Business Model Optimization and Transformation: Balancing Change with Continuity

Business Model is one framework that drives an organization towards growth and profitability. Business models in startups are developed by building and integrating models (or platforms) of technology, organization and resources. Technology determines the specifications of products and services, and how they are developed, manufactured and delivered to meet consumer requirements. Organization determines how roles and responsibilities are specified and talent assembled. Resources represent financial and material resources that constitute the infrastructure. The way the three models of technology, organization and resources are built up and are integrated determines how effective the business model is in terms of growth and development.  While this broad prescription is common for any firm, startup or established, in any industry, the relative balance of growth and profitability depends on a host of external and internal factors.

Interestingly, while the business model requires and determines how the platforms of technology, organization and resources are developed and utilized, once an organization is established, they tend to act as both enablers for and as constraints on how the further business models are developed. At first look, given that startups get developed with little of technology, organization and resources, established organizations should find it easy to have a multiplier effect from those established platforms. The reality in certain cases is that technology, organization and resources act as constraints than multiplicative enablers when established corporations try to develop themselves further. Again, a host of internal and external factors determine how the three models interact and influence business model development, from time to time.  Different academicians and practitioners have different opinions about the need for, and methodology of, transforming a business model, from time to time.

Static or dynamic

Industrial history has examples of firms being successful on product or service specialization not only over years but even over decades. Business model, however, is broader than just product or service definition. A business model has several components. Firms in the same industry may have business models that are entirely different. In some cases, transformations in technology have fundamental impact on business models. Very recently, HMV, once a global leader in the music industry and a global iconic brand in itself, called for administrator intervention to handle bankruptcy after nine decades of growth and turbulence. The music industry all these decades grew by leaps and bounds but HMV could not optimize its business model, including the technology, organization and resource components, to meet the transformational wave of music digitization.

HMV’s classic business model has, over the decades, been one of contracting music, recording it exclusively on certain media and marketing the media through physical stores. The musicians or the providers of music were paid royalties out of sales. While the company did change its technology platforms of recording from the classic long playing record to cassette tape, audio CD and DVD formats, and also opened marketing through distributed kiosks and the Internet, the company could never change the business model effectively enough to meet the competitive intensity of the new players.  There are several other firms which saw their industries grow but could not keep pace with the growth only because they were either impervious to, or ineffective in, changing their business models. It is no longer a point if business models can stay static at all in the competitive environment; business model optimization versus business model transformation is, on the other hand, is the only question.

Business model optimization

Business management is an essential feature of sustaining and growing business. Normal business management rarely is sufficient to assure success. At the very least business model optimization needs to be resorted to by each and every firm to stay successful. Business model optimization involves more innovative and effective use of the models of technology, organization and resources to keep business moving at least at the industry average rate. Automobile companies expanding portfolios and penetrating new regions based on new technologies, stronger organizations and deeper resources reflect business optimization. Similarly, automobile component makers diversifying their component portfolios are only optimizing their businesses to deepen and broaden their business linkages to automobile makers.

Business model optimization typically grows business and profitability at reasonable rates. It handles normal business and economic vicissitudes and additional competition. It helps companies keep pace with consumer demand, occasionally triggering additional demand. Business model optimization typically works best in a mature industry environment which has distributed competition and continuous technological improvement. Business model optimization is rarely effective for firms which want aggressive growth and profitability or in economic and industrial environments marked by discontinuities. Business model transformation would come in handy to such firms. Business model transformation does not mean either integration or diversification; rather it connotes an entirely different way of furthering its business.  

Business model transformation

Business model transformation involves moving of firms into adjunct areas utilizing new technologies, new organizations and full scale resources. Tata Coffee’s move into coffee shop business in collaboration and joint venture with Starbucks is an example. Microsoft’s move into computers with Surface tablet, Apple’s move into music streaming, Amazon’s move into electronic retailing and into digital publishing are some examples. That said, Google’s entry into mobile phone manufacture through acquisition of Motorola Mobility or Microsoft’s intended acquisition of Dell (to become a full-fledged computer hardware manufacture) may not be termed business transformation models. They are plain classic business diversification models. How then is business transformation characterized?

Business transformation expands the business boundary for a firm, utilizing breakthrough advances in technology, organization or resources. It invariably transforms how a firm conducts its business; for example, from a backend player in coffee growing and distribution to frontend coffee brewing and drinking. This case reflects a transformation of its organizational and resources models. Apollo Hospitals has transformed itself from a general medical and surgical healthcare company into an oncology therapy company additionally, bringing newer technologies such as robotic knife and photon knife for increasingly precise annihilation of cancerous cells. This is a combination of technology, organization and resource models. As may be seen, in business model transformation, the basic market that is served does not change.

Competency transformation

Business model optimization requires incremental improvements in technological, organizational and resource capabilities. On the other hand, business model transformation requires competency transformation of a higher order. In the domains of fine chemicals and pharmaceutical ingredients, conversion of synthetic manufacture into enzymatic manufacture is a transformative technology competence. In the wine industry, retention of pure resveratrol content and elimination of alcoholic tannin and toxin content is a transformative technological competence. In today’s world of outsourced development and manufacture, competency transformation may be seen as one of access and alliances and not one of availability. System integration, however, is a key competency that is required in-house in the accessed transformation.

Transformative technologies are at the core of business transformation models. Integration of state-of-the-art digital technologies and telecommunication platforms has helped a host of companies either reinforce the existing business models or morph into new ones. That said, organizational and resource capabilities are no less important. Steel makers in India, for example, never thought of owning mines abroad; oil refiners never thought of owning shale gas fields abroad. These models of business transformation require newer organizational competencies. Regional knowledge and cultural knowhow become important as Indian companies seek to secure supply sources and market segments in countries as varied as Africa and Middle East on one hand and Australia and America on the other.

Ownership, constraint or enabler?

In the Indian context, ownership becomes a key factor in how business models are operated. Promoter-led enterprises typically have struggled to break free of the startup mold and explore new pastures. Equally, there have been instances of such companies attempting extremely aggressive business transformation models without fine-tuning organizational models, upgrading technology models and, even more importantly, not taking resource models into consideration. The Indian public sector corporations, weighed down by governmental ownership constraints, are unable to leverage the existing technology, organization and resource platforms to achieve newer business platforms, despite the feasibility. Clearly, there is a need to view business models, whether for optimization or transformation, independent of ownership interests. National wealth is maximized only when business models are continuously optimized and/or transformed by firms keeping in view technology, organization and resource dimensions.

Posted by Dr CB Rao on January 27, 2013