IKEA reinvents its business model … why businesses need to keep innovating the way they work

March 20, 2019

We lease cars. We rent designer dresses. When the lease is up, we return it and get another.

Could a similar leasing model work for furniture? IKEA, the world’s largest furniture retailer, is launching a subscription model where people can lease everything from office chairs to kitchen cabinets. Imagine you’re ready to redecorate your office or update your kitchen. Instead of going through the rigmarole (and expense) of buying all new and getting rid of the old, you just return everything and pick out something else. It’s the same as leasing a car or a piece of designer clothing. Once returned, it gets cleaned up, refurbished, and goes back into rotation for someone else to rent.

IKEA will pilot the program in Switzerland starting as soon as this month. There’s no word yet how much subscriptions will cost or exactly which Ikea products will be eligible. If the subscription model goes well, Ikea may launch the program globally. The company will start by leasing office furniture like desks and chairs to businesses. Kitchen cabinets are also a possibility. Because of the way Ikea’s cabinets are designed, all you’d have to do is swap out the doors for a completely different look.

“Instead of throwing those away, we refurbish them a little and we could sell them, prolonging the lifecycle of the products,” Torbjorn Loof, chief executive of Inter IKEA, told The Financial Times.

Time to innovate your business model

“The failure of any business reflects at root the failure to innovate, failure to recognise change, and the inability to respond to change adequately or appropriately” says Langdon Morris in his great new book Business Model Warfare.

“Business model innovation is perhaps the most important form of innovation, because it’s available to any company of any size, anywhere in the world. All it takes is insight, and the willingness to listen well and try something new.”

Here’s a short extract:

Today, as we see that yet another massive wave of new technology is about to crash across the global marketplace — what with artificial intelligence, blockchains, machine learning, self-driving cars, robots, quantum computing, etc., etc., all arriving immanently, — we must therefore anticipate that every existing business model of every existing business is thoroughly and utterly subject to disruption. This is a stark warning about the need to innovate.

Wouldn’t it be so incredibly helpful if there were a formula to explain all this, to simplify it and make it useful in practice? And indeed there is, a simple, three element framework:

  1. Outside: The company provides experiences to customers through the delivery of products and services. The current quality of those experiences is today’s reality; making them transformatively better is the vision.
  2. Inside: The factors inside the organization make this delivery possible. These can be many and varied, including the product or service itself, the supply chain, the operations, and technology. These are the means.
  3. The Bridge: And then the way that a company communicates this value proposition to customers through marketing and branding, which are the messages and means through which the company communicates. This is the story.

This formula for business model innovation immediately gives us three essential questions to ask about our own business model, and how to improve it:

  1. What’s the best possible experience that our customer can have? (Vision)
  2. How can we organize ourselves to deliver that? (Means)
  3. What’s the best brand identity to represent it? (Story)

We also observe that the most successful business model innovators tend to focus obsessively on one particular aspect of their business means, and develop it innovatively and far beyond what’s been done before. That is, they push it to the edge, the absolute limit of possibility, and in so doing create an entirely new capability that they then leverage to define or enable an exceptionally better value proposition for their customers. (See the illustration at right.)

Let’s look again at some of the companies we’ve already been discussing to see how this applies: where did they push it?

Amazon: The company’s determination to leverage its core technology into every aspect of the customer relationship.

Apple: Obsession with the user interface design created an ease of use that is the basis for nearly everything else that Apple has accomplished.

Google: Obsession with creating user traffic on its platforms has driven two decades of growth.

Southwest Airlines: Obsession with reducing operating costs enabled an entirely new business model and created three decades of exceptional growth and success.

Walmart: Obsession with supply chain optimization is the foundation of its global retailing empire.

The word “obsession” shows up in each one for good reason, and in fact in each of these examples it’s a dual obsession. On the inside, it’s the obsession to optimize some aspect of operations; on the outside, it’s the obsession to optimize the customer’s experience.

Getting there may not be easy, though. Southwest Airlines had to endure a near-death experience during its startup stage before a core element of its eventually-successful business model became clear; it took Google years to figure out how to make money; Amazon and Uber are still losing money; and Apple was moribund as late as 1997, and it was only in about 2005 that its many decades of persistence began to pay off.

How does this work in practice? Business model innovators often begin with these questions simultaneously at the forefront of their thoughts:

The first is simply, What would make the customer’s experience better? Answering this question well requires a detailed understanding of the tacit dimensions of the user experience.

The second is, How can we achieve that? This is the means.

The third question then focuses the compelling story, the critical importance of branding.

Yes, the table is of course a simplification (and possibly an over-simplification), but isn’t it interesting anyway? Do you agree with all the labels I’ve chosen? Perhaps not. But it does convey some important ideas that you need to think about with respect to your own business model:

  • Can you articulate what your business model is about clearly and concisely?
  • Does it tell a story that matters to your customers?
  • Can you deliver on the promise?

Notice that nowhere on the chart is the story or the experience actually the technology itself. Thus, it becomes clear that the importance of new technologies is that they’re the means through which new and better experiences are delivered, but they should rarely be the focus.

Mediocre marketers sell technology. But people buy the hole, not the drill, so skilled marketers sell the hole.

That is, the best business model innovators figure out how to deploy new technologies in order to create better experiences for their customers, while the non-innovators push technology without considering what it means for their business model, or how their business model should be designed to create optimal experiences.

If you look at the up-and-down history of retailers like Best Buy, this is one of the key lessons. They originally designed their stores as temples for people to come and worship technology, which immediately got them commoditized, and soon squeezed by Amazon and Walmart. To turn the business around they had to make it experiential and thus interesting, which they did by turning the stores into brand bazaars, collections of interesting shops in one big box. To complete the turnaround they’re now developing the new brand identity, an essential element of all business models.

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