Reinventing Your Business Model

Summary of “Reinventing Your Business Model”

by Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann

When Apple introduced the iPod, it did something far smarter than wrap a good technology in a stylish design. It wrapped a good technology in a great business model. Combining hardware, software, and service, the model provided game-changing convenience for consumers and record-breaking profits for Apple.

Great business models can reshape industries and drive spectacular growth. Yet many companies find business-model innovation difficult. Managers do not understand their existing model well enough to know when it needs changing--or how.

To determine whether a firm should alter its business model, they advise these steps:

1. Articulate what makes your existing model successful. For example, what customer problem does it solve? How does it make money for your firm?
2. Watch for signals that your model needs changing, such as tough new competitors on the horizon.
3. Decide whether reinventing your model is worth the effort. The answer is yes only if the new model changes the industry or market.

A successful model has these components:

• Customer value proposition. The model helps customers perform a specific "job" that alternative offerings do not address.

MinuteClinic enable people to visit a doctor's office without appointments by making nurse practitioners available to treat minor health issues.

• Profit formula. The model generates value for your company through factors such as revenue model, cost structure, margins, and inventory turnover.

The Tata Group's inexpensive car, the Nano, is profitable because the company has reduced many cost structure elements, accepted lower-than-standard gross margins, and sold the Nano in large volumes to its target market: first-time car buyers in emerging markets.

• Key resources and processes. Your company has the people, technology, products, facilities, equipment, and brand required to deliver the value proposition to your targeted customers. Moreover, it has processes (training, manufacturing, service) to leverage those resources.

For Tata Motors to fulfill the requirements of the Nano's profit formula, it had to reconceive how a car is designed, manufactured, and distributed. It redefined its supplier strategy, choosing to outsource a remarkable 85% of the Nano's components and to use nearly 60% fewer vendors than normal to reduce transaction costs.

• Identify when there is a need of New Model. Companies should not pursue business model reinvention unless they are confident that the opportunity is large enough to warrant the effort. Moreover, there is really no point in instituting a new business model unless it is not only new to the company but in some way new or game-changing to the industry or market. To do otherwise would be a waste of time and money.

Summary of “Knowing When To Reinvent”

by MARK BERTOLINI, DAVID DUNCAN, AND ANDREW WALDECK

For this paper, two strategic consultants joined a CEO in an examination of how global brands as different as Nestle, Adobe, Xerox, Netflix and Aetna used reinvention to navigate disruption in their industries. In the article, the team discuss five interrelated “fault lines” that can suggest when the ground beneath a company is more unstable than it may appear.

Customer needs. The author suggest a good strategy to learn if there is a customer fault line, talk to customers. To discover if there is a potential problem, speak with your most profitable customers, your least profitable customers and customers you are not currently serving. Rather than asking for generic feedback, learn their functional, social and emotional needs, along with their frustrations. The authors recommend asking several questions:

• What are the top unmet needs of each group of customers?
• Do customers you do not currently serve have emerging unmet needs? If so, does that signal a potential market opportunity for a competitor?
• Are your customers loyal to your product or are they captive for lack of other options? Would they defect if they could?
• If you are a B2B business, do your customers’ needs conflict with those of end users?
• Could emerging technology simplify how end users’ needs are met?

Performance metrics. When an industry reaches an inflection point, old metrics can be deceptive. Once reliable ways of measuring success can lead to a sharp decline or even disaster although short-term results may be healthy. In the article, the authors suggest reassessing your business intelligence to ensure it is consistent with what your customers place the most value on. They also recommend you challenge the logic underlying each metric. The authors again offer several questions to guide your analysis:

• Do you understand what your customers really value? How well does product performance match the customer’s definition of value?
• Will future customers define quality differently from current customers?
• How closely do your customer satisfaction and financial metrics correlate? Are your customer satisfaction scores as strong as your financial indicators?
• Do your products or games have more features or complexity than most of your customer’s value?

Industry Position. To determine if your position is at risk, review the industry’s periphery: analyze start-ups, adjacent competitors and historical partners and suppliers that have the potential to fill existing and emerging customer needs. Again, the authors offer several questions to guide your analysis:

• Are regulatory, technological or other external developments lowering barriers to entry or changing how customers consume your product?
• Are external forces diminishing the value of your role in the industry?
• Is a disruptive technology emerging that could significantly change the cost-value equation in a major part of your industry?
• Is your industry expanding to include new kinds of competitors? Is there consolidation among major players?

Business model. Even if your current business model is widely used and profitable, it may not serve you in the future. To understand if you are at risk of a business model fault line, you need to look at the model and see how well it is built to compete against emerging rivals. The authors propose some questions to guide your analysis:

• Is at least one emerging competitor in your industry using a different business model (even if they are not yet profitable)?
• Is the way you make money aligned with how value is created for customers? Are customers complaining about price increases or added fees?
• How resilient are the primary elements of your existing business model? Are any at risk of being undercut by external forces or new competitors?
• Will the strategic assumptions that underlie your current model hold as your industry evolves?

Talent and capabilities. What skills, competencies and organizational structures will be required for future success? As the authors write, “the sense that your human resources are not well configured for the future can be the decisive indication that your company is off track.

The authors propose a fifth set of questions that can help uncover a fault line:

• Do you need to bring on board to fulfill customer needs?
• Do you have enough emerging leaders who are excited about a transformation?
• Is your company, or industry, having problems attracting top talent?
• Do the leaders of your business view talent as their responsibility or is it relegated to HR?

Summary of “How GE is disrupting itself”

The article co-written by CEO of GE Jeffrey Immelt and two academics mainly focuses on the transition from "glocalization" to "reverse innovation" and the organizational transformation companies must undergo to position themselves to capitalize on this trend. The need for "reverse innovation" arrived from globalization and the rapid rise of emerging economies like China, Brazil, and India, which are turning upside down how business is done, and specifically how companies approach innovation.

Local Innovation

Local design, made in EM for EM

Reverse Innovation

Local design, made in EM for the world

Glocalization

DM product design, made in EM for EM

Globalization

DM product design, made in DM for EM

For GE, "glocalization" means how Western companies created products for their domestic markets and then later adapted them for foreign markets. Glocalization has been adapted by a variety of multinationals to refer to how to adapt their corporate strategies to local environments.

Glocalization worked fine when the vast majority of market comprised of rich countries and other countries did not offer much opportunity. However, as emerging competitors became major players in the global economy, If GE's businesses are to survive and prosper in the next decade, and they must become as adept at reverse innovation as they are at glocalization.

There are however conflicts between glocalization and reverse innovation. In addition, the company cannot switch to reverse innovation because still Glocalization is being seen as the dominate strategy for the near future. However, in reality the two approaches, or models, need to work together in a complementary way instead of competing.

The authors explain that glocalization has been the dominant approach since it has "delivered". GE's revenues outside US soared by more than 31% because of glocalization from 1980 to 2008. However, that model came into picture when emerging economies were at the early stages and they had very limited middles classes from which to spur to consumer spending. However, that was a lot more different

CEO Jeff Immelt set a goal to accelerate organic growth. It led reasons to doubt the glocalization strategy, which limited the company's presence in the emerging economies to only the top segment. However, after GE analyzed its several offerings in health-care, power-generation, and power-distribution, it showed that it could gain much more market share in emerging countries like India and China which led to development of revolutionary products like a $1,000 handheld electrocardiogram device and a portable, PC-based ultrasound machine that sells for as little as $15,000. These products are now being sold in the United States, where they are pioneering new uses for such machines.

Reverse Innovation questions two major tenets of glocalization, which assumed that the emerging economies would follow the same growth path as developed economies, and the products that were developed for emerging countries' special needs cannot be sold in developed countries because of their non-competitiveness. However, both of these proved to be false as the emerging economies are growing at a much faster rate than expected because of their willingness to adopt breakthrough innovation. Emerging economies are becoming centres of innovation in fields like low-cost health-care devices, carbon sequestration, solar and wind power, bio-fuels, distributed power generation, batteries, water desalination, microfinance, electric cars, and even ultra-low-cost homes. Also, products like the portable ultrasound and handheld electrocardiogram proved that the emerging economies could also produce competitive products.

The article talks about the critical role that a CEO plays in serving as a catalyst for change, and to ensure that those in the organization see the big picture. When it comes to reverse innovation, executive leaders must work to advance their organization to new organization structures that will enable product innovation.

The article presents a paradigm shift in how to identify, secure and serve new markets. This is perhaps the most important and contemporary role of executive leaders in this era of globalization.