For example, a traditional food supermarket that sells vegetables, fruits and dairy products has a particular business model that is based on finding good retail locations with reasonable rents, staffing them with service-oriented employees and building a supply chain that makes fresh produce available to customers at competitive prices. The same products could be delivered to customers through an online grocery, and while the customer is getting the products, the organisational architecture is significantly different from that of traditional retail. The customers' experience is also starkly different from the way the company communicates with them, to the way they place their orders, to the manner in which the products are delivered.
The implication of these differences is that the organisational competencies required for success in the two cases are also quite different. An organisation that is good at traditional retail will not typically be good at online retail. Some researchers go so far as to say that it is counterproductive for an organisation to even try to have two very different business models under the same roof; an oft-cited example is the difficulties faced by the mainstream airlines in developing good low-cost models to compete with Ryanair, Air Asia and EasyJet.
A successful business model is one where the organisation adds value to all stakeholders, both external, such as the customer, the suppliers and the investors, as well as internal (the employees). It also enables the firm to capture value for itself. The internal and external linkages determine the architecture, whereas value creation and value capture determine the conditions for success.
An innovative business model typically changes the economics of the business in fundamental ways. For example, one researcher studied key indicators of online book retailer Amazon in 1998, about four years after it had been founded, and compared them to those of Barnes & Noble, and Borders, two traditional book retailers. He showed that Amazon carried 23 days' inventory versus approximately 150 days for the other two, and revenues per employee at Amazon were nearly three times those of the other two. Overheads were significantly lower at Amazon as it did not need to pay rent and personnel costs associated with hundreds of retail locations. Fulfillment costs, on the other hand, were higher at Amazon as it was delivering the books to customers' doorsteps.
The online book retail business model has been able to unlock such massive value through its much greater efficiency, and is gradually driving traditional book retailers out of business. For example, the Borders Group, which at one time had nearly 700 stores under the Borders and Walden-books brands and nearly 20,000 employees, went into liquidation in 2011. Traditional format bookstores are struggling in India also, as customers get more and more attracted to shopping for books online.
Over the years, I have been studying innovative private sector business models in the delivery of health-care services in India. There are a number of private sector organisations that have pioneered new business models based primarily on organisational innovations. If we look at eye care, where India has attained outcomes that are comparable to those of the developed world, we have a number of different models.
Aravind Eye Hospitals has large hospitals in Madurai, Coimbatore, Pondicherry and Tirunelveli, and a few smaller ones across the smaller towns of Tamil Nadu. It drives patient flow to these hospitals through over 1,500 eye camps it conducts annually.
LV Prasad Eye Institute (LVPEI), on the other hand, has a pyramid model with a super-specialty centre in Hyderabad, three tertiary centres in Vijayawada, Visakhapatnam and Bhubaneswar, 18 secondary care centres (nine owned and nine partnered) and 82 primary care centres. The bulk of LVPEI's infrastructure is in Andhra Pradesh and Telangana.
Vasan Eye Care has developed a highly scalable model that has allowed them to grow to over 170 eye care centres all over India. Vasan has received investments from Sequoia Capital and the Government of Singapore Investment Corporation.
Gurgaon-based Eye-Q has grown to 30 eye care hospitals in Tier-II and Tier-III towns mainly in northern India. In terms of their operations, these organisations are dramatically more efficient than their public sector counterparts, which allows them to achieve the objectives of affordability, access and quality.
Since business models are systems of activities encompassing both internal and external linkages, they are harder to innovate because every component of the system needs to be consistent with each other. At the same time, once an organisation has successfully innovated a business model, it is much harder for competitors to copy it.
CEOs have begun to realise that innovations that take place inside a research laboratory or in the product development group are but a small fraction of the innovations that their organisations need to focus on. Innovations need to be generated across the organisation. One key mechanism that can pave the way for high growth and sustained competitive advantage is business model innovation.
(S. Ramakrishna Velamuri is Professor of Entrepreneurship and Chair - Strategy & Entrepreneurship Department, China Europe International Business School)