Buisness Model Reinvention

Journal of Change Management,

Vol. 4, No. 3, 259–276, September 2004

The wheel of business modelreinvention: how to reshapeyour business model toleapfrog competitors

SVEN C. VOELPEL�, MARIUS LEIBOLD�� & EDEN B. TEKIE��

�Harvard University, USA, ��University of Stellenbosch, South Africa

(Received 9 October 2003; revised 1 February 2004)

ABSTRACT In today’s rapidly changing business landscape, new sources of sustainablecompetitive advantage can often only be attained from business model reinvention that is basedon disruptive innovation and not on incremental change or continuous improvement. Extantliterature indicates that business models and their reinvention have recently been the focus ofscholarly investigations in the field of strategic management, especially focusing on the search fornew bases of building strategic competitive advantage, not only to outperform competitors but toespecially leapfrog them into new areas of competitive advantage. While the available resultsindicate that progress is made on clarifying the nature and key dimensions of business models,relatively little guidance of how to reshape business models and its organizational fitness dimensionshave emerged. This article presents a systemic framework for business model reinvention, illustratesits key dimensions, and proposes a systemic operationalization process. Moreover, it provides a toolthat helps organizations to evaluate both existing and proposed new business models.

KEY WORDS: New business models, disruptive innovation, continuous improvement, sustainablecompetitive advantage

Introduction: relevance of business model thinking and change

The extant literature in strategic management illustrates the increasing need ofenterprises to achieve sustainable competitive advantage in the increasinglyturbulent and unpredictable business landscapes of the 21st century. In addition,there are many analyses and discussions of how technology and the ‘neweconomy’ have changed traditional business models in many industries, rangingfrom hi-tech to commodity industries (e.g. Tapscott, 1997; Kelly, 1998; Prahaladand Oosterveld, 1999; Evans and Wurster, 2000). However, there is little

1469-7017 Print/1479-1811 Online/04/030259–18 # 2004 Taylor & Francis LtdDOI: 10.1080/1469701042000212669

Correspondence Address: Sven C. Voelpel, Harvard University, Harvard Business School, Soldiers Field,

Boston, MA 02163, USA. Email: [email protected]

consensus of what new business models really mean, and especially how they arecreated, evaluated and sustained. It is evidently important to develop frameworksand guidelines in this regard to assist organizations in utilizing resourceseffectively for change and survival.

Every organization has a business model, simply described as its ‘way of doingbusiness’ or its ‘business concept’ (Hamel, 2000) so that it can sustain itself. Therapid-changing business environment of today has brought about numerous newbusiness models in addition to the reinvention of existing ones. This creation andreinvention of new business models, and not just continuous improvement, areregarded as providing the disruptive competitive advantages necessary to surviveand thrive in an environment where the ‘rules of the game’ change quickly inalmost all companies and industries. The challenge for companies is to developframeworks to examine how new business models and new industries emerge, andtherefore to enable managers to develop new business models and theiraccompanying organizational change and fitness requirements.

This article, first, compares the various views of the concept of business modelsand identifies their generic components; second, indicates the relevance ofreinvented business models for competitive advantage and outlines the particularchallenges some companies face in developing new business models; third,reviews eclectic approaches to developing new business models and provides asystemic framework for business model reinvention; and finally, proposes a toolfor operationalizing and evaluating new business models.

Generic definition of a business model and its key dimensions

To understand the concept of new business models, it is important to comprehendexactly what a business model means and what its key features are. There areseveral comprehensive case examples and analyses of how traditional businessmodels have changed, or need to be changed, due to changes in technology andglobalization. However, despite a widespread intuitive understanding, an analysisby Schmid et al. (2001) reveals a confusing and incomplete picture of thedimensions, perspectives and core issues of business models. The results disclosethat there are hardly any explicit references to business models, that anunderstanding of business models often remains unspecific and implicit and thatconsensus on the key elements of business models is lacking.

It is evident that should a company have a comprehensive and cohesiveunderstanding of a business model and its identified key elements, it can be a sourceof competitive advantage and assist managers in reinventing their company and/orindustry. Timmers (1998) provides a definition of a business model as being:

. an architecture for the product, service and information flows, including adescription of the various business actors and their roles;

. a description of the potential benefits for the various business actors; and

. a description of the sources of revenues.

On the basis of a general understanding of what business models seem to be,what are the various components, dimensions, and frameworks of business models?

S. C. Voelpel et al. 260

Review and comparison of approaches to the concept of a business model

An extant literature review by the authors identified a variety of business modeldefinitions and their components. These definitions have been analysed andcompared to arrive at the generic elements of business models.

. Schmid et al. (2001) distinguish six generic elements of a business model:mission, structure, processes, revenues, legal issues and technology. Whendesigning a business model and applying the framework, Schmid et al.emphasize that all six generic elements and the dynamics of the respectiveelements have to be considered.

. According to Viscio and Paternack (1996), a firm’s business model comprisesfive elements: global core (with five key missions: identity, strategicleadership, capabilities, control mission and capital mission), business units,services, governance and linkages. This model defines the elementsindividually as well as collectively, indicating that the model must generatea ‘system’ value in addition to the value from the individual parts. Thissystem value establishes what should be inside and what should be outsidethe organization. It additionally assists in setting the standards forperformance expectations from each of the elements.

. Hamel (2000) states that the elements of a business concept and a businessmodel are the same; a business model is simply a business concept that hasbeen put into practice. A business concept comprises four major components:core strategy, strategic resources, customer interface and value network.Intermediating between the components are three elements (customerbenefits, configuration of competencies and company boundaries) that linkand relate the major components.

As evident from the above descriptions, there are overlapping and commonelements among the components and dimensions of business models suggested bythe various authors. The next section extracts the central theme from thesedefinitions and proposes an integrated framework of a business model.

Towards an integration of (generic) elements and definition of a businessmodel

Business models consist of many dimensions and there does not seem to be asingle set of dimensions of a business model that applies to all companies and to allindustries (Schmid et al., 2001). As indicated above, it seems to be generallyaccepted that the model should enable the creation of value for customers and thevarious participants in its value chain. Moreover, it must generate a total ‘system’value that is higher than the sum total value from its individual parts. From theabove analysis of various generic elements of a business model, the term ‘businessmodel’ can be defined as (see figure 1):

The particular business concept (or way of doing business) as reflected by thebusiness’s core value proposition(s) for customers; its configurated valuenetwork(s) to provide that value, consisting of own strategic capabilities as well as

261 The wheel of business model reinvention

other (e.g. outsourced/allianced) value networks and capabilities; and itsleadership and governance enabling capabilities to continually sustain andreinvent itself to satisfy the multiple objectives of its various stakeholders(including shareholders).

From this definition, the generic elements in business models are defined as:

. new customer value proposition (which could also involve new customerbase);

. a value network (re)configuration for that value creation; and

. leadership capabilities that ensure the satisfaction of relevant stakeholders.

Organizations should be able to continuously revise their business models toensure that their strategies are viable in an ever-changing competitiveenvironment. Mainly driven by advanced technology, knowledge-networkingand globalization, the resulting socio-techno-economic environment is one thatchallenges the essence of relatively stable business models that firms use toachieve their particular goals. The components of the business model are usefulbases for developing evaluation dimensions and tools for new business models.These are illustrated as a systemic model (or framework) in the later section of thisarticle.

Relevance of business model reinvention for organizations

Although the concept of ‘business model’ is not a recent phenomenon, it is usefulto recapitulate its relevance for organizations. Where the industrial era’senvironment was relatively stable and simple, today’s companies are operating ina landscape of continuous and complex change. Hamel (2000) has termed it the‘age of revolution’—where change is no longer additive, but ‘discontinuous,abrupt, seditious’. Prahalad and Oosterveld (1999) used the term ‘competitive

Figure 1. Key elements of a business model


discontinuity’ and defined discontinuity as an abrupt change. These discontinuitieshave created a competitive landscape with substantial uncertainty andunpredictability.

The major driving forces behind the rapid and unpredictable change in thebusiness environment include deregulation and privatization, technologicalchanges and globalization. Deregulation and privatization have allowedcompanies and industries to exploit global opportunities by collaborating withcompanies outside their home country to gain access to capital, technology, skills,innovative capabilities and other resources in industries that have been mostlylocal (Prahalad and Oosterveld, 1999). Technological advancements, in turn,have had, and continue to have, significant improvements in the areas ofcommunication and information technology, resulting in increased connectivity,facilitated transmission of large amounts of information and low cost in processinginformation. This has prompted a wide array of options for businesses in terms ofhow, where and when to find and seize opportunities. As a result, technologicalinnovations create new market opportunities (Viscio and Paternack, 1996). Theeffect of globalization has been in creating a mindset of the world as a singlemarket. This has created substantial uncertainty in the competitive landscape bybringing about fundamental changes in the traditional boundaries of nations,industries and companies. And such changes continue to challenge the traditionalrules of competition (Hitt et al., 2001).

These driving forces have removed the certainty and stability in the economicenvironment from almost every industry. And consequently, the competitivelandscape has undergone a fundamental change to produce a different type ofmarketplace and society often termed the ‘new economy’, ‘knowledge economy’,or ‘networked economy’ (Tapscott, 1997).

The discontinuities that differentiate the ‘new’ economy from the ‘old’ arenumerous but to mention the prominent ones, these include: digitization ofinformation (Viscio and Paternack, 1996; Tapscott, 1997); the ‘virtual space’where economic transactions are increasingly taking place (Kelly, 1998); relyingmore on knowledge and intellectual (intangible) assets (Sveiby, 1997; Davenportand Voelpel, 2001); industry convergence (Tapscott, 1997; Prahalad andOosterveld, 1999); innovation as a main source of value (Hamel, 1998; Sengeand Carstedt, 2001); employee mobility as accelerating and increasing knowledge,innovation and value creation (Voelpel, 2002, 2003); networking (Ashkenas,1999); prosumerism (Gibbert et al., 2001); deconstruction and reformulation oftraditional business structures of organizations and value chains (Evans andWurster, 2000); and disintermediation and reintermediation (Kelly, 1998;Prahalad and Oosterveld, 1999; Evans and Wurster, 2000).

These major shifts in the business environment have changed many traditionalindustry structures and sources of competitive advantage. These changes suggestthat organizations have to adjust/transform their business models in order tosustain themselves in the ‘new’ business landscape.

From the above analysis of the driving forces and their resulting discontinuitiesit is evident that an organization, as part of a ‘business system’ that operates acrossa variety of industries (Moore, 1993), should have a ‘systemic’ perspective thatis not restricted by traditional boundaries. This understanding implies


organizations need to shift from traditional (existing industry focused, mechanisticthinking) approaches of strategic management to ones that are systemic (holistic,new value configuration focused) in nature.

A company should, however, be oriented and capable of reinventing its strategynot when it is in the midst of a crisis, but continuously (Hamel, 2000). After all, nomatter how successful and superior a company’s current business model seems tobe, it will be ‘imitated, diluted and commoditized’ by others and challenged bynew business models (Tucker, 2001). Additionally, major and unpredictablechanges in the business environment, the increasing importance placed oninnovation and knowledge as value-creating attributes, and the accelerating pace ofthe business environment create a challenge in sustaining the efficacy of existingbusiness models (Viscio and Paternack, 1996; Hamel, 2000; Tucker, 2001).

The significance of changing the ‘rules of the game’ in today’s businesslandscape include being persistently innovative and imaginative in differentiatingown and industry strategy/business model (Hamel, 1998, 2000; Govindarajan andGupta, 2001; Youngblood, 2000); reinventing existing business models or creatingnew ones instead of merely improving or optimizing current business models(Beinhocker, 1997; Prahalad and Oosterveld, 1999; Fiorina, 2000); realizing thecompetitive advantage found in proactively restructuring the industry’senvironment through a first-mover mindset (Kelly, 1998; Hitt et al., 2001) or attimes the advantages of being a second mover in learning from prime movers’early mistakes or becoming adept emulators (Bradley and Nolan, 1998; Bartlettand Ghoshal, 2000; Boulding and Christen, 2001); and experimenting with aportfolio of strategies, rather than having a singular focused strategy, to providethe flexibility needed in the uncertain and unpredictable environment (Beinhocker,1997, 1999).

Possible challenges for industry incumbents

Some large organizations resist disruptive change partly because the kind ofchange being required is radical and challenging. That is, what is needed is nolonger a matter of incremental change, but realizing a discontinuoustransformation in both organization and industry (Pascale and Millemann,1997). Some of the difficulties incumbents face include when a successful businessencourages top management to focus organizational energies and resources onrefining and extending the existing business model. Entrenched managerialroutines and commitment to the existing business model often brings failure to thecompany when discontinuities occur in the business environment (Sull, 1999;Youngblood, 2000).

Additionally, incumbents could easily become inept because of their reluctanceto deconstruct their established business model (e.g. sales and distribution systemsand long-term relationships with suppliers and customers), and this hesitationbecomes the greatest competitive advantage for new competitors. For this reason,companies have to pre-emptively cannibalize their own businesses to remaincompetitive (Evans and Wurster, 2000). Allowing ‘creative destruction’(Schumpeter, 1943) entails the paradox, and a challenge for managers, ofperfecting (improving, making efficient) products and services only to destroy


(cannibalize, reinvent) them (Harari, 1996). Nevertheless, it is important to realizethat if organizations are to defend themselves against competitors, they shouldplay the role of creator and destroyer of their own business models.

Another challenge is unlearning the past. Corporate managers may have ‘excessof rationality’ (Useem, 1999) or ‘widely established principles of goodmanagement’ (Christensen, 1997) that persuade them to disregard importantnew technologies and markets. And as a result changes in organizations often donot occur unless they are on the verge of collapsing, or when facing majordisruptions. For organizations to learn how to survive and compete in thecompetitive landscape, they should significantly unlearn their traditional strategymindset, way of thinking and doing, and business models (Hamel, 2000).

In general, traditional strategic management approaches involve a competitiveorientation with companies mainly attempting to get better (or ‘fitter’) to achieveunique positions in the existing industry. This is rooted in mechanistic, industryboundary-oriented thinking with companies striving to continuously improvethemselves (‘running harder and harder’). In today’s more chaotic environment,organizations should rather strive to systematically reinvent themselves (‘rundifferently’).

In cases where there is reluctance and hesitation in organizations to let go ofdeep-rooted ways of doing their business, these firms tend to hang on toestablished patterns of thinking and working despite dramatic environmentalchanges. An example of how discontinuity in the environment can lead a companythat is rooted in a traditional business model thinking to its downfall is suitablyportrayed by Encyclopedia Britannica.

Encyclopedia Britannica

Since 1768, Encyclopedia Britannica has evolved through 15 editions and to thisday it is regarded as the world’s most comprehensive and authoritativeencyclopedia. In the 1970s, Britannica grew into a serious commercial enterprise.The content was revised every four or five years, and the company built one of themost aggressive and successful direct sales forces in the world. By 1990, sales ofBritannica’s multivolume sets had reached an all-time high of about US$650million. Since 1990, however, sales of Britannica have collapsed by over 80 percent. Britannica was under serious threat from a new competitor: the CD-ROM.

The CD-ROM came from ‘nowhere’ and destroyed the printed encyclopediabusiness. Whereas Britannica sells for US$1500–2000 per set, CD-ROMencyclopedias sell for US$50–$70 with the vast majority of copies given away forfree to promote the sale of computers. While the marginal manufacturing cost ofBritannica is about US$250 for production plus about US$500–600 forsalesperson’s commission, the CD-ROM’s marginal cost is US$1.50 per copy.

Britannica’s executives initially seemed to have viewed the CD-ROMencyclopedia as an irrelevance, but as revenues plunged, it became obviousregardless of the quality, CD-ROM encyclopedias were serious competition.As sales continued to plummet, the company eventually put together their ownCD-ROM version of the encyclopedia.


The CD-ROM version engendered yet another crisis: it could not possiblyproduce the US$500–600 sales commission its traditional counterpart produced.To avoid a revolt by the sales force, Britannica executives decided to bundle theprinted product with its digital counterpart. The CD-ROM was given free tobuyers of the multivolume set. Anyone who wanted to buy just the CD-ROMwould have to pay US$1000. The decision appeased the sales force briefly, but didnothing to stem the continuing collapse of sales. In 1995, the company was put upfor sale, and after 18 months it was sold for less than half of the book value. In lessthan five years, one of the greatest brand names in the English-speaking world,with a heritage of more than 200 years, was nearly destroyed by inexpensive,plastic disk (adapted from Evans and Wurster, 1997, 2000).

A systemic framework for developing a new business model

It is possible for organizations to reinvent themselves with systemic strategyapproaches, i.e. value propositions for customers enabled by systemic newindustry configurations, while still maintaining their existing business models ifthese are still valid and resulting in profits for the company. The latter is veryimportant, as the old business model has to provide the necessary funding for thenew business model’s experimentation and incubation, while it still has relevanceto some (‘old’) customers and value chains. In this section a review of selectedapproaches to developing a new business model is first provided, and then asystemic integrated framework is proposed.

Review of selected approaches in developing new business model

Taking into consideration the challenges faced by organizations in cannibalizingtheir existing business models and operating in innovative ways, a number ofauthors have suggested ways to enable both new entrants and establishedcompanies to create new business models, or reinvent existing ones, in theirorganization and industry. Two prominent approaches are highlighted here.

Extended value chain management

According to Govindarajan and Gupta (2001) the business model involves theareas of customer definition, customer value identification and value chain processdesign. Accordingly, they have identified three highly interconnected arenas inwhich the ‘rules of the game’ can be changed. These include the dramatic redesignof the end-to-end value chain architecture that has reduced costs and/or greatlyenhanced value; transformation of the value customers receive by providing acomprehensive customer solution(s); and redefinition of the customer base bydiscovering and serving previously hidden customer segment(s).

Drivers of customer value creation

Amit and Zott (2001) propose four sources of value creation that demand equalconsideration and that enhance the value-creating potential of a business. These


are: efficiency of purchase (e.g. through increased information flows and reducedinformation asymmetries between buyers and sellers); offering complementaryproducts/services as an integrated bundle of products/services; using ‘lock-in’incentives to create high switching costs for customers and strategic partners; andnovelty of the product/service provided as unique and recognized to bepioneering, thus creating previously unrecognized value. Both approaches placeemphasis on creating value for customers as a starting point, in developing newbusiness models. This is the basis they use from which viable and successfulbusiness models can be created. Accomplishing this will enable new customervalue propositions to develop, and this in turn intensifies the firm’s ability toreinvent itself and its value chain.

It is important to note, however, that it is essential to establish a suitableorganizational environment, including appropriate managerial approaches andthinking, to enable new business models to arise. First, organizations should beable to make coherent creativity and innovation an outcome of a company-widecapability that combines a diverse and purposeful set of ideas and viewpoints frompeople throughout the organization, as well as amoung stakeholders (e.g.customers, suppliers, distributors) linked to the organization (Hamel, 1998; seealso Roos and Victor, 1999 for the generation of new strategies though strategicimagination, and Lissack and Roos, 2001 for balancing vision and cohesiveness instrategy making). Second, organizations should also be able to create anenvironment in which the firm can coherently self-organize and remaincompetitive by establishing a shared vision/identity and values, creatingacceptable degrees of ‘disorder’ that stimulate creativity, and encourage self-learning and promoting risk taking (Youngblood, 1997; Pascale, 1999)

Systemic strategy thinking as a prerequisite in networked value creation

Having discussed the key components of business models and the need to create/reinvent business models to remain competitive and to leapfrog competitors, howcan organizations and managers develop new business models? Thus far in thepaper, four aspects have become prominent for the purpose of developing newbusiness models. These are: customers, technology, business infrastructure, andprofitability.

As mentioned previously, technological advancements have greatly enhancedhow organizations compete and technological innovations often create newopportunities (Viscio and Paternack, 1996). With computers and communicationtechnology being utilized throughout the world, there is indication of a gradualdisplacement in the economy of materials by information (Kelly, 1998). That is,pervasive connectivity separates the flow of information from the flow of physicalthings, allowing each to follow its own economics (Evans and Wurster, 2000).This, in turn, has resulted in the deconstruction (breaking down) of traditionalboundaries, where deconstructed pieces of organizations can fragment intomultiple businesses that have separated sources of competitive advantage, orrecombine to form new business structures (Evans and Wurster, 2000).

With the advent of technology, customers have become more informed andpowerful — they are able to articulate and demand their needs and if they are not


satisfied with what they get then they take their demand elsewhere, they areincreasingly involved with organizations in the production/creation process(prosumption, co-creation), and they participate in communities (such as onlinecommunities) where they have a powerful voice that can make or break acompany’s reputation. Customers are no longer passive constituents of an industrybut principal participants in creating and competing for value (Prahalad andRamaswamy, 2000).

The frameworks for developing new business models suggested in businessliterature—including that of Govindarajan and Gupta (2001) and Amit and Zott(2001) reviewed above—consider business models from an individualorganization’s perspective. Organizations do not operate in a vacuum and theydo not have all the necessary resources they need to compete in the ever-shiftingbusiness environment. In order to capture opportunities that arise fromdiscontinuities, firms should form a network (business infrastructure) whereeach participating member allocates its resources (knowledge, expertise, capital,etc.). Successful businesses are those that co-evolve rapidly and effectively bybringing together resources, partners, suppliers, customers and other agents tocreate cooperative networks. This implies that in a ‘business ecosystem’,companies work cooperatively and competitively to generate new products/services, to satisfy customer needs, and to incorporate future innovations (Moore,1993). From an ecosystem perspective, therefore, the strategy focus of anindividual firm is to co-shape and co-perform with the other players in the businesscommunity and to build co-opted capabilities in the ecosystem (Leibold et al,2002). Figure 2 provides a systemic framework for understanding this co-shapingof the development of new business models.

Organizations, as ongoing concerns, have aspirations to attain a certain level ofprofit if they are to sustain themselves. Additionally, as previously discussed, abusiness model should have an economic feasibility to sustain the existingbusiness model as well as to provide funds for experimenting with differentmodels.

Figure 2 indicates that a new business model arises not only from reconfiguringan organization’s core business strategy and dynamic capabilities, but also frommaking sense of socio-cultural dynamics and opportunity gaps, reinventing of

Figure 2. A systemic perspective of developing new business models


customer value proposition(s), and reconfiguring the business network and itsvalue chains. This improves and sharpens managerial sense-making of socio-cultural business system dynamics, for managers to guide, cultivate and shapeself-organizing creative activities in the organization for the creation and buildingof new business models. Such systemic thinking therefore provides the basis forcontinuous radical innovation and adaptation to the changing environment throughco-shaped customer value propositions.

The wheel of business model reinvention: how to operationalize and measurethe development of new business models

Traditionally, the success or effectiveness of a business strategy could beevaluated in terms of how well it: fits the general external environment (political/legal, socio-cultural, technological, economic, demographic, and global aspects ofthe outside world); fits the industry in question (Porter’s five forces); considersenvironmental trends, identifies success factors and deals with the ramifications;and takes advantage of the firm’s current core competencies, or calls for theacquisition of core competencies, necessary for the strategy to succeed (Huffman,2001).

The ‘fitting’ concept of an organization was mostly used for existing businessmodels and applied in an analytical context, and should not be confused with theconcept of organizational fitness, i.e. dynamic capabilities for systemic adaptiveand reinventive activities. The challenge that arises is how to operationalize thedimensions of new model creation, as depicted in Figure 2, and how to evaluateproposed new business models within the uncertainty, unpredictability and rapidchange in the business environment.

Based on the four aspects of customers, technology, business infrastructure andprofitability, Figure 3 illustrates the four-dimensional tool of business reinventionby making sense of environmental changes and the relevance of possible newbusiness models.

The wheel of business model reinvention consists of the four dimensions(compare also with the seminal framework presented by Bradley and Nolan,1998: 36):

. Customer sensing (including new customer value propositions): refers to therelative ease of acceptance of a new value proposition.

. Technology sensing: indicates the relative strength, direction and impact oftechnology on new customer value and the business network.

. Business infrastructure sensing (organizational and business networkinfrastructure): refers to the relative responsiveness of the traditionalbusiness network to reconfigure, or to the relative ease of a new businessnetwork configuration.

. Economic/profitability sensing: indicates the relative economic feasibilityand profitability of the proposed model.

The closer the results are to the outer limits of the figure, the more likely it is forbusiness model reinvention. Whenever, for instance, new technologies emerge,


new businesses are likely to be created, and competitive advantages could accrueto effective first (prime) movers and/or early movers and close followers. Theframework takes into account the dynamic nature of business models and,moreover, considers critical dimensions, such as customer value creation,economic feasibility and the impact of technology and business infrastructure.

The wheel illustrates the interactive (systemic) flow from all four dimensions inbusiness model reinvention. Organizations seek ways of creating customer valuepropositions with products/services that are innovative and that satisfy genericunderlying needs. Suitable technology should be in place that can easily leverageefficiency and the new customer value. The business system infrastructure, in turn,should be configured in such a way that would enhance the customer value that hasbeen created and being offered. Finally, all the endeavours that have hitherto beenundertaken should be economically feasible to benefit all those involved in thereinvention process, as well as in newly configured value chains. Organizations

Figure 3. Wheel of business model reinvention


should continuously attempt to reinvent themselves, hence, the wheel starts allover again with sensing customer needs and technology direction, and thepotential for creating new customer value propositions and resumes with the restof the framework’s dimensions.

Application of the wheel

Taking the instance of Encyclopedia Britannica, the wheel would have enabledthe company to adopt the new CD-based business model if it had made the effort toappropriately sense the changes that were taking place in its industry. The firm hadfatally overlooked the potential of the CD-ROM initially, perhaps assuming that itwas a technology unrelated to its business. However, if Britannica had correctlysensed the direction and intensity of technology (such as, of computers andcommunication) and how existing and potential customers were becomingfamiliar, comfortable and savvy with sophisticated technology, the firm wouldhave been in a position to be part of a new customer value proposition. Britannicahad a powerful status of having the most comprehensive encyclopedia and thecompany could have used this valuable reputation to its advantage by creating abusiness network with members such as hi-tech companies. In such a network,Britannica would provide its compiled vast knowledge/information and otherparties of the value system would supply their respective resources, resulting in aproduct that is low-cost, low priced, with quality and ease of use. The profitabilityof such a business model would have for the members of the value system is clear:an innovative value for customers from which the rest of the business networkwould benefit. And as the term ‘wheel’ indicates, Britannica should not come to ahalt with the new business model but strive to create yet new customer valueproposition with participants of the existing network or reconfigure it according tochanging market/environment needs and requirements.

The wheel is not intended to give the impression that business modelreinvention is a simple task. There are risks involved where a new business modelmight fail. Even with sharp sensing capabilities of the competitive environment, itcould still be difficult for organizations to accurately make sense of theunpredictable environment. That is when having a number of possible strategies inthe pipeline provides a cushion from unsuccessful ventures. In the case ofBritannica, the organization held on to its single way of doing business until thethreat from a new competitor, and then later attempted to combine a new strategywith its existing model. This created a clash that only aggravated its dilemma, onebeing overriding the power of its sales force. As discussed previously, one of thediscontinuities in the environment is the deconstruction of organization structures.Britannica faltered in ‘letting go’ of its sales staff that was part of the ‘old’business and that was hindering it from moving ahead to reinventing its businessmodel that could offer a totally different customer value.

There are numerous examples of organizations that have both reinventedthemselves and their industry. Companies such as IKEA (Normann and Ramirez,1993; Von Krogh and Cusumano, 2001) and Wal-Mart (Moore, 1993) havesucceeded in changing the ‘rules of the game’ and becoming drivers of theirindustries by discarding established ways of doing business. Dell is another


popular example where the company redesigned its value creating activities so thatit became efficient and effective in targeting its customers and enhancing customervalue (Govindarajan and Gupta, 2001). Another case in point is BRL Hardy, asdescribed below.

BRL Hardy’s new business model in the global wine industry

Among many companies in the global wine industry, one that took advantage ofothers’ inflexibilities was BRL Hardy, an Australian wine company that defiedmany of the well-entrenched traditions of international wine production, tradingand distribution—despite the fact that its home country produces only 2% of theworld’s wine.

From a 1991 base of US$31 million in export sales—much of it bulk for privatelabels and the rest a potpourri of bottled products sold through distributors—Hardybuilt its foreign sales to US$178 million in 1998, almost all of it directly marketedas branded products. The insight that triggered this turnaround was the realizationthat for a lot of historical reasons, the wine business—unlike the soft-drinks orpackaged-foods industries—had very few true multinational companies andtherefore very few true global brands. This was a great opportunity waiting to beseized.

The inflexibility of the European practice could be attributed to labelling winesby region, subregion and even village. A vineyard could be further categorizedaccording to its historical quality classification. The resulting complexity not onlyconfuses consumers but also fragments producers, whose small scale preventsthem from building brand strength or distribution capability. This created anopportunity for major retailers to overcome consumers’ confusion, and capturemore value themselves, by buying in bulk and selling under the store’s own label.

For decades, BRL Hardy’s international business was caught in this trap. Itdistributed its Hardy label wines to retailers through local agents and sold bulkwine directly for private labels. But the company’s insight, and its willingness tochange the rules of the game on both the demand and supply sides, gave it a wayout. First, new staff was appointed and new resources allocated to upgradeoverseas sales offices. Instead of simply supporting the sales activities ofdistributing agents, they took direct control of the full sales, distribution andmarketing. Their primary objective was to establish Hardy as a viable globalbrand. The company’s supply-side decision was even more significant. In order toexploit the growing marketing expertise of these overseas units, Hardy encouragedthem to supplement their Australian product line by sourcing wine from around theworld. Not only did Hardy offset the vintage uncertainties and currency risks ofsourcing from a single country, it also gained clout in its dealings with retailers. Bybreaking the tradition of selling only its own wine, Hardy was able to build thescale necessary for creating strong brands and negotiating with retail stores.

The advantages have been clear and powerful. The company’s range of wines— from Australia as well as France, Italy and Chile — responds to supermarketneeds to deal with a few broad line suppliers. At the same time, the scale ofoperation has supported the brand development so vital to pulling products outof the commodity range. Results have been outstanding. In Europe, the volume of


Hardy’s brands has increased 12-fold in seven years, making it the leadingAustralian wine brand in the huge UK market, and number two overall to Gallo inthe UK. And branded products from other countries have grown to represent abouta quarter of its European volume. Hardy has evolved from an Australian wineexporter to a truly global wine company (adapted from Bartlett and Ghoshal,2000).

BRL Hardy’s radical strategy of introducing a new competitive business modelchallenged the industry’s established rules of competition by taking advantage ofothers’ inflexibilities and deep-rooted traditions in international wine production,trading and distribution. With systemic sense making, and application of the wheelof business model reinvention, Hardy discovered new customer value byproviding novel solutions for consumers, new value for small-scale wineproducers, as well as for distributors and other partners. Its business systeminfrastructure was reconfigured to appoint new staff and to allocate new resources.In addition, the value system was reconstructed to enable the company build astrong brand image with the necessary marketing and distribution capabilities thatsupported the organization. Finally, Hardy’s profitability from such anundertaking is obvious — it became one of the worldwide leading wine brands.

Conclusion

Disruptive changes in the business landscape have brought about thedeconstruction of traditional boundaries and relationships (organizational,industrial, national and global), creation of new industries and new businessmodels, and has made knowledge, innovation and self-renewed change sources ofsustainable competitive advantage. Despite these realities, many companies find itdifficult to escape organizational inertia caused by existing industry orthodoxy and‘conventional’ mindsets.

The driving forces behind the changes and unpredictability of the businesslandscape challenge the traditional approaches to strategic management. What arerequired in the ‘new’ environment are radically different solutions that test andchallenge the fundamental make-up of conventional strategic managementthinking and practices. The real challenge for most organizations is not whetherthe rules of the game will change (because they will); rather, will they make thenecessary (appropriate) radical transformation required for future survival.

The paradoxical situation of creating new business models while bothbenefiting and cannibalizing existing models, may seem like destroying anorganization that companies spend their resources on in perfecting. However,systemic strategic management does not mean a complete and/or instantaneousdiscarding of the existing organizational business model. It rather means toinitiate, experiment with, and develop new business models alongside themanagement of a traditional business model — a paradoxical and systemicmindset, with application of appropriate frameworks and tools.

Disrupting and even discarding traditional means of doing business may seemrisky for established companies. However, provided that organizations reinventorganizational business models and industry configurations that result in relevantnew customer value propositions, as well as sensible value for all value chain


stakeholders, companies can achieve new bases of sustainable competitiveadvantage in today’s fast changing business environment — until the next wave ofbusiness model reinvention. The latter indicates that the era of organizational‘comfort zone’ is finally over — when at the peak of success there is the greatestdanger for any organization. This implies that the search for business modelreinvention in today’s world is an important and continuous process.

Managerial implications

This article provides executives and managers with a systemic perspective ofdeveloping new business models in addition to a powerful tool — the wheel ofbusiness model reinvention. With a systemic view of the environment (thebusiness ecosystem perspective), organizations can co-shape new customer valuecreation and develop new business models together with other key players in thebusiness community. The wheel of business model reinvention provides a logical,integrated means of making sense of the environment and of proposed businessmodels. These include critical dimensions of new customer value propositions,technological innovation, reconfiguration of the value system and the economicfeasibility of a new business model.

It is also crucial to recognize that executives and mangers should be able tocreate a suitable organizational environment and mindset that enable new businessmodels to arise. Enabling such an environment and thinking consist of ways thatfacilitate and enhance company-wide and cohesive creativity, innovativeness andimaginativeness that result in novel and unique customer value proposition(s).

With a proper perspective and appropriate tool to reinvent business models,executives and managers can more readily discover ways for changing the basis oftheir organization’s competitiveness, and for cultivating their organization’sfitness for continuous change and survival.

Acknowledgements

The authors wish to thank Michael Beer, Russell Eisenstat and the colleagues atthe Center for Organizational Fitness for their helpful inspiration and insights. Weare also thankful to Charles Baden-Fuller and Richard Whittington for theircomments and to our colleagues at Harvard Business School since some of ourthoughts have been further enlightened during various discussions when sparksflew with Dorothy Leonard, Morten Hansen, Alan MacCormack, as well as HeikeBruch, Georg von Krogh and Thomas Davenport.

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Notes on contributors

Sven C. Voelpel is a Professor of Business Administration teaching andresearching at the Harvard Business School and the Graduate School of Artsand Sciences at Harvard University (USA), University of Groningen(Netherlands), Business School Netherlands International (Netherlands),University of St. Gallen (Switzerland), Stellenbosch University (South Africa),China Europe International Business School (China) and Tsinghua University(China). He was a former Visiting Professor at the Indian Institute ofManagement Bangalore (India) and Visiting Associate Professor atHitotsubashi University (Japan) and is a Group Strategy Partner withinSiemens (Germany).Marius Leibold is Professor in Strategic International Management atStellenbosch University (SU), South Africa, and also Professor of Strategy atBusiness School Netherlands International. He holds visiting professorships inNorth America and Europe.Eden B. Tekie is a research associate in the Department of BusinessManagement, Stellenbosch University, South Africa.


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