(Image: IMDb)
Chicago is of course the famous flashy musical, which first performances started in 1975. The American musical with music by John Kander, book by Edd and Bob Fosse and lyrics by Fred Ebb was actually based on a 1926 play, set in Chicago in the jazz age. It’s about fancy criminals and scary crimes on which a reporter (Maurine Dallas Watkins) published. The story itself is a satire on corruption in the administration of criminal justice and the then new concept of celebrity criminals.
The 1996 Broadway production of Chicago holds the record as the longest-running musical revival. It’s also the longest-running American musical in Broadway history. It is the second longest-running show ever to run on Broadway, behind only The Phantom of the Opera. Chicago has been staged in numerous productions around the world, and has toured extensively in the United States and United Kingdom. The 2002 film adaptation of the musical won the Academy Award for Best Picture.
What is so unique about the musical is that the production and execution is based on an open business model. It’s something airlines can adopt more as well to advance differentiating innovation.
Read on to find out more about open business models and what they can bring to airlines.
Closed business models
Imagine a movie studio that has and manages everything in-house. It has screenwriters, a director, actors on staff, own producers and financing, and owns the studio and overall production facilities. This is a type of vertical integration that used to be commonplace (a closed business model).
By the same token, companies like IBM had huge R&D divisions that would propel in-house innovation that would not be distributed outside the firm. Patents and IP were not transferred unless it was to affiliate or subsidiary companies.
But since the 1980s, this slowly started to change. In pharmaceuticals, computing and electronics, and in the movie business among many other industries.
For Chicago, it means sourcing all the components of the business model externally through intermediate markets. The screenplay was shopped on Broadway to entice the best producers, the contacts of actor Michael Douglas were used to source lead roles in the production, and each execution was done through the best local engineers, creating locally perfected performances.
And the trend to open innovation is still in its infancy. There are only a handful of examples in the airline industry other than in the engineering and development of jet engines, where there is more widely distributed knowledge and use of intermediate markets.
So what’s the hubbub about and how do you implement open business models?
Open business models
Open business models should not be confused with the modern use of the term “collaborative business model” or “collaboration”. This can just refer to marketing agreements or (revenue) joint ventures, as we see in the Atlantic market between airlines.
An open business model is about open innovation and entails patents and intellectual property, which is much trickier to share.
Open innovation means that companies should make much greater use of external ideas and technologies in their own business, while letting their unused ideas be used by other companies.
This requires each company to open up its business model to let more external ideas and technology flow in from the outside and let more internal knowledge flow to the outside.
And this creates a reliance on intermediate markets.
Intermediate markets are markets in which an upstream supplier licenses its know-how and intellectual property to downstream developers and producers. In intermediate market situations, different ingredients for business success (the idea itself, the critical development, manufacturing and distribution assets, the intellectual property [IP]) all lie in different hands.
With a more open business model, open innovation offers the prospect of lower costs for innovation, faster times to market, and the chance to share risks with others.
But the benefits also entail costs. As companies learn about the idea, they realize how much they have to change their innovation activities to take full advantage of it. Real barriers have to overcome not the least in managing patents and intellectual property (IP).
But enough with the concept.
How does this apply to airlines, and what are the open opportunities?
In Practice
In my experience and to my knowledge, airlines do not hold many patents or unique IP in the commercial function. That’s in part because it’s a service industry with few and common technology providers. But, this is an area where there are lots of opportunities for open innovation.
Even if airlines had been many patents, like in other industries it would be common that, on average, between 65% and 75% of patents are unused, but could create and capture value in different applications, often in an open business model with external intermediaries.
IBM did this with its chip and PC business, by licensing Chinese firms.
An example of an existing airline application is where business class upgrade optimization software is installed and embedded in an airline’s departure control system (DCS). The unique configuration of the DCS may involve airline-owned IP which is shared with an external (perhaps licensed) party. It can lead to a new business model where the airline’s and external provider’s IP jointly create a new business model.
This could then be exploited externally as a new solution and create and capture value that is monetized through the open business model.
There are other examples we can think of.
There is a clear trend toward aligning and hopefully integrating more airline commercial functions. Specifically, the airline revenue management, customer relationship management, and loyalty.
Ultimately, it will require improved logic, revenue managing individual customers based on their unique profile and contribution, without making pricing discriminatory. This can be done through re-engineering loyalty and integrating it with RM.
But due to “not invented here” (NIH) and “not sold here” (NSH) attitudes, the silos have persistently pushed back on creating more holistic commercial divisions, in part due to the scattered underlying software stacks.
Still, there are a few drivers of open business models. First are the rising costs of technology development, and second the shorter produce life cycles. We thus have to share the burden and be “openly” connected to more intermediate markets.
We then have to admit that perhaps some of the commercial business processes are not that unique relative to other airlines and that external parties can bring in IP that will revolutionize the business model.
Some airlines have started to use internal or at-arms-length “labs”, like Delta Airlines’ AI hub and Lufthansa’s Innovation Lab. The also test start-ups’ ideas.
Getting there
There are a few characteristics of firms, like Proctor & Gamble, that got to open their business models successfully. In most cases:
There is a shock to the system (either a collapse in the market or disruptive competition from outside)
Companies take a small step on the path of experimenting with the business model
Experiments showed that some results could work at scale in a better business model
The risk was taken to scale up and transition out of the former business model.
But in order to make progress, one has to open the business model, risk sharing part of the IP, transfer or sell patents as part of a bigger picture strategy, and allow parties in intermediate markets to help innovate your business model.
This means that the business evolves through different types of business models, from undifferentiated to differentiated, to segmented and externally aware business model types.
In the latter case, we would a lot outside for new ideas and technologies. We involve suppliers and customers in are strategic roadmaps (we take risks), and we manage innovation as a business across the company, not as an R&D function. It integrates business processes so that they do not end up on the shelf as unused ideas.
Like, Chicago, which overall execution became so successful based on on open business model, airlines have more opportunities than they perhaps think off, by working with more companies that form intermediate markets.
In sum, open business models attack the revenue side by broadening the number of markets addressable by the (joint) innovation. That’s good news for airlines.
Wishing you all a wonderful day, and greetings from Montréal.
Ricardo
Montreal, Tuesday, 10 October 2023
Feel free to contact me for questions, comments, or a chat:
ricardo(at)pomonaadvisors(dot)com
my general email has changed to: info(at)ricardopilon(dot)com