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Why new business model?

Business Model Innovation
A business model is nothing else than a representation of how an organization makes
money. This can be nicely described through the 9 building blocks illustrated in the graphic
below, which we call "business model canvas".

The business model topic is very popular among business people today because in various
industries could be seen a proliferation of new and innovative business models, or a new
ways of making money. In several industries new business models are threatening or even
replacing established companies and conventional ways of doing business. Just have a look
at the music or airline industry. Hence, the interest in business models comes from two
opposing sides:
1. Companies have to find new business models to compete against growing
competition;
2. Entrepreneurs want to find new and innovative business models to find out their
space in the marketplace

Within this context the business model concept is a particularly helpful unit of strategic
analysis tailored to today's competitive business environment. It helps companies increase
their capacity to manage continuous change and constantly adapt to rapidly changing
business environments by injecting new ideas into their business model.

But what actually is a business model?

Question of what a business model is often remains relatively vague. The main reason for
this is because business people have an intuitive understanding of business models.
Normal, the business model is about how an organization makes money. It is very
important to have a common understanding if we want to have high quality discussions of
one’s business model and make important decisions.

Therefore we have come up with the 9 building block approach to describing business
models. It has the characteristics of any other type of model. Like other models it is a
simplified description and representation of a complex real world object. It describes the
original in a way that we understand its essence without having to deal with all its
characteristics and complexities. In the same line of thought we can define a business
model as a simplified description of how a company does business and makes money
without having to go into the complex details of all its strategy, processes, units, rules,
hierarchies, workflows, and systems. Based on an extensive literature research and real-
world experience we define a business model as consisting of 9 building blocks that
constitute the business model canvas (readers of this blog will realize that this is an updated
and slightly adapted version of the model):
1. The value proposition of what is offered to the market;
2. The segment(s) of clients that are addressed by the value proposition;
3. The communication and distribution channels to reach clients and offer them the value
proposition;
4. The relationships established with clients;
5. The key resources needed to make the business model possible;
6. The key activities necessary to implement the business model;
7. The key partners and their motivations to participate in the business model;
8. The revenue streams generated by the business model (constituting the revenue model);
9. The cost structure resulting from the business model.

Origins of the term business model

The term business model became popular only in the late 90s, which, personally I think is
related to the rapid erosion of prices in the IT and telecom industry. The roots of my
assumption lie in Transaction Cost Economics (TCE). Because it became so cheap to
process, store and share information across business units and other companies all the way
to the customer, many new ways of doing business became possible: Value chains were
broken up and reconfigured; Innovative information-rich or -enriched products and services
appeared; New distribution channels emerged; More customers were reached. Ultimately
this lead to globalization and increased competition, but, as described above, it also led to
new ways of doing business. In other words,

Today there is a larger variety of how companies can make money: this means new in
terms of what they do, how they do it and for whom they do it... For managers and
executives this means that they have a whole new range of possibilities to design their
businesses. This results in innovative and competing business models in the same
industries. Before, it used to be sufficient to say in what industry you where in, for
somebody to understand what your company was doing. All players had more or less the
same business model. Today it is not sufficient to choose a lucrative industry, but you must
also design a competitive
business model. In addition, increased competition and rapid copying of successful
business models forces all players to continuously innovate and adapt their business model
to gain and/or sustain a competitive edge. Companies that thoroughly understand their
business model and know how the building blocks relate to each other will be able to
constantly rethink and redesign these blocks and their relationship to innovate before their
business model is copied.

Business Models & Innovation The term business model is also closely related to
innovation. As I mentioned, the business model concept is related to a whole new range of
business design opportunities. There are examples of business model innovations in each of
the 9 building blocks described. The most obvious is innovating in the value proposition.
When mobile phones appeared in the market they offered a different value proposition than
fixed line phones. In the early days of the Internet popular indexes like Yahoo! helped
people find information on the Web. Regarding target customer segments, low-cost airlines
like EasyJet have brought flying to the masses. Dell became really successful by exploring
the web as a distribution channel. Gillette has made a fortune by establishing a continuous
relationship with customers based on its disposable razors. Apple resurged based on its
core capacity of bringing design to computers and electronic gadgets. Cisco became
famous for its capacity of configuring activities in new and innovative supply chains. Intel
thrived for its capacity to get partners to build on its processing platform. Google tapped in
an innovative revenue streams by linking highly specific search results and content with
text ads. Wal-Mart became dominant by its ability to slash cost throughout its business
model.

Imagine the benefits to your business, if you could manage to have lower raw material
stock, or to reduce production time? To build ongoing revenue streams based on the supply
of information from equipment in the field? Obviously, this depends how easy it is to
obtain the information and how valuable it is to the end customer. Machine-to-machine
(M2M) communication is a technology that exists today, which uses the internet to
automate the collection of information without human intervention. If designed with a
flexible approach, it enables information flow from any machine to any back office system.
Connectivity to equipment anywhere in the world opens the opportunity for the
OEM to promote a service-based business model that utilises this information. M2M
communications technology has been a vision for some time; the ability to network many
machines enabling information to be gathered and distributed on a regular basis.
However, it is now beginning to be rolled out across many applications today. Applications
such as water monitoring, utility automatic meter reading, pipeline and oil well monitoring,
beer flow measurement/monitoring, security systems, gaming machines, vending machines
and so forth all have a service based element above and beyond the supply of the
equipment.
The service element in these applications can be wide ranging, and of importance to all
parties within the value chain including:
● Obtaining real-time information, for instance, stock, sales
figures and so on
● Distributing information, for example, advertising
● Monitoring alarm or equipment
● Controlling an appliance, calibrate or provide remote diagnostics
● Reducing infrastructure costs by removing any manual stages
● Providing marketing feedback
● Providing an audit trail to ensure correct materials/consumables
are used
● Providing a remote upgrade ability

Companies are therefore able to change business models to charge for ongoing
service/supply of information on a monthly basis rather than a one-off charge for hardware.
This allows suppliers to follow a similar business model to the satellite TV and mobile
phones suppliers. Why use the internet? Early versions of M2M systems used dial up, point
to point design methodologies which are flawed for large networks.
Imagine dialling 5000 vending machines for ten minutes of information per day, it would
take one month to dial each machine unless significant infrastructure was put in place. The
internet removes the need to invest in the infrastructure and permits parallel connectivity
through many distributed points of presence (POP). Costs are kept to a minimum due to
local call charging to the POP rather than long distance for overseas machines. Using the
internet also allows manufacturers to develop with technologies that are well established
and proven.
What makes up an M2M network?
If we take the example of a retail or industrial monitoring application then the M2M
network would have a number of building blocks. At the equipment (machine) end, a
module/box is required to adapt the machine language to internet protocols. The module is
also responsible for monitoring product status such as throughput, energy consumption,
trading patterns, hygiene or cleaning cycles and equipment loadings. A number of
diagnostic points could be monitored for pressure, temperature, voltage, current,
performance levels and alarm messaging.
Access to the internet is provided by POP from the public network of choice by using
appropriate modem technology, these include PSTN, GSM/GPRS, ISDN or ethernet via the
LAN. In isolation, a M2M network could use a database to store information and offer data
mining potential. Furthermore, reports can be generated using the gathered information. By
configuring the remote machines to dial in and upload their information the internet is used
for parallel operation. By developing an appropriate synchronisation protocol, the database
can download new configuration information such as new settings and new program
information within a supervisory control layer. A new alarm trigger point could be set
across the whole system via entry into a single database field.
Presentation to the customer is via a standard website with the appropriate customer logos
and brand co-ordination.
Alternatively information could be parsed to a legacy backoffice system where the M2M
network is merely used to collect information prior to manipulation in whatever form is
required.
A window into the database can offered through ‘web services’ enabling specific
information to be pushed out to the user in a targeted way. This removes the need for the
user of the information to have to data mine key variables.
The final piece of the jigsaw is an ISP set up specifically to meet the needs of remote
automated devices and central application users. An ISP ‘for machines’ needs redundancy
across all major components, security scalable to meet all requirements and a range of
capabilities not normally found within a traditional ISP. Key differentiators include
embedded communication servers geared to receive short rapid bursts from the field,
notification servers allowing email, SMS- and web-reported alarms and database servers
for dynamic data handling as opposed to static marketing web applications.
How can OEMs adopt M2M technology?
It is true to say that communications technology is not a core
competency of machine manufacturers. Why would it be?
Machine manufacturers have concentrated on their own areas
of expertise; designing franking machines, photocopiers, meters
and so forth. Interestingly, with the exception of the interface to
the machine, the infrastructure to obtain remote information
and distribute information is largely the same. A number of
companies now exist offering dedicated M2M systems such as
Comtech, which also offers rapid development pilot
programmes to ensure M2M initiatives are converted from
vision to reality. In many cases when companies undertake a
journey to change or adapt its fundamental business model,
their customers will take time to adapt. Very often total buy-in
is only obtained when the ‘new product’ can be demonstrated.
In conclusion, M2M technology is here today and viable for any
OEM’s to adopt. If access to remote information offers the very real
opportunity of a change to a service-based business model then it
warrants close attention. It offers the potential for ongoing
revenues and a differentiator against the competition.