BUSINESS MODEL REINVENTION AS A COMPETITIVE STRATEGY

April 26, 2023

Business Model Reinvention as a Competitive Strategy Download

In today’s rapidly changing business world, one of the major ways to guarantee a competitive advantage is through business model review and reinvention. Existing scholarly investigations show that the focus of reinvention is not only to outperform competitors but to especially spring a business into new areas of competitive advantage. Business model innovation is expected to become even more important for success than product or service innovation in the future due to its focus on improving the value that is to be provided to consumers and how that value would be inherently delivered to drive profitability.

A well-crafted business model serves as a valuable tool for attracting and retaining employees

Any business, whether startup or existing, needs a clear and concise business model; a plan that serves as a roadmap, laying out the strategies for the continual growth of the business. It should be regularly updated as the business grows and evolves because it describes the way a business will develop and present its product / service to the market, and drive sales. A business model determines what products / services are best for a company to sell, how it wants to promote its products / services, what type of customers it should try to cater to, as well as its fair share of the market and associated revenue streams to expect.

To reinvent is to modify the business model of an organisation, transforming it for the better by making real-time and mutually supportive changes both to its value proposition to customers and to its operating model. At the value proposition level, these changes address factors such as the choice of the target market segment, product, service offering, and revenue model; and at the operating model level, the focus is on variables such as how to drive profitability, competitive advantage, utilisation of resources, and value creation.

For example, in 2003, Apple introduced its iPod with the iTunes store, revolutionising portable entertainment, creating a new market, and transforming the company. In just three years, the iPod/iTunes combination became a nearly US$10 billion product market, accounting for almost 50% of Apple’s revenue. The company’s market capitalisation catapulted from around US$1 billion in early 2003 to over US$150 billion by late 2007.

This accomplishment is well known; what is less well known is that Apple was not the first business to bring digital music players to the market. A company called Diamond Multimedia announced the Rio in 1998. Another firm, Best Data, introduced the Cabo 64 in 2000. Both products worked well and were portable and stylish. So why did the iPod, rather than the Rio or Cabo, succeed tremendously?

Apple did something far greater and smarter than take good technology and wrap it in ostentatious design. It took good technology and wrapped it in a great business model; its true innovation was to make downloading digital music easy and convenient and to that, the company built a ground-breaking business model that combined hardware, software, and top-notch service. This approach worked like Gillette’s famous blades-and-razor model in reverse: Apple essentially gave away the “blades” (low-margin iTunes music) to lock in the purchase of the “razor” (the high-margin iPod). That model defined value in a new way and provided game-changing convenience to consumers.

Understanding the need for business model reinvention will help any business owner make the best choices in designing the path to growth

“Great opportunities await businesses that can find an undeserved market, discover the needs of that market…”

Below are some key business reinvention strategies that enhance the competitive edge of a start-up or existing business:

Implement Operational Changes
Change is not only inevitable but can also be very beneficial, the pandemic year saw many businesses undergo a total turn-around in their operational arm and whilst some businesses had to make moderate changes, other businesses were forced to transform nearly all facets of their operations. Many were unable to evolve into the required changes and were forced out of business. Fortunately, for those able to adapt, many of the changes and transformations embarked on made and will continue to make these businesses more profitable and stronger in the future.

Be Creative with Pricing
Many businesses get in a rut, always charging the same price for their products or services. Pricing, however, does not have to be static. There can be discount pricing for sales, quantity purchases, second item purchases, and special day or hour pricing. On the flip side, there can be premium pricing for extended warranties and services, add-on products and services, as well as personalised services.

Locate Underserved Markets and Target them
Great opportunities await businesses that can find an underserved market, discover the needs of that market, and then determine how to best satisfy those needs. An organisation can maintain its core target market while expanding into new markets, creating a unique market niche.

Have a Greater Internet Presence
Traditional, established businesses can certainly get caught in the past while their competitors gain traction in the future with a pervasive online presence and an e-commerce site. The global pandemic has caused most individuals and employees to isolate to a certain degree and also forced businesses – whether B2C or B2B – to operate differently than in the past. To operate in the new normal, a company needs to seek expanded opportunities provided by the internet and by extension, the Metaverse.

Conclusion

Disruptive shifts in the corporate landscape have resulted in the birth of new industries and business models, and knowledge, innovation, and self-renewed change have become sources of long-term competitive advantage. Despite these truths, many businesses struggle to overcome organisational stagnation created by existing industry conventions and ‘traditional’ views.

The contradictory situation of developing new business models while simultaneously benefiting from current models may appear to be distracting to most organisations. However, systemic strategic management does not imply the complete and/or immediate abandonment of the current organisational business model. Rather, it refers to the process of initiating, experimenting with, and developing new business models alongside the management of an existing business model through the use of appropriate strategic frameworks and tools.

In today’s business-scape, the era of organisational ‘comfort zone’ is most certainly over. This means that the pursuit of business model reinvention has become a critical ongoing process.

For assistance in the review and or design of your strategic roadmap, send an inquiry to mc@pedabo.com

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Ardova v. FIRS: TAT Rules that Taxpayers Need Not Claim Maximum Capital Allowance in any Assessment Year

April 5, 2023

The Tax Appeal Tribunal (“TAT” or “Tribunal”) in Lagos, has held in the case between Ardova PLC (“the Company” or “Ardova”) and Federal Inland Revenue Service (“FIRS”) that the claim of capital allowance below the threshold of 662/3 per cent of assessable profit does not offend the Companies Income Tax Act (CITA).

Highlights of the Case
Ardova PLC is a leading indigenous and integrated energy Company in Nigeria. The Company is engaged in the marketing and distribution of petroleum products like fuels, production chemicals, lubricants, greases, etc. The Company filed its income tax returns for 2015 and 2016 assessment years as and when due. However, in November 2016, the Company filed amended tax returns in line with the provisions of Section 90 of CITA. The amended returns were aimed at correcting a mistake made in respect of capital allowance claimed by the Company in the annual tax returns for both years.

Sometime in 2019, the FIRS carried out a tax audit of the Company for 2017 and 2018 assessment years and raised additional assessments on the Company. The additional tax liability was based on its treatment of unrecouped capital allowance carried forward from 2016 assessment year amongst other issues. The Company filed an objection to the additional tax liability on the basis that it has correctly applied the provisions of paragraph 24(7) of CITA and filed an amended tax returns in line with the provisions of section 90 of CITA. The FIRS, on the other hand, disagreed with the objection that was filed by the Company against the additional assessment. Consequently, the Company proceeded to the TAT to file an appeal against the tax assessment.At the tribunal, the Company requested to know amongst other prayers, whether:

the Second Schedule to CITA provides a general minimum deduction that must be claimed by a Company from its available capital allowance; and

the FIRS was right in law to disallow the capital allowances claimed by the Company in its restated tax returns.

In arguing its case, the FIRS stated that the decision of the Company to claim capital allowance below the unified percentage when it had sufficient assessable profit, is unreasonable, unjust, and a breach of paragraph 24(7) of the Second Schedule to the CITA. Therefore, the capital allowance carried forward to 2017 assessment year was disallowed.

The Decision of the Tribunal
In delivering its judgement, the TAT clarified that claiming capital allowances below the threshold of 662/3% does not offend the CITA, as the Act did not make provision for a minimum percentage of capital allowance to be claimed by a taxpayer. However, in taking a final position, the TAT held that the Company having claimed the maximum allowable capital allowances, self-assessed itself to Excess Dividend Tax, and paid the tax for the year in issue, could not file an amended tax return to reduce capital allowances, which had earlier been absorbed in previous tax returns. As a result, the TAT maintained that the Company cannot enjoy the relief contemplated by Section 90(1) of the CITA. The claim by the Company that the amended returns were filed to correct a mistake was not accepted by the TAT.

The Tribunal attempted to establish the essence of the provisions of Section 90(1) of the CITA by relying on the definition of “mistake” in the Black’s Law Dictionary as “some unintentional act, omission or error arising from ignorance, surprise, imposition or misplaced confidence”. The TAT held that even though the right of the Company to file amended tax returns as enshrined under Section 90(1) of the CITA was not in dispute, the intention behind the act could not be deemed to be a “mistake” as envisaged by the law. The TAT believed that the Company could only take the benefit provided in the aforementioned Section if the mistake had resulted in the Company being assessed to excessive tax. Therefore, since the issue of excessive tax does not arise, the Company cannot seek the relief envisaged under Section 90(1) of the CITA.

Our Comments
Over the years, the issue of minimum threshold for the claim of capital allowance has continued to generate a lot of controversy between the FIRS and taxpayers. It is, therefore, laudable that the TAT has finally put the matter to rest by confirming that the CITA, indeed, did not specify the minimum percentage of capital allowance that is claimable by a taxpayer. However, the Company’s appeal failed in part because the TAT held that the Company did not pay excessive tax as a result of the relief sought under Section 90(1) of the CITA.Therefore, it appears from this decision of the TAT that taxpayers cannot just rely on complying with the process or procedure of filing amended tax returns, where they are of the opinion that an error has been made in their tax returns. They must also ensure that they satisfy conditions which have been established by the TAT in this case, that is, they must:

have paid tax in the year of assessment;

be able to prove that a mistake or error has indeed occurred in its returns, statement, or account for the period;

have paid excessive tax as a result of the error or mistake in its returns or statement; and

apply for relief in writing within six years after the end of the year of assessment that the mistake occurred.

In the instant case, however, the amended tax returns of the Company did not relate to relief for overpayment of tax because a self-assessment was done, and the tax thereon was duly paid. Rather, the changes introduced by the amended tax returns of the Company was to effect 50% and 40% thresholds for the capital allowance absorbed for 2015 and 2016 assessment years. Consequently, the TAT held that the FIRS acted appropriately in disallowing the unrecouped capital allowance of the Company for those assessment years.

Notwithstanding the position of the TAT that the claim of capital allowance below the maximum threshold does not offend the CITA, it is important to note that Companies that are liable to pay minimum tax in any assessment year should take precaution in claiming capital allowance below the threshold provided under paragraph 24(7) of the Second Schedule of CITA. This is because Companies paying the minimum tax under Section 33 of the CITA are expected to claim their capital allowance as far as it can be absorbed by the assessable profit of the period.

It is yet to be determined whether the Company will file an appeal against the Tribunal’s interpretation of Section 90(1) of the CITA. Notwithstanding, we advise taxpayers to seek professional advice, where there is uncertainty with regards to their applications and interpretations of the tax laws, to avoid incurring additional tax liabilities due to misinterpretation of the tax laws.