Insights from CompanyCrafters #3

Crafting an Innovative Business Model To Create a Sustainable Competitive Advantage

This article is part of a series that explores how established organizations – corporations, research institutions, even nonprofits – can apply entrepreneurial thinking to become more innovative and successful.

Let's go back in history a bit, since, every once in a while, we find a story that uniquely illustrates a powerful point.  In the late 1980s, a pair of young and inexperienced Boston entrepreneurs, who happened to be married to each other, launched a business that conventional wisdom considered doomed to a quick and painful death.  Linda Mason and Roger Brown started daycare giant Bright Horizons Family Solutions, Inc. (Nasdaq: BFAM), and along the way built a company with over $600 million in annual revenue and a market cap of $1 billion. 

As Brown explained in his fascinating Harvard Business Review article, "How We Built a Strong Company in a Weak Industry" (February 2001), smart business folks, including venture investors, thought the original Bright Horizons business concept was unappealing for the most obvious of reasons: pre-school childcare, though laudable and needed, was an absolutely terrible way to make money.  The margins were razor-thin.  The most basic of business practices were often missing.  Daycare was brutally labor-intensive – the nearly all-female caregiver workforce was hard to attract and turned over constantly due to the poor wages and benefits – making it difficult to operate a single-location center, forget a multi-location chain.  The industry was so fragmented that branding made little difference; marketing was nearly entirely by word-of-mouth (the mom-to-mom network, if you will), and repeat customers only occurred to extent that a center's young charges had younger siblings.  Those few chains that did exist at the time were applying commodity service, fast-food-franchise thinking to the very different challenge of taking care of our precious little ones.  The business was not only heavily regulated, but worse yet, was ruled by a maddening patchwork of state-by-state or even municipal-level licensing regulations.  And, to top it all off, there was no sustainable technological product or service advantage.  (Can you imaging getting a patent issued for your unique method of diaper-changing or strained-pea-feeding?)

So think about it: having read the last paragraph, would you have been eager to start a multi-location daycare business (or invest in one) back then?

Brown and Mason's "secret sauce," interestingly enough, had nothing to do with what we business-types typically think of as innovation: science- or technology-based inventions around which we can build a unique and hopefully sustainable competitive advantage.  Instead, their elegantly simple breakthrough was a business model innovation.  By partnering with large employers (starting with Prudential Insurance) to provide onsite childcare to the partners' thousands of employees, Bright Horizons turned the existing industry "rules" on their head. 

High cost of customer acquisition and poor marketing efficiencies?  No problem: Bright Horizons' large-employer partners pushed the service to their thousands of employees as a very attractive, often subsidized benefit.  Onsite daycare not only helped participating employers to attract the best employees, but to retain them as well.

Poor margins?  No problem:  First, Bright Horizons' large-employer partners help improve margins by providing rent-free or subsidized onsite facilities.  Second, BH shifted its investors' focus to return-on-invested-capital (as opposed to operating margin), which turned out to be quite high since, by locating the daycare centers in their on-site facilities, the company's large-employer partners subsidized most of the capital normally required in the daycare industry for facilities purchase, leasehold improvement and furniture and equipment.

High employee turnover and associated poor quality control?  No problem: By providing best-in-class salaries and benefits, Bright Horizons was not only able to attract the best teachers and caregivers, but to retain them longer as well.

No scaling advantages or brand power?  No problem: Whereas brand didn’t mean much to the traditional daycare customer (the parent), it meant a lot to Bright Horizons' customer (the large employer).  As BH grew, its employer partners greatly appreciated its operating experience at multiple locations.

Poor sustainability?  No problem: Whereas, in the traditional childcare model, acquiring repeat customers only worked to the extent that current charges had younger siblings, Bright Horizons solved that dilemma by tapping into the onsite workforce of its employer partners.

An inconsistent and confusing web of regulations and certification requirements?  No problem: Counter-intuitively, Bright Horizons lobbied successfully for more and more consistent, national standards for childcare, thereby not only helping parents and their kids, but at the same time raising the quality bar to a level that they could consistently exceed but their competitors had trouble meeting.    

So as you see, a simple yet brilliant business model innovation – partnering with and working through large employers rather than marketing directly to parents – enabled the Bright Horizons team to, build a strong, scalable, sustainably profitable enterprise in an industry that others understandably avoided.   
  
Getting to know the Bright Horizons situation got us thinking:

• Where else have we seen successful new businesses built from scratch based on business model innovation and changing the existing rules in a given industry? 
• And, how can large, established organizations apply that kind of entrepreneurial thinking to successfully develop new lines of business or enter new markets?