(Published in Business Mirror, under the Mirror Image column, June 14, 2006)
“Business model innovation is becoming the new strategic differentiator”- this is one of the findings in "Expanding the Innovation Horizon," the 2006 IBM Global CEO Study reporting on the agenda of CEOs in the next few years. The results are based on interviews conducted recently by IBM and the Economist Intelligence Unit (EIU) with 765 chief executives from around the world.
With ever changing markets, globalization, and stiffer competition, companies need to innovate to survive and grow. According to the study, innovation is no longer about inventing new products and services, but more on innovating business models and competing in new ways.
So what is a business model and how can it be the centerpiece of innovation? Amit Singh Sisodiya, author of “Business Models - An Introduction” defines business model (which he also referred to as business design) as “the mechanism by which a business intends to generate revenue and profits…it describes how a company plans to serve its customers and involves both strategy and implementation.”
Business models are “stories that explain how enterprises work - it answers certain questions: Who is the customer? How do we make money? What underlying economic logic explains how we can deliver value to customers at an appropriate cost?”, as Joan Magretta puts it in her Harvard Business Review article “Why Business Models Matter”.
The common theme among these definitions and in business literature is that a business model describes a specific way the business expects to make money.
Operationally, a business model may be represented by a simple diagram of linked processes that transforms inputs to outputs. It should be simple enough to stay in the minds of the CEO, owner, or manager. Many business models have withstood the test of time owing to its simplicity and sustainability.
For instance, a popular model that has been in existence for long is the subscription business model. This model has been used by newspaper and magazines publications, telecom service providers, and even software service providers. It involves tying a customer to a service or product delivery instead of selling direct; thereby ensuring a recurring payment to the service provider apart from building long-term customer relationships.
Such good business models are a source of competitive advantage among successful companies, whether it is an established business or a new venture; and in many cases are sustainable and hard to duplicate. Take for example Dell’s make-to-order business model which it had perfected together with its superior supply-chain management, making it unrivalled in this sort of business model.
A good business model is, therefore, essential to the success of any organization,. However, when a business model results to organizational success, many companies adopt it resulting to cutthroat competition, and later to the erosion of business model value.
This is why organizations, to survive and stay ahead of competition, need to continually reinvent business models – business model innovation as it is called.
“Business model innovation is a way through which a company can differentiate itself from its competitors and thus avoid strategic convergence that leads to declining profits…companies can pursue new business models by seeking new segments out of the markets they are serving or by identifying unmet customer needs and trying to meet them,” asserts Phani Madhav, in his article “Business Model Innovation”.
For example, Smart Communications has pioneered the application of the “sachet” business model in telecom services by providing low denomination electronic loads to low-income subscribers segment.
Business model innovation, even so, is not limited to seeking new market segments or customer needs. It is also about “significantly changing the structure and/or financial model of the business” as the IBM CEO study puts it.
For instance, PLDT launched WeRoam wireless internet connectivity to its corporate clients with an innovative business model twist – by bundling a Thinkpad laptop together with the connectivity and offering the whole package via monthly subscription for 12 to 18 months. The structure of the offering is changed from the straight-sell, disparate components into a bundled-subscription model that adds more value to a customer.
Indeed, business model innovation can give the firm a sustainable competitive advantage by increasing customer value. But how can organizations make sure that business model innovation if part of its day-to-day practice and philosophy?
For one, organizations need to establish a kind of culture that is conducive to sustainable innovation – one that allows creative expression among organization members without the penalty of committing mistakes. Such cultures should also invest in equipping employees with the proper business skills, and in rewarding those who contribute to successful innovations.
In addition, organizations need to conduct a regular business model audit of its different “ways of generating revenue and profit”. Such audits may ask questions as: Is our current business model creating the best value to our customers? Is there a better way of serving our customers that maximizes value to them? Are there market segments that we can tap into? Such questions force the organization members to challenge the status quo.
Organizations can also tap into the ideas from external sources – partners, customers, and suppliers – leading to collaborative innovation. External partners are a rich source of innovation through joint undertakings. As reported by the IBM Study, “companies with higher revenue growth reported using external sources significantly more than the slower growers.”
In sum, organizations need to continuously innovate on business models to stay ahead of competition by providing the best value to its customers. To ensure this, business model innovation should be a part of the company’s best practices.
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Reynaldo Lugtu, Jr. teaches Management Principles and Dynamics, and electives in marketing and business management in the MBA Program of De La Salle Professional Schools. He may be e-mailed at rlugtu2002@yahoo.com.
“Business model innovation is becoming the new strategic differentiator”- this is one of the findings in "Expanding the Innovation Horizon," the 2006 IBM Global CEO Study reporting on the agenda of CEOs in the next few years. The results are based on interviews conducted recently by IBM and the Economist Intelligence Unit (EIU) with 765 chief executives from around the world.
With ever changing markets, globalization, and stiffer competition, companies need to innovate to survive and grow. According to the study, innovation is no longer about inventing new products and services, but more on innovating business models and competing in new ways.
So what is a business model and how can it be the centerpiece of innovation? Amit Singh Sisodiya, author of “Business Models - An Introduction” defines business model (which he also referred to as business design) as “the mechanism by which a business intends to generate revenue and profits…it describes how a company plans to serve its customers and involves both strategy and implementation.”
Business models are “stories that explain how enterprises work - it answers certain questions: Who is the customer? How do we make money? What underlying economic logic explains how we can deliver value to customers at an appropriate cost?”, as Joan Magretta puts it in her Harvard Business Review article “Why Business Models Matter”.
The common theme among these definitions and in business literature is that a business model describes a specific way the business expects to make money.
Operationally, a business model may be represented by a simple diagram of linked processes that transforms inputs to outputs. It should be simple enough to stay in the minds of the CEO, owner, or manager. Many business models have withstood the test of time owing to its simplicity and sustainability.
For instance, a popular model that has been in existence for long is the subscription business model. This model has been used by newspaper and magazines publications, telecom service providers, and even software service providers. It involves tying a customer to a service or product delivery instead of selling direct; thereby ensuring a recurring payment to the service provider apart from building long-term customer relationships.
Such good business models are a source of competitive advantage among successful companies, whether it is an established business or a new venture; and in many cases are sustainable and hard to duplicate. Take for example Dell’s make-to-order business model which it had perfected together with its superior supply-chain management, making it unrivalled in this sort of business model.
A good business model is, therefore, essential to the success of any organization,. However, when a business model results to organizational success, many companies adopt it resulting to cutthroat competition, and later to the erosion of business model value.
This is why organizations, to survive and stay ahead of competition, need to continually reinvent business models – business model innovation as it is called.
“Business model innovation is a way through which a company can differentiate itself from its competitors and thus avoid strategic convergence that leads to declining profits…companies can pursue new business models by seeking new segments out of the markets they are serving or by identifying unmet customer needs and trying to meet them,” asserts Phani Madhav, in his article “Business Model Innovation”.
For example, Smart Communications has pioneered the application of the “sachet” business model in telecom services by providing low denomination electronic loads to low-income subscribers segment.
Business model innovation, even so, is not limited to seeking new market segments or customer needs. It is also about “significantly changing the structure and/or financial model of the business” as the IBM CEO study puts it.
For instance, PLDT launched WeRoam wireless internet connectivity to its corporate clients with an innovative business model twist – by bundling a Thinkpad laptop together with the connectivity and offering the whole package via monthly subscription for 12 to 18 months. The structure of the offering is changed from the straight-sell, disparate components into a bundled-subscription model that adds more value to a customer.
Indeed, business model innovation can give the firm a sustainable competitive advantage by increasing customer value. But how can organizations make sure that business model innovation if part of its day-to-day practice and philosophy?
For one, organizations need to establish a kind of culture that is conducive to sustainable innovation – one that allows creative expression among organization members without the penalty of committing mistakes. Such cultures should also invest in equipping employees with the proper business skills, and in rewarding those who contribute to successful innovations.
In addition, organizations need to conduct a regular business model audit of its different “ways of generating revenue and profit”. Such audits may ask questions as: Is our current business model creating the best value to our customers? Is there a better way of serving our customers that maximizes value to them? Are there market segments that we can tap into? Such questions force the organization members to challenge the status quo.
Organizations can also tap into the ideas from external sources – partners, customers, and suppliers – leading to collaborative innovation. External partners are a rich source of innovation through joint undertakings. As reported by the IBM Study, “companies with higher revenue growth reported using external sources significantly more than the slower growers.”
In sum, organizations need to continuously innovate on business models to stay ahead of competition by providing the best value to its customers. To ensure this, business model innovation should be a part of the company’s best practices.
--------------
Reynaldo Lugtu, Jr. teaches Management Principles and Dynamics, and electives in marketing and business management in the MBA Program of De La Salle Professional Schools. He may be e-mailed at rlugtu2002@yahoo.com.
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