Author: Karan Girotra and Serguei Netessine

The death of over 800 people in the collapse of Rana Plaza, a building with garment factories in Bangladesh, spurred widespread outrage over working conditions in offshore factories. In the search for blame, many commentators point to the absence of building codes, lack of workplace safety rules, and the greed of US corporations.

Many of the solutions proposed are around paying people more to manufacture in the USA. But however well intentioned the ideas are, this is not the best use of one of the most productive workforces in the world. The true solution, we think, lies in understanding the changed nature of modern supply chains and identifying new business models better suited for managing them.

Over the last years, labor intensive production keeps moving to ever-cheaper countries. But producers in many of the newer entrants (such as Bangladesh) tend to be small and highly disaggregated. By some estimates there are over 4,000 garment factories in Bangladesh alone. This has made it increasingly hard, if not impossible, for a global retailer to ensure compliance with standards. In a knee-jerk reaction some firms have decided to just give up and exit the country altogether — a move that clearly does not serve the interest of the workers and which pulls valuable resources from developing economies.

The need to improve supply chain compliance does not come from moral arguments alone; the business consequences are also increasingly unescapable. Some apparel retailers attempted to deny that they had any connection with the Rana Plaza building that collapsed — but data at the level of each shipment is increasingly available to both researchers like us and to the general public. In fact, the press was quick to point out that some of the deniers did, in fact, source from Rana Plaza recently.

Let’s do some math to see how expensive the necessary improvements in safety and working conditions would actually be. Non-governmental organizations have calculated that it would cost about $600 million per year to bring all Bangladeshi factories up to Western standards. Given that Bangladesh exports $18 billion worth of clothing per year, we are talking about a 3.3% cost increase for garments. In other words, a T-shirt currently costing $3 to produce would cost $3.10 to produce properly. This is a very small price to pay for the ability to claim that no workers producing your closing were in any danger of dying.

In fact, ecolabeling is known to lead to price premiums of 10-50% and we believe one can expect similar price increases with “safe-workplace labeling”. What holds back improvements is thus not direct cost concerns, but the ability to ensure compliance with norms in a supply chain.

We think the answer to that problem lies in the novel business model pioneered by companies like Li & Fung Ltd., a supply chain intermediary that owns no production, transportation or retail facilities, but which is the key link in the sourcing practices of some of the world’s best known companies. This firm created a multi-billion dollar business for itself by sourcing “better” in places like Bangladesh than their customers can by going there directly.

Firms like Li and Fung ltd. have created a new business model that is based on simultaneously providing the flexibility of competitive sourcing and the confidence of long-term relationships that radically increase voluntary compliance even in complex, distributed supply chains. When suppliers and buyers have stable long-term relationships with intermediaries like Li and Fung, their incentives are better aligned, and a small factory in Bangladesh finds it in its own interest to improve workplace conditions that help maintain its long-term relationship with Li & Fung rather than risk losing it all for small gains.

An intermediary of this kind that devoted its energy to ensuring workplace safety could both bring the benefits of free trade to low-income countries and improve workplace conditions without punitive compliance costs or brand damage for the buyer. Such an intermediary organization (in this case probably an NGO) would collect the extra 3.3%, build relationships with buyers and sellers and would use the trust of its relationships to have the confidence to certify that clothing was produced according to proper standards.

It finally seems that the uproar over Marissa Meyer’s diktat banning flexible work policies at Yahoo is dying down. While good arguments were made on both sides of the issue, what got lost in the charged debate was the potential for evolving traditional business models through changing the employee-employer relationship.

Our research on identifying replicable templates for business model innovation shows that innovating how a company engages with its workforce is an often overlooked way of increasing business model performance. The basic structure of the firm-employee relationship has not changed much over the last 50 years. Relying on a forecast of organizational needs, firms select the nature and number of employees, who are then assigned some working hours and tasks to do in those hours.

But a few pioneering companies are challenging each aspect of this traditional model and are offering unprecedented opportunities along the way.

Rethinking Who Your Employees Are

Traditional organizations identify a set of individuals as their “employees” before they are fully aware of the employee’s talents and their needs. LiveOps is a fledgling provider of customer contact services maintains a virtual workforce of independent agents who, based on their schedules, signal their availability to join a pool of talent waiting to be “hired” once a call that matches their skills and experience comes in. Agents are paid only for their time spent on the call, and LiveOps gathers enough data on agent performance and abilities to intelligently route calls to the bets available agent.

Agents, for their part, have incentives to work hard to keep their ratings high in the system. This setup eliminates the multiple inefficiencies associated with traditional call centers: idle employees, long wait times, calls routed to uninterested or incompetent agents. Changing “Who” the employees actually are, has allowed LiveOps to shake up the customer contact industry. Today over 200 companies use LiveOps technology to support their multi-channel customer contact efforts.

Rethinking Where and When They Work

Automattic Inc, the parent company behind WordPress, the leading platform for powering blogs is a company that is 100% distributed. All Automattic employees work from home, or wherever they may be located, and the firm has been very successful with this strategy. Automattic employees have no set working hours, nor do they have to check in to any office. While there are many cultural issues that allow Automattic to manage and thrive with this distributed model, it is fundamentally challenging the key assumption regarding physical presence of employment.

Rethinking What They do

Traditional organizations assign employees to teams, projects and tasks. Based on their best assessment of an employee’s talents and interests, managers assign different employees to projects that they might be best suited for. Google’s famed 20% time to work on passion projects directly challenges this notion of clearly defining what each employees does. Reportedly, 50% of new projects came from this 20% of time including Gmail, Google News, Orkut, and AdSense.

Even the best informed manager does not know exactly what his/her employees are most passionate about and where they can excel. Giving employees (some) freedom to choose what they do, transfers this matching problem to the decision maker that has the best information to make this choice: the employee. Not surprisingly, employees are more likely to choose what they are interested in doing and might achieve better results. For instance, LiveOps agents know their skills and interests best, so they pick products to sell that best match their personalities and knowledge.

To be sure, the firm needs to retain some control to ensure employee efforts are aligned with firm goals, but this unshackling of employees can lead to dramatic increases in productivity. This is why Southwest replaced hundred-page long manuals of what the gate agent must do with a simple directive: “do whatever is necessary to get the plane out of the gate, fast”. Certainly, from time to time employees will go overboard and spend too much time and money trying to get job done, but it is easier to deal with these individual cases than to create constraining, enterprise-wide rules. The resulting productivity of employees at Southwest is several times higher than at any legacy airline, more than compensating for their higher salary.

Not all of these innovations are likely to be appropriate in every organization, and each of them comes with its own caveats, but they all highlight how powerful it can be to challenge assumptions around the employee-employer relationships. Most often, changes in the way company employs people will involve changing why people work (i.e., their compensation structure). But for organizations that heavily rely on the workforce to create value these alternative approaches can be equally, if not more, effective.

The Tesla Model S, arguably the most promising all-electric contender for a slice of the luxury sedan market, was panned recently by New York Times reporter John Broder, who finished his test-drive on the back of a flatbed truck. Elon Musk, co-founder of Tesla Motors, was quick to respond with accusations that the test was not performed under fair conditions. Whatever the rights and wrongs of the dispute, though, one thing is clear: Tesla has some way to go before it can get motorists to buy into its vision of an all-electric no-compromises luxury sedan.

There’s little doubt that the Model S is an excellent car. It has received numerous automobile awards, and it integrates many of the latest technological advances in electric powertrains and charging technologies. To support the new car, Tesla also plans to install a network of quick charging stations (which charge the battery to 50% capacity in about 30 minutes). The costs of the investments explain the vehicle’s high price tag, well above that comparable gasoline powered cars.

But look closely and you’ll see an interesting disconnect. The innovativeness of Tesla’s technology is not matched by the innovativeness of its business model. In fact, there is no change to the business model at all. Tesla is simply proposing to replace the standard gasoline car and gas station business model with the model S and a supercharge station network.

The electric car market will never take off unless this disconnect is fixed. What the model S needs is not a network of charging stations but a different business model.

Better Place offers a candidate. This start-up’s founders have focused as much on innovating the business model as on bringing new technology. Instead of a network of charging stations, Better Place proposes a network of battery swap stations at which electric vehicle owners can swap their depleted batteries with fully charged ones in just a few minutes. The vision is to have enough of these stations so that getting a new battery would be no different from filling up a tank of gas. Further, the company owns all batteries (including those in vehicles), taking full responsibility to supply charged batteries at these stations — the customers only pay for the miles driven.

This effective “leasing” of the battery brings the initial purchase price of the vehicle down to that of a gasoline vehicle and even though per-mile costs are a bit higher than those of an electric vehicle with battery ownership, they are still much lower than for a gasoline vehicle. To be sure, Better Place has had its troubles recently but it is running successfully in Israel and is refining its model as it goes along.

The best organizations innovate their technology and business models at the same time. Think of Apple. Apple designed products with widely praised user experiences long before the breakthrough success of the iPod. What Apple created with the iPod was not just another well designed product but a product accompanied with a new business model for content provision, the iPod/iTunes ecosystem, a perfect marriage of product, technology and business model — something the Electric Vehicle industry is still waiting for…

Will Better Place or Tesla be the iPod/iTunes of electric vehicles? The jury is still out on that, and perhaps it will be neither. In any event, though, the bigger question is: will electric cars help reduce emissions? In our recent (rather academic) paper we show that the answer is far from straightforward: electricity in most countries is produced using fossil fuels, which means that electric vehicles are not necessarily that much greener.

Quick test: name one company that does one thing and does it very well. The companies that occupy the limelight are typically diversified giants that achieve growth through constant expansion into new markets and the introduction of additional product lines (just think P&G, GE, and Microsoft).

But the truth is that the really successful companies are highly focused, achieving unprecedented efficiencies by designing a business model with a razor-thin focus and learning to do the one thing really well. Many of us academics still teach an old case about Shouldice Hospital, which only treats simple cases of hernias and nothing else but does it better than anyone. A more recent example is Quidsi, the driving force behind Diapers.com web site which sells only baby consumables. Some of readers may also recall ING Direct, which is focused on a narrowly defined set of simple financial services, and Southwest Airlines, which still has one class (economy) and one aircraft type (Boeing 737).

Thanks to this extreme focus there is no need for complicated processes, expensive equipment and underutilized (and expensive) resources. As a result, Southwest Airlines turns planes around much faster than competitors, ING Direct can avoid having hundreds of physical bank locations and Shouldice can schedule surgeries in a well-oiled production process with no downtimes or waiting.

Despite these advantages, such companies are actually quite rare in much of the Western World and it is much more “normal” to see complex conglomerates in which none of the above applies.

Except in Germany (and to a lesser extent in other German-speaking countries).

The amazing resilience of the German economy is often attributed to its reliance on Mittelstand companies, small to medium sized enterprises. These typically family-run businesses employ more than 70% of all German employees in the private sector, and are export-oriented, making Germany the second-largest exporter in the world. There is a wonderful account of these companies in the book Hidden Champions by Hermann Simon, former INSEAD professor and now Chairman of Simon, Kucher & Partners. During a recent presentation at INSEAD Hermann described some of their common features:

• Most Hidden Champions are extremely focused in what they do. To give a few examples: Jungbunzlauer supplies citric acid for Cola-Cola worldwide (and a few other salty and sweet chemicals), TetraMin is the number one producer of fish food, Uhlmann is the world leader in packaging systems for pharmaceuticals, and Flexi is the number one manufacturer of dog leashes worldwide.
• They do one thing but they do it extremely well by achieving tremendous efficiencies, making them cost-competitive despite their location in a very expensive country.
• Due to the simplicity of their product lines, their organizations avoid complexities and intricate structures, resulting in very lean management hierarchies.
• To compensate for their razor-thin focus on just a single product (or product category), they diversify internationally and enjoy great economies of scale.

All of these characteristics make these companies perfect examples of focused business models, which seem to thrive even in harshest economic conditions. Which raises some interesting questions: why don’t we see more of these firms in other countries? Is there something about their cultures that is hard to sustain? Does public ownership bring pressures to continually grow by going into new areas?

Whatever the answers to these questions, we do believe that extreme focus is an often-overlooked way to innovate a business model — for startups and established companies alike. Our own favorite US-based examples of such successful companies are Diapers.com and messenger bag manufacturer Timbuk2. What new focused company will come next?