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Book Review

Harvard Business Review on Business Model Innovation (2010),


Harvard Business School Publishing: Boston, MA
ISBN 978-1-4221-3342-2, pp. 207, U.S. $ 22.00.

Reviewer : Shiva Kumar Srinivasan1

1.0 INTRODUCTION

2.0 DEFINITIONS BRING CLARITY

What is a business model? How does it differ


from a strategy? What must firms do to find out
if their business model is working? What must
firms do if they are not in synch with the world?
These then are some of the questions that this
anthology of essays from the Harvard Business
Review sets out to address. There is a lot of
confusion as to what a business model is. For
instance, business models became ubiquitous
during the dot.com boom even though not many
people understood why, if at all, they should
bother to invest in a business model. Many
entrepreneurs sought out venture capitalists and
vice versa in the hope that they could roll-out a
thriving business only to be disappointed later.
There was also a point in management
education when writing up a business model
or designing a business plan was taught for a
while in business schools before the movement
fizzled out. While, needless to say, an expanding
economy is more likely to be preoccupied with
business models and business plans, it is time
to think-through what the implications of these
attempts are within the domain of strategy and
general management given that these terms are
often used loosely as synonyms. What this
anthology of essays does is to bring together
business academics who feel that there are
important lessons to be written up in the context
of the preoccupation with business models and
the role that they play in any business.

Joan Magretta, a McKinsey award winner,


argues that a business plan is not the same as a
strategy insofar as it leaves out the notion of
competition; but, nonetheless, it sets out the
basic elements that constitute a business and
how it hopes to add value. She compares a
business model to something akin to the
scientific method; it is a 'hypothesis' which must
be tested in 'action' and 'revised', if necessary,
in order to make it work. It is, quite simply, a
cognitive framework for both thought and
action. It helps a firm to experiment in order to
see if it has something viable in place. Magretta
also discusses a number of cases where revisions
to a business model made it possible to make a
success of what did not work in the first
instance. Euro Disney, for example, was
patterned after the American model but had to
be revised on several counts before it could
become acceptable in the French market since
the European patterns of dining, holidaying,
and so on were not the same. French customers
therefore did not 'graze' all day long like the
Americans do in eat-outs while visiting theme
parks; this directly affected the profits of Euro
Disney. The cultural differences between
American and European customers were so
different that a Disney theme park could not
work with the same business model on both the
American and European continents. This is a
simple but riveting example that was covered

*
1.

Received August 16, 2010


Visiting Assistant Professor, Managerial Communications, Indian Institute of Management, Kozhikode, email:
shiva@iimk.ac.in

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Vilakshan, XIMB Journal of Management ; March, 2011

extensively in the media; it is a problem that


the reader can easily identify with. What should
Euro Disney have done to turn around its
fortunes? What, to put it simply, is the
difference between tweaking the business
model and changing the strategy in place? This
is where inaccurate terminology and semantics
can confuse the discussion. The problem in the
Euro Disney case was not at the level of strategy
in the sense that a competitor had a better
offering, but rather in the fact that French
customers did not get what they were looking
for. So unless we differentiate between what is
intrinsically required in a model and how
customers respond, we can't begin to compare
it with what the competition is up to. Magretta
therefore argues that the process of 'definition
brings clarity' to the discussion.
3.0 DISRUPTIVE INNOVATIONS

Joseph Bower and Clayton Christensen of


Harvard Business School argue that the process
of 'disruptive innovation', especially in the
context of technology, has to be studied
carefully since the validity of a business model
can be challenged by new models through
forms of strategic disruption. This means that a
subset of crucial attributes of a piece of
technology may just about suffice to help
customers do what they want to do in ways that
could not have been sufficiently anticipated. Or
there could be situations when the development
of a new technology by the competition makes
existing business models and the products in
contention obsolete. This is an endemic problem
in the context of technology and there are a
number of important examples of this
phenomenon like the invention of the radial
tyre, the invention of 3.5 inch disk-drives, etc.
It is therefore important to understand the
'strategic significance', if any, of a 'disruptive
technology' in order for a firm to respond
effectively. Bower and Christensen not only set
out a framework to assess the significance and
the 'initial market' for a specific form of strategic

disruption, but also recommend the need to


spin it off as a separate and independent unit
from the main organization. This, they argue,
will make it possible to create businesses of the
future that can even take the place of the
mainstream business if needed.
4.0 OVERHAULING THE BUSINESS MODEL

What must businesses do when it becomes


necessary to overhaul the business model in its
entirety? Mark W. Johnson et al argue that often
businesses don't sufficiently understand the
model in place in terms of what constitutes their
'customer value proposition', their 'profit
formula', or even the 'key resources' that are
required to change the rules of the game. The
case examples that they cite include the Tata
Nano and the Apple iPod+iTunes combination;
the success of these ventures is based on
redefining the categories listed above in ways
that were not thought possible by the default
business models in place. Johnson et al not only
explain what a business model is at length, but
also set out an explanation of the categories
mentioned above. They also discuss the
situations which would warrant the need for a
new business model by setting out the relevant
competitive conditions, and the criteria
required for evaluating the continuing viability,
if any, of the old models as opposed to the new
models. Vijay Govindrajan and Chris Trimble,
who work in the area of innovation, explain the
relationship, like Bower and Christensen,
between old businesses and new spin-offs. They
argue that the new business must learn to forget
the 'success formula' in place in order to rethink
the business model anew. They illustrate this
challenge by explaining the differences in the
editorial and business strategies that were
invoked by the print and Net versions of the
New York Times. In what sense is the digital
version of the newspaper a matter of continuity
and in what sense is it completely different? It
was by managing successfully this structural
conflict that it became possible to set up a

Boston: Harvard Business School ......

profitable version of the paper on the Net. The


division or unit that is spun-off should know to
what extent the new business model must
borrow from the old and to what extent it must
forget the dictates of the model in place.
5.0 DISCOVERY-DRIVEN PLANNING

A specific suggestion that Rita McGrath et al


come up with in this context is termed
'discovery-driven planning'. Here, unlike the
'platform-based approach', it is not possible to
make predictions about how a business will
perform since the firm has ventured into
unknown territory. As they put it, 'new ventures
are undertaken with a high ratio of assumption
to knowledge' while 'with ongoing businesses
one expects the ratio to be the opposite'. The
importance of the discovery method is that it
will make it possible for take corrective action
on an ongoing basis. McGrath et al apply this
approach to explain what corrective actions
were quickly taken by Euro Disney in terms of
a number of categories including 'admissions
price', 'hotel accommodations', 'food',
'merchandise', etc. to pull around its operations
effectively. They list the assumptions that are
usually made by businesses in terms of both
product design and the sales pitch. They also
illustrate the notion of discovery-driven
planning by invoking the instance of the Kao
Corporation which tried to leverage its
knowledge and skills in surface chemistry to
move into the manufacture of floppy disks since
understanding the structure of the surface of
the disk is considered to be crucial in this
industry. How did the Kao Corporation decide
whether or not to take up this option? Kao
started by using the evaluative mechanisms that
are associated with 'discovery-driven planning'
which include the 'reverse income statement',
thinking-through the main assumptions and
operational specifications, and by evaluating
the progress in a specific project like a venture
capitalist who provides financial support in
stages. In like vein, Scott Antony et al work out

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the processes involved in mapping an


innovative strategy by deploying Christensen's
notion of a disruptive innovation. They argue
that innovation is context specific; it is
important for a firm to identify 'how' and
'where' to innovate; it should also be clear as to
the forms of innovation that go beyond its
strategic remit. Most disruptive innovations
happen when firms understand that often they
are making 'products that are too good, too
expensive, and too inconvenient for many
customers'. In such instances, firms may find
that they are not able to cater to a large portion
of the market. Offering a scaled-down version
of the product or service is the way that will
make it possible for them to disrupt either their
own business model or that of the competition.
Three important strategies offered here include
the following: make it possible for the customer
to do things beyond their ability; serve the
bottom of the pyramid; and expand the size of
the market. Through this process of selfdisruption, a firm may decide that its core
business is either not sustainable or cannot do
as much as its leadership would like it to do. In
these situations, it is important to quickly find
the 'next core business'. How should a firm go
about doing so?
Chris Zook comes up with a range of tools 'to
conduct an internal audit of possibilities' to
identify the emerging set of opportunities to
redefine or displace the core business in place.
This however will involve 'deep strategic
change' in the business model. Zook therefore
sets out the criteria under which a firm can
determine whether it needs to change. These
criteria include 'profit pools' which would be
expanding or shrinking, the problem of costing
its production process, and the sustainability,
if any, in its growth formula. When these
strategic indicators are not positive, it is time
to try something new. Zook therefore includes
the most important questions that a firm must
ask to evaluate its core business. These

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Vilakshan, XIMB Journal of Management ; March, 2011

questions address problems related to 'core


customers', 'core differentiation', 'profit pools',
'core capabilities', and organizational culture.
If the firm decides to set up a new business that
will eventually be integrated or displace the core
business, it must start by doing three things:
identify 'undervalued business platforms',
generate new 'insights into customers', locate
'underexploited capabilities', and generate a
new approach to the business. Zook also sets
out the actual set of steps that a firm can follow
to set up a new business. This is a challenge that
most firms have to confront sooner or later in a
competitive environment.
6.0 MANAGING CHANGE EFFECTIVELY

And, finally, Rosabeth Kanter, who works in the


area of change management, picks up the
challenges involved in managing change
effectively since the relentlessness of change in
the external world is going to make most
business models obsolete by rendering their
fundamental assumptions about the business,
its customers, the organization, and the
economy invalid. What must firms do to bring
about systemic change given that they are
situated in communities? Kanter argues that the
way forward is through 'private-public
partnerships'. She enumerates the six features
that successful partnerships share in common

along with case studies of 'vanguard companies'


like IBM and Bell Atlantic to make a strong case
for change which, in addition to giving firms
an opportunity to participate in corporate social
responsibility initiatives, will also make it
possible for them to apply innovative
approaches to social entrepreneurship and
community building through projects like
'inner-city development' and in reforming
welfare through 'welfare-to-work' programs,
etc. Firms which would like to make such
contributions however must have 'a clear
business agenda' and have 'strong partners' who
are willing to collaborate in order to make a
genuine difference to the communities to which
they belong or to which they would like to
contribute. Kanter concludes by stating that the
task for community-minded businesses is to
work 'in partnership with government and nonprofits.' It is also important for businesses 'to
go beyond the traditional models to tackle the
much tougher task of innovation'. Business
model innovation then is not just a way of
putting the elements of a business model
together for a firm to be profitable; it is a way
of 'cognizing' what is at stake in a socioeconomic endeavor that is represented by a firm
and understanding the conditions and
circumstances under which it may have to
correct course if necessary.

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