Business Model Innovation: Best Buy, P&G and Apple Get it. Starbucks Doesn't Get It.

Posted by: Bruce Nussbaum on July 31, 2008

An economic crisis can be a crucible that forges new innovations in business operations or they can lead companies to make dumb mistakes that destroy them as they rush blindly to survive. We’re beginning to see corporations move into one camp or the other as the economic downturn gets worse and worse.

Take Best Buy. I haven’t been in a big box electronics store in years. The experience used to be just horrendous. But a Best Buy just opened up in my West Side neighborhood in Manhattan and I went in to buy a Flip videocam. I’m going to be doing a lot more video (don’t forget to send in some serious questions so the “Innovation Guru” can talk about them—seriously), and I want a simple machine, so I went out to buy the Flip (designed by Smart Design and Pure Digital Technologies).

And my consumer experience was wonderful! It was almost Japanese-level service. People greet you with both information about products and a smile. Knowledgeable employees give you advice. There are wide open spaces with lots of products to play with. In a deep economic downturn, with so many companies firing people and cutting back on service, Best Buy is going the other direction—and getting

my business and my loyalty. I'll be back and so will many others. Best Buy's counter-intuitive decision to focus on service by adding people to help customers, is a long-term business strategy that is sure to pay off.

Apple's innovation strategy also involves great in-store service plus terrific new products. I was down in Soho this week, early in the morning for an interview, and passed an Apple store. Even before it opened up, people were lining up to get in. Coincidentally, I also had an early morning breakfast meeting the next day in the Chelsea neighborhood where Apple has another store. Again, people were lined up before the store was even open to get in. Now, how many businesses can make that claim? Apple's iPhone proves that even in a recession, people will spend money for a new product/service that enables them and gives them pleasure.

Let's look at Procter & Gamble. Their entire supply chain was designed during a period of low oil prices, meaning the cost of transportation and distribution was low. This led to big outsourcing in Asia and outside the US in general. But oil over $100 a barrel changes all that. Transportation, distribution and production suddenly become more expensive. Add in rising salaries in China and elsewhere and there arises a need to redesign P&G's entire supply chain to make production and distribution more local.

P&G has 30,000 trucks on the roads around the world every day and operates 145 manufacturing plants, according to the FT. The company is now reconsidering how it uses all of them. This is business process innovation at its best. P&G is smart in innovation.

OK, let's look at Starbucks, which is floundering. It's closing 600 stores because of the sharp economic decline. At the same time, it is pumping through more new coffee-based products. Fans (customers) of Starbucks are in an uproar over the closing of their neighborhood stores and everyone else has to wait even longer in line for people ordering more stuff.

The problem with this strategy is that the economy will almost certainly recover in 6 months to a year's time (economic cycles tend to repeat themselves), so will Starbucks reopen the 600 stores it is now closing in half a year? Will angry customers return? Meanwhile, people buying coffee in remaining stores will have a worse consumer experience on longer lines.

As for brand consistency, one day Starbucks announces it will get rid of all its morning food because the smell kills the rich aroma of coffee, the reason why people go to Starbucks. Now the company says it is keeping the morning food, despite the odor. Is the cash flow from sales of this food more important than the identity of Starbucks? Don't think so.

Starbucks needs a major revamp. I got a lot of comment on the post of Jim Biber's strategy for Starbucks. You may not agree with all o fhis 5 suggestions for change, but they are bold enough for Starbucks to consider. Starbucks needs serious business model innovation.

This recession is hurting Starbucks. But Best Buy, P&G and Apple are doing much better because they are innovating in the face of recession. It's the way to go.

Reader Comments

confused

July 31, 2008 7:34 PM

Did someone hit the "submit" button too soon? Two paragraphs and I'm wondering where's the rest of it -- at least to match up with the claims made in the title.

bruce nussbaum

July 31, 2008 9:08 PM

Sorry "confused,"
I did hit the "submit" button too early. It's all up there now.

What do you think?
Bruce

Jason

July 31, 2008 9:50 PM

The arguments posed in this poorly edited article (blog?) are unconvincing. I agree that Starbucks has made poor decisions recently but your arguments are supported primarily with opinion based on your local stores.

My local Best Buy is still filled with idiots that don't know what they are talking about. I've walked into the local Apple store and have been the only customer numerous times.

Perhaps there are actual sales numbers that support your claims, otherwise your neighborhood in Manhattan does not change the inertia of an international company.

ravi Sawhney

July 31, 2008 9:54 PM

Bruce,

I was was one of those people waiting in line at the Apple store to get my new phone.

Does Apple get it?

Here's my latest regretful experience with Apple. Its somewhat similar to your flight on Jet Blue. After multiple attempts I finally waited in line and after some time, I was greeted by an Apple representative who "qualified" me for the prices shown.

But wait, I didn't qualify ???? Apparently, AT&T and Apple hid from view that the pricing shown was preferential and submitted to charge me $200 over the stated pricing without ever showing any disclaimer. As I challenged the stated pricing, I was respectfully informed that I was uniformed and should have realized that all advertised pricing on cell phones always implies you would need to qualify for that price.

So, as you and I discussed some time ago, after Apple took advantage of the early adopters by inflating the price to them on the first issue of their I-Phone and they received consumer complaints. Now what shall happen?

I had once been a loyalist to Apple and kept them as an icon of consumer understanding, going back to the early 80s.

Now, it makes me wonder about their current motivations. Are they are using their ability to bond with consumers to gain financial advantage over them?

And, I bought the new I-phone because I needed the added capabilities it offers and to stay current. But, days later, the sour taste of the experience remains and I'm embarrassed that I did.

So, since the lesson I've taken away and hope to propose is that we have a need to inform all of the exposure created to damage one's brand by giving into the temptations of taking advantage of your consumers and brand loyalists. Financial mechanisms that leverage the hard work of strategic designers who create compelling brands that consumers love and evangelize can quickly be erased if not respected.

All in all, a relatively inexpensive study and lesson learnt at the end of the day for us, maybe not so for Apple and AT&T.

Feedback please?

Ravi

Bourgogne

August 1, 2008 1:34 AM

The macro and the micro are being discussed here in this thread. I would say that any newly opened BBY store in any local neighborhood goes through a honeymoon period where everyone is excited and in top form. Any macro market data explanation is separate from this kind of opinion however.

Ravi's experience could very well be from an existing apple store with entrenched protocol that leads to herding customers against their will.

Apple is doing well in a bad economy according to BWeek and other news sources. Like any drug dealer, they are applying the crack addict business model knowing their customers will pay anything to keep current and feed their addiction. Cha-ching...

Don't know much about P&G lately...There is just too much competition in coffee these days, Starbucks is sagging under its own weight as a giant, as well as being labeled an American company.

jay

August 1, 2008 2:41 AM

Quality of Serivice is different to Innovation, Starbucks needs both, whilst Apple probably needs to tighten is QoS. From what i've heard and seen of Starbucks they are a clear example of a company who never really had a clear understanding or belief in what there brand promise and brand experience was. If they did then they wouldn't be caught in the trap which a lot of companies fall into, which is to create more revenue and increase profits by broadening there portfolio of products and service at the detriment of there brand identity, brand experience and quality of service.
The problem is that a lot of companies think that this is innovation, but all it really is, is uneducated risk taking, you still need to test your ideas on customers and users and make sure that these risk's actually add value and build on your brand promise and brand experience.
Don't just start selling mugs because you think its going to make your business more money, think about the broader implications that that product/service will have to your brand experience, there are consequences to ever decession, try to work out what they are and use design thinking to brainstorm through them to work out the pros and cons, bring in users to help you out don't just sit infront of your computer drawing up pretty computer generated interiors and trying to answere all the questions on your own.

Jason

August 1, 2008 4:51 PM

Congrats! You must have one of those elusive Best Buys that actually have knowledgeable employees. The several that I've been into are staffed with chimps in blue shirts.

My electronics MO - Research online, go to big box retailer to see the product I've been researching, go back online to make purchase. Best Buy is hardly that. In many, many cases they are more expensive than their direct competitors.

Using your Flip example, you could have saved $25 by merely going to Amazon.com. Is the warm, fuzzy feeling you get from someone who reads off the card in the store worth $25 to you? It isn't to me.

Good luck with that...

jweller13

August 1, 2008 7:18 PM

Service is going down. I don't find Best Buy to be any less expensive than it's competitors. The service however was why I would come back, they actually new the products they were selling. However I've noticed there service is starting to decline. They still seem to know what they are talking about but they are rude.

ravi Sawhney

August 1, 2008 7:30 PM

Dear Bourgogne,

Thanks for your comment on my notes.

I'm not sure I conveyed myself and my position with regard to brands. I wasn't logging a consumer complaint. Well, only in part, I was.

Are you saying that a personal experience is "micro"? And, if so, how does the micro of consumer experience relate to the macro. I see them as the building blocks or core elements which should never be forgotten.

Consumers today know they have a voice and an opinion. Our experiences with a brand brings them to life or leaves them to fade away.

In defense of my points about my experience at Apple, perhaps, its my misunderstanding that Apple's in store advertisements (posters) and posted pricing on the phones would be uniform. I just can't imagine that an individual Apple store could get away with being a rogue site that does this. The sales person may have very well have been on their own.

Then also, I wonder about you drug analogy. Is design to be confused with drugs (positive or negative)? I assume you are you speaking in more global terms of addicting the consumer as negative behavior.

I hope these comments apply to all; individuals and brands and for all of us who drink at Starbucks paying $3.00 to $5.00 and to those that live on $2.00 a day (today).


Ravi

Ryan

August 1, 2008 8:25 PM

I think the author of this article ( Bruce Nussbaum) needs to disclose how many thousands of shares of Best Buy he owns...

I've never had an experience where the "salesperson", and I use that term loosely, has any other purpose other than to just to agree with whatever you ask in order to get you to pickup the product (and accessories...) AND don't forget about the extended warranty.

Only to then point you in the direction of one of the two open (out of eight available) checkout lines... Where your next 15 minutes is spent watching the people in line in front of you (and then eventually yourself) being solicited to sign up for a rewards card (tm), Sports Illustrated magazine or something that you obviously didn't go in there for.

I always order online unless there's an emergency (power converter for roadtrip, last minute memory card purchase...) and I need an item that same day.

Joshua-Michéle

August 2, 2008 4:39 AM

I would like to point out another distinction that is raised in the comments but not given enough air-time. I think it is easy to point to companies "that get it" and companies that don't. But if you don't consider category (like with like) and context it does a disservice to problem solving...

At the risk of stating the obvious I think the post misses the point that these companies are in radically different categories and contexts.
Best Buy and Apple can focus on customer experience because they have a fairly stable brand value proposition. In the case of Apple, they have the luxury of being roughly five years old.
Starbucks is a sagging giant that has grown out of its brand value proposition (all things coffee and the cafe hangout) into a kind of convenience store of junk food and mass-market music.
To turn this ship around requires some seriously heavy choices (not just customer service but the entire experience and product-mix). In proposing solutions what we all assume (but never say out loud) is that ALL of solutions should be in the service of growth.
I contend that the Starbucks brand may be at their limit given category and context. Jamba Juice anyone?

Bourgogne

August 3, 2008 6:06 AM

Ravi...

Indeed I was referring to anecdotal experiences as the "micro". The macro in this case is devoid of emotion and represents only cold hard economic facts. (i.e. Jason's comments)

Today, I think the more effort a consumer puts into understanding the innovation that he/she is participating in on the micro level, the more positive the experience might turn out. However, most consumers do not stay on top of these technological and informational innovations that in actuality go to help the brand better manage its business (or increase its profits)rather than create a better consumer experience. Your case is a perfect example from the view of the possible rogue apple employee.

As for the drug analogy, drugs as a product are no different than that of product innovations on the macro level. Both are created to enhance the consumers life experience, but both can be abused and lead to ruin. Some are more illicit and addictive than others. Starbucks markets caffeine and apple markets sensory stimulation in the audio, touch and visual areas of the brain. The profit margin of the crack dealer is much higher than that of Starbucks or Apple however. They spend next to nothing on user interface, industrial or packaging design and put all of their innovation into the post purchase experience design of their product. It is so successful that it is deemed illegal by many governments.

The sooner global brands can develop the $2 a day market for its products/services, the sooner they can hook them into the addiction that the $5 Starbuck and apple addicts are now vexed with.

Think Opium Wars of the 18th century and the colonial days before 1935. Its the same repeated pattern.

Prashanth

August 4, 2008 2:01 AM

I agree with the argument made for Best Buy in that by pursuing an innovative strategy such as increasing its labor force, it could be securing its long term future.

The argument made for P&G is much less convincing. The author simply states that P&G has tried to change the fact that it uses 30,000 trucks and 145 manufacturing plants to cope with the rising energy costs. This is not particularly innovative, as every company I know is trying to scale back operations which consume a lot of fuel. So how is P&G any different?

I also find the example of Starbucks as not being an appropriate example of a company with bad innovation. It isn’t cutting stores simply because of the bad economic conditions, but because some of its stores were cannibalizing its own other stores. This cannibalization would occur no matter what the conditions are, and hence I highly doubt it will open a huge number of stores up as soon as the economy gets better.

Prashanth
Brilliont: http://www.brilliont.com/

Prashanth

August 4, 2008 2:04 AM

I agree with the argument made for Best Buy in that by pursuing an innovative strategy such as increasing its labor force, it could be securing its long term future.

The argument made for P&G is much less convincing. The author simply states that P&G has tried to change the fact that it uses 30,000 trucks and 145 manufacturing plants to cope with the rising energy costs. This is not particularly innovative, as every company I know is trying to scale back operations which consume a lot of fuel. So how is P&G any different?

I also find the example of Starbucks as not being an appropriate example of a company with bad innovation. It isn’t cutting stores simply because of the bad economic conditions, but because some of its stores were cannibalizing its own other stores. This cannibalization would occur no matter what the conditions are, and hence I highly doubt it will open a huge number of stores up as soon as the economy gets better.

Prashanth
Brilliont: http://www.brilliont.com/

Peter Mortensen

August 4, 2008 11:27 PM

Having visited a Best Buy on Saturday, I saw the abundance of employees as a downside. Why? Because I was there strictly to browse cell phones, not ask questions. As a result, every 60 to 90 seconds, another blue shirt would ask me if I was "Looking for anything in particular?" I couldn't get any piece.

Worse, defying all logic, Best Buy's display cell phones are non-functioning units. instead of getting to play with the user interface and get a real sense for the phone's performance, you get to look at a pasted-on screen shot and imagine how it might work if it were a real phone. I could do better comparative shopping online at home -- the pictures look more realistic.

From what I can tell, most of Best Buy's innovation efforts are walled off from the big strategic picture. It's one thing at a time instead of an overall shift in focus. And, unfortunately for them, all of their products, services, and retail experience together don't tell a coherent positive story.

Worse, they tell a bunch of stories that have negative sides to them. Geek Squad says that people can't figure out technology on their own. The company's house-branded video cables are stunningly over-priced, suggesting contempt for consumers. The too-helpful questioning clerks in the phone section underscore the message that normal people can't handle technology. The dummy cell phones imply that people are shallow and buy phones based on looks alone.

All told, it's a place that depowers its consumers -- a 21st Century car dealership. Compared to the Apple retail experience, Best Buy isn't in the same league -- and it's not even playing a similar game.

ravi Sawhney

August 5, 2008 2:14 AM

Bourgogne,

I appreciate your comments as very interesting and stimulating dialogue. Thank you.

Would you agree that like drugs, through the senses, brands and their experiences create a sense of; well being, empowerment and self actualization, at their highest level?

Would you agree that we are coming to understand how to better leverage the senses for touching the consumers head and heart?

Can the macro be emotional and/or cognitive consensus?

We find this is extremely valuable in creating shared team vision and empowering the creative teams. We assign value through professional assessment in our mapping. And, in the process, this creates opportunity to deep dive into the micro by blowing up the Macro similar to zooming in on a Google map.

An analogy I use is that this is similar listening to music in new ways. Listening deeper and deeper until you hear each instrument separately and together allows you see the forest and the trees. When this happens you are able to affect the macro through the micro.

I would welcome a deeper dive into how and why you feel the macro is or should be seen as devoid of emotion.

Please elaborate. I believe this all relates to Bruce's stimulating blog.

I also am curious that while I am focused on consumer experience and creating business innovation through design, your perspective may be from a different angle.

Is it?

Ravi

Steve Wunker

August 14, 2008 12:40 PM

The great and terrible thing about business model innovation is that it is hard (usually much harder than technology-led innovation) and takes a while for large firms to pull off. That makes it difficult to copy, but also poorly suited to be a reaction to short-term economic cycles. Oftentime the (unwritten) internal processes and resources of a firm are highly interdependent, and untangling these to change the business model is fraught with operational and political difficulties. By all means, it should be undertaken, but in a deliberate manner that doesn't risk overloading the organization. If you believe the current economic cycle will be prolonged, then BMI makes sense as a response. The more general case for BMI is not as a recession-fighting initiative, but as a competitive and growth strategy play for the longer-term.

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About

Want to stop talking about innovation and learn how to make it work for you? Bruce Nussbaum takes you deep into the latest thinking about innovation and design with daily scoops, provocative perspectives and case studies. Nussbaum is at the center of a global conversation on the growing discipline of innovation and the deepening field of design thinking. Read him to discover what social networking works—and what doesn’t. Discover where service innovation is going and how experience design is shaping up. Learn which schools are graduating the most creative talent and which consulting firms are the hottest. And get his take on what the smartest companies are doing in the U.S., Asia and Europe, far ahead of the pack.

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