The Risk-Driven Business Model: A book review by Bob Morris

Posted on: July 29th, 2014 by bobmorris

Risk-Driven BusinessThe Risk-Driven Business Model: Four Questions That Will Define Your Company
Karan Girotra and Serguei Netessine
Harvard Business Review Press (2014)

“Yesterday’s dangerous idea is today’s orthodoxy and tomorrow’s cliché.”
Richard Dawkins

According to Karan Girotra and Serguei Netessine, “By changing WHAT decisions are made in the business model, WHEN they are made, WHO makes them, and WHY they are made, you will be able to come up with the business models that better manage information and incentive risks, and, as a result, outperform existing business models, disrupt established [and ineffective] ways of doing business, and lead to a sustainable advantage.” What they recommend is business model innovation (BMI), a process that not only challenges the status quo but also challenges the key decisions and assumptions on which the status quo is based.

More specifically, they recommend a three-step process:

1. Identify key decisions of the current business model.

2. Map out risks and inefficiencies that these decisions create in order to identify those that are most consequential.

3. Change the decision pattern associated with consequential decisions to create new, superior business models that defy risks that would otherwise create inefficiencies.

“In devising the framework [for this process], we found a useful model in the discipline of design thinking, which is a form of holistic, human-centered innovation that seeks to dramatically improve the ways in which people and systems interact.” They especially value design thinking’s emphasis on rapid prototyping, experimentation, and learning from diverse [perhaps previously ignored] sources of data and even insights.

These are among the dozens of business subjects and issues of special interest and value to me, also listed to indicate the scope of Girotra and Netessine’s coverage.

o The Key Decisions and Risks in Every Business Model (Pages 13-23)
o Information and Incentive-Alignment Risks: Warning Signs (42-43)
o Gauging Inefficiencies: Two Methods (47-50)
o Focusing the Scope of Key Decisions (60-71)
o Hedging Your Innovation Decisions (77-83)
o Delaying Decisions to Gain Maximum Flexibility (89-95)
o Changing the Decision Sequence: Revolution Through Competition (95-108)
o Split Decisions to Gather Early Signs of Demand (108-115)
o When Information Is Power, Select the Best-Informed Decision Maker (121-128)

Note: There is another approach suggested in one of Tom Davenport’s recent books, Judgment Calls. He and co-author Brooke Manville offer “an antidote for the Great Man theory of decision making and organizational performance”: organizational judgment. That is, “the collective capacity to make good calls and wise moves when the need for them exceeds the scope of any single leader’s direct control.” In other words, engage the best-informed decision makers.

o How Amazon Keeps Changing the WHO of Its Business Model (132-133)
o Why We Do What We Do (149)
o When Integration Is the Cure for a Broken System (161-170)
o Table: 7-1: Business Model Innovation Matrix (177)
o Five Implementation Principles (180)
o Looking for Flaws in the Existing Model (186-189)
o Table 7-2: Teams and Tasks (195)

When suggesting what the next business revolution may be, Karan Girotra and Serguei Netessine observe, “It is easy to look at an innovative business model and recognize that it has vastly improved on the status quo. But it’s another thing entirely to reverse-engineer the new business model, show what distinguishes it from what it replaced. and explained how it changed the risk equation in order to achieve transforming value.”

That is precisely what they have done in this book, extrapolating general principles that their reader can apply “to produce reliable, repeatable innovations to achieve transformative benefits in a wide range of industries and circumstances.” To both of them, I offer a heartfelt “Bravo!”

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