Shyamsunder Panchavati

Shyamsunder Panchavati
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Sunday, August 17, 2014

"Que Sera Sera” attitude does not work in Business….. 08-17


THIS ARTICLE IS  BASED ON MY GUEST LECTURE AT IIT KHARAGPUR SCHOOL OF MANAGEMENT (VGsom)


THIS ARTICLE IS BASED ON MY GUEST LECTURE AT IIT KHARAGPUR SCHOOL OF MANAGEMENT (VGsom)

“Que Sera Sera” is great in life but doesn’t work in Business…..

You need to have a robust Business Model to back your resolve……

Creating a Sustainable Business Model………..

I was invited by the Indian Institute of Technology (IIT) Kharagpur to deliver a Guest Lecture at their school of management (VGsom) on 7th Agust 2014. For my friends not familiar with Indian educational institutions, let me explain, IIT in India is what MIT is to USA and the rest of the world.

I enjoyed unbridled hospitality at their Technical Guest House where I was lodged. Awesomeness was omnipresent in the sprawling two thousand plus acre campus with picturesque green surroundings. Add to this was the continuous buzz of the students moving around busily in their bicycles, speaking in all the different languages and dialects India has, this kept the atmosphere live and vibrant. It gave a feeling of being in a cosmopolitan cosmos, of a different kind.

A couple of hours are not enough to gauge the quality of imparting at the school, but it was surely enough to determine the quality of the warmth of the students and the faculty, which definitely was Avant Garde.

Coming to the topic “Creating a Sustainable Business Model”…..

Let us first understand what a Business Model is?  

Wikipedia defines it thus….

A business model describes the rationale of how an organization creates, delivers, and captures value…The process of business model construction is part of business strategy.

Why do we need a business model?

A business enterprise without a business model is a like ship without a rudder. It is directionless, it can get struck midstream. It may sometime even reach the shore, but it may be one of the many possibilities. With a definite business model reaching shore is a definite certainty.

A well defined business model navigates the business enterprise in the desired direction. A business model in other words sows the seed of aspiration for a startup. Then it also creates suitable conditions for germination and proper growth. And finally it ensures the fructification of the aspiration of the entrepreneur. 

Can a service industry have a business model? Can an educational Institution have a business model?

Any type of business can have business model. In fact every industry in any segment should have well defined business model. In fact even a country should have business model to achieve growth in industrial and economic segments.

India as a Viable and Sustainable Business Model…

Let us take the example of India. Often the phenomenal growth of this country during the past decade and half is credited to the reforms brought in by the Narsimha Rao – Manmohan Singh team in the early nineties. While it certainly opened the doors for foreign investment in different forms and sectors, the change in the perspective of the people in United States and Europe about India being a country of Snake charmers and Bullock carts, to that of country of abounding vibrant human capital, was brought about by a set of Indians who went to United States on shoes string budgets established themselves, established their businesses and contributed hugely to the growth American economy. These technocrats are known as early adapters. This are the people who created confidence in the investors in USA & Europe and  helped create India as  a viable & sustainable business model. Read about them here.

Educational Institutions and the Business Model

Great educational institutional institutions have their own distinct Business Models that is reflected in intake of students, imparting methodology, their location and the type and quality of Faculty they hire. Each institution shows a distinct bias towards a particular area.

Harvard Business School uses the case study methodology for imparting.

Wharton school of Business uses the data driven methodology.

 Chicago Booth school is very possessive and obsessive about its faculty and culture of imparting. It flies its faculty from Chicago school to its London & Hongkong schools.

And so are other major schools like Tuck, Kellogg’s, Haas, Columbia, Stanford and other business schools, each one of them has a separate and distinct business model.

Points to ponder before constructing a Business Model

Before a business model is constructed, it is important to consider the following questions.
1.      Will the business model address the special needs the customers have?

2.      What are the activities the organization needs to undertake to meet these special needs of the customers?

3.      What are the unique way the various and diverse activities could be linked to create a seamless work flow?

4.       How best the delegation of the work responsibilities can be planned based on the individual skills and collectively how a novel governance procedure can be evolved?

5.      How best a value for the stake holder can be created?

6.      What are the revenue models that can supplement the business model?

The Business Model designed should address the above issues.


The Nine blocks of the business model




Read more about the 9 Blocks here.

Customer Segment CS, Value Proposition VP, Channels CH, Customer Relationship C R , Revenue Streams RS, Key Resources KR, Key Activities KA , Key Partnership KP, Cost Structure CS


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How about the existing organization having a well defined business model?

Even the established organizations need to innovate their business in accordance with times, technology and competition. We can already see some brick & mortar business structures   are either already crumbling or there are strong indications of this happening in near future.

Business model innovation matters to managers, entrepreneurs and academic researchers for several reasons. First, it represents an often underutilized source of future value. Second, competitors might find it more difficult to imitate or replicate an entire novel activity system than a single novel product or process. Since it is often relatively easier to undermine and erode the returns of product or process innovation, innovation at the level of the business model can sometimes translate into a sustainable performance advantage.

Business model innovation can occur in a number of ways:

1. By adding novel activities, for example, through forward or backward integration; we refer to this form of business model innovation as new activity system “content.”

2. By linking activities in novel ways; we refer to this form of business model innovation as new activity system “structure.”

4. By changing one or more parties that perform any of the activities; we refer to this form of business model innovation as new activity system “governance.”

5. Content, structure and governance are the three design elements that characterize a company’s business model.

The Challenge of Change 

Typically companies devote the majority of their resources to optimizing current business models especially by applying and improving incrementally on existing capabilities. This is because business models are ultimately based on a common understanding among individuals—company managers, employees and investors—of what business they are in and how they create value. Shifting these mental models to evolve business models remains a powerful barrier to innovation.

But, just because business model innovation requires a mental leap and requires potentially painful shifts within a company doesn’t mean it isn’t possible or necessary. In fact, when it comes to survival, some established companies will shift their models, and will do so quickly.

The largest companies tend not to be the source of new models, but they can help evolve and scale them.

Most business model innovation emerges from companies that design more sustainable models from the start. That said, bigger companies can help to bring these models to maturity. This may occur through acquisition or mutually-beneficial partnerships, or the adoption of new ideas into a given industry.

In addition, large companies are finding creative ways to innovate and experiment with new business models. They are partnering with social entrepreneurs and using a range of tools—impact investing, innovation platforms, in-house venture funds, and dedicated R&D centers—to search for and exploit effective new models.

Although smaller companies often lead the way in business model innovation, we believe bigger companies have a critical role to play in helping to enhance the impact of the most important innovations.

Business model innovation doesn’t happen in a vacuum. 

However urgent our quest for sustainability, new business models can’t just be willed into existence. Instead, we must recognize how any model—sustainable or not—is dependent on surrounding conditions, and that new models are often enabled by, or arise organically from, changes in those conditions.

Looking across the models identified in the report, we see numerous examples where changes in circumstances—an infusion of technology, entry into a new country, a shift in customer demographics and/or preferences, areas where old systems have crumbled—along with the keen insight of the innovators themselves, have been the key to radical shifts in models.


But the implication is not that business leaders and companies should simply stand by and wait for things to happen organically. Disruption frequently catches us off guard and is almost never orderly in its impact, and in a world that is more and more defined by the increasing scope and pace of change, it is more or less inevitable. The key is to increase our individual and collective ability to recognize and respond to— and where necessary, to directly engineer—circumstances that will support new, more sustainable ways of doing business.


Can the business model innovation transform the industries?


The biggest reason for companies to embrace business-model innovation is the threat that current models will ultimately slip or even fail. Examples of business models that have quickly transformed – or even become obsolete – abound across sectors: media (the decline of print), retail (the rise of online shopping and the sharing economy), education (the growth of online degree programs), music (the boom in digital music services such as Spotify and iTunes), telecommunications (the proliferation of smart devices and associated services) and even finance (the creation of peer-to-peer lending).

Many traditional business models that still remain viable today may rely on mispriced resources and other market distortions that make them more competitive than they would otherwise be. As sustainability trends and challenges – including energy and commodity price fluctuation, supply insecurity or demands for transparency – continue to shift the foundations of our current business models, incremental innovation will become less and less effective in enabling companies to adapt and succeed.

The energy industry is one example. Incumbent utilities are facing startups such as Solar Mosaic, which offers an easy-to-use crowd funding investment model enabling small individual investors to fund large commercial solar projects. This type of business model innovation is gaining more attention as it begins to challenge the established position of traditional fossil fuel-based energy producers.

However those who have been creating a business model with the benefit to the society in preference to high profitability have been receiving recognition & rewards from the society and international organization. This has also given them worldwide & and a relatively easy access to funds.

In health care, Narayana Hrudayalaya Hospitals, winner of a Financial Times' Boldness in Business award in 2013, provides a good example. The hospital uses innovative process efficiency, revenue generation, cost structure and financing to make a profit while providing both rich and poor access to vital health care services. The company, along with others such as Aravind Eye Care, is changing the way medical providers in India think about the cost, quality and reach of their services. At Narayana Hrudayalaya, the average open-heart surgery costs less than $2,000, compared to well over $100,000 in the US.

 Business-model innovation catalyzes broader systems change…


According to a 2012 paper from MIT, it's important to innovate in areas where the competition is unable or unwilling to act – and to involve an entire "activity system" in a way they might find it difficult to replicate. The classic example is the Apple iPod, which wouldn't have been the game changer that it was without the iTunes ecosystem. That combination dramatically changed how we acquire, store and listen to music.

To innovate within systems, companies need to be able to see and adapt to shifting market conditions and other changes by identifying trends and engaging stakeholders. Leaders must respond to, but also create, systemic change to build new markets while protecting themselves from any dramatic systems shifts that could present a risk. To do all this, companies must be willing to see beyond the obvious, short-term business case.

According to a 2012 paper from MIT, it's important to innovate in areas where the competition is unable or unwilling to act – and to involve an entire "activity system" in a way they might find it difficult to replicate. The classic example is the Apple iPod, which wouldn't have been the game changer that it was without the iTunes ecosystem. That combination dramatically changed how we acquire, store and listen to music.

To innovate within systems, companies need to be able to see and adapt to shifting market conditions and other changes by identifying trends and engaging stakeholders. Leaders must respond to, but also create, systemic change to build new markets while protecting themselves from any dramatic systems shifts that could present a risk. To do all this, companies must be willing to see beyond the obvious, short-term business case.

Innovative business models are not always a success..


There are many business models created with noble intensions by the high-end professionals that fail. However they remain unsung. Only the success stories make it to the business journals and also become part of the research being conducted by various academic institutions.

In fact failed business models should also form an important part of the case studies. A student of business management or a management professional will have a lot of take aways from these failed ventures. We need to delve into minutia of these businesses; these could provide important data that could  be an important resource of the entrepreneur learning lab. An in-depth study could help in identifying the pitfalls and avoiding them while constructing a successful business model.

One example of the failed business model is that of “Better Place” the electric car venture.


The demise of Better Place provides a cautionary tale that illustrates the need for larger systems change. The electric car venture, based on an innovative battery-swapping technology, sold only 750 cars, while amassing losses of more than $500m. Ultimately, the success of Better Place depended on broader systems changes that never materialized, including tax and/or subsidy support, local government approval in building battery-switching stations and automaker design partnerships.

How much of business model Innovation is real, how much is hype?


An analysis of major innovations within existing corporations in the past decade shows that precious few have been business-model related. And a recent American Management Association study determined that no more than 10% of innovation investment at global companies is focused on developing new business models.

Yet everyone’s talking about it. A 2005 survey by the Economist Intelligence Unit reported that over 50% of executives believe business model innovation will become even more important for success than product or service innovation. A 2008 IBM survey of corporate CEOs echoed these results. Nearly all of the CEOs polled reported the need to adapt their business models; more than two-thirds said that extensive changes were required. And in these tough economic times, some CEOs are already looking to business model innovation to address permanent shifts in their market landscapes.

Senior managers at incumbent companies thus confront a frustrating question: Why is it so difficult to pull off the new growth that business model innovation can bring? Our research suggests two problems. The first is a lack of definition: Very little formal study has been done into the dynamics and processes of business model development. Second, few companies understand their existing business model well enough—the premise behind its development, its natural interdependencies, and its strengths and limitations. So they don’t know when they can leverage their core business and when success requires a new business model.

After tackling these problems with dozens of companies, we have found that new business models often look unattractive to internal and external stakeholders—at the outset. To see past the borders of what is and into the land of the new, companies need a road map.

Unfortunately there is much hype than any real serious business model Innovation. Many a times a change in products or modifications in processes are passed off as business model innovation.

In a BCG and MIT survey of executives and managers, nearly half of the respondents said their companies had changed their business models as a result of sustainability opportunities. However, the majority of innovations we see involve changes in companies' processes and/or products, not underlying business models.

This brings us back to the question we asked in the beginning of this article.

What exactly is a Business Model?






Hope the audience understands the business model as the fundamental structures for how companies create deliver and capture value. Often it is not the product or the service alone that determines the business success, but the entire value structure around it.

Actually there is much, much, much, more to the business model than what can be written within the constraints of an article. I request  the audience to come out with their views perspectives, dissents, disagreements and help in the improvement of this article.

Hope you have enjoyed reading this article.

Best wishes,

Shyam

Case Studies

In studying companies that sustained a high level of performance over many years, we found that more than 80% of them had well-defined and easily understood differentiation at the center of their strategy.

Nike’s differentiation resides in the power of its brand, the company’s relationships with top athletes, and its signature performance-focused product design. Singapore Air’s differentiation comes from its unique ways of providing premium service at a reasonable cost on long-haul business flights. Apple’s differentiation consists of deep capabilities in writing easy-to-use software, the integrated iTunes system, and a simplicity of design and product line (Apple has only about 60 main SKUs).

Some important business models that also addressed sustainability factors worked towards pollution free environment and helped make basic healthcare to poor people.










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