Survival of the fittest in business
Smarter ways of working and new technologies disrupt the way business is done. Keeping your business model flexible to change can help you stay competitive. Steve Coomber takes us through the latest thinking.
The brutal reality of competitive markets means that for most companies the chances of long-term survival are slim. The Darwinian process of corporate evolution leaves few firms standing. Only four from the original 1935 FT 30 index remain in today’s FTSE 100: GKN, Imperial Tobacco, Rolls-Royce Group and Tate & Lyle.
Although many firms fail to adjust their businesses to meet changing consumer expectations, some move with the times and even adapt to disruption in their market. Take Nokia, one-time rubber boots and paper products manufacturer turned smartphones giant. Or IBM, which has embraced the electric tabulating machine, electronic typewriter, mainframe computer, personal computing revolution and the advent of the internet in its long history. Or once niche PC firm Apple, now morphed into a producer of iPods, iPhones and iPads and the biggest company by value in the world.
What differentiates these companies from those that fall by the wayside is the willingness to critically examine the way they do business and the ability to undergo successful business model innovation (BMI).
The business model
The concept of the business model has been with us for a long time, although the phrase was popularised more recently. “The term first appears in academic articles around the mid-1950s and then disappears. When we have the dot com boom in the 1990s, it reappears in the context of organisational structure and new ways of creating networks,” says Dr Katy Mason, senior lecturer at Lancaster University Management School (LUMS) and co-author of Using Business Models to Shape Business Success. “At the time, people were talking about virtual companies and virtual networks, and the term business model is used increasingly as people try to find a language to talk about these new ways of operating and structuring businesses.”
Despite the term’s common usage there is no single agreed definition. “Most simply it is a way of turning capabilities into money, whether you make things, deliver services or sell things, need things, or do it all yourself or in collaboration with someone else,” says Mason.
Business models provide an effective way for business leaders to understand and shape an organisation’s activities, capture elements of organisational strategy, bring them together in a coherent and cohesive manner and create and capture value for the firm, says Mason.
Together with co-author Martin Spring, Mason offers a framework for thinking about business models focused around three central elements: technology, network architecture and market offering.
One useful way of thinking about business models is through the lens of innovation. Business models change as people find better ways of leveraging the capabilities of the organisation, usually via advances in technology. Typically, BMI is incremental. But occasionally radical BMI is required, often in response to external market threats such as the introduction of the internet.
In the early 1900s, for example, audiences watched films in a cinema. Later, television allowed people to watch them in their own home. Videotape technology led to the video rental market. DVDs replaced videotapes, but the business model was the same, and the video rental store business model remained successful. Automated DVD kiosks followed. Then the internet helped to establish a business model to send and return DVDs by post. Now businesses are piping video on demand (VoD) to homes via the internet.
Thus the movie-viewing market has seen periods of business model evolution and revolution. Market players have changed. Some have adapted, others have vanished. Today major Hollywood studios vie with cinema operators, supermarkets and online retailers to capture value from the VoD market.
This is an extract from the Finance & Management Magazine, Issue 197, March 2012.