Radical Business Model Transformation
Carsten Linz, Günter Müller-Stewens & Alexander Zimmermann
1. Leading Radical Shifts with Transformational Mindset
Today’s exponential change, fueled by the two mega trends – digitization and service orientation (‘servitization’) – makes business model transformation a key strategic priority for many leaders. Companies, which are still relying on outdated business models, face the risk of becoming irrelevant. In contrast to start-ups that can drive business model innovation from the green field without any legacy, established companies or business units already act in a given business model with their existing customer base, proven assets and processes and thus have to find the right transformation path into the future despite structural inertia and market barriers.
Radical business model transformation is the systematic strategic change process of switching from one business model type to another in order to gain or regain the competitive edge. “Radical” means they have to change the type of business model, at least for major parts of the company. This implies a shift from incremental innovations, feature and function plays, efficiency gains and sole process automation to making the leap to the next business model with substantial change in all business model domains and often comes with a new firm mission.
Albert Einstein once stated wisely, “we can‘t solve problems by using the same kind of thinking we used when we created them“, and the same holds true for radical business model transformation.
The Business Transformation Board is the book’s central tool to help leaders navigate the fundamental change process from the currently applied business model type to the next one. The board differentiates four generic business model types, namely the product-, platform-, project-, and solution business model based on the two dimensions customization and inclusiveness. A radical business model transformation requires an integrative and well-orchestrated shift in all three domains: the customer-facing front-end (value proposition, offering and customer interaction), the organizational back-end (activities, critical resources and capabilities), and the monetization mechanics (cost and revenue structure). The board describes for every possible transformation path the required changes in all these three domains. To emphasize the fact that leaders need the courage to cross the line to a radically new business model despite exit and entry barriers, they are also referred as ‘crossings’.
2. Lessons from Companies That Have Made the Leap
Based on three years of rigorous research, during which we analysed more than 380 companies or lines of business, we were able to identify patterns for successful business model transformation. Some examples in the business transformation board are portrayed in the following.
2.1 Transforming to more Inclusive Business Models: From Platform Plays and Holistic Solutions
When crossing the equator from south to north, companies move from standalone, often-physical offerings with vastly independent transactions to comprehensive and interconnected offerings with recurring transactions.
The athletic apparel market is characterized by recent transformations from product to platform business models: Nike+ leverages data from sensors in the running shoes and hence allows athletes to track their performance statistics and improvement over time, as well as connect with a community of fellow runners to share routes. Similar with Under Armour Connected Fitness, which tracks, analyses and shares fitness activity with a community. Both companies transformed themselves from a producer of sport shoes and sportswear into an operator of a new, integrated, end-to-end fitness and health service with superior user experience.
The same logic applies to the mobility industry, where new entrant Uber challenges the traditional industry rules. With Daimler an incumbent firm launched a mobility platform called Moovel to transform itself from a traditional car OEM into an end-to-end mobility provider, which orchestrates even across different transportation means like public transport, limousines, car-sharing, taxis, rental cars, rental bikes, trains, long-distance busses and flights.
The Spanish construction company Sociedad Ibérica de Construcciones Eléctricas S.A. (SICE) historically worked in a project business model. When entering the toll collection market, the firm transformed itself into a solution business model and now even operates the toll solutions. With their mission, “to always provide the best customer solution”, SICE combines multiple product and service components and even leverages 3rd party instead in-house components to solve the client’s broader problem in the best way.
A successful south–north crossing requires (1) an adaptation of the customer-facing front-end from a singular value proposition to a comprehensive and integrated value proposition, (2) a transformation of the organizational back-end from standalone to integrating architecture by establishing a platform foundation and ecosystem, and (3) a shift in the monetization mechanics from one-off sales to recurring fees with subscription- or SLA-based payment schemes.
2.2 Transforming to more Focused Business Models: From Data Plays and Complexity Reduction
Netflix’s most striking business model transformation, was not going from video and later DVD rental via mail-order to streaming of licensed content towards greater inclusiveness, but to start producing premium, original content programmes in-house. This meant a shift in direction towards the focused product business model of the studios.
Already the first series ‘House Of Cards’ had won three Emmy awards because Netflix produces its original content based on behavioural propensity analysis of its paying customers, hence they analyse what and how customers watch films and predict which content they would like to see. In platform and solution business models, data nearly always plays a pivotal role. Netflix’s Chief Product Officer Neil Hunt claims that the combined effect of personalization and recommendations is worth more than $1 billion savings per year.
Similarly, Amazon makes extensive use of their customer data, e.g. to analyze which third party products outsell on Amazon Marketplace to potentially include them in their Amazon-owned assortment. As every company is evolving into a technology company, data is becoming the golden asset for companies. For leaders, it is key to derive optimum value from the platform data and extract insights for new, differentiating product or service offerings and incremental revenue streams that fit best the company’s future portfolio and DNA.
Complexity reduction is another strategic rationale, when companies move away from an inclusive business model. When operating end-to-end processes on customers’ behalf, the related risk and costs of building reliable architectures and managing the ecosystem can easily exceed acceptable risk levels.
A successful north–south crossing requires (1) an adaptation of the front-end from a comprehensive and integrated to a singular value proposition, (2) a transformation from an integrative architecture to a standalone back-end, and (3) a shift in the monetization mechanics from recurring fees to one-off sales.
2.3 Transforming to more Customized Business Models: From Scope-Plays and Servitization
When crossing the meridian from west to east, a firm enters market segments that do not allow for standardized, large-scale offerings but customers demand individualized products or services and are willing to pay for them.
Fundes, a South American consultancy for economic development, acted as a non-profit organisation in a product business model as they offered standardized support and education to small companies, to help them integrate their products into the supply chain of multinationals. When their main donator withdrew, the leadership team transformed the firm into a project business focused on highly individual requests from large multinational firms to manage their supply chains and leverage local “mom and pop shops” as a channel. Besides establishing an offshore holding plus local ‘business’ subsidiaries, they had to drive a massive skill and competence transformation towards delivering customer-specific projects.
Knorr-Bremse Group, the world’s leading supplier of braking systems for commercial and rail vehicles, transformed from systems supplier to a total lifetime solution provider – even for entire train vehicles with own or rented facilities and staff. Managing now SLAs focused on vehicle up-time rates, an in-depth understanding of the customer’s specific business processes is key, which led to the foundation of the independent RailServices business unit.
When companies change gears from ‘services around products’ to ‘products around services’ with the goal of potentially achieving higher margins, it is also referred to as servitization. The firm needs to develop organizational capabilities to build, sell and deliver integrated products and services that deliver value in use, which requires direct access and co-creation with the customer.
A successful east–west crossing in the business transformation board requires (1) a front-end adaptation from a standardized to an individual value proposition, (2) a back-end transformation from a scalable production structure to a flexible service structure, and (3) a monetization mechanics shift from cost-driven pricing to demand-driven pricing.
2.4 Transforming to more Standardized Business Models: From Scale-Plays and Productization
Customization can sometimes be quite frustrating because there is a variety of different customer use cases to be covered and once a solution is handed-over, customers often start further individualizing.
Jason Fried founded 37Signals, a Chicago-based Web design shop, as classical project business specialized in customized solutions. To handle the growing complexity, they developed a project management software, which impressed their clients due to its simple and intuitive user experience. One year after they had launched their ‘basecamp’ software, their product business was more profitable than web design and they abandoned their project business completely.
Venture capitalists are generally not in favour of service businesses as their growth remains linked to the size of staff. Its countermeasure is “productization”, a strategy that develops repeatable services to enable scalability.
For example, Coursera or edX offer massive open online courses (MOOC) and rely on productizing teaching content to offer lectures on-demand.
Same with Blume 2000, a German-based flower chain store, which sells a limited number of centrally arranged bouquets through its online and offline stores instead of customizing individual bouquets for every customer. Compared to traditional flower shops, they offer a seven-day freshness guarantee and lower prices due to bulk purchasing.
Infosys, the global IT services firm, focused traditionally on offering customer-individual projects delivered on-site, which requires excellent resource management capabilities. Due to the commoditization of classical IT outsourcing, they started around 2000 to transform towards IP-based productized offerings with the banking software product ‘Finacle’ as first result.
Additionally, they switched from time-and-material based projects to one-time upfront license payments for the software. They further expanded their product portfolio, also via acquisitions like Skava and Panaya, and today the product portfolio contributes around 5 percent of Infosys’ total corporate revenues.
The leaders task at hand is to strike the right balance between driving economies of scope as well as economies of customer integration on the one side and economies of scale and non-linear growth due to productization, standardization and automation on the other side.
A successful east–west crossing requires (1) an adaptation of the front-end from a customer-individual to a standardized value proposition, (2) a transformation from a flexible service structure into a scalable production structure, and (3) a shift in the monetization mechanics from a demand-driven to a cost-driven pricing model.
3. Conclusion: The Need for Entrepreneurial and Transformational Leadership
Changing from one business model type to a more effective one in order to defend or regain a company’s competitive advantage means managing a deep strategic renewal process that includes a shift in the firm’s dominant logic and cognitive mind-set. At its core, innovation must be the instantiation of every radical business model transformation to drive new revenue streams and to avoid transformations for the sake of transformation. This requires entrepreneurial leadership focused on exploiting unseen opportunities by creating novel combinations, taking initiative to pursue them regardless of the resources currently controlled, energizing and empowering people to act along a revolutionary mission. Even after a successful transformation, it is key to keep rejuvenating the business model to stay competitive.
To that end, Apple refreshed its iTunes platform model with the help of the $3.2 bn Beats Electronic acquisition to add missing streaming capabilities. Similarly, the Arri Group, the world's largest manufacturer and distributor of motion picture cameras, stuck to their heritage product model and successfully transformed from analogue film to digital cameras.
Following two questions can serve as guiding principles for transformational leaders, when they discuss business model transformation with their leadership teams: “When was the last time, we did something for the first time?” and “Are we thinking radically enough?”
To find out more about this topic, pick up a copy of Radical Business Model Transformation by Carsten Linz, Günter Müller-Stewens and Alexander Zimmermann. Transform your business model and outsmart the competition with this practical guide to innovative organisational development.
About the Author
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 Programs 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 Organization and Strategic Management and the Project Manager for the Center for Organizational Excellence (CORE) at the University of St. Gallen.