Next practices / technologies tools and methodologies: Business Model Innovation

Introduction

Change, or as Joseph Schumpeter coined it, creative destruction, is essential for achieving growth and moving forward. As organizations seek additional growth beyond their existing markets and activities, executives look beyond the existing business model to introduce entirely new ways to monetize capabilities, collaborate with partners to define new value propositions for customers, or enter new markets with an entirely new offering.

Global competition necessitates that even organizations in the most traditional of industries look for differentiation beyond their product line, and successful business model innovation brings ongoing differentiation. No longer is this phenomenon applicable only to a short list of large, well-known, innovation-driven organizations in fast-changing industries. Rather, entrepreneurial spirit and enabling technologies have given life to new business models, such as shared services, off shoring, e-commerce, and virtual supplier collaboration, among others, across all industries.

Capabilities

Business model innovation is a systemic approach to business that based on the flexibility and adaptive nature of the enterprise. Think holistically about the business model innovation.

 Although analyzing existing and potential customers is often a great way to gain a focused competitive advantage and increase the share of the existing market, it is not the only starting point for business model innovation. Business model innovation can also take its starting point in looking at creating value for non-customers, and in a way the organization can uncover hidden value, enter new markets, or simply support and maintain existing core business.

 Before venturing into new opportunities, it is essential to diagnose the current business model, and understand its limitations. We need to think holistically about the business model innovation. It enables to be better positioned to brainstorm the new opportunities. Successful patterns for Business Model innovation from other industries can be referenced to stimulate ideas for contemplating new business model ideas. The success of business strategy always starts with the profound understanding of the existing business environment. The business model design translates a strategy into a business model blueprint.

Breakthrough, game changing products rarely emerge from established businesses. That is because a radically new product usually needs a new business model. Business Model Innovation needs a clear plan that defines which structures and processes of organization that has to be designed, adapted, or phased out.

It is possible to transcend the problem if we:

  • Understand existing model at a granular level, its natural interdependencies, strengths, and limitations, so that we are in position to reinvent it.
  • Fact based analysis of past, current and expected performance in the context of a company’s strategy relative to its competitors
  • Leverages and build on extensive knowledge held by customers, employees, suppliers and advisors
  • Analyze most important business levers aligned with customers’ most important needs
  • Segment the business on relative advantage, relative market strength, and relevant channels of business to focus where the revenues are generated.

A business model is a conceptual tool that contains a set of elements and their relationships and allows expressing a company’s logic of earning money. It is a description of the value a company offers to one or several segments of customers and the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital, in order to generate profitable and sustainable revenue streams. Put enablers in place that allows changing the business model. New technology breakthroughs, such as enterprise SOA, are a critical element.

Business Model Innovation framework.

A business model describes the rationale of how an organization creates, delivers, and captures value. A business model can best be described through nine basic building blocks that show the logic of how a company intends to make money. The nine blocks cover the four main areas of a business, customers, over, infrastructure, and financial viability. The business model is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems.

The Customer Segments Building Block defines the different groups of people or organizations an enterprise aims to reach and serve Customers comprise the heart of any business model. Without

(profitable) customers, no company can survive for long. In order to better satisfy customers, a company may group them into distinct segments with common needs, common behaviors, or other attributes.

A business model may define one or several large or small Customer Segments. An organization must make a conscious decision about which segments to serve and which segments to ignore. Once this decision is made, a business model can be carefully designed around a strong understanding of specific customer needs.

Customer groups represent separate segments if:

  •  Their needs require and justify a distinct offer
  •  They are reached through different Distribution Channels
  •  They require different types of relationships
  •  They have substantially different profitability’s
  •  They are willing to pay for different aspects of the offer

The Value Propositions Building Block describes the bundle of products and services that create value for a specific Customer Segment. The Value Proposition is the reason why customers turn to one company over another. It solves a customer problem or satisfies a customer need. Each Value Proposition consists of a selected bundle of products and/or services that caters to the requirements of a specific Customer Segment. In this sense, the Value Proposition is an aggregation, or bundle, of benefits that a company offers customers.

Some Value Propositions may be innovative and represent a new or disruptive offer. Others may be similar to existing market offers, but with added features and attributes. The Channels Building Block describes how a company communicates with and reaches its Customer Segments to deliver a Value Proposition Communication, distribution, and sales Channels comprise a company’s interface with customers. Channels are customer touch points that play an important role in the customer experience.

Channels serve several functions, including:

  •  Raising awareness among customers about a company’s products and services
  •  Helping customers evaluate a company’s Value Proposition
  •  Allowing customers to purchase specific products and services
  •  Delivering a Value Proposition to customers
  •  Providing post-purchase customer support

The Customer Relationships Building Block describes the types of relationships a company establishes with specific Customer Segments. A company should clarify the type of relationship it wants to establish with each Customer Segment. Relationships can range from personal and automated. Customer relationships may be driven by the following motivations:

  •  Customer acquisition
  •  Customer retention
  •  Boosting sales (upselling)

The Customer Relationships called for by a company’s business model deeply influence the overall customer experience.

The Revenue Streams Building Block represents the cash a company generates from each Customer Segment (costs must be subtracted from revenues to create earnings) If customers comprise the heart of a business model, Revenue Streams are its arteries. A company must ask itself, for what value is each Customer Segment truly willing to pay? Successfully answering that question allows the firm to generate one or more Revenue Streams from each Customer Segment. Each Revenue Stream may have different pricing mechanisms, such as fixed list prices, bargaining, auctioning, market dependent, volume dependent, or yield management.

A business model can involve two different types of Revenue Streams:

  •  Transaction revenues resulting from one-time customer payments
  • Recurring revenues resulting from ongoing payments to either deliver a Value Proposition to customers or provide post-purchase customer support

The Key Resources Building Block describes the most important assets required to make a business model work. Every business model requires Key Resources. These resources allow an enterprise to create and offer a Value Proposition, reach markets, maintain relationships with Customer Segments, and earn revenues. Different Key Resources are needed depending on the type of business model. A microchip manufacturer requires capital-intensive production facilities, whereas a microchip designer focuses more on human resources. Key resources can be physical, financial, intellectual, or human.

Key resources can be owned or leased by the company or acquired from key partners. The Key Activities Building Block describes the most important things a company must do to make its business model work. Every business model calls for a number of Key Activities. These are the most important actions a company must take to operate successfully. Like Key Resources, they are required to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and earn revenues. In addition, like Key Resources, Key Activities differ depending on business model type. The Key Partnerships Building Block describes the network of suppliers and partners that make the business model work Companies forge partnerships for many reasons, and partnerships are becoming a cornerstone of many business models. Companies create alliances to optimize their business models, reduce risk, or acquire resources.

We can distinguish between four different types of partnerships:

  •  Strategic alliances between non-competitors
  •  Coopetition: strategic partnerships between competitors
  •  Joint ventures to develop new businesses
  • Buyer-supplier relationships to assure reliable supplies

The Cost Structure describes all costs incurred to operate a business model. This building block describes the most important costs incurred while operating under a particular business model. Creating and delivering value, maintaining Customer Relationships, and generating revenue all incur costs. Such costs can be calculated relatively easily after defining Key Resources, Key Activities, and some business models, though, are more cost-driven than others are.

Key Characteristics

We all know that products have life cycles. Business model designs also have life cycles, from value growth to economic obsolescence, due to underlying factors that cause value to migrate from one business model design to another. Just as product, life cycles are compressing, so are the life cycles of business model designs. Rather than life for decades at a time, many business model designs now need re-invention every 5-10 years.

Business model innovation is a top priority of CEOs. Business model innovations have reshaped entire industries and redistributed billions of dollars of value. Business Model Design starts when the customers are changing priorities. There is a reason for that. Forty years ago, the customer did not matter to strategy. In the postwar business landscape of the 1950’s and 1960’s, customer demand outstripped capacity. It was a supplier’s world; sellers were in the driver’s seat.

Today, in contrast, the number of customer options is dwarfed only by the amount of information available about each option. There has been a secular shift in power from the supplier to the customer. Most of the key competencies of organizations that are able to differentiate based on business model innovation, have a culture of flexibility that:

  •  Facilitates change while existing business models are still successful
  •  Empowers people and enables processes to be adapted easily to change
  •  Establishes an organization that is open to change and collaboration among employees,

Customers and suppliers to ensure broad-based involvement that sustains later success.

  •  Instills cross-functional thinking to spur innovation
  •  Scans internal and external organizational environments for new opportunities.

The Customer as the Focal Point of Innovation. Some of the most innovative and successful new business models are not based on a new product but on framing an existing product differently in terms of the market, it serves and how the customer experiences the product.

Some of the most highly competitive markets and abundant information have placed the customer at the center of the business universe. In this new environment, successful businesses are those that employ customer-centric thinking to identify customer priorities and construct business designs to match them.

Business Model Designs focuses on shareholder value. Its components encourage managers to think about the same underlying factors that investment analysts consider when valuing a stock. Customer Segment and Revenue Model choices affect a company’s ability to achieve growing cash flows. Scope choices affect asset intensity. Strategic control and aligned organizational systems lower the risk of a significant interruption in financial performance.

In an extension to the previous work, chesbrough has focused on networks; in which partners collaborate in the co-creation the open business model and introduced the notion of open business model. Open business model serve as a source of innovation in complementary markets because of reconfiguration of downstream industry structure as well as capabilities.

Business Value

 Additionally, with a business model approach companies can react faster to changes in the business environment. Finally, the business model concept improves the alignment of strategy, business organization, and technology. Market leaders that integrate Business Model Design thinking into their management systems find it offers them a valuable source of strategic anticipation. Rather than wait for competitive attacks to occur, incumbent leaders can use business Model design to compete and creatively exploit the advantages of their leading positions.

Perhaps the greatest opportunity that argues for business model innovation is return on investment. Statistics show that business model innovators see operational margin growth of more than that of competitors who only practice product or service innovation.

Of course, there is inherent risk associated with business model innovation as with any significant strategic change. However, along with great risk comes great rewards – and you can minimize the risk using tools for business model design and innovation.

A good business model is not defended by patents or high-tech but by the excellent interaction of all its components and, particularly, by the human factor. The need for business model innovation is a key requirement because business model is the core elements of a successful market disruption. A new business model is needed to maximize the reach of the technology and a comprehensive value network must finally evolve to support it.

Key for success is the ability to apply changes to the operating model and to deliver value designed by the new business models. Business model as a heuristic logic acts as a mental map, which mediates the way the ideas are perceived by filtering information as valuable, or not.

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