Focus of the Capstone Project Paper:You work for a consulting company that has been hired by a wealthy investor who is interested in buying a new business. This investor has asked your company to provide an analysis on the industry of this new business venture, along with recommendations for companies operating within the industry.Select one industry (and at least two companies operating within that industry) (Coke and Pepsi or Starbucks and Dunkin Donuts…..whichever industry is easier to research) for analysis. Address the following elements:Identify external environmental forces in the remote environment that are likely to impact the industry within the next three years.How will these changes likely impact the companies you have chosen for analysis?Analyze the chosen industry using one of the models presented in the following articles: “A Comparative Analysis of Strategies and Business Models of Nike, Inc. and Adidas Group with Special Reference to Competitive Advantage in the Context of a Dynamic and Competitive Environment” and “Business Model Innovation in Corporate Competitive Strategy.” Files are attached.Make at least two strategic choice recommendations for companies to successfully deal with the forces operating within the industry at the present time and in the near future.Writing the Capstone Project PaperThe PaperMust be eight to ten double-spaced pages in length and formatted according to APA style as outlined in the approved style guide. Papers less than eight pages in length and more than ten pages in length will have two (2) points deducted from the final score for each page under or each page over, exclusive of appendices, references, exhibits, etc.Must include a cover page that includes:Name of paperStudent’s nameCourse name and numberInstructor’s nameDate submittedMust include an introductory paragraph with a succinct thesis statement.Must address the topic of the paper with critical thought.Must conclude with a restatement of the thesis and a conclusion paragraph.Must use APA style as outlined in the approved style guide to document all sources.Must include, on the final page, a reference list that is completed according to APA style as outlined in the approved style guide.
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Problems of Economic Transition, vol. 57, no. 8, December 2014, pp. 14–33.
q 2014 Taylor & Francis Group, LLC
ISSN: 1061-1991 (print)/ISSN 1557-931X (online)
DOI: 10.1080/10611991.2014.1042313
ALEKSEI BEREZNOI
Business Model Innovation in Corporate
Competitive Strategy
In this analysis of business model innovation, a key competitive instrument
for major corporations, the author explores the concept of the business
model, identifies the features of innovative business models being used as
competitive tools in today’s volatile markets, and describes the challenges
involved in various approaches to implementing innovation. Innovation’s
role as a key driver of game-changing industry shifts is examined, and it is
concluded that business model development and implementation are
becoming a strategic imperative for most global players.
Keywords: Business innovation, business model, competitive strategy,
corporate organization, global competition, large corporations
Jel Classification: D21, F23, L20
Since the beginning of the twenty-first century, change has become the
norm in almost all spheres of economic life, and the pace and scale of
this change have only grown. It can be stated with certainty that future
economic development will see faster and more profound shifts.
English translation q Taylor & Francis Group, LLC, from the Russian text q 2014
NP “Voprosy ekonomiki.” “Innovatsionnye biznes-modeli v konkurentnoi strategii
krupnykh korporatsii,” Voprosy ekonomiki, no. 9, 2014, pp. 65– 81.
Aleksei Bereznoi is a Doctor of Economic Sciences and director of the Center for
Industrial Market Studies and Business Strategies at the Institute of Statistical
Studies and Knowledge Economics, National Research University–Higher School
of Economics in Moscow.
Translated by Nora Favorov.
14
DECEMBER 2014 15
This unprecedented pace and scale of change has highlighted the
importance of a particularly powerful tool: the innovative business
model. Not so long ago a major corporation that had successfully
established itself within a particular market could count on maintaining
its position long term by steadily improving an essentially unchanged
way of interacting with its customers. Today, however, this is rarely
enough. In almost any industry, no matter how mature a company is, it is
likely to be challenged by competitors introducing new business models
that radically change the “rules of the game.” Furthermore, unlike in the
case of innovative products and manufacturing methods, this is not
necessarily a matter of high technology. In business innovation, the
decisive role is played not by scientific discovery, but by an
entrepreneurial idea, by the identification of a new market need and
the skillful joining of ways to satisfy this need with effective demand
based on nonstandard ways and means of creating and delivering
consumer value to the target market.
Under current conditions, where even the most successful business
models are relatively short-lived, the introduction of business
innovation is becoming an important tool in dominating markets and
defending them against competitors for the vast majority of participants
in global competition. Innovative business models were behind the past
decades’ most remarkable corporate ascents: Apple, Walmart, Amazon,
Cisco, FedEx, and Virgin, to name a few. Corporations that have
become business innovation leaders become global leaders in their
industries. From this standpoint, the experience of developing and
introducing new business models is of clear interest for Russian
companies as they increasingly enter the competitive fray of global
markets.
The features of business models as competitive tools
Attempts to identify the features of business innovation that serves as a
competitive weapon for large corporations inevitably leads to the task of
defining the very concept of the business model. Although this concept
is neither new nor rare within the literature of economics and business, it
remains a subject of lively debate (Afuah, 2014; Johnson, Christensen,
and Kagerman, 2008; Kaplan, 2012; Magretta, 2002; Osterwalder,
2004; Osterwalder and Pigneur, 2010; Shafer, Smith, and Linder, 2005;
Teece, 2010).
16 PROBLEMS OF ECONOMIC TRANSITION
One reason for the lack of a clear definition of business models and an
insufficient understanding of the concept overall is its interdisciplinary
nature. “The economics literature has failed to even flag the importance
of the phenomenon, in part because of an implicit assumption that
markets are perfect or very nearly so. The strategy and organizations
literature has done little better. Like other interdisciplinary topics,
business models are frequently mentioned but rarely analyzed:
therefore, they are often poorly understood” (Teece, 2010, p. 192).
Without getting into the details of the debate over defining business
models (a topic in its own right), we should note that in our opinion this
concept amounts to more than an arbitrarily constructed understanding of
the basic mechanism through which a particular company operates (such a
broad interpretation essentially deprives the concept of any meaning). The
concept incorporates a number of specific business characteristics that are
fundamental to any company: (1) a means of creating consumer value and
delivering it to a target group of consumers; (2) a means of generating
profits; and (3) a means of using existing resources and processes to
promote the stable interaction of mechanisms for creating consumer value
and generating profit as well as ensuring enduring competitive advantages.
These fundamental characteristics, which as a system essentially define the
entire “logic of a business,” comprise the business model out of which grow
other, secondary elements of the architecture of the enterprise as a party to
market relationships: competitive tools and possible models of market
behavior, the organization of interactions with suppliers (the supply chain
model), the specific organizational structure and organization of business
processes (the operational model), and so on.
What distinguishes innovative business models (which are essentially
the systematic result of developing a set of business innovations) from
traditional weapons in the competitive arsenal? Large corporations use
three basic elements of the tried-and-true methods to increase sales in a
competitive market: lower prices, the gradual improvement of existing
products, or the release of new products. All of these levers can provide
(and continue to provide) measurable results from the standpoint of
increasing sales. However, when large corporations have been operating
in their industries for many years, these approaches inevitably begin to
yield diminishing returns.
The point of diminishing return comes particularly quickly in the case
of lowering prices (these days, most often through discounts and sales),
which is considered the simplest way to boost sales. However, many
DECEMBER 2014 17
companies that lower prices in the hope of a quick yield have learned
that a straightforward price reduction (or the large-scale use of various
sorts of discounts) without making the right changes to other elements of
the business model can quickly lead to reduced profitability. This is a
trap into which major department stores have often fallen after they
turned to large-scale sales: at first they saw a sharp increase in sales
followed by just as sharp a fall in their sales margin.
A solution was found by the pioneers of discount retailing in the United
States, which back in the 1950s began to apply the logic of the supermarket
to the sale of clothing, appliances, and other mass consumption items. This
new business model presumed a number of systemic departures from the
traditional department store: a sharp reduction in the number of sales
personnel; maximum freedom and self-service for shoppers; a redesign of
the sales environment to accommodate large numbers of shoppers; a move
toward purely functional design of sales floors (doing away with everything
superfluous); and changes to the formula for selecting suppliers that
compelled them to offer generous terms. As Joan Magretta has noted, only
after all these elements of the discount business model had been put to
effective use could discounters “offer low prices and still make money”
(Magretta, 2002, p. 91).
In the case of gradual improvements to existing products already
familiar to the market, the ability to apply this competitive method as a
means of increasing sales is exhausted all the more quickly in that
consumer value is generated not by the product as such, but by the
results associated with its use. Companies that continue to stubbornly
focus on improving the product itself can limit their growth potential,
make investments in innovation that are unlikely to be adequately
appreciated by the customer, and, in the end, wind up squeezed out of
the market by more farsighted competitors. A striking example of this is
Kodak, which recently entered bankruptcy after a history dating back to
the late nineteenth century, when it essentially founded and went on to
dominate the photographic technology industry.1
Beginning with the dawn of the current century, the rapid spread of
digital photography and social networks eliminated the need for the
printing of photographs on a large scale, leading a vast business empire
into financial ruin in 2013. An ironic twist in all this is that the digital
photograph was invented by Kodak engineers (back in 1975). But this
invention was obviously not integrated into the company’s business
model, which was built around the sale of relatively inexpensive
18 PROBLEMS OF ECONOMIC TRANSITION
cameras that generated massive sales of film and services to develop and
print photographs using an extensive network of Kodak photography
shops throughout the world.
For many years, the company’s management was absolutely certain of
the durability of this model and concentrated on improving their cameras
and increasing the quality of their film. They made a classic mistake:
focusing on improving the properties of already available goods and
services and ignoring new business models that would enable radical
industry shifts. Locked into their traditional business model, Kodak
essentially lost its connection to the end user, for whom film and printed
photographs per se were not as important as opportunities to capture
memorable moments in their lives and share them with friends and family
(which in our digital age the Internet and social networks offer on an
unprecedented scale). “Kodak’s business model,” according to an article
in Forbes, “was to make its money selling film, and it made a mint that
way. Digital photography didn’t fit that model so Kodak buried its head in
the sand and ignored the coming tsunami of new technology. When film
went from ‘essential’ to ‘old fashioned’ the company never recovered.”2
When it comes to the release of fundamentally new products, this
classical method of competitive struggle offers greater market
advantages than the usual reduction of prices or improvements to
products already being sold. However in the current era of rapid and
unpredictable change, even this method, in its traditional application,
offers no guarantee of stable long-term growth. The early victories of
Apple—perhaps the most successful corporation of the early twentyfirst century—illustrates this point.
In the late 1990s, Apple was a niche player in the personal computer
market, and it was losing ground to dynamic competitors, old and new
alike. But in 2001, with the release of a new product—the iPod digital
MP3 player—the situation radically changed. In the course of just three
years of sales, a huge, essentially global market worth $10 billion
(approximately half of all Apple sales) was created that paved the way
for other best sellers: the iPhone smartphone and iPad tablet. This story
was covered in many business publications, but one aspect of Apple’s
success went largely unremarked: it was not the first company to release
a digital music player on the market. Diamond Multimedia had begun
selling an analogous product, the Rio, in 1998, and in 2000 the Cabo 64
digital player was released by the Best Data company. Both competing
devices were excellent and considered very stylish by their youthful
DECEMBER 2014 19
target audience. Nevertheless, the iPod won, and the main reason for this
was not the product’s unique features, but the innovative business model
that Apple was able to design and introduce in record time.
Apple’s main achievement was the creation of a unique combination of
software, the device itself, and a service allowing consumers to
inexpensively, easily, and legally download digital music from the
Internet. The sale of the inexpensive (and essentially nonprofit generating)
iTunes software was combined with the sale of the high-margin iPod
device to yield excellent profitability for the business model overall.3
The Apple story strikingly illustrates the main advantages of the
innovative business model over traditional competitive tools. Unlike
classical methods that relied on innovation in one or two areas of a
corporation’s economic mechanism (such as price or technology), the
introduction of new business models inevitably brings essential changes
to most of its elements, including the choice of the potential buyer’s
target need, the mechanism for generating profits, and the means of
reliably combining the two. These numerous innovations provide
multiple “layers of protection” from attempts by competitors to copy a
successful business model.
Furthermore, since such innovations are part of an integrated business
model, by definition they are coordinated with one another, which sets
up a multilayered defensive system against competitors, substantially
improves the competitive durability of innovative business models, and
extends the time over which “the cream can be skimmed” in the form of
elevated profits. It is hardly surprising that analysis of a database created
by global management consulting firm BCG (in collaboration with
Business Week) of the most innovative companies of the year showed
that companies that had introduced innovative business models
generated the greatest return for shareholders compared with
competitors who limited their innovation to the introduction of new
products or processes.4 Furthermore, the success of business model
innovators proved to be more enduring: even ten years out they
continued to lead their competitors by a number of important measures.
The main types of innovation and problems in introducing IT
Since every successful business model is unique, it is hard to identify
a standard algorithm for “correctly” developing prospective business
innovations. It is, however, possible to identify some of the main
20 PROBLEMS OF ECONOMIC TRANSITION
pathways of change that have already brought success to today’s
business model innovators in the marketplace.
The first of these pathways involves rethinking ways to satisfy the
target need underlying a given industry’s dominant traditional business
model (including rethinking just what the target group of consumers
actually needs). The result of this rethinking could be, for example, a
reorientation of the company’s business model from making products to
providing services or achieving certain results important to targeted
consumers. For example, Hilti (based in Liechtenstein), facing
intensifying competitive pressure from Asia (especially China),
radically changed its business model, shifting from the sale of products
to a tool management service for contractors.
After years of working with construction firms in a variety of
countries, Hilti had a good understanding of its clients’ power tool needs
and the problems they faced. First among them was the need to purchase
a wide array of tools in order to have the right tools for every
construction job, a huge expense, especially for start-ups. Second, the
entire fleet of power equipment had to be constantly inspected and
managed to ensure that it is kept in good working condition and in the
right place at the right time. Third, builders were often forced to buy
exceptionally expensive tools that are needed only rarely.
Under Hilti’s new business model, the company does a more effective
job of satisfying its clients’ need for state-of-the art power tools. The
company does this by leasing power tools rather than selling them.
Furthermore, it guarantees clients that they will have as many tools as
they need when they need them and commits to continually update the
collection of tools they lease. This new business model obviously
required that Hilti’s operations be completely restructured and that it
develop the new competencies involved in managing a huge fleet of
equipment and transportation logistics as well as in introducing systems
to manage client power tool fleets, among other challenges. The cost of
this restructuring has been fully recouped: the company’s client base has
greatly expanded and revenues have increased.
Sometimes firms are able to accumulate knowledge about their
customers that reveals problems and needs of which the customers
themselves are not fully aware. For example, the U.S. company
ServiceSource, which specializes in developing cloud technologies for
major software and computer equipment producers, discovered a
potentially huge but often ignored source of revenue for their clients: the
DECEMBER 2014 21
renewal of contracts to keep recurring revenue streams flowing. According
to the company’s estimates, in the U.S. information technology (IT) sector
alone, software producers lose up to $30 billion annually because
approximately 50 percent of their clients are not approached by sales teams
(who are focused on finding new clients) to renew their contracts.
ServiceSource not only discovered this source of unrealized revenue
but also developed an appealing way for clients to compensate them for
their services that convinced them to share a portion of their revenues.
The company proposed that its services be compensated not through
standard fees for time spent (the norm for consulting firms), but based on
results—on a percentage of income generated through the renewals. The
innovation introduced into ServiceSource’s business model was not just
an original compensation model. What they essentially offered was the
outsourcing of a problem in a sensitive area and the sharing of risks in
exchange for a share of revenues.
As executive vice president Christine Eckert has stated, “We offer
clients a set of managed services, where we can solve the problem for
them. We can give them everything they need to outsource this problem
to us. We take it on and deliver them back a result” (Lindgardt and
Hendren, 2014, p. 8). ServiceSource’s innovative business model
achieved rapid market success. During 2007– 12, the company’s
compound annual growth rate was almost 30 percent, and by late 2013
overall client revenue being managed exceeded $14.5 billion.5
Other types of business innovation that have proved themselves by
creating successful models in many markets involve changing the way
consumer value is delivered to target customers and the overall
restructuring of interactions with them. An interesting example is the
business model of Nespresso, a fast-growing international company that
is part of the Swiss food giant, Nestlé.
Ever since it first began operation, this company, which was founded
in 1986 to retail high-quality single-serving coffee, was built around an
innovative idea that combined seemingly incompatible aspects: an
individualized approach to each customer marketed on a large scale.
A major role in this “personalization” was played by the way the
company packaged and sold the pr …
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