New Business Model

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Fanny Cros

How to design a winning Business Model?

Ramon Casadesus-Masanell and Joan E. Ricart, HBR Jan-Feb 2011

Because of the economic slowdown in developed economies and the mature markets more and more companies are encouraged to enter in emerging markets. We can observe an increasing pressure for MNE to enter in emerging economies by targeting middle and low Base of the Pyramid. The leading companies are targeting the BOP in emerging countries (India, Africa, Asia) by adopting innovative business models. Face to this situation, BOP strategies for MNE and Red Ocean for small companies, firms need to modify or reinvent their business model. According to the authors, the problem is that companies build their business model without thinking about competition, “in isolation”. One business model seems successful when we analyse it alone, but in interactions with others it create less value. For Ramon Casadesus-Masanell and Joan E. Ricart, appraising models alone, a faulty assessment of their strengths and weaknesses, bad decision making are the main reasons of business models failure.

* How to create a good Business Model?

For Joan Magretta, a Management writer, a business model is “the story that explains how an enterprise works”. For Peter Drucker, is the answer to four questions: Who is your customer? What does the customer value? How you deliver value at an appropriate cost? According to the research conduct by the authors, good business models respond to few criteria:

1. Is it aligned with company’s goals?
The company need to thin about it strategic fit, strategic stretch and strategic alignment. Capture value with a good alignment with the company objectives.

2. Is it self-reinforcing?
The choices should complement one another. There must be internal consistency. The company can gives up some choices and makes up news ones.

3. Customer value proposition
Profit Formula
Key Resources
Key Processes
Customer value proposition
Profit Formula
Key Resources
Key Processes
Is it robust?
The company should be able to sustain it over time

Harvard Business School’s Clay Christensen suggests that a business model “consist of four elements: customer value proposition, profit formula, key resources, key processes”.

A good business model creates virtuous cycles that result in competitive advantage.

* How business model creates virtuous cycles?

Business model implies choices, which led to consequences (likely or unlikely):

Business Model
CHOICES
(policies, assets, governance)

CONSEQUENCES
(fFexible, rigid)

Business Model
CHOICES
(policies, assets, governance)

CONSEQUENCES
(fFexible, rigid)

Offer a decent level of service at a low cost
CHOICES: Fly out of only secondary airports; serve no meal, non-unionized workforce, standardized fleet of Boeing 737s

CONSEQUENCES: High volume, low-cost reputation, low variable and fixed costs, aggressive management

Offer a decent level of service at a low cost
CHOICES: Fly out of only secondary airports; serve no meal, non-unionized workforce, standardized fleet of Boeing 737s

CONSEQUENCES: High volume, low-cost reputation, low variable and fixed costs, aggressive management

Executives made managerial choices about how the organization should operate (extend of vertical integration, compensation practises, marketing initiatives). These choices influence the “company’s logic of value creation and value capture”. Let us take the example of Ryanair. The company was in bankruptcy in the 1990’s. Ryanair has chosen to transform it business model from a traditional one to a low-cost one :

Ryanair’s business model creates several virtuous cycles. All of the cycles maximize profits by reduced-costs and low prices. Lower prices permit growth sales and increased Ryanair profits. The processes generate virtuous cycles that “continuously strengthen the business model by creating a network effect”. Smart...
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