IT-Driven Business Models

Global Case Studies in Transformation

Henning Kagermann, Hubert Osterle, John M. Jordan

• Publisher: Wiley
• Year: 2010
• ISBN:
  9780470944271
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Infrastruktur

A look at business model innovation's crucial role in today's global business environment.

Showing organizations how business model innovation should be a key focus area in today's global economy, this book features cases from businesses around the globe that have developed customized business models and achieved spectacular levels of performance.

• Case examples from well-known innovation leaders IKEA, Apple, Tata, SHARP, Saudi Aramco, De Beers, Telefonica, Valero Energy, LEGO, and Proctor & Gamble
• Shows businesses how to get beyond traditional business models to take better advantage of emerging opportunities
• Coauthored by former CEO of SAP AG, the world's largest provider of enterprise software

Filled with interviews with key executives, this book reveals the role of technology in driving and enabling changes to fundamental facets of a business. Companies around the world are innovating their business models with tremendous results. IT-Driven Business Models shows interested organizations how they can start the process.

Chapter 1
Enterprise Value from Customer Value

Business executives confront numerous uncertainties as they cross into the second decade of the new century. Consider:

• “Free” is a common price point in information industries, such as newspapers or music, leaving firms to find new models for profitability.
• Apart from free, pricing pressure is intensified by the rapid rise of developing economies, which are home to a steady stream of new low-cost providers serving many markets.
• The traditional model of the firm has been joined by other organizational possibilities: quasi-governmental capitalist entities (Thales Group, General Motors, AIG), business ecosystems that link capabilities from multiple organizational “homes” (Apple’s iPhone software development network), and dispersed pools of volunteer talent with no revenue streams but category-leading products (Linux, Wikipedia).
• The attractive size of Asian markets is made problematic by cultural issues, language barriers, the wide variation in intellectual property protection, and risks—everything from influenza outbreaks to terrorism and extreme weather.

In short, what firms deliver, how much they charge, how they organize to deliver it, and the constraints under which they do so are all in transition.

Perhaps the only certainty lies in the necessity of serving customers better. As these customers have more complex needs, increased competition of their own, and more suppliers to choose among, successful businesses are returning to the ground truth of profitably delivering value across multiple geographies, in the context of rapid and unpredictable change. Accordingly, an enterprise’s financial health is largely a function of the value its customers derive from the seller’s products and services.

Aligning the delivery of superior customer value with increasing enterprise value derives from strategy, from operational excellence, and from the business model, which articulates the differentiated ways that an enterprise delivers value to its customers. While the term is widely used, we follow coauthor Kagermann’s definition:

1. A business model consists of four interlocking elements that, taken together, create and deliver value.

1. Customer value proposition, including target customer, the customer’s job to be done, and the offering which satisfies the problem or fulfills the need.
2. Profit formula, including the revenue model, cost structure, margin model, and resource velocity (lead times, turns, etc.).
3. Key resources to deliver the customer value proposition profitably, potentially including people, equipment, technologies, partnerships, brand, etc.
4. Key processes also include rules, metrics, norms of behavior that make repeated delivery of the customer value proposition repeatable and scalable.¹

The great business models have become familiar icons. King Gillette gave away razors to sell an annuity stream of replacement blades. American Airlines pioneered the use of Sabre, a computerized reservations network that became so strategically important it was spun out as a separate entity; Bloomberg’s financial information service followed along similar lines. IKEA combined Nordic design, expertise in flat packaging, and large retail footprints to reinvent the furniture industry.

Because it is fundamental to a firm’s success, however, changing a business model can be difficult. General Motors’ template for labor costs, model changeovers, and brand management dates to the 1960s and did not adapt to new dynamics of competition and consumer behavior. The music industry’s bundling of songs into LP records worked for a few decades, but the model failed in the digital era, leaving the labels’ economics and practices out of step with the market. Established air carriers’ inattention to the low end of the market, and to their cost structures, left them vulnerable to a new wave of budget airlines such as EasyJet, Ryan Air, and Southwest.

With this history in mind, our focus in this book will be on business model innovation, specifically on the role of information technology in driving and enabling changes to the fundamental facets of the business: the offer and customer, the value chain and its players’ margin structures, and the ecosystem and the business processes it performs. A particular emphasis will fall on what we call business concepts. Business concepts, which frequently utilize technology in innovative ways, can be seen as building blocks in the creation or revision of business models.

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The business model determines the value of a company by facilitating the profitable delivery of value to the firm’s customers.

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Customer Value and Enterprise Value

To see how customer value shapes enterprise value, let’s do a thought experiment involving search. Before the World Wide Web, according to Kevin Kelly (founding editor of Wired), U.S. searches added up to a staggering 111 billion a year, most of them directory assistance telephone calls, but also counting librarian queries. After the advent of search engines, people appear to be asking more questions: the measurement firm comScore estimated 2 billion searches per day, worldwide, as of December 2007.

In Kelly’s admittedly rough estimate, an unnamed Google employee hypothetically and unscientifically values these searches as follows. Let’s assume, he says, that

1. 1/4 of all searches are really easy ones (like “american airlines”) that save the user maybe 30 seconds.
2. 1/4 are a little hard and save maybe 5 minutes.
3. 1/4 are just wasting time.
4. 1/4 are hard ones that lead to substantial savings—like diagnosing your serious disease, or choosing the right college, or the right vacation destination.
5. Suppose it takes 10 searches on average to get one of these “hard” answers, but when you get it, you’ve saved maybe 3 hours. That averages out to 6 minutes saved/search. Figure average income of $25,000/year, or $12.50/hr. So we get a value of $1.25/search by this metric.²

Assuming the U.S. audience as 1.2 billion searches per day at that $1.25 per search, and Google’s market share of roughly 65 percent, that would mean that Google creates $1.5 billion of value for its U.S. users per day.

Now, these are unofficial numbers, and this is only a thought experiment, but even if the numbers are off by a factor of five, that still means that Google creates 25 cents of value with the average search, at a cost to serve in the range of .2 cents. That would represent a 100-fold ratio of customer well-being to cost, a stunning value proposition by any measure. Google’s share price is a direct reflection of both this calculus and the advertising business model that allows it to be converted into revenue.

While stressing the role of customer value in enterprise value may sound like a truism, recent academic research suggests that theory and practice converge. The logic for moving from product or service provision into solution-centric business models is not only intuitive. In the past several decades, accounting-based value of a company’s assets has reflected less and less of the stock market capitalization. In fact, as of 2003, the market value of the Fortune 500 was fully six times the book value.³ If physical capital and similar assets fail to explain the value of a company, the reasoning went, intangibles such as brand equity, goodwill, and intellectual property must be responsible.

A landmark study published in 2004 explored one such intangible, customer satisfaction, which the authors hypothesized was related to increased “share of wallet,” improved customer retention and therefore cash flows, positive word of mouth, and other benefits. The research showed that a one point gain in customer satisfaction using standard metrics correlated to a 2.75 percent gain in shareholder value.⁴

More recently, a 2008 study used customer satisfaction metrics as a guide to portfolio creation, and the customer-satisfying portfolio outperformed groups of companies with either low or decreasing customer satisfaction scores.⁵ In both cases, positive customer experiences translated both to the bottom line and to stock market performance.

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Our assertion that enterprise value derives from customer value is founded in experience, logic, and quantitative models.

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Context

Because of the recent...