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Creating Value Through Business Model Innovation- Amit et al. (how to…
Creating Value Through Business Model Innovation- Amit et al.
Intro
more companies now are turning toward busi-ness model innovation as an alternative or complement to product or process innovation
A recent global survey of more than 4,000 senior managers by the Economist Intelligence Unit found that the majority (54%) favored new business models over new products and services as a source of future competitive advantage
U ana-lysts concluded that “the overall message is clear: how companies do business will often be as, or more, important than what they do.”
The leading questionWhat do executives need to know about busi-ness model innovation? Findings:
i- Business model innovation can con-sist of adding new activities, linking activities in novel ways or changing which party per-forms an activity.
ii- Novelty, lock-in, complementarities and efficiency are four major business model value drivers.
iii- Within organiza-tions, business model choices often go unchallenged for a long time
Business model innovation matters to manag-ers, entrepreneurs and academic researchers for several reasons.
i- First, it represents an often under-utilized source of future value.
ii- Second, competitors might find it more difficult to imitate or replicate an entire novel activity system than a single novel product or process.
iii- Third, because business model innovation can be such a poten-tially powerful competitive tool, managers must be attuned to the possibility of competitors’ efforts in this area
-We define a company’s business model as a system of interconnected and interdependent activities that determines the way the company “does business” with its customers, partners and vendors. In other words, a business model is a bundle of specific activities — an activity system — conducted to satisfy the perceived needs of the market, along with the specification of which parties (a company or its partners) conduct which activities, and how these activities are linked to each other.
Business model innovation can allow managers to resolve the apparent trade-off be-tween innovation costs and benefits by addressing how they do business, for example, by involving part-ners in new value-creating activity systems.
Business Model Innovation in Practice
eg: Apple and HTC
apple introduced a radical innovation of its business model. apple was the first computer company to include music distribution as an activity, linking it to the development of the ipod hardware and software.
Yet HtC’s business model has remained centered on hardware design and product innovation.
in effect, HtC sells great razors, but no razor blades: its business model allows it to benefit only from the sale of its innovative, state-of-the-art smart phones and tablets, but not from their use.
Comparing the performance of HtC and apple stock in the past two years highlights the fact that in the fast-moving technology market space, product innovation without business model innovation may not always provide enough competitive advantage
how to innovate in Business model design
Comparing the performance of HtC and apple stock in the past two years highlights the fact that in the fast-moving technology market space, product innovation without business model innovation may not always provide enough competitive advantage
Dell, for example, implemented a customer-driven, build-to-order business model that replaced the traditional build-to-stock model of selling com-puters through retail stores
Changes to business model design, however, can be subtle; even when they might not have the poten-tial to disrupt an industry, they can still yield important benefits to the innovator. Consider taco Bell
Business model innovation can occur in a num-ber of ways:
By adding novel activities, for example, through forward or backward integration; we refer to this form of business model innovation as new activ-ity system “content.”
By linking activities in novel ways; we refer to this form of business model innovation as new activ-ity system “structure.”
By changing one or more parties that perform any of the activities; we refer to this form of busi-ness model innovation as new activity system “governance.”
a. Content, structure and governance are the three design elements that characterize a company’s business model
The content of an activity system refers to the selec-tion of activities to be performed
eg Bancolombia
b. The structure of an activity system describes how the activities are linked and in what sequence. Con-sider Priceline.com
c. The governance of an activity system refers to who performs the activities. Franchising, for example, represents one possible approach to innovative ac-tivity system governance
eg franchising 7-Eleven stores in Japan
four major interlinked value drivers of business models: nov-elty, lock-in, complementarities and efficiency
Novelty
captures the degree of business model in-novation that is embodied by the activity system.
Lock-in
refers to those business model activities that create switching costs or enhanced incen-tives for business model participants to stay and transact within the activity system. Consider for example Nespresso
Complementarities
refer to the value-enhancing ef-fect of the interdependencies among business model activities.- PayPal has a value-en-hancing effect on the eBay activity system
Efficiency
refers to cost savings through the inter-connections of the activity system. Consider Wal-Mart,- An im-portant activity within this system is logistics.
Our research suggests that the presence of each of these value drivers enhances the value-creation po-tential of a business model. Moreover, we find important synergies among the value drivers. Com-plementarities, for example, can be more valuable when supported by novel business model design.
Interdependencies in Business Models
Intro
a. Interdependence among business model design elements
- Content, structure and governance can be highly interdependent. Take the San Francisco, Cali-fornia-based peer-to-peer lending company Prosper, for example.
b. Interdependencies between business and reve-nue models
.- The revenue model re-fers to the specific ways a business model enables revenue generation for the business and its partners.
It is the way in which the organization appropriates some of the value that is created by the business model for all its stakeholders. A revenue model complements a business model design, just as a pricing strategy complements a product design. Consider Better Place
The concepts of business and revenue model, al-though conceptually distinct, may be quite closely related and even inextricably intertwined. For exam-ple, in the product world, Gillette uses its pricing strategy of selling inexpensive razors to make cus-tomers buy its more expensive blades
A business model lays the foundations for a company’s value capture by codefining (along with the company’s products and services) the overall “size of the value pie” (that is, the total value that is created), which can be considered an upper limit to the company’s value capture
The greater the total value created through the innovative business model, and the greater a company’s bargaining power, the greater the amount of value that the company can appropriate
c. Caveats.
- As the Better Place example suggests, business model innovators need to bear in mind that identifying technologically or strategically distinct activities can be conceptually challenging, because the number of potential activities is often quite large.
Six Questions to Ask Before Launching a New Model
What perceived needs can be satisfied through the new model design?
What novel activities are needed to satisfy these per-ceived needs? (business model content innovation)
How could the required activities be linked to each other in novel ways? (business model struc-ture innovation)
Who should perform each of the activities that are part of the business model? Should it be the com-pany? A partner? The customer? What novel governance arrangements could enable this struc-ture? (business model governance innovation)
How is value created through the novel business model for each of the participants?
What revenue model fits with the company’s business model to appropriate part of the total value it helps create?
Meeting the demand for digital content may re-quire publishers to perform new activities
(new business model content).
Although it is unlikely that the traditional hardback/paperback book will dis-appear, it is expected that the demand for printed publications will fall sharply
Linking the various activities to each other, se-quencing these linkages and deciding how stakeholders will interact with one another in the new business models requires careful consideration
(new business model structure)
.
Determining whether McGraw-Hill or another partner will carry out each of the activities of the new business model requires a careful consideration of trade-offs
(new business model governance).
Taking a Systemic View
Adopting the business model perspective can help executives purposefully structure the activity systems of their companies; the purposeful design and structuring of business models is a key task for general managers and entrepreneurs and can be an important source of innovation, helping the com-pany look beyond its traditional sets of partners, competitors and customers
When you innovate, look at the forest, not the trees — and get the overall design of your activity system right before optimizing the details.