The Financial Daily

Companies fail when faced with disruptive technology because they don't know how to change their business model says Innosight Chairman --- Mark Johnson.

McKinsey award winning author of December 2008 article "Reinventing your Business Model" in Harvard Business Review has inked one of the most admired books by the viewers in business process designing, industry and trade.  Business model creations and innovations have already outlined entire industries and redistributed billions of dollars of value.  In retail, discounters like Target, Wal-Mart, and Amazon that entered the market with innovative business models now account for fully 76% of the total industry market capitalization, having seized more than $300 billion of value.  Low-fare US discount and regional airlines have grown from a blip on the radar screen to 55% of the market value of carriers.  More than half of the 26 companies founded in the last quarter century that have entered the Fortune 500 in 10 years before the current recession did so through business model innovation.

Business model innovation is on the minds and at the priority list of a great many CEOs these days.  A 2008 IBM survey found that nearly all of the more than 1,100 CEOs it polled reported a need to adapt their business models; more than 700 of them said extensive changes were required.  And there's certainly no shortage of discussion about it:  Google the term and you'll get back more than 12 million hits.  Yet despite all the concern and discussion, few companies seem to know how to pull it off.  A recent study by the American Management Association found that no more than 10% of the investments that global companies are making in innovation are focused on developing new business models.  And the companies that do attempt it rarely succeed, despite all the resources and talent at their disposal; most successful innovative business models are forged by start-ups like Amazon, FedEx, and IKEA.

Why doesn't all this high-level attention translate to action?  Companies can't pull business model innovation because, as familiar as the term is, very few people really understand what a business model is (and what it isn't) or what model their organization is actually operating under, much less how they would go about creating a new one and why or when they should.  That's what this book is all about.  At its heart it's a book about change.  As markets mature and new technologies are invented,  organizations continually face new threats to their survival and new opportunities for growth.  For a company to remain relevant over the long term, it must respond to these shifting conditions intelligently.  The question is how.  This book offers a systematic answer.

Establishing a successful business does not mean any longer that you will still be successful a few years down the line.  In 1958, the average amount of time a company spent on the S&P 500 was 57 years.  In 1983, it had dropped to 30 years and by 2008, it was 18.  As the rate of change rapidly accelerates, so does the possibility of your company becoming obsolete.  According to Mark Johnson, co-founder and chairman, Innosight, a strategic innovation consulting and investing company, a major reason companies often fall by the wayside is because they are unable to deal with disruptive innovations.

One often hears of companies that didn't last out because a competitor came in with a disruptive technology that rendered them useless.  Johnson offers a slightly different perspective.  "The issue isn't that the company affected could not develop the disruptive technology.  For instance, Digital Equipment Corporation had the technology for the personal computer but failed to capitalize on it as it didn't get prioritized internally, and this is because it required a different business model, " he says.  Companies, he says, are no longer built to last, but must be built to transform.  In other words, companies must pick up on when they need to switch from their existing processes to a new way of functioning.  In cases where companies were affected by a disruptive competitor, they either didn't recognise the need to do so, or didn't do it successfully.  In his new book, "Seizing the White Space", Johnson examines how companies can make this transition successfully and provides a framework that enables this process.

To start with, Johnson points out that not all new initiatives need a new business model.  "Very often, it is possible to enter a new market or launch a new product without making a fundamental change in how the company functions and still be successful.  It is when companies enter what we call "white spaces" is when they need to change their business model, " he says.  He defines 'white space' as a very specific term that could apply to every company.  "It is the opportunities outside the core that would require a business model different from the existing one to exploit them, " he says.

Most companies tend to fail at business model innovation because they are unsure about how to make the transition from the existing model to a new one.  And to do this, the first step is to clearly understand the existing model.  "Business model innovation is something that is more core than the core, " says Johnson.  White the term 'core' is normally used to refer to the core business, Johnson uses it to describe the essence of what business is in the first place - creating and delivering value.  "When a company wants to address a new area of opportunity, like Apple did with the iPod, or is getting affected by some disruptive innovation elsewhere, it is essential to get back to the core of how to connect with the customer.  And this is done by understanding how to create real value, how we can make money doing that and how we need to organise the business," he says.  This is where Johnson's four-box business model framework fits in.  Designed on the basis of both working with transformational companies and studying companies that managed to make the transition to a different business model effectively, the framework serves as a guidepost to build a business model.

"The four-box model basically gives you a lens by which to establish a process.  It helps organise a set of critical assumptions you need to test, like the customer value proposition, profit formula, key resources and processes," says Johnson.  Using regional examples like Hindustan Unilever (Project Shakti) and Tata Motors (Nano), Johnson demonstrates how it is possible to use a structured approach to identify and enter white spaces.

He goes on to add that often, what distinguishes the truly great companies from the rest over a period of time, is that they come up with a set of activities, resources and processes that are integrated across the board in a unique way that makes it difficult for another company to copy them.  And this to a large extent is a result of how their business model is structured.  He adds that companies need not actively go looking for white spaces, but should instead focus their energies on pursuing untapped needs.  Whether or not these opportunities qualify as white spaces would then determine if it needs a new business model.  Outlining the process, Johnson says that it has to start with wanting to satisfy a customer need.  Once you know what the customer wants, design a business system which both delivers a value proposition and allows you to make money out of it.  At this stage, Johnson says one need to document what the original business system looks like and whether you need a new system to deliver the new value proposition after comparing the key critical processes and resources.  The final step is to then connect with the real customer in a foothold market and test the assumptions before scaling it up - if it works.

He cautions however, against companies not clearly demarcating the space between the incumbent business and the new venture.  "At times, the core business puts undue pressure on the implementation of the new idea to speed up the process, which often doesn't work out well.  Another mistake people tend to make is to split resources across both projects.  I'd rather have three people focused on the new project rather than ten people working across both," he says.

Ultimately, it is about finding a sustainable business model.  Simply put, it's a model that repeatedly delivers value to the customer and also provides a sustainable way of making money while doing it.

Reviewed by Mohammed Hanif Ajari, Vice President, Institute of Cost and Management Accountant of Pakistan.

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