As the worst recession in recent history takes root worldwide, business leaders are doing what they are used to do in tough times: cutting costs. This is a natural response to try to and balance the books when revenues have started to dry up and credit is hard to come by. But becoming more efficient involves only part of the equation and ignores a more strategic response that could cause less pain in the short run, and result in more gain in the long term. Namely: to use the opportunity provided by the hard times to introduce serious innovation into the business, in particular to innovate the company's business model.
As markets reorganize, new needs and opportunities emerge and conventional ways of responding get obsolete. Therefore, even the most successful companies and entrepreneurs need to retune their business models as times change. Your business model is the conceptual model of your business that identifies what you do and how you create value doing it. It is the way your company makes money. In the scientific literature the term is defined as "the structure, content, and governance of transactions between the local firm and its exchange partners" (Rafael Amit, University of Pennsylvania). But, what are the elements with which you would have to tinker, should you wanted to change your business model?
We call those elements the "design parameters". If you were to design a business model from scratch, you would have to make four decisions:
- What are the boundaries of your business, both vertically (the degree of integration along the value chain) and horizontally (the width of the portfolio of products and services and the markets served)?
- What is the nature of the relationships between your business and parties outside the boundaries of your business, such as suppliers, customers and partners?
- Which assets and capabilities do you deploy to create value within your competitive environment in a unique and durable way?
- What are the economics of your business (cost structure and pricing format) that will enable you to extract value from your activities?
The most successful business models are those where the choices for the four design decisions are so intertwined that they are hard to copy by contenders. It's like a secret recipe: others may guess which ingredients were used in which quantities, but they won't achieve the real taste when they try to reproduce it. Let's have a look at some illustrations of companies that have introduced successful changes to their respective business models. Each illustration corresponds with one archetype of a business model. The distinction between the archetypes refers to the emphasis put on the various design parameters.
Archetype 1: Share the cake differently: Engage with customers or partners in a novel way, thereby overhauling the industry's traditional cost structure and pricing format (i.e. iTunes).
Archetype 2: Supplant the middleman: go direct to customers, thereby establishing a more intimate relationship with the customer community (i.e. Amazon.com).
Archetype 3: Shift the cost curve structurally: Deploy a different asset base to achieve radically lower cost and price levels for an existing product or service (i.e. Ryanair).
Archetype 4: Redefine the customer experience: Exploit unique operational capabilities and systems to offer customers a previously unimaginable purchase experience (i.e. Zara).
Archetype 5: Convert products into services: keep ownership of the product and charge customers for its per-unit-use as if it were a utility (i.e. Salesforce.com).
Once you have discovered an opportunity, do not expect to hit upon the right recipe immediately. In most cases, putting in place a new business model is an exercise of experimenting and learning. And even after you have hit it, you may need to adapt your business model to the local situation and an evolving external environment. That way, business models are not pie in the sky but come down to earth.
Undertaking an innovation in your business model implies undergoing a systemic change. Managers within the firm may rightly ask: why should we change something that has worked so well for us, and even continues to do so? In the end such logic may well win the day, making change harder to bring about, until it is too late and the new business model, introduced by the entrant, wins the day and makes obsolete the old business model of the incumbents, destroying them in turn.
This is where the crisis of a recession can play a crucial part in galvanizing change. Recessions are not simply bad times that call for cost cutting alone. Rather, they offer opportunities for innovation and systemic change, change that can make all the difference to the long term success of a firm. Our team of researchers and change agents has been experimenting for two decades with creative ways of bringing about innovations in the business models of our client organizations. And today, we are convinced of the following axiom: A crisis is a terrible thing to waste.
Copyright 2009 QBS, Inc.