Learn more about the six key features of business model transformation and how they deliver on the potential of new technology.
A Harvard Business School article called The Transformative Business Model by Stelios Kavadias, Kostas Ladas, and Christoph Loch, investigates 40 new business models with widely different outcomes. These business models relate to how companies organise themselves to serve customers and deliver value, the complimentary firms that they select to partner with, and how their supply chains operate.
“We usually associate an industry’s transformation with the adoption of a new technology. But, although new technologies are often major factors, they have never transformed an industry on their own. What does achieve such a transformation is a business model that can link a new technology to an emerging market need.” – The Transformative Business Model, Harvard Business Review
The professors cite MP3 technology as an example. Early MP3 devices allowed users to store thousands of songs on a small device, but it was only after Apple coupled the iPod with iTunes that the sale of music moved from the physical to the virtual world.
To determine what enables a business model to deliver on a technology’s potential, they conducted an in-depth analysis of 40 companies that had launched new business models in a variety of industries. Some succeeded in fundamentally altering their industries, while others did not.
Defining the business model
A business model describes how a company creates and captures value. According to the professors, in any given industry, a dominant business model tends to emerge over time, which will reflect the most efficient way to allocate and organise resources. “Most attempts to introduce a new model fail – but occasionally one succeeds in overturning the dominant model, usually by leveraging a new technology. If new entrants use the model to displace incumbents, or if competitors adopt it, then the industry has been transformed.”
They cite Airbnb as an example. The founders used platform technology to devise an entirely new business model that would challenge the traditional economics of the hotel business. Airbnb does not own or manage property; guests rent space from willing home owners through an online platform. Airbnb manages the platform and takes a percentage of the rent.
DID YOU KNOW?
American physicist and historian Thomas Kuhn described a paradigm shift as an important change that happens when the usual way of thinking about or doing something is replaced by a new and different way. Applying his thinking to the current economy, while most attempts to introduce a new model fail, occasionally one succeeds in overturning the dominant model – usually by leveraging a new technology. If new entrants use the model to displace incumbents, or if competitors adopt it, then the industry has been transformed.
“Before platform technology existed, there was no reason to change the hotel business in any meaningful way,” the article explains. “But after its introduction, the dominant business model became vulnerable to attack from anyone who could leverage that technology to create a more compelling value proposition for customers. The new business model serves as the interface between what technology enables and what the marketplace wants.”
Let’s unravel the six keys you can use to unlock successful business model transformation, as described by the professors:
1. A more personalised product or service
Many new models offer products or services that are better-tailored than the existing models to customers’ needs. Companies often leverage technology to achieve this at competitive prices.
2. A closed-loop process
Many models replace a linear consumption process (in which products are made, used, and then disposed of) with a closed loop, in which used products are recycled. This shift reduces overall resource costs.
3. Asset sharing
Some innovations succeed because they enable the sharing of costly assets – Airbnb allows homeowners to share them with travellers, and Uber shares assets with commuters. Sometimes assets may be shared across a supply chain. The sharing typically happens by means of two-sided online marketplaces that unlock value for both sides – I get money from renting my spare room, and you get a cheaper and perhaps nicer place to stay. Sharing also reduces entry barriers to many industries, because an entrant need not own the assets in question; it can merely act as an intermediary.
4. Usage-based pricing
Some models charge customers when they use the product or service, rather than requiring them to buy something outright. The customers benefit because they incur costs only as offerings generate value; the company benefits because the number of customers is likely to grow.
5. A more collaborative ecosystem
Some innovations are successful because a new technology improves collaboration with supply chain partners and helps allocate business risks more appropriately, making cost reductions possible.
6. An agile and adaptive organisation
Each feature on this list is tied to long-term trends in both technology and demand. On the tech side, one trend is the development of sensors that allow cheaper and broader data capture. Another is that big data, artificial intelligence, and machine learning are enabling companies to turn enormous amounts of unstructured data into rules and decisions. A third is that connected devices (the Internet-of-Things (IoT)) and cloud technology are permitting decentralised and widespread data manipulation and analysis. And a fourth is that developments in manufacturing (think nanotechnology and 3D printing) are creating more possibilities for distributed and small-scale production.
All six features represent potential solutions for linking market demand and technological capability. For example, greater personalisation in the value proposition responds to the fragmentation of consumer preferences and the resultant demand for more-diverse offerings.
How many boxes should a model tick?
The authors’ research suggests that to transform an industry, a business model must display at least three of the six key features. Taxi service company Uber has five key features of a potentially transformative business model.
Here’s how the authors describe Uber’s business model:
“[It] is built on asset sharing – the drivers use their own cars. Uber has developed a collaborative ecosystem in which the driver assumes the risk of winning rides, while the platform helps minimise that risk through the application of big data. The platform also creates agility through an internal decision-making system that responds to market changes in real time. This lets Uber apply usage-based pricing and direct drivers to locations where the probability of finding a fare is high. Finally, Uber uses a scheme whereby customers rate drivers. Via the big data platform, a would-be customer can see on his or her mobile device the closest drivers and their ratings. The rating system pushes drivers to offer clean cars and quality service, and it also provides at least a bit of personalisation. Allowing the customer to decide between the closest car and the one (maybe a bit farther out) with the highest rating may not sound like much, but it is still far ahead of traditional taxi services.”
Their conclusion is that if you are thinking about changing your business model or entering an industry with a new model, you can rate yourself on how well your model performs on the six features.
“If you don’t beat the competition on any of them, your chances of success are low. But if your model significantly outdoes the current model on three or more features, you are well positioned to succeed,” the professors say.
1. To rate yourself on a feature, first define what it means in your industry. For example, in financial services personalisation may mean tailored loan terms; in retail, it may mean customised T-shirt designs or one-off dresses; and in healthcare, it may mean data-enabled, targeted medicine.
2. Only when performance is expressed in such industry-specific ways can you develop metrics to evaluate and compare its model on the key features and begin to think about how to differentiate itself by using new technologies.
3. Although you cannot guarantee the success of an innovation, you can make it more likely by ensuring that your business model links market needs with emerging technologies.