Continuing Business Model
In 1992, we began looking annually for best practices at the 100 companies whose stock prices grew fastest under the same CEO in the prior three years. (If you would like to read this research, it is available for free at www.mitchellandco.com .) We soon noticed that repeating companies frequently changed their business models to create new competitive advantages. This was counter-intuitive to us. Our earlier studies of best practices had shown that such successful advantaged model changes by the same company were infrequent.
We read 20 years of the Value Line Investment Survey to locate other possible examples.
We contacted all companies which seemed to have repeated business model innovation successes, and asked them what they had done. Interviews followed with the CEOs and senior company executives.
We also tracked these business model innovators to see how their subsequent actions have worked out.
From these investigations, we began to notice patterns of how organizations were creating the best business model innovations.
The results of this research are reported in more detail in The Ultimate Competitive Advantage: Secrets of Continually Developing a More Profitable Business Model (Berrett-Koehler 2003).
Continual business model innovation is the management practice most clearly associated with high growth companies over the last two decades. Knowing that isn't much help, though, if your organization only attempts business model innovations that don't work. Let's focus on what worked best.
What is Business Model Innovation?
A business model is the who, what, when, where, why, how, and how much an organization uses to provide its goods and services and develop resources to continue its efforts. By business model innovation, we mean any successful change in any elements of the business model that substantially enhances a company's on-going performance in delivering benefits versus the available alternatives.
Let's develop these concepts by looking at Clear Channel Communications, one of the first companies to attract our attention with continuing business model innovation. The company was also unusual in that it used acquisitions to enrich its innovations by changing the businesses it bought. Their business model innovations are easy to follow, and will help you understand more about our subject.
Clear Channel was founded in 1972 by Mr. L. Lowry Mays, who is still the chairman and chief executive officer at this writing. The company started with a single radio station, which Mr. Mays sought to operate better by attracting a bigger audience and selling more advertising. Many other companies were doing the same thing at the time and still are. Clear Channel became very good at this activity, and began acquiring other radio stations and similarly improving their operations. By 1984, the company had gone public. Still, this talent for improving station ratings and advertising sales did not provide a lasting competitive advantage over the best operators. The next change did, when combined with Clear Channel's high-multiple stock to fund acquisitions.
As licensing limitations on the number of stations that could be owned in a geographical market were loosened in stages by the FCC, Clear Channel began concentrating its ownership in a few places where it could own the maximum number of stations. The broadcasting formats of these stations were changed to provide a complementary, ideal audience of consumers for local advertisers such as car dealers and department stores, the main sources of revenue for radio stations. To accomplish this, a weak rock and roll station might be switched to adopt a country and western format to reach more of the target demographic product-purchasing groups, if Clear Channel already had a strong rock and roll station in the market but no country and western station. A news channel might convert to a talk show format for similar reasons to serve market demand and broaden Clear Channel's audience base within the most advertiser-attractive audience. Next, Clear Channel would unstintingly improve the entertainment on the stations to enhance the ratings and audience quality from a local listener's and a local advertiser's point of view. Finally, Clear Channel provided combined advertising packages involving several of its stations and programs that assembled a higher quality audience for the specific advertiser at a lower cost than could be provided by using any other combination of newspapers, radio, and television. Clear Channel could easily accomplish this through their combined audience advantages among heavy buyers of specific local products and services.
Other radio station operators either lacked the number of stations or the complementary audience that Clear Channel had in a particular market. Most companies also chose to operate each station to fight for maximum profits and revenues without looking for total market efficiencies for advertisers. As a result, Clear Channel's advantages grew in each local market where it had a full complement of radio stations.
Clear Channel also purchased television stations in some of its radio station markets, expanding the same core concept to provide a broader audience to meld radio and television advertising packages. Other companies did this, but usually lacked Clear Channel's strength in local radio audience efficiency. Clear Channel still had the local edge.
The company did this kind of audience development in so many markets, that it eventually began to be able to offer similarly advantaged advertising packages to national advertisers. As the radio industry leader, Clear Channel was the most efficient choice. Clear Channel had a new advantage here, because broadcast television and print were much more expensive.
Through acquisitions, Clear Channel next added substantial billboard presences that could be added to the custom advertising packages. This provided a further unique advantage to build message frequency for local and national advertisers.
Through other acquisitions, the company expanded its entertainment and advertising concept internationally through owning minority positions in radio stations around the world. In other cases, Clear Channel provided local management for the stations.
Most recently, the company acquired talent and sports representation and concert capabilities. As a result, Clear Channel can offer unique talent-based media vehicles for advertisers to operate on the company's own media outlets. For example, an advertiser can arrange for a touring music group to appear in its radio, television, and billboard ads, make special appearances on its behalf, promote the advertiser at the concert, and mention the advertiser during interviews and free ticket give-aways on the company's stations.
Providing more appealing entertainment in a carefully coordinated geographical pattern is the continuing theme of all of these changes in order to create better choices for advertisers. Clear Channel took this simple core insight and continually innovated its execution through outstanding programming, audience development, advertising sales and acquisitions of additional advertising media into achieving industry leadership. Any one of thousands of other companies could have done the same, but none did. As entertainment choices proliferate, Clear Channel's opportunities continue to expand.
As you can see, Clear Channel changed every aspect of its business model. Its geographical base expanded, adding to "where" it did its work. The company moved into other media, changing "what" it did. New advertising choices were developed, adjusting "how" it worked. Prices were shifted in new ways, making "how much" lower than alternatives. Through acquisition, the company's size vastly multiplied, shifting "who" did the work. By becoming a global provider, the firm shifted "when" it did its work as well.
Revenues in 1989 were $52.4 million. Revenues in 2001 were $7.9 billion, a more than one-hundred-fifty-fold gain, greatly aided by acquisitions mostly paid for with company shares. In 1989, the company lost $400,000 and in 2001 earned more than $500 million before noncash, goodwill amortization charges.
The company now owns over 1200 radio stations that serve 11 percent of the radio audience in the United States, and is the industry leader. Clear Channel operates one of the largest radio networks, featuring on-air personalities like Dr. Laura Schlessinger, Jim Rome, Rick Dees and Casey Kasem. The company is also the industry leader in billboards, with over 730,000 in operation. The firm is a leading live entertainment promoter, producing or promoting over 26,000 annual events including music concerts, theatrical shows and sporting events attended by over 66 million. Clear Channel is involved with 19 television stations. The company has an expanding presence in international radio and billboards.
Companies typically enjoy the fastest sustained growth through adding sales-expanding benefits without raising prices, adjusting prices to encourage more purchases and lowering costs that hold back growth.
More Bang for the Buck
When a company provides new benefits at the same or a lower cost, few customers are likely to complain. Potential customers who value those new benefits are especially likely to be attracted. Market share gains follow. Business model innovators often find ways to provide these new benefits at lower cost, enhancing circumstances for them and their customers.
New Uses for What You Do
Paychex began as a company that provided reliable, lower-cost payroll services for small companies. Paychex's leaders realized that many other services for small companies depend on having accurate payroll records, such as pension administration. Whoever provides good payroll records can save small companies time, money, aggravation, and government fines in these other areas. As a result, Paychex now offers a whole range of record-development and record-keeping services based on the payroll database. Paychex provides these services at a lower price than its customers can do the tasks for themselves and is charged by other national companies. Despite its competitive pricing, Paychex rewards its shareholders with a 29 percent after tax profit margin, and has grown rapidly.
Learn and Share Your Lessons with Customers
Ultimately, the most valuable benefits are built on knowledge that cannot be duplicated in any other way. Ecolab provided cleaning chemicals for manufacturers, institutions, restaurants, and other service providers. For restaurants, Ecolab learned that it was more important to customers to keep good relations with the health inspectors than it was to simply have good cleaning supplies. As a result, Ecolab expanded its offerings to include the chemicals needed to sanitize everything in a restaurant. With its knowledge of the chemicals, Ecolab added ways to improve and maintain the dishwashing equipment to make better use of the chemicals.
Later, the firm expanded into the pest elimination, janitorial, floor care, water treatment, and management advice businesses. In each area, Ecolab carefully observes and measures its customers' experiences to locate the best practices. Using the expertise gained from observing many similar customers, the company can advise customers on how to save money and get better results, while paying normal prices for its chemicals and services. The cost reduction benefits alone are often a large multiple of what Ecolab's products and services cost.
No local provider of any one of these services can hope to provide a more effective combination of solutions than Ecolab does. No new entrant nationally can hope to gain the knowledge that Ecolab has to create valuable, custom solutions at regular prices.
Ecolab duplicated this knowledge-based, benefit-development process used for restaurants for other types of customers. Hospitals were an early and natural extension of this concept. Exposure to similar activities in other end-use markets, such as food manufacturing, institutional feeding and restaurants, creates additional knowledge that Ecolab has turned into customer benefits in each market.
Adjusting Prices to Encourage More Purchases
Remove price as a barrier to purchasing more. Here's how Disneyland in Anaheim, California has done this for frequent visitors.
In the early 1990s, visitors were offered the choice of a one-day, multiple-day, or annual passport. The highest price per day was by the one-day passport, and the least expensive per day was the annual passport (assuming that you visited at least 4 days a year for the less expensive version). If you knew that you were coming back for several days during a vacation trip, you would usually opt for a multiple-day passport. If you lived nearby, you might consider an annual passport.
If you did live nearby, you might seldom visit Disneyland, having been there too many times to count, unless it seemed virtually free. And that's the perception that an annual passport creates. Each entry is free after you have made the annual investment. So, you might even consider stopping by for only an hour or two. In your mind, the cost of the day has dropped from around $40.00 to zero. Would that change the number of times you go to Disneyland if you lived nearby? You bet.
Why would Disney want you to come all of the time? Well, actually they don't. So, there were usually two different kinds of annual passports. One allowed you to only come on days when Disney knows the park wasn't crowded. For about double the money, you could come every day. The price of the more expensive option was slightly more than buying two three-day passports. The price of the less expensive option was slightly more than buying one three-day passport.
What benefit does Disney get from having you come on not so busy days? Well, it's almost impossible not to spend some money while you're there. You will probably pay for parking in the Disneyland lot. Even if you don't park there and only spend $2.00 for a beverage, Disney probably made more money than if you hadn't been present that day. Throughout the day, you will be exposed to other Disney products and services, from Mickey Mouse shirts and watches to Disney Channel cable subscriptions. In essence, you are paying to receive increased amounts of Disney advertising. If you have a good time while you're receiving the advertising, you will undoubtedly buy more of those products and services.
Is this pricing strategy a good one for Disney? You bet.
Lower Costs that Hold Back Growth
Historically, gold mines kept their geological information secret. Its own geologists and a few others saw all the information. Mining companies were concerned that outsiders might find ways to exploit the information for the benefit of adjoining properties or corporate takeover artists.
Goldcorp abandoned that secretive approach. The company issued a challenge to all of the world's geologists to find more gold in its Red Lake Mine. That mine was already tapping into one of the world's richest, highest-grade gold ore deposits. Everything the company knew about the mine was shared with the geologists through the Internet. Substantial cash prizes of up to $95,000 were offered for the best ideas. This occurred at a time when gold prices were at a near-term low in constant dollar terms. With little else to do in the depressed market, many of the world's best geologists participated. Over 1400 prospectors registered for the challenge. A year later, the company announced that the winning submissions had located 6 million additional ounces of gold reserves. With further testing, the number may grow. The ultimate revenue from mining the gold will exceed one billion dollars and profits will probably be hundreds of millions of dollars. The cost of the prizes was only $575,000. The prizes cost much less than the unproductive exploratory drilling that would otherwise have occurred. To fully appreciate the power of this experience, you should know that Goldcorp's Red Lake mine has been operating for a very long time. Most would assume before the contest that there was little more gold reserves to be found in the mine. As a result, in March 2000 the ore-finding part of the traditional gold mining business model was laid to rest for all time by Goldcorp. The "how" of finding gold is now improved.
Goldcorp has gone from focusing on reducing its mining costs to get more profit, to reducing its finding costs to expand its sales and lower its mining costs.
How can your organization greatly improve its business model by accessing the best experts inexpensively?
As one sign of the potential value of this question, consider Goldcorp's track record. From 1993 to mid 2002, Goldcorp shares rose more than 17 fold in price while those of Microsoft expanded 10 fold, Berkshire Hathaway less than 5 fold, and General Electric by less than 4 fold.
The breakthroughs most often employed by continual business model innovators are seldom all seen in the same organization. Clearly, leaders need to focus more on business model innovation, and develop skill in more types of this activity. A good way to begin is to pay more attention to each other's breakthrough business model innovations. For example, other organizations could use on-line contests to develop breakthrough knowledge applications like Goldcorp did.
Donald W. Mitchell is chairman and chief executive officer of Mitchell and Company, a management consulting firm founded in 1977 which is located at 888 Worcester Street, Wellesley, Massachusetts 02493 (781-235-3322). Carol Bruckner Coles is president and chief operating officer of Mitchell and Company. The two are coauthors of The Ultimate Competitive Advantage: Secrets of Continually Developing a More Profitable Business Model (Berrett-Koehler, 2003), The Irresistible Growth Enterprise (Stylus, 2000) and The 2,000 Percent Solution (AMACOM, 1999) (the last with Robert Metz). Background on the firm can be found at www.mitchellandco.com .
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