28 Feb The transformative business model
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.
Definitions of “business model” vary, but most people would agree that it describes how a company creates and captures value. The features of the model define the customer value proposition and the pricing mechanism, indicate how the company will organise itself and whom it will partner with to produce value, and specify how it will structure its supply chain. Basically, a business model is a system whose features interact, often in complex ways, to determine the company’s success.
There are a number of characteristics which are displayed in businesses that have a transformative business model, and while not every business will have all of them, the more they have the higher chance of success at transformation.
- A more personalised product or service offering – 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.
- 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.
- Asset sharing – Some innovations succeed because they enable the sharing of costly assets – Airbnb, for example, allows homeowners to share them with travellers, and Uber shares assets with car owners. Sometimes assets may be shared across a supply chain. 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.
- 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; then company benefits because the number of customers is likely to grow.
- 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.