WIXLIB

HRadarIntelligent contentin one click.TheTransformaTiveBusiness modelhow to tell if you have oneby StelioS KavadiaS, KoStaS ladaS, and ChriStoph loChStelios Kavadias is the Margaret Thatcher Professor of Enterprise Studies in Innovationand Growth at the University of Cambridge’s Judge Business School and the director ofits Entrepreneurship Centre. Kostas Ladas is an associate at the CJBS EntrepreneurshipCentre. Christoph Loch is a professor at and the director (dean) of the Judge Business School.

HRadarIntelligent contentin one click.THe TranSforMaTive BuSineSS ModeLWe usually associate anindustry’s transformationwith the adoption of a newtechnology. But althoughnew technologies areoften major factors, theyhave never transformedan industry on their own.What does achieve sucha transformation is abusiness model that canlink a new technology toan emerging market need.MP3 technology is a classic case in point. EarlyMP3 devices represented an order-of-magnitudeincrease in capacity over magnetic tapes and CDs:Users could carry thousands of songs on a smalldevice. But MP3 players revolutionized the audiodevices market only after Apple coupled the iPodwith iTunes in a new business model, swiftly moving music-recording sales from the physical to thevirtual world.What, exactly, enables a business model to deliver on a technology’s potential? To answer thatquestion, we embarked on an in-depth analysisof 40 companies that had launched new businessmodels in a variety of industries. Some succeededin radically altering their industries; others lookedpromising but ultimately did not succeed. In thisarticle we present the key takeaways from our research and suggest how they can help innovatorstransform industries.2 Harvard Business Review october 2016How Business Models WorkDefinitions of “business model” vary, but mostpeople would agree that it describes how a company creates and captures value. The features of themodel define the customer value proposition andthe pricing mechanism, indicate how the companywill organize itself and whom it will partner with toproduce value, and specify how it will structure itssupply chain. Basically, a business model is a systemwhose various features interact, often in complexways, to determine the company’s success.In any given industry, a dominant business modeltends to emerge over time. In the absence of marketdistortions, the model will reflect the most efficientway to allocate and organize resources. Most attempts to introduce a new model fail—but occasionally one succeeds in overturning the dominantmodel, usually by leveraging a new technology. Ifnew entrants use the model to displace incumbents,

HRadarIntelligent contentin one click.idea in BriefThe quesTionNo new technology can transform anindustry unless a business model can linkit to an emerging market need. How canyou tell whether a model will succeed indoing that?The researchThe authors undertook an in-depthanalysis of 40 companies that launchednew business models in a variety ofindustries. Some had transformed theirindustries; others looked promising butultimately didn’t succeed.or if competitors adopt it, then the industry hasbeen transformed.Consider Airbnb, which upended the hotel industry. Founded in 2008, the company has experiencedphenomenal growth: It now has more rooms than either InterContinental Hotels or Hilton Worldwide. Asof this writing, Airbnb represents 19.5% of the hotelroom supply in New York and operates in 192 countries, in which it accounts for 5.4% of room supply(up from 3.6% in 2015).The founders of Airbnb realized that platformtechnology made it feasible to craft an entirely newbusiness model that would challenge the traditionaleconomics of the hotel business. Unlike conventional hotel chains, Airbnb does not own or manageproperty—it allows users to rent any livable space(from a sofa to a mansion) through an online platform that matches individuals looking for accommodations with home owners willing to share a room ora house. Airbnb manages the platform and takes apercentage of the rent.Because its income does not depend on owning or managing physical assets, Airbnb needs nolarge investments to scale up and thus can chargelower prices (usually 30% lower than hotels charge).Moreover, since the home owners are responsiblefor managing and maintaining the property and anyservices they may offer, Airbnb’s risks (not to mention operational costs) are much lower than thoseof traditional hotels. On the customer side, Airbnb’smodel redefines the value proposition by offering amore personal service—and a cheaper one.Before platform technology existed, there was noreason to change the hotel business in any meaningful way. But after its introduction, the dominant business model became vulnerable to attack from anyonewho could leverage that technology to create a morecompelling value proposition for customers. The newThe findingsTransformative business models tend toinclude three or more of these features:(1) personalization, (2) a closed-loopprocess, (3) asset sharing, (4) usage-basedpricing, (5) a collaborative ecosystem, and(6) an agile and adaptive organization.business model serves as the interface between whattechnology enables and what the marketplace wants.Let’s look now at what features make a businessmodel transformative.The Six Keys to SuccessWe selected the 40 new business models we analyzed on the basis of how many mentions they received in the high-quality, high-circulation businesspress. All of them seemed to have the potential totransform their industries, but only a subset had succeeded in doing so. We looked for recurring featuresin the models and found six. No company displayedall of them, but as we shall see, a higher numberof these features usually correlated with a higherchance of success at transformation.1 a more personalized product or service.Many new models offer products or services thatare better tailored than the dominant modelsto customers’ individual and immediate needs.Companies often leverage technology to achievethis at competitive prices.2 a closed-loop process.Many models replace a linear consumption process (in which products are made, used, and thendisposed of) with a closed loop, in which usedproducts are recycled. This shift reduces overallresource costs.3 asset sharing.Some innovations succeed because they enable the sharing of costly assets—Airbnb allowshome owners to share them with travelers, andUber shares assets with car owners. Sometimesassets may be shared across a supply chain. Thesharing typically happens by means of two-sidedonline marketplaces that unlock value for bothsides: I get money from renting my spare room,and you get a cheaper and perhaps nicer placeoctober 2016 Harvard Business Review 3

HRadarIntelligent contentin one click.THe TranSforMaTive BuSineSS ModeLLinking Technology and the MarketThe six features that characterize successful innovation all link a recognized technology trend and a recognizedmarket need. Trends were identified by an analysis of regularly published industry reports from think tanksand consulting companies such as the McKinsey Global Institute, PwC, and the Economist Intelligence Unit.TeCH TrendSKeyS To innovaTion SuCCeSSMarKeT needSsensing, interfacing, andmaterial technologiespersonalizaTionincrease in demand forproducts and servicesclosed loopoptimization technologies(ai, big data, robotics)more diversity of consumerpreferencesasseT sharingplatforms for connectingdevicesusage-Basedpricingmobility and cloudtechnologiesrise of input costs (resources,labor, transportation)collaBoraTiveecosysTemdecentralized small-scalemanufacturing (3-d printing)agiliTyto stay. Sharing also reduces entry barriers tomany industries, because an entrant need notown the assets in question; it can merely act asan intermediary.4 usage-based pricing.Some models charge customers when they usethe product or service, rather than requiringthem to buy something outright. The customersbenefit because they incur costs only as offeringsgenerate value; the company benefits becausethe number of customers is likely to grow.5 a more collaborative ecosystem.Some innovations are successful because anew technology improves collaboration withsupply chain partners and helps allocate businessrisks more appropriately, making cost reductionspossible.6 an agile and adaptive organization.Innovators sometimes use technology to moveaway from traditional hierarchical models ofdecision making in order to make decisions thatbetter reflect market needs and allow real-timeadaptation to changes in those needs. The resultis often greater value for the customer at less costto the company.Each feature on this list is tied to long-term trendsin both technology and demand. (See the exhibit“Linking Technology and the Market.”) On the tech4 Harvard Business Review october 2016greater regulatory pressureside, one trend is the development of sensors thatallow cheaper and broader data capture. Anotheris that big data, artificial intelligence, and machinelearning are enabling companies to turn enormousamounts of unstructured data into rules and decisions. A third is that connected devices (the internetof things) and cloud technology are permitting decentralized and widespread data manipulation andanalysis. And a fourth is that developments in manufacturing (think nanotechnology and 3-D printing)are creating more possibilities for distributed andsmall-scale production.On the market side, although the steady progressof developing countries has led to a stable increasein demand worldwide, it is complicated by a greaterdiversity in customer preferences (both across andwithin countries). Higher factor prices (despite thecommodity price reductions of 2015) and heightenedregulation (notably on environmental effects andbusiness conduct) further increase the challengesfor companies looking to gain market share.All six features represent potential solutions forlinking market demand and technological capability. For example, greater personalization in thevalue proposition responds to the fragmentationof consumer preferences and the resultant demandfor more-diverse offerings. That personalizationhas been made possible by sensors that collect data