BUSINESS MODEL WINNERA study by HBR. Summarised by Pranay Sanghavi

A NEW TREND

in the types of business

BUSINESS MODEL TYPES

1. Asset Builders

2. Service Providers

3. Technology Creators

4. Network Orchestrators

1. ASSET BUILDERS

➤ These companies build, develop, and lease physical assets to make, market, distribute, and sell physical things.

➤ Examples include Ford, Wal-Mart, and FedEx.

2. SERVICE PROVIDERS

➤ These companies hire employees who provide services to customers or produce billable hours for which they charge.

➤ Examples include United Healthcare, Accenture, and JP Morgan.

3. TECHNOLOGY CREATORS

➤ These companies develop and sell intellectual property such as software, analytics, pharmaceuticals, and biotechnology.

➤ Examples include Microsoft, Oracle, and Amgen.

4. NETWORK ORCHESTRATORS

➤ These companies create a network of peers in which the participants interact and share in the value creation.

➤ They may sell products or services, build relationships, share advice, give reviews, collaborate, co-create and more.

➤ Examples include eBay, Red Hat, and Visa, Uber, Tripadvisor, and Alibaba.

CONCLUSION S&P 500 Decade Analysis

WINNER IS… NETWORK ORCHESTRATORS

➤ Network Orchestrators outperform companies with other business models on several key dimensions. These advantages include

➡ higher valuations relative to their revenue

➡ faster growth

➡ larger profit margins

➤ Network Orchestrators receive valuations two to four times higher, on average, than companies with the other business models

➤ Network Orchestrators outperform companies with other business models on both compound annual growth rate and profit margin

➤ Value creation performed by the network on behalf of the organization reduces the company’s marginal cost

➡ TripAdvisor.com benefits from its customer’s reviews and AirBnb leverages its network’s housing assets

“Leaders of more traditional companies are left wondering why these upstarts merit such high valuations. Are they more profitable? Do they see faster growth? Do they have higher return on assets and lower marginal costs?

YES.

NETWORK ORCHESTRATORS CREATE MORE VALUE.

FEW COMPANIES OPERATE AS NETWORK ORCHESTRATORS. WHY?

1. Today’s network-based business models require new technologies and competencies.

➡ Most corporate leaders are skilled at building, owning, and managing their own physical assets or people.

➡ Network Orchestrators, however, rely on intangibles such as knowledge (Gerson Lehrman Group) or relationships (Facebook), or other people’s assets (Uber) as well as new “non-management” and “non-ownership” competencies related to facilitating a network of individuals and their individual assets and relationships

FEW COMPANIES OPERATE AS NETWORK ORCHESTRATORS. WHY?

2. Generally Accepted Accounting Principles (GAAP) categorize some assets as “assets” (plant property and equipment), others as expenses (people, training, and intellectual property) and ignores others (customers, sentiment, and networks) altogether, frequently resulting in the under-allocation of capital to intangible assets.

➡ This is especially problematic given that, today, intangible assets make up approximately 80% of corporate market value.

FEW COMPANIES OPERATE AS NETWORK ORCHESTRATORS. WHY?

3. Standard industry designations result in siloed thinking, leaving empty space where new business models can enter.

➡ Early 1990s. Most traditional retailers were slow to move into the online space because they didn’t consider themselves “technology companies

➡ The online market was left open, and in came a slew of new players such as Amazon, eBay, and Zappos, who gobbled up market share and changed the retail game

➡ The power of networks is creating a new cross-industry transformation. Uber and Lyft are affecting the taxi industry; how Airbnb is affecting the hotel industry

FEW COMPANIES OPERATE AS NETWORK ORCHESTRATORS. WHY?

4. business models are tightly integrated into all parts of a company, and are therefore daunting to change

➡ Changing business model requires changing capital allocation,

➡ But most companies follow the same allocation patterns year after year, despite dramatic changes in the business environment.

CO-CREATE VALUE

Recommendations to Leaders

HOW TO BECOME A NETWORK ORCHESTRATOR?

➤ Assess your business model: Understand your current model, preferences, biases of leadership team members, capital allocation

➤ Inventory your network assets: Take stock of your customers, employees, partners, suppliers, distributors, and investors, and determine which have the greatest potential.

➤ Reallocate your capital to networks: Divert at least 5% to 10% of investment capital to activating your networks. Take experimental approach, and adapt.

➤ Add network KPIs: Add indicators such as number of participants, their sentiment, and level of engagement to provide direction.

BOTTOMLINEBegin your evolution today

Summarised by Pranay Sanghavi.

Original article here.