Business Model Pioneers

The aspiration of companies to act as pioneers, and more specifically, as business model pioneers, is accentuated by the extreme frequency of change in today’s economic environment. With competitive advantages rapidly losing relevance, turbulent environments call for innovation and for rethinking tried-and-tested strategies. In times of growing competition, paired with constant changes in technological capabilities, firms have to constantly develop new ideas and find creative solutions for their customers’ problems. All 14 business model pioneers portrayed in the course of this book show a form of inherent awareness of fundamental customer needs. The book looks at business models that brought significant originality and individuality to the global business environment. Moreover, it analyzes organizations that had a long-lasting and significant impact on the marketplace, alongside with young and vibrant companies, helping to comprehensively understand the wide practical implications of business model pioneering.

The success of the company examples provided in this book is not primarily based on a new product, service or technology, but on a pioneering business model. But what is in fact a business model? To illustrate this, the book interprets business models as the way in which companies create and capture value, that is, the way in which the value proposition takes shape and is subsequently monetized. Certainly, a company’s business model design depends on its distinct characteristics and market positioning. While each company shapes its very own, individual business model, what all companies have in common is that each business model functions due to the interdependencies among its elements. To show this, the next chapters are built following a uniform logic, each first introducing the competitive landscape at the time when the portrayed company entered the market. This is complemented by highlighting unmet customer demands of the time—the demands, which the pioneer managed to address in an unprecedented manner. As well, a look is given at the founder (or founders), in order to counterpart the market perspective by a view on the leading figures behind the pioneering companies. Next, each business model is analyzed following the approach provided by Osterwalder and Pigneur (Business model generation. Hoboken, NJ: Wiley, 2010), and the most meaningful developments are individually illustrated on a time-line. Finally, the current market outlook is sketched, considering its positive and negative implications.

Aldi opened one of its first hard discount grocery stores in Germany in 1962. During the same year, Sam Walton inaugurated his first Wal-Mart in the United States. In spite of similarities, such as the attention towards low prices, the two companies were about to follow quite different strategies: while Wal-Mart focused on opening stores in rural communities and small towns, tapping into new markets as a sensible geographic expansion, Aldi much more thoroughly competed on price. The genuine discount business model did not start with Wal-Mart, but with Aldi—the latter being, beyond doubt, the pioneer among hard discounters in the retail industry. Hard discounters, also called limited-line stores, focus on selling a high volume of a limited and flat product range, concentrating on essentials and simplification, as well as on cost and price leadership.

“In the factory we make cosmetics, in the store we sell hope”. This famous quote of Charles Revson, founder of the U.S. cosmetics giant Revlon, best describes the value proposition of incumbent cosmetics companies during the 1970s, when The Body Shop emerged. The business model of Revlon and of other beauty brands back then was based on the so-called “hope-in-a-bottle” formula (van Someren 2005), having strong emotional and aspirational features. Besides glamour cosmetics companies such as Revlon, a market niche for firms offering natural products was progressively emerging. The Body Shop was part of this latter movement and, beyond its cosmetics value proposition, made a long-lasting social impact. The Body Shop became the pioneer of socially aware beauty companies. Anita Roddick used trade in a revolutionary way, as an instrument for improving not only business practices, but also the world around. Her change drive was triggered by what she saw in the cosmetics industry: unrealistic product claims and questionable animal testing practices for new products. In the words of Roddick herself: “I watch where the cosmetics industry is going and then walk in the opposite direction”.

In the early 1970s, the U.S.A. was the largest coffee consuming country in the world, offering an enormous market potential for new entrants. However, a few large established players were already dominating the market, for instance Procter & Gamble. During the 1960s, P&G took over its competitor, Folgers Coffee Company, and started to distribute coffee under this brand nationally. Soon after, Folgers became the top U.S. coffee brand. Yet the business models of P&G and Folgers were fully different from the one envisioned by Starbucks: the incumbents saw coffee as a beverage like any other. Their value proposition was instant and roasted coffee, sold in supermarkets, and intended for home brewing. No efforts were put into establishing a genuine coffee culture, for which Starbucks later became renowned. Americans of that time also did not view coffee shops in the sense of a community, or as a socializing possibility, and Italian-style coffee bars were barely known on the home market. Schultz sensed this as an opportunity to create a place for social interaction, and the high customer numbers enjoyed by the Starbucks stores from the beginning confirmed his intuition.

Two key aspects characterized the U.S. computer industry of the mid-1980s: product standardization/modularization on the one hand, and indirect distribution channels on the other. Standardization implied the usage of common architectural interfaces and standard components, which also allowed PC makers to outsource purchasing and production steps. However, this led to very low potentials for differentiation. Similarly, the indirect distribution model was the dominating approach and permitted little differentiation among PC makers. Manufacturers such as IBM, Compaq and HP relied on standardized components from suppliers as key resources, while their key activities were related to the PC-manufacturing process. The final products then went to distributors, who in turn sold them to a variety of retailers, resellers and integrators, who finally reached the end-customers. Yet even with accurate forecasting, the indirect distribution model was plagued by the need to hold high inventories at each step within the value chain. As time was not perceived as a competitive advantage, companies using indirect distribution did not treat inventories as a significant problem. Inventories were an expression of “business as usual”, and time lags represented the industry standard. Delays were acceptable, as long as the other vendors had similar cycles, but did constitute a tremendous cause for value reduction. The launch of Dell in 1984 and particularly Dell’s subsequent pioneering of direct distribution challenged all of this.

While Amazon managed to bring the shopping mall at one’s doorstep and currently seeks to bring the Internet of Things in one’s home, the company began much more humbly in 1995, by selling books. However, it was the first company in its industry to truly harness the power of the internet. At that time, the landscape of book retail entailed two main types of competitors: on the one hand, small market players such as independent bookstores located in city centers, neighborhoods and at focal points of mass transportation. On the other hand, large corporate groups were the ones dominating the market: bookstore chains such as Barnes and Noble and Borders, each with about a quarter market share in the U.S., together with walk-in chain stores such as Walmart. The market found itself in a phase of predatory competition, in which corporate groups drove out small, owner-managed bookshops. However, this fragmented group of booksellers had one thing in common—the absence of online book sales. There were only some minor exceptions: a small number of authors had own websites, where readers could order new publications. Amazon therefore faced no significant rivalry at the time of its launch—at least, not online. This fortunate outset helped the company to evolve from an online bookseller into an “everything store”. Moreover, it led to Amazon becoming the pioneer of online mass retail.

Google has become the epitome of online search. The popularity and success of websites often depends on their page rank on Google, which shows the search giant’s influence and market power. The search engine evolved into an innovative money-spinning machine, which consistently outperforms its peers. In time, it also extended its activities beyond pure web search, disrupting industries as diverse as advertising, broadcast and cable TV, or mobile telephony—and the list goes on. However, these additional business segments were made possible through the stunning success of its advertising business model. Google’s online advertising business was initiated two years after the company’s incorporation in 1998, representing the cornerstone of its market success. Although the company brought further business model innovations to the market, the present section solely discusses its advertising business, as advertisements have been, up to now, the source of over 90 % of its total yearly revenues.

Since the 1990s, leading newspapers began their expansion on the internet. In 1995, USA Today and in the following year the New York Times went online. However, incumbent newspapers did not effectively exploit the opportunity of interactivity offered by the internet, using their websites only to mirror and reproduce already printed content. This did not change much right after the turn of the millennium. Journalists had little interest to interact with readers, and were rather stupefied about readers starting online discussions. This attitude was diametrically opposed from that of Huffington Post, a company that understood the unmet market demand for interactivity and media co-creation. By establishing a news platform based on blogging and news aggregation, the Huffington Post responded fast to this emerging demand, enabling consumers to become active partakers, rather than passive spectators.

The Walt Disney Company was founded by Walter and Roy Disney in Hollywood in 1923, initially under the name Disney Brother Cartoon Studio. One year before the company was founded, only about one in five cinemas offered cartoons in their program—yet Walt Disney saw a real market potential for cartoon entertainment. Throughout the early years of the company, Walt Disney realized the future impact of color and sound on animation, and became one of the most prominent examples of how to build a successful business model around brand-new technologies. Disney was the first to produce a feature-length animated film (“Snow White and the Seven Dwarfs”, 1937) against all public skepticism, and pioneered television shows and theme parks, alongside with running a merchandise business. The company subsequently massively diversified over the years. Starting as a small animation studio, Walt Disney has evolved to a multinational media and entertainment group.

Netflix is a company that reinterpreted business ideas and processes from other industries and brought these to a field where it perceived an upcoming market demand. At the end of the 1990s, with more and more people owning a PC and beginning to feel comfortable online, the Netflix founders, Reed Hastings and Marc Randolph, saw an opportunity for improving the pattern of watching movies at home. They understood that customers did not necessarily like to drive back and forth to a video store in order to rent movies, and used this insight as a new business prospect. Netflix’s main disruption came from introducing DVD technology to the market, and establishing the DVD-by-mail business. The company started a technological transition, which soon became unescapable for competitors such as the movie rental chain Blockbuster. Since its launch, Netflix redefined its value proposition twice: first, it switched to a subscription model in 1999, providing customers unlimited DVD rentals for a monthly fee, without due dates or additional late fees. Hereby, Netflix introduced a form of flat rate for DVD rentals. Second, in 2007, Netflix did what it considered the next logical move, by launching its online movie streaming service, which is the main pillar of its business model today.

The powerful changes in the music industry since the launch of the MP3 format in the early 1990s brought both benefits to consumers, and angst to the industry players, since music became extremely easy to share. The major record companies suffered huge losses, as a series of illegal file sharing websites, also referred to as peer-to-peer-systems, emerged, Napster being one such example. Spotify launched its online platform in 2008, with the aim of becoming a worldwide alternative to illegal music sharing. The company is part of a group of evolving music streaming businesses, which experiment with different revenue logics and customer approaches. The business models based on subscriptions and freemium offers address an audience with shifting preferences, from owning music to being able to access music conveniently, fast, and regardless of location. Although Deezer preceded Spotify as the first freemium music provider, the latter distinguishes itself through the variety in titles and playlists, usage simplicity, close contact to social media and commitment towards long-term growth.

The online learning platform edX is the result of Harvard University’s and MIT’s dedicated efforts to globally democratize education. In 2012, when edX was launched, a number of other massive open online course (MOOC) providers started to operate, such as Coursera or Udacity, making edX part of a group of innovators in the MOOC domain. From the outset, edX aimed to offer education at unprecedented quality, access, and scale. The platform did not only start by offering lectures provided by two of the world’s leading universities, but also improved lecture comprehensibility through integrated exercises with instant feedback and live work groups. Although, in essence, different MOOC providers share the same motivation to offer qualitative education, their business models subtly diverge from one another. Unlike Coursera and Udacity, edX is a not-for-profit organization, allowing it an unparalleled focus on content provision. By the time edX was launched, the MIT had already accumulated over a decade of experience offering lecture notes, exams and course videos on demand via the internet. In comparison to Udacity and Coursera, edX evolved from the long-standing MIT open platform MITx, which in turn based on MIT’s first online platform for professors, MIT Open Coursework, introduced in 2001. The roots of edX date more than a decade back from its market introduction, making the platform the pioneer among MOOC providers.

Southwest Airlines is a somewhat different example of a business model pioneer—and indeed, one may ask if the company is a pioneer at all: neither was Southwest the first to offer intrastate flights on its home market, Texas, nor was it the first to experiment with low-cost flights. But while the other companies were merely experimenting, Southwest developed a business model, which proved its sustainability over the course of more than four decades. By starting operations in 1971, Southwest faced from the very beginning harsh competition from incumbent airlines. This inspired the young company to create its very own business model—and unlike its main competitors at the time, the airline remains profitable until today. Winning this race made Southwest a prime example of a pioneer in the low-cost airline industry.

The electric vehicle manufacturer Tesla Motors Inc. (Tesla) was founded in 2003, and substantially increased public attention towards electric mobility. Until the 1990s, automakers saw no pressing need to develop electric vehicle technology, largely due to low oil prices and facile environmental policies. By the turn of the millennium, some car manufacturers, for instance GM, made initial attempts to introduce environmentally friendly vehicles, such as the Chevrolet S-10 Electric. Such projects mostly failed, due to a lack of market driving factors. The most significant among them was the lack of performant batteries and infrastructural units like recharging stations, paired with a public policy not yet fully committed to supporting the development of electric vehicles. Some projects however succeeded: hybrid cars like the Toyota Prius and the Honda Insight found an incipient market of early adopters. Yet in a market, in which incumbents were mostly doubtful about the market acceptance of electric vehicles, new entrants with a sole focus on such models faced a hard time. Main entry barriers were the extremely high investments in production plants, immense technological know-how, and brand recognition. In spite of such hurdles, in 2008, when Tesla began serial production of its first model, the Roadster, it became the first company worldwide to manufacture serial electric sports cars. Tesla’s high-performance battery electric vehicle had an impressive travel range of up to 400 kilometers, which was double the range of other BEVs in the mid-2000s. Its performance was at least comparable to, if not exceeding, that of ICE vehicles. The time seemed right for setting in motion a worldwide transition towards electric mobility. This vision helped Tesla’s founders to persevere stubbornly in introducing a new product and a new business model in an industry dominated by giants.

Werner von Siemens revolutionized the communication medium of the nineteenth century, and astonished Europe by making communication at an unprecedented speed possible. In his home country, Germany, his company became well renowned due to its successful completion of a telegraph line between Berlin and Frankfurt on the Main in 1849. In comparison to earlier inventors active in the field of telegraphy, Werner von Siemens managed to establish a company based on complex international projects in the modern sense. For this reason, Siemens & Halske, later Siemens AG, is viewed as a business model pioneer in international project business. As will be discussed next, on the one hand, Siemens & Halske benefited from favorable economic and political circumstances; on the other hand, it actively co-created a period of revolutionary changes, through its product innovations and their substantial social and economic implications.

So what can be learned from the pioneers, beside how to create an internally consistent and unusual business model? All business model pioneers discussed so far provide answers beyond that of how to start an innovative business in their respective industries. The diverging strategies of the retail pioneers for drawing a solid customer base show that a multitude of approaches is suitable in this industry, provided there is a stable fit between the business and its target customers. From the heterogeneous group of pioneers in media and entertainment, Google shows the enormous importance of understanding who the key customers are, and how to develop a business model starting from this customer group. The service business model pioneers demonstrate that focusing on the core customer issue, in disregard of established business models, can help companies become creative regarding how to solve basic customer problems. Finally, among the manufacturing pioneers, Tesla shows how to create awareness for innovative products, and acclimatize a market that is not yet ready for your company’s offers. The companies give insights into how to create sustainable and coherent business models, while providing strategic inspiration on questions regarding customers, value creation and value capture.