Building Scalable Business Models
Many of today’s most successful companies are able to leverage business model scalability to achieve profitable growth. Executives need to factor scalability attributes into their business model design or they risk being left behind.
Business model innovation has become an increasingly hot topic in management circles, and understandably so. No management activity is more important than having clarity about how the organization creates, delivers, and captures value. It requires, among other things, knowing what customers want, how value can be best delivered, and how to enlist strategic partners to achieve maximum benefit.
Although the ability to develop strong value propositions can enable companies to “get by,” in our view many of today’s most successful businesses are those that are able to place themselves in the “sweet spot” of business model scalability. Scalability is about achieving profitable growth and is therefore a fundamental consideration for managers and investors alike. If managers are incapable of factoring scalability attributes into their business model design, they risk being left behind, much the way bookstores owned by Borders Group Inc. were eclipsed by Amazon.com Inc.
Over a five-year period, we studied scalability in the context of more than 90 Scandinavian businesses and also examined the experiences of a number of well-known businesses, including Google, Apple, and Groupon. (See “About the Research.”) In the course of our research, we identified five patterns by which companies can achieve scalability. The first pattern involved adding new distribution channels. The second entailed freeing the business from traditional capacity constraints. The third involved outsourcing capital investments to partners who, in effect, became participants in the business model. The fourth was to have customers and other partners assume multiple roles in the business model. And the fifth pattern was to establish platform models in which even competitors may become customers. Based on these patterns, we have developed a framework for identifying potential levers for business model scalability, along with a road map that managers can use to improve their business models.
1. C. Nielsen and H. Dane-Nielsen, “The Emergent Properties of Intellectual Capital: A Conceptual Offering,” Journal of Human Resource Costing & Accounting 14, no. 1 (2010): 6-27; and H. Dane-Nielsen and C. Nielsen, “Understanding Business Models from an Intellectual Capital Perspective,” in “Handbook of Intellectual Capital Research,” ed. J. Guthrie, F. Ricceri, J. Dumay, and C. Nielsen (London: Routledge, 2017).
2. This is an example of the type of complementary fit, where activities are mutually reinforcing, identified by C. Zott and R. Amit in “The Business Model: A Theoretically Anchored Robust Construct for Strategic Analysis,” Strategic Organization 11, no. 4 (November 2013): 403-411. See also P. Milgrom and J. Roberts, “Complementarities and Fit Strategy, Structure, and Organizational Change in Manufacturing,” Journal of Accounting and Economics 19, no. 2-3 (March-May 1995): 179-208. According to Milgrom and Roberts, activities are complements when the marginal value of one activity increases as the other activity is increased.
3. See Y. Taran, C. Nielsen, M. Montemari, P. Thomsen, and F. Paolone, “Business Model Configurations: A Five-V Framework to Map Out Potential Innovation Routes,” European Journal of Innovation Management 19, no. 4 (2016): 492-527; and H.W. Chesbrough, “Open Innovation: The New Imperative for Creating and Profiting from Technology” (Boston: Harvard Business School Press, 2005).
4. This is an English translation of the company’s name, Relationsfabrikken ApS. See www.relationsfabrikken.dk.
5. A. Osterwalder, Y. Pigneur, G. Bernarda, and A. Smith, “Value Proposition Design: How to Create Products and Services Customers Want” (New York: John Wiley & Sons, 2014).
i. C. Baden-Fuller and M.S. Morgan, “Business Models as Models,” Long Range Planning 43, no. 2-3 (April-June 2010): 156-171.
ii. Taran et al., “Business Model Configurations: A Five-V Framework.”