Reinventing Your Business Model 2008

Johnson et al. (2008)

Reinventing Your Business Model (2008)

• -  Apple’s success with iTunes & iPod: Razor (high-margin iPod) and Blade (low-margin iTunes music) system groundbreaking business model that combined hardware, software, and service
• -  Two problems with new growth of business model innovations

o Lack of definition: very little formal study

o Few companies understand their existing business model well enough - To develop new business models, companies need a 3-step road map:

1. realize that success starts with thinking about the opportunity to satisfy a customer (not with thinking about business models)
2. construct a blueprint laying out how the company will ful fill that need at a profit à4 elements
3. compare that model to the existing model to see how much has to be changed to capture the opportunity

Business Model: A Definition

- Business model: consists of four interlocking elements that, taken together, create and deliver value (most important is the first)

1) Customer value proposition (CVP) Value for customers
o Opportunities for creating CVP most potent when alternative products and service hae

not yet been designed with real job in mind and you can design an offering that gets the

job done perfectly

2. 2)  Profit formula: the blueprint that defines how the company creates value for itself while

providing value for the customer. Consists of

1. Revenue model (price x volume)
2. Cost structure (direct, indirect costs, economies of scale)
3. Margin model (expected volume and cost strucrure)
4. Resource velocity (turnover of inventory, assets etc.)

3. 3)  Key resources: assets such as people, technology, products, facilities, equipment, channels, partnerships & alliances, and brand required to deliver the value proposition to the targeted customer

o Focus on key elements that create value for customer and company and the way those elements interact

4) Key processes and rules, metrics, norms that make the delivery of the customer value proposition repeatable and scalable. Also includes recurrent tasks as training, development, manufacturing, budgeting, planning, sales, and service

è Power lies in complex interdependencies of the parts

How Great Models Are Built

- Creating CVP
o Most important attribute: precision (in doing lots of things they do nothing really well) o 4 most common barriers keeping people from getting jobs done: insufficient wealth,

access, skill, or Time

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When a New Business Model Is Needed

- established companies should not undertake business-model innovation lightly

5 strategic circumstances that often require business model change:

1. 1)  opportunity to address the needs of large groups of potential customers who are shut out of the market because existing solutions are shut out of am market entirely because
2. 2)  opportunity to capitalize on a brand-new technology by wrapping a new business model around it (Apple and MP3 players)
3. 3)  opportunity to bring a job-to-be-done focus where one does not yet exist
4. 4)  the need to fend off low-end disrupters
5. 5)  the need to respond to a shifting basis of competition

àCompanies should...

• -  make sure that the benefits of business model reinvention outweigh the costs
• -  make sure that the incumbent business doesn’t in some way prevent the new model from

creating value or thriving

Old model will work: When you can fulfill the new customer value proposition:

• -  with your current profit formula
• -  using most, if not all, of your current key resources and processes
• -  using the same core metrics, rules, and norms you now use to run your business

Secret sauce: Patience

• -  companies should focus on learning and adjusting as much as on executing
• -  companies with new business models should be patient for growth (to allow the market

opportunity to unfold) but impatient for profit (as an early validation that the model works). A profitable business is the best early indication of a viable model

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