"Samsung was founded as a grocery trading store on March 1, 1938, by Lee Byung-Chull. He started his business in Taegu, Korea, trading noodles and other goods produced in and around the city and exporting them to China and its provinces. Jan 6, 2021"
Capital structure that attracts investors to your tech startup
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Tech startup founders strive for and investors appreciate a “clean” capital structure for ventures that will eventually seek outside investment. There are a few terms you will hear when discussing the set-up of the capitalization structure for your business and here is what they mean:
The founders of a startup generally purchase shares at the time of incorporating the company at a nominal price per share, such as $0.0001 per share, paid in cash, since at that time the company will have no operating history, few assets and thus little value. These shares are referred to as founders’ shares.
Founders are the initial group of individuals who conceived the idea and/or the first individuals recruited to get the business off the ground. Founders are usually the one or two individuals who are the driving force behind the startup, but may be a larger group (usually less than six).
The founding group should objectively assess each individual’s expected contribution and allocate founders’ shares on that basis (rather than spread equally across the group). You’ll want to consider whether an initial equity issuance or stock options represents the appropriate incentive for an individual.
A founder may serve as a member of the tech startup’s management team; however, not all members of the management team are founders. Management will likely change over the life of the business and they are usually incented with a combination of cash compensation and stock options.
During start up, entrepreneurs should consider the number of founders’ shares and stock options to be issued in relationship to the current valuation of their business and/or the valuation they hope to achieve in the first round of investment from outside investors.
They need to determine how they wish to allocate the ownership of the business among the founders and to key employees, directors, advisors and contractors.
Consider the example below:
|Shareholder/option holder||Number of shares||Actual percentage owned||Fully diluted percentage|
|Founder A (CEO)||500,000||50%||42.5%|
|Founder B (CTO)||300,000||30%||25.5%|
|Founder C (Key Technical)||200,000||20%||17.0%|
|Issued and outstanding shares||1,000,000||100%||85%|
|Option holder 1||11,765||0%||1.00%|
|Option holder 2||3,000||0%||0.25%|
|Option holder 3||17,650||0%||1.50%|
|Total fully diluted shares||1,176,471||100%||100%|
If the founders had simply issued 50, 30 and 20 shares for a total issued capital of 100 shares instead of 1,000,000, the ownership percentage for the company would remain the same among the founders; however, the company would have difficulty splitting the 17.65 shares available for stock options among option holders, since legally, partial shares are not permitted.
If you have incorporated your business with a smaller than desirable number of shares, you can modify your capital structure by “splitting” the current number of shares issued. You should consult legal counsel who will assist you to seek the necessary shareholder approvals to make the change and to file revised articles of amendment, legally documenting the change.
What does a clean capital structure look like for potential investors?
- A limited number of classes of common shares are being used for equity issuances and stock option grants. Usually one voting common share class but sometimes a non-voting common share class may be established for stock option grants in addition to voting share class.
- There are a manageable number of shareholders, excluding insiders holding stock options.
- A stock option plan has been implemented, providing upside opportunity to all key employees who will continue to work with the business to build shareholder value.
- There are no obstacles to obtaining necessary shareholder approval for the company to issue shares to the new investor in exchange for cash investment and to amend any existing legal documents or the capital structure accordingly. This is usually achieved through having a Shareholders’ Agreement in place, a voting trust or other legal documents to ensure that minority shareholders will follow suit with the majority.
- Canadian investors generally prefer to invest in Canadian-Controlled Private Corporations (CCPCs). A CCPC is a Canadian-incorporated private corporation that is not controlled directly or indirectly by one or more non-residents of Canada or public corporations (or any combination thereof). CCPCs enjoy benefits including the right to claim refundable cash Investment Tax Credits under the Scientific Research & Experimental Development program as well as potential tax advantages for founders and employees on the sale of their shares or stock options. Companies should seek legal or tax advice as to how to maintain their CCPC status. However, some US investors may require the company to reorganize itself on a cross-border basis for their own local tax or operational reasons.
Tech startup entrepreneurs should seek professional legal advice when setting up or making changes to their capitalization structure, choosing legal counsel with experience in setting up early-stage ventures and working on investment rounds for their clients. Hiring a lawyer may seem like a big expense for your startup, but setting up your business incorrectly will cost you more in the long run.
Summary: Tech startups need to set up a “clean” capitalization structure from the beginning to attract potential investors, who will seek certain criteria.
Houston, Thomas, Andrea Johnson, and Eric Smith. (September 15, 2006). Technology Startups: A Practical Legal Guide for Founders, Executives and Investors. Fraser Milner Casgrain. Retrieved May 21, 2009, from http://www.lexology.com/library/detail.aspx?g=7c476ef3-67a9-4a33-8053-05331cb29e6a.
Challenge the Perception of Chinese Retailers to Inspire Western Retailers’ Focus on Ecosystems
Leading Chinese retailers are defining a new ‘era of belonging’ by forging stronger ties with consumers through an innovative buying experience.
In 30 seconds
- New Chinese retailers have created strong relationships with consumers that are both physical and emotional by leveraging multiple connection points and personalized communication with highly-connected customers.
- Leading Chinese retailers are close to achieving an elusive goal in retail: “unified commerce”, a seamless blend of digital, products and customer service that is tailored to ever-changing customer needs and aspirations.
- Leading Chinese retailers are reinventing their business models, developing “retail-as-a-service” offerings to become the privileged partner in an evolving ecosystem.
- The combination of these efforts is blurring traditional barriers between players in the retail value chain. This new role is creating a sense of belonging for each of the players in the value chain whilst providing new revenue to their organizations.
- China is a laboratory for retail innovation. In 2019, an estimated 57% of e-commerce sales globally will be transactions made by Chinese consumers.
- Leading Chinese retailers understand the technological demands of their consumers. Our study shows that 66% of Chinese consumers would like to have fully-automated stores and facial recognition to help them make buying decisions.
- Leading Chinese online retailers are tapping new revenue streams with innovative go-to-market strategies at record speed. JD.com was already planning the opening of hundreds of unmanned convenience stores in China when Amazon launched its first fully-automated store in January 2018. Now, they count over 20 unmanned stores in China, and started going international with an opening in Jakarta in August 2018. While Amazon has one in China and 4 planned openings in the USA.
- Leading Chinese retailers are creating a sense of belonging with customers by spreading economic growth to rural areas. Each new online store in an Alibaba “Taobao village” creates an average of 2.8 jobs. So far, 1.3 million jobs have been created.
- Leading Chinese retailers have developed powerful “ecosystem-plays”, which have strengthened their status as “privileged partners”. These ecosystem-plays are providing access to Chinese consumers, other Chinese retailers, and international brands. This opens up a realm of possibilities by introducing more data, more players, and more innovation into the retail market. For example, JD.com introduced a “retail-as-a-service” offering that hosts Walmart’s e-commerce platform in China, enabling Chinese shoppers to buy products directly from Walmart stores.
Have you ever wondered why Chinese tourists, who travel all over Europe with massive amounts of cash, are now becoming easy prey for robbers? This is not just because some Asian credit cards do not work in Europe. Chinese tourists are generally unable to pay electronically as they would do normally in their own market, using WeChat or Alipay on their smartphones.
Western retailers should look East. Unless they learn from China’s retail market (the world’s biggest and most innovative), they could face steady decline.
Chinese retailers are re-inventing retail by using digital technologies to simplify and personalize the customer experience.
Chinese consumers are often perceived as the early adopters in retail. Although there may be some truth in this claim, it represents only part of the story. Chinese retailers, mostly driven by e-commerce giants like Alibaba or JD.com, are re-inventing retail by using digital technologies to simplify and personalize the customer experience. This is exactly what needs to be done so that consumers feel they identify with or belong to a particular brand or retailer.
In addition, the new era of retail goes beyond a perfectly fluid omnichannel experience with the retailer. With the goal of becoming essential to each partner in each link of the retail value chain, Chinese retailers are facilitating the entire purchasing experience, even including other merchants. To do this, they are leveraging the value of data: specifically, predictive analytics in addition to digital technologies.
First, Chinese retail giants aim to “accompany” their customers in many aspects of their daily life. Examples include using Alipay to pay for ‘anything, anywhere’; and WeChat, which incorporates among others messaging, social media and a mobile payment app. They are also very active in leveraging customers as brand ambassadors: consumers are encouraged to become the privileged partner of Key Opinion Leaders (KOLS) – namely, those who act as influencers with expert product knowledge, providing the retailer with live streaming platforms. In summary, Chinese retailers know their customers intimately. They have gained this knowledge from leveraging information from many sources to exploit customer influence in the market.
Second, these giant companies want to become the privileged partners of other current retail players. Alibaba is equipping small grocery stores in rural areas with a suite of mobile tools (Ling Shou Tong) to manage their points of sale. Thanks to these tools, they can supply merchandise from Tmall by benefiting from sales prediction systems followed by delivery within two days, even in remote areas. This is an example of leveraging information and predictive analytics at work, again, to understand the market demand for products. Close to 100,000 grocery stores were already in the Global Shopping Festival in 2017, Alibaba’s yearly three week of promotions and products offerings from around the world (note 1).
Becoming the privileged partner for the different players along the value chain, Chinese retailers can be considered much more than simply excellent merchants. They are contributing as community facilitators, creating a sense of belonging towards all players in the retail value chain.
Western retailers may not be able to adopt many of Chinese companies’ most innovative retail business models since technology, customer behavior and consumer demands are simply too different. However, there are important opportunities to leverage some Chinese ideas selectively and adapt them to Western markets. One thing is certain: no Western retailer can afford to ignore the success of China’s retail market. They must learn from it and adopt techniques that can work in Western markets.
At one time, the USA was the most dominant player in the international retail market. However, in 2016, China overtook the USA to become the most innovative, largest and exciting player in retail market (note 2).China has gone from being a copycat to becoming a leader of innovation, helped by a huge customer base (its population is about 1.4 billion) and the fast adoption of new technologies. The pace of change in China’s retail market is astonishing, presenting both an opportunity and a threat for more sluggish Western retailers.
China’s retail market is a tempting target − and not just because of its size. Unlike Western markets where, typically, a handful of retailers dominate consumer goods and services, the Chinese retail market of physical stores is more fragmented with hundreds of department store chains, but none with major market shares.
Chinese retailers excel at using data to create an intimate connection with their customers. China’s huge e-commerce companies, such as Alibaba and JD.com, are often cited as exemplary data-driven companies that use customer and market data to personalize relationships with customers and increase efficiency. Yet few people seem to know that these new retail giants are also engaged in societal initiatives, for instance favoring the development of small businesses in rural areas - a new type of corporate social responsibility. They also have a strong emotional connection with customers.
Apart from that, Chinese retailers are distinguished by integrating themselves in the existing ecosystem more than imposing their way of working. This represents a true outside-in approach towards doing business. This approach is necessary for creating and reinforcing the sense of belonging that customers demand in today’s retail sector.
In 2025, 44% of worldwide luxury sector sales will be transactions made by Chinese shoppers (note 9).
China: high connectivity leads to retail success
Although China is still classified economically as a developing country (note 3), much has been written about its highly-connected rise. It is important to remember some key facts and figures to provide context.
A highly-connected country (note 4):
- There were 772 million Chinese Internet users in January 2017, with only a 53% Internet penetration rate – so there is still high growth potential in the country (note 5)
- Of these users, 695 million Chinese accessed the Internet via a smartphone
E-commerce: in numbers
- In 2017, China was by far the biggest e-commerce market in the world: it is 2.7 times bigger than the United States’ e-commerce market ($1,200bn vs. $440bn) (note 6)
- In 2019, 27% of worldwide e-commerce shoppers will be Chinese. Nearly six in 10 (57%) e-commerce sales will derive from Chinese consumers
- Nearly one quarter (23.1%) of China’s retail market was e-commerce in 2017, according to eMarketer. That share is forecast to increase to nearly 41% by 2021 (note 7)
- In China, more than two in three (67.5%) people with smartphones use them to buy things online. And half of all smartphone owners use their phones to pay in stores (note 8)
- Chinese e-commerce is not just about cheap goods and services. In 2025, 44% of worldwide luxury sector sales will be transactions made by Chinese shoppers, according to one forecast (note 9).
Social media is shaping China's retail market
- 91% of Chinese internet users have an account with one or more of the biggest social media platforms − WeChat, QQ, Weibo and Youku
- 64% of Chinese millennials buy products on social media
The most influential media form in China is the internet, which has introduced video advertising and live-streams online that are very popular and effective in China. KOLS leverage videos, live streaming, and vlogs as marketing channels using tested marketing techniques such as sponsorship and discount codes to promote their own products and to influence the sales of existing brands. (note 10)
Alibaba and JD.com have launched their own live-streaming platforms so that brands and retailers can create partnerships with influencers to promote and sell their products to their followers. (note 11)
Alibaba has invested in a series of videos advertising their app, “2nd Floor Taobao”, which tells a new story on a weekly basis. All videos are commonly available in the evenings where studies have shown that people are more susceptible to influence. The stories are connected to the products and are highly interactive for the viewer.
Are the Chinese early adopters?
A previous WSL study for BearingPoint (research conducted in 2017) (note 12) found that Chinese consumers are willing to try innovative services to help them shop and make buying decisions. These include seeing a hologram or 3D version of a product online (77%), shopping in a fully automated store (70%), using facial recognition, fingerprints and/or voice to validate payments (67%).
Recommendations for Western retailers
- Influencers are your first business partners. Leverage them by giving them a platform to speak their mind, by creating partnerships, co-creating new products, and/or simply recruiting them. L’Oréal Colorista has collaborated with the most influential KOLs in their market to co-create a new range of hair-dye colors.
- Become a media company. Start to produce and broadcast stories and videos: the language of millennials. This may involve setting up new teams with media expertise and being clear on the “personality” of the company.
- ... and still, be truly mobile first. Retailers already know that the smartphone is the backbone of today’s unified commerce. In Europe however, m-commerce (tablets and smartphones) was forecast to represent only 28% of total e-commerce (in value) for 2017 (note 13). Retailers’ online presence should be quickly re-designed to become “mobile first”, including all possible interactions using smartphone capabilities whilst customers are in-store or on the move: smartphones can be seen as retailers’ first sales associate.
Retailers already know that the smartphone is the backbone of today’s unified commerce but don’t act enough on it.
Expanding the new retail paradigm by unifying online, mobile and physical commerce to leverage information
China’s retail industry has developed in an inverse way to the retail sector in the West. In China, e-commerce and social media developed first whilst modern bricks-and-mortar stores developed second. Consequently, China’s first-generation of retailers have had more access to customer data than their Western counterparts, benefiting from the absence of barriers on personal data protection. They have also shown that they can leverage this customer data effectively to show the way on expanding the new retail paradigm: “unified commerce” (note 14), to include the focus on leveraging information.
Learning from WeChat: expand unified commerce through a mix of social and commercial data
WeChat is the clearest example of a unified commerce mix. Founded in 2011 and owned by Tencent, WeChat is a versatile social media and mobile app for sending text messages (SMS/ MMS) and for making voice and video calls. It is also used for sharing photos and games. Earlier than its Western counterparts, Tencent understood the benefit of mixing social and commercial data, so that customers can be supported not just on their shopping journeys, but more widely in their daily lives. This is why WeChat, its major application, has been the first app to cover a wide range of services.
Chinese retailers have proven that they can leverage their customer data effectively to show the way on expanding the new retail paradigm: “unified commerce”.
WeChat has reached the one billion account mark in the world, albeit mostly in China, where more than half of the population uses it: over 300 million people use WeChat’s electronic wallet function online and offline on a regular basis.
Leveraging mobile payment capabilities and social data has proved crucial for retail commerce, hence the alliance being built by Tencent and JD.com, the second largest Chinese e-commerce platform in China. Both internet giants are making numerous co-investments in e-commerce (for example, the event-sales fashion site VIPshop, in 2017) and brick-and-mortar retailers (for example, Better Life, a conglomerate owning department stores, hypermarkets and convenience stores, in February 2018) to increase rapidly the number of physical and digital points of sale that use their payment and e-commerce capabilities.
Learning from Alibaba: expand unified commerce by integrating online, offline, logistics and data in a single value chain
In 2016, Chinese e-commerce giant Alibaba Group Holding Ltd became the world’s largest retail platform, with its total trading volume online in the fiscal year ending in March 2016 surpassing Walmart’s annual sales. (note 15)
Yet Alibaba’s future is not just about e-commerce: it concerns what Jack Ma, its founder and CEO, calls “new retail” − the integration of online, offline, logistics and data in a single value chain. Jack Ma has been able to redefine shopping and leapfrog the USA and Europe in retail innovation, a feat closely tied to the company’s research and development team, which makes up half of Alibaba’s 50.100 workforce.
Alibaba is making life easier for customers, by providing services along the whole shopping journey, combined with operational excellence. In China, Alibaba operates its own version of Netflix, its own Spotify, and its own payment solution. After logging in once and verifying ID, a customer can use all of Alibaba’s retail and entertainment services. Customers at KFC, the fast-food restaurant chain, can pay for their meals using facial recognition technology co-developed by Alibaba.
As part of a five-year plan to shorten delivery times to 24 hours nationwide, and 72 hours worldwide, Alibaba is investing heavily in logistics capabilities whilst also leveraging big data strongly. For example, anticipating order behaviors enables the company to relocate relevant products from multiple warehouses into one, so cutting down delivery time, packing, and pick-up costs. Using these assets, Alibaba is at the forefront of new retail, the blending online and physical commerce.
Other new retail giants such as JD.com are also heavily investing in these fulfillment capabilities, including drone deliveries to cover remote areas to the point that, today, over 90% of eCommerce orders in China benefit from same- and next-day delivery.
At Hema, a food supermarket chain owned by Alibaba, customers are offered “Easy select, easy pay, and easy enjoy” functionality in-store. In other words, customers scan product barcodes to discover products’ origins or composition, and item suggestions are sent to their profile accounts. Customers can shop hands-free by scanning items using a mobile application, which can then place orders to be delivered to their home address. Picking rails are hooked onto the ceiling to route online orders to scooters, enabling a 30-minute delivery fulfillment period within a three-kilometer distance. At the checkout, customers give a list of QR codes without having to show all their items, and can pay online using Alipay, Alibaba’s online payment platform. Traditionally, Chinese like to have virtually anything delivered. Hema will be the basis for... coffee deliveries, according to a partnership between Alibaba and Starbucks announced in August 2018.
This new type of shopping experience is also available at Home Times, Alibaba’s furniture and home-decor store chain, which opened a physical store last year in Hangzhou. Most products come from Alibaba’s B2C shopping platform, Tmall, (note 16) which takes into account the behaviors and preferences of consumers within a radius of eight kilometers from the store to make the assortment. Prices are displayed on electronic labels and synchronized with e-commerce tags. Also, augmented reality is used: screens enable customers to test furniture in a virtual home.
Automated stores give retailers better customer data and make shopping quicker and easier
The “unmanned store” is another model illustrating the merger between online and offline, and Western retailers are playing catch-up.
In January 2018, Amazon Go opened a supermarket in Seattle, America, with no checkout operators or self-service tills. It made headlines worldwide. Amazon’s technology automatically detects when products are taken from or returned to the shelves and keeps track of them in a virtual cart. When you’re done shopping, you leave the store. The purchases are billed to a customer’s bank card when the person exits the building. All you need is an Amazon account, the free Amazon Go app, and a “recent-generation” iPhone or Android phone.
China’s retail industry is again ahead of the West. One month earlier, in December 2017, JD.com announced plans to open hundreds of unmanned convenience stores in China. (note 17) By August 2018, over twenty stores had opened in China, and one in Jakarta (Indonesia).
JD.com’s “unmanned” convenience stores use facial recognition technology to register payment and product identity. Cameras attached to store ceilings recognize customers’ movements and generate heat maps of their activity to monitor flow, product selection and preferences, which helps store owners to pick stock more efficiently. Through the use of big data, artificial intelligence, and other innovative technologies, “We know where the customer is and what they like and can ensure that the right products are in place”, according to Bao Yan, Director of Planning, JD Logistics, in a recent media interview (note 18)
JD.com claims it can better predict which of the products in its warehouses are suited to its customers according to demographics and tastes. By relocating relevant products from multiple warehouses into one, it reduces picking costs, packing, and delivery times. Plus, customers also receive fewer parcels per single order. (note 19)
Recommendations for Western retailers
- Unified commerce is now! Leading Chinese retailers are setting it as a new standard today. Continue your omnichannel initiatives but go further and start setting up a truly unified commerce IT architecture as an enabler to new services and concepts. Such architecture should leverage Big Data and Artificial Intelligence and enable interconnection between all systems: real-time flows for key data (customers, inventory, orders, pricing, IoT, behavioral data, external data), on the dimensions of customer experience, shopping, fulfillment and content management. The data should be powered by artificial intelligence for fully contextual and personalized interactions with customers across any touchpoint.
- Leverage automated stores with better customer data to make shopping more efficient and effective: Although it is difficult to predict the long-term success of such stores, retailers should test this format for selected product categories (especially the ones with recurring purchases), or design new store formats specifically designed to collect more customer data.
- Transform stores into real fulfillment centers: For better and quicker service to customers, leverage your existing assets. Introduce innovation and automation to speed up order picking and delivery, potentially partnering with third parties (for example, on-the-spot delivery using a bicycle or an electric car).
Leading Chinese retailers become community facilitators and privileged partners
Market-leading Chinese retailers are extending their traditional role beyond simply being excellent merchants. They have become privileged partners and community facilitators of the various players along the value chain, creating a strong sense of belonging towards each player. Western retailers should look towards the East to make this shift in their own strategy.
An effective and aligned online-offline strategy will help not only the retailers but also their suppliers and trading partners reduce costs and improve operational efficiency.
New revenue streams: Chinese retailers and service providers develop "retail-as-a-service" offerings
Not only are leading Chinese retailers transforming their business operations, they are reinventing their entire business models by introducing new revenue streams.
Both Alibaba and JD.com are developing bespoke “retail-as-a-service” strategy models, pioneered by Richard Liu, JD.com’s founder.20 They are diversifying into becoming service providers for other retailers, brands and other types of partners, just as Amazon has become one of the world’s largest suppliers of web services in addition to its e-commerce platform.
This online-offline strategy will not only improve their business; it will also help their suppliers and trading partners reduce costs, improve operational efficiency, and reach new consumer groups. How? Through the company’s assets, including smart logistics and supply chain management as well as advanced Internet marketing tools, all powered by big data and artificial intelligence. More importantly, it introduces new revenue streams that are not based on inventory, rather on their own in-house IP assets. This translates into even more growth for these already successful organizations.
As an example, JD.com partnered in May 2017 with US retail giant Walmart, the largest retailer in the world. JD.com hosts the company’s e-commerce platform in China, enabling shoppers to buy products directly from Walmart stores, benefiting from JD’s same- and next-day delivery network that covers of a population of more than 600 million.
Partners may also be brands. Danone Waters China (DWC), a subsidiary of Danone Group, has opted to work with JD.com to distribute its products throughout southwest China. The companies will build a shared warehouse in Chengdu, the capital of China’s southwestern Sichuan province, which will use JD.com’s logistics to fulfill online and offline DWC orders for the region.
Other types of partners include automotive manufacturer, Geely, which uses a JD.com platform to enable users to control various aspects of their car remotely and also open up on-board e-commerce capabilities. They also include alliances, such as the one between Walmart, JD.com, IBM, and Tsinghua University, which are all collaborating in a Blockchain Food Safety Alliance designed to enhance food tracking, traceability, and safety in China, a leapfrog to compensate for the Chinese state insufficiency on food security.
One way of adapting a business model could be to follow an ecosystem approach. (note 21)
Regarding Alibaba, a strong focus is to partner with bricks-and-mortar retailers to leverage its expertise in the “stores of tomorrow”. In 2017, it announced the launch of franchises across China: 10,000 small convenience stores will become official Tmall franchises by the end of the fiscal year 2018.
Alibaba also signed partnerships with French retailer Auchan (November 2017). Other large Chinese retailers have since announced similar plans and partnerships with foreign retailers.
Retailers should go beyond the simple act of selling goods and services and develop a ‘connection’ with their customers.
A new societal role for Chinese retailers: integration in the ecosystem helps the community
Leading Chinese retailers go beyond the simple mercantile relationship. “Our true legacy will not only be how many consumers we reach, but the overall impact we have on society”, according to Richard Liu, JD.com’s Chairman and CEO. (note 22) This mindset has materialized in several places at multiple levels.
In Western countries, historically, the opening of hypermarkets and shopping malls killed city centers and accelerated the decline of convenience stores in rural areas. However, in China, leading Chinese retailers such as Alibaba or JD.com have focused on the disadvantaged rural market by becoming the privileged partner of small grocery stores in these remote areas, creating wealth in areas that, until now, did not benefit from the famous Chinese growth curve. This new role of the retailer, assuming a social, even societal, responsibility, creates a strong ‘sense of belonging’ towards customers.
Alibaba has developed an initiative called “Taobao villages”, which support communities in rural areas to develop e-commerce activities. This is done with the connection to its e-commerce platform and a set of online services, including e-learning, medical services and a travel agency, supported by e-commerce training. Thus, e-commerce in may help ease poverty in China, or at least bring more jobs to rural China, which comprises 45% of the population. It is estimated that each new online store in a Taobao village creates 2.8 “direct” jobs. In total the online stores have created 1.3 million jobs. (note 23)
JD.com is also investing in mainland China. In April 2017, it announced a five-year business plan, to open one million physical convenience stores. These convenience stores are almost exclusively franchise-based and operated by independent investors, to which JD Finance provides loans. Half of these stores will be in China’s countryside, and the applicants are mostly migrant workers who have returned to their villages or small towns. JD.com has also leveraged a drone-delivery program in remote areas to continue to provide products to those who might otherwise not have access. In addition, they have formed a partnership with farm owners to develop sustainable farming leveraging technology and a reliable farm-to-table delivery.
Recommendations for Western retailers
- Revisit your mission statement and evaluate your true assets. In an environment of increasing complexity and “investment intensity” for retailers (multiple touchpoints, strong pressure on operational excellence, constant need for innovation, new expertise to develop), it is extremely hard for most retailers by themselves to be in the lead and stay there. More than ever, they should define which activities they should conduct with partners and which ones they should keep under direct control.
- Increase partnerships with technology companies. In today’s data-driven retail sector, working with tech partners can help augment appropriate connection points with customers by enriching retailers’ data with other data sources, and better exploiting them with artificial intelligence. Also, retailers should investigate strategic partnerships with companies from complementary sectors, in order to generate new opportunities by further enriching and cross-analyzing customer data.
- Develop “soft power”. Customers are looking for more than a simple mercantile relationship. Retailers should go beyond the simple act of selling goods and services by offering their customers the opportunity to make a meaningful purchase that fits their needs and brings back something to society (help to specific communities, environment protection, etc.) Moreover, they should all leverage KOLs to promote their company and products on social networks, through specific or long-term partnerships or cocreation.
China’s new retail giants and customers are eager to adopt new and sophisticated shopping and relationship mechanisms. It is a special – and perhaps unique – retail model.
They are now going beyond simple merchant-to-consumer relationships to creating emotional connections with their customers by leveraging data and social networks to develop their soft power and by committing to social roles, such as developing commerce in isolated rural areas.
More than the consumer relationship, Chinese retail giants are building their own new model of retail. Providers and other retailers are not necessarily direct competitors anymore; they may be privileged partners, using their collective skills in data and artificial intelligence to retrieve consumer data and share them with the different players, so that they can offer the customer a personalized experience. They also take into account that lines are increasingly blurred between retailers, brands and customers, which is why they become more than sellers: they evolve into platforms of expressions for KOLs, the best way to promote products while increasing consumer trust degree. As privileged partners, Chinese retailers become community facilitators by creating a strong sense of belonging with every player in the value chain.
This model cannot be replicated as such in Western countries. China benefits from the critical mass of its 1,4 bn inhabitants, a strong government support, and a lack of regulation on personal data. Conditions that Western countries cannot match.
However, Western retailers (who are mostly trailing China’s innovative retailers) should be inspired − and no less worried: for example, JD.com are investing EUR 1 billion into their expansion into France, to being to realise their European ambitions.(note 24) Western retailers should up their game and learn from China, adapting their most innovative retail technology and strategies for Western markets. One priority should be to use social media and alliances with non-retailers to create more “customers for life”, leveraging upcoming retail-as-a-service offerings.
Western retailers have already discussed many of these pivots to strategy. However, as the pace of change in retail accelerates, continued inaction could cause serious harm to their profits and reputation. Our next report will focus on Japan, to understand how digital technology can help retailers improve the experience shopping in a country with a very mature retail market and a tradition of superior customer experience.
Creating a not-for-profit corporation
Everything you need to know to incorporate and launch a federal not-for-profit corporation.
This information is not intended to replace legal advice. Consult a lawyer or another professional advisor to ensure that the specific needs of your corporation are met.
On this page
- Language of the articles
- Professional associations
- What to do after the corporation has been created
- Registering as a charity under the Income Tax Act
- Not-for-profit corporations and non-profit organizations
To create a not-for-profit corporation, you need to incorporate. The quickest and easiest way to do this is to incorporate online, but you can also incorporate by email or mail.
Language of the articles
The articles can be in the official language of your choice. This means they can be:
- in a format that uses either official language (in English or in French)
- in a format that employs both English and French, or
- in a fully bilingual format, using both official languages equally.
Incorporation of a professional association (that is, a corporation whose proposed name or purposes suggest that it considers itself to be an association of professionals) does not provide that corporation with the authority to practice, or to regulate the practice of, the profession. It is the corporation's responsibility to comply with provincial laws respecting professions.
What to do after the corporation has been created
Once the corporation has been created, a number of other items must be considered. Next steps following incorporation provides information on what needs to be done after a corporation has been created and on how to operate a not-for-profit corporation under the NFP Act.
You will be required to file certain documents with Corporations Canada (see Your reporting obligations under the Canada Not-for-profit Corporations Act).
At the first organizational meeting, the directors can make by-laws. This process can be simplified by referring to the Model by-laws – Not-for-profit corporations, which have been written to apply to a typical not-for-profit corporation.
Corporations Canada has also developed an online interactive tool called a By-law builder: not-for-profit corporations that allows you to generate the by-laws you want by choosing provisions that meet the specific needs of your corporation from a number of available options.
By-laws do not have to be filed with the application to obtain a certificate of incorporation. However, the NFP Act requires that they be filed within 12 months after the members have confirmed them.
Registering as a charity under the Income Tax Act
To be able to issue official donation receipts and to be exempt from taxation, the Income Tax Act requires that corporations created and operated exclusively for charitable purposes register with the Canada Revenue Agency (CRA) as charities. Consult How to draft purposes for charitable registration to know more.
The act of incorporating as a not-for-profit corporation under the NFP Act does not mean that the corporation will automatically be tax-exempt or considered as a registered charity for the purposes of the Income Tax Act.
If your corporation intends to become a registered charity, read CRA's Apply to become a registered charity before preparing your incorporating documents, particularly as it relates to the purposes of the corporation statement. It is important that this statement meet the CRA requirements to qualify for registration as a charity.
You should also know that if you need to change the purpose statement after incorporation to qualify for registration as a charity, changes to approved articles of incorporation could only be made through an amendment ― a separate fee-based service.
Not-for-profit corporations and non-profit organizations
Incorporation under the NFP Act does not automatically mean that the corporation will be exempt from tax under the Income Tax Act. For more information on being considered a non-profit organization under the Income Tax Act, see the CRA's website.
Date modified: 2020-08-28
What is an NGO (Non-Governmental Organization)?
Table of Contents
What Is an NGO?
A non-governmental organization (NGO) is a non-profit group that functions independently of any government. NGOs, sometimes called civil societies, are organized on community, national and international levels to serve a social or political goal such as humanitarian causes or the environment.
- NGOs, or non-governmental organizations, play a major role in international development, aid and philanthropy.
- NGOs are non-profit by definition, but may run budgets of millions or up to billions of dollars each year.
- As such, NGOs rely on a variety of funding sources from private donations and membership dues to government contribution.
While "NGO" has various interpretations, the term is generally accepted to include non-profit, private organizations that operate outside of government control. Some NGOs rely primarily on volunteers, while others support a paid staff. The World Bank identifies two broad groups of NGOs:
- Operational NGOs, which focus on the design and implementation of development projects.
- Advocacy NGOs, which defend or promote a specific cause and seek to influence public policy.1
Some NGOs may fall under both categories simultaneously. Examples of NGOs include those that support human rights, advocate for improved health or encourage political participation.
How NGOs are Funded
As non-profits, NGOs rely on a variety of sources for funding, including:
- membership dues
- private donations
- the sale of goods and services
Despite their independence from governments, some NGOs rely heavily on government funding. Large NGOs may have budgets in the millions or billions of dollars.
Types of NGOs
A number of variations of the NGO acronym exist, including:
- INGO: An international NGO. For example, the Conference of INGOs of the Council of Europe is comprised of more than 300 participating INGOs.2
- GONGO: This means government-organized NGO, often derogatory. Foreign Policy describes GONGOs as a government-backed NGOs set up to advocate on the behalf of a repressive regime in the international arena.3
- QUANGO: Chiefly a British term, often derogatory. A quango is a quasi-autonomous non-governmental organization that relies on public funding. Its senior officials are appointed by the government. A Financial Times opinion piece writes that quangos are seen as useless and are often staffed by quangocrats.4
- ENGO: An environmental NGO, for example, Greenpeace or the World Wildlife Fund. Both groups operate internationally in addition to advocating for the environment. They are often simply referred to as NGOs.
1The introduction of the business model perspective has brought about a major change in strategic management thinking over the last ten years (Massa, Tucci & Afuah, 2017). An insistence on innovation in the practice and discourse of managers has led to a vast literature being developed around business models as a vector of innovation (Chesbrough & Rosenbloom, 2002) and as a source of innovation (Massa & Tucci, 2014). However, while much has been written about business models, their precise implications for scholarly research and strategy practice have seldom been documented.
2 While we observe that value creation, value capture and business ecosystems are concepts that are increasingly being used, it is sometimes difficult to articulate them using the traditional strategic management repertoire. For instance, how value creation and value capture articulate with competitive advantage remains an open debate. Although we cannot discuss all the concepts that have come to the fore in what can be labelled today as “business model thinking”, in this paper we elaborate on what we believe could be the consequences of the business model approach for the concept of the environment—a central element in strategy.
3 This article has therefore been conceived as an essay. It is not our goal here to extensively review the literature on business models or to empirically study its position in the current landscape of strategic management. For a recent and detailed review of the literature on business… Instead, our argument is more speculative. Fifteen years of research on business models, introducing concepts, frameworks and a new approach on the organization and their performance (Lecocq, Demil & Ventura, 2010), have spurred the emergence of an innovative perspective on the environment. In this paper, we take a pragmatist approach to tentatively detail the main features of this new conception of the environment of the organization that is currently changing the face of strategic management in both research and practice. This pragmatist approach lies specifically in the rejection of a representational view of the environment (Lorino, 2018: 28-33) where means and ends are considered sequentially and representation determines action. We contend, on the contrary, that the environment is experienced by organizations during action.
4 We build on the idea that “business ecosystem” is not just a new term for “environment”. Indeed, the term “ecosystem” has to be fully articulated with the concepts of ‘business model’ and ‘environment’ to fully release its potential insights. We qualify the new perspective on the environment of the organization and discuss its consequences for the practice and discipline of strategic management.
5 This essay is organized as follows. First, we discuss the assumptions about the environment of the organization in the traditional perspective, shedding light on the self-fulfilling prophecy on the importance of the industry as a factor determining performance. Second, we discuss the particularities of the business model as a research programme, describing how it promotes a new perspective on the environment. In the third section, we show that “business ecosystems” (most often organized around platforms of products, technology or markets) are increasingly replacing the dominant view of industry as the focal level of analysis for strategic management. Fourth, we advance an original perspective on the concept of the business ecosystem as a selected environment. Finally, in the fifth section, we contend that viewing the competitive landscape as being selected has consequences for practice and research in strategic management.
The traditional perspective of the environment within strategic management and the self-fulfilling prophecy of the importance of industry
6 The environment—understood as the elements outside organizational boundaries—is central to strategic management. For years it has been considered as an element that should be understood and analysed when making decisions about strategy.
7 The modern view of the environment of the firm can be traced back to the 1950s when an open-system view of organizations developed (Katz & Khan, 1966). This view was echoed and further developed in strategy through the LCAG model (Learned, Christensen, Andrews & Guth, 1965) and the work of Porter (1979), who suggested that firms have to navigate a task environment composed of suppliers, customers and competitors. Later, strategy took greater account of the institutional dimension of the environment as an important driving force (see, for instance, Carroll & Huo, 1986; Zucker, 1987).
8 This perspective of the environment largely dominates the practice of strategy where senior executives and consultants tend to adopt a very homogeneous treatment of the environment in the strategy process. Indeed, we can identify several main assumptions about the environment that can be found in most textbooks and strategy classrooms:
- Analysis of the environment comes first in the strategy process;
- Environment has an ontological reality;
- Key structuring elements of the environment include micro/macro environment and industry as a focal level of analysis;
- First-order performance of an organization comes from the choice of the industry in which to operate; and
- Second-order performance of an organization comes from the fit of this organization with its environment.
10 Environment comes first in the strategy process. In strategic management, the environment is considered to be the first element that should be examined. Strategy begins with an analysis of the environment, and it is often considered impossible to craft a strategy without a deep analysis of the context of the organization. Strategic management practice relies on various frameworks (for instance Porter’s Five Forces) to help managers and consultants structure and improve their analysis of the environment. This analysis is intended to put forward the main drivers and structuring elements of the performance of organizations.
11 Environment has an ontological reality. Most strategic management practice is based on the assumption that the environment is given and has an ontological reality. Components of the environment are conceived as objective, and, above all, as imposing their constraints on a focal organization. Of course, the environment may eventually be interpreted differently by some actors who may find opportunities that are unseen by most other actors (Barney, 1986; Kirzner, 1973). Clearly, some authors go further in suggesting that the environment can be viewed differently, giving more importance to the interpretation of actors and suggesting that an ontological approach to the environment is inappropriate (for instance, Daft & Weick, 1984). From this point of view, organizations are interpretative systems and actors have to make sense of equivocal contexts (Weick, 1995). This last view is more interpretative. However, it should be noted that this is not the main approach adopted in organizations’ strategic management practice. When it comes to the practice of strategy, realistic assumptions on the ontology of the environment largely dominate, and tools are created to facilitate this analysis of the deterministic environment.
12 Key structuring elements of the environment include micro/ macro environment and industry as a focal level of analysis. The environment of an organization can generally be described at the micro level (i.e. the immediate task environment of the organization) and at the macro level (i.e. the general environment). Porter’s Five Forces (Porter, 1979) provide a framework for analysing the micro environment, while the PEST (political-economic-social-technological) or PESTEL (political-economic-social-technological-ecological-legal) model operates at the macro level. This is also, to some extent, the case for the CAGE distance framework, which analyses the cultural, administrative, geographic and economic differences between countries when companies are crafting their international strategy (Ghemawat, 2001).
13 Since the seminal work of Michael Porter (1979), the concept of “industry” has been considered to be another important structuring element in the analysis of the environment. Industry (or sector) appears as the main level of analysis in strategic management. Competition, entry barriers and strategic groups are only some examples of central concepts in strategy associated with industry. The prominence of industry analysis in strategic management has largely driven the assimilation of environment to industry with a focus on horizontal structuration of economic organization.
14 To take a fresh look at strategy, Gadiesh and Gilbert (1998) propose the need to adopt a more vertical view of economic organization. They advance the need to analyse the “profit pool” to help companies increase their profitability and growth. The authors define a profit pool as the total profits earned at all points along the industry’s value chain. The profit pool approach gives insights for the strategy of companies. However, it is worth noting that this vertical view has not made an impact on the field of strategy and that industry remains the dominant level of analysis and action domain of companies.
15 First-order performance of an organization comes from the choice of the industry in which to operate. In the practice of strategic management practice, the performance of an organization tends to be explained, firstly, by the industry in which it has chosen to operate. This assumption comes from the industrial organization perspective and has been much debated (Rumelt, 1991). However, portfolio matrices and Porterian approach are based on the idea that the characteristics of some industries may lead them to better performance. The choice of the industry is, then, the most important choice in the first stage of the strategic decision-making process. Thus, industry, as the main element of the environment, explains the first-order performance of the organization. By “first-order performance”, we do not mean that the choice of the industry necessarily comes first in the strategy process, nor do we mean that industry, in this view, explains a more important part of the performance of a company. We simply consider that, in this mindset, “first-order performance” is what comes first in the order of things.
16 Second-order performance of an organization comes from the fit of the organization with its environment. Once a choice has been made about the industry in which to operate, the organization can improve its performance by increasing its fit with the environment. Indeed, in the traditional view and practice of strategy, companies must adapt to their environmental conditions. The performance of an organization is explained, secondly (in the logical order), by its fit with its environment. Once again, this point has been debated and criticized (Child, 1972), but this line of reasoning remains dominant in strategic management practice and is associated, for instance, with the traditional concept of “key success factors” that continues to play a central role in strategic thinking within organizations. Indeed, key success factors, identified through observation of the characteristics of industry leaders, must be implemented by organizations if they want to achieve good performance in their industry. Key success factors consequently appear to be the “one best way” in each sector.
17 In concluding this section, one may ask whether, under the traditional approach to the environment, the various assumptions described above do not lead to a self-fulfilling prophecy. Indeed, companies are supposed to engage at a given time in one or several industries (the more attractive ones) and in each industry they all adopt the same business model to fit with what they think are the key success factors (identified through the common factors shared by the leaders in the industry). Consequently, the variance in performance is therefore greater between industries than within an industry, confirming the dominant approach of the environment whereby the performance of companies is essentially influenced by the industry lifecycle.
18 In the end, in the traditional view of strategic management companies are considered to have one purpose (seeking competitive advantage, i.e. supernormal return profit) and a very limited set of predefined means of doing this (strategic manoeuvres), such as the generic strategies. Thus, the number of options is very low and there is little room for creativity.
Business models as a research programme in the field of management
19 Over the last 15 years, use of the term “business model” has boomed. Business models have paved the way to new conceptions for setting up new companies, but they have also driven the transformation of incumbents. At a theoretical level, business models have also impacted various fields, such as the management of information systems or technology management (Wirtz, Pistoia, Ullrich & Göttel, 2016). Today, the term can be used to designate several things, which is a source of confusion. For instance, Massa et al. (2017) point out that business model can designate a real attribute of a firm, a cognitive schema or a conceptual representation of an activity. Beyond these ontological issues, in our view, depending on the context, the business model may designate a concept, a framework or a new perspective on organizations and their performance. This perspective has grown in the field of strategy, leading to what may be called “business model thinking”.
20 If Porter (2001) criticized the term “business model” as a fuzzy buzzword, today we can consider it as a concept in itself. For the philosophers Deleuze and Guattari (1991), a concept must be considered as a means to illuminate reality in a new way, giving different meanings to other concepts through new connections. Moreover, new concepts may also perform reality because meanings and actions are intertwined (Weick, 1995). Concepts are consequently neither true nor false. Under the pragmatist approach we are adopting here, some concepts are only better than others if they bring new insights and new meanings to the world. Indeed, business model has renewed the meaning of some concepts such as those of value, ecosystem or strategic innovation. The concept also promotes a different view of organizations and their performance. These characteristics have led us to consider it as a new research programme in the field of strategy (Demil, Lecocq, Ricart & Zott, 2015; Lecocq et al., 2010).
21 This research programme (Lakatos, 1980) differs from dominant strategic programmes, such as Porterian or resource-based approaches, by adopting other assumptions that produce new consequences (Lecocq et al., 2010).
22 First, business model has rested on a configurational approach of organizations since the first studies on the topic (Demil & Lecocq, 2010; Zott & Amit, 2010). In this view, a business model is theorized as a sum of interacting elements that produce a performance. Authors agree on this point, although they may have different views on the nature of the interacting elements (Zott, Amit & Massa, 2011).
23 Second, a business model perspective focuses on the interaction between what an organization offers (its value propositions) and how it produces value with and for its stakeholders (its organization). This point lies at the heart of most of the conceptions (Baden-Fuller & Mangematin, 2013). In entrepreneurship, George and Bock point out, for instance, that “a business model is the design of organizational structures to enact a commercial opportunity” (2011: 99).
24 Third, performance appraisal takes various forms depending on the project of the actors. Social entrepreneurs, for instance, may have different evaluation criteria to traditional for-profit organizations (Yunus, Moingeon & Lehmann-Ortega, 2010). Thus, the traditional concept of competitive advantage is not considered as the cornerstone of this perspective. For social entrepreneurs—and probably most entrepreneurs—it has no sense. On the contrary, by promoting value creation and value capture mechanisms, the business model perspective allows various organizational forms to perform differently.
25 Finally, compared to the dominant research programmes in strategic management, the environment plays a specific role. From an entrepreneurial perspective, organizations select their environment more than they are selected by it (Lecocq & Demil, 2006). We will come back to this specific point later.
26 The research on business models has largely been determined by these assumptions (Warnier, Lecocq & Demil, 2018). For instance, the creative implementation of the configurational approach is most often developed through a design thinking approach (Johansson-Sköldberg et al., 2013). The logic of “modelling” (Mangematin & Baden-Fuller, 2015) also enables prototypes of business models to be produced to “test and learn” from experimentation. This logic is now largely diffused among entrepreneurs and incumbent companies. The business model innovation literature also distinguishes between the design of business models for new activities and the reconfiguration of business models for incumbents (Massa & Tucci, 2014). In any case, a business model is likely to produce high performance when managers create virtuous circles in the interactions between its elements (Casadesus-Masanell & Ricart, 2010).
27 From a managerial perspective, the business model stream has brought creativity in economic or social activities to the fore when discussing the creation of new ventures or new activities within existing companies (Massa & Tucci, 2014). Whereas the strategic field is traditionally focused on analysis and provides little opportunity for creativity — except in frameworks such as Blue Ocean (Kim & Mauborgne, 2004), disruption (Christensen, 1997) or strategic innovation (Markides, 1998)— Arend (2013) points out that the business model perspective is fundamentally a creative one, as it tries to innovate and to find new ways to manage an activity beyond “business as usual”.
28 This “business model thinking”, which puts creativity at the heart of strategy, is opposed to the “one best way”, which characterizes the traditional strategy approach. Several methods have been proposed in the literature to design innovative business models, targeting entrepreneurs or students (Lund, Byrge & Nielsen, 2017). These methods may use analogy with existing business models in other industries, geographical areas or historical periods to stimulate reflections and envisage innovative ways to create and capture value (Martins, Rindova & Greenbaum, 2015; Rumble & Minto, 2017). To support the design phase, several frameworks and tools have been created, such as the Canvas (Osterwalder & Pigneur, 2010), the RCOV framework (Demil & Lecocq, 2010), the GRP model (Verstraete & Jouison-Laffitte, 2011) or, more recently, the Business Model Navigator (Gassmann, Frankenberger & Csik, 2014). In each of these models, the role of the environment is reduced and embeds predominantly elements of the micro-environment of a focal organization (Zott & Amit, 2010).
Articulating business ecosystem and the environment of organizations
29 The specific approach of the environment in the business model literature has led, in the last few years, to the re-emergence of the notion of the business ecosystem (Lecocq, Mangematin, Maucuer & Ronteau, 2018). However, there is a need to disentangle the notions of business ecosystem and environment. Indeed, to be a valuable concept, business ecosystem needs to describe something different to the previous concepts that might play a similar function in strategic management. In this section, we advance a particular articulation of environment and ecosystem.
Performing the business ecosystem through business model choices
30 The business ecosystem concept (Moore, 1993, 1996) has regained interest recently despite the critical comments about its foundations and definitional aspects (see Koenig, 2012 for a very detailed account). We connect this new interest in the concept to the rise of the business model perspective and to the blurring of industry boundaries that is occurring in numerous industries. Both concepts are related but, while business model usually focuses on focal organizations, business ecosystem develops a specific view of environment.
31 Based on a biological metaphor, Moore (1993, 1996) defines an ecosystem as a community of interconnected heterogeneous actors with complementary competences and participating in a value-creation process. This process generally requires the management of interdependencies between actors, eventually orchestrated by a leading organization (Gawer & Cusumano, 2013), and a balance between cooperation and competition among actors. This view maintains that ecosystem differs fundamentally from the concept of environment. Another characteristic of ecosystem is what it encompasses. Indeed, it does not comprise only heterogeneous actors but also technologies, regulations or physical infrastructures. A typical example of this can be found in the recent development of digital platforms connecting multiple stakeholders by offering a technological interface.
32 From a focal standpoint, the ecosystem may be defined as the part of the environment with which an organization interacts. Consequently, in a pragmatist view, the ecosystem is performed by the choices—deliberate, emergent or constrained—made by an organization concerning its business model (Warnier et al., 2018). Indeed, as developed by Hannah and Eisenhardt (2018), firms have various choices for navigating nascent ecosystems. They may follow a positioning logic driven by the search for bargaining power, a competency logic driven by their pre-existing capabilities or a bottleneck logic driven by entering bottleneck components of the ecosystem to create value.
33 Through the design and implementation choices encapsulated in a business model, a company chooses its stakeholders and its importance (i.e. its bargaining power) in the ecosystem. This means that the nature of competitors or the technological infrastructure within which an organization evolves depends on these choices. To some extent, even the regulations applied to an organization depend on business model choices. For instance, as demonstrated by Dewitte, Billows and Lecocq (2017), over the last 50 years, French food mass retailers have managed to avoid certain retail regulations by introducing a new business model when new laws have come into force. Thus, the ecosystem that an organization navigates results from the decisions of top management. Such a view is getting over with the artificial separation between task environment and institutional environment.
34 Choices in the business model and their consequences may be presented succinctly through our RCOV framework (Demil & Lecocq, 2010), in which the business model encompasses three main interacting components: resources and competences, internal and external organization and value proposition (see Table 1). Table 1
Examples of choices in a business model and consequences for the ecosystem
|Choices on…||Examples of choices||Consequences on…|
|Resources and competences||
- Using non-strategic resources|
- Developing own technological standard
- Availability of resources in factor
- No need for partners to develop technology
- Interacting with new partners|
- Direct selling
- Bargaining power of stakeholders|
- No need for distributors
- Targeting unusual customers|
- Discriminating through prices
- Intensity of competition|
- Type of customers served
From a focal view to an ecosystemic view
35 If the ecosystem is selected by the choice of a business model, it follows that each business model defines a specific ecosystem. At the focal level, the activity of an entrepreneur generally takes place in an ambiguous context, especially for an innovating business model. Entrepreneurs generally have to ensure economic viability and at the same time legitimate their activities, acting concurrently at the institutional and task levels (Van de Ven, 1993). At an individual level, entrepreneurs must establish relationships, translating objectives into interest for other actors to build irreversibility and to gather resources (Latour, 1992). New business models require the progressive construction and connection of heterogeneous elements to change an organization or create a new one (Demil & Lecocq, 2015). Consequently, entrepreneurial work encompasses activities related to the framing of the project (Doganova & Eyquem-Renault, 2009). The goal is, then, to convince and enrol other actors to gain support and open up new opportunities. Entrepreneurs must also progressively establish social and material boundaries for their activities (Lamont & Molnàr, 2002; Santos & Eisenhardt, 2009).
36 The previously mentioned activities are led from a focal standpoint. However, beyond individual actions to give flesh to their projects, entrepreneurs must also act at a collective level (Schultz, Marin & Boal, 2014; Van de Ven, 1993). Their business model opens up opportunities to create and capture value at the ecosystem level by establishing dyadic or collective relationships with customers, suppliers, complementors, regulators, competitors and so on. At a dyadic level, this may concern, for instance, the competencies required for building value proposition or organizational arrangements to have access to resources such as brand or intellectual property. At a collective level, the creation of professional associations or technological standards are actions that are likely to affect the legitimacy and economic viability of individual companies (David, Sine & Haveman, 2013). By establishing these relationships and matching their business models, entrepreneurs crystallize their value creation and value capture mechanisms at an inter-organizational level. At this stage, the business ecosystem exists on its own as an aggregate and not only as a view from the focal point of a given company.
The new perspective on the environment of the organization
37 Based on the previous discussion, we contend that a new perspective on the environment has gradually appeared over the last ten years, fuelled—at least partially—by business model thinking. Instead of promoting a deterministic conception of the environment or a fit that is imperative as a precondition of performance, it promotes the selection of the relevant environment. Depending on the choices concerning its business model, an organization will insert its activities into an existing ecosystem or participate in building a new one (Lecocq & Demil, 2006; Lecocq et al., 2010), defining which part of the environment is relevant for the organization.
38 In this perspective, aggregates such as, industries, profit pools or markets, are no longer the ultimate references. Horizontal and vertical structures are increasingly being replaced by an ecosystemic mindset in the cognitive repertoire of managers (Lecocq et al., 2018). Major trends such as digitalization or new social challenges are fuelling the need for a new perspective on value creation and value capture (Amit & Zott, 2001) and call for new organizational aggregates. Needless to say, numerous industries such as transportation, energy, IT and retailing are being shaken by these trends. Coordination between actors is more frequently being operated through platforms, creating constellations of heterogeneous actors (individuals and/or organizations from various sectors) around a product, a resource or a technology. These platforms are empirically diverse, but a first distinction can be made between internal and external ones (Gawer & Cusumano, 2013). An internal platform can be defined as a set of assets from which a company will develop and produce a stream of derivative products. External platforms also propose services, technologies or products but provide the foundations upon which external actors will develop their own value proposition, such as the ecosystem built around the Android Operating System. In this second case, value creation is strongly associated with the direct or indirect externalities that the platform generates.
39 These platforms enable the emergence of new, large-scale, multi-sided markets that cut across the traditional industries. We believe that this explains the development of the ecosystemic view—both among managers and academics—which is replacing the traditional industry mindset where collective actions used to appear at the sector level.
40 In this perspective, the first-order performance of a focal company comes from its ability to conceive creatively or choose a business model that could create high value for the “client (s)” while also capturing high value for the focal organization (in the form of revenues). Second-order performance lies in the ability to concretely implement the targeted business model, creating virtuous circles (Casadesus-Masanell & Ricart, 2010). Thus, the second-order performance comes essentially from the ability to build an ecosystem that makes the envisaged business model of the company effective. Indeed, many companies fail to deliver or capture value because they are unable to wholly implement the business model they have designed or chosen. Their incapacity to implement their business model can be the result of internal issues, but most of the time it arises from their difficulty in implementing the ecosystem that has been idealized. For example, many organizations fail to attract customers in the way they imagined, some do not get the support of banks, and others are not followed by the producers of the complementary offers necessary for the creation of a complete system of products and services. These are only examples of cases where the business model that has been designed is not implemented in its ideal form.
41 A consequence of first-order and second-order performance, in our perspective, (see Table 2) is that the variance in performance can eventually be greater within a given industry than between industries. Thus, instead of considering that we should observe more variance in performance across industries, this perspective recognizes that variance in performance among organizations comes from creativity (in the conception of the business model) and good implementation (of the business model), leaving room for important differences in performance within a given industry. Table 2
The traditional and the renewed approach to the environment
|Dimension||Traditional approach to the environment||Renewed approach to the environment|
|Role of the environment||To be analysed for strategic decisions||Resources and actors to build value creation and value capture processes|
|Nature of the environment||Given||Performed|
|Relation between firms and the environment||Organization looks for fit with the environment||Organization selects the environment that will matter: the ecosystem|
|Key element structuring the analysis||Sector/industry||Ecosystem|
|Main variance in performance||Inter-industry||Among firms whether they are in the same industry or not|
Selecting the competitive landscape: consequences for research and practice
42 Business model thinking offers a new perspective on the development of activities. As the concept is now widely being used and diffused among managers, it is not just an academic concept. Companies are implementing this configurational and creative approach when considering their development.
43 Adopting a business model perspective does not mean that the environment is neglected in the strategy process. However, the environment is not considered as deterministic, and the company does not have to fit with it or to try to change it (through non-market actions, for instance). The argument we have advanced here is not a constructivist one. We do not contend that environment is interpreted in different ways. Rather, we adopt a pragmatist posture that looks at how the business model is performing in the ecosystem within a broader environment (see Figure 1). It is the business model that therefore selects the relevant environment. Figure 1
The interactions between the business model of the organization, the ecosystem and the environment
44 In the business model approach, strategic management departs from the “one best way” of traditional approaches to integrate the various ways to deploy resources, to create and capture value, and to consider a venture as a success based on the various key performance indicators (KPIs) defined with the business model (profit, growth, creation of social value, etc.).
45 As argued in this essay, in business model thinking the environment is considered differently than in the traditional view of strategy.
46 First, the environment is not given and the environment is not the same for every organization in a given industry. The environment that an organization faces (its ecosystem) is performed through its business model. Thus, each organization is potentially involved in a different ecosystem, partially or largely defined by its choices. Indeed, the more entrepreneurs and managers are creative in the design of their business model, the more the ecosystem of the organization will be unique and chosen instead of imposed by the dominant mindset in the industry. And, the more the competitors imitate each other in terms of their business models, the more their ecosystem will be shared and similar, and traditional strategic tools will produce the self-fulfilling prophecy where performance is mainly explained by industry characteristics. A consequence of this first point is that the competitive landscape is selected by each organization when defining its business model. Another consequence is that traditional concepts of strategy (entry barriers, competition intensity, bargaining power with suppliers or customers, etc.) should be applied after the choice of business model has been made and not ex ante at the industry level.
47 Second, the ability to implement a business model relies essentially on the negotiations and interactions with the stakeholders selected by the choice or design of a business model. Customers, suppliers, retailers, competitors, complementors and others must accept their role and be convinced to interact in the value creation and value capture processes under the conditions expected by the focal organization. In this view, major failures arise from the inability to build an effective ecosystem, such as in the case of mobile payment solutions where actors failed to create a coalition (Ozcan & Santos, 2015). This point has often been made in the innovation and platform literatures. For instance, Gawer and Cusumano (2013) recommend sharing a vision and rallying complementors to co-create an ecosystem. This encompasses, among other things, working on legitimacy within the ecosystem, accepting the sharing of risks with complementors, and creating an articulated set of mutually enhancing business models for the different actors in the ecosystem.
48 This is a central stake as most of the literature and practice associated with business models is largely focused on the design of focal business models. This implies also that the cognitive dimension of the business model, which is central (Baden-Fuller & Morgan, 2010: Martins et al., 2015), should not lead to underestimating the importance of concrete implementation and management of the model so that it operates as anticipated when it is designed. Thus, the relevant environment, as a performed ecosystem to interact with (more than as a set of constraints to fit with), is important in the business model perspective. The business model literature and strategic management practice in the current environment should take full account of this new mindset to understand performance levers.
49 Third, business models and ecosystems are not static but co-evolve (Lewin & Volberda, 1999). Once defined, ecosystems, progressively constrain the business models (as depicted in Figure 1), as they are constituted by relationships and investments that may be difficult to change over time due to sunk costs and path dependence. But ecosystems also change through mutual interaction (Lewin & Volberda, 1999) and therefore offer new opportunities for the evolution of the business models (Hannah & Eisenhardt, 2018). An ecosystem may evolve because of the introduction of new partners or the development of new technologies and infrastructures. Similarly, a business model may produce less growth than expected (for example, because customers may be reluctant to pay the prices) or profits may decline. These situations may require small adjustments to the business model or a major reconfiguration (often referred to by the expression popular among entrepreneurs: “to pivot” a business model). But business models and ecosystems do not evolve only as a result of poor performance. Indeed, they may change over time as the companies gradually discover their ecosystem in a logic of effectuation (Sarasvathy, 2001). New partners are found, experience accumulates, and needs of customers are discovered. These new elements provide many opportunities for rejuvenating business models. For academics, this opens significant avenues for further research, as the progressive discovery of the performed ecosystem has not been explored, to the best of our knowledge. Acknowledgments: The authors would like to thank all the colleagues who made helpful comments on previous versions of this work. We are particularly grateful to Alain Desreumaux, Frédéric Garcias, Zoé Le Squeren, Jonathan Sambugaro and Xavier Weppe.
-  For a recent and detailed review of the literature on business models, see for instance Massa et al. (2017).