ALEKSEI BEREZNOIBusiness Model Innovation in CorporateCo.docx

ALEKSEI BEREZNOI
Business Model Innovation in Corporate
Competitive Strategy
In this analysis of business model innovation, a key competitive
instrument
for major corporations, the author explores the concept of the
business
model, identifies the features of innovative business models
being used as
competitive tools in today’s volatile markets, and describes the
challenges
involved in various approaches to implementing innovation.
Innovation’s
role as a key driver of game-changing industry shifts is
examined, and it is
concluded that business model development and implementation
are
becoming a strategic imperative for most global players.
Keywords: Business innovation, business model, competitive
strategy,
corporate organization, global competition, large corporations

Jel Classification: D21, F23, L20
Since the beginning of the twenty-first century, change has
become the
norm in almost all spheres of economic life, and the pace and
scale of
this change have only grown. It can be stated with certainty that
future
economic development will see faster and more profound shifts.
14
English translation q Taylor & Francis Group, LLC, from the
Russian text q 2014
NP “Voprosy ekonomiki.” “Innovatsionnye biznes-modeli v
konkurentnoi strategii
krupnykh korporatsii,” Voprosy ekonomiki, no. 9, 2014, pp. 65–
81.
Aleksei Bereznoi is a Doctor of Economic Sciences and director
of the Center for
Industrial Market Studies and Business Strategies at the
Institute of Statistical
Studies and Knowledge Economics, National Research
University–Higher School
of Economics in Moscow.
Translated by Nora Favorov.
Problems of Economic Transition, vol. 57, no. 8, December
2014, pp. 14–33.
q 2014 Taylor & Francis Group, LLC
ISSN: 1061-1991 (print)/ISSN 1557-931X (online)

DOI: 10.1080/10611991.2014.1042313
http://dx.doi.org/10.1080/10611991.2014.1042313
This unprecedented pace and scale of change has highlighted
the
importance of a particularly powerful tool: the innovative
business
model. Not so long ago a major corporation that had
successfully
established itself within a particular market could count on
maintaining
its position long term by steadily improving an essentially
unchanged
way of interacting with its customers. Today, however, this is
rarely
enough. In almost any industry, no matter how mature a
company is, it is
likely to be challenged by competitors introducing new business
models
that radically change the “rules of the game.” Furthermore,
unlike in the
case of innovative products and manufacturing methods, this is
not
necessarily a matter of high technology. In business innovation,

the
decisive role is played not by scientific discovery, but by an
entrepreneurial idea, by the identification of a new market need
and
the skillful joining of ways to satisfy this need with effective
demand
based on nonstandard ways and means of creating and
delivering
consumer value to the target market.
Under current conditions, where even the most successful
business
models are relatively short-lived, the introduction of business
innovation is becoming an important tool in dominating markets
and
defending them against competitors for the vast majority of
participants
in global competition. Innovative business models were behind
the past
decades’ most remarkable corporate ascents: Apple, Walmart,
Amazon,
Cisco, FedEx, and Virgin, to name a few. Corporations that
have
become business innovation leaders become global leaders in

their
industries. From this standpoint, the experience of developing
and
introducing new business models is of clear interest for Russian
companies as they increasingly enter the competitive fray of
global
markets.
The features of business models as competitive tools
Attempts to identify the features of business innovation that
serves as a
competitive weapon for large corporations inevitably leads to
the task of
defining the very concept of the business model. Although this
concept
is neither new nor rare within the literature of economics and
business, it
remains a subject of lively debate (Afuah, 2014; Johnson,
Christensen,
and Kagerman, 2008; Kaplan, 2012; Magretta, 2002;
Osterwalder,
2004; Osterwalder and Pigneur, 2010; Shafer, Smith, and
Linder, 2005;
Teece, 2010).

DECEMBER 2014 15
One reason for the lack of a clear definition of business models
and an
insufficient understanding of the concept overall is its
interdisciplinary
nature. “The economics literature has failed to even flag the
importance
of the phenomenon, in part because of an implicit assumption
that
markets are perfect or very nearly so. The strategy and
organizations
literature has done little better. Like other interdisciplinary
topics,
business models are frequently mentioned but rarely analyzed:
therefore, they are often poorly understood” (Teece, 2010, p.
192).
Without getting into the details of the debate over defining
business
models (a topic in its own right), we should note that in our
opinion this
concept amounts to more than an arbitrarily constructed
understanding of

the basic mechanism through which a particular company
operates (such a
broad interpretation essentially deprives the concept of any
meaning). The
concept incorporates a number of specific business
characteristics that are
fundamental to any company: (1) a means of creating consumer
value and
delivering it to a target group of consumers; (2) a means of
generating
profits; and (3) a means of using existing resources and
processes to
promote the stable interaction of mechanisms for creating
consumer value
and generating profit as well as ensuring enduring competitive
advantages.
These fundamental characteristics, which as a system
essentially define the
entire“logicofabusiness,”comprisethebusinessmodeloutofwhichg
row
other, secondary elements of the architecture of the enterprise
as a party to
market relationships: competitive tools and possible models of
market

behavior, the organization of interactions with suppliers (the
supply chain
model), the specific organizational structure and organization of
business
processes (the operational model), and so on.
What distinguishes innovative business models (which are
essentially
the systematic result of developing a set of business
innovations) from
traditional weapons in the competitive arsenal? Large
corporations use
three basic elements of the tried-and-true methods to increase
sales in a
competitive market: lower prices, the gradual improvement of
existing
products, or the release of new products. All of these levers can
provide
(and continue to provide) measurable results from the
standpoint of
increasing sales. However, when large corporations have been
operating
in their industries for many years, these approaches inevitably
begin to

yield diminishing returns.
The point of diminishing return comes particularly quickly in
the case
of lowering prices (these days, most often through discounts
and sales),
which is considered the simplest way to boost sales. However,
many
16 PROBLEMS OF ECONOMIC TRANSITION
companies that lower prices in the hope of a quick yield have
learned
that a straightforward price reduction (or the large-scale use of
various
sorts of discounts) without making the right changes to other
elements of
the business model can quickly lead to reduced profitability.
This is a
trap into which major department stores have often fallen after
they
turned to large-scale sales: at first they saw a sharp increase in
sales
followed by just as sharp a fall in their sales margin.
A solution was found by the pioneers of discount retailing in the

United
States, which back in the 1950s began to apply the logic of the
supermarket
to the sale of clothing, appliances, and other mass consumption
items. This
new business model presumed a number of systemic departures
from the
traditional department store: a sharp reduction in the number of
sales
personnel; maximum freedom and self-service for shoppers; a
redesign of
the sales environment to accommodate large numbers of
shoppers; a move
towardpurelyfunctionaldesignofsalesfloors(doingawaywithevery
thing
superfluous); and changes to the formula for selecting suppliers
that
compelled them to offer generous terms. As Joan Magretta has
noted, only
after all these elements of the discount business model had been
put to
effective use could discounters “offer low prices and still make
money”
(Magretta, 2002, p. 91).

In the case of gradual improvements to existing products
already
familiar to the market, the ability to apply this competitive
method as a
means of increasing sales is exhausted all the more quickly in
that
consumer value is generated not by the product as such, but by
the
results associated with its use. Companies that continue to
stubbornly
focus on improving the product itself can limit their growth
potential,
make investments in innovation that are unlikely to be
adequately
appreciated by the customer, and, in the end, wind up squeezed
out of
the market by more farsighted competitors. A striking example
of this is
Kodak, which recently entered bankruptcy after a history dating
back to
the late nineteenth century, when it essentially founded and
went on to
dominate the photographic technology industry.
1

Beginning with the dawn of the current century, the rapid
spread of
digital photography and social networks eliminated the need for
the
printing of photographs on a large scale, leading a vast business
empire
into financial ruin in 2013. An ironic twist in all this is that the
digital
photograph was invented by Kodak engineers (back in 1975).
But this
invention was obviously not integrated into the company’s
business
model, which was built around the sale of relatively inexpensive
DECEMBER 2014 17
cameras that generated massive sales of film and services to
develop and
print photographs using an extensive network of Kodak
photography
shops throughout the world.
For many years, the company’s management was absolutely
certain of

the durability of this model and concentrated on improving their
cameras
and increasing the quality of their film. They made a classic
mistake:
focusing on improving the properties of already available goods
and
services and ignoring new business models that would enable
radical
industry shifts. Locked into their traditional business model,
Kodak
essentially lost its connection to the end user, for whom film
and printed
photographs per se were not as important as opportunities to
capture
memorable moments in their lives and share them with friends
and family
(which in our digital age the Internet and social networks offer
on an
unprecedented scale). “Kodak’s business model,” according to
an article
in Forbes, “was to make its money selling film, and it made a
mint that
way. Digital photography didn’t fit that model so Kodak buried
its head in

the sand and ignored the coming tsunami of new technology.
When film
went from ‘essential’ to ‘old fashioned’ the company never
recovered.”
2
When it comes to the release of fundamentally new products,
this
classical method of competitive struggle offers greater market
advantages than the usual reduction of prices or improvements
to
products already being sold. However in the current era of rapid
and
unpredictable change, even this method, in its traditional
application,
offers no guarantee of stable long-term growth. The early
victories of
Apple—perhaps the most successful corporation of the early
twenty-
first century—illustrates this point.
In the late 1990s, Apple was a niche player in the personal
computer
market, and it was losing ground to dynamic competitors, old
and new
alike. But in 2001, with the release of a new product—the iPod

digital
MP3 player—the situation radically changed. In the course of
just three
years of sales, a huge, essentially global market worth $10
billion
(approximately half of all Apple sales) was created that paved
the way
for other best sellers: the iPhone smartphone and iPad tablet.
This story
was covered in many business publications, but one aspect of
Apple’s
success went largely unremarked: it was not the first company
to release
a digital music player on the market. Diamond Multimedia had
begun
selling an analogous product, the Rio, in 1998, and in 2000 the
Cabo 64
digital player was released by the Best Data company. Both
competing
devices were excellent and considered very stylish by their
youthful

target audience. Nevertheless, the iPod won, and the main
reason for this
was not the product’s unique features, but the innovative
business model
that Apple was able to design and introduce in record time.
Apple’s main achievement was the creation of a unique
combination of
software, the device itself, and a service allowing consumers to
inexpensively, easily, and legally download digital music from
the
Internet. The sale of the inexpensive (and essentially nonprofit
generating)
iTunes software was combined with the sale of the high-margin
iPod
device to yield excellent profitability for the business model
overall.
3
The Apple story strikingly illustrates the main advantages of the
innovative business model over traditional competitive tools.
Unlike
classical methods that relied on innovation in one or two areas
of a
corporation’s economic mechanism (such as price or
technology), the

introduction of new business models inevitably brings essential
changes
to most of its elements, including the choice of the potential
buyer’s
target need, the mechanism for generating profits, and the
means of
reliably combining the two. These numerous innovations
provide
multiple “layers of protection” from attempts by competitors to
copy a
successful business model.
Furthermore, since such innovations are part of an integrated
business
model, by definition they are coordinated with one another,
which sets
up a multilayered defensive system against competitors,
substantially
improves the competitive durability of innovative business
models, and
extends the time over which “the cream can be skimmed” in the
form of
elevated profits. It is hardly surprising that analysis of a
database created

by global management consulting firm BCG (in collaboration
with
Business Week) of the most innovative companies of the year
showed
that companies that had introduced innovative business models
generated the greatest return for shareholders compared with
competitors who limited their innovation to the introduction of
new
products or processes.
4
Furthermore, the success of business model
innovators proved to be more enduring: even ten years out they
continued to lead their competitors by a number of important
measures.
The main types of innovation and problems in introducing IT
Since every successful business model is unique, it is hard to
identify
a standard algorithm for “correctly” developing prospective
business
innovations. It is, however, possible to identify some of the
main
DECEMBER 2014 19

pathways of change that have already brought success to today’s
business model innovators in the marketplace.
The first of these pathways involves rethinking ways to satisfy
the
target need underlying a given industry’s dominant traditional
business
model (including rethinking just what the target group of
consumers
actually needs). The result of this rethinking could be, for
example, a
reorientation of the company’s business model from making
products to
providing services or achieving certain results important to
targeted
consumers. For example, Hilti (based in Liechtenstein), facing
intensifying competitive pressure from Asia (especially China),
radically changed its business model, shifting from the sale of
products
to a tool management service for contractors.
After years of working with construction firms in a variety of
countries, Hilti had a good understanding of its clients’ power
tool needs

and the problems they faced. First among them was the need to
purchase
a wide array of tools in order to have the right tools for every
construction job, a huge expense, especially for start-ups.
Second, the
entire fleet of power equipment had to be constantly inspected
and
managed to ensure that it is kept in good working condition and
in the
right place at the right time. Third, builders were often forced
to buy
exceptionally expensive tools that are needed only rarely.
Under Hilti’s new business model, the company does a more
effective
job of satisfying its clients’ need for state-of-the art power
tools. The
company does this by leasing power tools rather than selling
them.
Furthermore, it guarantees clients that they will have as many
tools as
they need when they need them and commits to continually
update the
collection of tools they lease. This new business model

obviously
required that Hilti’s operations be completely restructured and
that it
develop the new competencies involved in managing a huge
fleet of
equipment and transportation logistics as well as in introducing
systems
to manage client power tool fleets, among other challenges. The
cost of
this restructuring has been fully recouped: the company’s client
base has
greatly expanded and revenues have increased.
Sometimes firms are able to accumulate knowledge about their
customers that reveals problems and needs of which the
customers
themselves are not fully aware. For example, the U.S. company
ServiceSource, which specializes in developing cloud
technologies for
major software and computer equipment producers, discovered a
potentially huge but often ignored source of revenue for their
clients: the

renewal of contracts to keep recurring revenue streams flowing.
According
to the company’s estimates, in the U.S. information technology
(IT) sector
alone, software producers lose up to $30 billion annually
because
approximately 50 percent of their clients are not approached by
sales teams
(who are focused on finding new clients) to renew their
contracts.
ServiceSource not only discovered this source of unrealized
revenue
but also developed an appealing way for clients to compensate
them for
their services that convinced them to share a portion of their
revenues.
The company proposed that its services be compensated not
through
standard fees for time spent (the norm for consulting firms), but
based on
results—on a percentage of income generated through the
renewals. The
innovation introduced into ServiceSource’s business model was

not just
an original compensation model. What they essentially offered
was the
outsourcing of a problem in a sensitive area and the sharing of
risks in
exchange for a share of revenues.
As executive vice president Christine Eckert has stated, “We
offer
clients a set of managed services, where we can solve the
problem for
them. We can give them everything they need to outsource this
problem
to us. We take it on and deliver them back a result” (Lindgardt
and
Hendren, 2014, p. 8). ServiceSource’s innovative business
model
achieved rapid market success. During 2007–12, the company’s
compound annual growth rate was almost 30 percent, and by
late 2013
overall client revenue being managed exceeded $14.5 billion.
5
Other types of business innovation that have proved themselves
by

creating successful models in many markets involve changing
the way
consumer value is delivered to target customers and the overall
restructuring of interactions with them. An interesting example
is the
business model of Nespresso, a fast-growing international
company that
is part of the Swiss food giant, Nestlé.
Ever since it first began operation, this company, which was
founded
in 1986 to retail high-quality single-serving coffee, was built
around an
innovative idea that combined seemingly incompatible aspects:
an
individualized approach to each customer marketed on a large
scale.
A major role in this “personalization” was played by the way
the
company packaged and sold the product: the single-serving
coffee,
prepackaged in special capsules, can be brewed using Nespresso
automatic coffee brewing machines (an easy, convenient way to
brew an

excellent beverage), and the huge variety of coffees sold in the
capsules
allows coffee drinkers to find the blend that best suits their
taste.
DECEMBER 2014 21
Most important, Nespresso rejected traditional ways of selling
its
products through an impersonal network of outside distributors
and
created its own two-level sales system featuring, first, a
worldwide
network of Nespresso “boutiques” (327 as of May 2014), and
second,
Internet sales through the Nespresso Club. An important role in
all this
has been played by a global network of call centers offering
around-the-
clock advice on the secrets of espresso making.
This entire system was initially aimed at providing an
individualized
approach based on direct contact with all customers
(approximately 70

percent of company personnel—more than 5,800 people—work
directly
with clients) and involving all customers in the Nespresso Club,
through
which they maintain regular contact via e-mail. By late 2012,
the club
had more than 7 million members worldwide, and since 2000
the
company has maintained an average annual growth rate of
approximately 30 percent. Such a high rate of growth and the
company’s steady dominance of the coffee capsule market (in
2013, it
had a 31 percent share of the global market, valued at $10.8
billion)
attest to a successful choice of business model.
6
A striking example of a radical transformation of a business
model
based on a restructuring of interactions with customers is the
recent
reform undertaken by the management of Home Depot, a leader
in the
U.S. retail building materials market. In the early 1980s, when
Home

Depot first put its business model into practice, it represented a
sort of
revolution, essentially creating a new do-it-yourself-renovation
market
segment.
This model, which involved the creation of huge building-
material
supermarkets and achieved great popularity, primarily among
young
consumers with relatively modest incomes, bet on consumers’
desire to
renovate their homes themselves, without employing the
services of
expensive designers and craftsmen. However, the crisis of
2008–9 saw
plummeting demand for the materials needed to fix up
apartments and
homes and forced Home Depot to seriously rethink its business
model.
The main focus of the resulting changes involved interactions
with
customers.
Putting the new program into practice meant: (1) bringing the

proportion of time sales consultants are in direct contact with
shoppers
to approximately 60 percent of their workday; (2) mobilizing
advanced
communication technologies to provide greater convenience and
a
positive shopping experience (the use of special iPhone apps
allowing
shoppers to virtually see how a renovation would look in their
own
home, to instantaneously and precisely calculate the supplies
they would
need and compare the prices with those of competitors, and to
pay for
and arrange delivery of their purchases through their mobile
apps, etc.);
(3) extending “emotional” contact with customers beyond the
sales floor
(including by collecting comments from dissatisfied customers
from
social networks and applying lessons learned from them and

holding
special seminars led by well-known interior designers and
renovation
professionals, etc.). This new model, which brought relations
with the
target consumer audience to a new level, permitted Home Depot
not
only to significantly improve its customer satisfaction index but
also, in
2009–12, to confidently surpass its closest competitor, Lowe’s,
in terms
of the rate of annual income growth and EBITDA [earnings
before
interest, taxes, depreciation, and amortization].
One important type of innovation that has shaped quite a few
successful business models is the restructuring of income
generation
through the introduction of new cost models and new means of
monetizing use value, and the like. For example, for Qantas, the
top
Australian airline, the urgent restructuring of profit generation
based on
a new cost model proved to be the only solution after the 2001

arrival of
low-cost carriers, led by Virgin Blue (part of Britain’s Virgin
Group),
which quickly captured more than 30 percent of that market.
The low-
cost business model, which applies the same basic idea behind
retail
discounters to air travel, stakes its success on a significant
increase in
passenger volume achieved through a sharp reduction in ticket
prices
made possible by comprehensive cost cutting across a wide
spectrum of
the carrier’s operations. The experience of many of the world’s
airlines
has shown that attempts to apply individual elements of this
model to a
traditional operating scheme usually ends in failure.
Qantas followed a different path. In 2004 it founded a new
company,
Jetstar Airways, which from the start was based on the same
principles
as low-cost airlines and in many regards was more severe and

uncompromising in its cost cutting than its international
competitors.
The new company did not stop at half measures, such as
cramming more
seats into the cabin or reducing free in-flight services. It opted
for the
ultra-low-cost model, taking advantage of every possible
savings:
economizing on airport services (using second-tier airports and
nighttime flights); minimizing ground time (precise planning
and
adherence to schedules and optimizing the time spent on
boarding and
DECEMBER 2014 23
refueling); maintaining a new and uniform fleet of planes
(which enables
savings on fuel and spare parts and the interchangeability of
personnel
and crews); the introduction of a flexible pricing policy (a base
price
plus paid options for all sorts of in-flight services, including
baggage,

food and beverages, access to audio and video entertainment,
etc.);
dispensing with connecting flights (to avoid having to
compensate
passengers who miss a connection due to delays); mandatory
electronic
reservations and check-in (saving on preflight services); and
eliminating
seat assignments for faster boarding.
Consistent application of the new model proved highly
successful for
Jetstar. Foreign low-cost airlines lost out and became niche
players in
the Australian air travel market.
7
Jetstar’s annual income has passed the
US$3 billion mark, and it has become more profitable than its
parent
company, which targets higher paying segments. Furthermore,
Jetstar
became the first airline in the world to successfully apply the
low-cost
business model to transcontinental flights.
In recent years, the importance of the innovative business model

in
achieving competitive success has become increasingly clear to
the
leaders of major corporations. According to American
economists,
more than half of the most successful companies, those included
on
lists such as those of Fortune and Forbes ranking the largest
corporations traded on U.S. stock exchanges during the ten-year
period
beginning in 1997, achieved this specifically because of their
innovative business models.
8
Not surprisingly, a 2005 survey by the
authoritative Economist Intelligence Unit of more than four
thousand
top executives of leading corporations from twenty-three
countries
showed that a majority of them (55 percent) believe that a new
business model is a more important competitive asset than new
products or services (EIU, 2005, p. 9).
Nevertheless, when corporations set their priorities in the area
of

innovation, the development of business models winds up far
from the
top of the list. According to a study by the American
Management
Association, global corporations spend no more than 10 percent
of their
overall investment in innovation on developing new business
models
(Johnson, Christensen, and Kagerman, 2008, p. 52). The
paradox of the
parallel existence of two contradictory trends—a growing
awareness of
the competitive importance of innovative business models and
the
persistence of underinvestment in this area—usually has to do
with how
major corporations are currently organized.
First of all, unlike other sorts of innovation (those associated
with
new products and processes), innovative business models by
definition

require coordinated, simultaneous changes in several key areas
of a
company’s operations. The risks such large-scale changes entail
are
many times greater than for other sorts of changes, and the cost
of
getting it wrong can be devastating for the entire business. This
means
that launching the development of a new business model, to say
nothing
of introducing it, demands not just routine decision making by a
particular central management department (as would be the case
for
innovations of products or technologies), but decisive and
coordinated
action by the company’s top management. Today, it can be
difficult for a
large corporation with a complex management structure,
sprawling
bureaucracy, and problematic relationships among various
divisions and
services, to overcome inertia and turn its “corporate ship” in
another

direction.
Numerous studies have shown that the internal organization of
today’s major corporations, even those adapted to develop and
introduce innovative products and technologies, often does not
lend
itself to recognizing and realizing new business models. When
deciding which innovative projects to invest in, they tend to
choose
those that fit into the current business model, even if that means
ignoring the ideas that offer the most promise. This tendency is
one of
the main reasons for Kodak’s bankruptcy, and it deprived the
Xerox
Corporation of an opportunity to make use of a number of
interesting
technological innovations (including the first personal
computer) that
were developed by its engineers, but later realized with great
success
by others.
9
Furthermore, a lack of flexibility in decision making at major

corporations often creates insurmountable barriers to
experimenting
with and testing new business models—both of which are
essential.
In the opinions of Karan Girotra and Serguei Netessine, “Large
companies have the resources and capabilities to create and
exploit
business model innovation ideas on an extraordinary scale. But
their
failure rate is nonetheless unacceptably high because so far too
many
have not shown enough commitment and flexibility in the way
they
develop and roll them out.”
10
This is why companies that manage to
overcome “built-in” internal corporate barriers and unleash their
innovative potential to create and—just as important—introduce
innovative business models quickly become industry leaders.
DECEMBER 2014 25
The driving force behind industry revolutions

The importance of innovative business models as a competitive
tool for
major corporations is most obvious when they prove to be the
main
drivers of radical industry shifts. The unique role of the
transformer, a
company that changes the “rules of the game” in a particular
industry,
is not a new phenomenon belonging exclusively to business
models of
recent years. In fact this role has been an important feature of
the best-
known business models throughout the history of capitalism.
In the 1870s, a business model conceived and realized by Swift
and
Co. in the United States was built around a new system for
storing and
transporting frozen meat and led to a complete restructuring of
the meat
processing industry in the United States.
11
The razor/razor blade model
(also known as the Gillette model) has long since been included

in
business school textbooks. This model—designed around the
sale of one
product (the razor) at a low price on the assumption that the
sale of an
accompanying, more highly priced product (replaceable razor
blades),
would assure a steady revenue stream—launched a revolution in
the
razor industry in the early twentieth century. First realized by
the
renowned American entrepreneur King Gillette in 1903, it not
only
forever changed “the face of the shaving world,”
12
but also became a
classic mechanism for generating profit that has been widely
emulated in
many business models today, such as by producers of jet
engines (the
engine/spare parts model), and in the area of photocopy
technology (the
copier/cartridge model), among others. In the 1930s, the new

supermarket business model completely changed the retail
landscape
in the United States, and beginning in the 1950s it continued its
triumphant advance across Western Europe. In the 1970s the
low-cost
airline model paved the way toward fundamental changes in
international air travel, and in the 1980s, Sweden’s IKEA, with
its
innovative “self-assembly” model became a dominant force in
essentially all the main markets for inexpensive furniture.
In recent decades, the world economic environment has changed
and
is now even more favorable to innovative business models,
which have a
greatly increased potential influence on the fate of any given
industry.
Among several causes are this environment’s dynamism and
volatility.
This concerns above all the massive spread of an assortment of
new
and revolutionary technologies, including information and
telecommu-
nication technologies, which create unprecedented opportunities

for the
development and introduction of innovative business models
and
magnify their impact on an industry (or even across multiple
industries).
Second, a huge role is played by globalization processes, which
have
permeated virtually all sectors of the modern economy,
simultaneously
intensifying the effects of the interdependence and instability of
world
and national markets and forcing the development of new
business
models that take the economy’s global scale into account. Third,
the
heavy involvement of emerging markets in the global economy
is of
increasing importance, and the specific nature of these markets
forces
major corporations to transform business models that have been
developed over years, adjusting them to adapt to widely varying

circumstances.
When it comes to information and telecommunications
technologies,
since the dawn of the new century it has been hard to find a new
business
model that does not take advantage of the opportunities they
offer.
Attempts to ignore them generally do not end well.
Take the case of Blockbuster. This former U.S. video-rental
leader
seemed, as late as in the mid-2000s, not to notice the
appearance of the
Internet and was quickly squeezed out of the market by its
competitor,
Netflix, which put in place a more efficient and convenient
model for
ordering DVDs through the mail via online subscriptions. As a
result, a
company with billions in revenues and a huge network of outlets
across
the country (more than nine thousand) was forced to file for
bankruptcy
protection in 2010, while Netflix rapidly expanded its

subscriber base to
more than twenty-six million in the United States and abroad.
“Netflix
didn’t invent any new technology,” writes Saul Kaplan, “What
Netflix
invented was a new business model—the ability for the
customer to
avoid the trip to the video store by delivering the DVD by mail”
(Kaplan, 2012, p. 6).
Naturally, the information and telecommunications technologies
that
have taken economic life by storm have led to more than just
redesigned
business models that have become industry standards. They
have also
led to the creation of fundamentally new industries for which
the process
of devising even the first generation of business models is not
yet
complete and in and of itself serves as a field for heightened
competition
among new industry leaders. A good example is the Internet
commerce

sector, which after the dot-com boom of the 1990s and
subsequent crash
of most of its participants gradually acquired a rather stable
industry
structure with clear business models for the remaining top
players. Most
DECEMBER 2014 27
major Internet companies have striven to create a large user
base by
engaging with them through social networks (Facebook,
Twitter) or
search engines (Google), games, and so on, and then “monetize”
this
base through online advertisements. Others have immediately
attempted
to activate e-commerce mechanisms, although as Amazon’s
experience
shows, this has not brought big profits.
Recently analysts have taken note of the phenomenal growth of
China’s Tencent, which has succeeded in surpassing Western
global e-
commerce leaders by introducing an entirely new model for

monetizing
its user base. This company started out—like many others in the
Chinese
market—by copying Western experience in the area of social
networks
and the spread of electronic games, but unlike some global
giants (such
as Google and Twitter), for a long time it remained in the
shadows,
acquiring weight in the domestic network space, protected
against
outside competition. However in September 2013, when
Tencent’s
market value exceeded $100 billion, surpassing Facebook (and
not only
by this standard but also in terms of revenues and profits), the
company
found itself the focus of attention by investment experts. It
turned out the
Tencent’s monetization model was fundamentally different from
the
models used by its Western competitors.
Tencent energetically developed its social network, WeChat,
and its

instant messaging service, QQ, which has hundreds of millions
of
Chinese users, while at the same time introducing a
fundamentally
different means of generating revenue based on electronic
games: as
soon as users get hooked on a new game, the company offers
them the
opportunity to pay for additional services that “add value,” such
as
flashier clothing or weaponry for their avatars or a chance to
visit a
virtual VIP lounge, and so on. Whereas Western leaders of the
global
Internet industry earn approximately 80 percent of their revenue
through
advertisements, Tencent earns 80 percent by providing services
to users
for an extra charge. It is this new business model that prompted
the
Economist to say that Tencent has a “better business model than
its
Western peers” and that this model has given the company the
highest

shareholder total return for 2008–12, surpassing even such
champions
as Apple.
13
As globalization processes become more pervasive, they shape
the
design of new business models in a variety of ways. On one
hand, the
qualitatively higher level of interpenetration and
interdependence
among national economies creates new opportunities for
combining the
best resources from various countries to shape business models
that
more easily withstand outside competition by relying on global
networks of corporate partners. On the other, under
globalization,
business model life cycles have shortened due to heightened
competition among a rapidly growing number of global
competitors

(including networks of competitors), and has accelerated the
rate at
which destructive effects can spread during economic
downturns, which
can quickly become global.
A striking example of a business model resting on the principles
of a
global network and aspiring to become an industry standard is
the one
behind Boeing’s creation of the Dreamliner (a wide-bodied 787
passenger jet). The design of this innovative airplane and the
process
that brought it into commercial operation took international
cooperation
(not unusual for civil aircraft construction) to a whole new
level, with
first-wave suppliers alone totaling forty-four worldwide. This
network
model, according to experts, shifted the industry paradigm. As
scholars at
Aalborg University rightly point out in commenting on the
consequences
of globalization, “The new environment demands new
competitive

parameters, where the focus on internal optimization is no
longer
sufficient . . . . The focus has thus changed from businesses
competing
against businesses on BMs [business models], to networks
competing
against networks on BMs” (Pedersen et al., 2013, pp. 103–4).
The demand for new business models has markedly increased
since
the beginning of the current century, when major Western
corporations began accelerating their expansion into developing
markets. Simply transplanting models that work in developed
economies rarely works in these markets (see Bereznoi, 2014,
pp. 7–9). The reasons for this usually boil down to a failure to
fully
appreciate two essential features of these markets that lead to
the
rejection of imported business models.
First, the key characteristics of the group of consumers being
targeted by Western corporations is different. Adapting
products and

sales methods in these new markets requires more than cosmetic
adjustments tailored to local tastes and practices. Unless the
tiny sliver
of the population whose incomes and consumption standards
differ
little from those in the West is being targeted, fundamentally
different
approaches are needed to reach the typical consumer in
emerging
markets (the segment that the current expansion of Western
corporations is targeting). In the words of experts from
Innosight, an
DECEMBER 2014 29
international consulting firm: “Many multinationals simply
import
their domestic models into emerging markets. They may tinker
at the
edges, lowering prices . . . . But their fundamental profit
formulas and
operating models remain unchanged, consigning these
companies to
selling largely in the highest income tiers, which in most

emerging
markets aren’t big enough to generate sufficient returns”
(Eyring,
Johnson, and Nair, 2014, p. 90). At the same time, Western
firms often
need new business models to solve problems such as the
absence in
developing markets of reliable suppliers of high-quality
materials and
services, adequate transportation, and commercial and financial
infrastructure, among other needs.
For example, the American fast-food giant McDonald’s
encountered
a completely unfamiliar situation when it entered the Russian
market in
1990. Unlike in Western countries, where the company focused
on
running its restaurants, outsourcing the entire supply chain, in
Russia at
the time no suppliers could be found that were capable of
providing the
necessary level of quality and the required delivery schedule.
Attempts

to attract traditional suppliers from Europe to invest with them
in the
Russian market met with failure. But McDonald’s persisted
and—not
giving up on the strategic decision it had made—decided to
make
serious changes to its tried-and-true business model and
undertook to
create a fundamentally new vertically integrated structure.
14
These
efforts and investments totaling approximately $250 million led
to great
success in the huge Russian market, where in an essentially new
fast-
food industry, McDonald’s became the undisputed leader for
many
years (fifteen years after opening its first restaurant,
McDonald’s
accounted for approximately 80 percent of fast-food sales).
When it entered the Pakistani market, Telenor, the largest
Norwegian
mobile communications company, encountered the situation that
most

of the population did not use banks. This meant that the
company could
not receive payments using its traditional model. After several
years of
preparation, however, Telenor managed to transform this
problem into a
competitive advantage and gain a dominant market position. In
2009 the
Norwegian firm launched a service called Easypasia that gave
Pakistanis
an easily accessible system of mobile banking that allowed
customers to
make payments, get cash, and even open a savings account—all
with
their mobile phones. The company even acquired a small local
bank in
order to obtain a banking license. By 2010, Easypasia was
available at
more than 20,000 retail outlets, offering financial services
throughout
Pakistan (the country’s entire banking network consisted of

8,500
branches). Although 89 percent of the country’s adult
population did not
use banking services, 62 percent used mobile phones. As a
result of this
undertaking, the number of Telenor subscribers in Pakistan
grew to
more than 22 million. In essence, the Norwegian mobile
operator used a
new technology to compensate for a largely absent banking
sector and in
so doing achieved unprecedented growth among the local
population
through the use of an unconventional business model.
* * *
Given the increasing instability and volatility of the economic
environment, the importance of innovative business models has
grown
significantly as one of the most powerful tools in competition
among
major corporations. Competitive reality unambiguously shows
that even
a recognized engine of market success like technological

innovation can
achieve much greater power if it is integrated into an innovative
business
model. As European Commission experts stress, “Technologies
as such
do not have a specific value. Their value is determined by the
business
models used to bring them to a market.”
15
Given this circumstance, only
corporations that have armed themselves with a business
innovation
strategy and mastered the practice of renewing business models
that take
into account dynamically changing market demands and ever
faster
developing technologies will emerge triumphant in global
competition.
The development and implementation of new business models
has
become a strategic imperative for most of today’s large
corporations.
Notes
1. Until recently this company was still counted among the

mostrespected pillars
of big businesses in the United States. Founded in 1888, for the
better part of a century
Kodak was considered one of the most innovative corporations
in the world, known
for its commitment to exceptionally advanced technologies and
cutting-edge
marketing solutions. By 1976 the company controlled 85
percent of the American
photographic camera market and 90 percent of the photographic
film market. Until
the 1990s, it was regularly among the five most expensive
international brands.
2. Forbes, August 20, 2013; available at
www.forbes.com/sites/avidan/2013/
08/20/the-death-of-scale-is-kodaks-failure-an-omen-of-things-
to-come-for-
corporate-america/.
3. As American economists Raphael Amit and Christoh Zott
have noted,
“Rather than growing by simply bringing innovative new
hardware to the market,
DECEMBER 2014 31
http://www.forbes.com/sites/avidan/2013/08/20/the-death-of-
scale-is-kodaks-failure-an-omen-of-things-to-come-for-
corporate-america/
corporate-america/
corporate-america/

Apple transformed its business model to encompass an ongoing
relationship with its
customers . . . . In this way, Apple expanded the locus of its
innovation from the
product space into the business model” (Amit and Zott, 2012, p.
43).
4. The BCG analysis showed that although both groups of
innovative
companies had an average total shareholder return above their
industry’s average,
business model innovators on average earned returns four times
greater than
product and process innovators (Lindgardt et al., 2009, pp. 2–
3).
5. ServiceSource 2014 investor relations; available at
http://ir.servicesource.com.
6. As noted in a special study of the Nespresso business model,
“The idea of
selling coffee in capsules has now been copied many times but
what is hard to copy
is the entire system—the business model. This non-duplicable
business model
provides the foundation for sustained success” (Matzler et al.,
2013, p. 36).
7. An expert comparing the day-to-day effectiveness of Virgin
Blue’s and
Jetstar’s business models concludes that: “As a low cost carrier,
Jetstar is the reality
of flying’s present and a vision of travel’s future” (“Decoding
the New Economy,”

April 23, 2013; available at
http://paulwallbank.com/2013/04/23/jetstar-vs-virgin-
airline-flying-in-australia/).
8. Forbes, April 10, 2012; available at
www.forbes.com/sites/rahimkanani/
2012/10/04/business-model-innovation-is-the-fastest-path-to-
greatness/.
9. “Like Xerox, however,” Henry Chesbrough lamented in this
regard,
“companies have many more processes, and a much stronger
shared sense of how to
innovate technology, than they do about how to innovate
business models”
(Chesbrough, 2010, p. 356).
10. HBR Blog Network, September 27, 2013; available at
http://blogs.hbr.org/
2013/09/why-large-companies-struggle-with-business-model-
innovation/.
11. Until 1870, livestock in the United States destined for
processing plants was
sent to East Coast slaughterhouses from the main livestock
centers of the Midwest
before being turned into fresh, packaged meats that were then
sold to consumers in
major cities. Swift and Co. applied a fundamentally different
approach: it set up
slaughterhouses in the main livestock-producing regions,
supplying them with
powerful cold storage facilities, and then created a system for
transporting frozen
meats in specially equipped train cars to the main centers of
consumption. Having

thus sharply reduced costs, the company was able to radically
reduce prices and
quickly gained the dominant position in the industry. Its
competitors were forced to
follow the same model, which became the industry standard.
12. See http://wiki.badgerandblade.com/History_of_Shaving.
13. Economist, September 21, 2003; available at http://lb-
stage.economist.com/
news/business/21586557-chinese-internet-firm-finds-better-
way-make-money-
tencents-worth.
14. With the help of Moscow’s local government, several farms
were found and
given the means to buy modern equipment. A herd of cattle was
brought in from the
Netherlands and a special variety of potato from the United
States. The company
then built a huge production facility outside Moscow to produce
prepackaged beef,
frozen french fries, dairy products, and the company’s hallmark
sauces and
ketchups. It also had to put together its own fleet of trucks to
ensure on-time
deliveries to restaurants in accordance with a strict timetable.
http://ir.servicesource.com
http://paulwallbank.com/2013/04/23/jetstar-vs-virgin-airline-
flying-in-australia/
http://paulwallbank.com/2013/04/23/jetstar-vs-virgin-airline-
flying-in-australia/
http://www.forbes.com/sites/rahimkanani/2012/10/04/business-

model-innovation-is-the-fastest-path-to-greatness/
http://www.forbes.com/sites/rahimkanani/2012/10/04/business-
model-innovation-is-the-fastest-path-to-greatness/
http://blogs.hbr.org/2013/09/why-large-companies-struggle-
with-business-model-innovation/
http://blogs.hbr.org/2013/09/why-large-companies-struggle-
with-business-model-innovation/
http://wiki.badgerandblade.com/History_of_Shaving
http://lb-stage.economist.com/news/business/21586557-chinese-
internet-firm-finds-better-way-make-money-tencents-worth
15. European Commission, New Forms of Innovation, Research
and Innovation
portal, December 11, 2013; available at
http://ec.europa.eu/research/participants/
portal/desktop/en/opportunities/h2020/topics/2470-inso-2-
2014.html.
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Bereznoi, A. 2014. “TNK na razvivaiushchikhsia rynkakh: v
poiskakh uspeshnoi biznes-modeli.”

Mirovaia ekonomika i mezhdunarodnye otnosheniia, no. 10: 5–
17.
Chesbrough, H. 2010. “Business Model Innovation:
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Economist Intelligence Unit (EIU). 2005. Business 2010:
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Eyring, M. J., M. W. Johnson, and H. Nair. 2011. “New
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Kaplan, S. 2012. The Business Model Innovation Factory: How
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Game. New York.
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DECEMBER 2014 33
http://ec.europa.eu/research/participants/portal/desktop/en/oppo
rtunities/h2020/topics/2470-inso-2-2014.html
http://ec.europa.eu/research/participants/portal/desktop/en/oppo
rtunities/h2020/topics/2470-inso-2-2014.html
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Abstract The features of business models as competitive tools
The main types of innovation and problems in introducing IT
The driving force behind industry revolutions
Dyer, J. H., Godfrey, P., Jensen, R., & Bryce, D. (2016).
Strategic management: Concepts and tools for creating real
world strategy. Hoboken, NJ: John Wiley & Sons.

Dyer, J. H., Godfrey, P., Jensen, R., & Bryce, D. (2016).
Strategic management: Concepts and tools for creating real
world strategy. Hoboken, NJ: John Wiley & Sons.

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