Nokia’s Lumia: Microsoft’s Visible Surface or Invisible Fascia?

The last few months have been momentous for Microsoft. An acknowledged leader in software with annual revenues of USD 79 billion and market capitalization of USD 235 billion, Microsoft is a formidable player in the global technology space, notwithstanding the emergence of new Internet technologies and new players, and the changing business models. There have been two momentous decisions the corporation has made over the last two months. Firstly, the corporation has decided to transform itself from a software DNA to a devices and services play. Secondly, it has made its most ambitious acquisition yet of acquiring Nokia’s mobile business including all of its design, manufacturing and sales organization, along with long term 10 year licenses to Nokia’s patents, maps and the Nokia brand itself.  The author has analyzed the Microsoft-Nokia deal from a strategic perspective, and has found it to be a win-win for all, as declared by Microsoft CEO Steve Ballmer. Interested readers may see the blog post titled “Connecting with Nokia: Microsoft’s Timely Idea?” in Strategy Musings, September 9, 2013 (http://cbrao2008.blogspot.in/2013/09/connecting-with-nokia-microsofts-timely_9.html).

The above referred blog post analyzed the acquisition from a strategic and business perspective that could be interesting for students of management and strategy. Typically, strategies and businesses are built around products and technologies. In this context, it would be appropriate to take forward the analysis of the previous blog post in terms of product and technology management in a rapidly evolving industry. Such analysis is bound to throw up valuable insights into how the new Microsoft could be stacking itself up in the devices and services space, and what could be the challenges and opportunities for the acquiring Microsoft and the acquired Nokia division. The analysis could also throw light on the options available for other troubled software and hardware behemoths and embattled handset makers. That the acquisition is taking place at a time when the barriers for entry into the handheld mobile phone industry have sharply fallen makes the analysis even more interesting and relevant.

Microsoft product divisions

Microsoft has indeed evolved from the business model of providing only operating system software to personal computers to four other areas. Microsoft’s  current five divisions are windows, servers & tools, online services, business, and entertainment & devices. These five divisions account for approximately 22, 28, 4, 35 and 10 percent of the total annual revenues, trending from the Q4, 2013 data. Of these five divisions, three are profitable (Windows at 25, Servers and Tools at 42 and Business at 68 percent of divisional revenues) while two are loss making (online services at 50 and Entertainment and Devices at 5 percent of divisional revenues), again trending from Q4 results. These, however, are not watertight product or service divisions, and except the entertainment division, the other divisions are interrelated to personal computing software. To understand Microsoft’s perspectives on these divisions, it would be best to consider extracts from Microsoft’s official website as below.

Windows Division develops and markets operating systems for computing devices, related software and online services, Surface RT and Pro devices, and PC accessories. This collection of software, hardware, and services is designed to empower individuals, companies, and organizations and to simplify everyday tasks through seamless operations across the user’s hardware and software. The general availability of Surface RT and Windows 8 started October 26, 2012. The general availability of Surface Pro started on February 9, 2013.

Server and Tools Division develops and markets technology and related services that enable information technology professionals and their systems to be more productive and efficient. Server and Tools product and service offerings include Windows Server, Microsoft SQL Server, Windows Azure, Visual Studio, System Center products, Windows Embedded device platforms, and Enterprise Services. Enterprise Services comprise Premier product support services and Microsoft Consulting Services. Microsoft also offers developer tools, training, and certification.

Microsoft Business Division (“MBD”) develops and markets software and online services designed to increase personal, team, and organization productivity. MBD offerings include the Microsoft Office system (“Office,” comprising mainly the core Office product set, Office 365, SharePoint, Exchange, and Lync), which generates over 90% of MBD revenue, and Microsoft Dynamics business solutions. The general availability of the new Office started on January 29, 2013.

Online Services Division (“OSD”) develops and markets information and content designed to help people simplify tasks and make more informed decisions online, and help advertisers connect with audiences. OSD offerings include Bing, Bing Ads, and MSN. Bing and MSN generate revenue through the sale of search and display advertising, accounting for nearly all of OSD’s revenue.

Entertainment and Devices Division (“EDD”) develops and markets products and services designed to entertain and connect people. EDD offerings include the Xbox entertainment platform (which includes the Xbox 360 gaming and entertainment console, Kinect for Xbox 360, Xbox 360 video games, Xbox LIVE, and Xbox 360 accessories), Skype, and Windows Phone, including related patent licensing revenue. Microsoft acquired Skype on October 13, 2011.

The above does indicate that Microsoft has been seeking to diversify its offerings and be in step with, though not step ahead of, times. The acquisition of Hot Mail and Skype platforms as well as development of Azure cloud and the launch of Xbox gaming consoles were some success stories. However, the best what Microsoft could marshal was not good enough for the corporation to be on top of the dramatic changes in computer and connectivity technologies and the immensely growing popularity of tablet and mobile products.

Scratching the surface

The first sign that Microsoft took the tablet revolution seriously, though belatedly, came when the company launched innovative looking Surface tablet in RT version in October 2012 and in Pro version in February 2013. Surface, on paper, had additional ports, micro SD card and USB drive. It had also a sleek magnetic cover which doubles as a QUERTY keyboard and a capacitive touch screen on which a pen could be used. In addition, unlike iPad, it could provide an ability to utilize a complete Office suite. It appeared as though Microsoft found a niche in tablet computers with Surface that could do content creation as opposed to iPad which was primarily developed for content viewing. That was because Surface as mentioned above had additional functionalities which would enable a more compatible notebook performance.

Sales of the two sleek Surface models have anything been but tepid, with Microsoft having to take a USD 900 million inventory adjustment charge in the last quarter. The reasons lie in the complexity of Surface. Market favored the simplicity of iPad while the gap between content creation and content viewing was bridged by accessories and applications for iPad.  The high price set by Microsoft for Surface reflected Porter’s classic entry deterrent price level for a new player seeking a foothold in a hotly competed tablet computer industry. What was a clear USP in terms of keyboard magnetic flap was elusive, coming as it does with additional price. The other reason for lackluster performance of Surface, probably, was a lack of emotional connectivity of consumers with Microsoft as a device maker.  Microsoft is reportedly working on a successor model of Surface but whether and how it would make a different mark remains to be seen.

Mobile phone pecking orders

Given that Surface could not even scratch the surface, in a manner of speaking, in the battle of the tablets Microsoft had to go back to the drawing board particularly in the context of the publicly declared objective of becoming a devices and services company. The indications that the inroads made by Xbox One in the gaming console business are getting finally halted or even rolled back by Sony’s PS4 in the battle of the eighth-generation gaming consoles (again due to a typically Microsoft desire to aim high-end with price premium), Microsoft really has been facing a real strategic challenge in quest of viable and dominant devices business objective. The recent acquisition of Nokia’s mobile handset business with its products and people (along with a 10 year licensing of Nokia brand, patents and maps) for USD 7.2 billion, in the context, emerges as a timely strategy to redouble the devices effort.

Nokia’s mobile handset business achieved a turnover of USD 15 billion in 2012, with a physical sales of 336 million units, of which 35 million units were smartphones, with market shares of 19.3 percent in total mobile sales and 4.9 percent in smart-phones worldwide (for Nokia, smartphones were just 10.4 percent of its total sales). Samsung has been the market leader in mobile phones with an estimated turnover of USD 20 billion in 2012, with a physical sales of 406 million units, of which 236 million units were smartphones with market shares of  23.4 percent in total mobile phone sales, and 30.3 percent in smartphones worldwide (for Samsung, smartphones were 57.7 percent of its total sales). Apple, the original smartphone pioneer and leader is the second dominant player with a turnover of USD 15 billion in 2012, with a physical sales of 136 million units, of which all the 136 million units were smartphones, with market shares of 7.8 percent in total mobile phones and 19.1 percent in smartphones worldwide (for Apple, smartphones were 100 percent of its total sales). Worldwide, total mobile sales were 1736 million units, of which smartphones were 713 million units (41.1 percent to total).

Excluding Samsung, Apple and Nokia all other phone manufacturers (including but not limited to such names as ZTE, HTC, LG, BlackBerry and Sony) sold 858 mobile phones worldwide, of which 326 million were smartphones, with market shares of 49.5 percent in total mobile phones and 54.3 percent in smartphones (for other manufacturers, smartphones were 45.1 percent of total mobile phones). In terms of operating systems, of the 713 million units of smartphones sold, Android led the pack with approximately 70 percent share, followed by iOS at 21 percent, BlackBerry at 3.5 percent, Microsoft Windows at 3 percent and all others at 3 percent in 2012. All these statistics point to the enormous challenge as well as opportunity that Nokia has under Microsoft ownership. The challenge is one of uphill battle in terms of operating system share and overall market order. The opportunity is one of being able to maintain and enhance the overall Nokia share in feature phones, and increasing the share in smartphones several times over, to the levels of Apple and Samsung, as an aspiration.  

Beyond classic theories 

The answer to this lies in likely environmental trends and competitiveness of smartphones (which did not exist a few years ago but have taken center stage now).  Would the ratio of smartphones to basic phones which has reached an almost equal share increase even higher, to say 75 percent, in favor of smartphones? Or, will all mobile phones will only be smartphones in one scenario and new range of feature phones with simpler operating systems revive the feature phones in another scenario? Will Microsoft-Nokia follow these trends or shape these trends? Will, in an anxiety to push up the Windows operating system, Microsoft ignore the still formidable franchise that Nokia has in feature phones and cause its decline, with or without a commensurate increase in smartphone sales? Would Microsoft be better off making Windows OS as its proprietary OS for its Nokia/Lumia phones, much as Apple iOS is for iPhones? On the other hand, in an increasingly commoditizing smartphone technology market, what would be the differentiating feature of Windows OS?   

Students and practitioners of strategy have, therefore, an excellent case study coming up in the Microsoft-Nokia deal. The technological and competitive dynamics of the computing and communications industries are so multifaceted that no single management paradigm, be it competitive strategy, core competence, lean or reengineering alone can provide a solution. However, all of these need to be collectively applied by Microsoft to achieve cost leadership, product differentiation and mass customization on the strength of current and additional core competencies.  On the face of it, Microsoft brings a world-class operating system and considerable finances while Nokia brings world-class hardware and worldwide marketing. The combination should have every chance of success. The only hurdle to the achievement could be any misjudgment on the part of Microsoft on the future evolution of industry and competition. The misjudgment could arise from an unwillingness to understand the necessity of addressing the full market spectrum in terms of multiple products and value points, a strategy already undertaken by Nokia in recent times. Appropriate judgment will reinforce and expand this process.

Industry evolution

Porter’s theory of competitive strategy considers industry evolution and the definition of industry to operate in, and the definition of industry boundaries. The computer and connectivity industries are undergoing a tremendous industry evolution. Hitherto, personal computers were the target of cannibalization by tablets.  According to IDC, the device industry research firm, phablets, which are smartphones with larger screens, will start to cannibalize into the market share of tablets over the next 12-18 months. Generally, phablets are smartphones with screen size that ranges from 5-8 inches and are designed to combine the functions of a phone and tablet. IDC expects a new round of device cannibalization to kick in, but this time with large-screen (5-plus inch) smartphones beginning to impact the smaller (7-8 inch) tablet market. Also, cost will continue to be a key parameter. IDC expects lower-cost devices will drive global interest and aid in increasing uptake among first-time buyers in commercial sectors like education. That said, the overall device industry would continue to offer great potential for Microsoft, in terms of both operating systems and a range of products, with the twin strategy being possible with the Nokia device technology with IP and organizational strengths (engineering, manufacturing and marketing) now acquired.  

According to IDC projections, globally, smart connected devices -- PCs, tablets and smartphones -- will continue to surge with overall shipments surpassing 2 billion units by the end of 2015 with a market value of USD 735.1 billion. Shipments of desktop PCs are expected to touch 134.4 million units by 2013 and 123.11 million by 2017, while, that of portable PCs are expected at 180.9 million units by 2013 and 196.6 million by 2017. In the case of tablets, shipments are projected to touch 227.3 million units by 2013 and 406.8 million by 2017. Smartphone shipments are expected to touch 1,013.2 million units by 2013 and 1,733.9 million by 2017 (double the current level in just four years!). In terms of device mix, total PC shipments accounted for 28.7% of the smart connected device market in 2012 while tablets accounted for 11.8% and smartphones for 59.5%. By 2017, total PCs are expected to drop to 13%, while tablets and smartphones will contribute 16.5 % and 70.5%, respectively to the overall market. The shift in demand from the more expensive PC category to more reasonably priced smartphones and tablets will drive the average selling price (ASP) for the collective market from USD 462 in 2012 to USD 323 in 2017.

Visible surface; invisible fascia

In the communication and computer industries, the product is the visible surface. Without any pun, Microsoft thought, for good reasons, that its Surface tablet computer would lead the visible product revolution in the device strategy. Despite the setback, a new generation of Surface may still click. That said, Microsoft should fight against the temptation of using Lumia as just another Surface, that is just as a premium product. Lumia range could be highly visible products but their contribution to Microsoft has the potential to be internal and expansive, in terms of device engineering, technology and hardware. Rather than being a mere skin or surface of the device strategy, Lumia could be the fascia of a new Microsoft, both in terms of corporate anatomy and corporate visibility. Anatomically, fascia is the thin fibrous tissue under the skin that covers and ties the muscles together. Technologically, it also signifies the dashboard of a motor vehicle which provides an interactive platform that connects the motor vehicle with the external world. The fascia analogy perfectly fits Nokia/Lumia in/for Microsoft; it presents itself as a unique techno-marketing opportunity for Microsoft. The reasons lie in the likely dramatic evolution of the computer, tablet and smart-phone industries as discussed above.

The strategic opportunities for Microsoft lie in leveraging the acquired Nokia/Lumia technological capabilities to develop a full range of basic and feature phones, smartphones, phablets and tablets, with screen sizes from 2 to 10 inches. This should be accompanied by reinforcement of high-end and low-end manufacturing strengths, deploying premium manufacturing and low cost manufacturing simultaneously. It should be a grand expansive strategy, rather than an incremental niche strategy. A matching organizational strategy that reinforces and builds upon Nokia’s proven global distribution, sales and marketing strategies, rather than reformats them in a Microsoft format, would also be called for. Microsoft, clearly, has no time or need to rediscover the wheel, and worse still discover in an expensive manner a wrong wheel after considerable effort, time and cost! And in this nimble and agile expansive strategy, Nokia Lumia would be both the visible and invisible fascia.  India, as a country of low cost mobile phone development and manufacturing for Nokia India would offer great opportunities for driving Microsoft’s new device and services strategy, increasing Microsoft revenues manifold in the process.

Posted by Dr CB Rao on September 15, 2013     

 

 

‘Post Bank of India’: The Next Economic Revolution!

Generations of Indians, more particularly the home birds such as the housewives and senior citizens and expectant students and job seekers, have experienced the Indian post office system as an integral part of their lives. The bright red post box found at every street corner, the humble neighborhood post office, and the energetic post person with his or her cycle have been ubiquitous symbols of tireless public service. The colorful stamps periodically brought out  by the Indian philately system has contributed to remarkable integration across the country. The money order system which was almost the only way to transfer money a few decades ago had an interesting aside; the white message card at the bottom to be torn off and given to the recipient along with the money meant more than the money itself to the recipient. Listening to the shout of the postman announcing “post” or the anticipation of opening the house mail box had been the daily triggers of joyousness, and in some unfortunate cases, occasional pathos too for all individuals. The telegrams were the instant messengers of all news, good and sad.

The post office system was especially empathetic to the indigent rural and poor citizens. It pioneered the savings habit amongst them with very low minimum balance requirements. The advent of superior telecommunications and the surge of national banking as well as emergence of other mailing alternatives have, no doubt, challenged the dominance of the Indian postal system. That said, the Government owned post office system is not to be written off yet. In fact, its core competence of delivering the mail at the door step in every nook and corner with a personal connectivity by the postman with the people and homes he serves is not matched by any other competing service provider. The Indian postal system can reinvent itself and continue the glorious tradition of inimitable and personalized public service by becoming the Post Bank of India, as this blog post argues.      

Infrastructure and services

Even more than the Indian Railways, India Post (previously the Indian Posts and Telegraphs Department),  which falls under the Ministry of Communication and Information Technology amazes any resident or observer of India, for its reach and service. With a network of nearly 155,000 post offices, nearly 90 percent of which serve the rural population (rural population being 70 percent of India’s 1.3 billion population), with an area coverage of one post office for every 22 square kilometers and population coverage of one post office for every 9000 people, India Post has a formidable presence all across the vast country (of 3.287 million square metres). With the telecommunications and Internet revolution, India Post has also kept pace with the introduction of electronic versions of its physical services to an extent. Over time, India Post moved into savings bank operations as well as other financial services.  Today, it has 233 million post office savings account holders and a formidable deposit base of Rs 5.5 billion.

Whatever India Post has done to keep pace with the changing times has been commendable but not transformative, relative to its infrastructure, organization and reach. Time has now come for India Post to plan a paradigm shift in its vision, strategy and structure in terms of its products and services. In every sense, India Post has the ability to touch the lives of every Indian, and also connect every Indian nationally and internationally. With growing population and globalization, and the need for increased connectivity, India Post can leverage its core competence of mailing platform to consolidate itself into a communication hub and ultimately transform itself into a multifaceted economic hub. In this process, India Post can render a host of communication and economic services, with innovative products, that can ensure inclusivity for the vast rural and semi-urban population as well as the indigent sections of the society. This requires a reinforcement of existing services and diversification into new ones. Global communication and national banking would be two of India Post’s principal hubs which it can interleave with a wide range of social, essential and educational services too.

Global communication hub

India Post has in it the historical capability to continue to be the dominant mail agency of India for decades to come. At the same time, India Post has to recognize that it has lost substantial ground to private national and international courier services. India Post has, in the past, underestimated five critical competency levers that are required in a changing millennium. Firstly, it underestimated the growing need for safety and surety in mail and parcel services. Secondly, it underestimated the importance of a collection organization to supplement its delivery organization. Thirdly, it underestimated the need for dedicated transport infrastructure to ensure speed and flexibility in delivery. Fourthly, it underestimated the extent of information technology upgradation that is required to not only trace and track physical mails but also to convert physical mails into more cost-effective and time-effective electronic mails. For example, it never occurred to India Post that like Gmail and Yahoo it could also offer “Indiapost.com” mail service, for example. Fifthly, it never engaged itself with the changing trends of social communication with its own platforms.

All is not lost, however. Each of the above shortfalls can be taken care of with appropriate infrastructural, technological and organizational initiatives. In fact, it can convert the disadvantages into advantages by being ahead of the competitive curve. It can, for example, implement Good Transportation Practices for not only safety and surety for all universal mailing applications but also to enter into newer mailing services customized for multiple industries. It can restructure and refocus its delivery organization to double up as a collection organization as well. With superior transportation support for door to door travel and multiple shifts for personnel India Post can achieve enhanced customer contact. India Post also needs to modernize and diversify its transport fleet and also outsource mail and parcel transportation to achieve overnight delivery. Information technology can be leveraged to develop and offer India’s own multi-language dedicated email service. And, finally from developing applications suitable for the three operating systems of computer, tablet and mobile devices, India Post needs to develop its own operating systems and networking platforms for Indian needs.

Not too many years ago, people wanting to send greetings in India used to rely on the several telegraphic messages of India Post to communicate the wishes. Today, everyone relies on 123Greetings or a similar Internet portal, most of which are structured and executed by Indian software engineers! India Post can resurrect its historical role as a communication hub by providing communication connectivity for all requirements of the Indian population, which is both resident and non-resident in India. India Post can also tie up with appropriate multi-product gifting agents globally to participate actively in the global social networking. With each day of the year being observed as a special day internationally, special messaging and gifting could become a recurrent source of additional business for India Post.

This leads us to the hypothesis that India Post can no longer see itself as an India-centric communication entity. The more India Post globalizes by establishing physical infrastructure in other countries, executing international mail sharing arrangements and setting up global mail delivery objectives, the more effective will India Post will be as a global communication hub. As India Post moves from a business model of being a predominantly physical mail deliverer in India to a business model of globally present Indian communication hub, the organization has a lot to strengthen itself and fulfill its national mission in an international setting.     

National banking hub  

One of the simpler thoughts has been that India Post should diversify itself into banking operations. Given that post office savings schemes have been popular, banking is a logical extension. India’s Finance Minister P Chidambaram has proposed modernization of the country's postal network to make the post offices become part of the core banking solution and offer real time banking services. He has desired that the ubiquitous post office should morph into a neighborhood bank, proving a major boon for villages. The Reserve Bank of India (RBI) has recently formulated certain guidelines, including making all entities with a credible track record eligible for a banking licence. India Post has a strong rural presence and is already into the small savings scheme. It has, by itself, around 155,000 local post offices and around 24,000 district offices against a total of 90,000 bank branches (all banks included).  The new guidelines for setting up private banks issued by the RBI, among other things, makes it mandatory for new banks to open at least 25 per cent of branches in unbanked rural centers. India Post will handsomely win on this score.

India Post is already into various financial services, including small saving schemes, postal insurance, foreign exchange services, money remittance services etc as alluded to earlier. That said, India Post needs to do more than what it has been doing to become a full-fledged bank, competing with the likes of SBI or ICICI Bank. This requires India Post to implement very robust banking systems and Internet based high capacity servers and information technology backbones. India Post also needs to induct top flight banking and information technology professionals into its organization. Government also needs to support India Post with the integration of the post office banks with the direct cash transfer schemes and preferential interest rates for rural based savings and lending schemes. India Post has to evaluate the desirability of spinning off its financial services arm into a full-fledged bank to provide the requisite autonomy and competitiveness to the banking operations while providing access to the available infrastructure.

Compared to the Indian banking services which are still oriented towards the urban and semi-urban clientele in India, the Indian post office system is very well poised to facilitate and promote financial and economic inclusivity to the rural population in India. This, however, can be reinforced and supplemented with providing a range of community and economic services to the population. Each post office can offer an Internet centre which can act as an e-choupal popularized by ITC as an information and commercial exchange platform in the agricultural and aquaculture domains for the rural population and farmers. If ITC could set up 20,000 e-choupals as a private sector initiative and touch the lives of 15 million farmers in 100,000 villages, one may imagine what India Post with its 155,000 post office network all across India can achieve in financial and economic inclusivity, covering the billion rural citizens. In fact, taking advantage of complementary nature of communication and banking, of local production and national/global markets, post office network could even emerge as the new educator of information technology for the vast indigent population of India.

Structure to support strategy

The concept of India Post morphing into Post Bank of India synergizing global communication with national banking is a great strategic value proposition. For the strategy to succeed, structure must support strategy. While continued ownership by, and policy support from, the Central Government is essential, it would be necessary to move India Post from a departmental structure to corporate structure, with requisite empowerment and accountability.  As Alfred Chandler proposed in his landmark book published in 1962, structure must follow strategy. A new strategic direction for India Post to elevate its communication and financial services to an entirely new (and high) trajectory will require several structural inputs such as definition of strategic business units, creation of new organizational structures, induction of new technologies and talents, re-training of current talent base, incorporation of market competitive strategies and processes, and payment of market competitive salaries with services and tariffs that are aligned to benchmarks of social integration and economic inclusion. With an integrated strategy and structure, India Post which is famous for its evocative and colorful stamps, among others, is bound to put an indelible and pervasive stamp of integration and inclusivity on the Indian social and economic canvas.

Posted by Dr CB Rao on May 12, 2013     

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