Reinventing Your Business Model

Last Updated Jan 6, 2009 7:24 PM EST


The Idea in Brief

When Apple introduced the iPod, it did something
far smarter than wrap a good technology in a snazzy
design. It wrapped a good technology in a great
business model
. Combining hardware, software,
and service, the model provided game-changing
convenience for consumers and record-breaking profits for Apple.

Great business models can reshape industries and
drive spectacular growth. Yet many companies find
business-model innovation difficult. Managers don't
understand their existing model well enough to know when
it needs changing--or how.

To determine whether your firm should alter its
business model, Johnson, Christensen, and Kagermann
advise these steps:

1. Articulate what makes your existing model
successful. For example, what customer problem does it
solve? How does it make money for your firm?

2. Watch for signals that your model needs
changing, such as tough new competitors on the horizon.

3. Decide whether reinventing your model is worth
the effort. The answer's yes only if the new model
changes the industry or market.

The Idea in Practice


Understand Your Current Business
Model


A successful model has these components:

  • Customer value proposition. The model helps
    customers perform a specific "job" that alternative
    offerings don't address.


    MinuteClinics enable people to visit a doctor's office
    without appointments by making nurse practitioners available to
    treat minor health issues.

  • Profit formula. The model generates value
    for your company through factors such as revenue model,
    cost structure, margins, and inventory
    turnover.

    The Tata Group's inexpensive car, the Nano, is profitable
    because the company has reduced many cost structure elements,
    accepted lower-than-standard gross margins, and sold the Nano in
    large volumes to its target market: first-time car buyers in
    emerging markets.

  • Key resources and processes. Your company
    has the people, technology, products, facilities,
    equipment, and brand required to deliver the value
    proposition to your targeted customers. And it has
    processes (training, manufacturing, service) to leverage
    those resources.


    For Tata Motors to fulfill the requirements of the Nano's
    profit formula, it had to reconceive how a car is designed,
    manufactured, and distributed. It redefined its supplier
    strategy, choosing to outsource a remarkable 85% of the Nano's
    components and to use nearly 60% fewer vendors than normal to
    reduce transaction costs.


Identify When a New Model May Be
Needed


These circumstances often require business model
change:




Further Reading


Articles



Marketing Malpractice: The Cause and the
Cure


Harvard Business Review

December 2005

by Clayton M. Christensen, Scott Cook, and Taddy
Hall

Ted Levitt used to tell his Harvard Business
School students, "People don't want a quarter-inch
drill--they want a quarter-inch hole." But 35 years
later, marketers are still thinking in terms of
products and ever-finer demographic segments. The
structure of a market, as seen from customers' point
of view, is very simple. When people need to get a
job done, they hire a product or service to do it
for them. The marketer's task is to understand what
jobs periodically arise in customers' lives for
which they might hire products the company could
make. New growth markets are created when an
innovative company designs a product and then
positions its brand on a job for which no optimal
product yet exists. In fact, companies that
historically have segmented and measured markets by
product categories generally find that when they
instead segment by job, their market is much larger
(and their current share much smaller) than they had
thought. This is great news for smart companies
hungry for growth.


Meeting the Challenge of Disruptive
Change


Harvard Business Review

March 2000

by Clayton M. Christensen and Michael
Overdorf

Why can't large companies capitalize on the
opportunities brought about by major, disruptive
changes in their markets? It's because
organizations, independent of the people in them,
have capabilities. And those capabilities also
define disabilities. As a company grows, what it can
and cannot do becomes more sharply defined in
certain predictable ways. The authors have analyzed
those patterns to create a framework managers can
use to assess the abilities and disabilities of
their organization as a whole. They also suggest
ways large companies can capitalize on opportunities
that normally would not fit in with their processes
or values.


The Customer-Centered Innovation Map


Harvard Business Review

May 2008

by Lance A. Bettencourt and Anthony W.
Ulwick

We all know that people "hire" products and
services to get a job done. Surgeons hire scalpels
to dissect soft tissue. Janitors hire soap
dispensers and paper towels to remove grime from
their hands. To find ways to innovate, it's critical
to deconstruct the job the customer is trying to get
done from beginning to end, to gain a complete view
of all the points at which a customer might desire
more help from a product or service. A methodology
called job mapping helps companies analyze the
biggest drawbacks of the products and services
customers currently use and discover opportunities
for innovation. It begins with breaking down the
task the customer wants to accomplish into the eight
universal steps of a job: 1) defining the
objectives, 2) locating the necessary inputs, 3)
preparing the physical environment, 4) confirming
that everything is ready, 5) executing the task, 6)
monitoring its progress, 7) making modifications as
necessary, and 8) concluding the job. Within each
step lies multiple opportunities for making the job
simpler, easier, or faster. By locating those
opportunities, companies can discover new ways to
differentiate their offerings.


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