As more and more elements of the physical world become sources of digital data, software nowadays are able to analyze, control, and interact with devices, equipment, and people. This has brought economy-wide changes from the disintermediation of traditional media to the introduction of 3D printing in factories. Inside companies, digitization has contributed to new business processes, new business models, and even new managerial models Firms across all industries are embracing internet-based digitization strategies to expand or improve their business. In many cases, though, internet-based businesses pursue customer growth ahead of profits. The path to profitability, which is a core element of a business model, should not be an afterthought. A well-designed business model balances the provision of value to customers with the capture of value by the provider. The elements of a business model and the dynamic capabilities that help design, implement, and refine a model for an organization and its business ecosystem are reviewed.
Existing companies making physical products that launch a new digital platform, such as an automobile manufacturer providing in-vehicle mobile transactions, present an intermediate case. The company may already have income-statement discipline, but it may be tempted to subsidize the new business for an indefinite period in order to enable learning about digital markets and/or to block competing services from encroaching on its space.
A good business model explains how and why customers, suppliers, and complementors interact with the company through the digital interface. As circumstances change, it provides guidance as to the ways the value architecture can be altered and a systemic framework for maintaining overall coherence.
Business Models-
Business model’s one of the most vital tools for articulating the “architectural” design of a business so as to manage the complexity of next-generation competition. In other words, business model “articulates the logic that demonstrates how business create and deliver value to customers [and] outline the architecture of revenues, costs, and profits associated with delivering that value” (Teece 2010, p. 173). Without the right balance between the creation, delivery, and capture of value, the model will not be in operation very long, at least not by a for-profit enterprise.
A business model has many moving parts, all of which must work together congruently. The model as a whole must also be aligned with the organization’s strategy, culture, and resources. These relationships cannot be optimized just through data analytics. Good business model design depends as much on art and intuition as it does on science and analysis. A compact but fairly comprehensive list of business model components is provided by Schön (2012). His schema is similar to that of Osterwalder and Pigneur (2010) but further compiled into three main categories. Slightly adapted, the list is as follows:
Value proposition: product and service, customer needs, geography
Revenue model: pricing logic, channels, customer interaction
Cost model: core assets and capabilities, core activities, partner network
Business Model Design-
The process of designing a particular business model is typically engaged by sensing the existence of customers with an unmet (or poorly met) need who are willing and able to pay for a potential product or service. A successful business model provides a solution to the customer that can support a price high enough to cover all costs and yield profit, i.e. at least sufficient to support the business and its growth.
Sensing takes place at all levels of the organization, with lower levels helping to provide information and insights about external developments to middle and top managers. A manager looking to profit in a particular technology area needs “generative sensing” through which various hypotheses about the underlying state of consumer demand are tested until a set of options can be validated (Dong et al. 2016).
Most “new” (to a given firm) business models will be similar to older ones, involving a permutation or hybridization of existing models. A typical example would be a firm that excels in a particular area of operations, e.g., running a restaurant chain, and then leverages its expertise into a services business such as supply chain consulting. While there are a finite number of business model types, the opportunities for recombination are virtually endless.
Business Model Implementation-
In an existing company, the introduction of a new business model can prove challenging because of a cultural mismatch, the ability of existing businesses to influence budgets, or other reasons that start-ups do not face. This is particularly true when adding a next-generation business into a company that has been competing in more traditional ways. One solution is to set the new business apart, with its own premises and possibly even a different incentive system. This can work provided there is high-level support for the new venture. The capability of an established firm to experiment with new businesses while not undermining its existing revenue sources has been called ambidexterity (O’Reilly and Tushman 2004).
Business model implementation, like transformation more generally, involves closing capability gaps between the firm’s current activities and those required to enact the new business model (Teece forthcoming). The gap closure can be accomplished through internal or external means, with the decision depending on a number of variables, including the strategic relevance of the capability, the time that would be required to “build” it, and the availability of the capability from third parties.
The gap identification process begins by examining the match between a proposed business model and the firm’s existing capabilities. An analysis of existing capabilities needs an objective point of view that is detailed and realistic. Organizational instincts tend to compel the exaggeration of current capabilities. The true magnitude of a gap may become apparent only after an organization falls short in executing a strategic initiative. The early phase of a project may be satisfactory, but as it progresses, problems begin to crop up, the senior team has to get more and more involved, and the goal slips further away. Management may have thought that a particular capability, such as supply chain management, was in place only to discover that it was inadequate to the needs of a new product or strategy.