1. 1
When was the last time you considered a broader definition of your
business model, beyond your products or services and their price
The 2013 Garage Review: points? We believe thinking about your business model in broader
terms leads to more open space for innovation. Smart organizations
Business Model Innovation to around the world are doing it and seeing the benefits. However, once
you enter the game, recognize that business-model innovation will
Harness the Constant Flux need to become your standard mode of operation. The world is
simply moving too fast for you to stay relevant unless you commit to
innovate your model as you anticipate change.
Image Source: Photo licensed under Creative Commons 2.0 via Flickr user: IBRoomba
http://www.flickr.com/photos/ibroomba/3987493218/in/photostream/

2. 2
Consider Netflix, one of the most successful international expansion, focusing on innovating
early dot-com ventures and widely known for new elements of its business model rather than Trend 1: Permanent Beta
driving Blockbuster into bankruptcy. Unlike simply relying on adding new content. While
other companies who, for a variety of well- the story is still unfolding, some investors are
documented reasons, haven’t anticipated or optimistic that Netflix’s new deal with Warner Trend 2: Anytime, Anywhere
acted on market turbulence (think Blockbuster Brothers will stabilize the company and give it a
or Research in Motion, makers of that level of protectable differentiation in the video-
Blackberry device that’s now buried in your streaming space. However, as services like Trend 3: User-Defined Value
desk drawer), Netflix realized business-model Amazon Prime grow and as Apple considers
innovation was going to be the key to success entering this space, Netflix will need to continue
from the very beginning. to innovate or they may risk being acquired. Trend 4: Put Your Money Where Your Mouth Is
After revolutionizing the DVD rental business To that end, we’ve been exploring changes in
with a new approach to delivery, the company the business world that are driven by economic
is now facing its biggest challenge yet—to instability, Wall Street pressure, consumers’ new
maintain the world’s largest video-subscription definition of value and an ever-expanding menu
service and its relevancy as a company. After of new technology.
implementing an unpopular price increase and
unsuccessfully spinning its DVD rental business We’ve uncovered four broad trends that are
off into a separate company (Quickster), both enabling and demanding business-model
Netflix lost 800,000 subscribers and its share innovation. Here’s a deeper look into
price dropped 60%. Discontinuing marketing each trend, including the innovations enabled
efforts on its DVD business, the company by each and a few inspirational examples of
now expects to lose DVD subscribers every how companies are benefiting from adapting
quarter. Looking forward, Netflix plans to and evolving their business models.
continue to invest heavily in content deals and
Image Source: Photo licensed under Creative Commons 2.0 via Flickr user: IBRoomba
http://www.flickr.com/photos/ibroomba/3987493218/in/photostream/

3. 3
Trend 1:
Permanent
Beta
The line between startup and business-as- customers, salespeople and store managers. To founder is the only full-time employee and the
usual in established organizations is blurring overcome the typically slow, overly methodical office space has dropped to 350 square feet.
as traditional companies begin to embrace pace of other corporate initiatives, it conducts Instead of employing a staff, the company
entrepreneurship as a key competency. Small, a series of rapid, one-week experiments, utilizes between 15 and 30 specialist
forward-thinking experiments; iterative co- launching products in beta form to quickly freelancers—software programmers, search-
creation of new ideas; and new approaches to identify strengths as well as challenges or engine marketing specialists, graphic designers
multifunctional collaboration are transforming issues that can be overcome as they iterate and more—pooled from a vast global talent
the way companies operate, unleashing new versions of the product throughout the test. base that includes the US, Asia, Eastern Europe
employee ideas, reducing rework and As a result of this process change, Nordstrom and South America. The results? Decreased
complexity, increasing agility and driving both is attracting a broad diversity of thinking, overhead, increased flexibility and a solid plan
top-line and bottom-line results. increasing relevance through in-field rapid for a more diverse portfolio of deliverables to
prototyping, and hastening go-to-market time better delight a whole new set of clients.
“...traditional Let’s look at a few for more on-trend products and services that
companies begin examples. Against continually define and redefine their hallmark
increasing pressure first-class service. While the Lab expects 80%
to embrace for retailers to draw of the products it develops to fail, an
entrepreneurship in more shoppers, early idea sounds promising—an iPad
fashion-specialty retailer app that allows shoppers to try on and
as a key Nordstrom completely compare sunglasses.
competency.” restructured its
innovation process, While Nordstrom chose to leverage its
developing a customer-focused internal internal strengths through
consultancy they call the Nordstrom process innovation, Texas-based
Innovation Lab. Working as a streamlined Lancaster Advertising & Marketing
startup within the Fortune 500 company, the restructured its organizational model Watch this video to get a behind-the-scenes look at how
Lab leverages a diversified talent base and to tap into the strong, diversified this innovative approach is driving results for Nordstrom.
utilizes tools similar to those of a lean startup for talent available in the “freelance
rapid results. To ensure user-centric innovation, nation.” In 2004, the small business
Lab team members identify opportunities for employed 15 full-time staffers in a
growth through face-to-face interaction with 4,000-square-foot office; now, the
Image Source: Images taken from screenshots of video:
http://nordstrominnovationlab.com/#case_study

4. 4
Trend 2:
Anytime,
Anywhere
Technology has increasingly been teaching complement their in-showroom choices. The inventory strategy by adopting a high-frequency,
consumers that they can get answers as soon guideshops boast tremendous results: 90% low-volume replenishment strategy that allows
as they ask questions and get responses to conversion rates, five times the sales per square for greater merchandise variety. By syncing
their Facebook posts within seconds; instant foot of traditional retail stores and orders twice online order systems to a local warehouse
gratification is clearly the new norm. Proactively the value of average Bonobos purchases. stocked with pre-sorted fresh foods, the
leveraging this new reality and the technology Bonobos also gets real-time feedback from a stores are able to receive merchandise within
enabling it, forward-thinking companies are now base of increasingly loyal customers to better three to five hours of ordering. This inventory
innovating how they drive awareness of product guide its fashion buyers. innovation enables the grocers to carry a wide
lines, enable purchases, deliver products to and shallow assortment, providing consumers
consumers or customers, and manage their Taking a lesson from Apple’s anytime, anywhere with a variety that increases conversion and
inventory—all significant drivers of lower cost approach, JCPenney is innovating how and product turnover enough to offset any increase
and higher levels of consumer delight. where customers pay for merchandise by in transportation and logistical costs. Because
bringing traditional behind-the-counter the rapid-delivery system virtually eliminates
“...instant For example, online activities onto the sales floor for a more the need for backstock, stores require a
gratification men’s retailer Bonobos is seamless shopping experience. The retailer smaller brick-and-mortar footprint and therefore
innovating its approaches began rolling out mobile checkouts in late less overhead.
is clearly the to marketing, retail display, 2012, including both mobile cashiers and self-
new norm.” inventory, purchase and checkout stations equipped with RFID-based
customer engagement systems that eliminate the need to physically
by embracing the concept of showrooming scan items. On-the-spot checkouts increase
traditionally leveraged by car dealerships and conversion by reducing checkout wait times and
interior designers. In 2012, Bonobos opened completing the transaction while the customer
brick-and-mortar men’s-club-like guideshops is engaged and convinced. This innovation also
to allow customers real-life merchandise reduces overhead because mobile checkout
interaction, including beer and complementary technology is far less expensive than traditional
fitting consultations. While consumers are registers and real estate within the store is freed
encouraged to try clothing items on for fit and up to house profit-driving items. Watch this video to better understand how Bonobos is
look, they place all orders online, enabled by a innovating to leverage the concept of showrooming.
personal profile that lists the products they love, In urban Detroit, small grocery stores are
their perfect sizes and ideas for other items to advancing their consumer connectivity and
Image Source: “mobile-checkout-is-something-johnson-is-heavily-touting-hes-eventually-planning-to-get-rid-of-human-cashiers-completely-leaving-just-mobile-and-self-checkout” from http://
www.businessinsider.com/huge-photos-of-jcpenneys-brand-new-concept-shops-2012-7?op=1” from http://www.aaramshoppro.com/2012/07/mobile-checkout-headed-to-store-near-you.html,
“286905-612x612-1” from http://fab.com/inspiration/500-guideshop-experience, Image taken from screenshot of video: https://www.youtube.com/watch?v=CjVFzMVRi7k

5. 5
Trend 3:
User-Defined
Value
What do you get when you combine price- New York startup Greentoe took a new tools, appliances and computers can publish
savvy consumers with easily accessible big approach to integrating user-defined value their entire inventories for consumers to
data? Interestingly, we find the answer to be when it simultaneously innovated its pricing compare prices and make purchase offers.
micro-niche customization—highly customized model and its partnership model. The name- Most price-comparison sites utilize cost-
products, services and experiences and your-own-price retail website links buyers per-click billing, charging merchants every
personalized pricing. The segmentation that with merchants, allowing consumers to decide time their products are viewed; Netotiate,
forward-thinking companies are leveraging their desired price on an electronic item, however, functions on a cost-per-acquisition
goes well beyond the old notion of mass then allowing retailers to match or refuse platform, charging merchants only when a
customization; those that are doing it well the offer. While both parties actively control sale is finalized. Providing merchants with
are innovating everything from their product- the selling price of over 15,000 products, the the ability to upload unlimited inventory gives
development processes to pricing structures, company provides another layer of value to its consumers access to a broader selection; in
partnership models and marketing strategies. merchants—it serves as a customer acquisition return, satisfying both partners and consumers
vehicle, allowing them to collect consumer increases the company’s conversion and profit
Caterpillar, Inc. has radically altered its product- data. Merchants who actively collect data give margin, drives strong future partnerships and
development process, leveraging structured Greentoe a higher cut of each transaction, up promotes consumer loyalty.
crowdsourcing during various decision-making to 15%. This innovation encourages both repeat
processes to develop products tailored to consumers and repeat partnerships, allows Finally, an experiment is underway at Sweden’s
a highly specialized group of customers— new growth opportunities due to its agile profit Festival 2014, which hopes to be the first-of-
professional truck drivers. During the creation structure (the company plans to add 15–20 its-kind, open-source music festival. Ticket
of their CT660 multipurpose truck, Caterpillar product categories by mid-2013), and increases buyers get to choose the lineup after they
invited professional truckers and other market share by presenting highly relevant purchase their tickets; as the number of tickets
potential buyers to contribute design- offerings to niche consumers. sold increases, so does the popularity index
improvement ideas and real-time feedback of the headliners. This experimental approach
before the product ever reached market. This Like Greentoe, online retail middleman leverages an open call for help from music
product-development innovation enabled a Netotiate successfully innovated its partnership lovers, a strong Facebook presence and the city
highly engaged niche market of customers model in conjunction with its pricing model of Umea being chosen as the “cultural capital
to drive rapid-pace development, resulting to simplify and improve both consumer and of Europe” for 2014—all to deliver a true open-
in a much more relevant truck design with a partner costs. The Netotiate Inbound Product source, user-defined experience.
significantly decreased time-to-market and Feed, launched in 2012, features a consumer- Watch this video for an overview of Greentoe’s
increased brand affinity with its core user group. to-merchant online platform in which merchants innovative partnership and pricing models.
for products like glasses, cameras, watches,
Image Source: Logo from http://www.thompsontractor.com/PowerSystems/Pages/
CATTruck.aspx, logo from http://www.netotiate.com/info/how-it-works,
image taken from screenshot of video on http://www.netotiate.com/

6. 6
Trend 4:
Put Your Money Where
Your Mouth Is
Driven by the global financial crisis, the York presence, its low-key charity involvement brand with a strong equity long focused on
eco-movement and the infiltration of cause furthers the brand’s image by presenting sustainability, recently developed a biodiesel
marketing, companies are adopting a holistic Nordstrom as a leader in a new wave of behind- shipping program featuring next-generation,
mindset that intertwines profit, consumer the-scenes corporate philanthropy. fuel-efficient delivery trucks that are not only
centricity, social-cause orientation and lighter and more streamlined, but run on plant
environmental stewardship for an evolved Panera Cares, a chain of pay-what-you- oil and petroleum-blend fuel, and release 20%
perception of value. Companies are innovating can cafés in urban areas like Chicago and less environmentally damaging pollutants than
their distribution and financial models and, as a Portland, allows each patron to pay as much standard trucks. At least some portion of the
result, their overall value propositions as lines of—or more than—the recommended amount, savings are passed along to the end consumer
blur between internally focused profitability allowing money-strapped patrons to receive in the form of lower prices while loyalty,
and externally focused practices that make a discounted or free products. By utilizing an image and category leadership continue to be
difference in the world. existing storefront and building on the brand’s strengthened.
established consumer trust, the cafés appeal
“...lines blur between Treasure & Bond is an to both wealthy and lower-income patrons. On
unbranded boutique average, each location brings in between 70%
internally focused that sells accessories, to 75% of the would-be retail value, earning
profitability and artwork, books, enough to be self-sustaining. Such a business-
furniture, jewelry, savvy financial innovation allows Panera to
externally focused stationery goods and further its value proposition by giving back to
practices that make men’s, women’s and the community while generating brand loyalty
a difference in the kids’ apparel from a among existing customers and allowing brand
variety of selected exposure to a wide variety of income levels.
world.” vendors. Opened in
Watch this video for a more detailed explanation
of OneMorePallet’s eco-efficient model.
Manhattan by Nordstrom, it not only is paving Moving beyond just “talk,” organizations are
Image Source: “16_how_biodiesel” from http://methodhome.com/greenskee-
the way for Nordstrom to learn about New York making a difference in the environment by ping/biodiesel-fleet/
(a market it didn’t previously have a presence innovating their distribution and logistics “treasureandbond2” from New York For Insiders: Taken from the New
York For Insiders blog by Karin Dauch. http://newyorkforinsiders.blogspot.
in), but also allows the company to give back: processes beyond eco-efficiency to true eco- com/2011/11/newish-soho-arrivals-treasure-and-bond.html
all of the boutique’s profits are donated to effectiveness. OneMorePallet provides shared Photo licensed under Creative Commons 2.0 via Flickr user:Asmythie
http://www.flickr.com/photos/asmythie/5635503319, Image taken from
children’s charities. While this innovative model shipping for smaller shippers, saving cost screenshot of video: http://www.youtube.com/watch?v=irawJ1ggkag
serves the business by establishing a New and fuel. Method, the well-known home-care

7. 7
With the modern business landscape in a state of constant flux, successful
organizations must embrace change and adapt their business models:
First Third
Adopt a broader definition of your business Put a cross-functional team on a mission to
model beyond the products you make and drive meaningful innovation within one element
the prices you charge. Consider distribution, or across multiple aspects of that model.
pricing, logistics, organizational structures,
product-development processes, financial
models and approaches to marketing. What Fourth
assumptions have you built into your model
that may no longer be relevant? Don’t rest. Change and the need to
innovate your model will likely never slow.
Being agile and open to new approaches to
Second business-model innovation is the only way
to achieve sustainable success.
Learn about how customer and consumer
needs are changing, understand emerging
technology you could leverage and get
inspired by keeping a pulse on innovative new
models within and outside your industry.
Image Source: Photo licensed under Creative Commons 2.0 via Flickr user: IBRoomba
http://www.flickr.com/photos/ibroomba/3987493218/in/photostream/

8. 8
Contact
The Garage Group is a new kind of strategy © 2013 The Garage Group, Inc
firm helping companies with business-model 2645 Erie Ave #42
innovation through new approaches to strategy, Cincinnati, Ohio 45208
ideas and organizational development. 513.943.9700
thegaragegroup.com
Our clients include Fortune 500 companies like info@thegaragegroup.com
Procter & Gamble, Nationwide Insurance and Kao @TheGarageGroup
Brands; professional-service firms like LPK, Kantar
and TNS; as well as health-care organizations like
Cincinnati Children’s Hospital and the Greater
Cincinnati Health Council. We enable business-
model innovation through new approaches to
strategy, ideas and organizational development.
Essentially, we look broadly and deeply at the
foundational business model that an organization
or brand operates from, and find opportunities
for innovation across multiple components—
for example, new distribution avenues, new
production approaches, new pricing paradigms
or new internal organizational structures. We’ve
found that by opening up the business model,
there are limitless opportunities for innovation.
Image Source: Photo licensed under Creative Commons 2.0 via Flickr user: IBRoomba
http://www.flickr.com/photos/ibroomba/3987493218/in/photostream/