Redesigning today’s business model to exist tomorrow

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In recent times and especially over the last decade, changes in the environment have accelerated dramatically. The drivers of these changes are factors such as technological advances, changes in customer preferences, regulatory changes, new emerging competitors or globalization. All of these have led to a transformation in the way many companies compete, that is to say in their business models. Thus, the design (or redesign) of the business model plays a key role in a company’s current and future success.

Companies successfully developing a new business achieve on average 6% higher profitability compared to other forms of innovation such as product or process innovation (BCG 2008). That is why many managers believe that business model innovation is more relevant for competitive advantage than other types of innovation, and over 90% of CEOs surveyed in an IBM study (2012) stated that they planned to innovate the business model over the next three years. However, good intentions are not enough.

When it comes to taking action, that’s when problems surface. Few managers are able to spontaneously explain their company’s business model and even fewer are able to define what a business model really is. It is still very rare to find companies with teams just for business model innovation or that have established processes for that purpose. Given how relevant this issue is, this lack of institutionalization is surprising, although if you consider the complexity and confusion around this issue, it becomes understandable.

It does not help either that the concept of business model has been linked to the field of technological entrepreneurship. It is true that to commercialize a new technology, a robust business model needs to be designed. This is a view that is often held for start-ups even though it is no less true for existing companies as well.

In essence, this view recognizes that innovative technologies or ideas do not have value in and of themselves. It is by designing (or redesigning) the appropriate business model that managers and entrepreneurs can derive value from their ideas.

Another approach is to see business model innovation as a new kind of innovation, just as for product, process or organizational innovation. This new kind of innovation could be the origin of an improvement for competitiveness, even in mature markets.

By facilitating the commercialization of new technologies and ideas, the business model becomes a vehicle for innovation. Xerox invented the first photocopier, but the technology was too expensive, so sales were not achieved. Xerox executives solved the problem by leasing the machine, namely through designing a new business model to exploit the new technology.

Dell in the computer industry, Southwest in the airline industry, or Hilti in the construction industry are examples of companies that achieved high growth and outperformed their competitors by establishing new business models with no need to develop any new technology.

When we talk about business model innovation, we must differentiate between two distinct situations: 1) designing from scratch a new business model 2) redesigning an existing business model.

These two situations come with considerably different implications. When redesigning of a business model, which is already in use, the arising challenges are specific to organizations, e.g., organizational inertia, resistance to change, inward vision, fear of cannibalization or risk aversion; such challenges are not relevant for start-ups.

However, companies do not usually pay enough attention to rethinking their business models, unless they are forced to do so by external situations that threaten their survival. Approaching business model innovation reactively is discouraged, since companies may react when it is already too late. Remember what happened to Kodak, Blockbuster or Blackberry.

That’s why I urge managers in established companies to address this issue proactively, and to open processes to think about their business model. As a simple outline, here is a possible itinerary of steps to follow for this activity:

  • Define the current business model, which requires the stakeholders to reach a consensus.
  • Evaluate the business model and extract the most relevant challenges the company faces.
  • Seek inspiration from customers, other industries, trends, technologies, etc.
  • Generate ideas that enable us to redesign the business model and respond to the challenges identified above.
  • Conduct experiments for discovery and validate the main assumptions on which the new ideas are based. Based on the results of these experiments, make decisions on the next steps to take through to the onset of implementation.

 

In short, it’s not only start-ups or other companies wishing to diversify and grow new lines of business who must think about designing new business models. Companies wanting to adapt to the world around them to safeguard their future survival and competitiveness must also regularly rethink their business model, otherwise they run the risk of becoming irrelevant. The world evolves at great speed, so it makes sense to make sure that the company’s business model does too.

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ESCRITO POR

HR Blogger

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