Shift Happens: "How to Win in Business Model Warfare" An Overview
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Overview: How to Win in Business Model Warfare
Harness the forces of creative
destruction by identifying and
seizing game changing business
model opportunities
Shift Happens:
“How to Win in
Business Model
Warfare”
An Overview
© Copyright 2012 Funston Advisory Services LLC.
All rights reserved
© Copyright 2012 Funston Advisory Services LLC. All rights reserved 1
Draft For DiscussionOverview: How to Win in Business Model Warfare
THIS PAGE INTENTIONALLY LEFT BLANK FOR DUPLEX PRINTING
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Draft For DiscussionOverview: How to Win in Business Model Warfare
Contents
Contents ........................................................................................................................................................ 3
Harnessing the Forces of Creative Destruction ............................................................................................ 4
Who should read this book? ......................................................................................................................... 5
PART 1 - CREATING AND SUSTAINING ALPHA .............................................................................................. 6
Business Model Warfare ........................................................................................................................... 8
Life and Death Assumptions ..................................................................................................................... 8
“Think Different” ................................................................................................................................... 9
Continuous and Discontinuous Innovation ............................................................................................... 9
Thinking the Unthinkable ........................................................................................................................ 10
PART 2 - CASE STUDIES ............................................................................................................................... 11
PART 3 – LEADING SUSTAINABLE ALPHA CREATION .................................................................................. 18
Act Different............................................................................................................................................ 18
Personality or Process or Both? .............................................................................................................. 18
Alpha Leaders must overcome inertia .................................................................................................... 18
Challengers must develop discipline....................................................................................................... 20
Be Different Profitably ............................................................................................................................ 21
For further Information, contact: ............................................................................................................... 21
Endnotes ..................................................................................................................................................... 22
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Draft For DiscussionOverview: How to Win in Business Model Warfare
Harnessing the Forces of Creative
Destruction
Part 1 will describe how to systematically
understand and successfully challenge
“Surviving and Thriving in Uncertainty: Creating conventional wisdom and business “rules” about
the Risk Intelligent Enterprise” Funston and customers and value creation and the current
Wagneri featured a foreword by Tom Ridge and dominant business model.
interviews with race drivers, mountain climbers,
submariners and combat pilots, as well as Part 2 will present, for example, case studies
directors and senior executives, and presented 10 drawn from the following sectors:
fatal flaws in conventional risk management and
Health Care
10 corresponding risk intelligence skills and
Media / Entertainment
supporting tools.
News / Reference
1. Check your assumptions about the Airlines
“knowns” Personal Computing
2. Detect Weak Signals / Recognize Patterns Cloud Computing
3. Verify and corroborate Payment processing
4. Factor in velocity and momentum Retail banking in developing countries
5. Anticipate causes of failure Pharmaceuticals
6. Manage the key dependencies Telecommunications
7. Maintain a margin of safety Air Freight, Logistics / Business Services
8. Set your enterprise time horizons Automotive: OEMs, Suppliers, Retailers
9. Dare to take enough of the right risks
10. Develop and sustain
“Life short
operational discipline
Art long Part 3 will describe the
“How to Win in Business Model Opportunity fleeting challenges, successes and
Warfare” expands on several of these Experience misleading failures in “Business Model
skills and tools and their application to Judgment difficult” Warfare”. It will address
the success or failure of industry the role of personality vs.
specific business models. This book Hippocrates, 400 B.C. process, the differences
will be devoted to practical case between private vs.
studies and lessons learned drawn from publicly held companies, majority vs. minority
interviews with industry leaders and challengers control, and the engagement of internal staff and
and combined with an analysis of longitudinal external stakeholders such as institutional
performance data. It will describe how to harness investors in the development and execution of
the forces of creative destruction by identifying long-term value creation strategies.
and seizing game changing innovation and
marketing opportunities while avoiding killer risks
especially the risk of inertia and inaction.
© Copyright 2012 Funston Advisory Services LLC. All rights reserved 4
Draft For DiscussionOverview: How to Win in Business Model Warfare Who should read this book? First, this book is aimed at exceptional companies and their leadership. Frankly, it is not for everyone. It requires a willingness to think the unthinkable and then act on it profitably. There are already lots of well documented reasons why successful companies fail to innovate and adapt their business models. As a result they lose their leadership position and, at worst, cease to exist. The real question is whether game changers can be anticipated and exploited. The book presents a way to harness the forces of creative destruction for competitive advantage by challenging and then changing the assumptions about the rules. It is for leaders who understand the essential importance of innovation and are looking for a simple but not simplistic way to successfully challenge conventional wisdom and transform their enterprise. Second, it is aimed at investors who are looking for a framework to analyze industry business models, identify strengths and weaknesses in current alpha leaders and identify potential successful challengers. © Copyright 2012 Funston Advisory Services LLC. All rights reserved 5 Draft For Discussion
Overview: How to Win in Business Model Warfare
PART 1 - CREATING AND staying the Alpha leader is entirely another. There
probably has never been a more uncertain time in
SUSTAINING ALPHA
the life of the current generation of executives. It
presents huge opportunities and killer risks and
First, in investment terms, Alpha is a risk-adjusted the rate of change appears to be accelerating. In a
measure of the so-called active return on an globally connected, internet world, there are no
investment. Alpha is the return in excess of the longer buffers in time and space. Agility and
compensation for the risk undertaken (beta). It is adaptability are critical to survival and success.
what investors look for and is often used to assess
Corporate life expectancy and success appear
the performance of active fund managers.
directly related to the ability to create and retain
According to the Capital Asset Pricing Model
customers, create and sustain new value, and
(CAPM), beta (the measure of risk) is positively
generate future growth in excess of the risks
related to returns, i.e., increased risk should
taken, i.e., the ability to create and sustain Alpha.
translate into increased returns, i.e., Alpha.
Alpha is the first letter in the Greek alphabet and
Finding Alpha assumes companies are creating it.
has a numerical value of 1. The Alpha leader is
Who are they? How do they do it? Creating and
the highest ranking member in a social group
sustaining Alpha through innovation
whether male and/or female.
and marketing is the job of the CEO.
No matter how Alpha animals are often the first
The more discontinuous the
to eat, sometimes the only ones
innovation and marketing, the more it successful you are
allowed to mate and the Alpha
demands the understanding and today, sooner or later
is often determined by mortal
support of their board. the industry leading
combat. It is an incessant battle
business model will for survival and dominance.
This was the case for Dick Harrington
change.
when he was CEO of Thomson
Corporations are mortal too. For
Corporation. He was able to convince
most, life is short and it is even
his board that the timing was right to sell its then
shorter for those at the top. In the corporate
profitable newspapers to fund the acquisition of
world, most “wars” are won or lost on the
Reuters in 2008. This example will be discussed in
strength of the business model. The art of
more detail in Part 2. Creating and Sustaining
surviving and thriving is as old as mankind, yet
Alpha is also the basis of how most CEO’s and
despite legions of MBA’s and libraries of
senior executives are or ought to be compensated
management books, corporate life expectancies
and will be discussed in more detail in Part 3.
continue to decline rather than increase.
The Alpha leader is one that dominates its sector
None are immune or too big to fail (unless
and sets the rules of the “game”. It generates
government intervenes) and it appears that for
returns in excess of its peers and in excess of the
some their life spans are becoming more akin to
risks it undertakes. While a tide may lift or lower
that of fruit flies. For example, the average life
all boats, the Alpha outperforms its peers in good
expectancy of an S&P 500 company is now just 18
times and in bad. The Alpha is willing to take
years compared to 61 years in 1960 and 75 years
calculated risks without being reckless.
in 1937. Richard Foster of Innosight suggests that
Becoming the Alpha leader is one thing, but by 2030 it may be as little as 12 years.ii
© Copyright 2012 Funston Advisory Services LLC. All rights reserved 6
Draft For DiscussionOverview: How to Win in Business Model Warfare
In 1997, BusinessWeek began to identify the Top Schumpeter wrote “Capitalism [...] is by nature a
50 companies in the S&P 500 based on factors form or method of economic change and not only
such as one and five year risk-adjusted returns never is but never can be stationary (and…)
and analysts’ opinions. This provides a more illustrate(s) the same process of industrial
insightful, albeit subjective, way of looking at mutation [...] that incessantly revolutionizes the
companies than would a capitalization-weighted economic structure from within, incessantly
index which is used by most of the exchanges. destroying the old one, incessantly creating a new
one. This process of Creative Destruction is the
The top five companies in the 1997 BusinessWeek essential fact about capitalism. It is what
Top 50 (Intel, Microsoft, Dell, Cisco and Travelers capitalism consists in and what every capitalist
Group) didn’t make the Top 50 in 2012. In fact, concern has got to live in.”iii
regardless of industry, only two companies (Coca-
Cola and Nike) made the Top 50 in 1997 and again No matter how successful you are today, sooner
in 2012. or later the industry-leading business model will
change. Yahoo!, Avon, Motorola, Best Buy, Sony
History is replete with examples of the business and RIM are experiencing it now. Will you see it
model failures of once highly successful coming? Will you be able to adapt fast enough?
companies (Wang, Tower Records, Spiegel,
Lehman Brothers, RCA, Kodak, GM, Chrysler, Opportunity is indeed fleeting and such windows
USPS, Blockbuster, etc.). In tend to open and close quickly.
“Creating and Sustaining Alpha”, Situational awareness and agility
we approach corporate life span Life is short but life at are essential to first perceive the
and mortality from the perspective the top is even shorter opportunity and then act.
of investors and define corporate Unfortunately, experience can be
mortality as the time from listing to misleading. The business model
delisting, bankruptcy or acquisition. that got leaders to the top will not, in most cases,
keep them there. Business model change is
As we will demonstrate, the causes of such inevitable and most leaders lose their position due
mortalities are readily apparent in retrospect and to inertia and inaction.
are largely due to business model failure, i.e., the
failure to successfully adapt the business model to One of the biggest challenges for Alpha leaders is
a changing competitive environment. We also to overcome the assumption that because their
recognize that there will be acquisitions that innovation and business model has worked thus
created synergies and once public companies that far, it will work in the future as well. Many fall
were taken private but these are not within our prey to the convention that continuous innovation
scope. is sufficient to sustain their competitive
advantage.
Twenty-six per cent of the 1997 Top 50 no longer
even exists. In the turbulent and uncertain 21st Judgment is difficult because leaders must first
century, Schumpeter’s “Creative Destruction” is “think different” and then “act different”. Just
alive and well and applies to all sectors and saying you are different won’t help. As essential
business models as well as political and social as it is, innovation is becoming a much over-used
structures. term. Some seem to think that merely calling
something innovative means it actually is. This is
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Draft For DiscussionOverview: How to Win in Business Model Warfare
dangerously self-deceptive. In 2011, some form Key Competitors
of the word “innovation” was cited in Securities Key Growth Drivers
and Exchange Commission filings 33,528 times Key Channels
representing a 64% increase compared to five Key Partners/Networks
years earlier and, in the first three months of Key People
2012, over 250 books had been published with Key Investors
"innovation" in the title.iv Instead, we will provide Key Processes
a tool to systematically think different and then Key Systems/ Technology
act on it. We also explore the challenges faced by Key Resources
publicly held vs. privately held companies and the
Key Revenues / Costs
characteristics required to lead sustainable Alpha
creation.
Given the carnage and increasing corporate
Business Model Warfare mortality rates, the ensuing investor and job
losses and the social consequences of corporate
failures, the use of the term warfare is perhaps
A company’s strategy is embodied in its business
more than a metaphor. If it is indeed business
model at a point in time. Business models must
warfare, albeit not of the blood and guts variety, it
be dynamic and adaptive. A business model is the
may be useful to look at a couple of differences in
system by which a company creates,
describing opposing competitive
satisfies and sustains customers to
A fish doesn’t know forces.
provide greater value and thus derive
greater value. it is swimming in
Symmetric warfare is warfare
Every business has a model whether it water (whether hot or cold) among equal
recognizes it or not and the demise of forces, e.g., the U.S. and the former
any such system is inevitable but unpredictable. Soviet Union. On the other hand, in Asymmetric
Competition drives business model innovation warfare, the opponents are dissimilar in size,
which Morris Langford aptly describes as Business power and strategy. The smaller force typically
Model Warfare.v relies on exploiting the weaknesses in its more
powerful adversary rather than attack its
Systems, by their nature, need to be understood strengths. We will describe how Asymmetric
and approached holistically. Technology may be warfare can be applied using “war games” to
necessary but it is not sufficient by itself to be a challenge a strategy’s underlying assumptions.
sustainable source of innovation and
differentiator. Life and Death Assumptions
To simulate attack and defense, we provide a tool
A business model can be comprised of many to systematically identify and challenge the
elements and their collective interaction conventional or “life and death” assumptions
including, for example: which underpin every business model. Such
assumptions are often unrecognized and,
Key Value Propositions
therefore, remain unchallenged much like a fish
Key Customers
doesn’t know it is swimming in water. If “life and
Key Products / Services
© Copyright 2012 Funston Advisory Services LLC. All rights reserved 8
Draft For DiscussionOverview: How to Win in Business Model Warfare
death” business model assumptions prove false, it Continuous innovation or improvement is typically
can be fatal for the incumbent leader and a game focused on incremental improvement in products
changing opportunity for the challenger. and services and operations that improve
processes and systems. Operational innovations
“Think Different” are designed to incrementally and cost effectively
Apple Ad 1997-2002 eliminate unwanted variability and improve
resilience to adversity. Alpha leaders often
In 1997, Apple was #496 on the S&P 500 and this become Alpha losers because they tend to overly
ad concept was in many ways at the core of Steve focus on continuous innovation.
Jobs’ philosophy and Apple’s amazing turnaround. Clayton Christensen, author of the “Innovator’s
But how do you not only think but act different? Dilemma”, coined the phrase “disruptive
It’s certainly not about wearing a black turtleneck. technologies”.vi While technology may be an initial
differentiator, it is soon replicated. So disruptive
“Creating and Sustaining Alpha” is about
or discontinuous innovation is about more than
outperforming the competition by continuously
technology, it is the ability and agility to create
thinking and acting differently to create and
satisfy customers in ways that are and seize game changing
profitable. The case studies “It ain’t what you don’t opportunity. Discontinuous
described throughout this book know that gets you into innovations challenge and
trouble, change the existing paradigm,
clearly demonstrate how this can
i.e., conventional wisdom or
be accomplished very effectively it’s what you know for sure
way of doing things and create
retrospectively by comparing that just ain’t so”
new markets or value
conventional and unconventional Mark Twain
approaches. We will also networks.
demonstrate how this same approach can be As Peter Drucker so aptly stated, the “purpose of
applied prospectively. the enterprise is to create and keep customers
through marketing and innovation” vii and
Continuous and Discontinuous
“systematic innovation …. consists in the
Innovation purposeful and organized search for changes and
in the systematic analysis of the opportunities
such changes might offer for economic and social
Innovation is the process of introducing
innovation.”viii
something new, whether it’s an idea, a way of
doing things, a new product or service or a novel True innovation means successfully challenging
combination of existing elements, and then conventional wisdom yet the current literature
putting it into action and profitable use. provides only anecdotal evidence and attributes
innovation to a variety of sources and causes but
Innovation, however, does not exist on a
does not provide any systematic means to
continuum from continuous to discontinuous.
challenge conventional wisdom or how to harness
Like the biological evolutionary theory of
the forces of “creative destruction”.
“punctuated equilibrium”, discontinuous
innovation is characterized by sudden shifts after Many companies, especially successful ones,
periods of relative stasis. struggle to innovate and are constantly searching
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Draft For DiscussionOverview: How to Win in Business Model Warfare
for more systematic ways to “think different”. leaders are distracted or dither and deny.
Thus, sustaining Alpha creation is the ability to
continue to develop real, discontinuous “Thinking different” or “out of the box” begins
innovations. We will discuss how to “act with defining and understanding the current
different” shortly. “box”. This is one of the hardest things to do
because we often don’t make explicit the way we
Thinking the Unthinkable see the world (our shared assumptions, concepts
and values). This is precisely because they are so
broadly shared, e.g., pre-2007, the national price
To think the unthinkable, you must first describe of housing in the U.S. will continue to rise
what you currently think. This begins with indefinitely. Clearly, it is easier to do so in
describing the conventional or “normal” wisdom. retrospect.
This is the THESIS. The conventional view or
paradigm is a set of commonly shared Second, once the conventional wisdom or thesis is
assumptions, concepts, values, and practices that defined, the unthinkable, unconventional and
provide a way of viewing reality at a point in time. innovative opposite can also be defined, e.g., the
national price of housing will not rise indefinitely.
Conventional wisdom does, of course, change This becomes the ANTITHESIS. It is not predictive
over time but challenging it is not easy. As but it certainly does prospectively describe life
Thomas Kuhnix demonstrated, “outside the box”.
scientific paradigms change over
time and are non-linear. To think “out of the box”, Is there any evidence the
Anomalies, i.e., deviations from you have to first describe Antithesis may exist? Do you
the normal that are not have a requisite range of
the box scenarios? Do you have effective
explained by an existing
paradigm, lead to a new signal detection and pattern
paradigm. Typically new paradigms are strongly recognition systems in place? Do
resisted by the establishment even when there is you know the difference between a threat and
overwhelming evidence. Arthur Schopenhauer opportunity? What are your response
said “All truth passes through three stages: First, it alternatives? What if you did it first? What if your
is ridiculed; Second, it is violently opposed; Third, it competitors did it first?
is accepted as self-evident.”
While the viability of the ANTITHESIS remains to
Socrates, for example, was forced to drink poison be seen, i.e., whether it is economically and
and Galileo had to recant or be excommunicated technically feasible, whether the market would be
for his support of the view that the earth revolved receptive, etc., it still needs to be understood and
around the sun and not the reverse. As difficult as assessed.
it is to challenge conventional wisdom in science,
Third, the SYNTHESIS may be a novel combination
presumably the most rational of all fields, it
of elements of the current THESIS and ANTITHESIS
becomes even more difficult in other fields as
to create the “best of both worlds”. The
there are often huge emotional ties that blind
SYNTHESIS then becomes the new THESIS and so
people to what might otherwise be rationally
on.
obvious. This enables first movers to gain a
significant advantage while the current Alpha
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Draft For DiscussionOverview: How to Win in Business Model Warfare
Innovation is the evolution and revolution PART 2 - CASE STUDIES
engendered by the dynamic interaction between
Thesis, Antithesis and Synthesisx (TAS).
The following section provides high level
If this can be understood, harnessed and summaries of comparisons between the
translated into effective action, it can deliver conventional business model compared to the
potentially huge competitive advantages. non-conventional industry business model using
Challenge the “life and death” assumptions, Thesis, Antithesis and Synthesis (TAS).
concepts, values, and practices which rule the
conventional business model and key value This section of the book will have two major
propositions. components and include much more detailed
narratives. The first section will provide a time
Those who would be Alpha leaders need to be line of major external events that acted as
able redefine the business model “rules” of how enablers or constraints such as 9/11, the dot com
the game is played before someone else does. and telecom booms and busts, the Great
The case study summaries which follow show how Recession, regulatory changes, exchange rates,
this has been successfully applied in a wide range etc.
of sectors.
Second, we will develop the case studies
presenting the context and business model
comparisons and then engage executives and
directors from Alpha leaders “then and now”
about their business models, leadership styles,
growth strategies, investor and other stakeholder
relations, underlying assumptions and the effects
on their success. We will address internal factors
in terms of such things as board alignment and
support, ownership structure, commitment to
R&D, labor relations, etc.
We include high level examples drawn from eight
different sectors as well as the example of M-PESA
in Kenya and the Afghan War as demonstrations
of the broad applicability of our approach.
Although provided without context for the
moment, we believe the following high level
summaries clearly show the retrospective
effectiveness of TAS in identifying the next
generation business models of Alpha leaders. The
same approach can also be applied prospectively.
Part 3 will describe how.
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Draft For DiscussionOverview: How to Win in Business Model Warfare
HIGH LEVEL CASE SUMMARIES
HEALTH CARE
THESIS ANTITHESIS
(Conventional Health Care Model) e.g., Kaiser Permanente
Health care Health
Intervention Prevention
Fee for Service Fee for Outcomes
Negotiated fees Non-negotiated fees
Multiple payers Single payer
High cost provider Low cost provider
Cost Opacity Cost Transparency
Volume incentives Value incentives
Qualified workforce Effective workforce
Price controls Market driven
Physical records Electronic records
ENTERTAINMENT
THESIS ANTITHESIS SYNTHESIS
(Blockbuster) NETFLIX BY MAIL (Cloud)
Retail stores (8000) Virtual storefront Web-based access rights
High operating costs Lower operating costs Lowest operating costs
Inventory / Facilities / People Regional warehouses Server farms
Late Fees No late fees No late fees
Physical possession required Physical possession required Physical possession not required
Customer pickup Customer delivery Download / direct streaming
NEWS AND REFERENCE
THESIS ANTITHESIS SYNTHESIS
Encyclopedia Britannica Internet Thomson Reuters
Traditional Newspapers Wikipedia Encyclopedia Britannica
Print media Non-print Non-print
Stationary Mobile Mobile
Periodic update Instant update Instant update
Subscription fee Free Fee
Specialists / professional Users / crowd-sourced / Specialists / professional editors
editors volunteer editors
Verified Unverified Verified
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Draft For DiscussionOverview: How to Win in Business Model Warfare
AIRLINES
Business model THESIS ANTITHESIS
elements Traditional Airlines Southwest
Customer Focus National/International Regional
Assigned seats No assigned seats
Premium service provider Low-cost provider
Fee for reservation changes No fees
People
Organizational hierarchy Inverted pyramid
Formal/stiff Informal/fun
Salaries and wages First to introduce profit sharing
Equipment
Multiple types of aircraft Single type aircraft
Process
No fuel price hedging Fuel price hedging
Traditional ticket sales commissions Reduced ticket sales commissions
Long turnarounds High speed turnarounds
Hub and spoke Point-to-point
Primary airports Secondary airports
Multiple sources of ticketing issuance Direct ticketing by airline
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Draft For DiscussionOverview: How to Win in Business Model Warfare
Business
Model 1997 Thesis APPLE
Element MICROSOFT 1997 Antithesis
Vision A computer on every desk Change the world
Software is key for business Computer as hub is key for
entertainment network devices
More business computers means More devices means more
more MSFT users computer hubs
Synergy through 3rd parties Control the entire experience (no
3rd parties)
Value Software = the language of Software & hardware = the
Proposition business language of everyone
Product Windows/Office Software only Integrated hardware/software
Business focus Consumer focus
Open system Closed system
Desktop centered/stationary Mobile
Design/appearance not critical Design/appearance critical
Product No cannibalization Cannibalization
Developme Incremental add-ons/updates Planned obsolesce
nt People know what they want Show people what they want/need
Customer Requires a level of proficiency Intuitive (a child can use it)
Experience
Sales Utilize 3rd parties Eliminate 3rd parties
Channels OEMs, corporate licenses, big box Operate own brick and mortar
retailers store
Leadership Businessman, defined by Idealist, defined by unyielding
competiveness and opportunism commitment to vision
Meet the needs of the customers Create the needs of the customers
Organizatio Corporate/Establishment Pirates/Anti-establishment
n Bureaucracy/hierarchy Specialization/network
Identifiable org chart, public No org chart, private
Divisions Compulsory collaboration within
team
Diffused accountability Directly responsible individuals
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AFGHAN WAR
THESIS ANTITHESIS
Pakistan will sever ties to Taliban, seal border ISI retains Taliban hedge, Durand Line is porous
Taliban will be crushed as an organization Quetta Shura rapidly rebuilds
Bin Laden will be quickly killed or captured Bin Laden remains on the run for 10 years
Karzai will establish governance down to districts Corrupt client networks and tribal politics sustain a
governance vacuum
NATO allies will fight a war NATO allies insist they’re “Peacekeeping” with very
restrictive rules of engagement
West will be seen as liberators West will be seen as occupiers
CLOUD COMPUTING
(Customer Relationship Management)
ANTITHESIS
Business model THESIS
salesforce.com
elements e.g., Siebel
Initial Model
Vision Create a product Create a market
Provide selling tools Create a social enterprise
Develop an enterprise platform Develop a cloud platform
Dominate the CRM software space Provide best practice sales and marketing processes
Technology Installed On-demand - Software as a Service (SaaS)
Lengthy configuration (six to eighteen months) Minimal configuration required
Complex Simple to use
Large enterprise users only Scalable
Costly upgrades & maintenance fees Utility (upgrade and maintenance by host)
Enterprise network-based Internet-based
Internally-driven development Customer-focused development
Competition Interfaces with other applications Partnerships with other cloud-based service providers
and Alliances
Sales Sales infrastructure in each location Initially tele-sales / later evolved to sales teams
Discounts No discounts
Own the software Pay to use the software
Maintenance fees Subscription fees
Seat licenses Subscribers
Philanthropic Discretionary Built in at the outset
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Draft For DiscussionOverview: How to Win in Business Model Warfare
RETAIL BANKING IN KENYA & LATER AFGHANISTAN
Business model THESIS ANTITHESIS
elements e.g., Traditional banks (2006) e.g., M-PESA (2006-2008)
Urban middle class (less than 13% of Very poor and rural (BOP) Bottom Of
Customers
Kenyan households) Pyramid
Speed Very slow Very fast
Revenue Model Interest bearing accounts / fees No interest / flat transaction fee
Regulation Highly regulated & bureaucratic Minimal regulation & streamlined
750 branches & 3 million bank
Transaction accounts 5,000 outlets / 12 million subscribers
Tokens Cash or check Cell credits / mobile money
Locations Urban branches Everywhere
Security Safe and guards Data encryption / SIM Cards
Middlemen Many None
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Draft For DiscussionOverview: How to Win in Business Model Warfare
Business
Model 1997 1997 Watson
Element Big Pharma Thesis Merck Generic Antithesis
Markets Developed countries Emerging markets
Cures Prevention (e.g., vaccines)
Mass diseases Personalized healthcare/
rare diseases/niches
Global growth in drug funding Global austerity reduces drug
funding
Products Blockbusters Niche products
Patented drugs Generics/ branded generics/
OTC
Processes
R&D Internal, closed system (end to Partnerships and outsourcing
end)
Chemistry-based Non-chemistry-based (e.g.,
biotech)
Manufacturing Batch Continuous
Internal manufacturing Partnerships and outsourcing
Sales & Target providers/ wholesalers/ Consumers
Marketing physicians
Marketing alliances with Owned distribution channels
competitors
Industry Highly concentrated Fragmented
Structure Ongoing consolidation Limited number of mergers
Dominated by U.S. and western Dominated by emerging
European companies market companies
Integrated R&D, manufacturing Separate, specialized
and marketing companies companies for R&D,
manufacturing and
Dedicated pharmaceutical marketing
companies Pharma business units of
larger conglomerates
R&D private sector led
R&D public sector led
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Draft For DiscussionOverview: How to Win in Business Model Warfare
structure affect their ability to develop and
PART 3 – LEADING SUSTAINABLE execute a transformation strategy, how did they
communicate and maintain alignment and
ALPHA CREATION
support?
The skill. Is there a set of skills and tools that can
Part 3 will describe the challenges, successes and
be replicated to enable companies to create and
failures and lessons learned in “Leading
sustain Alpha? If so, what are the challenges to be
Sustainable Alpha Creation.” It will address such
faced? How are they different for established
factors as the role of personality vs. process, the
market leaders vs. new entrants? What is the risk
differences between private vs. publicly held
of action vs. the risk of inaction? Can companies
companies, majority vs. minority control, and the
more systemically and deliberately innovate to
engagement and alignment of internal staff and
create value? We will show they can.
external stakeholders such as institutional
investors. Personality or Process or Both?
This part will present case studies together with
interviews about what it really takes to develop Is discontinuous innovation the result of a single
and sustain long-term value creation strategies. It creative personality like Steve Job
will describe how to “Be Different
or perhaps a set of leadership
Profitably”. The current Alpha skills?xi Can companies more
leader’s biggest risk is systematically explore, plan and
exploit disruptive innovation? Is it
the risk of inertia and solely about disruptive
Act Different
inaction technologies or it also about the
business model in a holistic sense
With the right ideas, will and skill, and the style of leadership?
the forces of creative destruction can be
Some might think that even if there were such a
harnessed prospectively. In this part of the book,
systematic approach to “think different”, it would,
we will explore the conditions necessary to lead
by its nature, stifle the creative process. To the
Alpha creation by thinking and acting differently:
contrary, there is a method that can be
The idea. What are the kinds of leaders who are systematically applied to help the 21st century
willing to “Think Different” – to find out what they enterprise significantly improve its ability to “think
don’t know, to think the unthinkable, and different”.
challenge conventional wisdom? We examine who
has done this prospectively and whether it was
deliberate or intuitive.
Alpha Leaders must overcome
The will. What does it take to transform the inertia
successful organization to get it to “Act Different”
and overcome the inevitable forces of inertia
before it’s too late? How did they get support Every successful organization must learn to deal
from their boards, how did their ownership with inertia. Newton’s First Law of Motion defines
and quantifies inertia as “the resistance of a body
© Copyright 2012 Funston Advisory Services LLC. All rights reserved 18
Draft For DiscussionOverview: How to Win in Business Model Warfare
to changes in its momentum. Because of inertia, a market."xiii Apparently, TI’s goal was to stimulate
body at rest remains at rest, and a body in motion the use of transistors and bring national attention
continues moving in a straight line and at a to their potential commercial uses but not to build
constant speed, unless a force is applied to it. radios, so it abandoned the market. At the time,
Inside an organization that force is called the industry leaders in vacuum tube radios prided
leadership. themselves on the quality of the engineering of
their super heterodyne radios and considered
The concept of inertia can be meaningfully applied transistors to be “beneath their dignity”.xiv
to successful corporations. The formative stage of
an enterprise’s lifecycle is inherently, and perhaps Sony seized this opportunity and, in 1955, entered
intuitively, innovative. Sony’s founder Akio and then dominated the U.S. and, shortly
Morita saw the opportunity when, in 1952, he thereafter, global markets. The unanticipated
bought the license for transistors from Bell Labs effect of portable radios was to provide
for the sum of $25,000. Apparently, Morita was unfettered access to world music, information and
ridiculed at the time in the business community news to American youth without adult supervision
because the engineers at Bell Labs believed their and thus gave rise to the cultural and musical
transistors were “only good for revolution of the 60’s.xv
making hearing aids” and that
“a body in motion But 50 years later, Sony too has
radios were too expensive for
individuals. xii Instead, Sony continues moving in a succumbed to inertia. In 2001,
adopted the motto “One Person, when Apple was able to get the
straight line and at a Mac OS X operating on a PC, Steve
One Radio” and innovative history
was made. constant speed, unless a Jobs apparently flew to meet the
President of Sony to discuss the
force is applied to it.” In
From a bombed out department breakthrough and offer the
store in post-war Tokyo, he and an organization that opportunity to install it on the
his partner Masaru Ibuka built the Sony VAIO. Unfortunately, Sony
force is called leadership.
basis of the Japanese electronics had “just launched the VAIO
industry from the transistor radio. product line internationally and
Yet, the first transistor radio (the TR1) was was so busy expanding it … they didn't have extra
developed by Texas Instruments (TI) and the resources to work on (it).”xvi
Regency Division of Industrial Development
Engineering Associates. Beginning in 2005 and despite his best efforts,
Howard Stringer at Sony was only partially
TI developed the transistors while Regency built successful in breaking down the established
the radios. In 1954, TI even announced "The divisions that prevented productive synergies. It
introduction of this first mass production item to remains one of the key challenges for the new
use the tiny transistor to replace the fragile CEO Kazuo Hirai. We discuss further the cases of
vacuum tube leads the way for the long-predicted Sony, Apple and Samsung in Part 2.
transistorization and miniaturization of many
other mass production consumer devices. TI’ers The more successful a corporation becomes, the
can justly be proud of being the first to produce a greater becomes its mass and velocity and the
high-gain transistor at a cost permitting its greater its tendency to maintain its current
application to the high-volume commercial trajectory and the greater its resistance to change.
© Copyright 2012 Funston Advisory Services LLC. All rights reserved 19
Draft For DiscussionOverview: How to Win in Business Model Warfare
Thus even greater force must be applied to introduced. RIM incorrectly assumed that
change its direction. Such forces can be externally corporations would demand the higher security
caused by competitors’ actions and other market provided by RIM rather than succumb to popular
factors and/or internally by the leadership. The demand by their personnel for more interactive
hardest thing, for any successful organization, is to devices. The value proposition must be examined
change itself while it is still successful. Lawrence from the point of view of the customer not the
Miller states that those who were once barbarians product engineers.
and conquerors seem to almost inevitably become
bureaucrats.xvii The successful company must develop innovative
discipline if it is to overcome such inertia.
Resistance to change is created by established
assumptions, concepts, values and practices Publicly listed entities face greater scrutiny with
including controls which act to maintain the less willingness on the part of investors to tolerate
current course. This also results in missing negative impacts on Earnings per Share. This, for
fleeting windows of opportunity. They simply example, was a major factor in Iron Mountain’s
aren’t perceived as opportunities or threats. unwillingness to stay the course on its strategy
Disruptive innovations can be ignored or by and they jettisoned not only their strategy but
passed by the current Alpha because they also their CEO while their privately held
represent too radical a departure from the current competitor SunGard was able to stay the course.
mainstream business or demand cannibalization Public companies thus enjoy fewer degrees of
or the cost of change may be seen as too high.
freedom and ability to execute a long–term plan
Again, one of the first responses is
which may encounter the
to ridicule the new. Larry Ellison “Denial ain’t just a river inevitable bumps in the road less
of Oracle once called cloud travelled. Short-termism is
computing "complete gibberish" in Egypt”
endemic and can destroy future
before embracing it despite the Mark Twain value creation. Managing investor
fact that he had long been a
expectations and having the full
strong supporter of Marc Benioff’s
support of the board is critical to
saleforce.com.xviii the successful adoption and implementation of
Jerry Yang of Yahoo! turned down the opportunity major business model changes.
to buy Google in its early days because he didn’t
In this part, we will address how successful
see the business case. Likewise, Blockbuster had companies create viable business options, timing,
the opportunity to buy Netflix but didn’t. Kodak transition and garnering support from their key
delayed the pursuit of digital photography even
stakeholders. This will include a discussion of
though it had developed the core technology in
enabling and constraining forces for successful
1975 because it didn’t want to cannibalize the
business model strategic change.
profitability of its film business. These innovations
were known but their value was unrecognized
because it didn’t fit their current view of the
business model.
Challengers must develop discipline
This also happened to RIM which dominated the
enterprise PDA market until the iPhone was
© Copyright 2012 Funston Advisory Services LLC. All rights reserved 20
Draft For DiscussionOverview: How to Win in Business Model Warfare
Successful challengers attack market weakness
and the incumbent’s lack of agility. The absence Be Different Profitably
of emotional and financial investment and
commitment in conventional assumptions,
Being different is not an end in itself. The goal is
concepts, values, practices and controls helps
to be different profitably. Each of the case studies
challengers create new business models. Yet
in Part 2 will describe how a systematic approach
simultaneously this same lack threatens their
to challenging the conventional wisdom creates
survival. Challengers are typically both more agile
significant opportunities for competitive
to seize opportunities and yet they are often more
advantage and profitability. All business models
vulnerable to adversity because they lack
eventually become obsolete. The models that
resilience and discipline.
displace them become the new Alpha creators by
The faster an enterprise outgrows its successfully harnessing the forces of creative
infrastructure, the faster it is likely to fail. New destruction at that point in time.
companies (even ones with big sales) need to
develop business and financial controls with With the right ideas, will and skill, the
professional management. Although this book is forces of creative destruction can be
not about how to manage a start-up, it should
harnessed prospectively and profitably.
provide a useful way for challengers to analyze
conventional business model wisdom.
For further Information, contact:
Rick Funston
Managing Partner
Funston Advisory Services LLC
rfunston@funstonadv.com
313-919-3014
Randy Miller
Principal
Funston Advisory Services LLC
rmiller@funstonadv.com
248-250-1111
Mark Barrott
Principal
Funston Advisory Services LLC
mbarrott@funstonadv.com
313-919-5844
© Copyright 2012 Funston Advisory Services LLC. All rights reserved 21
Draft For DiscussionOverview: How to Win in Business Model Warfare
Endnotes
i
Frederick Funston and Stephen Wagner, “Surviving and Thriving in Uncertainty: Creating the Risk Intelligent
Organization” Wiley & Sons, 2010
ii
Richard N. Foster, “Creative Destruction Whips Through Corporate America”. Innosight Executive Briefing Winter
2012. P.1
iii
Joseph A. Schumpeter, Capitalism, Socialism and Democracy. 1942 Harper Brothers. p.82-83
iv
Leslie Kwoh, “You Call That Innovation? Companies Love to Say They Innovate, but the Term Has Begun to Lose
Meaning.” Wall Street Journal, May 23, 2012.
v
Morris Langdon “Business Model Warfare: The Strategy of Business Breakthroughs” 2003, Ackoff Center for the
Advancement of Systems Approaches (A-CASA) The University of Pennsylvania.
vi
Clayton M. Christensen “The Innovator’s Dilemma” Harvard Business School Press. 1997
vii
Peter F. Drucker. “The Essential Drucker” Collins, 2001 p. 20
viii
Peter F. Drucker. “Innovation and Enterpreneurship” Harper & Row, 1985. P. 35
ix
Thomas S. Kuhn. “The Structure of Scientific Revolutions” University of Chicago Press. 1962
x
The Hegelian Dialectic developed by Georg Wilhelm Friedrich Hegel
xi
J. Dyer, H. Gregersen, C. Christensen “The Innovator’s DNA” Harvard Business Review Press. 2011
xii
http://home.comcast.net/~phils_radio_designs/Phil_S10_R75.pdf
xiii
internal Texas Instruments Information Bulletin, October 18, 1954
xiv
Peter F. Drucker, “Innovation and Enterpreneurship: Practice and Principles” 1985 Harper & Row Publishers New
York. p.225
xv
1999, ScienCentral, Inc, and The American Institute of Physics
xvi
Nobuyuki Hayashi, “Apple Inc.: How does Apple keep secrets so well?” June 10, 2012.
xvii
Lawrence M. Miller, “Barbarians to Bureaucrats: Corporate Life Cycle Strategies” Fawcett Columbine, 1989.
xviii
Ben Worthen and Steven D. Jones. “Oracle Introduces Its Cloud Software Line” WSJ. June 6, 2012.
© Copyright 2012 Funston Advisory Services LLC. All rights reserved 22
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