Launching and leading creativity – Business Models
Carina Gras
BUSINESS MODELS
REINVENTING YOUR BUSINESS MODEL
In 2003 Apple launched iPod and it was a great success for the company because Apple’s market
capitaliza8on catapulted to from around $1 billion in early 2003 to over $150 billion by late 2007. However,
Apple was not the first company to bring digital music players to the market, there were other brands that
did it before, but what Apple did beQer was to make a beQer business model. They made downloading
digital music easy and convenient, so they provided a game-changing convenience for the consumer.
Business models innova-ons have reshaped en-re industries and redistributed billions of dollars of
value.
Why is it so difficult to pull off the new growth that business model innova8on can bring?
There might be 2 problems and that is why new business models oUen look unaQrac8ve to internal and
external stakeholders:
1) Lack of defini-on: LiQle formal study has been done into the dynamics and the process of
business model development.
2) Lack of well understand the exis-ng business model: Premise behind development, natural
interdependencies, strengths and limita8ons. They do not know when they ca leverage their core
business and when success requires a new business model.
To see past the borders of what is and into the land of the new, companies need to road a map that consist
of three simple steps:
1) Realize that success starts by not thinking about business models at all. It starts with thinking
about the opportunity to sa8sfy a real customer who needs a job done.
2) Construct a blueprint laying out how the company will fulfill that need at a profit.
3) Compare that model to the exis8ng model to see how much you’d have to change it to capture
the opportunity model.
Every company is already fulfilling a real customer need with an effec8ve business model, whether that
model is explicitly understood or not.
BUSINESS MODEL: A DEFINITION
Business model: Four interlocking elements that, taken together, create and deliver value, which form the
building blocks of any business.
1) Customer value posi-on (CVP): A company has the objec8ve to create value for customers when
having a fundamental problem in a given situa8on that needs a solu8on. The more important the
job is to the customer, the lower the level of customer sa8sfac8on with current op8ons for gedng
the job done and the beQer the solu8on is than exis8ng alterna8ves at gedng the job done, the
greater the CVP.
2) Profit formula: Blueprint that defines how the company creates value for itself while providing
value to the customer. It consists of:
a. Revenue model: Price · Volume
b. Cost structure: Direct costs, indirect costs, economies of scale
Launching and leading creativity – Business Models
Carina Gras
c.
Margin model: Given the expected volume and cost structure, the contribu8on needed
from each transac8on to achieve desired profits.
d. Resource velocity: How fast we need to turn over inventory, fixed assets, and other
resources to support our expected volume and achieve our an8cipated profits.
3) Key resources: Assets such as the people, technology,
products, facili8es, equipment, channels, and brand
required to deliver the value proposi8on to the
targeted customer. Key elements that create value for
the customer and the company and the way they
interact.
4) Key processes: Opera8onal and managerial
processes that allow companies to deliver value in a
way they can successfully repeat and increase scale.
E.g; recurrent tasks of training, development,
manufacturing, budge8ng, planning, sales, and
service.
Customer value proposi8on and the profit formula define
value for the customer and the company, respec8vely; key
resources and key processes describe how that value will be
delivered to both customer and the company.
The power of this framework lies in the complex
interdependencies of its parts and major changes to any of
these four elements affect the others and the whole.
HOW GREAT MODELS ARE BUILT
When a new business model is needed
Established companies should not undertake business-model innova8on lightly because they can oUen
create new products that disrupt compe8tors without fundamentally changing their own business model.
When changes are needed to all four elements of the exis8ng model, then crea8ng new growth requires
venturing not only into unknown market territory but also into unknown business model territory.
There are 5 strategic situa8on that oUen require model changing:
1) When there are groups of poten8al customers who are shut out of the market because the
exis8ng solu8ons are too expensive or complicated for them.
2) When there is an opportunity to capitalize on a brand-new technology by wrapping a new
business model around it or the opportunity to leverage a tested technology by bringing it to a
whole new market.
3) When there is the opportunity to bring a job-to-be-done focus where one does not yet exist. That
is common in industries where companies focus on products or customer segments, which leads
them to redefine exis8ng products.
4) The need to fend off low-end disrupters.
5) The need to respond to a shiUing basis of compe88ons
Crea8ng a new business model not always means that the current one is not working and should be
changed, it oUen reinforces and complements the core business.
Launching and leading creativity – Business Models
Carina Gras
COMPETING AGAINST FREE
In the recent years there has been an increase of “free” business models popularized by companies such
as Google, Adobe and Mozilla are spreading to different types of markets.
But, how should established companies respond? In two thirds of the baQles that has been judged,
incumbents have made the wrong choice. On the one hand, companies that should haven’t taken ac8on
did so immediately by introducing their own free offerings affec8ng its profits and profits. On the other
hand, companies that should have taken ac8on didn’t do so quickly enough or at all.
These companies could have used their assets to fend off free-product compe8tors, but managers were
against the idea of abandoning the exis8ng business model that was already genera8ng profits. “Even
companies with formidable assets are slow to fend off free-product compe;tors. The reason: the ubiquity
of the profit-center structure and mind-set.”
Assessing the threat
The seriousness of the threat posed by a new entrant relies on 3 factors:
1) Entrant’s ability to cover its costs rapidly
2) Growing rate of the # of users of the free offering
3) Speed with which your current paying costumers are defec8ng
Some companies are not able to face this problem because they are not able to cover its costs conver8ng
nonpaying customers into paying ones fast enough or because they cannot find a third party willing to pay
for access their users. That is why it’s crucial to determinate if the compe8tor’s free offering is genera8ng
revenue somehow.
Choosing whether and when to respond
Most established companies would respond in two different ways:
1) Free offering
2) Change radically the business model
Nonetheless, a lot of companies can deal this problem thanks to the differences in other quadrants, which
leave them with more 8me to respond this thread. A delayed threat happens when the entrant’s users
are growing rapidly but the established firms are defec8ng slowly and both products can coexist soma few
years. E.g: MicrosoU with Goodle Docs. To take
advantage of the delayed threat, companies should
figure out exactly then to respond with either a free
version of the exis8ng offering or a new offering product
that appeals to new users.
The opposite situa8on of delayed threat is immediate
threat, it is when the defec8on rate among the paying
customers is high and the growth rate of the entrant’s
users is low.
Launching and leading creativity – Business Models
Carina Gras
Offer a beQer free
AUer knowing when to respond, firms need to figure out how to respond. Firms usually use the same
strategy: let users know beQer how to use their product, advanced technical know-how, substancial brand
equity, significal financial resources, knowledge of the market and access to important distribu8on and
marke8ng channels. All these ac8ons can be used to introduce a beQer gree product and to employ some
other interes8ng strategies to generate revenues and proUs, e.g: up-selling, cross-selling,…
1) Up-Sell: Introduce a free basic offering to gain widespread use and then charge for a premium
version.
2) Cross-Sell: Sell other products that re not directly 8ed to the free product
3) Charge third par-es: Provide a free product to used and then charge a third party for access them
4) Bundle: Offer a free product or service with a paid offering
Rethinking profit centers
Two obstacles prevent managers at established companies from making the leap to free strategies.
1) Deeply rooted belief that products must generate a respectable level of revenues and profits on
their own.
2) Profit-center structure and the accoun8ng system it employs, which both reflect and reinforce
this mind-set.
In a stable compe88ve landscape, profit centers are advantageous for accountability and career
advancement, but they hinder the separa8on of product revenues and costs, essen8al for a free-product
strategy. To address this, profit responsibility should be shiUed to a management group overseeing a
broader range of revenue and cost sources. Companies relying on free-product models, such as Google,
place this responsibility higher in the organiza8on.
In free business models, revenue and cost management responsibili8es are typically handled by separate
teams. Revenue managers focus on crea8ve ways to increase income, while a dis8nct product
development team oversees cost control and user base expansion. Tensions between these groups may
arise, and senior managers or the CEO may intervene to resolve disagreements.
Cost accoun8ng systems can impede companies from offering free products by emphasizing average costs
over actual costs. Understanding marginal costs allows flexibility in pricing approaches, including free
offerings. The pharmaceu8cal industry example illustrates how established companies struggle with freeproduct strategies due to profit-center structures and cost accoun8ng systems.
In response to a compe8tor's free product, incumbents should consider embracing experimenta8on and
risk-taking, requiring a cultural shiU. Strong execu8ve leadership is crucial for compe88ve responses,
organiza8onal restructuring, and ques8oning cost accoun8ng informa8on. Taking decisive ac8on when a
free offering poses a threat can help incumbents survive and thrive.
WHY BUSINESS MODELS MATTER (MAGRETTA, J. 2002)
A good business model remains essen8al to every successful organisa8on, but we need a defini8on that
clears up the fuzziness associated with the term.
TELLING A GOOD STORY
Launching and leading creativity – Business Models
Carina Gras
A good business model consists of stories that explain how the enterprises work and ask ques8ons such
as who is the customer. And what does the customer value? Crea8ng a business model is a lot like wri8ng
a new story, it should represent a beQer way than the exis8ng alterna8ves. The basis of a business model
consists of two parts. Part one includes all the ac8vi8es associated with making something while part two
includes all the ac8vi8es associated with selling something. A new business model may focus on
designing a product for an unmet need.
TYING NARRATIVE TO NUMBERS
The term business became widespread with the advent of the personal computer and spreadsheet, as it
changed the way of crea8ng business models. Now, companies started opera8ng on the underlying
assump8ons about mo8va8on and economics. However, it is only as good as its assump8ons which will
be tested in the market when the business model is complete. If you fail to achieve the results you
expected, you reexamine your model. Business modelling is the managerial equivalent of the scien8fic
method. You start with a hypothesis, test it and review it if needed.
TWO CRITICAL TESTS
When business models don’t work, it’s because they fail either the narra8ve test (the story does not make
sense) or the numbers test (the P&L does not add up). A business model’s great strength is that it focuses
aQen8on on how all the elements of the system fit into a working whole. When used correctly, it forces
managers to think rigorously about their businesses. Business modelling is the managerial equivalent of
the scien8fic method.
WHAT ABOUT STRATEGY?
A business model isn’t the same thing as a strategy. Business models describe a system, and how the
pieces fit together. But they don’t factor in the cri8cal dimension of compe88on and this is the strategy’s
job. It’s all about how a company is going to be different and do it beQer than its compe8tors. To succeed,
companies need to build a strategy around a different kind of value, while the losers in the industry are
companies that tried to be all the things to all people and failed to find dis8nc8ve ways to compete.
A GOOD MODEL IS NOT ENOUGH
When a new model changes the economics of an industry and is difficult to replicate, it can by itself create
a strong compe88ve advantage. However, companies s8ll need to make crucial strategic choices about
topics like which customers to serve and what kinds of products and services to offer. The business model
stays the same, only the strategic choices about where and how to apply the model change. Clarity about
business models helps as stories are easy to grasp and easy to remember which in turn helps everyone in
the organiza8on aligned around the kind of value the company want to create.
References:
•
•
•
Bryce, D. J., Dyer, J. H., & Hatch, N. W. (2011). Compe8ng against free. Harvard Business Review,
89(6), 104-111.
Johnson, M. W., Christensen, C., & Kagermann, H. (2008). Reinven8ng your business model.
Harvard Business Review, 86(12), 50-59.
MagreQa, J. (2002). Why business models maQer. Harvard Business Review, 80(5), 86-92.