Forget your Customers and Develop Innovative Business Models!

Merely focusing on customers will not lead to groundbreaking changes in your business model. Instead, opportunities for business model innovation arise when focus is shifted to value creation for non-customers.

All organizations have certain assets or capabilities which can be valuable to non-customers. However, many fail to realize what they have and for whom it could be valuable, and perhaps most importantly how to create and capture the value. This article provides some thoughts on how to approach the subject and examples of how among others IKEA, P&G and Amazon.com have realized and captured value. I hope this will serve as inspiration for business innovators to examine their organizations with fresh eyes.

IKEA, the world’s largest furniture retailer, has a vast majority of its stores located outside of city centers with comparatively low property prices. Each store attracts large crowds of shoppers from long distances, driving up sales for nearby retailers and affecting the value of surrounding property. IKEA realized the value created by their stores and customers, and through IKANO Retail Centres it now develops and operates shopping destinations and retail parks around IKEA stores.

Does your organization even know what you have that could be potentially valuable for others?

Procter & Gamble is credited with many business innovations including brand management, the soap opera, and now recently sourcing 50% of its product innovations externally. P&G has been licensing its technologies, trademarks and other innovation assets to other companies for a long time extracting value from non-customers. When P&G realized the potential in using a newly discovered technology during a diaper project, to enhance the performance of trash bags and food wraps, P&G didn’t take it to market. Instead, the company decided to create a joint venture with Clorox, a rival firm in the cleaning category that owned Glad, a leading bag and food wrapping brand. The collaboration turned out to be highly successful, leveraging P&G’s assets and capabilities within R&D and branding, as well as Clorox’s products and established brand Glad. The total sales doubled in four years, turning Glad into a billion dollar brand.

… by always seeing things through the lens of customer value creation, companies constantly waste unique and valuable assets and capabilities.

Amazon.com, a firm which started as an online bookstore, diversified into selling DVDs, CDs, MP3 downloads, video games, electronics, apparel, furniture, food, and toys. Realizing that its processes and IT infrastructure could be used by other companies and individuals, Amazon.com created another path of growth.  Being able to guarantee a 99.9% monthly uptime, it started to offer a number of services such as storage, computer capacity leasing, end-to-end product sales and a full logistics platform handling orders, payments and shipments. Today Amazon.com powers and operates retail web sites for companies such as Target, Mark & Spencer, Lacoste and CDNOW. Amazon S3 (Simple Storage Service) reportedly stores more than 102 billion objects as of March 2010.

You have to create value for non-customers

The rapid pace of technology and business change raises serious questions for executives on how to continuously innovate and find new ways to create and capture value, what resources and capabilities to develop in-house and how to use collaborative or distributed value creation. The need for organizations to increasingly manage uncertainty and volatility is driving organizations to become more flexible, and utilize external resources and capabilities when and where appropriate.

Traditional value chains are in many industries being replaced or complemented with flexible value networks. When companies increasingly are seeking external resources and capabilities, or rely on complementary products and services for their business models to be successful, there will be increased competition for assets and talents. Why should a promising start-up collaborate with you and not your competitor? Why should software programmers develop applications for your platform and not competing platforms? Why should a university or research center develop new knowledge in your field? Why should innovators share their ideas with your company?

You already have things that are valuable to non-customers

Global connectivity of organizations has reduced old barriers and enabled new ways for companies to access external resources and capabilities. I often argue that if a company is creating and capturing value for customers today, the probability that the same company has assets and capabilities valuable to non-customers is incredibly high. You might have very loyal customers, or customers with high switching costs, information on customer behavior and needs, strong brands, partnerships with leading value chain actors,  superior processes, unique technologies, patents, trademarks, low cost production, quality programs, etc. all of which could be potential sources of business model innovation.

Philips, one of the largest electronics companies in the world, is not only providing its consumer electronics, healthcare and lighting products, but technology and IP which has the potential to cannibalize on the company’s markets. At the company website, visitors can browse, access and license technologies and other innovation assets, and the company also provides knowhow, training, services and support to realize or support other businesses. Philips is selecting and sharing assets that are potentially valuable for non-customers to the extent that the “side-business” is becoming substantial. Does your organization even know what you have that could be potentially valuable for others?

You throw away things that are valuable to non-customers

Companies depend on customers for revenues which drive decision making and how companies prioritize resource expenditure. The importance of deeply understanding your customer at both the rational and the emotional level cannot be stressed enough. However, by always seeing things through the lens of customer value creation, companies constantly waste unique and valuable assets and capabilities.

Perhaps it’s not what you deliver but how you deliver it that makes people buy?

Unique and potentially disruptive ideas, inventions, or business models that don’t fit neatly into planned products or innovation initiatives are sometimes forgotten if at all seen. Customer priorities directly affect decision making, internal project prioritization, ability to attract attention within the company, identification of value within a project or organization, the definition of what a valuable invention is, collaboration decisions, deciding which inventions to patent or abandon, etc. Companies are designed to execute the existing business model efficiently for a linear world. When organizations start using external resources and capabilities for various purposes, things are no longer as linear.

Isn’t this taking focus from the core business?

It is known that companies with a few highly focused core businesses historically have accounted for the majority of sustained growth companies. Spin-offs usually create more focus and value, something private equity companies know, often achieving their greatest success by buying orphan businesses from scattered conglomerates. Also, an undeniable lesson from observed transactions in the past is the higher success rate of acquisitions made for the purpose of expanding scale, than acquisitions to diversify and expand scope.

But what is your core business? Perhaps it’s not what you deliver but how you deliver it that makes people buy? – Perhaps you should deliver something else as well given your superior way of delivering things? – Perhaps it’s not the gadget you sell but the software interface that people like? – Could other gadget manufacturers need your superior software interfaces? – Perhaps the reason someone wants to collaborate with you is not your own qualities, but your existing customer relationships? – Could other companies be interested in getting access to the same customers?

My point here is not to diffuse company activities and focus, but to illustrate hidden value within your existing organization that is often overlooked, and which could be a source for business model innovation. What you choose do with the new insights, with newly identified valuable assets and capabilities, is something completely different. You may choose to do nothing, change your core business model, spin-out new companies, create external business development groups, out-license technology and patents, have visitors on your webpage browse and access your assets to find areas for collaborations, create joint ventures in new business areas, etc. What I ask you to do is to consider available options and make informed decisions.

Business model innovation based on value for non-customers

There are many great concepts and tools for business model innovation starting from existing or potential customers such as analyzing the jobs to be done, the outliers using products and services in unintended ways, customers who use the non-premium market offerings in search of better solutions, potential customers who find the offerings unacceptable or beyond their means. Although analyzing existing and potential customers is often a great way to gain a focused competitive advantage and increase the share of the existing market, it is not the only starting point for business model innovation.

… to illustrate hidden value … which could be a source for business model innovation.

Business model innovation can take its starting point in external factors such as trends in technology, society, culture, or from responses to actions by suppliers, partners, customers, or competitors. It can begin in the existing business model, starting with “what-if” questions such as: what if we segmented our customers in this way, what if we offered this for free, or what if we delivered our products and services in this way instead? However, as I’ve demonstrated here, business model innovation can also take its starting point in looking at creating value for non-customers, and in this way your firm can uncover hidden value, enter new markets, or simply support and maintain your existing core business.

IKEA realized the value of its customers to non-customers. P&G created a joint-venture with a rival firm based on their new technology, R&D and branding capabilities. Amazon realized it could provide the backbone for other companies’ activities on the Internet.

Is there something your company should realize?

By Anders Sundelin

About the author

Anders Sundelin is VP of Business Operations at CIP Professional Services, a development and consultancy firm owned by Chalmers Industriteknik and the University of Gothenburg in Sweden. CIP PS specializes in knowledge- and technology-based business development and in particular intellectual asset and property strategy in development, commercialization and collaboration initiatives. Anders Sundelin, who has consulted for multinational corporations, institutes, SMEs and universities, is a frequent speaker and workshop facilitator in a number of executive educations and corporate training programs on the topics of intellectual asset and property strategy, business model design, business modeling and valuation. He lectures at several universities, and has a popular blog called The Business Model Database.
  • Willem Poterman

    Hi Anders, like tyour story. It’s more or less a Blue Ocean Strategy process that companies follow to discover their non-customers

  • http://./. rita jaskolla

    Hi Anders,
    this is a well packed article about your great research, a proper inside-looking into potential firms, added up with good advices.
    I hope some readers will get in touch with CIP in Sweden because you state to know a lot more than written about.
    I also think that the two owners of CIP found a good way of collaboration – very effective!
    Further-on, I wish you good luck and Merry Christmas!

  • http://www.tbmdb.com Anders Sundelin

    @ Willem

    Thanks! Blue Ocean Strategy processes are highly relevant as it suggests that you should try to find value that crosses conventional market segmentation. The Blue Ocean concept often denotes industries that are not in existence today, the unknown market space. I would argue that looking at what you have you will find things that are valuable to potential customers in existing markets and potentially new markets, but also other actors that are not or will not be your customers. Perhaps you can create value for someone that can create value for you in return without any monetary transactions? What does others have that could create value for your organization?

  • http://www.tbmdb.com Anders Sundelin

    @ Rita

    Thanks Rita, and thank you for promoting CIP ;) If you are interested to know more about the challenges we are working with I recommend CIP FORUM in the end of May. I think there will be a program at http://www.cipforum.org during the next week. Thank you for your kind words and Merry Christmas to you too!

  • http://blog.thingamy.com Sig

    Hi Anders, good one!

    If I get your drift correctly it seems I’ve been tinkering with same issue lately, but instead of using the term “Non-customer” I expanded and unbundled the “Customer” term a bit:

    Primary customer: The one who pays, but not necessarily the user, still the decision maker. Management for enterprise IT for example. Parent at MacDonald.

    Secondary customer: The actual user, can be primary too but often different. Not necessarily the one who pays (kid at MacDonald, employees at company) but the one for which we design and refine the product/service as they influence the primary customer.

    Tertiary customer: Can enhance the product/service (suppliers, games at FB), finds value to be had (advertisers, use service/product as distribution channel), and is most often willing to pay.

    Those “tertiary customers” seems to me to match your examples of “Non-customers”…

    Cheers,
    Sig

  • http://blog.business-model-innovation.com Patrick

    Hoi Anders,
    you mention the classical dilemma for management. Sustaining innovation for existing customers vs. disruptive innovation innovation for non-customers or low-end customers. Christensen calls this question the innovator’s dilemma since you can not be good at both. Dual strategies (doing both) sound nice but reality show that is almost impossible.
    For you business model innovations are disruptive in nature but I think business models and some degree of innovation are also possible within a sustaining framework. To separate the two different ways of innovation I use business model innovation for the innovation with disruption and business model optimization for innovation with more sustaining character.
    Interestingly, one innovation can be sustaining for one firm but disruptive in nature for another. Think about the newspaper guys. For them the Internet is disruptive but for the Google gang the Internet is sustaining.

    Best regards from snowy Germany where I am traveling in the moment.

    Patrick

  • http://www.tbmdb.com Anders Sundelin

    @Sig
    Hi Sig, I use a very similar terminology myself, sometimes referring to value recipients to get others to think outside the “customer box”. However, I would not limit value creation to relate it to my customers or the “enhancement of a product/service” (Tertiary), but “Can enhance the value of our organization through increased sales, our ability to attract talents or partners, our technology portfolio, our options to expand, etc”. Or perhaps that group is a forth category in your reasoning?

    For me, potential value recipients can be customers, suppliers, partners, competitors, industry trade groups, professional associations, actors in other industries, universities, research institutes, non-profit organizations, local or national communities, government, society, etc. Google is a great example of a company that creates value for users, network partners, business owners, libraries, authors and publishers, society etc. while 99% of total revenues in 2007 and 97% in 2008 was from advertisers or the “Primary customer”.

    Thanks for your comment!

  • http://www.tbmdb.com Anders Sundelin

    @Patrick
    Thank you for your comment Patrick! I agree with you (and Christensen) that disruption is relative. One interesting example I have been working with is within medical equipments: The convergence of industries where pharmaceutical companies enter the medtech industry from one side and ICT companies from the other side drastically changes the reality of the companies within medical equipment. Companies that are used to work inside their respective silos are now forced to collaborate or license technology and IP. For the pharmaceutical and ICT companies this is just another market for their technology and IP through their existing business models.

    For people interested in the subject Christensen’s books Innovator’s Dilemma and Innovator’s Solution are great. However, I don’t agree that “you cannot be good at both sustaining and disruptive innovation”. There are strategies to handle dual business models such as separating groups or entities, create spin-outs, license technology and IP to external companies to further develop etc.

    For me the term business model innovation can refer to both incremental and disruptive innovation (however I wanted to spice up this article). I agree with you that Business Model Optimization could be a useful term to communicate the continuous work.

    Have a nice Christmas Patrick! I am still in a snowy Sweden but will leave for three weeks of vacation in Thailand on Monday.

    Take care!

  • Petra

    What is your thoughts on Osterwalders idea of Business Model Innovation together with Steven Blanks Customer Development?

    http://www.businessmodelgeneration.com/
    http://steveblank.com/category/customer-development/

  • http://www.tbmdb.com Anders Sundelin

    Thanks for your question Petra!

    In contrast to the main idea of this article, to identify value for non-customers, Steve and Alex collaboration is as you know focused on customer value creation.

    Steve’s main point as I see it is that start-ups need to iterate their business models and get out of their offices early to verify or falsify their business assumptions. His thesis is that the reason of existence of a start-up is to find and verify a business model. I find this extremely relevant and a necessity for most start-ups.

    Alex has done a great job in creating a business model framework that many (including start-ups and VCs) find highly useful. As I see it, Alex has also contributed greatly with a very visual approach which I think will start a new trend in communicating new and old business concepts, and turn them into useful tools.

    Steve has written a nice book on finding business models that is great in content but poor in communication whereas Alex has introduced a visually appealing and practical way of packaging business tools. This can become a perfect fit and I look forward to see the results of their collaboration!

    In relation to my article above, my main point is that firms can create value for others than their existing customers. I believe all firms (including start-ups) should investigate how to create value and for whom, beyond what first seems obvious. The investigation will lead to a number of hypotheses that will need to be verified or falsified. Large firms, just as Steve’s start-ups, need to constantly evaluate and test new opportunities and business models. Perhaps Steve and Alex will develop something that could even help larger firms to create value for non-customers…

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  • Westinaso

    Great article Anders. Might also be worth checking out Vumero (www.vumero.com).
    Launched in early 2012. New innovative business model changing the global
    Professional Services industry. Businesses can hire world-class professional
    freelancers (like Odesk) and can buy their portfolio of work from a large
    document repository (e.g. Excel spreadsheets, financial models, analysis,
    business plans).

  • Frank

    Business model innovation is the fastest way to acquire value for businesses yet they retain a commitment to technology driven strategies rather than evolving an innovation roadmap – a plan of all the problems requiring solutions that would generate value if solved

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