Boundaries between industries are eroding.
The relationships among suppliers, producers, and consumers are also blurring, more rapidly than many business decision makers are prepared for.
Dr Chander Velu, head of the IfM’s Business Model Innovation research programme, contests why having digested the dot com boom and bust, the time has come to rethink business model innovation, since we have ample evidence that by harnessing new technologies has the potential to create value in new ways.
Amazon and eBay, for example, have fundamentally changed the world of retail. Since then we’ve seen Google and Facebook, iTunes and Spotify find innovative ways to monetise data-sharing platforms, and we now use Uber to get us from A to B and Airbnb to find us somewhere to stay when we get there.
“Society is undergoing tremendous change right now — the sharing and collaboration practices of the Internet are extending to transportation (Uber), hotels (Airbnb), financing (Kickstarter, LendingClub) and music services (Spotify). The rise of the collaborative economy, of which the Open Source community is a part, should be a powerful message for the business community. It is the established, proprietary vendors whose business models are at risk, and not the other way around.”
Dries Buytaert, Founder of Drupal
Every organization has a business model
A business model comprises three things: value proposition, value creation and value capture.
In other words, what products and services will be provided for which customer groups, the mechanics of how you interact with them, how the products or services will be created and delivered and how and how you realise value.
“Very few people are conscious of what their business model actually is,”
says Alex Osterwalder said to Dorie Clark, a marketing strategist in a recent interview, drawing from his bestselling book, Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers.
“Every organization has a business model, but it’s relatively new that people need to make it explicit,” “It used to be that in one industry, you’d have a dominant business model over decades that wouldn’t change much – you’d focus on better implementation or better quality, but the business model wouldn’t change. But in the last 1-2 decades, we see different business models emerging in the same space, and also, a lot of business models expiring – think of the music industry or the news industry.”
Nowadays, if you don’t think explicitly about how your company will make money and offer value to consumers, you’re likely to be overtaken quickly.
For example, while Blockbuster is out of business, Netflix continues to take advantage of digital advances in order to innovate its business model, moving from mail order to video streaming and now to original programming.
Osterwalder cites one example of what overreliance on a legacy business model can do. “Kodak had one very successful business model around analog film, and they lived for a long time off this business model,” he says. “It’s not that they weren’t innovative – they helped invent digital photography; they were investing in innovation. But the problem is, they didn’t have a business model for digital, so they almost shoveled their own grave by helping invent digital photography. People today, when you say innovation, they think about technology or product innovation, and that’s part of the equation.” But as Kodak showed, technological innovation without a business model to support it leads to failure.
“What was powerful about Nespresso was they locked in consumers and then created recurring revenues.” Indeed, he says, while many people think about Apple’s iPod as a stunning technological breakthrough, Osterwalder also views it as a smart business model. “[Steve Jobs] created switching costs. Once you have 1000 songs on your iPod, it’s very hard to switch, and by doing that, he locked us in.” The trick, Osterwalder says, is to think about how the same principles could be applied elsewhere.
Another possibility to consider is how to get others to work for you for free – a trick Mark Zuckerberg mastered to great success. “Facebook gets a billion people to work for them for free,” says Osterwalder. “If you sketch out their business model…most of the value is from content, and that happens to be produced by people who use Facebook.” Another example is IKEA, which gets customers to assemble their own furniture.
How, then, can you lead your company, to play a pivotal role in the next industrial revolution?
How can you take advantage of your existing strengths while developing the digital skills that you need?
How do you balance the technological acumen you require with the managerial skill?
How can you help the broader society meet the challenges posed by this technology — issues related to privacy, employment, income equality, and general wellbeing, among others — while still ensuring sustainable growth?
10 Principles for Leading the Next Industrial Revolution
According to a Strategy+Business article ‘10 Principles for Leading the Next Industrial Revolution,’ the authors, Norbert Schwieters and Bob Moritz contest that the leaders of the the next industrial revolution are companies making advances in fields such as robotics, machine learning, digital fabrication (including 3D printing), the Internet of Things (IoT), drone technology, data analytics and blockchain. Because these technologies all reinforce the others’ impact, they are leading to a new level of proficiency, and new types of opportunities and challenges for business and for society at large.
A new technology in and of itself does not necessarily deliver new value – it often needs a new business model if its benefits are to be fully realised.
Dr Chander Velu, head of the IfM’s Business Model Innovation research programme
The foundation of business strategy that has long been the classic value chain, which links together raw materials producers, manufacturers, distributors, and consumers through a well-established commercial infrastructure characterized by a stable set of transactions is altering dramatically.
In the manufacturing context, understanding business models and how to create new ones is becoming an increasingly urgent task: they are often the bridge between a technology and the ability to deliver a compelling value proposition.
With the emergence of new production technologies such as additive manufacturing and enabling technologies such as sensors, the Industrial Internet of Things and Industry 4.0, underpin a business model transformation.
For example, drone technology is altering the traditional supply chain, and by using new manufacturing processes to make products in smaller quantities we encounter a shift to mass personalisation and customisation.
Understanding how to harness the potential of these new technologies by creating new business models that shift the focus from achieving ‘effectiveness’ to driving ‘efficiency’, is going to play a key part in the survival of many organisations. In order to innovate they need to be less concerned with maximising short-term return on investment and become more focused on creating customer experiences.
Digital technology enables individuals to connect outside the value chain and deliver more efficient, effective products and services. This will reduce the importance of economies of scale and conventional divisions of labour. Relationships among companies will be more fluid and the price and cost of goods and services more volatile than they are today.
In spite of the emergence of new technologies, achieving sustainable growth and productivity remain major challenges. Being able to develop business models which will bring new technologies successfully to market will help to deliver productivity gains for new and established firms alike. Firms need to understand the importance both of business model innovation and evolution and have the people, capabilities and culture in place to make it happen.
Dr Chander Velu, head of the IfM’s Business Model Innovation research programme
The challenge, is a simultaneous exercise: to sustain their existing business model while the new one takes shape and redesign their operations networks . This calls for diverse capabilities, organisational structures and collaborative engagement cultures in embedding ownership of the business model across the organisation.
A key characteristic of business model innovation is the need to collaborate. With technologies moving so fast, firms find it increasingly difficult to have all the specialist knowledge they need in-house. As a result, they need to partner with customers, suppliers and even competitors.
The dynamics of business model innovation are complex: the evolution of the business model will be affected by its ecosystem, by technology advances and adoption and by organisational capabilities, structures and culture.
There is one certainty, however: Trustworthiness and a clear articulation of purpose, will become more important to business — including employees, suppliers, customers, and regulators.
This means looking closely at the reasons people come to your company, the outcomes they expect, and the ways you can deliver. When you are clear about what your company is, and why you sell what you sell, people will trust you to deliver what you promise.
An enterprise that is continually changing must balance that turbulence with purpose and trust, or people— will not be able to make the full commitments that businesses need.
The following 10 principles can help Leading the Next Industrial Revolution in a profitable way.
According to PwC research it all boils down to the capabilities they build and the extent to which they reframe their business and operating models to make the most of this new technological infrastructure.
Shared data is the fuel of the next industrial revolution, and just as earning digital trust will be key to success.
You will need not only to manage customers’ behavior, but to prevent outsiders from gaining access to critical information. Strong risk management, cybersecurity, and data integrity systems are essential. As PwC cybersecurity experts David Burg and Tom Archer put it, your company will most likely protect itself in the future “by monitoring activity across all its online systems, studying not just the moves of hackers but the actions of legitimate customers as well. Both types of visits, after all, are forms of repetitive human behavior, opposite sides of the same coin.”
Business, in particular, will thrive in this new world only if its leaders understand the place of human values.
Set up your enterprise to foster better connections among people, to encourage humane behavior, and to build the requisite capabilities that overcome technological isolation. Your company will need people who can understand the technologies of the industrial infrastructure, such as artificial intelligence and analytics.
They need not just the technical training to use digital tools, but insight into the patterns of technology and how to accumulate the type of data that can foster machine learning.
Individuals of all ages must have the skills to participate in the digital economy
As the Grand Coalition for Digital Jobs analysing the technology trends, labour market activity and demand for skills, confirms that knowledge of digital tools (coding and programming) will be an ever-increasing advantage for firms and job-seekers alike.
According to Dr Chander Velu, head of the IfM’s Business Model Innovation research programme, in embracing business model thinking we need to adopt multidisciplinary approaches which involve scientists and engineers, economists and management researchers.
This approach can help firms find new ways of commercialising new technologies to create value and grow through a more integrated view of their business and its stakeholders; a better understanding of the link between the customer value proposition, how the value is created and distributed among its stakeholders.
Finally and most importantly, Leading the Next Industrial Revolution, your company will need people who have a flair at working with an organization’s culture; their abilities to care, connect, in ways that provide stability, and a high quality of life.
Business Model Generation is a handbook for visionaries, game changers, and challengers striving to defy outmoded business models and design tomorrow’s enterprises. If your organization needs to adapt to harsh new realities, but you don’t yet have a strategy that will get you out in front of your competitors, you need Business Model Generation.
Co-created by 470 “Business Model Canvas” practitioners from 45 countries, the book features a beautiful, highly visual, 4-color design that takes powerful strategic ideas and tools, and makes them easy to implement in your organization. It explains the most common Business Model patterns, based on concepts from leading business thinkers, and helps you reinterpret them for your own context. You will learn how to systematically understand, design, and implement a game-changing business model–or analyze and renovate an old one. Along the way, you’ll understand at a much deeper level your customers, distribution channels, partners, revenue streams, costs, and your core value proposition.
Business Model Generation features practical innovation techniques used today by leading consultants and companies worldwide, including 3M, Ericsson, Capgemini, Deloitte, and others. Designed for doers, it is for those ready to abandon outmoded thinking and embrace new models of value creation: for executives, consultants, entrepreneurs, and leaders of all organizations. If you’re ready to change the rules, you belong to “the business model generation!”
Tools and techniques to ensure your company is crossing safely the digital frontier.
Read the full article: 10 Principles for Leading the Next Industrial Revolution
Dorie Clark is a marketing strategist who teaches at Duke University’s Fuqua School of Business. Learn more about her book Reinventing You: Define Your Brand, Imagine Your Future (Harvard Business Review Press)
- Frank Burkitt, “A Strategist’s Guide to the Internet of Things,” s+b, Nov. 10, 2014: The digital interconnection of billions of devices is today’s most dynamic business opportunity.
- Ivan de Souza, Richard Kauffeld, and David van Oss, “10 Principles of Strategy through Execution,” s+b, Feb. 13, 2017: How to link where your company is headed with what it does best.
- Daniel Gross, “Siemens CEO Joe Kaeser on the Next Industrial Revolution,” s+b, Feb. 9, 2016: The manufacturing chief describes how an industrial powerhouse founded in the 19th century is using software, sensors, and savvy to create a digital manufacturer that can thrive in the 21st century.
- Art Kleiner and John Sviokla, “The Thought Leader Interview: GE’s Bill Ruh on the Industrial Internet Revolution,” s+b, Feb. 1, 2017: During the next few years, says GE Digital’s leader, the Industrial Internet will turn every company into a digitally empowered enterprise.
- Klaus Schwab, The Fourth Industrial Revolution (Crown, 2016): Overview of the technologies and implications of the Industrial Internet from the founder of the World Economic Forum.
- Norbert Schwieters, “The Future of Industries: Bringing Down the Walls,” PwC, 2016: How technological change will blur sector boundaries during the next 10 years.