A market economy is based on the principles of free enterprise and a variety of forms of ownership. So, companies try to occupy a niche in the market and secure a sustainable competitive advantage. This is especially true in an unstable economic situation. New players on the market change the rules of the game, as they use new strategies and business models. This fact and the development of revolutionary technologies complicate this task. Companies are forced to look for new security measures. They should ensure the flexibility and sustainability of their business model. They also can allow companies to respond quickly to new challenges. For Russian companies, these protection measures are one of the key elements of maintaining their competitiveness. It is not a secret, in the majority, it is at a rather low level. In fact, it can be said that a significant part of Russian companies does not have any stable competitive advantages at all. High share in the domestic market and knowledge of the specifics of doing business in Russia are not so. The emergence of western players on the Russian market and (especially in the case of Russia’s accession to the WTO) the lack of a sustainable business model and a sustainable competitive advantage can be a big threat.
In the world practice, there are enough examples of companies that have successfully entered the market using new business models. This is Southwest, Amazon, FedEx, Walmart, McDonald’s, IKEA, Enterprise, eBay, Priceline, Dell Computers, Starbucks, Skype, Groupon, etc. It is very important to understand that all these companies did not try to outdo competitors in the already established market. They offered an innovative approach to the offer of similar goods and services.
There are different kinds of innovations that can contribute to the conquest of a new market niche or the formation of new markets. An example of innovation in the field of goods is Apple with all the famous iPod, iPhone, and iPad. Amazon used technological innovations in the field of Internet sales to create a new market space: the focus was on the breadth of choice, the speed of ordering and low price. Southwest segmented the air transportation market. It was able to allocate a segment of budgetary air transportation. It was able to form a new market niche as well. Dell Computers has changed the way. The product is offered by organizing sales not through intermediaries, but directly to the end customer.
All the above companies used different types of innovation. However, generalizing their experience, one important conclusion can be drawn. New technologies should be the main driving force giving impetus to innovative development. At the same time, they should not be considered the basis of the company’s innovative strategy. They should become a means of winning over new customers and successful implementation of its business model.
Understanding the rules of value migration
Innovative business models are based on value migration. The introduction of such a business model allows us to find a new segment of consumers that do not serve existing companies on the market. For them, this segment does not look attractive enough. The formation of a qualitatively new supply of goods or services changes the chain of added value and creates new values for the consumer.
As an example, budget air carriers emphasize ticket prices. Traditional airlines pay more attention to the regularity of flights, the breadth of the route network and the creation of optimal connections. Another example is the emergence of online trading. It provides a high transaction speed for a lower cost. Traditional brokerage services make individual consultations with a specialist. In the banking sector, ING Direct is part of the ING Group. It has an innovative business model. It provides direct banking services in different countries. They include Australia, Austria, Canada, France, Germany, Italy, Spain, the United Kingdom and the United States. They have no branches in these countries. In the food industry, companies have emerged that emphasize the quality of their products. They are grown on their own farmland without the use of pesticides, genetic modification and so on. These products can be ordered by phone or online. Home delivery is also included. And there are similar examples in almost all industries.
Everything described above illustrates the rethinking of values in the field of supply of goods or services. The application of such an innovative approach allows new companies to form new markets and be competitive with them.
Promotion of the new and protection of the old
What are the elements of the company’s innovative business model? Adrian Slovacki puts the business model in seven following directions.
· A fundamental understanding of the business (new customer preferences, new sources of profit).
· A range of activities (new products or services).
· Selection of customers (new customer segments).
· Source of differentiation (new values).
· A system of production (a new production system, new methods of offering services).
· Organizational structure (new organizational structure).
· A mechanism for entering the market (new methods of distribution of goods or services).
An innovative business model should be new not only for a single company but also for the market as a whole. This is not a proposal for a fundamentally new product or service. It is, rather, finding a new way of offering.
The introduction of innovative business models is confusing “veterans” of the market. They often do not have time to react quickly to changes in the market situation. Innovations that undermine the activities of “veterans”, Clayton Christensen defined as “destructive innovation.”
Old companies have both resources and technologies to implement an innovative business model. At the same time, most of them are introduced by newcomers. This is due to a number of reasons. For long-established companies, the introduction of a new business model is associated with greater risks. They include the risk of losing existing customers, deteriorating partnerships, damaging the brand, blurring strategic benchmarks, squandering the company’s resources, financial risks and the risk of destroying the corporate culture. The management of established companies sometimes does not want to develop a new business. They consider it unattractive or point to the presence of more important current problems. Usually, they are related to the existing business. Also, the leadership links the introduction of a new business model with the need for a large amount of additional investment. The main focus is on extracting profits from previous investments in the core business. The rejection of the existing business model in favor of the new one will not always be the right decision. It is necessary to take into attention the economic effect, the results of a detailed analysis of operational and financial consequences.
“Veteran companies” should be prepared for the emergence of new players and have an appropriate response strategy. However, practice shows that the old-timers of the market initially do not perceive new players with innovative business models as strong competitors. While the “veterans” retain their client base, they do not pay attention to “newcomers”, and new business models do not cause them much interest. When “innovators” begin to generate profits and win their market niches, you have to react. A properly chosen response strategy can transform the emergence of a new business model from the threat into a new opportunity for business development. It can be, for example, entering a new growing business segment, developing new competencies, increasing revenues, cutting costs and/or providing protection from competitors.
Implementation issues
It is important to notice that any innovative business model is doomed to failure, if not to ensure its effective implementation. And it doesn’t matter how good it is on paper.
To install the innovative business model within the framework of the business that has already taken place, it is necessary to evaluate new key success factors. It is also necessary to develop a new value system, to develop new business processes, organizational structure, and corporate culture. The coexistence of traditional and new business models with two different value-added chains within the same company can lead to a corporate conflict. New and old business models may contradict each other. Proceeding from this, many companies make a decision to bring a new business model to a separate unit.
Such examples can often be observed in the automotive industry. Toyota has the separated Lexus. GM opened Saturn. Airlines allocate budgetary transportations in the isolated business with another trademark. In goods, FMCG also shares the supply of goods for the general public and luxury goods. Within the framework of the new division, it is possible to develop a new strategy, a system of values, business processes, the corporative culture that will not contradict existing ones.
It should be noted that the decision to bring an innovative business model into a separate business is not the only true one. There are plenty of examples where companies successfully combined two business models. For example, Merrill Lynch in the traditional business opened Internet trading. Also, the separation of the business model into a separate structure may limit the access of the new “daughter” branch to the resources of the parent company. The exchange of knowledge and the extraction of synergies can get complicated as well. Accordingly, some companies have the opportunity to combine the use of two business models within the same company. It is possible to do with the provision of sufficient degree of autonomy for the new business for effective development. In general, the decision to combine or separate business models should be based on an analysis of all the attendant factors.
However, in any case of introducing an innovative business model, innovations must become part of the daily life of the company.
