The Yin and Yang of Business Model Innovation

The “free fall” that Sony, Sharp, Panasonic and Toshiba are experiencing in the flat Japanese economy is partially the result of a failure to adopt new business models to adapt to changes in the marketplace, says Kay Plantes.

A recent column in the Washington Post column describes the “free fall” that Sony, Sharp, Panasonic and Toshiba are experiencing. They “once controlled the industry, outclassing and outselling their U.S. rivals. But now they represent the most alarming telltale of corporate Japan’s two-decade struggle to adapt, downsize and innovate….unable to catch on in the digital world of tablets and smartphones.”

Harlan’s article describing what happened to the Japanese electronics companies presents a terrific Economics 101 lesson. As the electronics industries matured, product quality shifted from being an advantage to a consumer expectation. As incremental improvements in quality added more to the costs of electronics than they added in benefits to the consumer, demand shifted to lower-cost producers (e.g., Samsung and LG). At the same time, the industry profit pool shifted from the increasingly commodity-like products to solutions offering new-to-market benefits, like smartphones and tablets. Stuck in broken business models, the Japanese companies suffered the consequences.

So what are the lessons for us? Decide which path you want to take through the changing market: low-cost producer, adopter of new business models or exit the category. Firms that survive must learn to manage two conflicting cultures: the existing one, which emphasizes cost-cutting and supply chain efficiency, while at the same time fostering a culture of innovation that gives rise to new business models.

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