The Path to Growth

Even the most successful business models erode over time. Microsoft Corp. is under threat from Web-based software such as Google Inc.'s Writely and open-source offerings such as Linux. Coca-Cola Co. is facing challenges from bottlers flexing their muscle and increasingly health-conscious consumers. Manufacturers across the board are struggling with the new dominance of China, and professional firms are similarly threatened by the growing presence of India.

The key to thriving under such tough conditions is adaptability. Many companies get stuck in a rut, coming up with just one way to make themselves valuable to customers and sticking with it no matter how much the market changes. Instead, companies must continually update their business model in response to threats and opportunities.

When faced with these challenges, most managers consider a host of conventional approaches, such as copying competitors or finding unexplored niches to exploit. But there's another way to approach the problem, a method that can uncover new and unexpected ways to boost business: Look at value-creation strategies.

The idea is simple. All of the possible methods of bringing customers value—anything from more-efficient production lines to new products and services—boil down to just three fundamental strategies. All business models can be seen as one of these three things, or a combination of two or more. In that light, the best way to tweak a business model is to find a new combination of building blocks that better fits market conditions.

Here are those three fundamental strategies, as developed by Charles Stabell and Øystein Fjeldstad, professors at the Norwegian School of Management:

• Industrial efficiency, which creates value by producing standardized offerings at low cost. Manufacturers and fast-food restaurants rely on this approach.
• Network services, which creates value by connecting clients to other people or other parts of the network. Telephone companies, delivery services and Internet middlemen such as eBay use this method.
• Knowledge intensive, which creates value by applying customized expertise to clients' problems. Law firms and medical practices are prime examples.

Looking at business models this way can bring insights—and new ways to compete—that the regular methods miss. Let's say you manufacture industrial parts. If the market got tougher, you'd probably try to find a way to make your products more cheaply or differentiate them more strongly from your competitors' offerings. You wouldn't ordinarily consider using the network-services approach—that is, giving your customers new ways to connect to you or to each other.

But that's exactly what many big industrial companies have done to boost their business—even if they haven't looked at it in those terms. Car makers, for instance, have created "networks" of dealerships across the U.S. that provide after-sales service and parts support. General Motors Corp. has gone even further, partnering with OnStar. When customers buy a GM vehicle equipped with the service, customers are buying not only a car, but also an online network that ensures they get help whenever and wherever they are.

Of course, companies produce successful left-field strategies using conventional approaches. But focusing on the three value-creation strategies can help produce those insights regularly by forcing managers to look at their business and their options in a novel way.

What follows is a closer look at how companies can use the value-creation strategies more creatively to keep up with a changing market.

INDUSTRIAL COMPANIES

Companies that rely on industrial efficiency sell large volumes of low-cost, standardized products or services. Prices are primarily influenced by market forces, so the company's profitability typically depends on management's ability to manage costs. The category includes companies in commodity industries, such as petroleum refining, as well as near-commodity ones, such as generic label goods. The category also covers service companies such as fast-food restaurants and copy shops.

The big threat for pure industrial companies is China, whose companies are beginning to dominate the low-cost, standardized segment for most products. At times, Chinese companies offer better quality at prices as much as 30% lower.