CIO upfront: Why many business models need to radically shift

“One secret to maintaining a thriving business is recognizing when it needs a fundamental change.” 

Mark W. Johnson, Clayton M. Christensen, Henning Kagermann

Most established companies understand their business model from the inside out. They have continuously finetuned their established business model to stay aligned with changes in the environment. But they have not questioned their type of business model.

Today, however, discontinuous changes and megatrends coming from the outside, such as digitisation and servitisation, are putting more and more established business models under pressure. Incremental fine-tuning of the current business model will not suffice.

Innovation competition has shifted from technological and process innovation to business model innovation, because startups, niche players, or small- and medium-sized businesses today have the means to challenge established players with relatively limited investments.

For example, it is doubtful whether automotive companies can survive just by producing and selling cars.

Some, like Daimler’s CEO Dieter Zetsche, are saying: “We regard ourselves not only as a vehicle manufacturer but also as a provider of mobility solutions.”

They want to provide mobility as an integrated service. Or think about all the fintech startups which are offering banking services without being a bank. And it is also doubtful that a print-based daily newspaper can survive in the long run only on the basis of its physical product business model.

Print-ad revenue has continued to fall for more than a decade and is getting close to zero. Many have tried to finetune their business model in an incremental way to react to changes: A lot of the newspapers started to sell online ads, but the prices are falling sharply. Others have tried to make readers pay for online content. Some even started selling individual articles. Others have offered readers a few free articles before asking for payment.

Or some came up with the option to choose between viewing ads and paying for the articles. There are also others that make some additional money by selling products alongside related articles. But in the vast majority of these cases, this kind of finetuning still follows the same type of business model and has not really solved the basic problem of having an outdated type of business model.

While business model research has flourished over the past decade, most of it is focused on the value proposition or structure of a business model.

For example, we have learned much about what the components of a business model, the actors, and their interactions should look like. Of course, this information is helpful if you are a startup company with all the flexibility to design your business model from scratch, or if you are a company that is looking for completely new business models outside of its existing one. But for many existing companies, this is not the case.

 In many established firms and even some industries the dominant business model is under fire. They have to think about options to adopt and transform their business models and about ways in which to manage change and evolution. 

Managers are facing a number of challenging questions: How do we adapt our front-end and our products and services to satisfy the needs of our targeted customers? What are the implications for the backend to make these products and services possible? What is the best monetisation mechanism to create sustainable value for the company and its stakeholders?

The core question for many established firms is whether they can service in the long run by just focusing on and defending their current business model, or whether they have to make a fundamental change in the way they create and appropriate value. It is our observation that more and more companies are discovering the painful truth that an incremental fine-tuning of the current business model is not enough to stay competitive in the future. The only way out is a radical shift.

But transforming to a new business model is often easier said than done, as in many cases it means also breaking with the very DNA that has made a firm successful for a long time. Additionally, the “Googles” of this world are of little help as future blueprints for established firms, because they have never undergone a business model transformation. However, established firms also have strong advantages over new entrants, because they know the existing products and customers in the market and often have important competences and resources at their disposal. The expertise of the incumbents is often hard to replicate, and they often control access to decisive resources like data or knowledge.

Based on the study of dozens of business model transformation cases we developed the framework below called the “Business Transformation Board”, to guide leaders in established firms through the endeavour of radical business model transformation. “Radical” means they have to change the type of business model, at least for major parts of the company.   

Figure: The business transformation board

The process starts by assessing the status quo: Which of the four generic types of business model you are closest right now?

In the second step you identify future business model opportunities. You answer the question: Which type of business model fits best to future requirements? If it is a different type you have to undergo a radical transformation.

In this case you have to develop a transformation path in a third step, moving for example from South (Product BM) to North (Plattform BM).

Finally, you to take the appropriate actions to follow this path. The three most prominent actions are mentioned in the figure. An example in a South-North-Transformation is, that you have to provide customers with a superior end-to-end process by orchestrating and integrating a holistic solution.

Of course, such generic templates must be adjusted to each application case. But our experience shows us that using such a framework is much more efficient than starting from scratch.

This is a synopsis from the book  Radical Business Model Transformation  by Carsten Linz, Guenter Mueller-Stewens and Alexander Zimmermann.

About the authors:

Dr Carsten Linz  is an entrepreneurial leader and renowned business transformation expert. He leads the Center for Digital Leadership at SAP SE, teaches in top-ranked executive programess and is a sought-after keynote speaker. He acts as advisor to CxOs around the world..

Prof. Dr. Günter Müller-Stewens is professor of strategic management and director of the Institute of Management at the University of St. Gallen. His main research interest is corporate strategy.

Prof. Dr. Alexander Zimmermann is an assistant professor of organisation and strategic management and the project manager for the Center for organisational Excellence (CORE) at the University of St. Gallen.

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