- October 24, 2019
- Posted by: Ramkumar
- Category: Strategy
Elements of Business Models and Value Creation
In my earlier post, I had described about the elements of the business models and the value added to the customer.The link to the blog is here.
The elements of the business model would include what services does a business offer to address customers pain point, cost structure of the assets/capabilities/technologies required to deliver that services to the customer and how the products/services offered will be monetized in order to define the maximum potential value created by an opportunity.
Merely describing the elements of the business model will not help us, insights needs to provided how the pain point that is addressed and the assets/capabilities required to deliver that job to the customers interact to create different strategic propositions.
Radical Innovation during business models development
- Let us have a matrix where the services provided by the company is either better, inferior or same as the other players and capabilities required to deliver the services is conventional or innovative.
- When the company comes with a new service that addresses the customer requirement in a different manner than other existing services and also leverages a new technology to deliver that product, then the company provides a product that is radically innovative than any other products available in the market.
- For instance, photocopying and the first polaroid camera had an enormous impact as it brought out a radical innovation because they delivered something that did not previously exist from a new technology.
- When computers came, the worldwide demand predicted for the computer was only a few units because nobody could understand how to utilize a computer inspite of the fact that computers were an extension of calculators and word processors already existed at that time.People were unable to understand that computers could not only perform those functions better than calculators and word processors but also perform new functions.
- Amazon came up with a distinctive logistics systems based on fulfillment centers and Vans to pick and deliver individual items at home.Amazon approach of selling online was in complete contrast with the brick and mortars approach.Amazon was successful because it provided value by performing a better service using a new technology and approach.
- The above business models are the examples of radical business models that created substantial value even though it is extremely difficult to achieve in practice.Only a few companies are able to exhibit this radical innovation.
- Incumbents generally create product development portfolios that allocate adequate investments to Horizon 3 opportunities and then tap the market when the market is ready to embrace radical innovation.This is the reason we see Walmart and other retail chains venturing into online retail years after Amazon.
Point of No Return
- When a company provides an inferior product/service using the same approach that other players follow, then it creates a recipe for disaster.
- No value is created for the customer and the me-too approach followed means the company has no advantage over the incumbents.
- There is no incentive for the customer to buy the product.The only rare case where it can be successful is when company offers services at cheapest costs and the demand for the services provided is very high, but again this success will be temporary as customers would soon switch to its competitors.
- Another approach would be using incremental innovation within existing business models.By creating quality improvements to an existing product, companies create small increments in value over the long term.For instance, the latest iPhone is qualitatively better than original iPhone in quality, camera and performance.
- Innovations here create value as incumbents look to improve their products and at the same time look to reduce costs.Hence firms look for continuous quality improvements matched by its obsession to reduce costs as they are running hard to retain its position because other companies with the same business model are also relentlessly driving improvements on costs and performance.
- Some companies follow a Blue Ocean strategy by looking to deliver the services to a new market that is either downplayed, underprovided or not discovered.They look to deliver their services and products to new customer segments rather than using a different technology or capability. As the companies are providing the same services but to a new market, it is vulnerable to imitation by its competitors.
Disruption in business models
- The term Disruption was defined by Clayton Christensen who said that companies can achieve success even with an inferior offering.Recent Business models like Netflix were successful in disrupting the market.
- According to Christensen, even if the business provides an inferior offering on some dimensions, it can still succeed if it provides superior offerings on certain dimensions that customers consider it very important or that overshoots their performance requirements.For PC manufacturers, the appeal lies in the small physical size of the disk even when the technical specifications of the disks are inferior to that of large disks.This is because customers gave more importance to size and compactness rather than technical specifications.
- Disruption is an extension of Blue Ocean strategy by providing a set of criteria that are under satisfied for set of customers and reducing a set of criteria where the customers are either over satisfied or does not give too much importance.Disruption actually proves a point that if a solution is inferior on certain parameters then it is not the death knell of the new business model.If it is a superior offering on certain dimensions to some customers then it can still be successful.
- The biggest threat that disruption poses is in its dynamics.It is not the value proposition of a disruptive company that is a threat to the incumbent but the speed and the agility in which it scales the business by acquiring customers at a breaking speed.The greatest threat is the way the disruptors deliver services to customers even though the services per say can be much inferior to the services offered by the incumbents.
- The disruptors are able to provide same services using a new technology or by delivering the same services in a different manner which the incumbents find it hard to replicate.
Business models should focus on disruption
Most of the strategic initiatives today is focused on businesses adapting their business models to either improve performance or reduce costs in order to retain their position in the market place.Some businesses invests in future technologies or horizon 3 investments where they imagine that the market would embrace these future technologies at some point.When that point reaches, the company be ready to take advantage of it.
Today business focus their strategy least on Disruption where the services offered can be inferior but are delivered through a novel approach by using technologies. This is the segment where companies need to focus on in order to reach the market leadership position.Hence in order to succeed in today’s business, companies need to reinvent their business models and not the strategy.