Managerial mistakes that lead to inefficiencies are directly manifested from choices having to do with the 2 fundamental types of risk.
Karan Girotra and Serguei Netessine professors of Technology and Operations Management at INSEAD suggest in their book, The Risk-Driven Business Model: Four Questions That Will Define Your Company, that most inefficiencies originate from key choices having to do with either one of the 2 types of risks, which are (1) information risk and (2) incentive alignment risk. These 2 types of risks have intrinsic influence over the architecture of a company’s business model.
Information risk concerns the conflict of interest that sometimes occurs between client management and investors. Employees are often influenced by management to exaggerate the success of a company, which leads to the circulation of false and misleading information. Harvard Business Review stated that the consequences of misaligned incentive include stock-outs, inadequate sales, incorrect forecasts, excess inventory, and poor customer service. Incentive alignment risk, when applied to security engineering is, “The motive that the people guarding and maintaining the systems have to do their job properly and also the motive that the attackers have to try to defeat your policy” (Anderson, 2008).
Inefficiencies emanating from these 2 types of risks have powerful influence and become evident in performance, which alters the business model. Designing a programmatic approach for your company allows small ongoing modifications to be made. Management that is mindful about the specific effects of these risks will be able to design a business model generative of superior performance by implementing processes that help to reduce the potential damage.
Turning Business Model Inefficiencies into Business Model Innovation (BMI) is the first step to eliminating the inefficiencies of a company.
Business Model Innovation is the process of reducing, eliminating, or re-situating information risk and business alignment risk. The key assumptions and decisions that currently make up the architecture of the business model must be re-evaluated, so that “point of leverage” becomes apparent.
The 4 Basic Types of Interventions
Most key decisions and the context in which they are made, are part of a larger pattern of decision-making. Changing how decisions are made become the tools for creating the new business model. The Girotra/Netessine 4-W framework for decision pattern interventions include:
- What: changing what a decision focuses on; the various objectives
- When: changing the timeline having to do with when a decision must be made
- Who: altering the organization; those with decision-making powers
- Why: deciding why a decision would create incentive to those affected by its influence
Girotra and Netessine state that the most important impetus for change is the understanding of the interrelatedness of all business model decisions.
Amazon.com is an example of a company founded on the idea of business model innovation. Decisions and practices involved with risk that were at one time intentionally left out of the company architecture, would later be researched and added to its scope of activity. The technology that supports Amazon’s virtual inventory platform has been incredibly important for the company, which has grown a great deal from its original “sell all carry few” model. It now utilizes quite a different model that provides the company greater command of its supply chain. Payment services like BACS for example, use cloud technology created by computer programming experts and finance professionals to process high volume payments faster and more efficiently. For more information click on this link: What is BACS?