Sunday, May 22, 2011

Business Models Drive Success -- What about Risks?

Among the Week 2 readings for Strategy Development (Summer 2011, Mini-5), I got the most from “Reinventing Your Business Model” by Johnson, Christensen and Kagermann.

The authors challenged my preconceptions that, to be successful, a new company must introduce some startling new piece of technology. Not so. An excellent business model is paramount given the examples of Apple, Southwest, Ratan Tata and others. Who knew Apple wasn't really the first to create a digital music player? What really hit home was the idea that a customer value proposition must be precision, it must nail “the customer job to be done – and nothing else.”To me, that's the essence of operating a business in an efficient manner. Hitting objectives without the waste.

The concept of developing a crack-jack business model to sell a familiar project reminded me of a New York Times story about Warby Parker, a NYC-based start-up that bucked the traditional idea that people won’t buy certain things online -- things like prescription eyeglasses, which is what Warby Parker sells. They make it work by allowing shoppers to upload photos of themselves and then virtually try on a pair of frames. Voila, the company sold 20,000 frames in its first year, according to the story. To me, it’s an example of what Johnson and co-authors were writing about. Warby Parker took a risk in creating a model that defied a traditional idea and seized an enormous potential market of Internet-savvy eyeglass-wearers.

Here’s the link: http://www.nytimes.com/2011/01/17/technology/17glasses.html

“Reinventing” raises some questions for me, however. At one point, it encourages caution, and the next it preaches a certain level of risk-taking, particularly through the anecdote about the creation of Xiameter, which is doing quite well: http://www.mlive.com/business/mid-michigan/index.ssf/2010/07/dow_cornings_xiameter_continue.html.

The cautionary note seems to be, "companies should not pursue a business model reinvention unless they are confident that the opportunity is large enough to warrant the effort.” If a company is truly confident in gross profit figures of a new venture ahead of time, where’s the risk? What’s large enough? Why such a blanket prohibition? It was one sour note in an otherwise excellent piece. I also think it's idealistic to believe that a company would be able to answer yes to the four questions it poses before starting a new business model. There's going to be a maybe or a no in there -- and I'm wondering if that's where the CEO really earns his or her pay in deciding what to nix and what to green light.

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