Disruptive Business Modeling

My next Blog was going to focus a little more on Ratio Analysis as a follow on to my previous discussions. However, when researching for an opportunity I am pursuing, I came across an interesting Harvard Business School video interview with Clayton M. Christensen entitled “Should You Reinvent Your Business Model”.
During this interview he touched on how technological innovations can cause significant disruption to businesses and may require a new business model to adapt to the disturbance. One of his examples was the evolution of the Computer Industry from mainframes to mini computers to PCs. In the interview he takes IBM as a good example of a company that managed its way through this evolution where many failed. He discusses how IBM did not try to adapt its existing business models to manage its way through these changes but started entirely new organisations in each case with its own innovative Business Model. His reasoning is that as technology evolves the resources requirements change, cost structures transform and the profit margins reduce as volumes increase and so entirely new business models are required to meet the new demand.
When asked to define a business model he states there are main four elements which need to be considered when investigating the impact of disruptive innovation:

1. All Business Models start with a Value Proposition
2. Next stage is a Profit Formula to establish a cost structure to support technological changes and the new demand for the product.
3. Then put into place a Set of Resources i.e. People, Products, Technology, Buildings, and Equipment etc. working inside of the profit formula.
4. And then as then Processes are developed within this framework to get things done

This explanation helped me put some of my ideas and previous experiences into perspective. Its shows the importance of understanding the impact of external change within the life time of an organisation. Also it highlighted the relationship between processes and profit and, how, sometimes process improvement will be sufficient if the business model radically changes. Finally technological innovation is not the only factor into today’s dynamic markets that affects radical change; also the economic cycles and the depth of recession can have the same destructive impact.