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Changing Business Models - Surveying the Landscape

Changing Business Models - Surveying the Landscape

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Institute forStrategic Change
ChangingBusiness Models:Surveying theLandscape
Jane LinderSusan Cantrell
When people speak about "business models," they could bespeaking about three distinct things: components of businessmodels, real operating business models, and what we callchange models. A business model, strictly speaking, is theorganization's core logic for creating value. A change modelis the core logic for how a firm will change over time in orderto remain profitable. The capacity to distinguish andcommunicate these models will improve your organization'sfocus, establish a framework for competing agilely, and positionyour company to thrive despite industry discontinuities.
May 24, 2000© Accenture 2000-2001
 
moving to "clicks 'n' mortar" channels, and high tech compa-nies that are exploiting alliances to streamline their supplychains. Frankly, we're confused. It seems that the executives,reporters, and analysts who use the term "business model"don't have a clear idea of what it means. They sprinkle it intotheir rhetoric to describe everything from how a companyearns revenue to how it structures its organization.We'd like to help straighten out the confusion. If nothingelse, we'll all be able to communicate better. And it's justpossible that some clear definitions and frameworks will helpus sort the interesting opportunities from the blind alleys.When people say "business model," they're really talkingabout three different kinds of things: components of businessmodels, real operating business models, and what we callchange models.
Components of business models.
These aren't really com-plete business models at all—they're just pieces. Businessmodel components range from revenue models and valuepropositions to organizational structures and arrangementsfor trading relationships (see Exhibit 1). Each may be animportant part of a business model, but not the whole thing.Since the Internet has dramatically impacted the way firmsreach customers, price, and tailor the commerce experience,e-watchers have paid a great deal of attention to new valuepropositions, new channel configurations, and new revenuemodels. Many have mistakenly called these business models.
Operating business models.
Operating business models are thereal thing.
An operating business model is the organization'score logic for creating value.
The business model of a profit-oriented enterprise explains how it makes money. Since organi-zations compete for customers and resources, a good businessmodel highlights the distinctive activities and approaches thatenable the firm to succeed—to attract customers, employees,and investors, and to deliver products and services profitably.Only the business model components that are part of theessential logic are included, so one company's operating modelmay look dramatically different from another's. Throughout therest of the paper, we use the term "business model" to meanoperating business model.
Change models
. A change model goes one step further. Itdescribes how an organization adapts in a dynamic environ-How do companies succeed? They choose an effective businessmodel and execute it superbly. They relentlessly renew theirdistinctiveness as competitors threaten. And they master theability to change their business model—again effectively—at apace that matches the dynamism in their markets.This isn't easy. Today, executives can't even articulate theirbusiness models. Everyone talks about business models but 99percent have no clear framework for describing their model.They do know what business they're in—they just can't describeit clearly. And if they can't describe it clearly, they can't shareit effectively throughout their organization. Furthermore, thefamiliar three-point strategic frameworks we've all learned atbusiness school aren't comprehensive enough to describe therich array of business model choices managers face. And thedetails matter. Small shifts in the business model can have amajor impact on profitability.This research note starts by defining what we mean by a busi-ness model. Then it lays out the business model landscape andthe common ways models evolve. Finally, we discuss implica-tions for management. Our goal is to provide operating man-agers with a better roadmap for leading change. Through ourinterviews with 70 company executives and analysts as wellas extensive secondary research, we conclude that:
n
Developing a sound business model matters
. Effectivecompanies know how to make money. And some strikinglynew business models have shifted the art of the possible.Innovative firms are using the Internet to create interlock-ing value propositions for different customer sets. Theresult? First mover advantages and switching costsincrease dramatically.
n
But business models wear out.
Competition catches up,markets shift, technology changes, and firms must altertheir business models to remain viable.
n
Leading companies don't just adjust their business mod-els incrementally, however, they master change models.
Heads-up managers know how business models evolve,they know where they are in the process, and they deliber-ately manage patterns of change.
What is a business model anyway?
Talking about new business models is all the rage. Under the"New Business Model" headline, we hear about e-commercestart-ups that sell through auctions, traditional firms that are
A Working Paper from the AccentureInstitute for Strategic ChangeSurveying the LandscapePage 2
 
n
And attracts capital for growth.
n
Growth and the promise of an IPO help the company attracttop talent, which enables them to develop an appealingWeb site and to sustain excellent customer service.This operating business model is not only sound logic, it's "round"logic. The components of the model reinforce each other (see theschematic in Exhibit 2). Pull out or modify any one of the piecesand the structure would have to change substantially.Furthermore, a firm with several divisions may have several oper-ating business models. How can you tell? If the divisions could bespun off with no impact on their ability to compete or remainprofitable, their operating business models are independent.
Global Tire and Rubber
Let's go through another, more traditional example (see Exhibit3). Around 1990, the operating business model for a firm we'llcall "Global Tire and Rubber" had three major value proposi-tions. They attracted quality-focused consumers with premium,branded replacement tires. The company reached these cus-tomers through high-service independent and company-owneddealerships and through aggressive advertising of their qualityment. A change model is the core logic for how a firm willchange over time to remain profitable in a dynamic environ-ment. Operating business models create core assets, capabili-ties, relationships, and knowledge; change models extend andleverage them.More about change models later. Let's illustrate an operatingmodel by walking through two examples: SupplyGenie.com, anInternet business-to-business office products site, and "GlobalTire and Rubber," a traditional consumer products manufacturer.
SupplyGenie.com
n
SupplyGenie.com sells office products at dealer cost overthe Internet.
n
The great prices attract small and mid-sized firms accus-tomed to paying 25 to 40 percent markups.
n
Good service—including wide selection, next day delivery,and phone center support—keeps customers coming back.
n
This builds volume.
n
High volume enables SupplyGenie to negotiate purchasediscounts with wholesale suppliers,
n
Which, along with a lean cost structure, gives SupplyGenieits profit,
A Working Paper from the AccentureInstitute for Strategic ChangeSurveying the LandscapePage 3
They say "business model,"but they mean:For example:As in:
Pricing model
n
Cost plus
n
CPM (cost per thousand)"Free is almost a default business model on the Web." Fortune, March 1999.Revenue model
n
Advertising or broadcast model
n
Subscription or cable model
n
Fee-for-service"The solution for many established companies and startups [to their difficultyfinding good business models], has been to apply traditional business modelssuch as advertising, subscription services and retail sales to the Web…."Webmaster Magazine, October 1996.Channel model
n
Bricks 'n' mortar
n
Clicks 'n' mortar
n
Direct-to-customer"Disintermediation is already taking a hit on the business-to-consumer front,where new business models, such as cobranding and digital channelmanagement — as opposed to channel cannibalization — are beginning to takehold." Computerworld, December 1999Commerce process model
n
Auction
n
Reverse auction
n
Community"Ancient history may perhaps be a good place to find a new business model.Traditional auctions have been held since the time of Babylon. Requirements?A community of interested buyers and sellers, agreed rules of conduct, a timeand place. Auctions are a time-honored method of getting the best price forgoods." PriceWaterhouseCoopers, August 1999.Internet-enabled commercerelationship
n
Market-maker
n
Aggregator
n
 Virtual supply alliance
n
 Value network"The real key to competing in the New Economy is in business modelinnovation. Based on the Internet, fundamentally new models of the firm andits interaction with external entities have emerged…. " Business 2.0, November1999.Organizational form
n
Stand-alone business unit
n
Integrated Internet capability"The eCommerce Steering Committee considered the following electroniccommerce business models: skunkworks, standing steering committee,eCommerce executive VP, new business unit, spin off, and outsourcing." Big 5Consultant, December 1999. Value proposition
n
Less value and very low cost
n
More value at the same cost
n
Much more value at greater cost"There are two basic business models. Companies either compete on price, orthey compete on quality." Oil and Gas Industry Analyst, January, 2000.
Exhibit 1: Components of a Business Model

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