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The Challenges of Transforming the Business Model

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In those cases where a new business model has been successfully developed, companies gain on average, a 6% increase in return on investment, compared to other forms of innovation, such in product or process innovation (BCG 2008). Therefore, the innovation of the business model plays a key role in the current and future success of companies.

That is why many managers think that to achieve competitive advantages, business model innovation is more important than other types of innovation. More than 90% of the CEOs surveyed in a study conducted by IBM (2012) stated that they planned to innovate the business model over the next three years. However, good intentions are not enough.

When it comes to moving to action, problems surface. Few managers can explain their company’s business model off the top of their head and, even less so, define what a business model really is. It is still very rare to find companies with teams dedicated to innovating the business model, or to have established processes for that purpose. Given the relevance of this issue, the lack of institutionalization is surprising, although if you consider the complexity and confusion surrounding the issue, it is understandable.

Business model

Essentially, we can say that a business model is the way in which companies create, deliver and capture value. Hence, this is the business logic, and it is always the result of a series of strategic reflections and decisions.

To describe a business model, we can use conceptualization based on five components: customer segments, value proposition, value configuration, value network and value capture.

  • Customer segments: together with the customer segments a company targets alongside these customers’ needs, this includes the interactions and relationships established with these customer segments.
  • Value proposal: to do with the products and / or services that a company offers. It also describes the benefits that the company brings to its customers or users (for example, design, trust, user-friendliness, performance, durability, etc.)
  • Value configuration: refers to the set of resources, capacities, processes and activities that are required to next create and deliver the value proposal to the customer segment.
  • Value network: identifies the network of collaborators that cooperate with a company with the aim of achieving a goal (for example, economies of scale, contribute resources or knowledge, reduce risk, etc.)
  • Value capture: describes how, and in what way, customers pay for the products and / or services offered, as well as the quantity of value a company captures, bearing in mind the costs incurred to create and deliver the value proposal.

Transforming the business model

In recent times, especially over the last decade, changes in the environment have accelerated dramatically. Some of the drivers of these changes are factors, such as digitization, changes in customer preferences, regulatory changes, the entry of new competitors, or globalization.

All this has generated a transformation in the way many companies or their business models compete. Therefore, the transformation, or innovation, of established business models is becoming a fundamental aspect to guarantee the competitiveness of companies.

However, companies portray different attitudes towards this phenomenon. There are various approaches on how an established company initiates an innovation process of its current business model:

  • Reactive: undergo a crisis that the current business model cannot respond to
  • Adaptive: adjust, improve, or defend the current business model
  • Expansive: launch a new technology, product or service
  • Proactive: prepare for the future.

It is important to highlight that when we talk about creating new business models, we must differentiate between two different situations: 1) designing  a business model from scratch, 2) transforming an existing business model.

These two situations entail considerable differences. For example, for transformation, it is assumed that previous business model exists, so the challenges that arise are for existing organizations, such as organizational inertia, resistance to change, internal vision, fear of cannibalization, or aversion to risk; whereas such challenges are not relevant for start-ups. This means that many transformation attempts do not achieve the expected objectives.

These challenges arise throughout the innovation process of the business model, either in the design stage or in the implementation stage. Taking them into account and responding to them is vital for a successful initiative.

  • Internal vision: the company must be able to understand the needs of the most relevant actors for a successful initiative and identify the factors of change that can have a greater impact on the current business model (digital transformation, globalization, circular economy ...) For this, it is essential for the organization to look beyond its walls.
  • Organizational inertia: the difficulty of overcoming the prevailing logic of the company limits the ability to generate ideas, which questions the conventions on which the current business model is based. To overcome this challenge, critical questioning and using analogies are key.
  • Product-focused vision: companies tend to have a very product-oriented approach, which makes it difficult to think in terms of the business model. Introducing the notion that the company is a system, that the product is a key part of this system, but not the only one, may contribute towards a more systemic vision of the company.
  • Fear of cannibalization: sometimes the new business model requires dropping some current source of income to replace it with another. This spurs misgivings and delays decision-making. A clear example is Kodak, the company that postponed its transition to digital photography, as a large part of its income came from photography reels, while other companies seized the opportunity. The outcome led to Kodak losing its leadership position. It’s worth remembering that when the moment comes, if you don’t cannibalize yourself, someone else will do it for you.
  • Resistance to change: any transformation of the current business model implies, to a greater or lesser extent, changes. There are many reasons why people in the organization may be reluctant to change and may even have incentives to boycott the new initiative. This is one of the aspects that can cause the implementation of the new business model to fail. Transparency, empathy, communication and personalized responses are essential to overcome this scenario.
  • Risk aversion: during the implementation phase, one of the greatest challenges is to launch the new business model in phases to avoid damaging the company’s image, in case something does not go according to plan. Care must be taken to meticulously plan in which customer segments or geographical territories to start  the implementation.

Xavier Camps

Xavier Camps es fundador de Innoservice Consulting y especialista en innovación. Colabora con empresas pertenecientes a diversos sectores. Sus principales áreas de trabajo son: la creación de culturas innovadoras a partir de las personas, la gestión del proceso de innovación, desde la detección de oportunidades hasta la comercialización y la innovación del modelo de negocio.

Es licenciado en A.D.E por la Universitat de Barcelona, Executive MBA (EADA), Executive Master in Business Innovation (Deusto Business School) y ha realizado también un programa de Intra/Entrepreneurship, High‐Tech Spin‐offs and Innovation en la Cambridge Judge Business School. Colabora como profesor con varias escuelas de negocio como, IESE, Loyola Leadership School y ENAE Business School en diferentes programas ejecutivos en "in company", impartiendo sesiones relacionadas con la gestión de innovación.

Es autor de “Cómo llegar a ser una empresa innovadora”, y del blog “The Jazz Musician”, donde escribe sobre temas relacionados con la innovación y las personas que la hacen posible. El blog recibió una mención especial en la última edición de los premios de la Blogosfera de RRHH.

Xavier Camps is the founder of Innoservice Consulting and an innovation expert. He collaborates with companies in various sectors. His main areas of work are: creation of innovation cultures from the people, innovation management process from the detection of opportunities through to commercialization, and business model innovation. Graduated in Business Administration from the University of Barcelona, and holds an MBA (EADA), an Executive Master in Business Innovation (Deusto Business School) and also an Intra/Entrepreneurship, High-Tech Spin-offs and Innovations programme at the Cambridge Judge Business School. He collaborates as a lecturer with several business schools such as EADA, Loyola Leadership School, Deusto Business School and ENAE Business School in different executive “in company” programmes, giving sessions on innovation management. He is the author of the book, “Cómo llegar a ser una empresa innovadora” in Spanish (Trans. How to become an innovative company) and the blog, “The Jazz Musician” where he writes on innovation related issues and the people who make it possible. The blog received a special mention in the last edition of the HR Blogosphere awards.

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