Unlike past growth economic cycles driven purely by new product development, many forward-thinking CEOs are looking to transform their businesses using innovative business models and processes, according to a recent IBM study.
This is the second study conducted by the technology giant within the past two years that has examined CEO perceptions on business growth drivers. While the earlier study concluded that new product introduction was critical to business success, the latest analysis found that CEOs are leveraging business-model innovation to drive market differentiation, revenues, and profits. Results were based on in-person interviews with over 750 CEOs and equivalent titles worldwide, in 20 separate industries.
In fact, the latest study found that two-thirds of CEOs' efforts now are targeted at business model and operational innovation. One-third of all CEOs' innovation resources are targeted at their business models.
The study's findings include one CEO's comment that sums up the state of Corporate America: "The business model we choose will determine the success or failure of our strategy," while another stated that, "Products and services can be copied; the business model [has to be] the differentiator."
Interestingly, these findings are similar to the concepts laid out in Managing Automation's Progressive Manufacturing philosophy, which calls out six disciplines -- including business model and innovation (i.e., design collaboration) -- manufacturers must master to survive, if not thrive, in coming years.
While the results of the IBM study largely emphasize the significance of business model innovation and collaboration, the words have slightly different meanings today than in the past. Collaborating, it turns out, means working closely with established business partners and customers, but, increasingly, with competitors, as well. Why? Because ever-increasing pressures from global competition and market forces -- along with factors including workforce issues, technological advances, and regulatory concerns -- have CEOs primed to explore radical change, the study revealed.
Among the CEOs currently prioritizing business model innovation, 67% stated that organizational structure changes are the most common business model innovations, while 52% thought that major strategic partnerships were most common.
Redefining Partnerships
The main drivers of this change are globalization, commoditization, higher costs, and increasing specialization. Every industry either recently has or will experience a major disruption with radical change(s) within the next two years, according to IBM.
The study found that companies are beginning to assemble a business model made up of "specialized" capabilities, combining internal expertise and scale through shared service centers with the capabilities of specialized partners. (Learn more about this phenomenon by clicking here.) Seventy-six percent of respondents said that collaboration with outside sources is critical, while only 51% say their organizations currently collaborate extensively.
Companies that once viewed one another as competitors, in fact, are starting to become "strategic partners," where each focuses on a given aspect of delivering a product or service to customers, the study pointed out.
Midwest electric and gas supplier Xcel Energy Inc. (Minneapolis, MN), for example, is endeavoring to combine the efforts of several external partners -- some of which are competitors -- to work toward objectives such as increased customers satisfaction and cost reduction. Through this collaborative arrangement, which the company calls "Utility Innovations," the participants found that the advantages to working with traditional competitors outweighed the intellectual property risks. The Utility Innovations project gives partners access to a "real-world laboratory," thereby helping each to make better product development decisions through the use of pooled resources.
Swiss pharmaceutical manufacturer Novartis International AG also has implemented an organizational structure designed specifically to encourage teams to collaborate across disciplines, functions, geographies, and corporate boundaries. The company has found that through extensive internal and external collaboration, it has been able to build one of the strongest product pipelines in the industry, with 76 drugs in some stage of clinical development.
Extensive collaborators were found to have outperformed the competition in terms of both revenue growth and average operating margin, according to the study. More than half of these companies, for example, fared better than their closest competitors when analyzing historical operating margin results over a five-year period, the report noted.
Collaboration has become open and global, not something business leaders simply engage in among "friends." According to the study, only 14% of the respondents ranked internal R&D as a source for new ideas.
Overcoming Internal Barriers
Top obstacles to innovation include an unsupportive culture and climate, with internal inhibitors more significant than external hurdles, the executives said. In addition, the study found that the strongest financial performers create "a collegial culture and reward individual contributions." Those who reward individuals have achieved 2% higher operating margins on average and grew their revenue nearly 3% faster that those that do not.
"[CEOs] have to equip their team in terms of how they will benefit personally from the acceptance of change and innovation," said Ronald Williams, president and CEO of Aetna Inc. (Hartford, CT), and panelist at a recent press conference detailing results from the study.
Added Ken Denman, president and CEO of iPass Inc. (Redwood Shores, CA), a provider of mobile enterprise connectivity services for corporate fleets, and conference panelist: "The acceptance of change will vary among the different functions within an organization. The CEO's role is to ensure strategic dialogue with the business; we as CEOs are not going to innovate by ourselves."
Another panelist, Brian Gallagher, president and CEO of United Way of America, added, "People are trained to think vertically, but the criteria for change is horizontal. The global market has changed the economic and social conditions of business."
A Familiar Refrain?
What really has changed from the last time the world of business was turned on its head? Or the time before that? Increasingly, it's the speed with which change is occurring.
Among the CEOs who prioritize business model innovation, most fear that changes in the business model of a competitor could likely result in a "radical change to the entire landscape of their industry," according to the study. "Requirements for the speed of change -- how fast your business can react to it -- have changed themselves. Business plans now take only months, instead of years, to execute," said Denman.
"Your customers' requirements are changing so fast, that if you don't move at least as fast, you'll fail to meet their needs," noted Williams.