The Transformative Business Model

Picture Credit: Leandro Castelao

An interesting Harvard Business School article called “the Transformative Business Model” by Stelios Kavadias, Kostas Ladas, and Christoph Loch investigates 40 new business models with widely different outcomes. These business models relate to how companies organize to serve customers and deliver value, the complimentary firms that they select to partner with, and the means by which their supply chain operates. The professors summarize:

We usually associate an industry’s transformation with the adoption of a new technology. But although new technologies are often major factors, they have never transformed an industry on their own. What does achieve such a transformation is a business model that can link a new technology to an emerging market need.

So, part of the trick to to see the emerging market need before competitors do and to find the early adopters among the customer population that make demand go viral. As the business model evolves, the key is to select, allocate and organize the critical resources (i.e. MP3 combined with a pay-per-listen music service like iTunes driven by an easy-to-use online menu that is a front end to remote, large scale storage such as the Apple Cloud). The authors allude to Thomas Kuhn‘s concept of “paradigm shift” when they explain, “Most attempts to introduce a new model fail—but occasionally one succeeds in overturning the dominant model, usually by leveraging a new technology. If new entrants use the model to displace incumbents, or if competitors adopt it, then the industry has been transformed.” NPR did a nice profile on Kuhn’s 94th birthday last July 18th, defining a paradigm shift as “an important change that happens when the usual way of thinking about or doing something is replaced by a new and different way.”

Interestingly, even though a natural scientist, Kuhn was highlighting that paradigms determine large areas of experience at the same time and the “shift” involves an accelerating adoption of a new way of thinking or doing something. (Kuhn fascinates me and I wrote my senior thesis at Yale in the early 1980s about the shift from a bipolar world to a unipolar political economy in the wake of the collapse of the Soviet Union).

HBR always does the basic takeaway points well (analysts take note)- the professors define the “Transformative Business model” as linking technology and the market:

1. A more personalized product or service.

Many new models offer products or services that are better tailored than the dominant models to customers’ individual and immediate needs. Companies often leverage technology to achieve this at competitive prices.

2. A closed-loop process.

Many models replace a linear consumption process (in which products are made, used, and then disposed of) with a closed loop, in which used products are recycled. This shift reduces overall resource costs.

3. Asset sharing.

Some innovations succeed because they enable the sharing of costly assets—Airbnb allows home owners to share them with travelers, and Uber shares assets with car owners. Sometimes assets may be shared across a supply chain. The sharing typically happens by means of two-sided online marketplaces that unlock value for both sides: I get money from renting my spare room, and you get a cheaper and perhaps nicer place to stay. Sharing also reduces entry barriers to many industries, because an entrant need not own the assets in question; it can merely act as an intermediary.

4. Usage-based pricing.

Some models charge customers when they use the product or service, rather than requiring them to buy something outright. The customers benefit because they incur costs only as offerings generate value; the company benefits because the number of customers is likely to grow.

5. A more collaborative ecosystem.

Some innovations are successful because a new technology improves collaboration with supply chain partners and helps allocate business risks more appropriately, making cost reductions possible.

6. An agile and adaptive organization.

Innovators sometimes use technology to move away from traditional hierarchical models of decision making in order to make decisions that better reflect market needs and allow real-time adaptation to changes in those needs. The result is often greater value for the customer at less cost to the company.