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
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