Business model example: Zara - A devastating business model

Zara, owned by Inditex, has been described by Daniel Piette, fashion director LVMH, as "possibly the most innovative and devastating retailer in the world" and is a vertically integrated retailer controlling the design, manufacturing and distribution of clothing itself. This is very different from most clothing retailers that outsource much of their manufacturing to developing countries. Zara has managed to substantially shorten the time to develop a new product and get it to stores, and in doing so it can react quickly to changing market trends. From design to finished goods can be made in four to five weeks, and modification of existing items can be made in as little as two weeks. It produces about 11,000 distinct items annually compared with 2,000 to 4,000 items for its key competitors, constantly updating its range of clothes. Zara shop managers report back every day to designers on what has and has not sold, information that is used to decide which product lines and colors to keep or alter, and whether new lines should be created. Reducing the time to get the clothes into the shelves and the batches of clothing in small quantities also keeps the costs down by keeping stocks low, and if a design doesn't sell well within a week, it is withdrawn from shops, and further orders are canceled. Where most retailers have different "seasons" Zara keeps no design on the shop floor for more than four weeks, encouraging customers to make repeat visits. Popular items appear and disappear within a week creating an image of scarcity. Some customers know exactly when new deliveries arrive at their local shop and turn up before opening time to pick up the latest fashion. Zara uses no advertising or promotion, and 50% of the products are manufactured in Spain, 26% in the rest of Europe, and 24% in Asian and African countries and the rest of the world.

Further reading:

• List of business model examples
• Threadless - Dressing the long tail in user design

Business model example: Xerox - Business Model Innovation in 1959

The business model around Xerox Model 914, introduced to the public in 1959, has become a classical example of how a new technology sometimes needs a new business model to become successful. The Xerography technology, to produce images using electricity that avoids the use of wet chemicals, was superior to other available methods, but also very expensive. When Haloid (later renamed Haloid Xerox and then Xerox Corporation) tried to find marketing partners for its Model 914 the company was constantly turned down by the likes of GE, IBM and Kodak. Haloid decided to lease the equipment, instead of selling it, at a relatively low cost and then charge a per copy fee for copies in excess of 2000 copies per day. The company provided all the required supplies, service and support and the customer could cancel the lease on only fifteen day's notice. This was a bold move given that the average business copier at that time produced an average of 15-20 copies per day. Haloid took a large risk as customers were only committed to the monthly lease payment and paid no more unless the performance of the Model 914 led them to make more than 2000 copies. The Model 914 became a huge success, with customers averaging two thousand copies per day (instead of month) and the company sustained a compound annual growth rate of 41% over a 12 year period. Also, the company became highly incentivized to develop faster machines that could handle high volumes with maximum machine uptime and availability.

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• List of business model examples

Business model example: Threadless - Dressing the long tail in user design

Challenges in the apparel industry are to find designers that can create hit products on a continuous basis, to predict the demand down to the style, color and size. Threadless started as a hobby inviting anyone to submit artworks for t-shirts to an online platform, a community to rate and the best t-shirts to be printed. Today, the company is the biggest community-based t-shirt store on the web, selling more than 100 000 t-shirts per month. It is one of the most famous examples of "crowdsourcing" inviting everyone to design and assess new t-shirts. Members, some 900 000, download a template and upload a design, around 150 submissions per day, and a small percentage are selected by the visitors and members of the community to be printed and sold through the online store. Creators of the winning designs receive $2000 in cash, a $500 gift certificate and a membership to a monthly subscription-based line of t-shirts. Threadless t-shirts are run in limited batches with 9 new designs a week, and when sold out reprinting only occurs when there is enough demand for a new batch. Producing a predetermined demand keeps costs low and margins high, and because community members tell the company which t-shirts to produce Threadless never produces t-shirts that are not sold. In addition to being designers, voters, and buyers, community members get t-shirt credits by sending in digital pictures of themselves wearing purchased t-shirts if featured, and for recommending t-shirts to people in their social networks when purchased through a referral link. Threadless was one of the first firms to systematically mine a community for designs, a trend that today can be seen in various industries.

Further reading:

• List of business model examples
• Zara - A devastating business model

Business model example: Tata Motors - Inexpensive cars for modular distribution

Tata Motors is India's largest automobile company, the world's fourth largest truck manufacturer, the second largest bus manufacturer and the developer and manufacturer of Tata Nano, listed in the Guinness Book of World Records as the world's cheapest car. The Tata Nano, that has received media attention due to its low price, started to be delivered to customers after July 17 2009, with a starting price of Rs 100,000, which is approximately equal to UK£ 1,360 or US$ 2,171 as of October 2009. When competing in the Indian market the Tata Nano is not primarily competing with other cars but with motorcycles used to transport entire families. Making a car affordable for families with low incomes the launch of Tata Nano is believed to expand the Indian car market by 65%. Boston Consulting Group predicts that by 2015, 100 million households in the developing world will be able to afford cars priced between the Nano and the more expensive Renault Logan ($6000). So how could Tata create such a low cost car? Tata refined the manufacturing process breaking down every component of the car into its smallest pieces eliminating everything that is absolutely necessary and predominantly outsourcing its manufacturing to a limited number of suppliers. The number of parts have been reduced with changes such as one windscreen wiper instead of two, no power steering, three lug nuts on the wheel instead of four, no tubes in the tires, only one side mirror and the basic version has no air conditioning, no power windows, no fabric seats, radio or central locking and the seats are fixed except for the driver's which is adjustable. What is really fascinating is how the Nano is constructed of modules that can be built and shipped separately to be assembled in a variety of locations. It can be sold in kits that are distributed, assembled and serviced by local entrepreneurs in rural areas, adjusting the car for local needs adding value to the product or receiving replacement modules for broken cars. To ease assembly, body panels are glued instead of welded. Still, the car meets all Indian emission, pollution, and safety standards. Tata is also developing electrical versions of the Tata Nano that will probably become the world's cheapest electric car when launched.

Further reading:

• List of business model examples
• Better Place - Introducing per-distance fees

Business model example: Lego - Turning users into product developers

Lego has turned its most loyal users into designers and co-creators of their own products. The toy manufacturer providing a building system based on interlocking bricks patented in 1958 begun to run into difficulties in the late 1990s. Lego's product development had become increasingly complex with many product ranges and at one stage Lego had 11000 contractors -more suppliers than Boeing used to build its airplanes. At the same time a change in customer behavior from building models to computer games together with low cost competition made the company increasingly losing money and market share. With a new CEO and the injection of turnaround funding, the company rationalized its supply chain and factory location, reduced the number of unique pieces, in-licensed the rights to use characters from blockbuster movies and developed new ways of working with users as designers as part of the new product development process. The latter is what has made Lego famous in business model innovation (even though the in-licensing has proven to be the main revenue generator). An early product involving users, launched in 2000, was Lego Mosaic, which allowed users to upload photographs to Lego's website. The company would digitize the picture and calculate the bricks required to build the mosaic. In 2005 Lego launched Lego Factory where users can design, share and purchase custom models. The user downloads a virtual building program to design 3-D models with virtual bricks and elements and depending on the creation, a price is dictated by the size and elements used. A community of builders shares their virtual creations, more than 30000 kits uploaded so far, and download the building instructions to build from their existing Lego collection or purchase someone else's model for themselves. In parallel to the sharing platforms Lego launched its MIndstorms Robotic Invention System (RIS) product, aimed at competing with computer games. MIndstorms is a sophisticated kit with a programmable brick, various sensors and actuators to build models that can carry out various movements. One of the key limitations of the original Mindstorms was the complexity of the programming language and Lego discovered that users were hacking the software and developing applications and extension to the original code. Within weeks of the original Mindstorms’ debut, a user had reverse engineered the system and posted all of his findings including information on the underlying firmware, online. Lego concluded that limiting creativity was contrary to its mission or encouraging exploration and ingenuity, and rather than sending out cease and desist letters, Lego decided to write a "right to hack" into the software license. More than 40 guidebooks providing step-by-step strategies were developed by external users and hardware developers designed sensors far more sophisticated than the included ones. When Lego later developed the next generation Mindstorms (NXT), key developers driven by interest and involvement were recruited into a Mindstorms user panel in exchange for Lego sets and NXT prototypes.

Further reading:

• List of business model examples

Business model example: Gillette - The razor and blade business model

The name Razor and Blade business model refers to Gillette's use of razor handles, sometimes given away for free, and high margin disposable blades. Gillette has used the razor-and-blade business model since the first model with disposable blades was launched in 1902, with granted patents in 1904. Since then several different generations of razors have been developed, patented and released and razors has become one of the most heavily patented consumer products with more than 1000 granted patents. Gillette's success with its razors and blades is a story about superior technology, design and the use of control mechanisms, foremost patents, to ensure market dominance. Gillette who spends huge amounts on R&D and patenting, has fine tuned its business model and patenting activities, and never releases a new razor until the next generation is already in development. It has continuously developed and heavily patented its products, replacing old models just when patents have started to expire. As patents per definition becomes publicly available, and is used for competitive intelligence, Gillette, instead of filing own patents when inventions are discovered, awaits the right time to file large batches of patents to be published in perfect timing for the launching of new products. In 1998, after more than $750 million of research and testing, Gillette introduced Mach3, with innovations such as the triple blade, the single-point cartridge docking, the indicator lubricating strip to signal when to replace cartridge and the diamond-like carbon-coated DLC blade edge (three times stronger than stainless steel, made with chip-making technology). The company made sure to patent every design and engineering feature resulting in a wall of more than 50 patents surrounding the product. Seven years later the Gillette Fusion was launched with new inventions protected by more than 70 patents.

Further reading:

• List of business model examples
• Razor and blade business model

Business model example: Etsy - Mass customization of arts and crafts

Customization has traditionally been costly with plenty of long-tail producers and customers spread out over the world, too small to set up shop on the average city street without expensive pricing. Etsy aggregates the long tail in an online marketplace for handmade goods with the goal to enable people around the world to make a living making things. The company provides a platform for users to buy and sell items listed under broad categories and user-defined tags. Where Ebay attracts brand-name bargain-hunters, people go to Etsy looking for something handmade, something unique, and find more than 250 000 sellers from around 100 different countries. The company collects a 20 cents listing fee and a 3.5% commission on each item sold, and sells slots in a showcase (internal advertising program for sellers to show off) of featured items for $7 a day. Etsy offers workshops to help entrepreneurs sell their stuff on its platform and market their products using social media such as Twitter and Facebook.

Further reading:

• List of business model examples

Business model example: Apple - Providing convenient solutions

Apple has a history of design-driven product innovation and has introduced a number of high-end products such as personal computers, media devices, accessories, peripherals as well as media and software to support their products including operating systems, applications for areas such as music and video. Apple has revolutionized the computer industry, the music industry and now the mobile phone industry. The classical example of business model innovation is related to Apple's iPod and later the iPhone. Launched in 2001, the iPod was a standalone product, but when Apple launched the iTunes Music Store in 2003, it provided cheap music for buyers of their physical products, turning Apple into the world's largest online music retailer. The same strategy was applied to provide a convenient solution for applications to its iPhone when the App Store for iPhone was launched in 2008, establishing Apple as a broker of application, collecting a 30% royalty on each application sold.

Further reading:

• List of business model examples

Business model example: Amazon - Leveraging assets

Amazon was launched in 1994 and established itself as an online book seller providing books but also an online community for customers to share information and opinions about books with one another. The company soon realized the potential in leveraging the platform and infrastructure to offer new categories of products, turning into an online department store. Amazon also supplies e-commerce services and features to power other companies' web sites. Another way of leveraging its software is the supply of e-commerce services to syndicated stores that sell Amazons products on other companies' web sites resulting in distributed distribution channels. To provide the largest catalog possible on its platform, other companies including competitors are allowed to utilize the platform establishing Amazon as a broker of transactions and leaser of web space to other retailers. By bringing buyer and seller together, collecting the buyer's funds when the order is placed, and maintaining advantageous payment terms with suppliers, Amazon has done with online retailing what Dell did with computers. Further leveraging its assets and capabilities Amazon started to offer a number of services such as storage services, the lease of computing power, together with an end-to-end product sales and logistics platform, handling orders, payments and shipments.

Further reading:

• List of business model examples