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BUSINESS MODELS

All firms have a business model but many leaders have different views on what a business model is.

Def. A business model is an explanation of the way a business creates value for customers, how value if delivered to customers and how profits are captured for the company.

Business model research has exploded in recent years. In 1995 just 50 articles were published, whilst in 2009 there were 1203. Some academics say this is due to the rise of the Internet and in our opinion this is partly true. Technology now enables businesses to create and capture value in many ways that were previously impossible, and customers are now more accepting of new business models effectively creating a market for innovation.

Business models are mainly employed in trying to address or explain three phenomena;

  1. E-business and the use of information technology in organizations

  2. Strategic issues, such as value creation, competitive advantage, and firm performance

  3. Innovation and technology management

Figure 1 below shows how the business model relates to other ways of describing business.




 
BEYOND CORE BUSINESS

Safeguarding core business is essential, but sometimes a change in business model is needed to do this. To grow, firms often decide first on adjacent moves. Adjacent moves are normally defined as opportunities to serve existing or new customers in new ways using a company’s current business model. This is typically a low-risk way to increase revenues, but the downside is that it offers very little protection against more innovative competitors.

The smarter companies moving into adjacent markets often employ a different business model to generate higher growth. These kinds of adjacency moves can be identified as trials for what could be a much more fundamental long-term business strategy. In this regard, adjacency with business model innovation should be seen as a good early indicator for how competitors are moving in their marketplace.

For companies looking to expand into overseas markets, to ensure success the right business model must be used rather than simply transposing the native model.

Figure 2 below shows how companies move away from core business.

 

AVOIDING COMMODITISATION


Business theory states that all companies will eventually lose their competitive position due to nimbler firms disrupting the sector. Those new competitors will offer more compelling value as technology and other environmental changes happen, and the incumbent firms are unable to react quickly enough. Skype is a good example of this.

Products and services tend to commoditise over time, as knowledge and understanding evolves, and products lack differentiation. Increased competition then builds and leads to commoditisation, driving profits down and eventually leading to casualties unless new products make up for the slowdown. As markets develop, companies typically compete by focusing on adding features, then they add reliability, then they add convenience, then ultimately as commoditisation sets in, they compete on price.

Developing a new business model is one way to prevent this situation. Packing a product with new technology will not necessarily ensure success. Instead, it can be far better to implement a new business model to deliver a more compelling customer value proposition, growing the business and profits. Customers want to be served in different ways, perhaps at a lower cost level, with added convenience or with added social values.
 

EXAMPLES


Examples of companies winning with business model innovation through the decades

 
BUSINESS MODEL MAPPING FRAMEWORK

The business model framework below is used in the IIG concept design ofbusiness. It is made up of nine separate boxes that all interrelate to create the business model system (Osterwalder/businessmodelgeneration).

 

VIEWPOINTS ON BUSINESS MODELS FROM LEADING ACADEMICS

The essence of the association between business model design and firm performance can be analyzed by looking at two distinct effects: the total value creation potential of the business model design and the firms ability to appropriate that value. Two design themes are identified around which the business model can be orchestrated: efficiency and novelty. In their emperical work, Zott & Amit see the business model as the independant variable, and link it to firm performance, moderated by the environment.

  1. Business models that emphasize novelty and are coupled with either differentiation or cost leadership can have a positive impact on the firm performance.

  2. Novelty-centred business models together with early entry into a market have a positive impact on performance.

The business model represents a potential source for competitive advantage. The novelty presented by new effective models can result in superior value creation.(Morris el al)

IBM (2007) looked at the relationship between business model innovation and firm performance. They identify three types of business model innovation, namely;

  1. Industry models (innovations in industry supply chains)

  2. Revenue models (innovations in how companies generate value)

  3. Enterprise models (innovations in the role the structure of an enterprise plays in new or existing value chains)

They report two key findings;

  1. Each type of business model innovation can generate success

  2. Innovation in enterprise models that focuses on external collaboration and partnerships is particularly effective in older companies as compared to new ones.

Firms that address the same customer need and pursue similar product-market strategies can do so with very different business models; business model design and product-market strategy are complements, not substitutes. (Zott & Amit).

Two main differentiating factors seem to have captured the attention of scholars. The first is the emphasis of strategy on competition, while the business model focuses more on cooperation, partnerships, and joint value creation. In general, the business strategy of a firm is more concerned with value capture and competitive advantage than with value creation, whereas business models combine a concern for sustainable value creation with value capture and appropriation. (Makinen & Seppanen)

The second factor of interest to management scholars is the focus of the business model on the value proposition and a generalized emphasis on the role of the customer, which is less pronounced in strategy literature. This review reveals a strong consensus that the business model revolves around the general concept of (customer-focused) value creation. Despite the highlighted conceptual differences between business models and particular aspects of firm strategy, recently scholars have emphasized that the business model can play an important role for strategy. According to Richardson (2008), the business model explains how the activities of the firm work together to execute its strategy, thus bridging strategy formulation and implementation.

A business model can be a source of competitive advantage, as it emphasizes the importance of activities centred on customer needs, a perspective that is relatively rare within strategy literature.

The rising costs of R&D together with increasingly short product life cycles means that even great technologies can no longer be relied upon to earn a satisfactory profit before they become commoditized. A better business model will beat a better idea or technology (Chesbrough 2007)

Recently Chesbrough (2010) has analysed in more details barriers to business model innovation in existing firms, suggesting two types of barriers;

  • The first refers to the underlying configuration of assets. Barriers exist in terms of conflicts with existing assets and business models (i.e. inertia emerges because of the complexity required for the reconfiguration of assets and operational processes).

  • The second barrier is cognitive. It is manifested by the inability of managers who have been operating within the confines of a certain business model to understand the value potential in technologies and ideas which do not fit with the current business model.

How can managers overcome these barriers?

They could, for example, construct maps of business models, in order to clarify the process underlying them; the maps then become a source of experiments to consider alternatives. In a related vein, some scholars contend that the business model takes shape through a discovery-driven process of experimentation (McGrath 2010). Hayashi (2009) notes that many companies need to experiment in order to ‘find’ the right business model. They need a culture that encourages employees to investigate numerous ‘what if’ questions.

A specific leadership agenda might be required for business model renewal. In order to overcome the rigidity that accompanies established business models, Doz & Kosonen (2010) propose that companies be made more agile, which can be achieved by developing three meta-capabilities; strategic sensitivity, leadership unity, and resource flexibility. They point to the importance of the top management team to achieve collective commitment for taking the risks necessary to venture into new business models and abandon old ones.

The ‘core logic’ of a business model revolves around the firm’s revenues and costs, its value proposition to the customer, and the mechanisms to capture value. These issues have traditionally been neglected in economic theory, in organisational and startegic studies, and in marketing science (Teece 2010). Thus conceived, the business model can be a vehicle for innovation as well as a source of innovation.

 
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