New technology, no matter how transformative, is not enough to propel a business into the future.
To survive in today’s fast changing marketplace, every business–large or small, startup or long established–must be capable of a continual process of transformation and renewal. Surveys show that most executives agree, and in fact, many believe that business model innovation is even more important to their company’s success than product or service innovation. But other studies have determined that no more than 10% of innovation investments at established companies are focused on creating transformative business models.
This is not surprising. Most successful new business models come from startups. Despite the talent and resources at their disposal, business model success stories from well-established companies are relatively rare.
“Building a great business and operating it well no longer guarantees you’ll be around in a hundred years, or even twenty,” notes business model expert Mark Johnson in his new book, “Reinvent Your Business Model.”
Examples abound. In the 1970s, Xerox PARC famously developed, but didn’t commercialize, some of the key innovations of the PC era, including the graphical user interface, the mouse and local area networks. In 2010, Blockbuster filed for bankruptcy, a victim of Netflix Inc.’s new business models.
New technology alone, no matter how transformative, is not enough to propel a business into the future. Nor, for that matter, can past success justify existing business models. The business model wrapped around the technology is the key to its success or failure, argues Mr. Johnson, senior partner at Innosight, the strategy consulting firm he cofounded with Harvard Business School professor Clayton Christensen.
Why are so few big companies engaged in business model innovation? What prevents them from embracing innovative transformational opportunities?
Mr. Johnson’s book aims to answer these questions. Familiar as the term is, there’s no clear definition what a business model is and what it isn’t. Few companies have a clear understanding of their existing business model, its strengths and limitations, when it’s time to embrace a new model and how to go about creating one. In addition, successful companies are often risk averse and reluctant to go into uncharted white spaces that might require new strengths and whole new business models.
What’s a business model?
“A business model, in essence, is a representation of how a business creates and delivers value for a customer while also capturing value for itself, doing so in a repeatable way,” writes Mr. Johnson. He proposes a business model framework based on four interdependent elements: customer value proposition, profit formula, key resources and key processes.
Customer value proposition. This is, by far, the key element to get right. A successful business model identifies an important, unsatisfied customer job-to-be-done or problem-to-be-solved and proposes an offering–a product, service or combination–that does the job or solves the problem at an affordable price.
Profit formula. How the company creates value for itself and its shareholders while providing value to its customers. It includes a revenue model, how much each transaction should net to achieve profitability and resource velocity.
Key resources. What’s needed to profitably deliver the value proposition to the targeted customers. It includes people, technology, facilities, equipment, information, channels, brand, and partnerships and alliances.
Key processes. The means organizations develop to produce and deliver their offerings in repeatable, scalable and sustainable ways. It includes business rules, behavioral norms, and performance metrics.
“The power of this deceptively simple framework lies in the complex interdependencies of its parts. Successful businesses devise a relatively stable system in which these elements interact in consistent and complementary ways. A change to any one of the four affects all the others and the system as a whole. Incongruities or conflicts between elements, even seemingly inconsequential ones, can bring about its downfall.”
What does it take to go after a white space, that is, a brand new business opportunity? It all depends on the nature of the opportunity and on the nature of the customers being served. It’s best explained by contrasting core, adjacent, and white space opportunities.
Core operating space. Every company has a core sphere of operation; a set of skills and capabilities that enables it to serve its customers and make a profit in return. Over time, a successful company becomes very good at stretching its existing business model to extract the most value from its core activities.
Adjacent spaces. New business opportunities that fit quite well within the company’s existing business model and capabilities.
White spaces. White spaces, on the other hand, are new opportunities that cannot be well served within the existing business model and organizational structure. Such opportunities lie outside the company’s core spaces and beyond its adjacent ones. Going after them may require going way outside a firm’s usual way of working, including a whole new business model.
Technology-enabled business models
“While any technology without a viable business model can lead to a commercial dead end, digital technologies do drive the formation of certain kinds of business models, creating value in broadly predictable ways,” notes Mr. Johnson. The business models they enable fall under four broad categories:
E-commerce. They include B-to-C models like Warby Parker’s, which offers designer eyeglasses to online consumers, and B-to-B models like Dow Corning Xiameter’s, which sells silicone-based products to manufacturers.
Digital platforms. Their business models are generally based on network effects: the more products or services a platform offers, the more users it will attract, helping it then attract more offerings, which in turn brings in more users, which then makes the platform even more valuable.
Models that turn data into assets. Business models that derive value from their ownership and analysis of large volumes of data.
Automation-enabled services. Business models that harness sophisticated software to do jobs that were formerly carried out by people, such as online machine translation, intelligent bot services, robotic warehouse systems.
“Business model innovation efforts should be focused on the pursuit of something grand – changing the game in an existing market, creating a whole new market, transforming an entire industry,” Mr. Johnson writes in the book’s final chapter. “Business model innovators should be hunters of big game and leave the harvesting of core assets to others.”
This article first appeared in www.blogs.wsj.com
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