Some business models are superior than others because their overall configuration creates a significant advantage. We previously outlined seven powerful business model mechanics to help you strengthen your business model and outcompete others. In this post, we'll focus on game-changing cost structures as a strategic advance. We'll illustrate this by examining the business models of Nike, Bharti Airtel, and Skype.
A game-changing cost structure generates a substantial cost decrease of at least 30% compared to industry standards. Let’s look at three examples of companies that challenged the status quo by revolutionizing their cost structure:
Board members jaws' dropped when Bharti Airtel’s CEO presented his unconventional idea: outsourcing the telco’s network infrastructure development and maintenance to a consortium around Ericsson and IBM. This idea challenged the conventional wisdom that a telecom company’s core business is to build and maintain its telcom network. Bharti Airtel decided to focus entirely on creating great value propositions for customers instead, and outsourced the rest of its operations. Bharti Airtel transformed fixed capital expenditure costs in equipment purchase, maintenance and infrastructure development into variable operating costs based on how much network capacity Bharti Airtel was consuming. This revolutionary cost structure reduced Bharti Airtel’s price per minute to an unbeatable $0.02, and gave the Indian giant more flexibility to improve its offerings.
When Skype was created, its bold business model delighted consumers around the world and frightened telecom operators. Skype completely reinvented the business model priorly put in place by traditional telcos to enable people to communicate. While traditional telcos rely on a burdensome and costly telephone network to transfer calls from individual A to individual B, Skype bypassed this infrastructure by relying on a much cheaper network to transmit conversations: the internet. Without incurring expenses related to a telephone network, Skype’s cost structure turned out to be considerably lighter than telcos to the point that it even offers free video calls. The heavy lifting lies in developing and maintaining the Skype software based on its proprietary VoIP system.
Runners rave about Nike’s Flyknit shoes: they’re light, fit with the natural shape of your feet and provide an unparalleled comfort. But guess what? We engineered Nike's business model on our-Strategyzer App and estimated that Flyknit shoes' cost of production is 40% lower than for its regular running shoes. This isn’t something that Nike often shares, but its automated (and patented) Flyknit knitting technology has completely transformed their cost structure. Regular running shoes require labor-intensive work to stitch about 30-40 pieces together, whereas Nike's Flyknit automated knitting technology reduces this number (of pieces to stitch together) to two. This eliminates the need for low-cost workers and reduces the cost of production. The automated knitting technology allows Nike to manufacture almost anywhere in the world and reduces its shipping cost by operating closer to consumers markets.
Nike, Bharti Airtel, and Skype's innovative cost structures have surely improved their company's overall business model and created a strategic advantage over competitors. What’s interesting about these examples is that while business model transformations can be technology driven, like Nike and Skype, they don't necessarily rely on R&D or products. Bharti Airtel reengineered its business model and gained a cost advantage not by introducing any new process or technology, but by challenging the status quo. Beyond anything else, improving and reinventing the inner workings of your business model can unlock opportunities to create powerful business model mechanics, like game-changing cost structures.
Could you dramatically re-engineer your cost structure to gain a competitive advantage?