Better profit formulas for new business models: capital goods industries in a fragmented market

Abstract

Purpose

Over the past years, traditional manufacturers of capital goods, such as Siemens, ABB and GE, have seen their business environments transform. As a response to these changes, firms began to change their business models from providing singularly developed, integrated one-off solutions to offering modular, mass-customizable systems, including increasingly sophisticated services. This paper aims to support such manufacturers in overcoming uncertainties in designing innovative profit formulas in this new approach.

Design/methodology/approach

This study is based on an 18-month research project at a multinational, multi-scope manufacturer in the capital goods industry.

Findings

To innovate profit formulas, this study recommends a three-step approach: first, categorize your customer requirements along new dimensions for each project; second, apply smart and novel combinations of competition- and value-based pricing and cost strategies within projects; and third, calculate your profits at the feature level instead of the aggregated project level. Based on this approach, managers can categorize projects through an introduced matrix tool and identify ways to improve profitability.

Research limitations/implications

Findings are applicable to the capital goods industry and to comparable sectors where vendors can tailor product features for each customer individually.

Originality/value

This study will help managers to overcome the challenge of rethinking ways of operating that are long established and, until now, very successful. It sets out a methodology – the profitability matrix – that managers can use to analyze the profitability of a specific customer offering and suggests ways to improve it based on a novel three-step approach for designing new profit formulas.

Citation

Windisch, G. (2020), "Better profit formulas for new business models: capital goods industries in a fragmented market", Journal of Business Strategy, Vol. 41 No. 2, pp. 29-38. https://doi.org/10.1108/JBS-09-2018-0159