How To Design A Winning Business Model
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The document discusses business models and their importance in today's competitive environment. It notes that developing innovative business models is a major priority for senior executives. Business models consist of key elements like customer value proposition, profit formula, and key resources and processes. The choices made in designing a business model should align with company goals and reinforce each other. Business models create virtuous cycles through their choices and consequences, but these cycles can become threatened by competitors. Companies must strengthen their own cycles and weaken competitors' to be successful.
How To Design A Winning Business Model
- 2. Past - Strategy has been the primary building block of competitiveness. Future - Sustainable advantage may well begin with the business model. IBM Institute for Business Value’s biannual Global CEO Study - Senior executives across industries regard developing innovative business models as a major priority. In Developing countries - Pressure to crack open markets, particularly those at the middle and bottom of the pyramid, is driving a surge in business-model innovation. In developed countries - Economic slowdown is forcing companies to modify their business models or create new ones.
- 3. Companies create and capture value through their business models by undergoing a radical transformation. Companies are focusing on business model innovation and modification. Much of the problem lies in companies’ narrow focus on creating innovative models and evaluating their efficacy in isolation. Success or failure - Depends largely on how it interacts with models of other players in the industry. Competition using business models - Outcomes are difficult to predict. One business model may appear superior to others when analyzed in isolation but create less value than the others when interactions are considered.
- 4. A story that explains how an enterprise works - Joan Magretta Who is your customer, what does the customer value, and how do you deliver value at an appropriate cost? - Peter Drucker Business model consist of four elements: A customer value proposition, A profit formula, Key resources, Key processes. - Clay Christensen (HBS)
- 5. Aligning with company goals: While designing a business model, the choices made should enable the organisation to achieve its goals. Ex: Xerox. Xerox PARC, Laser printing, Ethernet, GUI, etc… Xerox was unable to draw new business from its innovation, due to lack of alignment with its’ goals. Self-reinforcing: While creating business model, the choices made should complement one another: there must be internal consistency. Ex: Providing comfort level in a low cost airline, comparable to that offered by a full fare carrier (reducing no. of seats on plane & offering food and coffee). Reinforcement with new choices. Robustness: A good business model business should be able to sustain its effectiveness over time by fending off 4 threats. Imitation , holdups, slack, and sub-situation. The effective period is shorter than before.
- 6. CHOICES: Policy choices - Actions an organization takes across all its operations. (Using non-union workers, locating plants in rural areas, or encouraging employees to fly coach class) Asset choices - Tangible resources a company deploys. (Manufacturing facilities or satellite communication systems, for instance) Governance choices - Decision-making rights over the other two. (Should we own or lease machinery)
- 7. Flexible consequence - Responds quickly when the underlying choice changes. Ex: Choose to increase prices will immediately result in lower volumes. Rigid consequence - Reflected in company’s culture of frugality. Built over time through policies. Difficult to imitate. Ex: Oblige employees to fly economy class, share hotel rooms, and work out of Spartan offices is unlikely to disappear immediately, even when those choices change.
- 8. In 1990’s Ryanair switched from a traditional business model to a low-cost one. Choices - Offering low fares, Secondary airports, One class of passenger, No meals, Short-haul flights, Fleet of Boeing 737s, Non-unionized workforce, High-powered incentives to employees. Consequences - High volumes, low variable and fixed costs, a reputation for reasonable fares, and an aggressive management team.
- 11. They are consequences of business model choices. The consequences enable further choices, and so on. This process generates virtuous cycles that continuously strengthen the business model. Ryanair’s business model creates several virtuous cycles that maximize its profits through increasingly low costs and prices. But these cycles don’t go on for a long time. Ex- If Ryanair’s workforce forms a union and demand higher wages, one of the cycles will become vicious.
- 12. Irizar, a Spanish manufacturer of bodies for luxury motor coaches, posted large losses after a series of ill-conceived moves in the 1980s. Irizar’s leadership changed twice in 1990, which prompted Koldo Saratxaga, the new head of the company’s steering team to make major changes. He transformed the organization’s business model by making choices that yielded three rigid consequences: employees’ tremendous sense of ownership, feelings of accomplishment, and trust. The choices included eliminating hierarchy, decentralizing decision making, focusing on teams to get work done, and having workers own the assets.
- 13. It’s easy to infuse virtuousness in cycles when there are no competitors, but few business models operate in vacuums. Companies must build on rigid consequences to compete with rivals having similar business models so as to create and capture more value.
- 14. Strengthen your virtuous cycle: Modify the business models to generate new virtuous cycles so as to compete more effectively with rivals. Ex: Boeing and Airbus. Weaken competitors’ cycles: Some companies get ahead by using the rigid consequences of their choices to weaken new entrants’ virtuous cycles. Ex: Microsoft and Linux Turn competitors into complements: Rivals with different business models can also become partners in value creation.
- 15. The 3 are interrelated. Business models - Logic of the company - How it operates and creates and capture value for stakeholders in a competitive marketplace. Strategy - Contingent plan - Which business model to use. Choice and consequences is a reflection of strategy. Changing strategic choices can be expensive. There will be options to compete that are comparatively easy and inexpensive to deploy. Tactics - Residual choices open to a company by virtue of a business model it employs.