, Binney & Smith, purveyor of the iconic Crayola brand crayons and markers, has launched an in-home sales program for its famous product line (For more details and other examples, see table, New Model Runway, below).

Plenty of others want to make the leap into business model innovation. That’s because Wall Street puts a price premium on a company’s ability to sprout new businesses as a sign of corporate vigor — think of General Electric’s long string of earnings growth, high P/E ratio and history of creative business model development.

The security analysts’ view is that acquisitions are okay, but homegrown ideas are better. The buzzword du jour — “organic growth” — says it all in this age when natural foods attract a premium price over processed goods.

But dreaming up and then commercializing promising business models requires more than funding a “new model development” department, transferring some hot shots from marketing and R&D and giving them a three-month deadline.

Business model innovation isn’t just about creativity or a sudden insight like Dave Turner’s inspiration one night in a South Carolina parking lot. It rests on a set of processes that companies can learn, if they’re properly motivated.

Crazy innovation drivers
For all the coverage of globalization, the more palpable forces bearing down on companies to become more innovative are local rather than global, says Eric von Hippel, a management professor at the Massachusetts Institute of Technology. “Rather than being affected by a larger trend, they see XYZ company doing something, and they have to counter it,” says von Hippel, head of MIT’s Innovation and Entrepreneurship Group and author of several landmark texts on innovation.

Worse, at a time when competitive pressures are more intense than ever, technology is eroding some of the best-known tools companies use to compete. The Internet has undermined traditional, multimillion-dollar branding strategies faster than you can say HTML.

Once-captive customers are now liberated. Thanks to the Internet, they are an increasingly potent force via search engines and shopping bots. The rise of user-generated content — blogs, chat forums, fan sites, hate sites, video casts, you name it — is further stripping away the power of branding from corporate marketing gurus.

How bad is it? Just ask Land Rover. Type the name of the British carmaker and its Discovery 3 model into MSN, and, a blog detailing the unhappy experiences of an anonymous owner, pops up as listing number two out of 117,362 — immediately following the car company’s corporate web site.

So much for the primacy of branding. “You can no longer hide behind your brand,” says Sam Kogan, president of GEN3 Partners Inc., a Boston consulting firm company — founded by Michael Treacy, the author of Double-Digit Growth and one of the leading sages of the innovation movement.

Nor can companies take refuge in conventional approaches to innovation. Those approaches are now considered too short-lived to provide an advantage in today’s hypercompetitive business environment. “Product innovation no longer works,” contends consultant Larry Keeley of Doblin Group in Chicago, considered the leading organization for innovation metrics. “The mean time to clone a new product in financial services is six weeks. That’s assuming it’s regulated. If it’s not regulated, it’s six days.”