Business Modelling

Business Modelling

"I am more interested in the future than in the past, because I intend to live in it."
Albert Einstein

Business Model Innovations

Business model innovations are a particularly effective and sustainable means of making companies fit for the future - and making companies more profitable in the short and medium term. Studies show that the positive effect of business model innovations on the operating result exceeds that of product and process innovations many times over after just three years.

We show why business model innovations are indispensable for successful companies and how your company can also benefit from the continuous adaptation of its business model.

The World is flat.

Business model innovation - the key to success in highly competitive markets

The world is flat was the title of a 2006 world bestseller by Thomas Friedman. What the New York Times columnist and renowned globalization expert described with his catchy title is the reality of a global market that is open to more and more companies from more and more countries and in which old securities no longer exist.

Increasing competition through globalization

The consequences for domestic companies are far-reaching. The global market not only offers them new opportunities, but also confronts them with previously unknown risks. Because the future competitor of the German medium-sized company is very likely no longer speaks Swabian and comes from the neighboring town, but is working somewhere in China or Korea on a product that could soon revolutionize the market and shake the business model of the local company overnight.

Business models have life cycles.

Even the most successful business models have life cycles - and these are getting shorter and shorter in the globalized world. Because not only do more companies have access to the world market than ever before. There is also more research and development going on than ever before, and the internet is making innovative ideas spread at breakneck speed. Those who are successful today will only remain so if they also have a better business model than their competitors tomorrow.

Medium-sized companies are particularly challenged

German companies, especially from medium-sized companies, are particularly challenged here. Because they are considered particularly innovative worldwide and are often market leaders in their very special niche. But what is a compliment for the strength of the domestic economy and its many “hidden champions” should also be understood as a warning. Because today's market leader is watched and copied very closely by the competition and can therefore very quickly be the loser of tomorrow - if he does not continuously develop his business model and thus maintain his lead over the competition.

Business model - a definition

The business model of a company describes the interaction of all factors that contribute to creating added value for the customer on the one hand and generating income on the other. These factors concern, on the one hand, the so-called value proposition for the customer and, on the other hand, the internal processes that are necessary to fulfill the value proposition and generate a profit in the process.

Which offer for which target group at which price?

The value proposition relates to what a company offers whom and has three components:
  • Target group (s): Who are the company's customers and what are their needs?
  • Range of services: What products (goods or services) does the company offer its customers to meet their needs?
  • Revenue model: How is the company paid for its offer?

How can the offer be made profitable?

The internal processes concern the question of how the offer can be provided profitably and can also be divided into three components:
  • Value chain: How is the company organized to meet customer demand? Which services are provided internally, which externally?
  • Cost model: How is the company positioned on the assets and liabilities side in order to profitably fulfill the value proposition?
  • Organization: How are the company's employees optimally deployed in order to maintain and expand the company's competitive advantage?
In order to find reasons for the success or failure of a company - that is, an answer to why market shares are being gained or lost, or the earnings situation is improving or deteriorating - the individual factors are examined in detail. In the case of a business model innovation, this analysis of the old business model is always the first step.

Business model innovation.

Business model innovation

If a company wants to improve its market or earnings position or at least keep it under increasing competitive pressure, it has to adapt its business model to the changing conditions. This process is known as business model innovation.

From optimizing the old to creating a new business model

Business model innovations can vary in scope and range from optimizing the previous business model to creating a completely new business model. In extreme cases, a new market is created in the first place through a business model innovation, which at least gives the company a de facto monopoly - and correspondingly high earnings opportunities - as long as there are no competitors in this new market. Which form of business modeling is chosen, the "small solution" of gradually changing the existing business model or the "large solution" of strategic realignment, depends on the company's situation and its market and competitive position.

Reason and direction of business model innovations

The type and scope of a business model innovation depend on its occasion and goal. The reason for a business model innovation can be of a defensive or offensive nature. The reason for a change in the business model is always defensive when it consists of an external threat - for example, in a sharp decline in demand for one's own products, in the loss of a competitive advantage (e.g. due to the expiry of a patent) or in an imminent change in the law, by which the previous business is significantly impaired or made completely impossible. On the other hand, the reason for changing the business model is offensive if the company's own competitive position is to be improved proactively (ie without the presence of an external threat).

Two fundamentally different options can also be distinguished when it comes to the direction of business model innovation: It can either be aimed at defending or expanding the company's position in its traditional business area or at gaining market shares in a neighboring or completely new business area. If the cause and direction of the business model innovation are related to one another, four basic scenarios for business modeling can be distinguished

4 basic scenarios for business model innovations.

Defense of the old core business

In the first scenario, the company's core business comes under considerable pressure (e.g. due to the loss of competitive advantages or new legal provisions), but it can still be operated profitably. Here, the value proposition for the customer and the internal processes only need to be adjusted, but not fundamentally changed. In this scenario, the reason for the business model innovation is a defensive one (the old core business is threatened), and the goal of the business model innovation is to defend the position in the traditional business area.

Search for new business areas

In the second scenario, the company's core business has come under so much pressure that its continued existence can be viewed as uncertain, even with some adjustments. Here, business fields related to the old core business are examined for possible engagement and the business activities are relocated there if necessary. In individual cases, the old core business can even be given up entirely in favor of a new core business. Here, too, the reason for the business model innovation is of a defensive nature (the old core business is threatened), while the goal of the business model innovation - unlike in the first scenario - is aimed at conquering new business areas.

Conquering market shares in the core business

In the third scenario, the company's core business is successful and is to be aggressively expanded. Companies that choose this approach are often start-ups or smaller but already established companies that have a particular competitive advantage - such as a new technology - and are convinced that it will revolutionize their respective markets and set new standards to be able to. In this scenario, the reason for the business model innovation is of an offensive nature (the old core business is successful and should be aggressively expanded), and the goal of the business model innovation is to gain further market shares in the traditional business area.

Transfer of the successful business model to new business areas

The company's core business is also successful in the fourth scenario, and here too the company is expected to expand - however, not by expanding its market position in the traditional business area, but by transferring the successful business model to neighboring or entirely new business areas. The reason for the business model innovation is also an offensive one here (the old core business is successful and the company is to expand), but the goal of the business model innovation is to gain market shares in other than the traditional business area.

However, there is no simple formula for changing a business model. Even in companies where the desired business model innovation falls into the same of the four scenarios mentioned, the procedure can differ considerably - because the circumstances of the specific individual case are always decisive.

Step by step to the new business model.

The starting point for every business model innovation is a precise analysis of the previous business model, on the basis of which a new business model is then developed and the measures required to implement it are determined.

Analysis of the old and development of a new business model

As part of the analysis of the old business model, both the value proposition for the customer and the internal processes with their individual elements are examined more closely.

The value proposition for the customer examines how the target group and their needs have developed, whether the range of services still fits the needs of the target group and whether the revenue model is still profitable for the company.
The other side of a company's business model, the internal processes, is also analyzed in exactly the same way. It examines whether the company is set up in terms of value chain, cost model and organization in such a way that it can fulfill the value proposition for the customer and generate a profit at the same time.

React to changed customer needs and remain profitable

The online mail order company Amazon, for example, found that many of its customers not only wanted to buy its original range of books online, but also other products. Amazon therefore gradually expanded its range to include music, film and game DVDs and finally numerous other products, all of which required the same sales capacities as the original “book” and therefore only incurred low additional costs.

In this case, the starting point for adapting the business model was that the needs of the target group were different than originally assumed. A change in the business model may also be necessary if customer needs have remained unchanged, but a competitor makes a more attractive offer, or if the range of services still fits the needs of the target group, but the business cannot be operated profitably enough .

The platform strategy of the car manufacturer Volkswagen, for example, aims to standardize as large a number of components as possible so that they can be used in as many models as possible from its currently ten subsidiary manufacturers. This not only allows Volkswagen to use economies of scale in the manufacture of components, but also makes the manufacturer less dependent on fluctuations in demand for individual models.

Advantages through outsourcing and skillful organization

In the value chain, for example, it is checked which services are provided internally and which can be outsourced. The key to Amazon's breakthrough in online book retailing was that it was offering over a million book titles shortly after it was founded, but at the same time only had around 2000 of the most popular titles in stock. The rest of the titles came directly from publishers or wholesalers that Amazon worked with. For Amazon, this sales model had the decisive advantage that the risk of incorrectly assessing demand could be completely transferred to publishers and wholesalers. If Amazon had simply transferred the classic sales model of brick-and-mortar booksellers to online business, its market success would probably have been much more modest.

Here the value chain was the starting point for adapting the business model. But the other factors of internal processes can also be used to optimize the business model. With the cost model, for example, a change in internal and external financing can free up resources for expansion. And when it comes to organization, the question is not whether "the right man and the right woman are in the right place" internally - but also whether the right decision-maker for a specific task cannot even be found outside of the company.

For example, the US retail group Wal-Mart entrusted its supplier Procter & Gamble to equip its shelves with its own products. Because the consumer goods manufacturer had both the necessary information about consumer behavior and the necessary incentive to always orient the range of its products as precisely as possible to the needs. A welcome side effect for Wal-Mart was that it was able to dispense with its own market research in this area.

As these examples show, large international companies are also constantly revising their business models in order to survive the competition. In order to perpetuate their innovation success, many of them invest in it systematic innovation management.

Your individual business modeling ...

When do you develop your new business model or your new product / service innovation?

As experienced "serial entrepreneurs", we have successfully launched a dozen project ideas on the market over the past decade.

We would be happy to carry out a fast launch for you. We work very methodically in all projects and carry out market studies and field tests. Ask us specific questions about where your products can still be used or sold. We will give you specific answers that are supported by numbers and pre-tests.

We are happy to develop individual projects especially for you.

Swell:

Note:

  • The study mentioned in the introduction to this text on the positive influence of business model innovations on the operating result is published by Lindgardt / Reeves et. al. cited on p. 3. This is the Business Week / Boston Consulting Group Innovation Survey 2008.
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