Disruptive Business Model Innovation

Xecced
You are preoccupied with conventional business models and therefore utilizing ineffective strategy lenses to improve, perhaps haphazardly, Customer Equity (CE) and Customer Lifetime Value (CLV) e.g. minimize customer attrition rates (churn rate). You should be concerned with disruptive business model innovation or risk losing market share and obsolescence.

Case study: Business Model Innovation in Frontier and Emerging Markets

Challenge:
much larger proportion of the population through tariffs cited as being amongst the lowest in the world. Erstwhile market leading business models were no longer sustainable as a consequence of ensuing price competition. The capital intensive and large fixed cost structure presented a challenge to growth and therefore this profit formula. The provider circumvented this issue by sourcing strategically. They devised a revenue sharing model based on performance thresholds with suppliers for IT functions and bought installed network capacity - a subtly different approach to conventional methods of procurement. The result is fixed costs and capital expenditures (Capex) were converted into variable operating expenditure

The telecoms industrys conventional profit formula of average revenue per user (ARPU) and market segmentation coupled with its capital intensive and large fixed cost structure confines the size of the market to a relatively small proportion of a developing countrys vast population.

Business model innovation:

This problem inspired a provider to alter its profit formula - shifting focus from average revenue per user (ARPU) and market segmentation to gross profit. Thereafter it focused on: Gross revenue and profit Operating efficiency (ratio of operating expenses to gross revenue) Capital productivity (ratio of revenue to capital expenditure). The formula enabled them to extend their customer base to a

(Opex) thus reducing capital intensity. This inspired auxiliary innovations that include: Selecting six key strategic areas (customer management, people motivation, financial management, regulatory affairs, brand management and strategy creation) in which to differentiate and evolve core competences in contrast to, the industry norm of, vertical integration. This enabled competitive advantage Circumventing the costs of sales channels through strategic alliances underpinned by cobranding, loss-leader strategies and alliances with finance companies on payment schemes Creating a joint venture to reduce the cost burden of non-differentiating passive infrastructure A multisided business model, in the form of an

open development platform with a similar revenue sharing deal arranged with third party application developers. The platform leverages Open Innovation and Long Tail to create low cost profitable growth avenues.

Result:

The provider is now one of the worlds most profitable carriers with a return on capital employed (ROCE) of 27%, earnings before interest, tax, depreciation and amortization (EBITDA) of $2.04billion, cash reserves of $983 million and zero debt. The business agility bestowed by these innovations enabled operating margin to raise from 2.25 to 28.3%.

Lesson:

The providers ARPU is amongst the lowest in the world but business model innovation enabled higher profit margins than conventional carriers with ARPU orders of magnitude higher.

About author: M. Adanan is a partner at Xecced. Contact: Enquiries@xecced.com Xecced, 145-157 St Johns Street, London EC1V 4PW Join us on LinkedIn Unsubscribe