The Business Model Must Be Innovative and Flexible

What does the following list of companies have in common?

A&P
Hudson Motor Car Co.
Montgomery Ward
TWA
Horn and Hardart
Studebaker
Indian Motorcycle
Bonwit Teller
Woolworth
Bethlehem Steel
Polaroid
LTV

These Companies were successful, recognizable brands in their respective categories. They were publicly traded and a number were in the Nifty Fifty in the 1970’s and/or the Dow Jones Industrial Average. The element they all have in common (and with hundreds of other equally recognizable names) is that they did not innovate. They created a static business model and did not anticipate that there were newer, better ways to implement new technology and strategies.

Let’s look at two old, established retail categories and how the ability to innovate has determined contemporary success or failure.

Music Stores
Recorded music retail has always been a competitive market. Tower Records followed the national chain concept, offering a broad range of music styles and competitive pricing. Mass marketers such as Target and Best Buy offer music as well, typically only the more popular artists, narrow and deep. Every city had a local shop, sometimes specializing in a specific area of musical taste. The underlying similarity was that a customer came into the store, made a selection and then purchased the CD or album.

Then along came the internet. The ability to protect trademarks and copyrights was believed to trump this technology. Artists and record companies believed that legal protections would enable them to continue as always: selling an album, with one or two hits, for $20 to $30. Software was written enabling the music consumer to cheaply, or for free, download specific hit songs while avoiding the filler cuts. The Napster effect has revolutionized the music industry.

Napster is a disruptive technology. The world of music retail was stood on its head. Legal fights and challenges are still being fought. However, chains like Tower Records are gone. The marketplace did not allow for a rigid system to thrive in the face of innovation. Tower did not stay flexible, anticipating technology advances and changing tastes. Trying to sell albums with 15 cuts, when the consumer only wants to hear and pay for two hit songs, is an obvious loser.

Airlines
Until the late 1970’s the airline industry was protected by Federal Government regulation. This enabled the airlines to artificially inflate fare pricing. Hub and spoke systems were created. Each major carrier had a geographic area of strength (Delta the southeast, USAir the middle Atlantic, American the mid-west and Latin America, etc.) that they dominated. Unions were aggressive and the carriers were profitable so the need to squeeze costs was not urgent.

When de-regulation occurred in 1978 the major carriers did not anticipate the radical disruptive innovation that was just around the corner. An aviation pioneer in San Antonio named Herb Kelleher did. He watched as fares plummeted without government regulation protection. Competition for gates, destinations and expansion resulted in many regional carriers (Republic, Piedmont, etc.) being gobbled up by the majors. Out of the changing landscape for air travel Mr. Kelleher saw opportunity.

Mr. Kelleher created and launched Southwest Airlines to address a gaping need. Southwest utilized a business model that reflected the changing landscape in providing air service. The major carriers utilize complex pricing models that try to maximize seat yield revenues per mile flown. Southwest posted one low price for every seat on a flight. The major airlines were totally union shops. Southwest was non-union. The major carriers flew a mix of plane models. Southwest flew only the Boeing 737 (this streamlined service and parts expense).

Very quickly the flying public recognized that a Dallas to Phoenix flight that was $579 on American, and $149 on Southwest, was a no-brainer. Southwest remains ahead of the curve with standardized policies, simple restrictions, a feel good fun loving staff, hedging contracts for jet fuel purchases and the promise of value for money on each flight.

Southwest capitalized on the changes it recognized was coming in the air travel universe. Today, there are a number of airlines utilizing some or/all of the Southwest model and virtually all are successful. Easy Jet, Jet Blue and Ryan Air in Europe are booming while the old-line giants all over the world are in desperate straits.

Proctor and Gamble is a wonderful example of an old alpha enterprise that is constantly re-inventing itself to reflect changing market conditions. Dell Computer, MicroSoft, Intel, Research in Motion, Nokia and many more are examples of businesses (all little more than 20 years old) that innovate, change, anticipate and succeed. They were all small startups only a few years ago.

For entrepreneurs, the ability to innovate and keep ahead of the field is crucial. When analyzing the potential for a successful market placement the ability to create a cutting edge business model is so important. If your goal is to open a male clothing shop and one already exists in the area you have chosen, you have a problem, unless you can differentiate your unique selling proposition. Maybe this can be accomplished by offering a tailoring operation for hand cut suits, or specializing in formal wear.

Whatever your product or service, define a business model that separates you from your head to head competition. Do not play the price game. Lowest price is almost always a temporary benefit, someone will come along that can produce cheaper, faster, better. Your goal should be the offer of a benefit that the customer will value, desire and not find immediately available. Then back up the benefit with superior service and the promise of continued new cutting edge innovation. Innovate or die!