What role should external factors of demand play in successful business models?
External factors of demand play the role of facilitating the process of designing a business model by acting as drivers and constraints of the business model. External factors of demand serve as drivers by ensuring all the elements of a good business model are included in the business model design. The latest trend, for instance, is an external factor of demand suggested by Ostwalder and Pigneur (2010). It acts as a driver because the designer has to consider it when developing a business model. As constraints, external factors of demand ensure that the designer is aware of all the factors that may prevent the development of an efficient business model. A good business model takes into account the external environment. The model is developed to address the pressure which the external factors place on the organization. Understanding the particular context in which a business operates will enable the organization to develop stronger and highly competitive models (Osterwalder & Pigneur, 2010).
According to Osterwalder and Pigneur (2010), the external environment should be considered as design space where efficient models are designed and developed. The demands of these environments are the design drivers and constraints. Factors such as new technologies, customer needs, and developing markets are design drivers that should aid the development of the business models. Regulatory trends, intense competition, and disruptive technologies are design constraints (Osterwalder & Pigneur, 2010). However, they are not obstacles to the development process. They just need to be understood so that an organization can design models that consider them.
A firm needs to scan external environment comprehensively to establish all external factors of demand. The scan should cover four main areas: industrial forces, key trends, market forces, and macroeconomic forces. Each of these areas includes various external factors that should influence the business model. Even though the factors are numerous, the business model designer should not be intimidated (Osterwalder & Pigneur, 2010; Jevarathnam, 2008). Instead, the design should find creative ways of developing an efficient model. They create an efficient model by considering external factors of demand.
Superior understanding of the external factors of demand will guarantee the adoption of an efficient business model. The adaptability of the business model is determined by the efficiency of the evaluation process. Proper assessment, which is dependent on how well the business designer understands the external environment, will enable the designer to establish ways a model can evolve to adapt to the changing environment (Osterwalder & Pigneur, 2010; Jevarathnam, 2008).
What is Business Model Design and Innovation?
Designing is simply the process of investigating and, hence, identifying new and, preferably, unexplored elements. The items discovered can either be a business, process, or product. Business people are designers, and their work is to explore and identify new ways of doing business. Osterwalder and Pigneur (2010) connect the concept of designing with the process of establishing business models. Business model design and innovation are the processes designers follow to develop efficient model (Tennent & Friend, 2005). The process requires the designer to establish the context and objectives of his or her organization.
A business model and innovation design is adopted to address issues affecting a firm. Osterwalder and Pigneur (2010) outline market satisfaction, bringing new product or services to the market, improving organization’s presence in the market, and creating new markets as the business model and innovation issues that apply to all types of businesses. Facebook, for instance, designed its model to include a Messenger to appeal to customers who increasingly prefer chatting while Google enhanced its presence by designing a business model that involved acquiring Youtube. Developing a Facebook payment option is an example of design and innovation geared towards developing new markets.
A company may engage in a model design and innovation to react to a crisis. The setting of Google Plus is an example of a reactive business model. Google feared that it was losing a significant market share to the social media. Therefore, it established Google Plus to compete in that media space. The model, however, has not enjoyed significant success. New York Times interactive website is an example of adaptive design. The newspaper adopted an online business model because customers’ preference shifted to consume online content. Amazon has adopted a pro-active design through online services. On the other hand, Alibaba drop shipping is an example of an expansive design where new technology that leads to new ways of serving customers is developed (Osterwalder & Pigneur, 2010; Tennent & Friend, 2005).
Challenges to Business Model Design and Innovation
Osterwalder and Pigneur (2010) divide the challenge to business model design and innovation into various categories. The first one includes challenges that apply to all, not just established businesses. The challenges include finding the appropriate model, testing it before launching in full scale, convincing or rather inducing the market to take on the model, adopting it continuously according to the market feedback, and finally managing uncertainty.
The second category of challenges applies only to established businesses. These challenges include developing a culture that readily adopts new models, aligning the new and old models, handling vested interests, and adopting a long-term focus (Osterwalder & Pigneur, 2010). One may mistakenly think that established businesses do not face challenges because they have the relevant experience in business modeling. However, this is not the case. Organizations have a tendency to resist change. Therefore, an efficient process of designing and developing an innovative model is likely to be unsuccessful.
New businesses, also, face unique challenges. Most of these challenges occur because the businesses lack sufficient experience in business modeling (Khosrow-Pour, 2013). For instance, an organization may prematurely launch a business model. Doing so will be costly to the firm since the company may waste a lot of time and other resources. Lack of experience may also imply that the organization does not have an appropriate model. As a new business, the organization will have to adopt an entirely new model which must be unique enough to enable the organization penetrate the market (Osterwalder & Pigneur, 2010). Fortunately, new ventures are likely to be open-minded and flexible since such businesses rarely suffer from vested interests. They are therefore likely to be more willing to adopt new models.
Jeyarathnam, M. (2008). Strategic Management (1st ed.). Mumbai: Himalaya Pub. House.
Khosrow-Pour, M. (2013). Cases on Performance Measurement and Productivity Improvement (1st ed.). Hershey, Pa.: Business Science Reference.
Osterwalder, A. & Pigneur, Y. (2010) Business Model Generation: Handbook for Visionaries, Game Changers, and Challengers (1st ed.). New Jersey: John Wiley & Sons.
Tennent, J. & Friend, G. (2005). Guide to Business Modeling (1st ed.). London: Profile.