New Business Models In Emerging Markets – Abstract A business model that can connect new technology to the needs of an emerging market is the key to transforming the industry. When Apple combined the iPod with iTunes, it revolutionized the audio device market. But most attempts to introduce a new model fail. The authors conducted an in-depth analysis of 40 companies that have introduced new business models in various industries, and here they present the main results of their research. They looked for repeated features in the models and found six: customization, closed-loop process, resource sharing, usage-based pricing, collaborative ecosystem, and agile and adaptive organization. No model has shown them all, but having more traits often correlates with a greater likelihood of successful transformation. (The Uber taxi service can pick up five out of six.) Companies considering changing their business model or entering the industry with a new model can assess themselves against six features to assess the likelihood of transformation.
No new technology can change an industry if its business model doesn’t match the needs of an emerging market. How can you tell if a model will succeed?
New Business Models In Emerging Markets
The authors conducted an in-depth analysis of 40 companies that have introduced new business models in various industries. Some have transformed their industries; others looked promising but ultimately failed.
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Transformational business models typically include three or more of the following: (1) customization, (2) closed-loop process, (3) resource sharing, (4) usage-based pricing, (5) collaborative ecosystem, and (6) agile and adaptive organization.
We often associate industry transformation with the adoption of new technology. While new technologies are often important drivers, they have never changed the industry by themselves. What makes this transformation possible is a business model that can match new technology with a need in an emerging market.
MP3 technology is a classic case. The first MP3 devices represented an order of magnitude increase in capacity over magnetic tapes and CDs: users could carry thousands of songs on a small device. But MP3 players revolutionized the audio device market only after Apple combined the iPod with iTunes in a new business model, rapidly shifting the sale of recorded music from the physical to the virtual world.
What exactly allows a business model to exploit the potential of technology? To answer this question, we conducted an in-depth analysis of 40 companies that have introduced new business models in various industries. Some have managed to radically change their industries; others looked promising but ultimately failed. In this article, we present the main findings of our research and suggest how they can help innovators transform industries.
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Definitions of a “business model” vary, but most people would agree that it describes how a company creates and captures value. The features of the model define the value proposition for the customer and the pricing mechanism, indicate how the company will organize itself and with whom it will collaborate to create value, and determine how it will structure its supply chain. Essentially, a business model is a system whose different characteristics work together, often in complex ways, to determine the success of a business.
In every industry, a dominant business model emerges over time. In the absence of market distortions, the model will reflect the most efficient way to allocate and organize resources. Most attempts to introduce a new model fail, but sometimes the dominant model is overthrown, usually through the use of new technology. If new players use this model to displace existing ones, or if competitors adopt it, then the industry has been transformed.
Consider Airbnb, which has changed the hospitality industry. Founded in 2008, the company has experienced phenomenal growth: it now has more rooms than InterContinental Hotels or Hilton Worldwide. At the time of writing, Airbnb accounts for 19.5% of New York’s hotel room supply and operates in 192 countries, where it accounts for 5.4% of room supply (up from 3.6% in 2015).
The founders of Airbnb realized that the technology of the platform enabled the creation of a completely new business model that challenged the traditional economics of the hospitality business. Unlike conventional hotel chains, Airbnb does not own or manage the property; allows users to rent any living space (from a sofa to a mansion) through an online platform that connects people looking for accommodation with owners who want to share a room or house. . Airbnb manages the platform and takes a percentage of the rent.
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Because its revenue does not depend on owning or managing physical assets, Airbnb does not need large investments to scale, so it can offer lower prices (usually 30% lower than hotels). Also, because owners are responsible for managing and maintaining the property and the services they may offer, the risks associated with Airbnb (not to mention operating costs) are much lower than with traditional hotels. On the customer side, the Airbnb model is redefining the value proposition by offering a more personal and less expensive service.
Before platform technology came along, there was no reason to change the hospitality industry in a significant way. However, after its introduction, the dominant business model became vulnerable to attacks from anyone who could use this technology to create a more attractive offer for customers. The new business model serves as an interface between the two
We selected 40 new business models that we analyzed based on the number of mentions in high-quality, widespread business press. Everyone seemed to have
Transform their industries, but only part of the group has succeeded. We looked for repeated features in the models and found six. No company has demonstrated all of them, but as we shall see, more of these characteristics correlate with a greater likelihood of transformational success.
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Many new models offer products or services that are better suited than the dominant models to the individual and immediate needs of customers. Companies often use technology to achieve this at competitive prices.
In many models, the linear process of consumption (where products are made, used and then discarded) is replaced by a closed loop where used products are recycled. This change lowers overall resource costs.
Some innovations succeed because they enable the sharing of expensive resources: Airbnb allows homeowners to share their resources with travelers, and Uber makes resources available to car owners. Sometimes resources can be shared across the supply chain. Sharing is often done through two-way online marketplaces that unlock value for both parties: I get paid to rent a spare room, and you get a cheaper and perhaps nicer place to stay. Sharing also lowers barriers to entry in many industries as the participant does not need to own the asset; can only act as an intermediary.
Some models charge customers when they use a product or service, rather than requiring them to purchase directly. Customers benefit because they incur costs only when offers create value; the company benefits because the number of customers is likely to increase.
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Some innovations are successful because new technology improves collaboration with supply chain partners and helps better allocate business risk, enabling cost reductions.
Innovators sometimes use technology to move away from traditional, hierarchical decision-making models to make decisions that better reflect the needs of the market and allow them to adapt to changes in those needs in real time. The result is often greater value for the customer at lower costs for the company.
Each feature on this list is linked to long-term trends in both technology and demand. When it comes to technology, one of the trends is the development of sensors that allow for cheaper and wider data collection. Another is that big data, AI, and machine learning enable companies to turn massive amounts of unstructured data into rules and decisions. Third, connected devices (Internet of Things) and cloud technology enable decentralized and widespread manipulation and analysis of data. Fourth, the development of manufacturing (e.g. nanotechnology and 3D printing) creates more opportunities for distributed, small-scale production.
On the market side, while the steady progress of developing countries has led to a steady increase in demand worldwide, this is complicated by the greater diversity of customer preferences (both between and within countries). Higher input prices (despite commodity price cuts in 2015) and tighter regulations (especially in terms of environmental impact and doing business) further increase the challenges for companies seeking to gain market share.
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The six features represent potential solutions combining market demand and technological opportunities. For example, greater personalization of the value proposition is a response to the fragmentation of consumer preferences and the resulting demand for more differentiated offerings. This personalization was made possible by sensors that collect data from connected devices via the cloud; data is analyzed using big data solutions and transformed into services – such as recommendations and alerts – that are different for each user.
Theoretically, the more of the six features a new business model has, the greater its potential to transform the industry. We tested this hypothesis by analyzing how many features each of the 40 new models has
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