An increasing number of innovative business models and brands are no more than streamlined supply chains and value chains.
In recent posts, I have talked about open innovation in the context of technology and intellectual property centric industries. However, innovation does not have to be complicated or involve complex technologies. Some of the newest business models involve quite ordinary things and ideas. Companies like Zipcar and Netflix leverage e-commerce framework and principles to create value through reengineering established supply chains.
LEVERAGE THE E-COMMERCE FRAMEWORK
You don't have to be an Internet commerce company to think like one. E-commerce companies seem to have a leg up over traditional brick-and-mortar companies when it comes to inventing new business models. Many of these new business models and brands involve nothing more than rearranged supply chains and value chains. Early on, Internet based organizations figured how to make a profit from arbitrage by eliminating things like buildings, office space, retail outlets, manufacturing operations, shipping operations, warehouses, distribution channels, and even ownership of IT infrastructure. The ability to eliminate distribution and channels out of the old supply chain became know as disintermediation. I use the term more broadly.
Today, with the comparative advantages of globalization, literally everything can be outsourced, licensed, or contracted out to other b2b partners without jeopardizing the brand. Thanks to China's comparative advantage in manufacturing and b2b exchanges like Alibaba.com , companies big and small are becoming increasing virtual. Alibaba.com Ltd. is set to go IPO today and plans on raising US$1.5 billion. So the next time you buy a $5,000 luxury steam-shower for your new home or bathroom renovation project, chances are you are buying from a home-based business and not the original equipment manufacture (OEM).
Having lived in Boston, I can relate to Zipcar's value proposition. During that time, I got very familiar with the hassles of dealing with street parking, vandalism, being booted, and the high cost of auto insurance. At the time, Boston was one of the car theft capitals of the country. Back then, I was paying more for my car insurance than I am now. I vividly remember the morning my brand new candy apple red Volkswagen GTI was stolen. Two decades later, I doubt things have changed much. I even heard, people trying to convey private parking spaces for upwards of $200K. I think anyone who has experienced the high cost and hassles of owning a car in a big metropolitan city can relate to this innovative subscription based car rental service.
GREENER CAR OWNERSHIP
Maybe the answer to achieving better gas mileage or reducing CO2 emissions is not technology or some alternative fuel source, but a fundamentally new and more socially responsible way of looking at car ownership. What if we could reduce the total number of cars on the road with a time-share approach? We already have time-share for vacation homes, planes, sailboats, and other big ticket items that we might enjoy occasionally. Maybe we should not think of owning a car permanently parked in our driveway. We just need access to one. Zipcar claims it can offsets 20 cars for every Zipcar. This sounds like a better alternative than trying to squeeze a couple extra miles to the gallon. Zipcar is actually closer to a car-sharing service than a car rental agency.
"We are trying to replace car ownership," said Scott Griffith, Zipcar's chief executive. "It's a business model that locates cars in neighborhoods and uses 24-hour technology to locate the car." (soure: Washington Post)
I have not had the chance to try Zipcar yet. I think it makes a lot sense in urban settings where people need a car for a special occasion like making a run to Ikea, Home Depot, or bringing a Christmas tree home. After years of refining their business model, it looks like the concept finally has legs. The merged companies plan to do about a $100 million annually. Eventually they hope to be a $1 billion market. A number of traditional rental firms like Hertz, Thrifty Car Rental, and Enterprise have announced similar hourly rates. According to one report, there are currently 30 competing car-sharing providers in the country. My sense is that urban dwellers are willing to ditch their car completely for a subscription hourly model.
ZIPCAR VALUE CREATION STRATEGY
- Decentralize the classical car rental operation
- Get rid of sprawling airport lots
- Eliminate need for any bricks-and-mortar
- Eliminate airport counters
- Eliminate the need to check in with an agent
- Distribute the cars in and around the city
- Negotiate designated spaces with municipalities, parking lots, and businesses
- Create automated reservation process
- Create an online reservation system
- Create a phone reservation system
- Subscription based pricing
- Rent by the hour
DISINTERMEDIATION OF VIDEO RENTAL
Netflix is one of my favorite examples for business innovation and value creation through supply chain reengineering. Just in case you live in a different part of the world, Netflix is a company that invented the concept of all you can eat flat rate online subscription based movie rental. Video rentals have been around for decades. During the past twenty years if we wanted to rent a movie, you had to drive to the closest video rental store and hope nobody else beat you to the latest movies. Stores were limited to the depth and breadth of choices. Moreover, you had a very limited window to watch your movies or risk paying late fees. Netflix simply applied e-commerce principles to a legacy industry. Netflix took the traditional video rental supply chain, and decided they could streamline it significantly while reinventing the traditional pricing model.
NETFLIX VALUE CREATION STRATEGY
- Replace thousands of stores with half a dozen centrally located warehouses
- Eliminate physical process of driving to and form retail store
- Use the U.S. postal system for distribution
- Leverage the DVD medium and HD standard
- Eliminate check out counters
- Increase access to customers through online model
- Increase availability through centralized inventory
- Create an online system for reservation and queuing
- Create tools for finding movies by genres, themes, actors
- Change the unit pricing to subscription based pricing
- Eliminate late fees
- Offer online viewing (real-time distribution)
Other industries and business ripe for similar disintermediation:
Put a little Netflix in your business model. Whether you are in a low tech or high tech industry, look for new ways of creating value by rearranging your value chain or supply chain. Other links, weblogs, and articles I found pertaining to this post:
FastCompany Fast 50 , Scott Griffith http://www.fastcompany.com/fast50_07/profile/?test1
Business 2.0, 15 Companies That Will Change The World http://money.cnn.com/galleries/2007/biz2/0708/gallery.next_disruptors.biz2/4.html
Video interview with Zipcar CEO http://money.cnn.com/video/#/video/business/2007/08/02/b2.disruptors.zipcar.cnn
Forbers.com: Fast Times For Zipcar http://www.forbes.com/video/?video=fvn/business/ab_zip073106