REINVENTING YOUR BUSINESS MODEL

HARVARD

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

BUSINESS

REVIEW

Articulate what makes your existing model successful

Watch for signals that your model needs changing

Decide whether reinventing your

model is worth the effort

T h e a n s w e r i s YES only if the new model changes the industr y or market

One Secret to maintaining a thriving business is recognizing when it needs a fundamental change.

To see past the borders of what is and into the land of the new, Companies need a road map.

First Step Second Step Third StepRealize that success

First StepRealize that success

starts...

...with thinking the opportunity to satisfy a real customer who needs a job

done

...by not thinking about business models at all

Second Step

Construct a blueprint laying out how your company will fulfill that need at a profit

That plan has four elements

Third Step

Compare the new model to your existing

model to see how much you’d have to change it

to capture the opportunity

A Business Model consists of four interlocking elements that, taken together, create and deliver value.

Customer Value Proposition (CVP)

Profit

Formula

Key Resources

Key

Processes

Every successful company already

operates according to an effective business

model.

A successful company is one that have found to create value for customers. CPV

Target Customers

Job to be done to solve an important problem or fulfill an important need for the target customer.

Offering, which satisfies the problem or fulfills the need. This is defined not only by what is sold but also by how

it is sold.

It is not possible to invent or reinvent a business

model without first identifying a clear

customer value proposition.

The profit formula is the blueprint that defines how the company creates value for itself while providing value to the customer.

Profit

Formula

Revenue Model.

How much money can be made: price x volume.

Cost Structure.

How costs are allocated: includes cost of key assets, direct costs,

indirect costs, economies of scale.

Margin Model.

How much each transaction should net to

achieve desired profit levels.

Resources Velocity.

How quickly resources need to be used to

support target volume

Start by setting the price required to deliver the CVP and then work backwards from there to determine

what the variable costs and gross margins must be.

The two elements that describe how the value which is created will be delivered to the customer and the company.

Key Resources

Key

Processes

Needed to deliver the customer value

proposition profitably.

Operational and managerial processes that allow a

company to deliver value in a way they can successfully

repeat and increase in scale.

+

+

People, Technology, products, Equipment, Information,

Alliances.

Rules and metrics such as credit terms, lead times, supplier terms.

Norms: opportunity size needed for investment, approach to customers

and channels.

Key

ProcessesKey Resources

Major changes to any of these four elements affect the others and

the whole.

Established companies can often create new products that disrupt competitors without fundamentally changing their own business model.

When a new business model

is Needed?

These circumstances often require business model change

Address needs of large groups who find existing solutions too expensive or complicated.

The Nano’s goal is to open car ownership to low-income consumers in emerging markets.

Capitalize on new technology, or leverage existing technologies in new markets.

A company develops a commercial application for a technology originally developed for military use.

Bring a job-to-be-done focus where it doesn’t exist.

FedEx focused on performing customers unmet “job” : Receive packages faster and more reliably than any other service could

Fend off low-end disruptors. Mini-mills threatened the integrated steel mills a generation ago by making steel at significantly lower prices.

Respond to shifts in competition.

Power-tool maker Hilti switched from selling to renting its tools. Low-end entrants had begun chipping away at the market.

Example

Example

An opportunity to...

A need to...

Creating a new model for a new business does not mean the current model is threatened or should be changed. A new model often reinforces and complements the core business.

Embraces the Low End

High-margin, high-overhead retail prices pay for value-added

services.

Customized solutions, negotiated contracts.

R&D, sales, and service orientation.

Spot-market pricing, low overhead to accommodate

lower margins, high throughput.

No frills, bulk prices, sold through the

internet.

IT system, lowest-cost processes, maximum

automation.

Customer Value Proposition Profit FormulaKey resources and processes

Traditionally high-margin company found

new opportunities in low-margin offerings by

setting up a separate business unit that

operates in an entirely different way.

Investment paid back in just three months!

The Elements of a Successful Business Model.

Systematically identifying all of the constituent parts of a successful business

model.

Understand how the model fulfills a potent value proposition in a

profitable way.

Judge how well the existing model could

be used to fulfill a radically different

CVP.

What it needs to do to construct a

new one.

Break the Rules.

Identifying new competencies.

Be patient for growth but

impatient for profit.

Envelop new technology in

the appropriate model.

Customer Value Proposition

Profit Formula

Key Resources

Key Processes