2. November 2019
Michal Dallos (8 articles)
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Business Model Evolution

Are Business Models Evolving?

Have you noticed that some successful companies suddenly “disappeared” after decades of market dominance? The video rental company Blockbuster no longer exists, but there is Netflix; instead of Nokia, came Apple; and the toys from Toys “R” Us are now sold at Amazon. The list is already long and is getting longer. Sooner or later, this list will include companies from almost all sectors that are currently part and parcel of the portfolios of numerous investors!

The pace of the wheel seems to be accelerating. According to the latest study by Innosight, the average S&P500 listing period of companies has been shortened from 33 years (1967) to 24 years (2016). A further reduction to 12 years in 2027 is predicted. 

What is the reason for this unexpected demise of companies?

It is not due to a lack of product innovation or to inefficient processes. Rather, the answer usually lies at the strategic level, in the outdated business model, i.e. in the strategy of how to target which group of customers with which products while making money.

Business models are subject to evolution. They reflect the combination of technical possibilities and socio-political expectations of the respective period. We are currently living in the age of one of the greatest evolutionary changes in business models: the age of customer-centric business models. But first things first.

1900 to 1950: Mass Production Business Models

The introduction of mass production gave manufacturers a significant competitive advantage. This in turn was only made possible by technical innovations and by a high degree of standardization. Standardization took place not only at the technological level, but especially in work processes (e.g. assembly line work) and product design.

The first consistent application of these concepts was at the Ford Motor Company between 1910 and 1920, with the result that the sales price of the Ford-T model was reduced from the original $900 (1910, equivalent to approx. $22,500 today) to $395 (1920, equivalent to approx. $4,800 today). The car, available only in its iconic black, became the best-selling car of its time with production figures higher than the sum of all competitors together.

Other successful companies of this period were GE (mass production in the energy sector, such as electric lights, generators, motors, etc.), and P&G (industrialization of soap production).

Business Model Perspective on ‘Mass Production BM’

The most successful business models of that period were based on ownership of the mass production facilities and on gaining leadership by technological innovation. Whoever owned the factory automatically owned the market. The added value for customers were standardized products affordable for a broad population. One of the biggest driving forces behind this development was the product shortage (seller’s market) and inefficiency and expense of manual production.

1950-1990: Distribution & Marketing Business Models

The ‘age of distribution’ as a combination of mass production and global transport systems enabled a new phase of business model evolution. In addition to standardized production, mastery of logistics was now an important factor in new business strategies.

The economic boom of the post-war years increased the purchasing power of the consumers. Low prices and the customer-targeted brand awareness further incentivized them to buy. Most markets in this period were still sellers’ markets. Technical innovation remained an important component of competitive advantage.

Take, for instance, Walmart and Toyota. These companies combined good product quality at narrow profit margins with huge volumes, thus achieving unrivalled profitability. 

Business model perspective on ‘Distribution & Marketing BM’

From the perspective of the business model, or customer value proposition, the price advantage of low-cost, outsourced production was passed on to customers. By separating production facilities from the point of sale across continents, the mastery of distribution systems became one of the most important aspects of business model disruption.

1990-2010: Internet & E-Commerce business models

The age of information and Internet networks in the 1990s and around the millennium made it possible to further increase efficiency through computer-aided data processing, but also to create completely new business models. The advantage in information complemented the advantages in efficient production and distribution.

Internet networking and the availability of affordable hardware created many successful information-centric companies: Microsoft, Google, Ebay, Amazon, etc. Another category of successful companies enabled the rapid exchange of data: cable companies and mobile operators.

Business Model Perspective on ‘Internet & E-Commerce BM’

Dominant business models of the time were characterized by mastery of the flow of information, which led to optimization along the entire value chain. Thanks to the internet, it was now possible for the first time to develop scalable business models for a global market. New monetization concepts were developed, such as freemium at Skype (free basic product combined with a paid full product) or purely advertising-financed companies such as Google and later Facebook.

In many industries, the seller’s market was beginning to turn into a buyer’s market, which required even higher process efficiency. Intercontinental supply chains, efficient processes in global corporations and technological innovation were being driven to perfection in this period.

2010-(2025?): Customer-Centric Business Models

Most companies have always been more or less customer-oriented. Customer-centric business models are taking a crucial step further: they place the customer at the center of all corporate activities. It is not a simple “the customer is always right”, but rather an empowerment and elevation of the customer over all traditional strengths of a company, such as production, logistics, or supplier relationships. Product innovation is replaced by real-time knowledge of the customer’s needs; price-optimized logistics chains are replaced by customer journeys and the appropriate sales channels; and brand-oriented advertising is replaced by interactive marketing and customer evaluations. More and more resources are being directed towards maintaining relations with and providing information about the customer.

Today the customer is more powerful than ever! Equipped with the knowledge of all product features, (worldwide) availability and prices, as well as an oversupply of comparable products (buyer’s market), they choose at their discretion, but neither randomly nor (exclusively) rationally. The product that best meets the customer’s needs and best addresses the customer on his or her customer journey gets the deal. The unconditional customer centricity of the company, to which all processes must be subordinated, is today the strategic key to success.

Business Model Perspective on ‘Consumer-Centric BM’

From the business model perspective, the ‘customer obsession’ of companies leads to far-reaching changes. Successful companies often unbundle their business models (unbundling) in order to focus better on the required customer benefits. Example: Mobile phone providers increasingly separate the technical network operation (infrastructure) from the customer-end business (customer relationship) in order to focus better on the respective segment. In addition, mobile operators are opening up their networks to a large number of developers who create exciting and useful apps (product innovation).

(2025 – ?) Data-Driven Predictive Business Models

My personal ‘educated guess’ of the future of the business model evolution is based on two expectations:

  • Shift from instant to (near future) predictive technologies based in AI / cognitive technologies
  • Enhancement of the consumer analytics by psychometric methods

Both key expectations lead to an even closer relation between companies and their clients, allowing them to ‘trap’ the customers in a predictive ‘pleasure bubble’. Current successes in the AI development combined with large-scale applications of psychometrics (example: Cambridge Analytica) give us the first glimpse of the possibilities. Additional information can be found in the article: What is a Digital Business Model?

The key to success from the companies’ point of view will be the ownership of a broad data set on every consumer and the successful application of the above-mentioned technologies. The required data sets may not be limited to the direct business relation, but need to be much more extensive. By this requirement, data-hungry platform companies will have a substantial advantage over production or single-service companies.