The transformative business model: How to tell if you have one.

By: Stelios Kavadias, Kostas Ladas, and Christoph Loch

Introduction

An industry's transformation is usually associated with the adoption of a new

technology, but new technologies have never transformed an industry on their
own. What is needed is a business model that links the new technology to an
emerging market need. The purpose of this paper is to explain how this is done
based on an in-depth analysis of 40 companies that launched new business
models in a variety of industries.

How Business Models Work

A business model describes how a company creates value by defining the customer
value proposition and pricing mechanism. It also describes how the company is
organized including its partners and supply chain. Industries tend to have a
dominant business model that emerges over time. Although most attempts to
introduce a new model fail, some succeed by leveraging a new technology. For
example, Airbnb developed a new model that challenged the traditional economics
of the hotel industry. Airbnb does not own or manage property. Instead it allows
users to rent property through an online platform matching renter with home
owners willing to share a room or house. It simply takes a percentage of the rent.
Airbnb's value propositional offers a more personal service at a lower cost. Their
new business model connects what online technology enables with what the
marketplace wants.

Six Keys to Success

The authors identified six keys to success based on an analysis of 40 new business
models that appeared to have the potential to transform their industries. Company
models with a higher number of these six features were correlated with a higher
chance of transformation. The six features are as follows:

By: Nabin Tamang

 1. A more personalized product or service: Providing products or services
that are better tailored to customers' individual and immediate needs than the
dominant model.

2. A closed-loop process: Recycling used products to reduce overall resource

costs.

3. Asset sharing: Sharing costly assets reduces cost and reduces entry
barriers.

4. Usage-based pricing: Customers are charged when they use the product
rather than having to purchase the product.

5. A more collaborative ecosystem: Collaborating with supply chain

partners allocates business risks and facilitates cost savings.

6. An agile and adaptive organization: Real time decisions are made based
on changes in market needs.

Long Term Trends in Technology and Demand

Each of the six features is linked to a recognized technology trend and a

recognized market trend. Each feature represents a potential solution for linking
what the market needs to the new technological capabilities.

Technology trends include:

 The development of sensors that provide for cheaper and broader data
capture.

 Big data, artificial intelligence, and machine learning that enables

companies to convert large amounts of data into rules and decisions.

 Connected devices and cloud technology that permit widespread data

manipulation and analysis.

 Developments in manufacturing such as nanotechnology and 3-D

printing that create more possibilities for small-scale production.

By: Nabin Tamang

By: Nabin Tamang
Market trends include:

 The progress of developing countries has led to a worldwide increase

in demand for products and services.

 More diversity in customer preferences.

 Higher input costs for resources.

 More regulation.

From Innovation to Transformation

The theory is that the more key features a new business model has, the greater the
potential for transforming the industry. To test the theory, the authors analyzed
how many of the features each of the 40 new models included, and then compared
the results to each model's actual performance, e.g., gain in market share and the
extent the model was copied by other companies. Note that each key feature has a
different meaning in each industry. For example, personalization might mean
tailored loan terms in the financial services industry, but data-enabled targeted
medicine in the health care industry. The results of this research indicated that
transformative business models have three or more of the six features.

Uber's Taxi Operation

Uber's innovative taxi operation is associated with five of the six key features.
These include asset sharing (the drivers use their own cars), collaborative
ecosystem (the drivers assume the risk of obtaining riders, but the platform
minimizes the risk using big data), usage-based pricing (the fare varies for each
trip), agility (an internal decision-making system responds in real time), and
personalization (customers rate drivers and can see the closest drivers and their
ratings on their mobile phones).

Healx: A Case Study in the Field of Personalized Medicine

By: Nabin Tamang

The Healx business model focuses on the health care of patients with rare diseases.
Healx matches treatments to rare-disease patients with a platform that uses big data
technology and analytics across multiple databases owned by different
organizations. Their initial model included three of the six keys to transformative
innovation. These included asset sharing (e.g., use of clinical-trial[ CITATION
Ste16 \l 1033 ][ CITATION Ste16 \l 1033 ] databases that measured the effectiveness of
various drugs on common and rare diseases), personalization (identifying drugs
with high potential for treating the rare diseases covered), and collaborative
ecosystem (matching big pharma companies that have the trial data with health
care providers that have the effectiveness, incompatibility reactions, and personal
genome descriptions). Realizing their technology could predict the failures that
result from specificities in individual genomes, Healx developed a machine
learning algorithm that could match drugs to disease symptoms and predict exactly
which drug will achieve a specific level of effectiveness for a particular patient.
This added agility to the model by making it possible for the treating clinician to
make better treatment decisions directly with the patient rather than relying on
rules of thumb related to which drugs to use.

Conclusion

Industries need new technologies for transformation but having new technology
alone is not enough for industry to transform itself. It needs strong business model
that links the new technology to an emerging market need. There are six keys to
success for successful business transformation. They are more personalized
product or service, closed-loop process, Asset sharing, Usage-based pricing, more
collaborative ecosystem and agile and adaptive organization. The more key
features a new business model has, the greater the potential for transforming the
industry. There are no guarantees, but business models that link market needs to
emerging technology have a better chance of transforming an industry. The more
links a model has the more likely the model will transform an industry.

References

Karvadias, S., Ladas, K., & Loch, C. (2016). The Transformative business model:
How to tell if you have one. Harvard Business Review, 10.

By: Nabin Tamang

By: Nabin Tamang