Technical Innovation vs Business Model Innovation

We invest in innovation; new ideas, new products, new services, and new approaches to the marketplace that result in opportunities to build new businesses.

Over the years, entrepreneurs have been mostly known for technical innovations. And there are many great companies that have been built on top of technical innovations like Intel, Cisco, Oracle, Apple, and arguably Microsoft.

But I wonder if business model innovation isn't as powerful, maybe a more powerful opportunity to build a new business. If you think of Federal Express, Google, Netflix, these companies were built on business model innovations. Of course, there has to be some technical innovation around the edges, and in the case of Google, you can argue it was a combination of both technical and business model innovation that powered its rise, but nonetheless, these businesses have grown because they offered customers a new way to do something that had not been offered before.

You don't always have to invent the new business model. Google didn't invent paid search, Overture did, but they executed it better and reaped a large portion of the rewards for that innovation.

What got me thinking about this is a company that we heard about on our trip last week in Seattle.  The company is called Bag, Borrow and Steal and it is bringing the "netflix rental model" to the fashion accessory market, initially handbags, but over time possibly much more. That's right, for a monthly fee, you can have any handbag you want for as long as you want it, then you send it back and get another one.

I have no idea if this business model will work in the fashion accessory market, but if it does, it would represent a new way to market fashion accessories. It could be a very large opportunity.

As the technology business becomes ever more competitive, with developers building things right and left, with less need for significant investment, and the globalization of the technology marketplace, I wonder if technical innovation is going to become harder to produce and if business model innovation is going to become more important.

We don't have a strong point of view on this and look for both technical innovation and business model innovation in equal measure.  That said, if any of you have views on technical vs. business model innovation, I'd love to hear them.

Comments

[Dave]

I've heard about this company before and its model sounds utterly stupid. Expensive handbags are not DVDs; the inventory and security costs associated with peddling rented handbags is likely to exceed any profits that can be earned.

It is a stupid model, made possible only by virtue of the internet. The internet by itself is not sufficient reason for a company to exist (hello, Pets.com, etc., etc. ad infinitum.)

[Jason L. Baptiste]

I'm curious to see how this model works in this specific industry. As a guy, it's really hard to comment on whether this is something useful or not. Women do love to get new hand bags. To show off a new one for only 20 dollars a month instead of spending 200 dollars for a new one isn't bad. Fred, here's something you and I can understand better as guys, the Exotic Car Club:

http://www.ec-cc.com/

Basically, you pay 250,000 up front (the cost of lets say one slightly used Lamborghini Murcielago). The up front fee, is refundable if you leave. You also pay an 1800 month fee (The cost of leasing a slightly used Mercedes SL55). This lets you exchange cars as often as you want, and drive new exotics. A ferrari one week, a lamborghini the next, and a bentley soon thereafter. They even claim, if they don't own a car you want, they will go out and buy it. If anyone here has tried this service, I'm beyond curious to know.

I'm a firm believer in creating new business models, ones that think outside the box or mix and match, to create combinations you wouldn't expect. Too many companies exist that love to spend all their time innovating the technology, but only use adsense as a business model. A balance is the way to go in my mind. Am I the only one that gets as excited creating a new way to make money, as I do when creating new features? Okay, enough commenting on blogs, time to get back to work on the press release.

-Jason L. Baptiste

[anonymous]

certainly disrupts the industry... those bags arent so elite anymore...

[J L]

Watch out for that "Exotic Cars Club"
Just digging a little into the company brought up some disturbing info.

http://www.ferrarichat.com/discus/messages/251280/111390.html
http://www.nsxprime.com/FAQ/Reference/dealers_and_service/exoticcarwholesale.htm

'nuff said.

[anonymous]

i cant speak for the exotic cars club... but this has been done successfully in europe... http://www.p1international.com/index2.htm

[howard Lindzon]

My wife is buying handbags at Last Chance (Nordstrom closeout) and selling them at 2-3 times as a hobby on Ebay. Prices are absurd so maybe a niche in here. But my wife with little expertise is selling this stuff on ebay so I think that is the market. Just buy them used. The market on Ebay seems flooded.

I think the model needs some technical innovation on top of just being different or loads of cash for marketing.

I think it also helps if you pick a fragmented market.

Fashion could be looked at as fragmented because styles changing so rapidly.

Lot's of upper middle class women here in Phoenix in over 40 crowd - using it

[John Cooper]

Fragmented markets, yes, but also markets dominated by a few large incumbents who are slow to adopt new technologies and/or new ways of doing business.

Telecom is a good example, as new technologies struggle to gain a foothold, telecom dogma informs us that telecom is a scale business where you mus be huge to compete, that licensed spectrum is required, and that individual subscribers must pay a monthly fee for access. New technology enables new business models that challenge those precepts. We still haven't seen a successful rollout yet. But I think we will.

[Dave Chase]

The biz model vs. tech innovation topic is a great one. I think journalists like to talk about tech innovation more than biz model innovation along with the fact that engineers are the high priests of the tech field. The byproduct is much more focus on tech vs. biz when biz model innovation has proven more durable as I commented in my 6 most valuable words in the history of tech post [I'm not sure if your trackback feature is working or if there's just a lag as the aforementioned post isn't showing up.]

[Stephanie Sarka]

Hi Fred,
This is Stephanie Sarka, one of the co-founders of Overture. We met a few years ago with Brad.
I agree that the GoTo/Overture innovation was in the business model and Google executed it better. And legal protection of the business model (there was a patent) wasn't sufficient to keep others from taking the business model (although in this case, Yahoo settled for Google stock which was disappointing, thereby creating their own monster with no royalty or other way to reap some of the benefit, but that's another story....)
But after giving a lot of thought to this over the last few years, as you can imagine, I also believe that technical innovation serves as a barrier to entry or at least to slow down the competition to achieving scale - and we really didn't have much in the way of technical innovation. The business model didn't lend itself to much but there are areas where technology could have made us faster, better, more efficient.
Furthermore, I believe that when you create business model innovation, you are also in the position of creating a new market and in many cases educating that market to do things differently. It is the market's propensity to embrace new behaviors that allows the innovation to take root. At GoTo/Overture, we spent an enormous amount of time, effort and money educating advertisers, small and especially large, about the merits of paid search/keyword advertising - it took years to get the large corporate advertisers and the agencies to make this mainstream in their operations - and partly they embraced it as they saw the results of the business model over time. Today virtually every major company and advertising agency has a search marketing person(s) on their payroll - talk about an industry shift that is completely disruptive.
So I do believe that in a business model innovation which shifts fundamental and deeply entrenched behaviors, which is truly disruptive, it is often not going to be the inventor that will benefit just because they are making the manpower and financial investment in the market education and training because that takes time to create your market, but he who comes in afterwards and is a beneficiary of this investment. You could almost consider the inventor's invention and investment a public good.
So on top of execution and a great tipping point effect with their audience, Google received a windfall because they walked into a market that was primed and ready.
In contrast to Netflix which is not really a stretch for consumers to change their behavior to embrace and hence they created the business model and will win the game, having already practically put Blockbuster out of business.
By the way, I was also at Coach for several years and ran Mark Cross, and am now on the board of Tanner Krolle which is a 150-year old carriage trade luxury leathergoods brand in London - so a few thoughts on Bag, Borrow and Steal. I will be curious to see how this works because it is clever - in the same way that I have often though a "rent-a-dog" business would be great for single people looking to meet others in the park. But as a marketer and heavy consumer of this level of handbags which often run from $800 to $2000, I can tell you there is nothing like the rush that comes from finding the handbag that just speaks to you and that you positively have to have, despite the cost, and paying for it and knowing it is yours. It is an emotional thing. I know this sounds corny and many of the men reading this won't understand (perhaps a car is an analogy for you - I don't know - and must more costly). Most women cannot afford these bags but will buy them anyways, in lieu of vacations and other things. Handbags have become THE fashion statement and a woman usually buys one because it says something (both the brand and the design) about who she is - and it becomes her personal signature for the season. Even if we have a few bags for the season, or some old favorites that we wear for years (we call this "vintage bags"), they are an expression of who we are. This business model doesn't address this. Perhaps it addresses the super wealthy audience that has so many social functions and doesn't want to wear the same thing twice, which would suggest this idea could extend to dresses and shoes - but that is a small audience - and these folks notoriously have closets full of shoes and bags they buy and this would be too much trouble. Or to the more mass market audience that absolutely cannot or will not fork out the dough for these handbags - esp. for the bags in the Trendsetter and Princess categories. But then one needs to ask whether they have the brand awareness to want these bags anyhow.
Also from an economic point of view this does not make sense to me. I would not wear anything in the Trendsetter or Princess categories - too mass market. To have access to the full assortment with the best and hottest bags (Diva and Diva-Couture), I have to pay $100 per month, and if I want two bags an additional $75 per month - and an additional fee on top of that if I choose a couture bag. So if I want two great bags for the season, that is already $1200 for the 6 months. At that point I could have bought one great bag (note that markdowns start early in the season) and called it "mine".

[Stephanie Sarka]

Said differently, I think the monthly annuity model to rent movies, etc is better for commodities than for emotional purchases.

[Z Axis]

Fred,

Said another way, this is the difference between companies that pursue a "red ocean" strategy of continuous technology and process improvement versus those that focus on a "blue ocean" strategy of creating new demand by creating new market and business models. See my post on this topic at: http://the-z-axis.blogspot.com/2006/03/value-innovation-and-blue-oceans.html.

[Steve]

Another big problem. This is going to be just like the rental car business. If you rent a car and don't buy the insurance, you're going to be sweating the whole time you're driving around. So here, you'll have to buy the insurance too, so you don't have to worry about spilling wine on your Prada bag or your dog eating your Dooney. Then the price goes up, and then you tack on the $9.95 round trip charge (note that Netflix never has a shipping charge) and you're ending up hating life. Rather, as Stephanie says, buy one bag and make it yours.

[Minh Dp]

Hi Fred,

An avid reader but this is the first time I'm posting. I'm a student and wannabe entrepreneur based in the UK, so the Web 2.0 and all round tech stuff is very interesting to me.

Because I'm not a science or technology student (Law actually) I think its unlikely i'll be able to come up with significant technical innovation. Thus I find this topic of great interest to me.

First and foremost, I think its amazing that nobody has mentioned the company that I see as the ultimate business model innovator. That company is Dell Computers. Dell hit the market right on the nail by providing a 'direct' service, with a made to order business model that has now become the world's number one computer maker. I'm not sure if Dell was lucky that computers are the perfect item to be made to order, because of the customizability and different requirements that each individual has (e.g. you would never think of customizing your stereo or tv).

On the 'Bag, Borrow and Steal' concept, I don't think it will work as successfully because bags are the wrong product, as Stephanie mentions above. Oddly, whilst I do believe that cars are an extension of a guy's personality, there are so many different cars that guys would like to try that I think the exotic car model will be a big success (note to 'anonymous' - the links you posted refer to what I think is a different company, called Exotic Cars Wholesale, which from reading the content, is a car dealer). I think this maybe because cars have an interactive portion to them, driving a different car gives a different experience, whilst carrying a handbag will not give you a different experience every time you use it. Perhaps something more analagous to handbags would be wristwatches for guys.

As an overall conclusion, I do think that business model innovation is a very powerful way to build a business, however as Stephanie mentioned above, having a business built on little technical innovation means there are low barriers to entry. It would be interesting to find out why there hasn't been much 'direct' competition to Dell, and why most companies still sell their computers on retail shelves.

I think Howard is absolutely right that in the telecom industry we will see a huge shift in business models, an incumbents feel unwilling to innovate at the expense of previous cash cows.

[Parkite]

It is interesting to read the negative consensus on the "bag, borrow, & steal" business model. I think it is brilliant and will do very well. What is it that Buffett says about the wisdom of crowds?

[annextraitor]

To Stephanie's point, I think that BBS is mainly targeted at young aspirants that want more than one bag for the season. They want to be exchanging fairly frequently to mimic the celeb behaviour. Target demo is 20-35 young professionals moving rapidly upward and 40-60 marrieds with restricted income looking for a treat. BBS looks to be a fairly decent competitor to Canal street for the custom of middle aged women who want fashionable handbags without the drama of actually buying them.

Friends, family, and associates will not spend the money to own a nice bag despite 7+ figure houshold incomes. It seems mostly to be an age thing, especially with people who have gone the entrepreneurial route and went through tight times to make things work. Professionals who had a stable and growing cash flow seem more willing to consume and acquire the bags themselves. However, a $100-200 monthly expense is much more justifiable, especially if there is significant variety.

I think that Stephanie is too close to the carriage trade and to the mindset that would rather pay for it to accurately analyse the prospects of BBS. I'm of the same mind and would never join the car or watch scheme and would be very disappointed if a close female friend/spouse was using BBS. But I'm the target demo/attitude of carriage trade merchants. I always find it very hard to step outside of my own preferences when dealing with markets that I feel strongly about, and I think that this is definitely one of the markets where knowledge and experience are detrimental if you can't step outside of yourself. Same goes in politics when trying to craft a message: an ad or approach that appeals to committed insiders is likely to be extremely unsuccessful, while an approach that is hated by insiders (too folksy, unsophisticated...) is likely to work. Just like direct marketing (the horrible crap that works, oy).

[10012]

Wouldn't it be nice to hear what a non-blog reading woman that actually wants these bags thinks? I'm pretty sure thats the kind of info Dell was interested in......not all "smart" opinions

[Alex Osterwalder]

Business Model Innovation will be the most powerful differentiator in the coming decade. A recent report of IBM highlights the importance CEO's give this topic:
http://business-model-design.blogspot.com/2006/04/ibm-global-ceo-study-highlights-focus.html

I will be writing a wiki-based book on "business model design & innovation" in the coming months. It will be a participatory and innovative writing experiment... Anybody who's interested in participating or following can subscribe to my blog or send me a mail... Cheers from Lausanne, Switzerland, Alex
http://business-model-design.blogspot.com

[Luciano]

And... what about a some kind of "initial stage word-of-mouth effect"? ("initial" because I am not sure about how much it could last).
I am wondering how much cash will earn "bag, borrow, & steal" based on people just renting a bag and telling their friends "hey! see my bag... nice, eh? I rent it... at BBS, do you know it? go and see, there are hundreds of models!". With respect, women are special for this...

[William E. Fields]

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