Building Resilence - Introduction to Business Models

8/13/2019 Building Resilence - Introduction to Business Models

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Two of the worlds most prestigious accounting bodies, AICPA and CIMA, have formeda joint venture to establish the Chartered Global Management Accountant (CGMA)designation to elevate and build recognition of the profession of management accounting.This international designation recognises the most talented and committed management

accountants with the discipline and skill to drive strong business performance. CGMAdesignation holders are either CPAs with qualifying management accounting experienceor associate or fellow members of the Chartered Institute of Management Accountants.


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Introduction 2 What is a business model? 3

What creates and drives value in your business? 7

Innovative business models 11

When business models go wrong 15Toughen up your business model 18

The management accountants role 22

CONTENTS


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BUILDING RESILIENCE An introduction to business models2

Whether the founder articulates a formal model orimprovises along the way, a fundamental concept ofinputs, processes or activities, outputs and outcomesunderpins the belief that prots are at hand. Even achilds lemonade stand from bygone days requiredlemons, water, and sugar, xed assets including apitcher and a table, and maybe even angel investors(the parents). Activities included mixing the ingredientsand marketing. The output was a cooling summer

beverage, andif successfulthe outcomes includedsatised customers and additional pocket money.

Poorly structured business models can also be theend of a commercial venture. The model can beawed from the start or lack the exibility to adaptto a changing environment. Lemonade doesnt sellwell in the arctic or as winter approaches.

Even before the term business model came intovogue, businesses have been based on an idea,

by whatever name, of how value is created anddelivered. The term itself rose to prominence atthe end of the 1990s during the internet boom andhas become a well-established concept in strategicthinking. Indeed, there has been an explosion inthe number of papers published and an abundanceof conference sessions and panels on the subject.1

Understanding how business models work and howthey create value for a company is vital for anymanager and is essential in the higher echelons.

Todays commercial environment is characterisedby rapid change. New technologies are introduced,customer behaviours and desires shift, supply anddistribution chains mutate, and the inuence ofstakeholder groups rises and falls all at speedsunprecedented in economic history.

In this report, we examine how business modelsfunction and the factors that contribute to theirsuccess and failure. In the rst chapter What isa business model?we provide a framework of thebasic elements of a business model. What createsand drives value in a business? takes a closer look

at how the human factor and intellectual capital cancontribute enormous value. The third, Innovativebusiness models, explores how some companieshave reached beyond the traditional template tocreate business models better suited to the times.

The fourth chapter, When business models gowrong, presents case examples that illustratecritical failures in business models, including somethat once supported decades of corporate success.Toughen up your business model, suggests aseries of measures that can help build resilienceinto business models and provide early warningswhen models are foundering. And we end withThe management accountants role, illustratinghow nancial professionals can become intricatelyinvolved in guiding the success of their companiesbusiness models.

Management accountants can better serve their

corporations and provide additional value byunderstanding more clearly the connection betweenthe business model and commercial success. Nextto the CEO, management accountants often havethe most holistic perspective of a corporationsoperations. Unlike other specialists with afocused view on, say, research and developmentor marketing, nancial professionalsespeciallyat senior levelsgather inputs from throughout anorganisation to create an overview of corporatehealth. This stream of information can often hold therst signs of business model stress or indications ofsuperior performance.

Management accountants contribute skills andcapabilities beyond straightforward nancialexpertise. They bring to the conversation a deeperunderstanding of corporate strategy, risk analysis,and economic forecasting, among other aspects ofcorporate performance. Combined, these qualitiescreate managers who can not only identify fault linesin business models, but can also propose solutionsand bring the credibility necessary for their voicesto be heard.

Every business starts with a business model.

INTRODUCTION


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While the debate has left room for uncertainty, thismuch is clear: the business model matters. And,more precisely, understanding what makes yourbusiness model sustainable matters even more intodays environment where traditional products,services and delivery channels can be renderedobsolete almost overnight.

Organisations need to be resilient and adaptive.How will your business react to variation inthe quality and availability of key inputs? Thisresponsiveness to change is a key element of aneffective and sustainable business model.

As a concept, the business model is often confused

with business strategy. In 2011, writing for theHarvard Business Review , business professors RamonCasadesus-Masanell and Joan E. Ricart sought todifferentiate the two.2 They wrote that a businessmodel is:

On its face, What is a business model? is a simple question

but there is no easy answer. The term, while the focus of daily presscoverage and boardroom debate, has never had a common denition.While some see it through the lens of strategy and competitiveadvantage, others apply a more encompassing perspective,dening it as the overall impact of a business on its environment.

WHAT IS A BUSINESS MODEL?

the logic of the company how it operates andcreates and captures value for stakeholders in acompetitive marketplace. That denition impliesthat the enterprise has made a choice about how

it wishes to compete in the marketplace. Thesystem of choices and consequences is a reectionof the strategy, but it isnt the strategy; its thebusiness model. Strategy refers to the contingentplan about which business model to use.... Whileevery organisation has a business model, not everyorganisation has a strategy a plan of action forcontingencies that may arise.

Strategy and the businessmodelStrategy can be dened as the course ofaction, including specifying the resourcesthat are required, that an organisationfollows to achieve its specic objectives.

In terms of the strategic planning process,the business model is informed by thestrategy, vision and mission statementsof the organisation:

Vi i tat m t are future orientedand describe the desired or idealstate of the organisation or enterprise,answering the question Where do wewant to be?

Mi i tat m t describethe fundamental purpose of theorganisation, why it exists and whatit is trying to do to achieve its vision,answering the question What dowe do?

The bu i m d then addressesthe issue of How do we create value?

Understanding these key areas helporganisations build a framework toformulate t at y ; answering thequestion How are we going to get towhere we want to be?

A change in desired strategy maynecessitate changes to the business model.


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TABLE 1: Integrated Reporting capitals

A background paper to support the work of theInternational Integrated Report ing Councils (IIRC)development of an Integrated Reporting ()framework, attempted to reconcile the var iousways in which the term business model is used

and aimed to reach a common, widely accepteddenition of the business model for use in, andbeyond, Integrated Reporting.3 The work of the taskforce found two key themes; rstly, that businessmodels focus upon the way in which organisationsseek to create and dene sustainable value, bothnancial and non-nancial. Secondly, a businessmodel provides a statement of the basic logic of thebusiness: How we do it.

The proposed denition of business model,published in March 2013, was:

While this denition has been developed to supporta reporting and disclosure framework, it has widerrelevance in enabling organisations to betterunderstand their business model and managetheir businesses effectively.

The model uses the concept of capitalsto illustrate the resources and capabilities anorganisation may require and utilise to create value.

The relative importance of each capital to the valuecreation process will vary by business. However,organisations need to understand how the capitalsinteract with each other to create (or potentiallydestroy) value. A business model based on openinnovation or crowd sourcing, such as those of

online furniture retailer Made.com and advertisingagency Ludvik + Partners, relies upon strong linksbetween the nancial, human, intellectual, and socialand relationship capitals to create sustainable value.The chosen system of inputs, business activities,

outputs and outcomes that aims to create value overthe short, medium and long term.

Capital Denition Examples

Financial The pool of funds availableto an organisation for use inthe production of goods or theprovision of services

Debt

Equity

Grants

Funds generated through operationsor investments

Manufactured Manufactured physical objects(as distinct from natural physicalobjects) that are available toan organisation for use in theproduction of goods or theprovision of services

Buildings

Equipment

Infrastructure, eg roads, ports, bridges,waste and water treatment plants

Human Peoples competencies,capabilities and experience,and their motivations toinnovate

Support of organisational policies,strategy and culture

Ethical values

Loyalties and motivations for improvement


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Taking these six elements into account will helporganisations take a broader view of the conceptof value creation and consider the positive andnegative impacts of business operations in a widercontext (Table 1).

Business models create value through the conversionof resources and capabilities, the availabilityand appeal of which may change over time. In2012, John Chambers, Chairman and CEO of

Cisco Systems, announced plans to move awayfrom Ciscos traditional focus on the design andmanufacture of hardware to a more lucrative andsustainable software and services approach. In thecontext of the model, this would representa shift in relative importance from manufacturedto intellectual capital, recognised by Ciscosrecent acquisition of software developers suchas NDS Group.

Failure to consider the material impact businessactivities have on all capitals carr ies the potentialfor disaster. Issues related to natural capital are aprime example of this and not only for the obviousindustries such as shing or extraction.

In early 2011, the global sportswear brand, PUMA,became the rst major multinational to issue anenvironmental prot and loss account, seekingto place a monetary value on the impact of the

greenhouse gas emissions and water consumption oftheir business and supply chain, from raw materialto sale of the nished product.4 The environmentalimpact relating to these two areas was valued at 94.4m, Putting this into context, PUMAs netearnings that year were 202m.

The framework shows the business model asa process for converting inputs to outputs throughbusiness activities (Figure 1). These may includeproduct planning, design and manufacture, or thedeployment of specialised skills and knowledge inthe provision of services.

Capital Denition Examples

Intellectual Organisational, knowledge-based intangibles

Intellectual property, eg patents,copyrights, software, rights and licences

Organisational capital, eg tacitknowledge,systems, procedures and protocols

Intangibles associated with brandand reputation

Natural Renewable and non-renewableenvironmental stocks thatprovide goods and services,supporting the current andfuture prosperity of an

organisation

Air, water, land, forests and minerals

Biodiversity and ecosystem health

Social and relationship The institutions and relationshipsestablished within and betweeneach community, groupof stakeholders and othernetworks, including an ability toshare information, to enhanceindividual and collectivewell-being

Shared norms, common values andbehaviours

Key relationships with stakeholders

An organisations social licence tooperate


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FIGURE 1: Creating value through business activity

Understanding how value is created is a key elementof the business model. When thinking strategicallyabout their business activities and the relevanceof their business models, organisations need toconsider the following:

How are initiatives inuencing the effectivenessand efciency of business activities, such asprocess improvements, employee training andrelationship management, contributing to longterm success?

How does your organisation differentiate itselfin the marketplace? Would a change in businessmodel mean a gain in competitive advantage?

How does your business model generate revenue?Can you alter it to generate further revenue afterthe initial point of sale, perhaps throughextended warranties?

Business activities extend beyond the generationand sale of a product or service. Culture plays animportant role. A culture of innovation can be a keybusiness activity in terms of generating new productsand services that anticipate customer demand,introducing efciencies and better use of technology,or substituting inputs to minimise adverse social orenvironmental impacts.

The net result: positive or negative?Within the framework a clear distinctionis made between outputs and outcomes. Outputs

are key products or services produced by anorganisation to create value as well as the waste orother by-products that may either create or erodevalue. Outcomes, on the other hand, are the internaland external consequences for the capitals as a resultof an organisations business act ivities and outputs,including customer satisfaction, prot (or loss),shareholder return and contribution to the localeconomy through taxes.

In the case of a car manufacturer, the output isthe car, while the outcomes to the consumer maybe mobility, safety, reliability, comfort and status.Outcomes that ow beyond the customer includeenvironmental impacts a rising from emissions.5

Regular reassessment of desired outcomes againstactual performance, outputs and strategic objectivesmay prompt adjustments and changes to the businessmodel. In this uncertain world, managementaccountants have a key role to play in ensuring theirorganisations business model remains relevant,resilient and responsive.

O r g a n i s a t i o n

External environment

Manufactured

Intellectual

Human

Social and relationship

Natural

Financial

S o c

i e t y

Financial

Manufactured

Intellectual

Human

Social and relationship

Natural

S o c i et y

Or g ani s at i on

Mission and vision

G o v e r n a n c e

Opportunitiesand risks

Strategy andresource allocation

Future outlookPerformance

Businessactivities OutputsInputs

Outcomes

Business model

framework showing the business model at the heart of the organisation IIRC 2013


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No-frills airlines like Easyjet and Ryanair have beenusing this approach for many years, where customersmay purchase their seat at a competitive price, butif they want optional extras such as refreshments,extra legroom, or additional baggage allowance,they must pay extra. Even the legacy carr iers haveseen the appeal of this model, with many nowcharging for refreshments. However, now, by notfollowing the herd, airlines that do not charge bagfees stand out. Southwest AirlinesBags Fly Free policy turned what was once a common practiceinto a registered trademark.

The upselling concept may continue whenyou arrive at your destination. All-inclusivebeach resorts in remote locations charge boredholidaymakers for off-site excursions or offer theoption to eat at an la carte restaurant rather thanthe communal buffet, each for additional fees.

Flat-pack furniture businesses such as IKEA haveoutsourced non-value-adding activities such asconstruction and delivery to the customer. Assemblyand home delivery services are still available, but

at a premium. These approaches have worked wellfor airlines and manufacturers, but what of thosebusinesses which rely upon less easily measurableassets as a source of competitive advantage?

The CGMA report , Rebooting Business: Valuing

the Human Dimension, found that 81% of CEOsbelieve knowledge and human capital contributesignicantly to the overall value of the business.The ndings also showed that these factors, togetherwith customer relationships, were considered to bethe two highest providers of value to the business,scoring higher than nancial and manufacturingassets. Clearly, non-nancial elements have becomecrucial to driving value and, if managed well,long-term sustainable business success.

Has your organisat ion unlocked and maximisedthe value of its human and intellectual capital?To illustrate further, we looked at the ways differentorganisations have recognised and leveraged thesekey inputs to their business model.

Many companies have found that adapting their business modelscan lead to improved performance and competitive advantage.For example, some companies are choosing to eliminate thenon-value-adding aspects of their business and passing thevalue-creation decision back to the customer, creating newrevenue streams in the process.

WHAT CREATES AND DRIVES VALUEIN YOUR BUSINESS?

Overwhelmingly, more value is coming from peoplerather than nancial and physical assets.

The most signicant forces shaping the futurebusiness agenda for organisations customersand employees are also grounded in thehuman dimension.

Rebooting Business: Valuing the Human Dimension, CGMA, 2012


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Driving value: the human factor The British entrepreneur Richard Branson wrote,A companys employees are its greatest asset,particularly in serv ice-based operations where your

people are your product.6 This view is reectedthroughout Virgin Group companies. At VirginTrains it has been recognised that employees are thekey to identifying customer-focused improvements.The Virgin way of working encourages employeesto interact with customers to improve the customerexperience and understand customer needs. Thisfriendly face approach has a higher strategicpurpose. Employee empowerment allows staff tofeed their insights into decision-making processes,which, in turn, increase the employees feelings ofvalue to the company. Virgin Medias vision forits employees to create a place where peoplelove to work, and a community of people who feelinspired to deliver a brilliant customer experience7 - is supported by a cloud-based e-learning andperformance management system, linked directlyto career development.

Branson has said one of the secrets of Virgin Groupssuccess, including an innovative expansion into

space and ocean tourism, is to recognise the valueof its staff and to create a culture of empowerment.This creates additional value by giving employeesthe same freedoms that the senior managers and Igive ourselves. Our team can successfully take onprojects that other brands cant.8

On a smaller scale, the sandwich chain Prt aManger, which operates 320 stores in France, HongKong, the United Kingdom and the United States,recognises the importance of staff buy-in to creating

and driving value through freshly-made qualityproducts and a positive customer experience.

Prt is a private company determined never toforget that our wonderful hardworking people makeall the difference. They are our heart and soul.When they care, our business is sound. If theystop caring, our business goes down the drain.9

With the people element so fundamental totheir business model, Prt goes to great lengths

to employ the right people to join their in-storeteams. Applicants are assessed against three corebehaviours Passion, Clear Talking and Team

Working - before working a paid shift in one ofthe Prt stores. Exist ing staff vote on whethernew applicants should stay, helping to ensure newmembers are a good t with the existing team.Regular mystery shopper visits are made to each

store to ensure that core behaviours are upheld,for which the entire team are rewarded, and staffwho are promoted or pass training milestones aregiven rewards to pass on to the teammates whohelped them. While Prts approach to developingan enthusiastic and cheerful workforce who clearlydemonstrate personality (unusual for the fast foodindustry) has been criticised by some as enforcedhappiness, it is clearly successful, with prots ofmore than 61m in 2012 and plans to open a further

50 stores in 2013.Value can also be created through developing strongcustomer relationships, a challenge which has beentaken up by internet retailers such as Amazon.comand Asos.com, which lack the personal interfaceadvantage of high street stores like Prt a Manger.

Amazons customer relationship focus has led tothe development of automated services, such asbook and lm recommendations based buying andbrowsing patterns. Customers have the facility tolook and search inside books that they are interestedin and are encouraged to contribute to the sites bodyof knowledge by writing product reviews, which

other customers are then able to rate or commentupon. In this way, customers begin to create valuefor each other.

...Our energy at Amazon comes from the desireto impress customers rather than the zeal to bestcompetitors. We dont take a view on which ofthese approaches is more likely to maximisebusiness success. There are pros and cons to bothand many examples of highly successful competitorfocused companies.

We do work to pay attention to competitors and beinspired by them, but it is a fact that the customer-centric way is at this point a dening element ofour culture.10

Jeff Bezos, founder and CEO of Amazon, Annual Letter to Shareholders, April 2013


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Continual improvement of the customer experiencecontinues beyond the online interface, with Amazoncurrently building capability for a same-day deliveryservice. This customer-focused approach, combinedwith technology, competitive pricing and a huge

range of products, has enabled Amazon to becomethe worlds largest online retailer.

Organisations may also choose to leverage otheraspects of human capital to create value. Examplesof this include people development, includingsuccession planning, talent management, openinnovation and collaborative relationships withcustomers and suppliers.

Driving value through intellectualcapitalIntellectual capital is dened in this report asorganisational, knowledge-based intangibles,including intellectual property such as patents,copyrights, software, r ights and licences;organisational capital, such as tacit knowledge,systems, procedures and protocols; and intangiblesassociated with the brand and reputation that anorganisation has developed.

Different types of organisations place highervalues upon specic types of intellectual capital.A consumer goods company, for example, mayconsider their brand cr itical to value creat ion,while a software development company will havean intellectual property focus.

The luxury fashion company Burberry, designersof the original trench coat during the First WorldWar, had failing fortunes during the late 1990s.Poor distribution and licensing strategies meantthat products of inconsistent quality were being soldin inappropriate retail outlets, leading to a loss ofcachet. Counterfeiting added to the devaluation ofthe brand, while reliance on a small, conservativeproduct range brought a moribund image.

In 1997, Burberry embarked upon a radicalrealignment of its business model, strengtheningcontrols over management and distribution andexpanding the product portfolio. Crucially, this

included a repositioning of the brand into the

exclusive luxury lifestyle market, appealing to newfashion-forward customers, as well as the traditionalbase. A agship store opened on Londons NewBond Street, adjacent to leading fashion brandssuch as Versace, Chanel and Prada, and advertising

campaigns featured top models such as Kate Moss.

By understanding and leveraging the va lue of itsuniquely British brand, Burberry was able to rescueits 157-year-old business from stagnation. Today,it follows a one company, one brand philosophy,earning revenue through the retail, wholesale andlicensing of clothing, accessories, fragrance andbeauty products. Adjusted operating prot in 2012was 377m, a 25% increase on the previous year.

High-end fashion labels such as Burberry are ableto exercise strong controls over their manufacturedproducts and to maintain quality and brandintegrity. However, for some businesses, particularlyin the technology sector, no physical productexists. They focus instead upon the developmentof intangible assets. The FTSE 100-listedsemiconductor and software design companyARM Holdings operate a collaborative businessmodel in which the product is intellectual property(IP) and the monetary value is created throughlicensing this product to manufacturers. Royaltiesthen provide an additional revenue stream.

The ARM business model involves the designingand licensing of IP rather than the manufacturingand selling of actual semiconductor chips. Welicense IP to a network of over 2,500 partners,which includes the worlds leading semiconductorand systems companies. These partners utilise

ARM IP designs to create and manufacturesystem-on-chip designs, paying ARM a license feefor the original IP and a royalty on every chip orwafer produced.

In addition to processor IP, we provide a range oftools, physical and systems IP to enable optimisedsystem-on-chip designs.

ARM company prole


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By focusing on research and development ratherthan manufacturing, ARM is able to offer signicantsavings, which are estimated at around $20bnindustrywide, by licensing the result of theirR&D efforts to semiconductor companies, who

then design smart, low-energy chips. Ultimately,this brings down the cost of digital electronics tothe end user.

ARMs product is used in a wide variety ofelectronic applications, from mobile handsets anddigital set-top boxes to car braking systems andnetwork routers. Chips using its technology are usedin 95% of smart phones, 80% of digital cameras, and35% of all electronic devices. Prot from operationsin 2011 was 148.9m and in 2012, 208.1m,highlighting the growth in consumer gadgets.

People: the critical success factor?It is important to realise that a business model whichcentres on the creation of value through intellectualcapital, such as IP, patents or software, cannot afford

to take one specic aspect in isolation. Organisationsmust also recognise the value, both present andfuture, of their people and that their competitors mayhave an eye on their biggest assets. ARMs peoplestrategy demonstrates this recognition, aimingto provide an engaging environment for ARMemployees where they can fully develop personaland collective potential better than elsewhere.

It can be argued that the human dimension in itselfis the critical success factor of the business model.To return to the Rebooting Business report: One thingwe can be sure of in this uncertain world is thatpeople their ideas and relationships will bemore important than ever before.


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A number of key drivers are making new businessmodels possible, including primarily:

Global economic integration. New technologies. Greater (and faster) connectivity.

For example, Harvard Professor ClaytonChristensen established in his work onTheInnovators Dilemma and The Innovators Solution thatit was not necessari ly technology that upendedcompanies such as Wang and Kodak, but the newbusiness models embraced by their new competitors.Technology alone is rarely the key to unlockingeconomic value since companies create real wealth

when they combine technology with new ways ofdoing business.12

However, it is important to be aware that businessmodel change is subject to many other drivers andnew inuences are constantly emerging.

Further examples are: The impact of an ageing population. Democratisation of innovation, where greater

consumer access to technology is spurring

development. Regulation, deregulation, or both. Environmental resource constraints.

Systematic scanning of the horizon, for examplethrough political, economic, social, technologyanalysis,13 can help to identify the key drivers andhow changes in each area can impact the businessmodel should be assessed.

Internet platforms, hybrids, marketing-driven,modular and category creator models are someexamples of business model innovation.

Internet platform modelsThe internet has spawned many new business modelpossibilities based on:

Customers as product-makers. For example,Facebook relies on user-generated content inwhich users create their own experiences. Appleinvented the iPod and iPad, but users here alsocreate their own experiences by loading theirproducts with content. Co-creation of productsis not a choice but a necessity for many businessmodels because the product choices are inniteand cannot be conceptualised or delivered bya single producer.14

A changing price-cost-product interface. Forexample, consumers do not pay for the product,and revenues are generated from other sourcessuch as advertising. Many f ree smart phoneapplications work on this model.

Peer-to-peer consumption. This approach isa renement of the traditional cut out themiddleman model, for example where ownerscan rent their assets, such as holiday homes,directly to individuals.

But how do such innovative business models makemoney? An important concept here is stickiness,which is the notion of strong customer engagementand experience driving users to a site. Some ofthe challenges of this approach are exemplied byFacebook and Google, which both use advertising-supported business models.

The primary challenge is that the advertising itselfcan spoil the customer experience. Users maybecome concerned about data privacy and turnedoff by the advertising. It is important to ensure thatthe advertising is targeted effectively by matching

Business models function in a dynamic environment, and the models

themselves must change and adapt to deliver continued success. Newmodels are emerging, and a review of the innovations being exploredcan prompt a reinvigorated perspective of business models thatposition these models as an integral part of strategic planning.

INNOVATIVE BUSINESS MODELS


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preferences with sellers. Googles business has beenbased around the combination of a search productand a keyword advertising model and it is arguedthat advertising is more effective when users havepurchasing intent, which is more likely when using

a search function than social networking.

Peer-to-peer businesses are emerging modelswhich build on the internets capacity to facilitateconnectivity. For example, car owners who do notneed to use their vehicle all the time can rent it outthrough rms such as Buzzcar or Getaround. Andif they have free time, they could also earn extraincome by offering a taxi service. There are alsoexamples of accommodation being rented out in thisway, and the model can be extended to other itemssuch as expensive gardening and DIY equipment.In essence, the concepts of ownership and rental arebeing reframed, and incumbents in the car marketsuch as Avis and GM are investing in this area.Avis, for example, paid $491m in January 2013 toacquire the hourly rental rm ZipCar.15

A further example is Freemium, in which a basicproduct or serv ice is offered free of charge anda fee is based on the added-value premiumproduct, a common approach with software wherethe manufacturing costs are low. Examples areLinkedIn, Skype and childrens game networks suchas Club Penguin. By offering the basic service free,a large customer base can be built quickly.

Another interesting variant on the premium pricingmodel is Amazon Prime, where subscribers pay anannual subscription fee$79 in the United Statesand 49 in the United Kingdomfor unlimited1- or 2-day shipping. Subscribers have doubled their

annual spending at Amazon because they startbuying items that they would have normally boughtelsewhere and they want to get as much value aspossible from their Prime subscription.16

A recent McKinsey & Company article arguedthat software has become so important for everyorganisations performance that any organisationcan turn to software companies for lessons in termsof how they have built new business models. It citedexamples including Freemium to illustrate how

new revenue streams have been created throughthe integration of software into products. A further

example is Nike+ sensor, which is compatible withApple iOS devices, and allows runners to trackmileage and upload data to a web site.17

Hybrid bricks-and-clicks modelsIn internet and software-driven business models,the links between revenue and costs are oftendisconnected, but in the retail industry the cost-and-pricing model has remained conventional: theconsumer pays for the product purchased and used.Even under such a conventional linkage, however,business models have evolved in the face of newchoices in delivery channels. In the early years ofthe internet, the idea formed that all shopping couldmove online. The reality that unfolded has been

more nuanced, creating room for the bricks andclicks or multi-channel model in which retailerscombine the best of both environments to addressthe different needs and preferences of consumers,depending on what and when they are buying.

For example, the successful UK clothes retailer,Next, combines high street sites where it canshowcase its latest lines together with the NextDirectory catalogue, which carries a much largerrange, including furniture and houseware, that canbe delivered to residences or retail outlets. Apple andStaples are also successful bricks-and-clicks retailers.

Similarly, supermarkets such as Tesco and Walmartare combining large out-of-the-way sites and internetordering with home delivery and small, convenientstores in city centre locations to reect changingshopping patterns.

Marketing-driven business modelsMarketing-driven business models are ones builtaround a very strong brand with the core productor service almost an incidental added bonus.Such organisations commonly outsource allmanufacturing and logistics activities. Drink makerRed Bull, for example, has been called just a mediacompany who happen to sell energy drinks?18 The drink brand is built around the developmentof its own media content and activities, especiallyin the eld of extreme sports. Examples of its

efforts include lms featuring snowboarding andskydiving from near-space, together with prominent


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sports sponsorships such as Formula 1. Red Bullsinvestment in marketing stands at 30-40% ofrevenues, but it is the strong brand awareness thathas allowed Red Bull to charge premium prices forits energy drinks.

Modular or standardisedbusiness modelsAnother useful model is the modular businessmodel where companies standardise core aspectsof their activity to provide other benets, such ascost savings. Low-cost airlines, for example, mightoperate exclusively with just one aircraft modelto make maintenance more efcient. SouthwestAirlines runs a eet of Boeing 737s to gain suchadvantages.19

Volkswagen is another example. The Germancarmaker has been better than its r ivals at reducingthe number of common platforms for its line ofautomobiles. The measure has helped it offer alarge variety of brands and styles, while slashingmanufacturing costs.20

A more recent variant of this exible approachis localised modularisation. Chinese motorcyclemanufacturers, such as Longxin and Zongshen,needed a simpler, more exible model because,unlike competitors like Honda, they did not havemajor foreign partners with substantial resources.As part of the solution, rather than specifying everydetail of the parts they needed from suppliers, theyspecify only the essentials such as size and weight.The approach has delivered cost savings and qualityimprovements.21 Such tactics and others haveenabled new entrants into the market, but can

also help established companies consider whethertheir own processes could be modied to capturecost benets.

Category creator business modelsSome innovative business models may involvecreating a new class of products that can be soldusing traditional methods. For example, UnderArmour used new synthetic fabrics to invent a newcategory of sports clothing. However, according to

a recent Harvard Business Review article,22 the most

successful category creation examples are whenbreakthrough products are combined with a newbusiness models. For instance, the Microsoft XboxLive gaming system combines a traditional videogame with a subscription-based online service.

While category creation is one of the most effectiveways for organisations to achieve growth, largecompanies hesitate when faced with categorycreation opportunities, believing, for example,that star t-ups are better at such innovation orthat customers might not be receptive to tryingnew things.23

Facing the challenge of innovation

Change is often difcult. The same inertia thatkeeps a stone steady unless a force is applied canimmobilise a company. A rst step could be to reecton a series of questions:

How does your organisations businessmodel work?

How could it be modied to createadditional value?

How could a new entrant disrupt the model?

Where are the points of vulnerability?If the answers suggest a new business model couldbring benets, management accountants can playa valuable role in testing the waters and helping tobreak the inertia. For example, they can re-examinethe companys approach towards costing and pricingin cases when, for instance, revenue sources areseparated from product costs or producers andconsumers are indistinguishable. Such a disconnectimplies altered cost objects and altered costmanagement objectives. Rather than following atraditional model of pricing, which may be cost-plusbased or market based, pricing may have to tie intothe strategy of the rm along different parameters.Such trends suggest management accountants wil lneed a broader vision of their role to thrive in morecomplex organisational contexts, such as a movetowards greater business partnering and a greaterinvolvement in decision making and strategicimplementation.24


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Multi-channel retail strategies or marketing-driven approaches would require managementaccountants to entertain a revised approach to costallocation and protability analysis. As businessmodels become more innovative, it may become

more difcult to identify the sources of revenue.Management accountants must work closely withtheir nancial accounting colleagues to ensure thatinternal metrics continue to be aligned with externalaccounting requirements, particularly when thelatter are subject to change as is currently the casewith revenue recognition.25

As weve asserted in earlier reports, managementaccountants have a key role to play on initiating,partnering and providing constructive challengesto the innovation process.26


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15

Many models fail immediately. Business parks andcyberspace are littered with companies that shutdown within a few years or hobble along withoutcovering initial investments. The carnage includesnot just small businesses, but also efforts backed byserious money. In 2012, Harvard Business School

senior lecturer Shikhar Ghosh looked at more than2,000 start-ups in the United States that generallyreceived $1m or more in venture capital funds andfound that about three quarters failed to cover initialinvestments and, indeed, about a third shut downentirely.27

At the same time, business models that have beensuccessful at times stunningly so can collapse,often catching investors and managers by surprise.In their ground-breaking 2001 book,CreativeDestruction , authors Richard Foster and SarahKaplan reported that of the companies listed in theoriginal 1957 S&P 500, only 74 were still on thelist 40 years later (and the vast majority of thesesurvivors had underperformed the index over thecourse of those four decades).28 In his blog, CarpeDiem , University of Michigan economic professorMark Perry noted that of the Fortune 500 companiesin 1955, only 67 were st ill on list in 2011.29 Amongthose dropped were American Motors, Detroit Steel

and Maytag. He wrote:Almost 87% of the companies have either gonebankrupt, merged, gone private, or still exist buthave fallen from the top Fortune 500 companies.Most of the companies on the list in 1955 areunrecognisable, forgotten companies today. Thatsa lot of churning and creative destruction, and itsprobably safe to say that many of todays Fortune500 companies will be replaced by new companiesin new industries over the next 56 years.

While strategies that misre can cripple companies,often the culprit is the business model. How dobusiness models especially those with some trackrecord run afoul?

Five forcesMichael Porters ve forces analysis offers someclues. In late 1979, Porter, then an associateprofessor at Harvard Business School (and nowone of the premiere business management experts),published his framework describing the vefactors that weigh upon a companys performance(Figure 2).30 While some modern critics suggest theframework is too simple for todays complex web ofindustry relations, the ve forces analysis remainsan essential tool for understanding how companiesprosper or whither.

On screen or on paper, all business models look rock solid and

built for success. But unleashed into the real world, these models arebuffeted by exogenous and endogenous forces that can cripple oreven completely undermine a company.

WHEN BUSINESS MODELS GO WRONG

FIGURE 2: Michael Porters ve forces framework

The industry(jockeying for

position amongcurrent competitors)

Bargainingpower ofcustomers

Bargainingpower ofsuppliers

Threat ofnew

entrants

Threat ofsubstituteproducts/services


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The intensity of these forces varies across industries,but they are each present when a company isfounded and change constantly over the years.A business model that overlooks any of them ortakes the benevolence of any for granted could

face severe challenges.

Groupon, an internet wonder that went public withmuch fanfare in November 2011, was brought to itsknees after being buffeted from all sides by theseforces. Groupon, founded in Chicago in 2008,offered daily deals for products or services that werevalid only if a minimum number of coupons forthe deal were sold. Groupon took half the purchaseprice as a commission, with the remainder goingto the merchant. It was a sensat ion, and within twoyears Groupon had spread globally and boasted oftens of millions of registered users. Internet giantstook note, and in 2010 Groupon rejected a $6bnbuyout bid by Google. A year later, the companywent public with a debut price of $20 a share fora valuation of about $13bn. Immediately, the shareprice jumped briey to more than $31.

And then the bottom fell out. A year after theIPO, company shares were trading at about 13%their debut price, and in February 2013 co-founderAndrew Mason was ousted, leaving behind one ofthe most quoted executive goodbye notes:

After four and a half intense and wonderful years asCEO of Groupon, Ive decided that Id like to spendmore time with my family. Just kidding I was redtoday. If youre wondering why you havent beenpaying attention.

Commentators have pointed to several factorscontributing to Groupons straits, many linkeddirectly to its business model.31 Customers, forexample, had little incentive to be loyal to themerchants who were offering coupons and mostwere satised just tak ing the one-off discounts. Atthe same time, merchants received little benet fromtheir discounted offers because revenues were sharedwith Groupon and sales didnt necessarily bringrepeat business at full prices. And nally, the modelwas easily copied, leading to dozens of imitators.At least three of Porters ve factors were working

against Groupon.

More importantly, even ahead of the IPO, someanalysts were sounding warning about thecompanys model, but few were listening. Weeksahead of the public offering, The Associated Pressquoted Sucharita Mulpuru, a Forrester Research

analyst, saying, Groupon is a disaster Its a shillthats going to be exposed pretty soon.32 The art iclesummarised:

Now Groupon faces concerns about the viabilityof its daily deals business model. The novelty ofonline coupons is wearing off. Some merchantsare complaining that they are losing money andcustomers on the deals. And competitors areswarming the marketplace.

Caught in the crosshairsCompanies with much longer histories than Grouponcan nd their business models outdated and unableto generate prot if they arent continually vigi lantto market changes. After more than a century,Eastman Kodak, the US photography company,led for bankruptcy protection in 2012, hobbledirreparably by the advent of digital photography,which ironically Kodak had helped pioneer.

Kodak was founded in 1888, and by the late 1970sthe company was supplying 90% of the photographiclm sold in the United States and 85% of thecameras.33 Innovation had always been a strategicpriority for the company, and indeed the digitalcamera was invented by a Kodak engineer in 1975.But in its last decades, the company could not turnideas into cash and was eventually overcome aslm and snapshot cameras became more andmore obsolete.

More than anything, the company was afraid torisk its highly protable lm business by embracingthe new age of digital photography, a former R&Dleader at Kodak, David Glocker, told the WhartonSchool of Business.34 He explained:

I believe the single biggest mistake that Kodakmade for two decades or more was the fear ofintroducing technologies that would disrupt thelm business. There were excellent scientists andengineers who generated some of the worldsleading innovations. The company, however, was


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17

almost never willing to risk the high lm marginsby introducing them. The irony is that many CCDarrays, digital X-rays, etc eventually did Kodak in.

The 2008 collapse of British retailing giant

Woolworths Group is widely seen as collateraldamage from the global nancial crisis : Almost 100years old, Woolies, as it was known locally, was avictim of an exogenous disruption that was, for themost part, outside its control. But why Woolworthsand not other global retailing giants like Walmart ,Carrefour or Tesco or even the Woolworths Ltd.,which remains the largest retail chain in Australiaand New Zealand? Woolworths collapse wasone of the dening events of the credit crisis,The Telegraph reported in 2009. But questions havebeen asked about whether Woolworths failure canpurely be put down to a brutal recession.35

Jim Prior, CEO of London branding consultancyThe Partners, concluded that Woolworths failure tokeep up to date with its r ivals on High Street andelsewhere played a critical role in the companysdownfall.36 Despite the national anguish over itsclosing, Woolworths was a relic of a bygone age,he wrote, explaining:

It has big stores with tightly packed aisles ofseemingly randomly merchandised, cheap-pricedgoods. No clear sense of what the store stocks,or why. It is a soulless experience reected in anave brand identity and bland interior design thathave clearly not been invested in for decades.Woolworths hasnt changed in over 20 years, andit shows and this is why it has failed.

Key fault linesHow are problems that seem so obvious in hindsightmissed by executives in the thick of battle? Foran ongoing business, a key failure is an inabilityto recognise or react to changes that impact acompanys business model, shifts in the ve forces.Writing forThe Guardian , Saul Kaplan, author ofTheBusiness Model Innovation Factory , recently suggestedten reasons companies can be blindsided:37

CEOs dont really want a new business model:Leaders focus on performance improvementsrather than real change.

Business model innovation will be the next CEOsproblem: The urgency of the challenge is oftenunderestimated.

Product is king; nothing else matters: Servicesthat support the product can be neglected.

Information technology is only about keepingthe trains moving and lowering costs: Legacy ITsystems may be favoured over updated and moreproductive technologies.

Cannibalisation is off the table: Leaders may fearharming current businesses even if new offeringshave substantial potential.

Nowhere near enough connecting with unusualsuspects: Insular att itudes can keep executives

isolated from new trends and ideas. Line executives hold your pay card: Attracting

capable managers to a new project can bedifcult if bosses linked to the old modelcontrol their career.

Great idea, whats the ROI? New models oftenrequire new ways of analysing ROI that could becontrary to the current model.

They shoot business model innovators, dontthey? New models and their supporters are oftendisruptive and face signicant corporate inertia.

You want to experiment in the real world, areyou crazy? Stepping from white board to launchtakes courage.

Management accountants a re uniquely positionedto watch for fault lines in a companys businessmodel. Combining nancial expert ise with cr iticalcapabilities in risk management, they can sound anearly warning when forces essential to a companys

success whether the arrival of new entrants, theadvent of substitute products or services, changesin customer or supplier behaviours or an evolvingindustry environment begin to work against thecompanys best interests. By remaining v igilant,management accountants can be key players inbringing a company away from the abyss of failure.


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A business model that worked yesterday or eventoday could spell ruin tomorrow.

Companies must continuously review their businessmodel to ensure that they remain relevant for thecurrent and foreseeable business environment

and to make any necessary adjustments beforethey step onto a burning platform. Even the bestbusiness models eventually become obsolete, themanagement consultancy Deloitte wrote in a recentreport.38 Yet we have found that companies areoften reluctant to tinker with something so crucialto their business part icularly if it has served themwell in the past.

Looking at two peer-to-peer web businesses companies that connect individual sellers to

individual buyers illustrates how vigilance andchange can help safeguard a company. Backed byventure capital, the car-sharing club HiGear.comwas founded in 2011 to bring together luxury carowners with people wanting to rent a sleek ride fora day or two. Owners got value from cars that wereoften just sitting in garages, while renters got steepdiscounts from rates charged by traditional carrental companies.

HiGear, with operations in San Francisco and LosAngeles and plans to expand further, closed after just a few months. In a widely distributed email, theCEO explained that a car theft ring had used falsecredit card information to steal four cars valuedtogether at about $300,000. Even though insuranceclaims were being processed and some of cars wererecovered, the email said, This incident exposed usto the worst case r isks inherent in our service. Evenby improving security and processes, we are notcompletely sure we can prevent an incident of this

sort from happening again g iven the peer-to-peernature of our service.39

Airbnb, another San Francisco peer-to-peer servicebacked by venture capital, also faced a corporatecrisis that arose from overestimating the integrityof its clients. Airbnb was founded in 2008 toconnect individuals seeking to rent their homes forshort periods to others looking for a place to stay.

In 2011 two rented apartments in San Franciscowere ransacked and jewellery, electronics andother items were stolen, triggering a wave of badpublicity. Rather than raising the white ag, Airbnbresponded by giving property owners using the sitea $50,000 guarantee against theft and vandalismand by expanding its customer services centre.In Spring 2013, the company boasted more than300,000 properties listed in more than 33,000 citiesworldwide.40

In a corporate blog, Airbnb CEO and co-founderBrian Chesky summarised:41

In the last few days we have had a crash course incrisis management. I hope this can be a valuablelesson to other businesses about whatnot to do in a time of crisis, and why you should alwaysuphold your values and trust your instincts. Weshould have responded faster, communicated moresensitively, and taken more decisive action to makesure [the home owner] felt safe and secure. But wewerent prepared for the crisis and we dropped theball. Now were dealing with the consequences.

As part of its risk management and damagecontrol response Airbnb unlike HiGear madeadjustments to its business model to include betterprotection for its clients. The company not onlycreated a model more resilient to harmful customerbehaviour, but also gained positive press for itshandling of the situat ion.

Corporate success is a moving target. Customer behaviour can shift quickly.

Suppliers rise and fall. Aggressive new entrants appear on the horizon,and new technologies and processes threaten established systems.Meanwhile, incumbent rivals are driving and reacting to these changes.

TOUGHEN UP YOUR BUSINESS MODEL


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Building resilienceThe market environment is changing faster todaythan ever before, and its likely to change evenfaster tomorrow. From day one, business models are

buffeted by these changes, and more often than not,the winds are blowing against a models success.Changes in customer att itudes, shifting supplychains, moves by competitors, new products andservices, and new entrants can all impact the valuegenerated by any business model. Generally, thevalue of a model erodes slowly sometimes almostimperceptibly until its too late but at times theground shifts quickly beneath a company.

A survey of more than 4,000 senior executivesglobally by the Economist Intelligence Unitunderscored the importance top managersgive to business models that adapt to changingenvironments. In the 2005 survey, about 55% of therespondents said they expected new business modelsto be a greater source of competitive advantagethrough 2010 than new products or services.42 Thereport said:

The rising importance of business models is alogical reaction to too many choices in the market.For consumers and companies alike, its gettingharder to distinguish between many productsand services on a purely functional basis. By2010, companies in many sectors will distinguishthemselves by innovative business models be theynew pricing models, a shift to selling products asservices or another model that will differentiate theiroffering from those of global competitors.

For example, more recently, a report from the IBM

Institute for Business Value43

shows that cloudtechnology has the potential to be a major driver ofbusiness model innovation.

Tinkering with a business model can beintimidating, especially if the model has broughtsuccess in the past . Overhauling a business modelcompletely can be frightening. But company aftercompany have discovered the dangers of trusting thestatus quo. Along with avoiding potential pitfalls,business model innovation can open new avenues

to success. Raphael Amit and Christoph Zott ,respected authors on business strategy, explained ina MIT Sloan Management Review report:44

Our research shows that in a highly interconnected

world, especially one in which nancial resourcesare scarce, entrepreneurs and managers must lookbeyond the product and process and focus on waysto innovate their business model. A fresh businessmodel can create and exploit opportunities for newrevenue and prot streams in ways that counteractan aging model that has tied a company into acycle of declining revenues and pressures onprot margins.

The two professors suggest managers ask six

critical questions as they consider changes totheir business models:

What perceived needs can be satised throughthe new model design?

What novel activities are needed to satisfy theseperceived needs?

How could the required activities be linked toeach other in novel ways?

Who should perform each of the activities that

are part of the business model (the company, apartner, a customer)? What novel governancearrangements could enable this structure?

How is value created through the novel businessmodel for each of the participants?

What revenue model ts with the companysbusiness model to appropriate par t of the totalvalue it helps create?

Business models can be recrafted in a wide variety

of ways, and the right approach depends largely onwhich force in the business environment are mostrelevant to a companys success and how they arechanging. For example, customer interactions can beshifted by incorporating auctions that allow them toset their own prices, by offering lease arrangementsin addition to purchases, or by bundling togetherrelated goods and services, among many otherpossibilities.45


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Companies that have facedthe challengeCompanies worldwide have faced the challenge ofredrawing their business model and became strongerin the process. Whether spurred by a crisis , a slowtrek to oblivion or perspicuous leadership, thesecompanies have taken a hard look at their businessmodel and future and moved forward with a newplan. Apple can be counted among these.

Apple started in 1976 as a computer company, andin the 1980s pioneering buyers of home computersgenerally faced a choice between an Apple or anIBM and the IBM-compatible clones. Apple wasdriven by innovation, offering a graphical computerinterface well before its competitors did, and bythe early 1990s it had become one of the mostprotable corporations in the United States.46 Thenthe company went sour. Between 1995 and 1997,sales plunged 36% and the company was reportinga billion-dollar annual net loss. Shares were tradingat less than half their 1980 IPO price, even afteradjusting for a 1987 share split.

Buffeted by a series of CEOs with differing views,

part of Apples problem was misdirection on whetherto compete on cost or regain its premium status, andanother part was competition from the Windowsoperating system which was being used on IBMs andtheir clones. In 1997, co-founder Steve Jobs returnedto the helm of Apple and helped the companyrediscover its footing as a technology innovator.The Harvard Business School noted:47

Despite a strong brand, rapid growth and highprots in the late 1980s, Apple almost went bankrupt

in 1996. Then Jobs went to work, transformingApple Computer into Apple Inc. with innovativenon-PC products start ing in the early 2000s. In the2009 scal year, sales related to the iPhone and theiPod represented nearly 60% of Apples total salesof $43bn.

Of course, companies dont have to face the abyssto change their business models. South Koreanautomobile maker Hyundai tweaked its model inresponse to the 2008 global nancial crisis thatbrought depressed demand for cars and otherconsumer purchases. Instead of trying to retain

business with lower prices, Hyundai allowed buyersto return their new cars within a year if they losttheir jobs. While most other car makers saw salesdrop in 2009, Hyundai enjoyed an 8% increase insales. (The offer was discontinued in 2011.)48

US bookseller Barnes & Noble had to move quicklyto meet the threat posed by Amazon.com. Notonly were online sales eating into revenues fromtraditional channels, but Amazons Kindle ebookreader, launched in 2007, was making boundvolumes seem obsolete. Along with its own onlinepresence, Barnes & Noble responded by refocusingits stores on higher margin products, like childrensbooks, coffee table books and gifts, launching Nook,its own ebook reader with superior technology andthe possibility of trying it in a store, and improvingits capabilities in branding, customer intelligenceand merchandising. 2012 revenues were $7.1bn, a35% rise from 2007, and Nook had gained a 27%share of the ebook market.49

Ready for the changeIdentifying when it is time to re-evaluate or changea business model requires a keen awareness ofa companys goals, strategy and competitiveadvantages. The management consultancy Deloitteoffers a series of questions that should be asked todetermine whether its time to change a companysbusiness model.50 Does the model:

Support your companys business strategy? Support your go-to-market strategies? Enable timely adjustments or changes in response

to market shifts such as competition and costpressure?

Serve a key element of your companyscompetitive strategy?

Provide for continuous improvement in vendorand supplier relationships?

Help interact with customers effectively andefciently?

Support the most efcient and effective coststructure?

Support the companys desired culture?


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21

Take into account alternative service deliverymodels such as shared serv ices, outsourcing, andoffshoring?

Help leverage processes and organizat ionsglobally or internationally?

Support clear, effective, and efcient decisionmaking at different levels of the company?

The consultancy advises that too many no answersmay signal its time to do something different.


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In addition to the skills and capabilities honed

through traditional nancial activities, managementaccountants wil l have to discover creative waysof viewing a companys current and potentialprotability, while remaining faithful to the highstandards of the profession. At times, examining thebenets of a new business model may require a lessconservative view of risk management with a clear,objective perspective of the trade-offs involved infollowing a new course.

In looking at changes to corporate business models,

management accountants could take the lead byconsidering a series of questions that could generatevibrant and informative discussions.

Raising these questions, even if their answers seem

obvious, can initiate an internal conversationthat not only spotlights the value delivered bymanagement accountants, but also can help steera company onto a more successful and protablecourse. For more insights on how to balance therisks of innovation, see alsoManaging Innovation harnessing the power of nance .

But above all, management accountants need toensure they are keeping a close eye on business trendsand developments with the constant question in

their minds, Could this disrupt our business and ifso, how? Only then will their organisat ions be in abetter position to avoid the fate of those consigned tohistory through failure to adapt their business models.

The impetus to change a business model can come from any direction

or from multiple directions. A siloed view of a companys operationsand situation is unlikely to provide adequate insights.

Management accountants, with their holistic perspective of a companysstrengths and weaknesses, may be best positioned to identify when abusiness model should be revisited. Untangling the root causes of subtleshifts in the nancials and spotting changes in risk exposure can beinvaluable to identify when the seas have changed.

THE MANAGEMENT ACCOUNTANTS ROLE


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Questioning the model Are the outcomes of the current business

model being measured appropriately? Is the value of non-traditional assets such

as human and intellectual capital accuratelyreected in the current model?

Do changes in a companys nancialssuggest shifts in Porters ve forces thatindicate either threats or opportunities?

How do the nancial risks of pursuingthe new model compare to the risks offollowing the status quo?

Is the perceived magnitude of the riskcoloured by an overly conservativeapproach to business or a reluctanceto change?

Do legacy accountancy practicesappropriately capture potential sources

of revenue for models that feature morediverse revenue streams?

In evaluating a new business model, shouldcost allocation methods be revised to reecta more complex business environment?

Should traditional pricing models suchas cost-plus be re-examined for modernbusiness settings in which, for example,producers of value and consumers arealmost indistinguishable?

Is a new way of calculating return oninvestment needed?

Should forecasting models be adjusted tomost accurately capture the potential of aninnovative business model?


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Footnotes 1 Ale Novak, Business Model Literature overview,

presentation at Accounting Renaissance: Lessons fromthe Crisis and Looking into the Future, Venice, Italy,

Nov. 4, 2012. 2 Ramon Casadesus-Masanell and Joan E. Ricart,

How to design a winning business model,Harvard Business Review , January-February 2011.

3 Business Model Background paper for ,International Integrated Reporting Council (IIRC),2013.

4 Apocalypse H20 case studies on Rio Tinto andPuma, CIMA, 2011.

5 IIRC, 2013.6 Richard Branson, Richard Branson on passing

the bad-news buck,Entrepreneur , December 2010,accessed at www.entrepreneur.com.

7 Virgin Media web site, Looking after our people,accessed at www.virginmedia.com/about/cr/people.php.

8 Richard Branson, Richard Branson on giving youremployees freedom,Entrepreneur , December 2012,accessed at www.entrepreneur.com.

9 Prt A Manger web site, Good jobs for good people,accessed at www.pret.co.uk/us/about_our_company/our_team.htm.

10 Jeffrey P. Bezos, letter to shareholders, Amazon.com,April 2013.

11 ARM web site, company prole, accessed atwww.arm.com/about/company-prole/index.php.

12 Manyika et al, quoted in A. Bhimani andM. Bromwich, Management Accounting: retrospect

and prospect, CIMA Publishing, 2010 13 Political, economic, social, technology (PEST) analysis

is a common tool for performing an assessment of thefactors impacting strategic decisions.

14 Manyika et al, quoted in A. Bhimani andM. Bromwich, 2010.

15 All eyes on the sharing economy,The Economist ,March 9, 2013.

16 Brad Tuttle, Amazon Prime: Bigger, more powerful,

more protable than anyone imagined,Time, Business andMoney , March 18, 2013, accessed at business.time.com.

17 Hugo Sarrazin and Johnson Sikes, Competing in adigital world: Four lessons from the software Industry,McKinsey Quarterly , February 2013.

18 Simply Zesty Blog, Are Red Bull just a mediacompany who happen to sell energy drinks?blog entry by Niall Harbison, Nov. 24, 2011.

19 At March 2013, all 574 planes in Southwest Airlineseet were Boeing 737s, and the carrier was the worldslargest operator of 737s, according to Wikipedia.

20 VW conquers the world,The Economist , July 7, 2012.

21 Vijay V. Vaitheeswaran,Need, Speed and Greed: How theNew Rules of Innovation Can Transform Businesses, Propel

Nations to Greatness, and Tame the Worlds Most WickedProblems, HarperCollins Publishers, New York, NY,USA, 2012.

22 Eddie Yoon and Linda Deeken, Why it pays to be acategory creator,Harvard Business Review , March 2013.

23 For further information about supporting innovation,see Managing Innovation harnessing the power of

nance , CGMA, May 2013.

24 Manyika et al, quoted in A. Bhimani andM. Bromwich, 2010.

25 IASB and FASB are expected to publish newguidance on revenue recognition soon that focuses onthe identication of discrete performance obligationsas measurement criteria.

26 CGMA, May 2013.

27 Wall Street Journal Small Business Blog, The VentureCapital Secret: 3 Out of 4 Start-Ups Fail, blog entryby Deborah Gage, Sept. 19, 2012.

28 Richard Foster and Sarah Kaplan,Creative Destruction

,Chapter 1, Doubleday, New York, NY, USA, 2001.

29 Carpe Diem Blog, Fortune 500 Firms in 1955 vs. 2011;87% Are Gone, blog entry by Mark Perry, Nov. 23, 2011.

30 Michael Porter, How competitive forces shapestrategy,Harvard Business Review , July-August, 1979.

31 Among the analyses of Groupons problems wereHarvard Business Review Blog , The Problem withGroupons Business Model, blog entry by RitaMcGrath, July 13, 2011, and How to Save Groupon,blog entry by Ra Mohammed, Dec. 10, 2012, andForbes Markets Blog, Groupons Problem, blogentry by Panos Mourdoukoutas, Aug. 14, 2012.


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32 Michelle Conun, Groupons fall to earth swifter thanits fast rise,The Associated Press , Oct. 21, 2011.

33 Jasper Rees, The end of our Kodak moment,

The Telegraph , Jan. 19, 2012.34 Knowledge@Wharton Strategic Management Blog,

Whats wrong with this picture? Kodaks 30-yearslide into bankruptcy, Feb. 1, 2012.

35 James Hall, Woolworths: The failed struggle to savea retail giant,The Telegraph , Nov. 14, 2012.

36 Jim Prior, Woolworths provides a case study in hownot to manage a brand,Marketing , Dec. 2, 2008.

37 The Guardian Media Network Blog, 10 reasons

companies fail at business model innovation, blogentry by Saul Kaplan, Feb. 1, 2013.

38 Three steps to sustainable and scalable change/Part 1: Rethinking a companys business model,Deloitte, 2010.

39 Email quoted, among other places, in TechCrunchBlog, Luxury Car-Sharing Service HiGear ShutsDown Due To Theft, blog entry by Sarah Perez,

Jan. 1, 2012.

40 Airbnb.com web site, Airbnb at a glance, accessed June 4, 2013, https://www.airbnb.com/about.

41 Airbnb blog, Our Commitment to Trust & Safety,blog entry by Brian Chesky, Aug. 1, 2011.

42 Economist Intelligence Unit, Business 2010:

Embracing the challenge of change, February 2005.43 IBM Institute for Business Value, The power of

cloud, 2012.

44 Raphael Amit and Christoph Zott, Creating Valuethrough Business Model Innovation,MIT SloanManagement Review, Spring 2012 .

45 Seizing the White Space blog, Business ModelAnalogies, blog entry by Mark W. Johnson, 2009.

46 Chris Higson with Tom Albrighton, Apple

Computers Financial Performance, LondonBusiness School case study, 2008.

47 David B. Yofe and Renee Kim, Apple Inc. in 2010,Harvard Business School case study, March 21, 2011(revised).

48 Peter Valdes-Dapena, Hyundai wont buy your carback anymore,CNNMoney , March 30, 2011.

49 Clark Gilbert, Matthew Eyring and Richard N. Foster,Two Routes to Resilience,Harvard Business Review ,December 2012.

50 Deloitte, 2010.

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