Business Model Innovation

Executive Summary

“In the information era, change is the best equilibrium. No single organization structure is perfect and can solve all problems.” – Jack Ma, founder and executive chairman of Alibaba Group

In the aftermath of the last great financial crisis, the new normal is a slowing global growth – OECD forecasts a global GDP growth hovering around 3.5% and then slowly declining beyond 2020 -, historically low interest rates, and more volatile financial markets. Central banks and governments have deployed non-conventional monetary and fiscal policies, but are still struggling to chart a clear path for sustained long-term global growth and prosperity. The truth is that fast technological and demographic changes are disrupting all aspects of our lives, so this calls for a broader transformation. And sustainable global development will also require increased public–private partnerships with transparent structures and policies and a clear accountability to deliver tangible benefits for communities, businesses and countries.

We’ve managed about just fine the transition from the industrial to the knowledge economy, and now we are grappling with an even deeper and faster transformation, one that opens the door to limitless opportunities. The digitalisation of our lives is a positive evolution as it will ultimately give individuals and groups everywhere a louder voice, more choice and opportunities, and more efficient ways to develop their ideas and use their talents. But these benefits will come at the price of embracing change, flexibility, and more risk than before.

At the policy and regulatory level, in order to mitigate the risks of increased inequalities and social unrest worldwide, national governments and global political and financial institutions must increase their collaboration. Because this is crucial to our ability to speed up structural reforms and take bold steps towards creating deep synergies across countries and across regional clusters. There is an urgency to boost economic value creation and continue to rise standards of living by increasing the structural flexibility and antifragility of our economies. For example, by doing much more to support entrepreneurship and the upskilling of people to solve the growing problem of unfilled jobs due to skills shortage.

It may take a many generations to get there, but in the long-run, the physical world will inevitably converge with the borderless virtual world to reach the full potential and benefits of the digital age. This evolution towards a new global societal model will likely imply a tighter global political and economic integration, and a stronger harmonisation of trade, the movement of people and capital, and security. It also means preparing for large-scale workforce transitions into new kinds of occupations and services that we must create. Because technological advances will automate masses of today’s safe corporate jobs, in a much more efficient big-data-and-analytics-driven, hyper connected and highly-automated society of the future.

In this macroeconomic scenario, only agile companies that are able to anticipate market shifts and innovate to create new scalable markets and renew their competitive advantages, are likely to flourish and maintain rates of growth and returns that are higher than the overall economy. But competitive advantage has become more transient and customer-outcomes driven innovation drives more cross-fertilisation of industries. So understanding customers’ changing needs and adopting a startup mindset in experimenting with new products and customer experiences is a major advantage.

For example, think about how Google, Facebook, LinkedIn, and Twitter have transformed the ways we interact and create and consume content and adverts. Think how other digital leaders such as Apple, Netflix, and Spotify have disrupted media industries. Or how the stars of the sharing economy Airbnb and Uber have launched a wave of disruptions that will spread to all the sectors of the economy. The next big transformation which started rolling thanks to many successful Fin-Tech startups will likely change the financial industry beyond recognition.

In this new reality, more than ever before, business executives need to pay less attention to short-term stock price fluctuations and focus more on consistently making the right strategic choices that increases the companies’ long-term intrinsic value. This means focusing on customers’ unmet needs, to create scalable new markets and capture value by serving them with unique capabilities and ecosystems. Adapting current talent, performance, and incentives management systems will help reinforce this trend. But in all situations, we must align our thinking processes and actions with the following seven value-creation guiding principles:

1. We must all ensure at all times that everything we do creates value. Always ask the question: “will this make the boat go faster”. If the answer is no, then review your strategy, plans, and actions. This implies that everyone in the organisation understands how value creation works, what are the key value drivers in their particular industry and customer segments, and how her/his work links specifically to the firm’s long-term goals?

2. Invest constantly in renewing your company’s competitive advantages to increase value. The core of business strategy must deal with renewing the company’s competitive advantages, driven by a strong purpose and winning aspiration, and orchestrated by inspiring authentic leaders. Otherwise, growth decays rapidly, and chasing it at any price may even destroy value. The answer is to take a disciplined approach to investing in building innovation capabilities. This implies defining the vision and the process, setting few specific key guiding rules and long-term goals, and empowering talented teams. For example large companies such as GE are leveraging the lean startup model to develop a portfolio of innovations, rapidly and frugally, by tapping into rich ecosystems and talent pools both internally and externally.

3. Take the long view and prioritise investments in high-return growth strategies. This implies giving rigorous consideration to the company’s mission and vision, where to play and how to win choices, core capabilities, and enabling management systems. All these components must be tightly aligned both between them and with the external environment, as well as reflecting realistic scenarios of the future. The strongest long-term drivers of value are true product innovation which adds value to customers, expanding high-growth market segments, and bolt-on acquisitions bringing in new competitive advantages.

4. What distinguishes great companies from others is the ability to anticipate shifts in markets and technology, and adapt faster than competitors. This typically results from having a diverse team of forward-thinking and externally-oriented executives with complementary skills, who bring a unique combination of insights, expertise and energy. And it is crucial to proactively and deliberately adapt and shape the company as different core capabilities and management skills will be required at different stages of its development.

5. Know your company’s true relative performance to know where you are going and chart superior business performance. You will know how much headroom you have by measuring your company’s performance percentile rank relatively to a large sample of relevant competitors across key performance dimensions such as growth rate, return on invested capital (ROIC), and total shareholder return (TSR). This will help you focus on the right strategic choices that will lead to the highest returns on investment and value created in your sector.

6. Break your industry’s bottlenecks to unlock new sources of growth and profitability and reshape existing markets or create new ones. If your company is stuck in a mature industry or saturated markets with a bleak growth and profitability outlook, put your top talents in a diverse team to work on unlocking disruptive innovations in the following 5 areas: 1) Update an outdated customer experience, 2) Eliminate a superfluous major expense categories, 3) Neutralise customers’ financial risk, 4) Invest in winning the hearts and minds of disengaged employees, and 5) Mitigate negative environmental side effects of the product or service.

7. Leverage digital-age technologies and management practices to evolve synchronously with the market. We all agree that we can learn a lot about new ways of competing and winning from the giant pioneers of the digital age such as Google, Netflix, Amazon, and Alibaba. We are of course familiar with the ways they leverage real-time data on customer behaviour to automatically adapt their offerings. And it is reasonable to expect that big-data and analytics advances will help spread these practices to other traditional industries. Yet there is an even greater value-creation and market-shaping power in an emerging management trend which is to stop managing what is better left to market-driven mechanisms. Alibaba provides a good example for a model of the self-tuning enterprise that continuously adapt its vision and experiments with new business models. Whenever they see an important market shift, they trigger a “co-creation” process do develop new business directions directly with customers. An approach worth learning and adapting to your particular context.

Managers and employees at all levels, while they need to excel in their functional roles must abandon functional lenses for a more holistic approach to strategy and problem solving. It can be done by reframing every strategic choice and business problem along the following questions: What would have to be true so that our strategic choices are the right ones? How can we make more customers willing to buy more of our products and services and pay a price premium for the value, the quality, and the care we provide? And how do we empower everyone across the entire value chain to innovate in order to cut waste out of the system and increase value? Think how much boost collaboration and innovation will get if this mindset becomes imbedded in the company’s culture.

Finally, we all know that ideas account only for 3% of success and good execution accounts for the remaining 97%, and as Peter Drucker said, that “culture eats strategy for breakfast”. So to connect all the dots, it is also crucial to have reliable market-driven analytical tools across the business to understand what you’re doing and how do your capabilities and performance stack up against your best competitors. A healthy culture and high-calibre leadership and management capabilities are what cement everything together and increase the probability to meet both short-term targets and ambitious long-term goals.

To that end you need to have the right people on-board, those who are agile learners and energise people around them. You must adapt the company’s structure, processes and systems so that it can evolve synchronously with the market with the speed and the flexibility of a startup to develop new directions. It will be inevitably a flatter and more entrepreneurial organisation but also one that has clear accountabilities, aligns all its parts dynamically, and focuses on the right value-creation metrics. Then what separates great from average execution is the grit to bring down all obstacles and the courage to quickly pivot or discontinue projects that do not meet expectations. Business success is a tough process that requires discipline, a healthy culture and much more agile, adaptive and aligned companies.

1. Executives, managers, and employees all must ensure that everything they do creates value

Executives and sophisticated investors know well that anything that does not increase cash flows doesn’t create value (also known as the conservation of value). So what drives value creation in the form of total shareholder returns (TSR), employment, customer value, and overall contribution to GDP growth and rising standards of living?

The combination of growth and profitability measured by return on invested capital (ROIC) relative to its cost is what drives value; the faster companies can increase revenues and deploy more capital at attractive rates of return, the more value they create. The picture below shows that value is driven by expected cash flow discounted at the cost of capital. Cash flow, in turn, is driven by expected return on invested capital and revenue growth.

Conversely, any actions taken to drive higher growth at ROICs below the cost of capital will destroy value. The picture below illustrates the impact of higher growth and ROIC on value creation. The takeaway here is that companies with low ROIC need to focus on improving their operating performance and cost structure before trying to grow faster. Depending on your particular situation improvements can be achieved for example through business and offerings portfolio optimisation, organisation and process re-design, better employee engagement and performance management, shared services, outsourcing low-value activities, using balanced score card, upgrading IT, or programs such as Lean Six Sigma. On the other hand, companies with a healthy rate of return on investment should focus on increasing their growth even if that means moderately lowering margins to drive significant value creation.

Experience shows that it is not only small unsophisticated businesses that fail to apply these fundamental principles of value creation. Even some of the largest firms that are equipped with world-class management systems become trapped in a reactive mode, as they struggle under short-term market and shareholder pressures, or deal with internal politics and cultural sclerosis. All this leaves little time for executives to work on sound strategy-making and long-term advantage building.

Also, at the strategic level value destruction and firm decline often happens when executives are short-sighted or try to beat the market by paying high premiums for large acquisitions. Then poor strategy and management capabilities and systems lead to the failure to integrate these acquisitions and realise the sought synergies, execute the strategy, or harmonise and develop a healthy culture across the company.

Alcatel-Lucent – which has been recently acquired by Nokia after its 6^th restructuring since 2006– is a good example of mega M&A deals that fail to create value. Management has not been able to fully integrate the two companies into a more agile global innovation and commercial power house. It is not easy to fight cultural sclerosis and cope with fierce competition from much nimbler and leaner Chinese competitors such as Huawei and ZTE, all of this in the midst of slow economic growth and fast technological disruption.

Another striking example of failed large M&A deals is Microsoft’s recent write-down of $7.6 billion, almost the entire value of its Nokia handset acquisition and 7,800 layoffs, after only 15 months. The business unit didn’t meet sales volume or revenue goals and generated margins lower than expected. The decision to make the deal was more the result of a bold bet by executives than it is the result of rigorous strategy analysis and market-based insights.

At the base level, the most common value destruction drivers include: poor customer experience, disengaged workforce, unhealthy culture, lack of vertical and cross-functional alignment and collaboration, poor performance management, poor product and service quality, unnecessarily complex or outdated processes, and inefficient or outdated enterprise IT, management systems, and supply chain infrastructure.

2. Focus strategy on renewing your competitive advantages to sustain value-creating growth

In the long-run, companies can sustain strong growth and high Return on Invested Capital (ROIC) only if they have a distinct competitive advantage; as a central driver of value creation it is in fact one of the important core concepts of business strategy.

Companies such Wal-Mart, Amazon, Facebook, Disney, Uber, Google, PayPal, GE, Microsoft, Netflix, Apple, Nike, and Starbucks to cite only few prominent global brands, are known primarily for the value they provide to their customers. But at the heart of their success is a business model and core capabilities that enable them to satisfy unmet customer needs in a better way than any other competitor.

There are several components of competitive advantage as shown in the picture below. A company can combine more than one advantage allowing it to earn a higher ROIC because, it either charges a price premium, serves its customers and deploys capital more efficiently, or achieves both. For example:

• Coca-Cola who has consistently ranked as one of the world’s most valuable brands with a brand value of $56B (32% of its market cap), surely charges a premium for its beverages compared to less known brands. But the most interesting comparison point is that although it charges similar prices to its closest competitor Pepsi, Coke dominates the market because it is available everywhere. Being ubiquitous builds brand loyalty, which reinforces demand, which then makes it the retailers’ favourite. Coca-Cola’s competitive advantage resides in marketing and distribution capabilities and channels that are unmatchable in scale and impact which are sustained by a virtuous cycle.
• Apple, the 5^th largest company by revenue on Fortune 500’s 2015 ranking has become the most valued company by market cap (3 times the market cap of n.2 Facebook) and number one world’s most valuable brand. It has achieved this position by consistently developing industry-redefining breakthrough innovations. And by not compromising on the high-quality and the life-enhancing attributes of its products, it has created durable virtuous cycles which continue to strengthen its brand, quality, customer lock-in, and economies of scale advantages.
• Ryanair is probably not the best customer experience but is a great stock. It has a young and cheaper workforce, it has planes which are new and more fuel efficient. And it flies to cheaper airports. This allows it to weaken its competition and expand its market share.

Facebook, Google, Microsoft, and Amazon are good examples of the “Network Effect” and customer lock-in advantage. The more users use it the more its value grows. In the case of Facebook or LinkedIn as more users join and share content, the more it is attractive for new potential users and advertisers. As these platforms grow, new use cases are found and new innovations are bolt-on which makes them attractive to more types of users. It also becomes costly or time consuming for users to switch to a competitor or a substitute product or service, hence the customer lock-in effect.

As illustrated through the above examples, when companies find a strategy that earns a high ROIC, it is very likely that this will persist through changing economic, industry and company conditions. This is particularly true in industries with long product lifecycles and for competitive advantages that are based on differentiation through product innovation and brand superiority.

As technology and globalisation continue to advance, competitive advantages will erode faster under the effect of macro trends such as intensifying global competition, accelerating rate of technological and business model innovation, and shortening product lifecycles. Therefore, companies must continually seek and exploit new sources of competitive advantage if they were to create long-term value.

It is well known among leading strategy consulting firms and business schools’ academia, that in extremely complex scenarios, analytical models alone are not able to generate the insights necessary for making high-stakes strategic decisions. Proven heuristics can be a valuable tool in such situations. For example, when results from analysis are not clear-cut, executives must define their priorities according to the two rules for making a company truly great: 1) focus on offering better quality product and services before cheaper, and 2) focus on revenue growth before cost efficiency.

3. Take the long view and selectively prioritise investment in the highest potential growth strategies

Based on empirical analysis of performance data for more than 5,000 U.S.-based nonfinancial companies since 1963, McKinney & Company’s authors of the 5^th edition of Valuation (2010), emphasise the fact that creating sustainable value is a long-term endeavour.

This implies that managers must resist the short-term pressures to take actions that create illusory value at the expense of the real thing in the long-term. Instead, thick-value creation requires managers to take a rigorous consideration of where-to-play and how-to-win choices based on a realistic long-term view about external conditions and unique internal capabilities.

Executives have the extremely demanding task to allocate investors’ money to a diversified portfolio of high-return strategic choices in the highest potential growth segments of the market, and meet expectations. It takes, vision, passion, strong leadership, knowing how to select the right talent and how to shape a culture of integrity, performance, and innovation. If a company does not have such strong management capabilities it would do much better in the hands of different owners. And ultimately, either it will be acquired by better owners who will increase its long-term cash flows or it will decline.

For example, investing in taking market share from competitors in a mature market may help slightly in the short-term but it does not have an important impact on long-term value creation. Superior insights and discipline are required to pursue the right growth strategies that maximises sustained value creation from every dollar of incremental revenue.

The truth is that stock price only reflects the changing expectations in the company’s long-term forecast cash flow, based on information about management actions, company performance and competitive position, industry health, and the health of the economy. For that reason, short-term stock volatility is often unavoidable due imperfect information, economic cycles, and the relative importance of noise stock trading. But in the long-term, stock price reflects the intrinsic value of the firm, which largely depends on management’s ability to renew the firm’s competitive advantages, sail through turbulences, and make the right strategic choices about how to achieve growth.

Knowing the difference between a great company and a great stock is what differentiates great managers and investors from poor ones. There are many great companies which sustain high operating performance but their stock price falls, because investors already built unreasonably high expectations in the price.

For that reason, managers need to understand the expectations built in their stock price or valuation if privately owned. This empowers them to tailor communication and set the right expectations of different stakeholder groups. And at the same time it gives them confidence to focus on the vital task of driving the right combination of growth strategies and operating performance improvements, i.e. the thing they really can and must influence.

The example of the picture below shows how much value is created from investing in different types of growth for every dollar of incremental revenue. So managers need to prioritize their strategic choices according to the following value-creation pecking order:

1. Introduce new innovative products, including acquiring promising startups. This enables firms to create completely new markets and enjoy the first mover advantage.
2. Leverage portfolio momentum through organic revenue growth from overall expansion in served markets segments, existing or new. As the entire segment is expanding all competitors’ benefits without entering into price wars that erode margins.
3. Mergers and acquisitions by making bolt-on acquisitions such as acquiring a disruptive new technology and leveraging the firm’s existing extensive salesforce and distribution networks to achieve performance at the top percentile of its industry.

The challenge with large M&A deals is that revenue synergies are the most hoped for but they are the hardest to realise. Cost synergies are more common but still require the management capability to successfully integrate the businesses and increase the cash flows if the combined companies. Also, if the price premium paid is higher than the synergies realised, M&A actually destroys value for shareholders of the acquiring company and transfers value to the shareholders of the target.

4. Great companies anticipate shifts in markets and technology and have the management capability to adapt and shape industries

Increasing the firm’s long-term intrinsic value is a massive undertaking that requires a strong and diverse team of executives with an external orientation and the right combination of complementary skills and experiences. These management capabilities are necessary to foresee trends and create sound and actionable insights about the future of the economy, the industry, geographic markets, and customers.

It is also vital for such executive teams to figure out the right operating and governance models they need, to strike a good balance between short-term and long-term focus. And of course, no company can be great without the leadership qualities that engage and inspire people to drive change, boost innovation and collaboration, and ultimately execute the strategy and realise goals.

Here are some key questions to reflect on when assessing a business’s long-term value creation capability:

• Is management aligned with investors?
• Do offerings serve unmet needs with pricing power?
• Do underlying market size and growth rates, and profitability lead to goals?
• Are genuine assets deployed to protect and renew competitive advantages?
• Does the firm’s culture and management systems enable collaboration, innovation, empowerment, and high-performance to execute well the strategy?

When developing strategies for growth, it is crucial that managers assess rigorously how the company’s assets and capabilities stack up against their competitors and whether they can leverage the drivers of growth and success in the markets they decide go after. This includes the firm’s size, core capabilities, management capabilities, the maturity of management and support systems, structures and measures, and value-adding partnerships. For example, many companies tend to underestimate growth prospects in their home market and they prematurely embark on an ambitious international expansion strategy only to realize many years later that returns on capital invested are poor or negative.

The truth is that global role models such as General Electric and Samsung are easier to admire than to imitate. Generally, companies that stay local see bigger profits, especially small and mid-size firms which operate in more traditional industry sectors and have not yet reached a critical size. Because scale and management capability matters when it comes to overcoming the tough regulatory, political, and cultural hurdles that are inherent to international expansions. At the other end of the spectrum, digital-economy based business models, think Facebook and Airbnb, can not only expand internationally very quickly but also increase cash flows much faster than any traditional business model.

In tandem with prevalent macro trends, companies have also to worry about their industry’s lifecycle by adapting as they move from the emergent phase to the growth phase to finally reach a maturity stage. Emerging phase managers must focus on investing in the fast improvement of customer experience to set the standard for the category at the same time as aggressively penetrating the target markets and scaling up operating capabilities to gain the first mover advantage. Growth phase managers have the more complex task of accelerating portfolio momentum to capture a significant chunk of the growth in expanding markets segments in parallel with anticipating the maturity phase. The closer the maturity phase the more managers need to drive strategies that boost innovation capabilities, sustain a startup culture and an agile organisation, and constantly update the management capability and technology to achieve high-relative performance. Those strategies include acquiring externally disruptive innovations to accelerate their development through the company’s established supply chain, sales, marketing, and distribution channels.

5. Know your company’s relative performance to know where you are going and chart superior business performance

As explained above, increasing the company’s intrinsic value in the long-run you results from making the right strategic choices and trade-offs: do you focus on growth, profitability, or both? Should you invest in differentiation to gain pricing power, or aggressively grow your customer base, even at lower margins?

Take the example of a company with a 5% return on capital invested (ROIC) and a 12% growth rate. Which performance dimension should it improve and to what level? Without a rigorous understanding of how you’re doing on each performance dimension, you risk wasting valuable resources and time for little returns. As you develop your business you need to equip it with systems, structures and measures that will support you in making the right strategic choices.

To know where investments will yield the best returns, measuring absolute performance only is not very helpful. You need to measure relative performance, expressed in percentile rankings to get insights on where you have the most room for improvement (e.g. revenue growth rate, ROIC, earnings, total shareholder returns, etc.). Only then, you will be able to set ambitious goals based on how well you are doing in comparison to similar companies, at the same time as increasing the probability that your will meet the expectations.

You may be proud that you’ve achieved a double digit growth, but on a relative scale your growth rate is actually below the median compared to a large sample of competitors. For example, companies in the upper left quadrant of the picture below are doing well in absolute terms but still have a significant headroom to reach their industry’s peak performance.

Conversely, you might be throwing investors’ money at competing for market share to improve a poor growth rate, but on a relative scale you will find out that you are already near the peak for your industry. In which case any gains will be mediocre and short-lived and a superior strategy should focus on developing innovative products either organically or through M&A to tap into a high-growth market.

This dimension of business strategy is explained in an HBR article authored by Michael E. Raynor from Deloitte Services LP. They also provide a link to an online tool which helps to estimate percentile ranks and the probability of meeting expected performance. Their analysis of U.S. publicly traded companies between 1980 and 2013 is a good source for learning what performance targets make sense and how aggressively to pursue them. In the end, in business “shortcuts are likely to be difficult to find and harder to follow.”

6. Break your industry’s bottlenecks to unlock new sources of growth and profitability and reshape existing markets or create new ones

So what to do if you your company is stuck in a structurally unattractive industry or mature markets with a bleak outlook of low growth and profitability?

You need to create new scalable markets, move into attractive adjacent industries, or disrupt your industry. To that end you need to broaden your horizon and develop a capability to generate insights from emerging trends in your industry and beyond. Form a diverse team of talented business, creative, and technical experts. Leverage mutually beneficial partnerships with academia and leaders in other industries. Put this into action to look for inspiration in completely different sectors and unearth new opportunities by looking for hidden structural problems in your industry. To lay the ground for success first access the health of your strategic orientation by following these five steps:

• Start with an in-depth-review of your company’s mission, vision, scope, and goals in the light of current economic and industry trends and three to four plausible scenarios of the future.
• Take the opportunity to refresh your company’s definition of what winning means for shareholders and all the stakeholders in your particular circumstance. Make sure everyone is aligned.
• Consider new where-to-play spaces and how-to-win choices, in particular look for creative ways to re-shape your industry and its boundaries, or expand into adjacent more attractive industries.
• Analyse what capabilities and management systems you can leverage and what other capabilities you may need to develop or acquire. And make sure all the above strategic choices are aligned.
• Pay particular attention to how you will deal with the people side, i.e. convince people about the new direction, earn their full engagement and change the organization to realise the new strategy.

Innovation is a tough and long process. It is very difficult to come up with a blue ocean strategy. However, the good news is that there is often room for disruptive innovation or important performance improvement. It can be done by challenging the business as usual and solving structural problems in your industry. In breaking these bottlenecks companies can eliminate an entire cost category, boost demand or both. A study of 50 small and midsize companies that have managed to disrupt their sector led to categorizing 5 type of business model innovation:

1. Update an outdated customer experience. Look for aspects of the customer experience that discourage demand for all companies in the industry. E.g. Uber disrupted the taxi industry by taking away the need to hail a taxi on the street and at the same time redefining the customer experience standards for the industry with its mobile App, convenience, and quality.
2. Eliminate a superfluous major expense categories. Focus on any large cost category that is common to all companies in the industry and figure out ways to eliminate it. Generally, a first mover defines the standard for an industry’s offerings and cost structure and other followers don’t question the assumption that this is the best way to provide the offering. For example Redbox’s automated DVD renting kiosk cut the large costs of physical stores wining 19% market share within two years. Netflix disrupted the industry further with its online video-on-demand business model. With more than 60 million subscribers worldwide Netflix accounts for 37% of U.S.’s peak internet traffic.
3. Neutralise customers’ financial risk. For example in 2009 Hyundai offered customers to take back purchased or leased cars with no impact on their credit rating in case they lose their income in the next year. As a result, sales increased 8% in 2009 and 24% in 2010. Another good example is Google’s AdWords innovation that boosted internet advertising, as it charged customers only when and Ad is clicked on.
4. Invest in winning the hearts and minds of disengaged employees. Call centre provider Appletree launched a program that granted employee’s dreams. This has led to reducing employee turnover from 110% to 30%, and helped increase margin from 47% to 60% between 2008 and 2012.
5. Mitigate negative environmental side effects of the product or service. Patagonia’s founder Yvon Chouinard, who believed in building a profitable business without causing negative externalities, has built a business model based on highly-differentiated products made with environmentally friendly materials. This choice attracted many loyal customers and has led to tripling the company’s revenue from 2001 to 2013.

7. Leverage “Digital Transformation” and data-driven decision making to evolve synchronously with the market

To stay really competitive, companies also need to be among those that are pioneering new ways of continually adapting their visions, business models, and strategic choices. In our world that is growing in complexity and uncertainty, big data and analytics is making inroads into many business functions including strategy. In the far distant future maybe algorithms will help executives fine-tune strategy in a dynamic way. But for now we will focus on material emerging management trends that digital pioneers such as Google, Amazon, and Alibaba are using to adapt to the fast changing and complex global marketplace and capture increasingly large slices of economic value.

Here we will not focus on the indisputable importance of using advanced IT innovations to automate tasks and processes in order to unlock-value based on a cost-efficiency advantage. In an increasingly dynamic and complex world, it is important to learn from the ways these companies embed rapid adaptive learning into their strategy and operating model to continuously adapt to changing customer needs, competitive forces, and regulatory environment.

The core principle is pretty straightforward but its application requires companies to enable rapid learning and experimenting with new business models, offerings, and customer experiences. It is very difficult to get there particularly for large established companies as it takes adapting company culture, structure, processes and systems. And it is crucial to correctly calibrate the experimentation process and the resources allocation to avoid crossing the line of diminishing returns.

Depending on the particular circumstances of your company and industry you may prioritise developments at three different levels to increase value-creation, through evolving synchronously with the market. Additionally, in order to minimise the risks and costs of experimentation, start with running small pilots that can be conducted on a particular product-line or customer segments and then scale up successful initiatives. When constrained by internal skills and resources, engage in a mutually beneficial partnership with a promising Big Data and Analytics startups and co-create intelligent management systems that fit your needs.

At the base quick wins can be achieved by developing experience in using big-data and analytics to generating customer and competitive insights, about your offerings and customer behaviour that were not accessible with traditional methods. This will help you fine-tune your business model and offerings and avoid wasting resources by rapidly reallocating resources to more promising developments. The next level of experimentation requires more sophisticated algorithms that automatically fine-tune components of your offerings, marketing mix, and value chain in order to optimise the customer value equation, while maximising the value captured by the company.

At the strategy development and execution level, Alibaba provides a good example for a model of the self-tuning enterprise that continually adapts its vision and experiments with new business models. Whenever they see a significant market change, they trigger a “co-creation” process do develop new business directions directly with customers. An approach worth exploring and adapting to your specific business.

There are no shortcuts to success in business. Most success stories start with a talented hard-working team building an attractive business model founded on inimitable, durable, and scalable capabilities, products and services to fulfil unmet customers’ needs better than any other competitor. Then value increases in the long-run by re-investing in expanding high-growth market segments, improving customers’ experience and loyalty, and working tirelessly on renewing the company’s offerings and competitive advantages.

And always keep in mind that the top three most common reasons for business failure are failure to understand your market and customers, deciding to play in a non-profitable industry without the ability to change the game in your favour, failure to articulate in an attractive your customer-value-equation.