Radical Business Model Transformation

Gaining the Competitive Edge in a Disruptive World

Carsten Linz, Günter Müller-Stewens, Alexander Zimmermann

• Publisher: Kogan Page
• Year: 2017
• Print ISBN:
  9780749480455
• Edition: 1
• eBook ISBN:
  9780749480462
• Topic: Business
• Subtopic: Business Development
• Index: Business

Many companies are relying on a business model that is fundamentally suited to a different era. Now, organizations are under pressure from new trends such as digitization and servitization. Trying to adapt to a new environment, they risk relying on improvements that only scratch the surface of developing a radically different value proposition. Based on rigorous research into companies that have successfully and radically redesigned their business models, Radical Business Model Transformation shows why they made the leap, what they had to do to achieve it and how it has transformed the potential for their organizations. This book is a step-by-step guide for leaders who want to seize the opportunity of new business models and gain a competitive advantage. It explains how to assess the status quo, identify the value of future business models and develop a transformation path. It also provides advice on how to involve both the leadership team and all other employees in order to implement successful business model transformation. Illustrative case studies of organizations that have crossed the line to a more transformative business range from exponential-growth companies like Netflix and global players like Xerox, SAP and Daimler to mid-sized hidden champions like Knorr-Bremse and LEGIC. Radical Business Model Transformation is essential reading for business leaders, transformation experts and MBA students interested in ensuring that their business model is future-proof and can withstand the new proliferation of innovations that are set to transform the business landscape. Online supporting resources include a business model transformation calculator to help design your transformation path.

PART ONE

Why business models need to radically shift

One secret to maintaining a thriving business is recognizing when it needs a fundamental change.

MARK W JOHNSON, CLAYTON M CHRISTENSEN AND HENNING KAGERMANN¹

Most established companies understand their business model from the inside out. They have continuously fine-tuned their established business model to stay aligned with changes in the environment, but they have not questioned their type of business model. Today, however, sporadic changes and megatrends coming from outside the business, such as digitization and servitization, are putting more and more established business models under pressure. Incremental fine-tuning of the current business model will not suffice. Innovation competition has shifted from technological and process innovation to business model innovation, because start-ups, niche players and small and medium-sized businesses today have the means to challenge established players with relatively limited investment.

For example, it is doubtful whether automotive companies can survive just by producing and selling cars. Some of them fear they will be demoted to being low-margin metal-bashers if they are unable to take advantage of the entertainment and e-commerce services that could be offered on screens inside the car of the future. These ‘smart services’ are often far removed from the principal use of the product,² requiring an account ID to participate in their monetization and hence would mean a radical shift of an automotive company’s business model, including a deep cultural change. Many media companies have already had to undergo reformation. Print and online advertising revenues continue to fall. Content is still king but the new delivery formats are many-fold and journal- and newspaper-based subscription has limited reader acceptance. Media companies are challenged to monetize content consumption across media formats and per usage; block chain technology can be a game changer. Radical transformation is required, fine-tuning existing business models is not enough.

While business model research has flourished over the past decade,³ most of it is focused on the value proposition or structure of a business model. For example, we have learned much about what the components of a business model, the actors and their interactions should look like. Of course, this information is helpful if you are a start-up company with all the flexibility to design your business model from scratch, or if you are a company that is looking for completely new business models outside its existing one, but for many existing companies this is not the case. In many established firms and even some industries, including private banks, energy providers, telecom providers, bookstores and many more, the dominant business model is under fire. They have to think about options to adapt and transform their business models and about ways in which to manage change and evolution. Managers are facing a number of challenging questions: How do we adapt our front end and our products and services to satisfy the needs of our targeted customers? What are the implications for the back end to make these products and services possible? What is the best monetization mechanism to create sustainable value for the company and its stakeholders?

The core question for many established firms is whether they can operate in the long run by just focusing on and defending their current business model, or whether they have to make a fundamental change in the way they create and appropriate value. It is our observation that more and more companies are discovering the painful truth that an incremental fine-tuning of the current business model is not enough to stay competitive in the future. The only way forward is a radical shift.

But transforming to a new business model is often easier said than done, as in many cases it means changing the very DNA that has made a firm successful over time. Additionally, the ‘Googles’ of this world are of little help as future blueprints for established firms, because they have never undergone a business model transformation. However, established firms also have strong advantages over new entrants, because they know the existing products and customers in the market and often have important competences and resources at their disposal. The expertise of the incumbents may be hard to replicate, and they often control access to decisive resources like data or knowledge.

The objective of this book is to guide leaders in established firms through the process of radical business model transformation. ‘Radical’ means they have to change the type of business model, at least for major parts of the company. That often also includes a shift in a firm’s mission and value proposition. There are several reasons why we have recently seen an increasing number of cases where minor adjustments to the business model – for example, adding an online sales channel – are not sufficient, and more fundamental changes are needed. One cause might be the rise in new technologies, which has changed the strategic context profoundly, or new entrants, which might come from another competitive arena and have a completely new business model. For example, Google discovered manufacturing as a new growth sector. Benefiting from its Google Maps data, it entered the automotive market with its own self-driving concept car and is about to become a mobility competitor for the established car producers – not to be underestimated because Google has a different mental model understanding of what a car represents. The new strategic alliances of BMW with Chinese search giant Baidu, chipmaker Intel and supplier Mobileye show their commitment to produce fully autonomous cars by 2021 in preparation for the transformation of their classical business model.

Using many practical examples, we show in this book how firms can respond to similar challenges by turning their heritage from an impediment to change into a competitive advantage to successfully establish an entirely new way of doing business. Of course, such a radical transformation is very challenging and often has a high risk, but in many cases there are no other options available to a company that wants to remain successful in the long term. For example, many think they can survive by selling solutions instead of products, but we notice that only a few are really capable of managing such a fundamental transformation. Asian Paints, India’s largest paint company, was a traditional paint supplier. They transformed themselves into a solution provider as a ‘hassle-free premium home painting service’ with a one-year guarantee delivered by trained painters from their network of more than 10,000 painters. Their end-to-end offering includes prefabricated painting themes, an interior decorator advice service, the brokerage of academy trained local painters, final inspection and warranty.

In Part One of this book, we explain in Chapter 1 why so many existing business models are under fire and why a radical shift of at least parts of a company’s business model seems to be the only option. In Chapter 2, we introduce a typology of business models that helps us to show the options there are when choosing or applying a new business model. Chapter 3 gives a short overview of the discussion of business models and shows the shortcomings on which this book is focused.

Endnotes

1 M W Johnson, C M Christensen and H Kagermann (2008) Reinventing your business model, Harvard Business Review, 86 (12), pp 53–63.

2 The Economist (2013) Does Deutschland do digital? Europe’s biggest economy is rightly worried that digitisation is a threat to its industrial leadership, The Economist, 21 November, p 59.

3 B W Wirtz, A Pistoia, S Ullrich and V Göttel (2016) Business models: Origin, developments and future research perspectives, Long Range Planning, 49, pp 1–19; C C Markides (2015) Research on business models: Challenges and opportunities, Advances in Strategic Management, 33, pp 133–47.

01

Taking consequences from digitization and servitization

Two megatrends – digitization and service orientation (‘servitization’) – make business model transformation a key strategic priority for many leaders. While digitization influences the technical opportunities for firms to develop, produce and deliver their offerings and to manage their customer interactions at scale, servitization represents a fundamental shift in the customer value proposition towards co-creation and offering individualization. Innovative new services are often generated out of the data coming from a digitized business model. It is very challenging to respond to these trends, as both may have different implications for a firm’s business model, and there is the risk of getting caught in the extremes. To avoid this, digitization requires a balance between digital and physical assets (‘phygital’), while servitization calls for a balance between service and product orientation (‘hybrid’) (see Figure 1.1). New and better physical offerings can be developed out of the knowledge taken from digitized business models (‘physication’); innovative standardized products can be developed out of the experiences taken from extremely customized business models (‘productization’).

‘Phygital’: Torn between digital and physical orientation

The digital revolution is far more significant than the invention of writing or even of printing.

DOUGLAS ENGELBART¹

Over the past few years, exponential progress in information technology has brought the digital revolution to nearly everybody in the business world. Digitization is rewriting the rules of competition, and incumbent firms are most at risk. Attackers are growing at an incredible speed worldwide, because digitization knows no borders and redefines the distribution of the profit pool. Companies that dominated the national market for decades are suddenly confronted with new competitors that are redefining entire industries and hence restricting the incumbents’ strategic freedom to shape their future. For example, we see national telecom providers being curtailed and becoming pure infrastructure providers because of companies like Google, Netflix and Facebook. New leaders emerge out of nowhere. The automotive industry has started to be disrupted by Tesla, Google and Apple, as software is taking over hardware in connected and self-driving cars. According to a CNBC prognosis, 40 per cent of the S&P 500 companies will no longer exist in 10 years’ time if they do not keep up with the trends in technology.² In the digital age, industry boundaries are blurring.

Figure 1.1 Balancing digital and physical assets as well as service and product orientation

Digitization is not a new phenomenon. Defined as the transformation of analogue into discrete values with the goal of storing or processing them, digitization started back in the 1980s, with the first digital products being digital watches, CD players and internet routers. This was followed in the 1990s by the rise of digital services such as search portals, e-commerce sites and marketplaces. Around the turn of the century – after the dot-com bubble – the focus shifted to digital distribution and relations, then coined Web 2.0, with social media business and e-commerce for content. Around 2010 the age of digital orchestration and anything-as-a-service models started and promoted platforms with their business networks and ecosystems. Digitization has evolved from a purely technical into a holistic phenomenon and impacts nearly every company function as business processes become increasingly digitized.

At the beginning, the impact of the digitiza...

Table of contents

• Cover
• Title Page
• Contents
• About the authors
• Contributors
• Preface
• PART ONE Why business models need to ­radically shift
• PART TWO How to lead a radical shift of your business model
• PART THREE Learning from successful transformational organizations
• PART FOUR How to move forward
• Index
• Copyright