Organizational Capital: Business Model Innovation

One of the reasons we believe that traditional fundamental metrics will hardly apply today is due to the fact that the world economy has been transitioning from the industrial age to the information age-where Alvin Toffler calls this the Third Wave.

This means that the current underlying trend which deepens the integration of global markets (globalization), intensifies comparative advantages and the international division of labor plus competition driven technology innovations has been paving way for a reconfiguration of global economic structures.

This also means that capital in a traditional sense has also been evolving to incorporate organizational capital-or a procedure implemented by businesses to complete work (wikipedia.org).

The Boston Global Consulting Group presents a recent paper "Business Model Innovation" highlighting on these:

According to BCG, (bold highlight mine)

``This combination of product innovation and business model innovation (BMI) put Apple at the center of the market approximately 30 times larger than its original market. It also helped expand the company's share of the traditional computer market, as new customers become so attached to their iPods that they took another look at the Apple's computers.

``The greater frequency of disruption and dislocation in many industries is shortening business model lifecycles. New global competitors are emerging. Assets and activities are migrating to low cost countries. Systemic risk is growing as global business becomes increasingly interconnected. Social and ecological constraints on corporate action are emerging. All these factors require businesses to bolster and accelerate innovation. The discipline of BMI offers a fresh way to think about renewing competitive advantage and reigniting growth in this challenging environment.

``Business model innovation means more than a brilliant insight coming at the right place and the right time. To confer a reliable advantage, BMI must systematically cultivated, sufficiently supported, and explicitly managed.

Here is a diagram of the conventional model.

The BCG says that BMI is helpful during times of crisis or instability in the sense that

-it provides companies a way to break out of competition via process or product innovation.
-it help address disruptions or technological shifts-to cope with new business demands
-it addresses specific opportunities, by enabling companies to concentrate on either lower prices or reduce risks and cost of ownership for customers-usually by means of reengineering or reinventing themselves.
-companies often find it easier to gain consensus around the bold moves required to reconfigure an existing business

To add, BMI delivers superior and sustainable returns according to BCG, aside from offering "a premium over the average total shareholder return" on their industries or businesses See exhibit 2

And BMI can take several forms (see above).

Read the entire BCG paper here

And it is probably a reason why workers may have been more productive even during today's crisis. To quote Garrett Jones (Source Tyler Cowen: Marginal Revolution), ``Workers mostly build organizational capital, not final output. This explains high productivity per 'worker' during recessions."

The Internet Age Means Markets Based On Niches Or Specialization

The advent of the internet has given tremendous access to nearly "free" information to practically anyone who has the interest to seek them out.

This can be even seen filtering into mainstream education see A Bet On Free Education and A Bet On Free Education 2: University Bubble, Democratizing Education Via Creative Destruction.

In fact one can argue that the internet has "democratized" information that has allowed people to close the gap of so-called "informational advantages" long held by so-called experts, when the cost of information had been exorbitant or prior to this eon.

Yet democratization of information comes at the cost particularly to those who wish to do online business-particularly on the subscription facet. And that includes me.

That's fundamentally because information providers have been in a steep "invisible" competition.

Research recap quotes a Forrester study that says despite the thrust to increase the online subscription business by information providers, this has been elusive due to the resistance by the market.

From Researchrecap,(bold emphasis mine)

``A recent American Press Institute survey found that 58% of newspaper respondents are considering initiating paid access for currently open/free news and information online, and nearly 25 % expect to implement a paid strategy in the next six months. “This is a big change, considering that 90 % of the responding newspapers currently do not charge for content, and only 3% currently have a paid-only site.”

``But in Publishers Need Multichannel Subscription Models Forrester finds that “most consumers (80%) say they wouldn’t bother to access newspaper and magazine content online if it were no longer free (no surprise), and the rest are split about how they’d like to pay for content:



``What’s more, “those consumers can’t be identified by demographic segmentation alone; publishers must use engagement metrics to target the right consumers with the right offer. And what that offer is will vary: While some consumers say they’d prefer a multichannel subscription bundle, others say they’d consider a single-channel subscription or micropayments. While some consumers voice a preference for Web delivery, others prefer access via mobile devices like phones, eReaders, and netbooks.”

``The situation in Europe is similar, in Who Will Pay For Online Content? Forrester finds that 4% of European Internet users surveyed pay for online news content, and 12% said they would pay for it in the future. The picture is somewhat brighter for music and movies, followed by eBooks and games:

The reluctance to pay for information doesn't mean most have been for free. What has been willingly paid for by subscribers have been specialized content. The Boston Consulting group says that localized information gets more of this business.

From the BCG, (bold highlights mine)

``New research released today shows that consumers are willing to spend small monthly sums to receive news on their personal computers and mobile devices. In a survey of 5,000 individuals conducted in nine countries, BCG found that the average monthly amount that consumers would be prepared to pay ranges from $3 in the United States and Australia to $7 in Italy.

``John Rose, a BCG senior partner based in New York who leads the firm’s global media sector, said, “The good news is that, contrary to conventional wisdom, consumers are willing to pay for meaningful content. The bad news is that they are not willing to pay much. But cumulatively, these payments could help offset one to three years of anticipated declines in advertising revenue.”

``BCG’s survey found that consumers were more likely to pay for certain types of content, specifically news that is:

• Unique, such as local news (67 percent overall are interested; 72 percent of U.S. respondents) or specialized coverage (63 percent overall are interested; 73 percent of U.S. respondents)

• Timely, such as a continual news alert service (54 percent overall are interested; 61 percent of U.S. respondents)

• Conveniently accessible on a device of choice

``In addition, consumers are more likely to pay for online news provided by newspapers than by other media, such as television stations, Web sites, or online portals.

``They are specifically not interested in paying for news that is routinely available on a wide range of Web sites for free.

``While encouraging, this willingness to spend is only part of the solution for newspapers. For example, in the United States, advertising—which accounts for around 80 percent of newspaper revenues—is in a steep decline. If consumers start to pay for their news online, it will slow, but not stop, newspapers’ decline. As a result, newspapers must look to innovate on multiple fronts.

``Consumers More Likely to Pay for Online Content from National and Local Newspapers Than from Major Metros"

And this reminds me of marketing guru Seth Godin's counsel,

``The problem with "everyone" is that in order to reach everyone or teach everyone or sell to everyone, you need to so water down what you've got you end up with almost nothing...

``You don't want everyone. You want the right someone.

``Someone who cares about what you do. Someone who will make a contribution that matters. Someone who will spread the word.

``As soon as you start focusing on finding the right someone, things get better, fast. That's because you can ignore everyone and settle in and focus on the people you actually want." (bold highlights mine)

The point is that the industrial age of mass marketing has been gradating into the information "internet" age which focuses on niche or specialized marketing.

In other words, business trends (like the subscription model) in a more globalized setting backed by real time communications are likely to shift markets into highly segmented (localized) or customized backed by real time features, since generalized information is likely free.

This also suggests that traditional metrics in appraising business models or even in economic conditions, largely based on the industrial age won't be accurate or even effective.

Perhaps organizational capital -a procedure implemented by businesses to complete work (wikipedia.org) -will matter more than final output in measuring of productivity.

This also suggest that what we know of as success models of the past won't likely be the same models going forward. So the axiom of past performance don't guarantee future outcomes becomes increasingly elaborate.