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Friday, January 23, 2009

How to know if your business model needs to change?

With some regularity, I find myself reading — usually with considerable interest — articles discussing how to adjust a company's business model to increase the company's competitive differentiation.

The latest item that has come my way is an article in the December 2008 issue of the Harvard Business Review by Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann (JCK). Johnson is a consultant, Christensen teaches at Harvard Business School, and Kagermann is co-CEO of SAP.

JCK sound a similar note to that of Julian Birkinshaw and Jules Goddard, as discussed in yesterday's post: If a company does not understand its current business model in detail, it won't be able to analyze properly the issue of whether the model needs to change in order for the company to take advantage of a new opportunity that is big and that involves a significantly different value proposition from what the company is currently offering customers.

Such opportunities entail one of the following:
  • Doing a job for customers in a dramatically better way. (JCK cite Swiffer products, which I wholeheartedly agree are a major improvement over various older cleaning tools. JCK also cite FedEx overnight delivery service.)

  • Solving a problem that has never been solved before (e.g., delivering music digitally easily via the iPod and iTunes technology combo from Apple).

  • Serving an unaddressed customer base (e.g., the Nano auto that Tata is gearing up to produce for families with very low incomes).

  • Responding to a shift in the basis of competition. (The most common example is an industry's move toward commoditization.)
JCK note that a new business model will definitely be needed when a competitor successfully challenges an established company's market position.

JCK also note that, under certain circumstances, a company's existing business model will work for developing a game-changing opportunity. (Again, Swiffer products are a prime example. Proctor & Gamble has not had to change its traditional business model in order to bring the Swiffer line to market.)

In general, the existing model will serve the new opportunity when:
  • you can fufill the new customer value proposition with your current profit formula,

  • using most, if not all, your current key resources and processes, and

  • using the same core metrics, rules, and norms you now use to run your business.
JCK argue that any business model can usefully be viewed as having four interdependent elements:
  • Customer value proposition — A statement of what "job" the company will do for a specific category of customer.

  • Profit formula — An explanation of how the company will make money from delivering on the value proposition. Consists of a revenue model, a cost structure, a gross margin model, and a planned resource (transaction) velocity.

  • Set of key resources — The resources essential for creating value and differentiation.

  • Set of key processes — The processes essential for making the production of value repeatable and scalable. Encompassed here are operational processes (which include employee training and development); managerial processes; and rules, metrics, and norms.
The first two of these four elements define value for the customer and the company. The second two define how the value will be delivered. In sum, JCK argue that
Companies will almost always need to integrate their key resources and processes in a unique way to get a job done perfectly for a set of customers. When they do, they almost always create enduring competitive advantage. Focusing first on the value proposition and the profit formula makes clear how those resources and processes need to interrelate.
Note: Previous posts on business model innovation are here (Alexander Osterwalder provides a business model schematic), here (discusses IBM's WebSphere Business Modeler software), and here (discusses an IBM report that includes a variety of suggestions for business model adjustments that can, in the right circumstances, enable deeper differentiation).


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