Dynamic Concept of Business Models and the Relationship to Innovation and Transformation

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8th Feb 2020 Business Strategy Reference this

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Review the recent (post-2000) literature on the business models, playing particular attention to the dynamic concept of business models and the relationship to innovation and transformation.  Use your review to advise the senior management of your project organisation on whether they should revisit their business models in developing strategy for their organisation.

Background

Senior managers within major organisations are required to look into the courses of action that define how a company innovates and transforms, which Macintosh and Maclean (2015) refer to as strategic options. These are defined through various sets of choice in which managers must specify. For example, making a decisions based on competition.

According to Osterwalder and Pigneur (2016), a business model is essentially a conceptual tool consisting of set objects, concepts and their relationships with the objective to express the business logic of a specific firm. Therefore, mangers must consider which concepts and relationships allow a simplified description and representation of what value is provided to customers, how this is done and with which financial consequences (Osterwalder and Tucci, 2005).

Introduction

A review of the literature shows a broad diversity of understandings, usages, and places in a firm. This literature review will identify the terminology used to describe a business model, and the relationship to innovation and transformation. This systematic review will also look at the evolution of how managers have adopted business models, and how business models influence innovation and transformation. The review will essentially focus on authors contributions and the reviews which have appeared as a reaction of their work. For example, academic articles, scholars and critic of authors contributions.

By doing so, a wider perspective of business models will be provided, which will contribute when clarifying and integrating the findings in its evolution.

Lastly, in order to reconcile the theoretical findings of the review, the management of French connection will be advised on how to enhance their innovation and transformation by adopting and revisiting their business model.

Methodology

This literature academic and corporate resources will be used in order to systematically address the benefits and disadvantages of using business models. I addition, it will look into the relationship which business models have with innovation and transformation.

Findings

Business models and the relationship between innovation and transformation

David J. Teece published an article on how business models is a conceptual, rather than financial, model of a business (Teece, 2010). He argued that a business model should articulate the logic and provide data and evidence which demonstrates how a business creates and delivers value to customers. He also stated that the five elements which senior managers need to determine in a business model are

  1. Select technologies and features to be embedded in the product/service
  2. Determine benefit to customer from consuming/using the product/service
  3. Identify market segments to be targeted
  4. Confirm available revenue streams
  5. Design mechanisms to capture value

The issues related to good business model design are interrelated, and lie at the core of the fundamental. To profit from innovation, business pioneers need to excel not only at products innovation, but also at business model design, understanding business design option as well as customer’s needs and technological trajectories (Teece, 2010).

In addition to Teece’s argument, Demi and Lecocq had their own definition of the term “business model”. Demi and Lecocq argued that there are two different uses of the term. The first one is the static approach. As a blue print for the coherence between core business model components. Demi and Lecocq second point referred more towards transformation approaches. They stated that the concept could be used to address change and change and innovation in an organisation, or the model itself (Teece, 2010).

Combining Osterwalder (2004) and Doganova and Eyquem-Renailt (2009), it can be distinguished the following elements of a generic business model concept is Value proposition, supply chain, customers interface and financial model (Osterwalder and Tucci, 2005).

Business Models and Frameworks for developing transformation and innovation

Managers must ensure that they have a reconstructionist view in order to build and develop new and reliable business models. Managers should not be intimidated by risk and should aim towards rebuilding and developing new models which could essentially enhance their innovation and competitive advantage.

Teece’s argued that the main driver of technological innovation and transformation are set on the on the foundation of strong business models. Demiler and Reeve’s also argue that the way in which to achieve a strong innovative system is to implement two essential elements. One of which being the value proposition and the other being the operating model (Teece, 2010).

According to Teece, a business model embodies nothing less than the organisational and financial ‘architecture’ of a business. It may not be a spread sheet, however, a business model is well embedded in a business plan an in income statements and cash flow projections (Teece, 2010). However Teece stated that the notions refer in the first instance to a conceptual, rather than a financial, model of a business. Teece also stated that business models have only been explicitly catapulted into public consciousness during the last decade or so (Teece, 2010).

Business models are necessary features of market economies where there is consumer choice, transaction costs and heterogeneity amongst consumers and producers and competition (Aspara et al., 2013). Profit seeking firms in competitive environments can essentially endeavour to meet variegated consumer wants through invention and presentation to the consumer of new value propositions. According to Demil, business models are often necessitated by technological innovation which creates both the need to bring discoveries to the market and the opportunity to satisfy un requited customer needs (Demil and Lecocq, 2010).

Therefore, Demil concluded that new business models can themselves represent a form of innovation. There are a plethora of model possibilities; however, Teece stated that some of which will be much better adapted to customer needs and business environments than others. Demi believes that adjusting and improving business models is a complex art (Demil and Lecocq, 2010). Designs are likely to be high situational, and the design process is likely to involve iterative process. Therefore, new business models can both familiar and represent innovation as history has demonstrated.

An example of successful business model innovation is Southwest Airlines, where the founder of the company surmised that most customers were seeking direct flights, low costs, reliability and good customers service. Teece highlighted that in order to achieve these objectives, Southwest eschews the hub-and- spoke model associated with alliances, which meant the sales were direct, no tickets were bought from agencies. Southwest’s business model – which was very distinctive from those of major carriers, followed by elements of a discount airline model first pioneered in the UK (Teece, Pisano and Shuen, 1997).

The razor blade model is another classic case within well-known businesses revenue models, which essentially involved pricing razors inexpensively, but aggressively making up the consumables. Jet engines for commercial aircraft are priced the same way, manufacturers know that the engines are long lived, and maintenance and parts is where GE and other make their money. Therefore, the engines are sold relatively inexpensively- however, parts involve considerable mark-ups and represent an income stream that may continue for decades (Teece, Pisano and Shuen, 1997).

Criticism

Joan Magretta concluded that a business model does not work due to the fact that it either failed the narrative test or the numbers test. Margareta described the narrative test as a story that does not make sense and the umbers test as the P&L that doesn’t add up. Margretta used the grocery industry as clear example (Magretta, 2002). The industry has a very thing margins to begin with, and on-line merchants like webvan incurred new costs for service, delivery, marketing and technology. As customers were not willing to pay significantly more for groceries bought on line than in stores, there was essentially no way in which the maths could work. Internet grocers had plenty of company. Many ventures in the first wave of electronic commerce simply failed as the basic maths were flawed. Many other business models failed due to the narrative test (Magretta, 2002).

Magretta as stated that every visible organisation is built upon a sound business model, whether or not it’s founders or its managers conceive of what they are doing in those terms. However, a business model isn’t the same thing as strategy. Business models describe, as a system, how the pieces of a business fit together. They do not factor a critical dimension of performance: competition sooner or later an it is unusually sooner- every enterprise runs into competitors.  A competitive strategy explains how a business will do better than their competitors. Doing better, essentially means being different and more innovative (Magretta, 2002).

Teece also stated that the concept of a business model lacks theoretical grounding in economics or in business studies. Quite simply there is no establishment in economic theory for business models; and there is not a single scientific paper in the mainstream economics journals which analysis or discusses business models. Teece also states that the business model has no place within the theoretical constructs of planned economies. Therefore, as central planners are erquired to understand the stages in the production system – where consumers merely get what the system produces, business models simply aren’t necessary (Teece, Pisano and Shuen, 1997).

French Connection Business Model

French connections offers high quality, differentiated products to its customers. Recently, there has been articles that French connection may potentially close all their branches due to the fact that they are under performing, incurring losses of over £5m in 2017. French connection should consider revising their business model and ensure that their foundation is correct. The first sector of their business model which the company should analyse is the selection of technologies and features to be embedded in to their services. When researching French Connections percentage of sales, it showed that only 35% of the sales came from online purchases (Javed and Woods, 2018). Therefore, French connection need to invest more in their technological aspect in order to enhance sales and reach their customers. As David Teece states “Since technology has evolved to allow the lower cost provision of information and customer solutions.

Teece also stated that technology can have an equally transformative effect on the cost side of the business model (Teece, Pisano and Shuen, 1997). Despite the fact that French connection may have to re-invest in their technological aspects, it is proven that it will enhance innovation. In addition to the technological aspect of the business model, French Connection need to determine benefit to the customer from using the products. In order for French connection to become more successful, senior managers need to understand what drives value for customers.

 It would be beneficial for French Connection to interact with their customers, survey them and watch their actions and reactions. Capture data to comprehend what is important to the customers and the opportunities which can arise by meeting their need. In addition identifying the market segments to be targeted. Coupling competitive strategy analysis to business model design can require segmenting the market, creating a value proposition for each segment, setting up the apparatus to deliver that value, then figuring out ways that it can be used to prevent the business model from being figured out by competitors.

In addition, French Connection should also confirm their revenue stream. A revenue is the building block representing the cash which a company generates from each customer. Lastly, French connection managers need to ask fundamental questions such as how they can capture value from delivering new information services that users often expect to receive without charge. This has allowed individuals as we’’ as businesses easy access to vast amounts of information and data ,and customer power has enhanced as comparison shopping has become much more easier .

Conclusion

To conclude, Business models do have a direct relationship with both innovation and transformation. As this paper has shown, a key way in order to reach out to customer and to be more effective it by innovating and implementing technology in to businesses models. As seen with the Southwest example, when implementing new ways to meet customer’s demands, Southwest became more innovative as well as transformed their business model. In order for French connection to become more innovative and recover from losses, they would need to refer back to the five elements which Teece suggested which were select technologies and features to be embedded in the product/service, determine benefit to customer from consuming/using the product/service, identifying market segments to be targeted, confirming available revenue streams and designing mechanisms to capture value.

References

  • Aspara, J., Lamberg, J., Laukia, A. and Tikkanen, H. (2013). Corporate Business Model Transformation and Inter-Organizational Cognition: The Case of Nokia. Long Range Planning, 46(6), pp.459-474.
  • Aspara, J., Lamberg, J., Laukia, A. and Tikkanen, H. (2011). Strategic management of business model transformation: lessons from Nokia. Management Decision, 49(4), pp.622-647.
  • Baden-Fuller, C. and Haefliger, S. (2013). Business Models and Technological Innovation. Long Range Planning, 46(6), pp.419-426.
  • Carbonell, F. (2012). Business Models in Real Estate: Change Models?. SSRN Electronic Journal.
  • Demil, B. and Lecocq, X. (2010). Business Model Evolution: In Search of Dynamic Consistency. Long Range Planning, 43(2-3), pp.227-246.
  • Demil, B. and Lecocq, X. (2010). Business Model Evolution: In Search of Dynamic Consistency. Long Range Planning, 43(2-3), pp.227-246.
  • Javed, A. and Woods, B. (2018). French Connection losses widen after House of Fraser administration. [online] The Telegraph. Available at: https://www.telegraph.co.uk/business/2018/09/20/french-connection-losses-widen-house-fraser-administration/ [Accessed 14 Nov. 2018].
  • MacIntosh, R. and MacLean, D. (2010). Strategic Management (2nd ed.). Conditioned Emergence: A Dissipative Structures Approach to Transformation, 52(4).
  • Magretta, J. (2002). Why Business Models Matter. Why Business Models Matter, 1(1), p.47.
  • Osterwalder, A. and Tucci, C. (2005). Clarifying Business Models: Origins, Present, and Future of the Concept. Communications of the Association for Information Systems, 16.
  • Teece, D. (2010). Business Models, Business Strategy and Innovation. Long Range Planning, 43(2-3), pp.172-194.
  • Teece, D. (2010). Business Models, Business Strategy and Innovation. Long Range Planning, 43(2-3), pp.172-194.
  • Teece, D. (2010). Business Models, Business Strategy and Innovation. Long Range Planning, 43(2-3), pp.172-194.
  • Teece, D. (2010). Business Models, Business Strategy and Innovation. Long Range Planning, 43(2-3), pp.172-194.
  • Teece, D., Pisano, G. and Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), pp.509-533.
  • Osterwalder, A. and Tucci, C. (2005). Clarifying Business Models: Origins, Present, and Future of the Concept. Communications of the Association for Information Systems, 16.
  • Sorescu, A. (2017). Data-Driven Business Model Innovation. Journal of Product Innovation Management, 34(5), pp.691-696.

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