Edison Chen
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When most companies think of innovation, they focus on developing new technology or products - the process that is typically relegated to separate research and development departments where dozens of very expensive, highly qualified engineers rule.
This is an expensive and risky way to innovate: R&D budgets in some industries go as high as 30 per cent of sales while the return on this type of innovation remains elusive. Every company wants to be the next Apple but this Jobsian style of innovation is hard to pull off. Asian giants have attempted to replicate this model of innovation with limited success, often due to limited knowledge of markets, and the inability to find talented designers and engineers, who are concentrated in Silicon Valley.
But if we look at the history of disruption, there is much more than new technology that is behind the companies that disrupt and change industries.
Consider the history of the automotive industry as one example. It was Henry Ford's business model that brought the technology developed by Gottlieb Daimler and others to the masses. It was then Toyota's business model, the famous Toyota Production System, which ensured that we could trust the cars we had would always work, and now start-ups such as Uber and Tesla are disrupting the business model of the industry again.
Uber (and other similar taxi apps such as GrabTaxi and Easytaxi) have built platforms that match the demand for rides with service providers efficiently, eliminating the need for mass car ownership.
Tesla realises that electric vehicles need a business model to be viable and has broken many of the rules of the traditional automotive industry, eliminating dealership networks and focusing on providing infrastructure for charging cars and replacing batteries as much as on the car itself.
In the car industry, it is new business models and the firms that developed them are the centre of disruption. In this sense, new business models really do move the world (and people in it).
It is still rare for world-beating novel products and technologies to originate in emerging economies but companies in Asia have been highly successful in bringing new business models to the market. Consider Xiaomi, which invented a drastically different model of product development than Apple.
It is great if you have Apple's very talented team of designers and people who can predict what consumers will want. But that is hard to have and even Apple stumbles a lot with this approach.
Now think of a small Asian company with limited resources that really cannot afford to invest hundreds of millions of dollars in R&D, pre-order millions of units of the product in anticipation of demand, and keep it all in complete secrecy. Only a company that wields significant market power over suppliers and has deep pockets can do all of this.
This is why, unlike Apple, Xiaomi produces its products in small batches, allowing for easy changes based on user feedback. Every Friday there is a major feature update of the operating system and a round of feedback from expert consumers. Because it only sells directly to consumers - unlike Apple, which goes through many intermediaries - Xiaomi can collect all this feedback and build it into the next generation of devices.
This novel business model of new product introduction is the reason why Xiaomi was able to grow rapidly and reach US$5 billion in sales in just three years.
Another example of business model innovation comes from Alibaba. Unlike US internet marketplaces such as eBay, Amazon and others that have adopted a one-business-model-fits-all approach, Alibaba adapts its business model to different business segments.
Its English-language portal, Alibaba.com is directed at international buyers looking to connect with Asian exporters. The revenue streams for this portal go to the heart of relieving frictions in this market - services to help buyers discover sellers and services that insure transactions that are often faceless.
Taobao, which perhaps contributes most to its valuation, is a fee-free consumer-to-consumer platform (think eBay without the fees), with most of the revenues made from advertisements. The fee-free intermediary model works very well for the price-sensitive small merchant and is arguably at the core of its massive growth to 760 million product listings with 7 million sellers.
Finally, Tmall is a marketplace to help big companies connect with Chinese consumers. Most of its revenues come from fixed annual online-marketplace operation fees, and sales commissions - again adopting a revenue model that goes to the heart of the customer need - running an efficient online store for large brands. The unique combination of business models contributes to the keen anticipation of Alibaba's US initial public offering, which is likely to be one of the largest in history.
The common thread that drives the success of all these companies is that they rely on business model innovation rather than on developing new technologies and products.
Among the many advantages of this innovation approach is that it does not cost a lot of money; it really only involves a paper and a pencil and involvement of the company's top management.
So how does one begin? Unlike product and technology innovation, which usually begins by evaluating consumer demand and looking for opportunities in the market, the first step in business model innovation is always an audit which looks for risks (or inefficiencies) in the current model. You have to involve a diverse set of leaders from all lines of business and all functional areas in this process.
We advocate establishing this as a routine re-examination, the same way managers examine their financial statements. Only by constantly questioning the efficiency of the current model can the company's leaders create the culture of innovation and the sense of urgency they need.
A business model that might have worked well 10 years ago could be plagued by inefficiencies now because of evolving technology, changing consumer tastes and the evolving landscape of the industry.
This is an expensive and risky way to innovate: R&D budgets in some industries go as high as 30 per cent of sales while the return on this type of innovation remains elusive. Every company wants to be the next Apple but this Jobsian style of innovation is hard to pull off. Asian giants have attempted to replicate this model of innovation with limited success, often due to limited knowledge of markets, and the inability to find talented designers and engineers, who are concentrated in Silicon Valley.
But if we look at the history of disruption, there is much more than new technology that is behind the companies that disrupt and change industries.
Consider the history of the automotive industry as one example. It was Henry Ford's business model that brought the technology developed by Gottlieb Daimler and others to the masses. It was then Toyota's business model, the famous Toyota Production System, which ensured that we could trust the cars we had would always work, and now start-ups such as Uber and Tesla are disrupting the business model of the industry again.
Uber (and other similar taxi apps such as GrabTaxi and Easytaxi) have built platforms that match the demand for rides with service providers efficiently, eliminating the need for mass car ownership.
Tesla realises that electric vehicles need a business model to be viable and has broken many of the rules of the traditional automotive industry, eliminating dealership networks and focusing on providing infrastructure for charging cars and replacing batteries as much as on the car itself.
In the car industry, it is new business models and the firms that developed them are the centre of disruption. In this sense, new business models really do move the world (and people in it).
It is still rare for world-beating novel products and technologies to originate in emerging economies but companies in Asia have been highly successful in bringing new business models to the market. Consider Xiaomi, which invented a drastically different model of product development than Apple.
It is great if you have Apple's very talented team of designers and people who can predict what consumers will want. But that is hard to have and even Apple stumbles a lot with this approach.
Now think of a small Asian company with limited resources that really cannot afford to invest hundreds of millions of dollars in R&D, pre-order millions of units of the product in anticipation of demand, and keep it all in complete secrecy. Only a company that wields significant market power over suppliers and has deep pockets can do all of this.
This is why, unlike Apple, Xiaomi produces its products in small batches, allowing for easy changes based on user feedback. Every Friday there is a major feature update of the operating system and a round of feedback from expert consumers. Because it only sells directly to consumers - unlike Apple, which goes through many intermediaries - Xiaomi can collect all this feedback and build it into the next generation of devices.
This novel business model of new product introduction is the reason why Xiaomi was able to grow rapidly and reach US$5 billion in sales in just three years.
Another example of business model innovation comes from Alibaba. Unlike US internet marketplaces such as eBay, Amazon and others that have adopted a one-business-model-fits-all approach, Alibaba adapts its business model to different business segments.
Its English-language portal, Alibaba.com is directed at international buyers looking to connect with Asian exporters. The revenue streams for this portal go to the heart of relieving frictions in this market - services to help buyers discover sellers and services that insure transactions that are often faceless.
Taobao, which perhaps contributes most to its valuation, is a fee-free consumer-to-consumer platform (think eBay without the fees), with most of the revenues made from advertisements. The fee-free intermediary model works very well for the price-sensitive small merchant and is arguably at the core of its massive growth to 760 million product listings with 7 million sellers.
Finally, Tmall is a marketplace to help big companies connect with Chinese consumers. Most of its revenues come from fixed annual online-marketplace operation fees, and sales commissions - again adopting a revenue model that goes to the heart of the customer need - running an efficient online store for large brands. The unique combination of business models contributes to the keen anticipation of Alibaba's US initial public offering, which is likely to be one of the largest in history.
The common thread that drives the success of all these companies is that they rely on business model innovation rather than on developing new technologies and products.
Among the many advantages of this innovation approach is that it does not cost a lot of money; it really only involves a paper and a pencil and involvement of the company's top management.
So how does one begin? Unlike product and technology innovation, which usually begins by evaluating consumer demand and looking for opportunities in the market, the first step in business model innovation is always an audit which looks for risks (or inefficiencies) in the current model. You have to involve a diverse set of leaders from all lines of business and all functional areas in this process.
We advocate establishing this as a routine re-examination, the same way managers examine their financial statements. Only by constantly questioning the efficiency of the current model can the company's leaders create the culture of innovation and the sense of urgency they need.
A business model that might have worked well 10 years ago could be plagued by inefficiencies now because of evolving technology, changing consumer tastes and the evolving landscape of the industry.
