Business Model Innovation is the key to disruption (8 min video)

Welcome back to another Garage Gig. If I say innovation, the chances are this needs no explanation, product innovation. but if I say business model innovation, maybe I can mean a few different things. One way to think about this is this is a weapon, and this is a strategy. Business model innovation is often the redeployment of existing products and services in an industry in a new way.

So, what are some examples of that? Let's say I'm Boeing. In Boeing I'm all about new aircraft, I'm all about developing new aerodynamic performance, efficiency, fuel efficiency, fitting more people in, being able to fly further, maybe having more services and things onboard. So If I'm Boeing, I'm all about making my aeroplanes better.

In the airline industry there's been a number of business model innovations over the last few years. GE has for years sold jet engines to Boeing and Airbus. These jet engines are massively expensive, and you can imagine with the duopoly in the global marketplace that Boeing and Airbus can exert significant negotiation pressure on a $35 million engine sale, so the margins were tough.

So what GE did is they said "Hey, instead of paying us for the engines, we want you to pay us for the hours of up time. So we'll charge you $1 per hour for up time." The airlines want up time, and GE wants up time, because they get paid for it, so we have a lined incentive. So they changed from selling the asset that they were innovating all the time, to selling a service as a business model innovation.

A company called Surf Air changed the prevailing norm in the air travel industry, that you would pay for a ticket from A to B. What they said is "You give us a fee per month, a couple of thousand dollars a month, and you can have unlimited air travel in our charter jets." And they did this by flying from smaller airports, near the big ones, they saved busy people, who could afford a couple of thousand dollars a month and travelled a lot, they could save them time through check in, and through parking, and through knowing their preferences. So they changed that business model.

A company called Airly in Australia, just new, is making private jet travel for execs more affordable by filling empty back legs. It's got some Uber like properties, it's jet sharing. And so we go from A to B, and then we're going to come back empty, so they fill that for 75% less. Maybe not what you or I would do, but it's out there. These business model innovations are gaining traction all over, in different sectors.

In the insurance industry, a prevailing norm is that you just buy your insurance premium. One of the troubles with buying your insurance premium is that lots of people make dodgy claims, and they force your premium up. They make a claim when it's not warranted. So a company called Friendsurance has said "If you get together with nine of your family and friends that you trust, nine of your buddies, family, that you know and trust, you can trust them not to make a claim when it's not warranted. And, in fact, if you can go the year without making a claim, we'll give you a big fat cheque back at the end of the year."

In the real estate industry there's lots of business model innovation happening at the moment. So, the prevailing norm in real estate was that you would pay an agent on commission to sell your home for you. Purple Bricks has come in and said "Well, we won't charge a commission, we'll charge a fixed fee." And then another company, then there's many of them, buyMyplace, has come in and said "Well, we won't just take the commission out of it, we'll also take the agent out of it. You can sell it yourself."

The reason why business model innovation is very important at the moment is when technology shifts, when transportation technology shifts, when communication between buyer and sell shifts and everything's moving online, and when drones come into play, and when autonomous vehicles come into play, and when payment technology shifts ... When all these technologies shift, they can erode the power of product innovation.

At the moment, the retail clothing industry could be at the top of their game, they could have the best products ever, the most fashionable, the best products ever, but the trouble is the buyers are changing how they buy, they're changing how they find out about the products, how they learn about the products, how they interact with the products, how they make a purchase decision, where they make a purchase decision. And it's all moving online.

So the secret to this is not going to be more product innovation, it's not going to be about the next best dress and the next best jumper, it's going to be about what's going to bring people back to buy your product? This year, there is a prediction that there'll be 12,000 store closes in the US, up from 9,000 last year. In Australia already we've had Diana Ferrari and Maggie T go under, and we've had Mountain Designs come out and say "We're going to close one in three stores." And [inaudible 06:37], which went into receivership last year, is reported to be saying to their landlords either we get a 40% discount in the rent, or we will close the store in your facility.

So what are the landlords going to do when faced with great store closures, greater numbers of store closures, and also much more powerful negotiations on behalf of their tenants? The answer has to be here, because it's not going to be ... Well it's going to be partly here too isn't it, it's going to be new types of malls, shopping centres. But some of it has got to be from here too.

So let's balance it out a little bit more, we've had too much here, we've had too much product innovation focus, or service innovation focus, and unless you've got the best thing going around, you need to be doing more of this as technology shifts.