This can work provided there is high-level support for the new venture. The capability of an established firm to experiment with new businesses while not undermining its existing revenue sources has been called ambidexterity (O’Reilly and Tushman 2004). Pioneering a new business model is particularly important when the market has network effects and “installed base” characteristics such that the more users who are engaged, the greater the value associated with the platform.
Organizational instincts tend to compel the exaggeration of current capabilities. The true magnitude of a gap may become apparent only after an organization falls short in executing a strategic initiative. The early phase of a project may be satisfactory, but as it progresses, problems begin to crop up, the senior team has to get more and more involved, and the goal slips further away. Management may have thought that a particular capability, such as supply chain management, was in place only to discover that it was inadequate to the needs of a new product or strategy. Business model implementation, like transformation more generally, involves closing capability gaps between the firm’s current activities and those required to enact the new business model.
Many established companies are experimenting with the new possibilities in much the same way as start-ups. General Motors, for instance, is experimenting with a new model of car ownership that, for a monthly fee, allows customers to switch in and out of different types of Cadillac up to 18 times a year rather than own a single car. Other firms, like Blockbuster Video, proved unable to respond innovatively and have vanished. This paper begins by briefly examining the way competition has become more volatile and fast-paced in the digital era.
While there will certainly not be any guarantee that a new business will be, or will remain, profitable, certain steps entrepreneurs can take in the early stages of creating a business will improve its chances. An essential step is taking the time to think through a business model. Firms across all industries are embracing internet-based digitization strategies to expand or improve their business. In many cases, though, internet-based businesses pursue customer growth ahead of profits. The path to profitability, which is a key element of a business model, should not be an afterthought. A well-designed business model balances the provision of value to customers with the capture of value by the provider.
An important early decision is whether to test a business model on a segment of the potential user base before the new product or service is introduced more widely. This can help prove the concept behind the business model and allow an opportunity to make adjustments before large-scale commitments are manufactured. However, it can also allow potential rivals valuable information and time to better position themselves to compete. A business model has many moving parts, all of which must work together congruently. The model as a whole must also be aligned with the organization’s strategy, culture, and resources. Good business model design depends as much on art and intuition as it does on science and analysis. Without the right balance between the creation, delivery, and capture of value, the model are not in operation very long, at least not by a for-profit enterprise.
While building capabilities is hard, there is a silver lining; if well-built, they can be difficult for others to imitate and provide a basis for competitive advantage. The gap identification process begins by examining the match between a proposed business model and the firm’s existing capabilities. An analysis of existing capabilities needs an objective point of view that is detailed and realistic.
In an existing company, the introduction of a new business model can prove challenging because of a social mismatch, the ability of existing businesses to influence budgets, or other reasons that start-ups do not face. This is particularly true when adding a next-generation business into a business that has been competing in more traditional ways. One solution is to set the new business apart, with its own premises and possibly even a different incentive system.
In such cases, winner-take-all, or winner-take-most, competition is more likely. This helps to explain why early Internet companies like Amazon that survived initial industry shakeouts have developed formidable leadership positions. Business models can last for years or even decades, but they all have finite life spans. When changes are sensed in technology, consumer demand, or the competitive landscape, business model revision is needed. Proactive sensing of the need for change is a dynamic capability that must be cultivated and built into the organization’s structure. Scanning and interpretive processes can be embedded throughout the organization, with open communication channels leading back to upper management so that information flows to where it is needed. A firm’s seizing capabilities come into play for the crafting of a revenue mechanism and the planning of the organization’s value chain, including the designation of which activities will be internalized and which will be left to outside suppliers.