Business Model Innovation

BUSINESS MODEL INNOVATION

Presented By….. Radha Rani M. S. Ramaiah Institute of Management

Business Innovation Definition : Business innovation involves a wide spectrum of original concepts, including development of new ways of doing business, new business models, business application of technology and communications, new management techniques, environmental efficiency, new forms of stakeholder participation, telecommunication, transport and finance.

Business Innovation & Growth Strategies

Types of Innovation Competence Enhancing Vs. Destroying Innovation:  

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Competence enhancing innovation builds on existing knowledge & skills. Whether an innovation is competence enhancing or competence destroying depends on whose perspective is being taken. An innovation can be competence enhancing to one firm, while competence destroying for another.

Types of Innovation… Architectural Innovation Vs. Component Innovation : 

Architectural innovation is an innovation that changes the overall design of a system or the way its components interact with each other.

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Component innovation is an innovation to one or more components that does not significantly affect the overall configuration of the system.

Types of Innovation… Radical Vs. Incremental : 

Incremental innovations take the existing product or offering and make small- step improvements to the original technology and design. Incremental improvements add up to produce a great deal of chance in an offering over time.

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Radical innovations can create an essentially different kind of product or offering with a new combination of types of value produced. The new products and services would require customers to radically change there past behavior with the promise of gaining equally dramatically new value. They are disruptive technologies that permit entire industries and markets to transform or even disappear.

Types of Innovation… Technical vs. Social Innovations: 

Innovation does not have to be technical does not indeed have to be a “thing” altogether.

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Management, that is the “useful knowledge” that enables man for the first time to render productive people of different skills & knowledge working together in an “organization” is an innovation of the 19th century.

Business Model Innovation 

Business Model Innovation (BMI) refers to the creation, or reinvention, of a business itself.

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A Business Model Innovation results in an entirely different type of company that competes not only on the value proposition of its offerings, but aligns its profit formula, resources and processes to enhance that value proposition, capture new market segments and alienate competitors.

 Business

model innovation rests not in the technology or product or service, but in the business model itself.

 Business

model is a broad-stroke picture of how an innovative concept will create economic value for the ultimate user, for the firm and its shareholders and partners.

 It

considers the infrastructure required to move the product/service to the market in a manner that it is both easy and convenient for customers and profitable for the firm.

Evolution of Business Model Innovation (BMI) Theory

The BMI concept was explored by :  Clayton

Christensen, a Professor at the Harvard Business School  Mark Johnson of Innosight, and  Henning Kagermann of SAP in their feature article “Reinventing Your Business Model” published in December 2008 Harvard Business Review.

Role of BMI  Business

Model Innovation is needed as one of the core elements of a successful market disruption.

 First,

a simplifying technology is needed to spark the disruption, a new business model is then needed to maximize the reach of the technology and a comprehensive value network must finally evolve to support it.

Key Principles of BMI Theory

 According

to their construct, a business model consists of four interlocking elements that, taken together, create and deliver value.  Innovation can occur in one or more of these areas simultaneously :  Customer Value Proposition  Profit Formula  Key Resources  Key Processes

Customer Value Proposition 

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A successful company is one that has found a way to create value for customers — i.e. a way to help customers get an important job done. By job we mean a fundamental problem, in a given situation, that needs a solution. The best customer value proposition is an offering that gets that job–and only that job–done perfectly. The lower the price of the offering and the better the match between the offering and the job, the greater the overall value generated for the customer. The more important the job is to the customer, the lower the level of customer satisfaction with current options, and the better your solution is than your competitors’ at getting the job done, the greater the value for your company.

Profit Formula  The

profit formula is the blueprint that defines how the company creates value for itself.  It consists of the following:   

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Revenue model Price × Volume Cost structure Assets; direct and indirect costs; and a model of how, and whether, scale affects costs Margin model How much does each transaction need to net to cover the cost structure and deliver target profits? Resource velocity How much revenue do we need to generate per dollar of assets and per dollar of fixed costs, and how quickly?

Key Resources  The

key resources (or assets) are the people, technology, products, facilities, equipment and brand required to deliver the value proposition to the targeted customer.

 The

focus here is on the key elements that create value for the customer and company, and the way those elements interact.

 Every

company also has generic resources that do not create competitive differentiation.

Key Processes  Successful

companies have operational and managerial processes that allow them to deliver value in a way they can successfully repeat and increase in scale.

 These

may include such recurrent tasks as training, development, manufacturing, budgeting, planning, sales and service.

 Key

processes also include a company’s rules, metrics and norms.

Business Model Innovation Cycle

1. Environmental Framing 

The first step to business model innovation is building a multi-disciplinary “business model innovation team” with people from business, process, technology, customer segments, Design, R&D, HR...

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Get the team to understand the business model environment (Social, Legal, Competitive and Technological Landscape). Then frame the business model design space.

2. Business Model Innovation 

  

Within this design space the team can start generating different business model prototypes. One example can be a Metamodel with 9 business model building blocks that can help describe business models. This can serve as a basis for iterative business model design thinking and innovation. The team and a number of designated executives can then select one or several of the business model prototypes for implementation and testing. If several business models are selected this is called a business model portfolio that can be like in the financial world (portfolio management with risks, returns and investments...)

3. Organizational Designs 

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

Based on the business model portfolio the company should reflect on how to best translate the models into business units and business processes, called as organizational design. The underlying Information Systems are designed to support the implementation of the selected business models (e.g. ebusiness systems, balanced scorecards, data mining, etc.) Then the right people have to be brought in to implement the design, the business processes and the supporting technologies.

4. Business Model Implementation

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Business Model Implementation involves transforming models (business model, organizational model, process model, information systems model) into reality. After securing the external (e.g. venture capital) or internal (e.g. budgets) financial funding the business has to be built and run. The process doesn't end here! Business model innovation is a continuous and iterative process that ends with a business model (portfolio) evaluation and re-starts with the framing of the changing business environment - even for successful business models...

Types of Business Model Innovation Three main types of business model innovations, which can be used alone or in combination :  Industry

Models

 Revenue

Models

 Enterprise

Models

 All

three types (or combinations) of business model innovation can lead to successful financial results.  There is no significant variation in financial performance across the different types of business model innovation.  With a sound strategy and strong execution, any of the paths can lead to success.  The best business model innovation strategies provide a strong fit between the competitive landscape for a particular industry and the organization's strengths, shortcomings and characteristics such as age and size.

 Because

of its prevalence as a successful innovation strategy, Enterprise Model Innovation, emphasizing collaboration and partnerships, should be a key consideration for executives as they respond to change.

Financial Crisis - An Opportuni 

   

Business model innovation is difficult to achieve because :  It affects so many parts of an organization  It needs the buy-in of so many different people.  It requires the right organizational structures & sense of urgency to make it happen. All these conditions are easier to achieve during an economic downturn. People resist change much less when the survival of their company and ultimately their jobs are at stake. Most people resist change in good times. This is the best opportunity a company will get to position itself for the future of business model innovation.

Characteristics of an organization that wants BMI  Its board explicitly gives the management the mandate to continuously

examine business model innovation.  It extensively works with multidisciplinary teams across "departments" and

across hierarchies.  It

has mechanisms that allow innovative business model ideas to be evaluated by peers during a first phase, rather than "just by managers”.

Cont…  It involves the customer in the process of business

model innovation.  It maintains a portfolio of innovative business models that may even cannibalize the existing business model.  It has the right physical space in place to allow multidisciplinary business model project teams to flourish. In other words, it has project/war rooms dedicated to a project during it's entire duration and with lots of whiteboards and walls to post visuals.

Five strategic circumstances fueling Business Model Innovation 1. The opportunity to address the needs of large groups of potential customers who are shut out of a market entirely because existing solutions are too expensive or complicated for them. This includes the opportunity to democratize products in emerging markets (or reach the bottom of the pyramid). 2. The opportunity to leverage a brand-new technology, wrapping the right business model around it or the opportunity to leverage a tested technology in a whole new market.

Cont… 3. The opportunity to bring a job-to-be-done focus to a marketingdriven industry. Such industries tend to make offerings into commodities. But a jobs focus allows companies to redefine the industry profit formula. 4. The need to fend off low-end disruptors. If Tata’s 1 Lakh ($2300) Nano is successful, it will threaten other automobile makers. 5. The need to respond to a shifting basis of competition. Inevitably, what defines an acceptable solution in a market will change over time, leading core market segments to commoditize.

Examples of BMI where the business model is the core value proposition  Tata–Tata

Nano 1 Lakh ($2300) city car  Apple–iTunes Store + iPod  WalMart–Discount retailing  Hilti–Power tools leasing/subscription  FedEx–Guaranteed overnight delivery  Southwest–Low-cost regional air travel

Obstacles to Business Model Innovation  Current Success - It prevents companies from asking themselves how their business model could be replaced.

 Risk

Avoidance - People are often unwilling to take risks on a personal level, but also as an organization. It is easier to stick with the status quo.

 Organizational

Structures - Because they are not designed for new business models to emerge. They sustain the status quo.

Obstacles to BMI…  Lack

of customer understanding - Of course organizations understand their customers, but not good enough to design new business models that address their emerging needs.

 Required

size of innovations - In big companies a potential new business model must immediately demonstrate an opportunity of millions of additional revenue.