Choosing the Right Business Model

Following your key business purpose, your core values and your strategic goals, the right business model needs to be chosen to support the purpose, values and goals.

A business model describes the rationale of how your organization creates, delivers and captures value. Your organization needs a business model concept that everybody understands; one that facilitates description and discussion. People need to start from the same point, and talk about the same thing. The challenge is that the concept of your business model must be simple, relevant, and intuitively understandable. Following Geoffrey A. Moore’s theory of innovation vectors, we believe that any enterprise needs to make fundamental decisions in the choice of the business model needed to support their key business purpose, their core values and brand promise, and their strategic goals.

Business Models

Following Moore’s theory, we distinguish four different business models:

Model 1: The ‘Disruptive Innovation’ Business Model (“Red”)

A ‘disruptive innovation’ oriented strategy initiates a growth market by creating a new category through one of two mechanisms:

Discontinuous technology: creates new standards incompatible with currently prevailing standards, forcing those who adopt it to displace their existing systems, e.g. Apple;

Value-chain discontinuity: destabilizes the value chain in an existing market by challenging existing business models, e.g. Southwest Airlines.

The preferred organizational structure for the red strategy is a ‘skunk work’ structure, creating innovations, improvements and plans in spontaneous and often temporary entities with subjectively defined (or even undefined) metrics.

The best culture for this strategy is a ‘cultivation culture’, where self-actualization, individual accountability and empowerment are key contributors.

Examples of “red” companies are Google (however slowly losing its color and turning “green”), Apple, Southwest Airlines (with a touch of “yellow” – see here), and Virgin.

Model 2: The ‘Customer Intimacy’ Business Model (“Yellow”)

The ‘customer intimacy’ oriented strategy focuses on making flexible and differentiated value propositions by aligning them more precisely with target customers’ needs and values. This strategy requires close customer proximity, and relies heavily on accurate market- and customer intelligence. Customer intimacy does not necessarily call for increasing customer satisfaction. It requires taking responsibility for customer results. It does not impose arm's length goodwill. It requires down-in-the-trenches solidarity, the exchange of useful information, and a collaborative pursuit of results.

The preferred organizational structure for this strategy is a ‘matrix structure’, where different disciplines are closely collaborating in a matrix model, providing the best possible individually tailored customer offerings.

The best culture for this strategy is a culture of ‘collaboration’, rooted in the need for affiliation, and characterized by team-level accountability to subjectively determined metrics.

A clear example of a “yellow” company is Dell Computers. Dell was the first personal computer company to organize and build itself around the idea of direct customer feedback. “Our attitude was diametrically opposed to the engineering-driven thinking of ‘Let's invent something and then go push it onto customers who might be willing to buy it.’ Instead, I founded the company with the intention of creating products and services based on a keen sense of the customer's input and the customer's needs. I spend about 40% of my time with customers” says Michael Dell (1). Dell has a touch of “red” as well, since their strategy of selling direct through the Internet is a clear example in their industry of disruptive ‘value chain discontinuity’.

Another example of a “yellow” company is within the otherwise very green Bayer group: Nunhems Vegetable Seeds. Nunhems Vegetable Seeds is a relatively small but extremely successful international plant genetics company, specialized in breeding vegetable seed varieties. Nunhems successfully competes with giants like Syngenta and Monsanto, and for almost ten years in row, Nunhems is the benchmark in the industry for growth and profitability. Like Dell, Nunhems also has a touch of “red”; Nunhems’ unique and daring strategy of selling directly to vegetable growers instead of through dealers is an example of ‘value chain discontinuity’.

Model 3: The ‘Product Leadership’ Business Model (“Green”)

The ‘product leadership’ oriented strategy focuses on differentiating market offerings by creating more desirable features, better performance, or lower market price. It mainly creates a growth market position by using research and development to improve features, performance, or market price in an established product category.

The preferred organizational structure for this business model is a ‘project structure’. In this structure, officially appointed project teams and departments work along objectively defined metrics.

The best culture for this business model is a ‘competence culture’. This culture is rooted in the need for achievement and characterized by individual-level accountability to objectively defined metrics.

Examples of “green” companies are Bayer, Hewlett Packard, Microsoft, Philips, and Syngenta.

Model 4: The ‘Operational Excellence’ Business Model (“Blue”)

The ‘operational excellence’ oriented strategy focuses on optimizing processes and systems  to differentiate offerings by lower cost, higher quality, or faster time to market.

The preferred organizational structure for this business model is the hierarchical structure, in which processes and systems are fixed in protocols, the following of which is mandatory. The best culture for this business model is a ‘control culture’. The control culture is rooted in the need for order and security and characterized by team-level accountability to objectively defined metrics.

Examples of “blue” companies are General Motors, Compaq (before the takeover by HP), Eastman Kodak, General Electric, TNT.

Below you see a diagram with some of the typical behaviors in the different business models:

Business Model Cultures

In order to assure long-term success, organizations need to align their strategy, their organizational structure, and their organizational culture into one color; combining a strategy of customer intimacy (yellow) with a project structure (green) and a control culture (blue) obviously is not a good idea.

Some examples of poorly aligned organizations are:

  • TNT – pretends to be yellow, organized itself green, has a blue business culture;

  • Eastman Kodak – presents itself yellow (no pun intended), but has a blue organizational model, and a blue business culture;

  • General Motors  - has tried yellow initiatives like Saturn, but is slowed down by a very blue HQ.

 


(1) Quoted from “Direct from Dell: Strategies that Revolutionized an Industry” by Michael Dell and Catherine Fredman

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