The Basis and Concepts Behind Creating Value in the New Business Model Ram Charan

8/6/2019 The Basis and Concepts Behind Creating Value in the New Business Model Ram Charan

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The Basis and Concepts behind Creating Value in the New Business Model

"The core concept is that companies will lose their competitiveness if they deny four current

trends and how the convergence of these trends is changing the way we think about

innovation and value creation. It does not matter whether the business is selling tires,

insurance or health care, or whether it's one of the new age businesses like Facebook, Google

or eBay.

For the last four years, I've been asking myself: in the age of the Internet, what is going to be

the underlying source of competitive advantage for companies? What will endure for the next

ten years? I noticed four trends.

First, connectivity - and I think it's the core issue that will change the competitive landscape

for all of us, whether it's through PCs or cell phones. Second, the cost of digitization is going

down, so the cost of technology is not going to be a limiting factor for deploying it across the

world. A third trend is the convergence of technology. Is your cell phone a telephone, a

computer, a camera, a watch or all of the above? And industry boundaries are breaking down

like technology boundaries. The fourth trend is the emergence of social networks.

If you take globalization, which feeds on connectivity, digitization, convergence and social

networks - and the other way around - all of them together will change the way we think

about innovation and value creation."

To Stay Competitive, Companies Need to Adopt the New Way of Doing Business

How will it change the way companies do business and innovate to create value for their

customers?

"It causes the relative balance of power between the consumer and the firm to change. Ten

years ago, the firm had significantly more influence than the consumers. Now consumers can

have as much influence and, in some cases, more influence than the firm.

As an example, Google does not create firm content. The content is sourced from a large

number of suppliers around the world, none of whom Google owns, but to whom Google has

privileged access. In the new business model, the firm does not have to own the resources but

must have the capacity to access the resources."


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Are there any examples of companies already successfully operating within this new

business model?

"I'll share two examples. In the first one, diabetes is a chronic public health crisis in this

country and in most developing countries. There are 40-45 million people in India who havetype 2 diabetes, even though it's a poor country. In most countries, the insurance goes up

dramatically if you have type 2 diabetes. In many cases, you cannot be insured because it's a

high-risk disease with life-long problems that require diagnosis and medication on a continual

basis. I was involved in trying to create a product where we could apply new principles to

create a different insurance product for type 2 diabetes and improve opportunities for not only

rich but also poor people with this disease.

We started with a simple principle. Lifestyle diseases need effective management by

individuals, need a personalized routine, and need an individual context for the treatment.

Dealing with this disease needs to be unique for one individual at a time.

The second principle is that economic incentives can be a source of feedback to individuals

So an insurance company can start with a base price and a regimen; if you as the patient

follow the regimen, your risk goes down and it also goes down for the insurance company -

which can therefore reduce the premiums. The company gives enough of a stretch for

compliance so there are economic incentives for people to take care of themselves. But this

involves diabetics needing to test themselves, have medication that is inexpensive, diagnose

themselves, check their blood sugar. One firm cannot do all this. Therefore, you have to

create a large number of vendors who can work together to create a system that allows you to

deliver this product.

A company in India is partnering in a joint venture with an insurance company and has

created this product. They put together an ecosystem of a company that makes insulin, a

monitoring company that makes testing equipment, diagnostic places where people who

cannot afford their own testing equipment at home can go to a testing lab, and in some areas

the ecosystem also includes collaboration with resources that can help transport people to the

testing lab. It can also help customers create a new lifestyle and health consciousness by

constantly sending messages. In fact, the system today can monitor you and send you a

message: don't eat the cheesecake for the next week because your sugar is out of control.


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This was launched last year and already compliance rates have dramatically gone up when

people are signed up. This system works, and it is totally transforming the traditional

insurance industry, which did not even want to talk about high-risk individuals; now they are

a viable business opportunity.

So essentially the transformation that I see happening is that the firm used to be the center of

attention and center of analysis, whether it's ERP, supply chain management, CRM-these are

firm-centric views of suppliers and customers. I believe we will move to consumers

activating the systems through multiple channels (either through a PC or a cell phone or other

channels such as an ATM or bank branch); but it looks like a network, not a sequence of a

supply chain.

Another example is DHI, a fleet management company in the United States, with helicopters,

jets, and other models in the fleet. It has multiple customers from various places such as the

arctic, deserts, mesas and oil-drilling platforms. Each one uses the fleet very differently, from

a medical emergency, to somebody going to Africa for a safari. So there is tremendous

complexity in managing the business. There are also multiple software vendors and more

than 1,000 databases, which keep increasing because nobody knows where the stuff is. Those

systems and business processes are not resilient. You could not change it very easily for

customer service. And of course you have poor performance and loss of business.

So to transform this company, you start with the goal of one consumer at a time, one

application at a time. For each one, you do personalized pricing based on usage (oil drilling

as opposed to transporting cargo, for instance) instead of flight hours, and you depreciate

assets differently. So you'll have a large number of vendors because it's a large fleet, and

different people service the fleet. So the system has to be reconfigured differently-to be

transparent, flexible, protect the legacy systems, and also have new analytics and insight on

how each customer is using the fleet very differently and therefore what you have to do to

create value for each customer.

DHI went through a very elaborate process for transformation. Results include the aircraft on

the ground reduced from eight to two hours - that means real money. There was a 50 percent

reduction in overall price of service and $6 million in warranties. But you cannot create this

real value without transparency to all vendors and logistics, flexibility in business rules,

analytics and insight. So we have gone from product innovation, to specific solutions, to co-

created experiences."

IT is Crucial in the New Model for Value Creation


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How will companies migrate into this new business model of co-created experiences?

"The business unit of the mid-1990s looked at the whole corporation as a source of

competence, especially the intellectual assets of the organization. The extended supply

network also was a source of competence. Today we are saying the consumers also are asource of competence. So company strategists need to increase and improve the importance

of the company's resource base so it can build a system that it can access.

To do that, you have to build fundamentally new capabilities in the organization's social

architecture: the values, skills, attitudes, strengths, training, and performance measurement.

But more importantly, you have to re-think the technical architecture of your business and

how ICT can become a strategic asset. So if you go through that logic, you come to two

simple conclusions: (1) talent matters more than we thought, and (2) IT matters more than we

thought.

You may still need a product. For instance, if your business is an emergency-managementsystem, you need a product, but it doesn't mean you still need an ambulance. And what I find

exciting is that every company can differentiate itself because it's dealing with unique

personalized experiences and not commoditized products."

How does this impact the future of the software industry?

"Investment in products is not the game. Now it's global talent leverage, new business

models, collaborative capacity, and common shared standards and platforms. So I believe that

companies will go to consumer-centric global businesses, and I believe our systems must

move toward citizen-centric public services. If somebody gets married and wants to change

their driver's license and want to change the passport or something else, why do they have to

fill out eight forms asking for the same information? That is the business opportunity. And it

cannot be done without understanding how the underlying systems work.

For the diabetes example I described, you need a network, sensors, the ability to do analytics

so you understand out of five million customers which ones need to get some notification that

they're not in compliance. And looking at business processes, you need the ability to identify

and change pricing, the ability to identify one individual behaviour at a time; you need an

extraordinarily interesting large database, focused analytics, and a flexible business process.

You also have to leverage legacy assets. And you need to worry about scalability and

interoperability because multiple organizations are involved. And how do you build

platforms? That's the IT side. On the business side, you have to worry about constant change,

quality, flexibility - and it has to be Six Sigma all the time."


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What will be involved in creating such platforms?

"I think of a platform not as a single company or just companies merging but, rather, a

platform as an ecosystem of large and small companies working together to common shared

standards. It will involve little companies and big companies, all of them working on three

areas: collaboration, connectivity and computing."

Will these platforms become the backbone of the new business model for innovation and

creating value?

"I believe there is a new house of innovation on two pillars of co-created experiences and

equal demand/access to global resources. The basement of the house is the technical

architecture of the firm - the information and communication technology backbone. The

social architecture of the firm is the values, skills, attitudes of all managers and people in the

company form the roof. But the thing that holds everything together, the glue, is the IT

architecture, which is the flexible and resilient business processes and focused analytics.Value creation becomes understanding and managing tensions and frictions across all these

parts.

The competitive landscape is changing. I think the next generation of systems is one

consumer co-created experience using the resources from multiple vendors. The nature of

advantage, I believe fundamentally, is access to capital, raw materials, technology, and

resilient processes and analytics. And new value creation and innovation depends on

rethinking technical architecture of your firm. I believe information architecture and

capabilities will become new strategic assets; therefore, IT matters."

The Basis and Concepts Behind Creating Value in the New Business Model Ram Charan

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