{"id":4,"date":"2013-03-26T14:02:00","date_gmt":"2013-03-26T14:02:00","guid":{"rendered":"http:\/\/flevy.com\/blog\/?p=4"},"modified":"2020-12-11T16:57:39","modified_gmt":"2020-12-11T21:57:39","slug":"deconstruct-and-innovate-your-business-model","status":"publish","type":"post","link":"https:\/\/flevy.com\/blog\/deconstruct-and-innovate-your-business-model\/","title":{"rendered":"Deconstruct and Innovate Your Business Model"},"content":{"rendered":"<p>The <a href=\"https:\/\/flevy.com\/business-toolkit\/business-model-design-bmodel\">business model<\/a> is at the core of any organization&#8217;s <a href=\"https:\/\/flevy.com\/browse\/stream\/strategy-development\">Corporate Strategy<\/a>. \u00a0It defines how the company creates, delivers, and captures value.<\/p>\n<p>Most tech startups fail because they lack a viable business model. \u00a0Even for enterprises with established business models, they often need to revisit and innovate on their business models.<\/p>\n<p>To understand the essence of a successful business model, first, let\u2019s look at its 4 core components:<\/p>\n<ul>\n<li><a href=\"https:\/\/flevy.com\/business-toolkit\/customer-value-proposition\">Customer Value Proposition<\/a>,<\/li>\n<li>Profit Formula,<\/li>\n<li>Key Resources, and<\/li>\n<li>Key Processes.<\/li>\n<\/ul>\n<p><strong>Customer Value Proposition<\/strong><\/p>\n<p>A successful company helps its customers get a \u201cjob\u201d done. \u00a0Doing the \u201cjob\u201d\u2014this is the \u201cvalue\u201d the business is delivering for its customer. \u00a0For instance, Google helps customers with the job of finding information online. \u00a0McDonalds helps customers with the job of feeding a greasy appetite quickly and cheaply. \u00a0<a href=\"https:\/\/flevy.com\" target=\"_blank\" rel=\"noopener\">Flevy<\/a> helps customers with the job of finding business documents they need for work.<\/p>\n<p>High customer value proposition is correlated with<\/p>\n<ul>\n<li>Importance of the job to the customer;<\/li>\n<li>Low customer satisfaction with alternative options in the market; and<\/li>\n<li>Higher quality (or lower price) of your product relative to alternative options.<\/li>\n<\/ul>\n<p><strong>Profit Formula<\/strong><\/p>\n<p>It\u2019s great to offer customers great value, but, as a business, the economics still need to work in your favor. \u00a0We need to make money! \u00a0This is the profit formula.<\/p>\n<p>The profit formula is the blueprint that defines how the company creates value for itself, while providing value for the customer. \u00a0The profit formula consists of numerous economic components, including:<\/p>\n<ul>\n<li>Revenue model<\/li>\n<li>Cost structure<\/li>\n<li>Margin model<\/li>\n<li>Asset turnover and velocity<\/li>\n<\/ul>\n<p>Many tech startups fail because their \u201cbusiness models\u201d lack this critical component: the profit formula. \u00a0They aim to amass an impressive user base, but don\u2019t have a practical way of making a profit from its users.<\/p>\n<p><strong>Key Resources and Key Processes<\/strong><\/p>\n<p>A company must have access to the key resources and processes necessary to deliver its value proposition and profit formula. \u00a0In other words, the key resources and processes describe how value will be created for both the customers and the company, itself. \u00a0For instance, for a consulting firm, the key resources are its people and its key processes are people-related (e.g. training, recruiting programs).<\/p>\n<p>Key resources are assets, such as people, technology, products, facilities, equipment, channels, and brand required to deliver the value proposition to the targeted customers. \u00a0It must also have the key processes to properly leverage these resources. \u00a0Key processes of are usually characterized by operational and managerial processes that allow them to deliver value in a way that is repeatable and scalable. \u00a0Processes can take the form policies, metrics, and culture, as well.<\/p>\n<div><\/div>\n<div><a href=\"https:\/\/flevy.com\/browse\/business-document\/Business-Model-Innovation-136\"><img decoding=\"async\" class=\"alignnone size-full wp-image-7701\" src=\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2013\/03\/businessmodel.png\" alt=\"\" width=\"1162\" height=\"872\" srcset=\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2013\/03\/businessmodel.png 1162w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2013\/03\/businessmodel-300x225.png 300w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2013\/03\/businessmodel-768x576.png 768w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2013\/03\/businessmodel-1024x768.png 1024w\" sizes=\"(max-width: 1162px) 100vw, 1162px\" \/><\/a><\/div>\n<p>As alluded to, even with a concrete business model, there may come a time to modify and innovate it. \u00a0So, the question is\u2026<\/p>\n<p><strong>What circumstances require business model innovation?<\/strong><\/p>\n<p>There are five circumstances that often require business model innovation. \u00a0They can be categorized into Opportunities and Needs.<\/p>\n<p><span style=\"color: #888888;\"><strong>Opportunity<\/strong><strong> #1: Disruptive Innovation<\/strong><\/span><\/p>\n<p>The opportunity to address, through disruptive innovation, the needs of large groups of potential customers who are shut out of the market entirely because existing solutions are too expensive or complicated for them.<\/p>\n<p><span style=\"color: #888888;\"><strong>Opportunity #2: New Technology<\/strong><\/span><\/p>\n<p>The opportunity to capitalize on a new technology by wrapping a new business around it or the opportunity to leverage a tested technology by introducing it to a new market.<\/p>\n<p><span style=\"color: #888888;\"><strong>Opportunity #3: Focus on Unmet Need<\/strong><\/span><\/p>\n<p>The opportunity to bring a focus on a customer need that currently is unmet. \u00a0This is common in industries where companies focus on products or customers segments, which lead them to refine existing products more and more.<\/p>\n<p><span style=\"color: #888888;\"><strong>Need #1: Low-end Disruptors<\/strong><\/span><\/p>\n<p>The need to fend off low-end disrupters. \u00a0I.e., these are new entrants that are low cost, niche players.<\/p>\n<p><span style=\"color: #888888;\"><strong>Need #2: Shifting Competitive Landscape<\/strong><\/span><\/p>\n<p>The need to respond to a shifting basis of competition. \u00a0It\u2019s simply inevitable that what defines an acceptable solution in a market now will change with time, leading core market segments to commoditize.<\/p>\n<p>Oftentimes, barriers exist that prevent a shift in business model. \u00a0A barrier is not necessarily overt political opposition to a shift in way business has been done. \u00a0Rather, with time, the fundamental understanding of the core business model often fades into institutional memory. \u00a0These are considered institutional barriers and may be financial, operational, or strategic in nature.<\/p>\n<p>To combat institutional barriers to business model innovation, many companies decide to launch a separate brand or business to adopt the new business model. \u00a0It\u2019s best for the new entity to be based in a completely separate office. \u00a0This way, it\u00a0won\u2019t be mired down by any of the parent organization\u2019s habits.<\/p>\n<p>Changing an organization\u2019s business model is a BIG change. \u00a0We need to be patient\u2014patient for profit. \u00a0Successful companies usually revise their business models four or more times on the road to profitability.<\/p>\n<p>To learn more about\u00a0<strong><a href=\"https:\/\/flevy.com\/browse\/business-document\/Business-Model-Innovation-136\" target=\"_blank\" rel=\"noopener\">Business Model Innovation<\/a><\/strong>, check out <a href=\"https:\/\/flevy.com\/browse\/business-document\/Business-Model-Innovation-136\" target=\"_blank\" rel=\"noopener\">this business framework<\/a> published by <a href=\"https:\/\/flevy.com\/seller\/pptlab\" target=\"_blank\" rel=\"noopener\">PPT Lab<\/a>. \u00a0You can view more of <strong><a href=\"https:\/\/flevy.com\/seller\/pptlab\" target=\"_blank\" rel=\"noopener\">PPT Lab\u2019s business frameworks here<\/a><\/strong>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The business model is at the core of any organization&#8217;s Corporate Strategy. \u00a0It defines how the company creates, delivers, and captures value. Most tech startups fail because they lack a viable business model. \u00a0Even for enterprises with established business models, they often need to revisit and innovate on their business models. To understand the essence&hellip;&nbsp;<a href=\"https:\/\/flevy.com\/blog\/deconstruct-and-innovate-your-business-model\/\" rel=\"bookmark\"><span class=\"screen-reader-text\">Deconstruct and Innovate Your Business Model<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"neve_meta_sidebar":"","neve_meta_container":"","neve_meta_enable_content_width":"","neve_meta_content_width":0,"neve_meta_title_alignment":"","neve_meta_author_avatar":"","neve_post_elements_order":"","neve_meta_disable_header":"","neve_meta_disable_footer":"","neve_meta_disable_title":"","footnotes":""},"categories":[81],"tags":[4,3,5,2],"class_list":["post-4","post","type-post","status-publish","format-standard","hentry","category-strategy","tag-business-model","tag-business-model-innovation","tag-business-strategy","tag-innovation"],"_links":{"self":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/4","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/comments?post=4"}],"version-history":[{"count":8,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/4\/revisions"}],"predecessor-version":[{"id":7702,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/4\/revisions\/7702"}],"wp:attachment":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/media?parent=4"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/categories?post=4"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/tags?post=4"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}