The Risk-Driven Business Model

“In an increasingly volatile business environment, more and more industries will achieve significant and inimitable competitive advantages that arise from applying a different risk model, rather than different cost, revenue, or resource capability models. It is therefore important that any systematic design or improvement of a business model start with a search for the apparent and the not-so-apparent risks in your business model.”

INTRODUCTION

• Information risk is a feature of a business model that requires you to make decisions without sufficient information.
• Incentive-alignment risk arises when the incentives imposed by a business model lead to actions that clash with the broader interests of a value chain.

KEY TAKEAWAYS

• By making seemingly small modifications to your business models in a programmatic way; you will find that you can create significant even game changing competitive differences.
• At its heart, this book is about how the key choices you make in designing your business models will either increase or reduce two characteristic types of risk - information risk and incentive-alignment risk. Defined simply, information risk is a feature of a business model that requires you to make decisions without sufficient information. Incentive-alignment risk arises when the incentives imposed by a business model lead to actions that clash with the broader interests of a value chain.
• […] business model innovation (BMI) entails relatively lower degrees of difficulty and uncertainty than traditional forms of product innovation. Producing significant benefits demands neither a new breakthrough technology nor the creation of a brand-new market; a BMI opportunity delivers existing products based on existing technologies to existing markets.
• Thomas Edison invented the lightbulb, but he also invented the business model whereby electric power was generated, transmitted, metered, and purchased so that the bulb could be lit. Otherwise, there would have been no market for lightbulbs. Jobs and Apple invented the iPod, but they also invented a customer-empowering content-distribution model as complete in its conception as was Edison's grid.
• […] when newly innovated tangible products have trouble getting traction In the marketplace, their champions look first for a technological answer, often ignoring evidence that the problem may rest within the business model itself.
• every business model, without exception, imposes a number of key decisions on the business. We call these key decisions and the context in which they are made the decision pattern.
• The path to reinventing the business model then lies in changing how decisions are made so decisions are levers for inventing (and reinventing) new business models. Our framework identifies four basic types of interventions an innovator might choose to make to a decision pattern: changing what decisions the business model involves; when a decision is made; who should make the decision; decision the way and why the decision maker makes the he does.
• The What Every key business model decision is predicated on foundational choices. In other words, an organization's earliest the firm has chosen to offer a particular set a of products or services in a particular way, and those prior choices drive what substantive matters the business model addresses. Some choices are simply better than others at maximizing the value created within an economic system. The previous choices on which you founded your business frequently become the fixed starting point for everything you do. That invariably places constraints on the directions in which you might be willing or able to take your business model.

• The When The architecture of the business model imposes timing for every decision, or when decisions are made. You must make many of the decisions imposed by your business model before you have enough information to make them with confidence. In general, the costlier it is to reverse the consequences of a decision, the more intensely its timing will affect the level of risk.

• The Who particular person (or persons) [.] makes every decision that a business model induces. Ideally, the decision maker relies on the best available information so as to maximize the value created by the decision. Obviously, the choice of decision maker affects both information risk (since different decision makers are informed to varying degrees) and incentive-alignment risk (since some decision makers might be more appropriately invested in the outcome than others, in ways that better serve the value chain).

• The Why The design of a business model typically imposes certain goals and incentives on decision makers. Because decision makers are generally rational actors, these factors can powerfully influence the decisions they make. p. 19

• BMI is fundamentally an activity based on constructive skepticism. It requires that you make yourself (and your organization) open to questioning old assumptions.
• The audit is therefore an effort to find underlying weaknesses in the way you've been doing business.
• It's impossible to overstate how easily businesses can become hostages of their own success, looking to the past for the keys to their futures.
• smart businesses develop ways of questioning what they do. Amazon was born as a business model innovation, it has never stopped changing aspects of the founding model's architecture. Turning against founding wisdom takes real courage. But Amazon teaches us that a company can't afford to sentimentalize the icons of its past. Instead, it needs to be able to "selectively forget the past" and destroy its icons without hesitation. It also needs to be disciplined about experimenting and adjusting things.

• inventing the future if your perspective is stuck in the past is very difficult. Your business models need to be strong enough to meet the demands of the present, flexible enough to respond to changing near-term conditions, and monitored over time to make sure they position your business to seize the new opportunities that will ensure its competitive future.
• we focus on information risk and incentive-alignment risk in particular because they are the two key inefficiency creators in business models, arising because of decision patterns. These two risks are responsible for most, if not all, problems with existing business models.
• Information risk is a consequence of uncertainty. Many managers base business decisions on incomplete or incorrect information. That's because managers often make decisions long before they have the information to make them with confidence.
• Incentive-alignment risk drives conflict between parties that must collaborate to create value. Business models incorporate incentives that can clash and impede the achievement of common goals. That is because businesses (and their employees) often make decisions on the basis of self-interest rather than what best serves the goals of an entire value chain. This type of risk is therefore context dependent: incentives that motivate excellent performance within the context for which they were designed often cause problems when multiple differing motivations converge.
• In an increasingly volatile business environment, more and more industries will achieve significant and inimitable competitive advantages that arise from applying a different risk model, rather than different cost, revenue, or resource capability models. It is therefore important that any systematic design or improvement of a business model start with a search for the apparent and the not-so-apparent risks in your business model.
• The point of conducting a business model audit is to prepare you to reinvent existing business models or create entirely new ones [...] remember that auditing is a journey, not an event. Don't think of the audit as a onetime deal or an activity reserved for a crisis. Instead, view it as a regular opportunity to assess your firm's overall strategic hygiene.
• Organizations typically fail to recognize that adopting different set of decisions can dramatically transform the business model, even if all else remains unchanged.
• the decisions that define the problems your business model most aggressively sets out to solve-what the business is about and what its attitudes are on questions of risk. Firms tend to take for granted their foundational decisions, giving little thought to the impact they may have on business model inefficiencies.
• Determining what decisions to select in designing business models is usually the dominant driver of their risks and inefficiencies.
• The cliché gets it almost right: timing is everything. Actually, timing and sequence are everything. Determining when you must make key business model decisions and the order in which they are arranged, relative to one another, is crucially important to your business model's performance and to the value it creates (or destroys).
• Paul Krugman once defined moral hazard as "any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly."
• Increasingly, modern organizations will survive only through reinvention.
• The ability to effectively orchestrate different modes of innovation to achieve complementary benefits will be a hallmark of excellent innovation governance.
• for the past two decades, have had many opportunities to see how a truly well-conceived and executed business model provides a decisive competitive advantage. Optimized business models drive down risk and deliver measurably better performance.

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