1. business and industrial

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
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Overview: How to Win in Business Model Warfare
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Overview: 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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Overview: How to Win in Business Model Warfare
Harnessing the Forces of Creative
Destruction
“Surviving and Thriving in Uncertainty: Creating
the Risk Intelligent Enterprise” Funston and
Wagneri featured a foreword by Tom Ridge and
interviews with race drivers, mountain climbers,
submariners and combat pilots, as well as
directors and senior executives, and presented 10
fatal flaws in conventional risk management and
10 corresponding risk intelligence skills and
supporting tools.
1. Check your assumptions about the
“knowns”
2. Detect Weak Signals / Recognize Patterns
3. Verify and corroborate
4. Factor in velocity and momentum
5. Anticipate causes of failure
6. Manage the key dependencies
7. Maintain a margin of safety
8. Set your enterprise time horizons
9. Dare to take enough of the right risks
10. Develop and sustain
operational discipline
Part 1 will describe how to systematically
understand and successfully challenge
conventional wisdom and business “rules” about
customers and value creation and the current
dominant business model.
Part 2 will present, for example, case studies
drawn from the following sectors:
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Health Care
Media / Entertainment
News / Reference
Airlines
Personal Computing
Cloud Computing
Payment processing
Retail banking in developing countries
Pharmaceuticals
Telecommunications
Air Freight, Logistics / Business Services
Automotive: OEMs, Suppliers, Retailers
“Life short
Art long
Opportunity fleeting
Experience misleading
Judgment difficult”
Part 3 will describe the
challenges, successes and
“How to Win in Business Model
failures in “Business Model
Warfare” expands on several of these
Warfare”. It will address
skills and tools and their application to
the role of personality vs.
the success or failure of industry
process, the differences
Hippocrates, 400 B.C.
specific business models. This book
between private vs.
will be devoted to practical case
publicly held companies, majority vs. minority
studies and lessons learned drawn from
control, and the engagement of internal staff and
interviews with industry leaders and challengers
external stakeholders such as institutional
and combined with an analysis of longitudinal
investors in the development and execution of
performance data. It will describe how to harness
long-term value creation strategies.
the forces of creative destruction by identifying
and seizing game changing innovation and
marketing opportunities while avoiding killer risks
especially the risk of inertia and inaction.
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Overview: 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.
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Overview: How to Win in Business Model Warfare
PART 1 - CREATING AND
SUSTAINING ALPHA
First, in investment terms, Alpha is a risk-adjusted
measure of the so-called active return on an
investment. Alpha is the return in excess of the
compensation for the risk undertaken (beta). It is
what investors look for and is often used to assess
the performance of active fund managers.
According to the Capital Asset Pricing Model
(CAPM), beta (the measure of risk) is positively
related to returns, i.e., increased risk should
translate into increased returns, i.e., Alpha.
staying the Alpha leader is entirely another. There
probably has never been a more uncertain time in
the life of the current generation of executives. It
presents huge opportunities and killer risks and
the rate of change appears to be accelerating. In a
globally connected, internet world, there are no
longer buffers in time and space. Agility and
adaptability are critical to survival and success.
Corporate life expectancy and success appear
directly related to the ability to create and retain
customers, create and sustain new value, and
generate future growth in excess of the risks
taken, i.e., the ability to create and sustain 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.
Alpha animals are often the first
No matter how
The more discontinuous the
to eat, sometimes the only ones
successful you are
innovation and marketing, the more it
allowed to mate and the Alpha
today, sooner or later
demands the understanding and
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
when he was CEO of Thomson
Corporation. He was able to convince
his board that the timing was right to sell its then
profitable newspapers to fund the acquisition of
Reuters in 2008. This example will be discussed in
more detail in Part 2. Creating and Sustaining
Alpha is also the basis of how most CEO’s and
senior executives are or ought to be compensated
and will be discussed in more detail in Part 3.
The Alpha leader is one that dominates its sector
and sets the rules of the “game”. It generates
returns in excess of its peers and in excess of the
risks it undertakes. While a tide may lift or lower
all boats, the Alpha outperforms its peers in good
times and in bad. The Alpha is willing to take
calculated risks without being reckless.
Becoming the Alpha leader is one thing, but
change.
Corporations are mortal too. For
most, life is short and it is even
shorter for those at the top. In the corporate
world, most “wars” are won or lost on the
strength of the business model. The art of
surviving and thriving is as old as mankind, yet
despite legions of MBA’s and libraries of
management books, corporate life expectancies
continue to decline rather than increase.
None are immune or too big to fail (unless
government intervenes) and it appears that for
some their life spans are becoming more akin to
that of fruit flies. For example, the average life
expectancy of an S&P 500 company is now just 18
years compared to 61 years in 1960 and 75 years
in 1937. Richard Foster of Innosight suggests that
by 2030 it may be as little as 12 years.ii
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Overview: How to Win in Business Model Warfare
In 1997, BusinessWeek began to identify the Top
50 companies in the S&P 500 based on factors
such as one and five year risk-adjusted returns
and analysts’ opinions. This provides a more
insightful, albeit subjective, way of looking at
companies than would a capitalization-weighted
index which is used by most of the exchanges.
The top five companies in the 1997 BusinessWeek
Top 50 (Intel, Microsoft, Dell, Cisco and Travelers
Group) didn’t make the Top 50 in 2012. In fact,
regardless of industry, only two companies (CocaCola and Nike) made the Top 50 in 1997 and again
in 2012.
Schumpeter wrote “Capitalism [...] is by nature a
form or method of economic change and not only
never is but never can be stationary (and…)
illustrate(s) the same process of industrial
mutation [...] that incessantly revolutionizes the
economic structure from within, incessantly
destroying the old one, incessantly creating a new
one. This process of Creative Destruction is the
essential fact about capitalism. It is what
capitalism consists in and what every capitalist
concern has got to live in.”iii
No matter how successful you are today, sooner
or later the industry-leading business model will
change. Yahoo!, Avon, Motorola, Best Buy, Sony
and RIM are experiencing it now. Will you see it
coming? Will you be able to adapt fast enough?
History is replete with examples of the business
model failures of once highly successful
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
Life is short but life at
we approach corporate life span
are essential to first perceive the
and mortality from the perspective
opportunity and then act.
the top is even shorter
of investors and define corporate
Unfortunately, experience can be
mortality as the time from listing to
misleading. The business model
that got leaders to the top will not, in most cases,
delisting, bankruptcy or acquisition.
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
is sufficient to sustain their competitive
scope.
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
term. Some seem to think that merely calling
structures.
something innovative means it actually is. This is
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Overview: How to Win in Business Model Warfare
dangerously self-deceptive. In 2011, some form
of the word “innovation” was cited in Securities
and Exchange Commission filings 33,528 times
representing a 64% increase compared to five
years earlier and, in the first three months of
2012, over 250 books had been published with
"innovation" in the title.iv Instead, we will provide
a tool to systematically think different and then
act on it. We also explore the challenges faced by
publicly held vs. privately held companies and the
characteristics required to lead sustainable Alpha
creation.
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Key Competitors
Key Growth Drivers
Key Channels
Key Partners/Networks
Key People
Key Investors
Key Processes
Key Systems/ Technology
Key Resources
Key Revenues / Costs
Given the carnage and increasing corporate
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
forces.
A fish doesn’t know
provide greater value and thus derive
greater value.
it is swimming in
Symmetric warfare is warfare
(whether hot or cold) among equal
water
Every business has a model whether it
forces, e.g., the U.S. and the former
recognizes it or not and the demise of
Soviet Union. On the other hand, in Asymmetric
any such system is inevitable but unpredictable.
warfare, the opponents are dissimilar in size,
Competition drives business model innovation
power and strategy. The smaller force typically
which Morris Langford aptly describes as Business
relies on exploiting the weaknesses in its more
Model Warfare.v
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
Life and Death Assumptions
differentiator.
Business Model Warfare
A business model can be comprised of many
elements and their collective interaction
including, for example:

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Key Value Propositions
Key Customers
Key Products / Services
To simulate attack and defense, we provide a tool
to systematically identify and challenge the
conventional or “life and death” assumptions
which underpin every business model. Such
assumptions are often unrecognized and,
therefore, remain unchallenged much like a fish
doesn’t know it is swimming in water. If “life and
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Overview: How to Win in Business Model Warfare
death” business model assumptions prove false, it
can be fatal for the incumbent leader and a game
changing opportunity for the challenger.
“Think Different”
Apple Ad 1997-2002
In 1997, Apple was #496 on the S&P 500 and this
ad concept was in many ways at the core of Steve
Jobs’ philosophy and Apple’s amazing turnaround.
But how do you not only think but act different?
It’s certainly not about wearing a black turtleneck.
Continuous innovation or improvement is typically
focused on incremental improvement in products
and services and operations that improve
processes and systems. Operational innovations
are designed to incrementally and cost effectively
eliminate unwanted variability and improve
resilience to adversity. Alpha leaders often
become Alpha losers because they tend to overly
focus on continuous innovation.
Clayton Christensen, author of the “Innovator’s
Dilemma”, coined the phrase “disruptive
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
and seize game changing
satisfy customers in ways that are
opportunity. Discontinuous
“It ain’t what you don’t
profitable. The case studies
innovations challenge and
know that gets you into
described throughout this book
change the existing paradigm,
trouble,
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
networks.
approaches. We will also
demonstrate how this same approach can be
applied prospectively.
Continuous and Discontinuous
Innovation
Innovation is the process of introducing
something new, whether it’s an idea, a way of
doing things, a new product or service or a novel
combination of existing elements, and then
putting it into action and profitable use.
Innovation, however, does not exist on a
continuum from continuous to discontinuous.
Like the biological evolutionary theory of
“punctuated equilibrium”, discontinuous
innovation is characterized by sudden shifts after
periods of relative stasis.
As Peter Drucker so aptly stated, the “purpose of
the enterprise is to create and keep customers
through marketing and innovation” vii and
“systematic innovation …. consists in the
purposeful and organized search for changes and
in the systematic analysis of the opportunities
such changes might offer for economic and social
innovation.”viii
True innovation means successfully challenging
conventional wisdom yet the current literature
provides only anecdotal evidence and attributes
innovation to a variety of sources and causes but
does not provide any systematic means to
challenge conventional wisdom or how to harness
the forces of “creative destruction”.
Many companies, especially successful ones,
struggle to innovate and are constantly searching
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Overview: How to Win in Business Model Warfare
for more systematic ways to “think different”.
Thus, sustaining Alpha creation is the ability to
continue to develop real, discontinuous
innovations. We will discuss how to “act
different” shortly.
Thinking the Unthinkable
To think the unthinkable, you must first describe
what you currently think. This begins with
describing the conventional or “normal” wisdom.
This is the THESIS. The conventional view or
paradigm is a set of commonly shared
assumptions, concepts, values, and practices that
provide a way of viewing reality at a point in time.
leaders are distracted or dither and deny.
“Thinking different” or “out of the box” begins
with defining and understanding the current
“box”. This is one of the hardest things to do
because we often don’t make explicit the way we
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
of housing in the U.S. will continue to rise
indefinitely. Clearly, it is easier to do so in
retrospect.
Second, once the conventional wisdom or thesis is
defined, the unthinkable, unconventional and
innovative opposite can also be defined, e.g., the
national price of housing will not rise indefinitely.
This becomes the ANTITHESIS. It is not predictive
but it certainly does prospectively describe life
“outside the box”.
Conventional wisdom does, of course, change
over time but challenging it is not easy. As
Thomas Kuhnix demonstrated,
scientific paradigms change over
To think “out of the box”,
Is there any evidence the
time and are non-linear.
Antithesis may exist? Do you
Anomalies, i.e., deviations from
you have to first describe
have a requisite range of
the normal that are not
the box
scenarios? Do you have effective
explained by an existing
signal detection and pattern
paradigm, lead to a new
recognition systems in place? Do
paradigm. Typically new paradigms are strongly
you know the difference between a threat and
resisted by the establishment even when there is
opportunity? What are your response
overwhelming evidence. Arthur Schopenhauer
alternatives? What if you did it first? What if your
said “All truth passes through three stages: First, it
competitors did it first?
is ridiculed; Second, it is violently opposed; Third, it
is accepted as self-evident.”
Socrates, for example, was forced to drink poison
and Galileo had to recant or be excommunicated
for his support of the view that the earth revolved
around the sun and not the reverse. As difficult as
it is to challenge conventional wisdom in science,
presumably the most rational of all fields, it
becomes even more difficult in other fields as
there are often huge emotional ties that blind
people to what might otherwise be rationally
obvious. This enables first movers to gain a
significant advantage while the current Alpha
While the viability of the ANTITHESIS remains to
be seen, i.e., whether it is economically and
technically feasible, whether the market would be
receptive, etc., it still needs to be understood and
assessed.
Third, the SYNTHESIS may be a novel combination
of elements of the current THESIS and ANTITHESIS
to create the “best of both worlds”. The
SYNTHESIS then becomes the new THESIS and so
on.
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Overview: How to Win in Business Model Warfare
Innovation is the evolution and revolution
engendered by the dynamic interaction between
Thesis, Antithesis and Synthesisx (TAS).
If this can be understood, harnessed and
translated into effective action, it can deliver
potentially huge competitive advantages.
Challenge the “life and death” assumptions,
concepts, values, and practices which rule the
conventional business model and key value
propositions.
Those who would be Alpha leaders need to be
able redefine the business model “rules” of how
the game is played before someone else does.
The case study summaries which follow show how
this has been successfully applied in a wide range
of sectors.
PART 2 - CASE STUDIES
The following section provides high level
summaries of comparisons between the
conventional business model compared to the
non-conventional industry business model using
Thesis, Antithesis and Synthesis (TAS).
This section of the book will have two major
components and include much more detailed
narratives. The first section will provide a time
line of major external events that acted as
enablers or constraints such as 9/11, the dot com
and telecom booms and busts, the Great
Recession, regulatory changes, exchange rates,
etc.
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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Overview: How to Win in Business Model Warfare
HIGH LEVEL CASE SUMMARIES
HEALTH CARE
THESIS
(Conventional Health Care Model)
Health care
Intervention
Fee for Service
Negotiated fees
Multiple payers
High cost provider
Cost Opacity
Volume incentives
Qualified workforce
Price controls
Physical records
ANTITHESIS
e.g., Kaiser Permanente
Health
Prevention
Fee for Outcomes
Non-negotiated fees
Single payer
Low cost provider
Cost Transparency
Value incentives
Effective workforce
Market driven
Electronic records
THESIS
(Blockbuster)
Retail stores (8000)
High operating costs
Inventory / Facilities / People
Late Fees
Physical possession required
Customer pickup
ENTERTAINMENT
ANTITHESIS
NETFLIX BY MAIL
Virtual storefront
Lower operating costs
Regional warehouses
No late fees
Physical possession required
Customer delivery
THESIS
Encyclopedia Britannica
Traditional Newspapers
Print media
Stationary
Periodic update
Subscription fee
Specialists / professional
editors
Verified
NEWS AND REFERENCE
ANTITHESIS
Internet
Wikipedia
Non-print
Mobile
Instant update
Free
Users / crowd-sourced /
volunteer editors
Unverified
SYNTHESIS
(Cloud)
Web-based access rights
Lowest operating costs
Server farms
No late fees
Physical possession not required
Download / direct streaming
SYNTHESIS
Thomson Reuters
Encyclopedia Britannica
Non-print
Mobile
Instant update
Fee
Specialists / professional editors
Verified
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Overview: How to Win in Business Model Warfare
AIRLINES
Business model
elements
Customer Focus
People
Equipment
Process
THESIS
Traditional Airlines
ANTITHESIS
Southwest
National/International
Assigned seats
Premium service provider
Fee for reservation changes
Regional
No assigned seats
Low-cost provider
No fees
Organizational hierarchy
Formal/stiff
Salaries and wages
Inverted pyramid
Informal/fun
First to introduce profit sharing
Multiple types of aircraft
Single type aircraft
No fuel price hedging
Traditional ticket sales commissions
Long turnarounds
Hub and spoke
Primary airports
Multiple sources of ticketing issuance
Fuel price hedging
Reduced ticket sales commissions
High speed turnarounds
Point-to-point
Secondary airports
Direct ticketing by airline
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Overview: How to Win in Business Model Warfare
Business
Model
Element
Vision
1997 Thesis
MICROSOFT
 A computer on every desk
 Software is key for business
 More business computers means
more MSFT users
 Synergy through 3rd parties
APPLE
1997 Antithesis
 Change the world
 Computer as hub is key for
entertainment network devices
 More devices means more
computer hubs
 Control the entire experience (no
3rd parties)
Value
Proposition
 Software = the language of
business
 Software & hardware = the
language of everyone
Product
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Product
Developme
nt
 No cannibalization
 Incremental add-ons/updates
 People know what they want
 Cannibalization
 Planned obsolesce
 Show people what they want/need
Customer
Experience
 Requires a level of proficiency
 Intuitive (a child can use it)
Sales
Channels
 Utilize 3rd parties
 OEMs, corporate licenses, big box
retailers
 Eliminate 3rd parties
 Operate own brick and mortar
store
Leadership
 Businessman, defined by
competiveness and opportunism
 Meet the needs of the customers
 Idealist, defined by unyielding
commitment to vision
 Create the needs of the customers
Organizatio
n
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Windows/Office Software only
Business focus
Open system
Desktop centered/stationary
Design/appearance not critical
Corporate/Establishment
Bureaucracy/hierarchy
Identifiable org chart, public
Divisions
 Diffused accountability
Integrated hardware/software
Consumer focus
Closed system
Mobile
Design/appearance critical
Pirates/Anti-establishment
Specialization/network
No org chart, private
Compulsory collaboration within
team
 Directly responsible individuals
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Overview: How to Win in Business Model Warfare
AFGHAN WAR
THESIS
Pakistan will sever ties to Taliban, seal border
Taliban will be crushed as an organization
Bin Laden will be quickly killed or captured
Karzai will establish governance down to districts
NATO allies will fight a war
West will be seen as liberators
ANTITHESIS
ISI retains Taliban hedge, Durand Line is porous
Quetta Shura rapidly rebuilds
Bin Laden remains on the run for 10 years
Corrupt client networks and tribal politics sustain a
governance vacuum
NATO allies insist they’re “Peacekeeping” with very
restrictive rules of engagement
West will be seen as occupiers
CLOUD COMPUTING
(Customer Relationship Management)
Business model
elements
Vision
Technology
Competition
and Alliances
Sales
Philanthropic
ANTITHESIS
salesforce.com
Initial Model
THESIS
e.g., Siebel
Create a product
Provide selling tools
Develop an enterprise platform
Dominate the CRM software space
Installed
Lengthy configuration (six to eighteen months)
Complex
Large enterprise users only
Costly upgrades & maintenance fees
Enterprise network-based
Internally-driven development
Interfaces with other applications
Create a market
Create a social enterprise
Develop a cloud platform
Provide best practice sales and marketing processes
On-demand - Software as a Service (SaaS)
Minimal configuration required
Simple to use
Scalable
Utility (upgrade and maintenance by host)
Internet-based
Customer-focused development
Partnerships with other cloud-based service providers
Sales infrastructure in each location
Discounts
Own the software
Maintenance fees
Seat licenses
Discretionary
Initially tele-sales / later evolved to sales teams
No discounts
Pay to use the software
Subscription fees
Subscribers
Built in at the outset
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15
Overview: How to Win in Business Model Warfare
RETAIL BANKING IN KENYA & LATER AFGHANISTAN
Business model
elements
THESIS
e.g., Traditional banks (2006)
ANTITHESIS
e.g., M-PESA (2006-2008)
Speed
Urban middle class (less than 13% of
Kenyan households)
Very slow
Very poor and rural (BOP) Bottom Of
Pyramid
Very fast
Revenue Model
Interest bearing accounts / fees
No interest / flat transaction fee
Regulation
Highly regulated & bureaucratic
750 branches & 3 million bank
accounts
Cash or check
Urban branches
Safe and guards
Many
Minimal regulation & streamlined
Customers
Transaction
Tokens
Locations
Security
Middlemen
5,000 outlets / 12 million subscribers
Cell credits / mobile money
Everywhere
Data encryption / SIM Cards
None
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16
Overview: How to Win in Business Model Warfare
Business
Model
Element
1997
Big Pharma Thesis
1997
Generic Antithesis
Watson
 Emerging markets
 Prevention (e.g., vaccines)
 Personalized healthcare/
rare diseases/niches
 Global austerity reduces drug
funding



Merck
 Developed countries
 Cures
 Mass diseases



 Global growth in drug funding

 Blockbusters
 Patented drugs


 Niche products
 Generics/ branded generics/
OTC


 Internal, closed system (end to
end)
 Chemistry-based

 Partnerships and outsourcing


 Non-chemistry-based (e.g.,
biotech)

Manufacturing
 Batch
 Internal manufacturing


 Continuous
 Partnerships and outsourcing


Sales &
Marketing
 Target providers/ wholesalers/
physicians
 Marketing alliances with
competitors

 Consumers


 Owned distribution channels

 Highly concentrated
 Ongoing consolidation
 Dominated by U.S. and western
European companies
 Integrated R&D, manufacturing
and marketing companies






 Dedicated pharmaceutical
companies
 R&D private sector led

 Fragmented
 Limited number of mergers
 Dominated by emerging
market companies
 Separate, specialized
companies for R&D,
manufacturing and
marketing
 Pharma business units of
larger conglomerates
 R&D public sector led
Markets
Products
Processes
R&D
Industry
Structure


© Copyright 2012 Funston Advisory Services LLC. All rights reserved
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



17
Overview: How to Win in Business Model Warfare
structure affect their ability to develop and
execute a transformation strategy, how did they
communicate and maintain alignment and
support?
PART 3 – LEADING SUSTAINABLE
ALPHA CREATION
The skill. Is there a set of skills and tools that can
be replicated to enable companies to create and
sustain Alpha? If so, what are the challenges to be
faced? How are they different for established
market leaders vs. new entrants? What is the risk
of action vs. the risk of inaction? Can companies
more systemically and deliberately innovate to
create value? We will show they can.
Part 3 will describe the challenges, successes and
failures and lessons learned in “Leading
Sustainable Alpha Creation.” It will address such
factors as the role of personality vs. process, the
differences between private vs. publicly held
companies, majority vs. minority control, and the
engagement and alignment of internal staff and
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
Act Different
the risk of inertia and
inaction
With the right ideas, will and skill,
the forces of creative destruction can be
harnessed prospectively. In this part of the book,
we will explore the conditions necessary to lead
Alpha creation by thinking and acting differently:
The idea. What are the kinds of leaders who are
willing to “Think Different” – to find out what they
don’t know, to think the unthinkable, and
challenge conventional wisdom? We examine who
has done this prospectively and whether it was
deliberate or intuitive.
The will. What does it take to transform the
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
from their boards, how did their ownership
systematically explore, plan and
exploit disruptive innovation? Is it
solely about disruptive
technologies or it also about the
business model in a holistic sense
and the style of leadership?
Some might think that even if there were such a
systematic approach to “think different”, it would,
by its nature, stifle the creative process. To the
contrary, there is a method that can be
systematically applied to help the 21st century
enterprise significantly improve its ability to “think
different”.
Alpha Leaders must overcome
inertia
Every successful organization must learn to deal
with inertia. Newton’s First Law of Motion defines
and quantifies inertia as “the resistance of a body
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18
Overview: How to Win in Business Model Warfare
to changes in its momentum. Because of inertia, a
body at rest remains at rest, and a body in motion
continues moving in a straight line and at a
constant speed, unless a force is applied to it.
Inside an organization that force is called
leadership.
market."xiii Apparently, TI’s goal was to stimulate
the use of transistors and bring national attention
to their potential commercial uses but not to build
radios, so it abandoned the market. At the time,
the industry leaders in vacuum tube radios prided
themselves on the quality of the engineering of
their super heterodyne radios and considered
transistors to be “beneath their dignity”.xiv
The concept of inertia can be meaningfully applied
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
succumbed to inertia. In 2001,
continues moving in a
individuals. xii Instead, Sony
when Apple was able to get the
adopted the motto “One Person,
straight line and at a
Mac OS X operating on a PC, Steve
One Radio” and innovative history
Jobs apparently flew to meet the
constant speed, unless a
was made.
President of Sony to discuss the
force is applied to it.” In
From a bombed out department
breakthrough and offer the
an organization that
store in post-war Tokyo, he and
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
Beginning in 2005 and despite his best efforts,
Engineering Associates.
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
The more successful a corporation becomes, the
other mass production consumer devices. TI’ers
greater becomes its mass and velocity and the
can justly be proud of being the first to produce a
greater its tendency to maintain its current
high-gain transistor at a cost permitting its
trajectory and the greater its resistance to change.
application to the high-volume commercial
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19
Overview: How to Win in Business Model Warfare
Thus even greater force must be applied to
change its direction. Such forces can be externally
caused by competitors’ actions and other market
factors and/or internally by the leadership. The
hardest thing, for any successful organization, is to
change itself while it is still successful. Lawrence
Miller states that those who were once barbarians
and conquerors seem to almost inevitably become
bureaucrats.xvii
introduced. RIM incorrectly assumed that
corporations would demand the higher security
provided by RIM rather than succumb to popular
demand by their personnel for more interactive
devices. The value proposition must be examined
from the point of view of the customer not the
product engineers.
The successful company must develop innovative
discipline if it is to overcome such inertia.
Resistance to change is created by established
Publicly listed entities face greater scrutiny with
assumptions, concepts, values and practices
less willingness on the part of investors to tolerate
including controls which act to maintain the
negative impacts on Earnings per Share. This, for
current course. This also results in missing
example, was a major factor in Iron Mountain’s
fleeting windows of opportunity. They simply
unwillingness to stay the course on its strategy
aren’t perceived as opportunities or threats.
and they jettisoned not only their strategy but
Disruptive innovations can be ignored or by
also their CEO while their privately held
passed by the current Alpha because they
competitor SunGard was able to stay the course.
represent too radical a departure from the current
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
in Egypt”
computing "complete gibberish"
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
to buy Google in its early days because he didn’t
see the business case. Likewise, Blockbuster had
the opportunity to buy Netflix but didn’t. Kodak
delayed the pursuit of digital photography even
though it had developed the core technology in
1975 because it didn’t want to cannibalize the
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.
major business model changes.
In this part, we will address how successful
companies create viable business options, timing,
transition and garnering support from their key
stakeholders. This will include a discussion of
enabling and constraining forces for successful
business model strategic change.
Challengers must develop discipline
This also happened to RIM which dominated the
enterprise PDA market until the iPhone was
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20
Overview: How to Win in Business Model Warfare
Successful challengers attack market weakness
and the incumbent’s lack of agility. The absence
of emotional and financial investment and
commitment in conventional assumptions,
concepts, values, practices and controls helps
challengers create new business models. Yet
simultaneously this same lack threatens their
survival. Challengers are typically both more agile
to seize opportunities and yet they are often more
vulnerable to adversity because they lack
resilience and discipline.
The faster an enterprise outgrows its
infrastructure, the faster it is likely to fail. New
companies (even ones with big sales) need to
develop business and financial controls with
professional management. Although this book is
not about how to manage a start-up, it should
provide a useful way for challengers to analyze
conventional business model wisdom.
Be Different Profitably
Being different is not an end in itself. The goal is
to be different profitably. Each of the case studies
in Part 2 will describe how a systematic approach
to challenging the conventional wisdom creates
significant opportunities for competitive
advantage and profitability. All business models
eventually become obsolete. The models that
displace them become the new Alpha creators by
successfully harnessing the forces of creative
destruction at that point in time.
With the right ideas, will and skill, the
forces of creative destruction can be
harnessed prospectively and profitably.
For further Information, contact:
Rick Funston
Managing Partner
Funston Advisory Services LLC
[email protected]
313-919-3014
Randy Miller
Principal
Funston Advisory Services LLC
[email protected]
248-250-1111
Mark Barrott
Principal
Funston Advisory Services LLC
[email protected]
313-919-5844
© Copyright 2012 Funston Advisory Services LLC. All rights reserved
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21
Overview: 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
xiv
internal Texas Instruments Information Bulletin, October 18, 1954
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
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