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Reinventing your Business Model

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Harvard Business Review

Published in: Business
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Reinventing your Business Model

  1. 1. REINVENTING YOUR BUSINESS MODEL HARVARD by Mark W.Johnson, Clayton M.Christensen, and Henning Kagermann BUSINESS REVIEW
  2. 2. One Secret to maintaining a thriving business is recognizing when it needs a fundamental change. Articulate what makes your existing model successful Watch for signals that your model needs changing Decide whether reinventing your model is worth the effort T h e a n swe r i s YES only if the new model changes the industr y or market
  3. 3. To see past the borders of what is and into the land of the new, Companies need a road map. First Step Realize that success starts... ...by not thinking about business models at all ...with thinking the opportunity to satisfy a real customer who needs a job done Second Step Construct a blueprint laying out how your company will fulfill that need at a profit That plan has four elements Third Step Compare the new model to your existing model to see how much you’d have to change it to capture the opportunity First Step Second Step Third Step
  4. 4. A Business Model consists of four interlocking elements that, taken together, create and deliver value. Customer Value Proposition (CVP) Profit Formula Key Resources Key Processes Every successful company already operates according to an effective business model.
  5. 5. A successful company is one that have found to create value for customers. CPV It is not possible to invent or reinvent a business model without first identifying a clear customer value Target Customers Job to be done to solve an important problem or fulfill an important need for the target customer. Offering, which satisfies the problem or fulfills the need. This is defined not only by what is sold but also by how it is sold. proposition.
  6. 6. The profit formula is the blueprint that defines how the company creates value for itself while providing value to the customer. Profit Formula Revenue Model. How much money can be made: price x volume. Cost Structure. Start by setting the price required to deliver the CVP and then work backwards from there to determine what the variable costs and gross margins must be. How costs are allocated: includes cost of key assets, direct costs, indirect costs, economies of scale. Margin Model. How much each transaction should net to achieve desired profit levels. Resources Velocity. How quickly resources need to be used to support target volume
  7. 7. The two elements that describe how the value which is created will be delivered to the customer and the company. Key Resources Key Processes Needed to deliver the customer value proposition profitably. Operational and managerial processes that allow a company to deliver value in a way they can successfully repeat and increase in scale. + + Key Processes People, Technology, products, Equipment, Information, Alliances. Rules and metrics such as credit terms, lead times, supplier terms. Norms: opportunity size needed for investment, approach to customers and channels. Key Resources Major changes to any of these four elements affect the others and the whole.
  8. 8. Established companies can often create new products that disrupt competitors without fundamentally changing their own business model. When a new business model is Needed? These circumstances often require business model change Address needs of large groups who find existing solutions too expensive or complicated. Example The Nano’s goal is to open car ownership to low-income consumers in emerging markets. Capitalize on new technology, or leverage existing technologies in new markets. A company develops a commercial application for a technology originally developed for military use. Bring a job-to-be-done focus where it doesn’t exist. FedEx focused on performing customers unmet “job” : Receive packages faster and more reliably than any other service could Fend off low-end disruptors. Example Mini-mills threatened the integrated steel mills a generation ago by making steel at significantly lower prices. Respond to shifts in competition. Power-tool maker Hilti switched from selling to renting its tools. Low-end entrants had begun chipping away at the market. An opportunity to... A need to...
  9. 9. Creating a new model for a new business does not mean the current model is threatened or should be changed. A new model often reinforces and complements the core business. Embraces the Low End High-margin, high-overhead retail prices pay for value-added services. Customized solutions, negotiated contracts. R&D, sales, and service orientation. Spot-market pricing, low overhead to accommodate lower margins, high throughput. No frills, bulk prices, sold through the internet. IT system, lowest-cost processes, maximum automation. Customer Value Proposition Profit Formula Key resources and processes Traditionally high-margin company found new opportunities in low-margin offerings by setting up a separate business unit that operates in an entirely different way. Investment paid back in just three months!
  10. 10. The Elements of a Successful Business Model. Systematically identifying all of the constituent parts of a successful business model. Understand how the model fulfills a potent value proposition in a profitable way. Judge how well the existing model could be used to fulfill a radically different CVP. What it needs to do to construct a new one. Break the Rules. Identifying new competencies. Be patient for growth but impatient for profit. Envelop new technology in the appropriate model.
  11. 11. Customer Value Proposition Key Resources Profit Formula Key Processes

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