OK, I’ve created some confusion. I’ve been writing a lot recently about business models, including here and here. But I’ve also written a lot abou
John Hagel – Co-Chairman presso Deloitte Center for the Edge
OK, I’ve created some confusion. I’ve been writing a lot recently about business models, including here and here. But I’ve also written a lot about business types/roles, including a popular Harvard Business Review article almost 20 years ago. Many of you have approached me to ask, so what’s the difference between a business model and a business type? And, if there is a difference, what business models should each business type adopt?
Well, fasten your safety belts. I’m going to try to explain myself, but I’m going to throw around a lot of concepts that may be hard to grasp on first reading. Because I can’t pack too much into a short (well, not that short) blog, I’m going to fly at a pretty high level and hope that it will motivate you to dive deeper into the concepts.
And, not to keep you in suspense, there is a difference between business models and business types as I use them. As I suggested in a blog post last year, business models focus on the specific form of value delivered to customers and the economics (revenue, expenses and assets) required to deliver that value to the marketplace so that customers feel they are paying a fair price and the owner of the business earns a decent return. It’s ultimately all about money.
Business types, on the other hand, focus more on the capabilities and culture required to deliver value to the marketplace. As we’ll see, there’s also an economic dimension to business types but the focus here is on the potential for fragmentation and concentration for each business type. As I’ll discuss below, each business type is likely to end up with somewhat different business models as a result of differing value propositions.
Let’s focus on the three business types – infrastructure management businesses, product innovation and commercialization businesses and customer relationship businesses – as a context for discussing business model choices.
Infrastructure management businesses
This business type involves high volume, routine processing kinds of activities – everything from assembly line manufacturing and logistics networks to data center operations and routine call center operations. It also includes a growing range of platform businesses that focus on aggregating participants and transactions.
These businesses are driven by a cost-focused efficiency culture – the key is to drive down cost per transaction without compromising on quality and reliability. Predictability is one of the highest values in these businesses. Standardization also ranks high – the more variability there is, the harder it will be to drive down costs.
These are typically asset intensive businesses and the key capabilities involve building/acquiring assets that are optimized for routine processing and managing these assets to drive increasing asset utilization and efficiency over time.
From an economic perspective, these businesses are driven by powerful economies of scale. The larger they get, the lower their unit transaction costs become. As a result, these businesses are likely to become very concentrated on a global scale over time.
So, what business models are most appropriate for infrastructure management businesses? As I share my answer, it may be useful to take a look at the posting where I developed the three dimensions of business model evolution so that I don’t have to repeat all that detail here.
In short, on the payment dimension, infrastructure management businesses are most suited for usage based pricing models. The payment model of impact based pricing is likely to be more challenging for infrastructure management businesses because they have limited visibility into the broader context of their customers and their culture is much more driven by efficiency and standardization.
If we turn to the data dimension, infrastructure management businesses are likely to be able to evolve into predictive data services, helping their customers to anticipate potential issues and opportunities related to the routine processing operations. Moving further along the spectrum to prescriptive data services may be more challenging because, once again, these businesses don’t have a lot of visibility into the broader context of their customers.
On the participant dimension, infrastructure management businesses are likely to remain locked into a vendor based model. Their economies of scale will make them relentlessly focused on doing as much of the routine activities themselves – their nirvana is truly a one to one relationship with the customer.
There’s one major exception to this last observation and that has to do with platform businesses, which I view as a sub-category of infrastructure management businesses. Platform businesses by necessity reach out to recruit a broader and broader range of providers to serve the users on their platform. Their economies of scale hinge on attracting more and more participants because the value of their infrastructure – the platform itself – depends on the number of participants.
But these platform businesses are unlikely to evolve into the “anyone/everyone” position on the participant spectrum. They are very protective of their platform because that is the asset that generates increasing value and they understandably want everyone to participate on their platform.
Product innovation and commercialization businesses
This business type is all about coming up with creative new products and services, bringing them to market quickly and accelerating their adoption. The culture of this business type is completely focused on celebrating the creativity of product and service designers – they rule the roost.
The key capability for this business type is, of course, creative product design that integrates a sense of unmet customer needs, a deep understanding of the materials and components that can be assembled to address those needs (or, in the case of services, the activities required to address those unmet needs), and an awareness of what will be required to support these products and services over time. In addition, this business type requires highly sophisticated marketing and sales capability that can rapidly build awareness of new products and services and accelerate adoption of the products and services.
From an economic perspective, this business type is the one that is most vulnerable to fragmentation over time as customers move from a willingness to settle for highly standardized, mass market products and services to an increasing desire for creative products and services that are tailored to their unique needs. Highly creative talent also likes to be in charge of their own shop and, as the means of production become more accessible to smaller and smaller businesses, the creative talent is likely to cluster into small businesses that make it possible for them to run their own show. I explored the fragmentation potential of this business type in greater detail here.
So, let’s look at the business models that would likely be the best fit for product innovation and commercialization businesses. On the payment dimension, this business type is likely to evolve the full distance to impact based pricing. After all, this is the key measure of success of a product or service – did it increase impact in terms of value creation for the customer? These businesses would be highly motivated to understand more deeply how their products and services are increasing value for their customers so they can tailor them even more finely to meet their various needs. With the proliferation of sensor and monitoring technology, it will be more and more feasible to gain visibility into the customer context, especially if the customer is assured that it will only pay for impact achieved.
On the data dimension, that ability to develop a deeper understanding of customer context will also make it more feasible for product innovation and commercialization businesses to move to generating revenue from prescriptive data services associated with their core products or services. As they develop a deeper understanding of the customer context in using their products and services, they can not only help customers to anticipate what might happen as they use the products and services, but give them advice on the options that they might pursue given what is likely to happen. Their understanding of the customer context is likely to remain limited to the immediate context defined by their products or services, but within that limited domain, they can become more helpful to the customer and, in the process, develop more insight about how to evolve their products and services to create even more value over time.
On the participant dimension, product innovation and commercialization businesses may have an opportunity to evolve into a specific variant of a platform business as a way to mobilize a larger number of third parties to add value. The type of platform business that could be attractive to this business type is what I have called a “product platform.” This business focuses on defining and developing some core functionality in a product or service domain that could then become a foundation for third parties to come in and develop a growing range of variations to address more specific customer needs. The platform provider would focus on rapidly evolving the foundation elements to enhance the ability of participants to develop more and more variations.
This product platform business is most developed in the digital product space where, for example, an operating system can become a platform for both device developers and application developers to use as they tailor their products to specific customer niches. I expect that this form of product platform will become increasingly prevalent in non-digital product and service arenas as well.
These product platform businesses are different from the platforms described earlier in the infrastructure management business type. Instead of focusing on high volume, routine processing kinds of activities, these product platforms focus on becoming more and more creative in developing and evolving core functionality that matters to more specialized product and service vendors. It requires a deep understanding of, and connection with, creative product and service developers to anticipate their needs.
But it would be very unlikely that a product innovation and commercialization business would evolve further on the participant dimension to embrace the “anyone/everyone” position. After all, the essence of a product innovation and commercialization business is great pride in the creativity and talent of its own product and service developers, so reaching out and connecting the customer with anyone and everyone, even competitors in its own product domains would be unthinkable.
Customer relationship business
This business type focuses on developing a deeper and deeper understanding of individual customers and using this knowledge to become more and more helpful to the customers in connecting them with the products and services that would create the most value for them. It is what I have described as a “trusted advisor” that is totally focused on helping customers, regardless of their needs.
The culture of this business type is very much driven by “the customer comes first” mindset. Whatever the customer wants, the customer gets. These businesses will move heaven and earth to accommodate the customer, no matter how trivial or unique their need might be. But they also are driven by helping the customer to accomplish even more, so they are willing to challenge customers if they are asking for something that is not in their best interests or would limit their ability to achieve their aspirations.
The key capability required for this business type is an ability to read individual customer contexts in great detail and, based on this information, to be able to anticipate and address customer needs. In order to do that, there must also be a capability to build and sustain deep trust so that the customer is comfortable in sharing more and more information about themselves. The advisors in this business type must have a deep sense of emotional intelligence so that they can constructively challenge customers and help them to accomplish even more.
This business type is driven by powerful economies of scope. The more the trusted advisors know about the context of an individual customer, the more helpful they can be to the customer and they can be much more helpful than someone who sees only a narrow slice of the customer’s context. And, the more customers the trusted advisor serves, the more helpful the advisor can be to each customer because of the ability to see patterns among customers like that particular customer in terms of what kind of value they have received from certain products or services. As a result, this business type is likely to become very concentrated over time, giving rise to large, global corporations.
So, what kinds of business models would be most appropriate for this business type? OK, I’ve saved the best for last, because this business type is in the best position to fully exploit the potential evolution of business models on all three dimensions of payment, data and participants.
In terms of payment, the trusted advisor is certainly in the best position to charge the customer based on the impact experienced by the customer since the trusted advisor depends on a deep understanding of the broader context of each customer. Again, because of this deep understanding of broader context, the trusted advisor is in a privileged position to leverage data to provide prescriptive value for customers, not just helping them to anticipate what might happen to them but providing tailored advice in terms of the choices available and which choices are likely to create the most value for the customer. Finally, trusted advisors are much more likely to evolve to an “anyone/everyone” position on the participant dimension because they are committed to connecting their customers with the most relevant resources regardless of where they are.
Tying it all together
Most companies today are an unnatural bundle of all three of the business types outlined above. Because these three business types have very different cultures, capability requirements and economics, keeping them tightly bundled together in a single company inevitably leads to sub-optimal performance across all three business types. In a world of mounting performance pressure, companies are ultimately going to be forced to choose which of the three business types they really want to focus on and shed the remaining two business types to more focused players who can provide world-class performance in those business types.
The unbundling of the corporation does not mean that companies are doomed to get smaller. If they choose to focus on the infrastructure management business or the customer relationship business, they will have an opportunity to become much larger than ever before, driven by powerful forces of concentration and consolidation. If you’re a large company or want to become a large company, the one business type you might want to shed most quickly is the product innovation and commercialization business, because that business type will be increasingly vulnerable to fragmentation.
Making the choice on business type to focus on will make it much easier to assess the potential for evolution of a company’s business model. The business model must ultimately be optimized for each business type. If the company continues to try to hang on to all three business types, it will inevitably sub-optimize on the business model front as well.
Bottom line
Life is complicated, and getting even more complicated, but there are promising approaches to simplify it. Start by asking “what business should we really be in?” Don’t stop asking that question until there is an alignment around one of the three business types described earlier and a commitment to shed the other two business types. That will lead to a much tighter focus on what really matters for success and free up resources to deepen capabilities in the chosen business type. It will also make it much easier to choose the business model that will generate the most value for the company.
We need to extricate ourselves from the understandable but increasingly dysfunctional tendency to fall into a reactive posture, trying to spread ourselves too thinly across too many businesses and initiatives. The winners in this more complicated and uncertain world will be those who have a clear sense of who they are and what is really required for success.
by John Hagel – Co-Chairman presso Deloitte Center for the Edge
