Business Model Innovation

BUSINESS MODEL BUSINESS MODEL INNOVATIONINNOVATION

Presented By…..Presented By….. Radha Rani Radha Rani

M. S. Ramaiah Institute of M. S. Ramaiah Institute of Management Management

Business InnovationBusiness Innovation

DefinitionDefinition : :

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

Business Innovation & Growth Strategies

Types of InnovationTypes of Innovation

Competence Enhancing Vs. Destroying Competence Enhancing Vs. Destroying InnovationInnovation::

Competence enhancing innovation builds on existing Competence enhancing innovation builds on existing knowledge & skills.knowledge & skills.

Whether an innovation is competence enhancing or Whether an innovation is competence enhancing or competence destroying depends on whose perspective competence destroying depends on whose perspective is being taken. is being taken.

An innovation can be competence enhancing to one An innovation can be competence enhancing to one firm, while competence destroying for another.firm, while competence destroying for another.

Types of Innovation…Types of Innovation…

Architectural Innovation Vs. Component Architectural Innovation Vs. Component InnovationInnovation : :

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

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

Types of Innovation…Types of Innovation… Radical Vs. IncrementalRadical Vs. Incremental : : Incremental innovations take the existing product or offering and Incremental innovations take the existing product or offering and

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

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

Types of Innovation…Types of Innovation…

Technical vs. Social InnovationsTechnical vs. Social Innovations::

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

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

Business Model InnovationBusiness Model Innovation

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

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

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

Business modelBusiness model is a broad-stroke picture of how an is a broad-stroke picture of how an

innovative concept will create economic value for the innovative concept will create economic value for the ultimate user, for the firm and its shareholders and ultimate user, for the firm and its shareholders and partners. partners.

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

Evolution of Business Evolution of Business Model Innovation (BMI) Model Innovation (BMI)

TheoryTheoryThe BMI concept was explored by The BMI concept was explored by :: Clayton ChristensenClayton Christensen, a Professor at the , a Professor at the

Harvard Business SchoolHarvard Business School Mark JohnsonMark Johnson of Innosight, and of Innosight, and Henning Kagermann Henning Kagermann of SAP in their of SAP in their

feature article “feature article “Reinventing Your Reinventing Your Business Model”Business Model” published in December published in December 2008 2008 Harvard Business ReviewHarvard Business Review. .

Role of BMI Role of BMI

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

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

Key Principles of BMI Key Principles of BMI TheoryTheory

According to their construct, a business model According to their construct, a business model consists of four interlocking elements that, consists of four interlocking elements that, taken together, create and deliver value. taken together, create and deliver value.

Innovation can occur in one or more of these Innovation can occur in one or more of these areas simultaneously :areas simultaneously :

Customer Value PropositionCustomer Value Proposition Profit FormulaProfit Formula Key ResourcesKey Resources Key ProcessesKey Processes

Customer Value Proposition 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 FormulaProfit Formula The profit formula is the blueprint that defines The profit formula is the blueprint that defines

how the company creates value for itself.how the company creates value for itself. It consists of the following:It consists of the following:

Revenue modelRevenue model Price × VolumePrice × Volume Cost structure Cost structure Assets; direct and indirect costs; Assets; direct and indirect costs;

and a model of how, and whether, scale affects costsand a model of how, and whether, scale affects costs Margin model Margin model How much does each How much does each

transaction need to net to cover the cost structure transaction need to net to cover the cost structure and deliver target profits?and deliver target profits?

Resource velocity Resource velocity How much revenue do we How much revenue do we need to generate per dollar of assets and per dollar need to generate per dollar of assets and per dollar of fixed costs, and how quickly?of fixed costs, and how quickly?

Key ResourcesKey Resources The key resources (or assets) are the people, The key resources (or assets) are the people,

technology, products, facilities, equipment and technology, products, facilities, equipment and brand required to deliver the value proposition to brand required to deliver the value proposition to the targeted customer. the targeted customer.

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

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

Key ProcessesKey Processes Successful companies have operational Successful companies have operational

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

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

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

Business Model Innovation Business Model Innovation CycleCycle

1. 1. Environmental FramingEnvironmental Framing The first step to business model innovation is The first step to business model innovation is

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

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

2. 2. Business Model InnovationBusiness Model Innovation Within this design space the team can start generating different Within this design space the team can start generating different

business model prototypes. One example can be a business model prototypes. One example can be a MetamodelMetamodel with 9 with 9 business model building blocks that can help describe business models. business model building blocks that can help describe business models.

This can serve as a basis for iterative business model design thinking This can serve as a basis for iterative business model design thinking and innovation.and innovation.

The team and a number of designated executives can then select one or The team and a number of designated executives can then select one or several of the business model prototypes for implementation and several of the business model prototypes for implementation and testing.testing.

If several business models are selected this is called a If several business models are selected this is called a business model business model portfolio portfolio that can be like in the financial world (portfolio management that can be like in the financial world (portfolio management with risks, returns and investments...)with risks, returns and investments...)

3. 3. Organizational DesignsOrganizational Designs Based on the business model portfolio the company should Based on the business model portfolio the company should

reflect on how to best translate the models into business reflect on how to best translate the models into business units and business processes, called as organizational units and business processes, called as organizational design. design.

The underlying Information Systems are designed to The underlying Information Systems are designed to support the implementation of the selected business support the implementation of the selected business models (e.g. e-business systems, balanced scorecards, data models (e.g. e-business systems, balanced scorecards, data mining, etc.)mining, etc.)

Then the right people have to be brought in to implement Then the right people have to be brought in to implement the design, the business processes and the supporting the design, the business processes and the supporting technologies.technologies.

4. 4. Business Model Business Model ImplementationImplementation

Business Model Implementation involves Business Model Implementation involves transforming models (business model, organizational transforming models (business model, organizational model, process model, information systems model) model, process model, information systems model) into reality. into reality.

After securing the external (e.g. venture capital) or After securing the external (e.g. venture capital) or internal (e.g. budgets) financial funding the business internal (e.g. budgets) financial funding the business has to be built and run. has to be built and run.

The process doesn't end here! Business model The process doesn't end here! Business model innovation is a continuous and iterative process that innovation is a continuous and iterative process that ends with a business model (portfolio) evaluation and ends with a business model (portfolio) evaluation and re-starts with the framing of the changing business re-starts with the framing of the changing business environment - even for successful business models...environment - even for successful business models...

Types of Business Model Types of Business Model InnovationInnovation

Three main types of business model innovations, Three main types of business model innovations, which can be used alone or in combination :which can be used alone or in combination :

Industry ModelsIndustry Models

Revenue Models Revenue Models

Enterprise ModelsEnterprise Models

All three types (or combinations) of business All three types (or combinations) of business model innovation can lead to successful model innovation can lead to successful financial results. financial results.

There is no significant variation in financial There is no significant variation in financial performance across the different types of performance across the different types of business model innovation. business model innovation.

With a sound strategy and strong execution, With a sound strategy and strong execution, any of the paths can lead to success. any of the paths can lead to success.

The best business model innovation The best business model innovation strategies provide a strong fit between the strategies provide a strong fit between the competitive landscape for a particular competitive landscape for a particular industry and the organization's strengths, industry and the organization's strengths, shortcomings and characteristics such as shortcomings and characteristics such as age and size.age and size.

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

Financial Crisis - An Opportunity for Business Model Innovation?

Business model innovation is difficult to achieve because Business model innovation is difficult to achieve because :: It affects so many parts of an organization It affects so many parts of an organization It needs the buy-in of so many different people. It needs the buy-in of so many different people. It requires the right organizational structures & sense It requires the right organizational structures & sense

of urgency to make it happen. of urgency to make it happen. All these conditions are easier to achieve during an All these conditions are easier to achieve during an

economic downturn. economic downturn. People resist change much less when the survival of their People resist change much less when the survival of their

company and ultimately their jobs are at stake.company and ultimately their jobs are at stake. Most people resist change in good times.Most people resist change in good times. This is the best opportunity a company will get to position This is the best opportunity a company will get to position

itself for the future of business model innovation. itself for the future of business model innovation.

Characteristics of an organization that Characteristics of an organization that wants BMIwants BMI

Its board explicitly gives the management the mandate to continuously Its board explicitly gives the management the mandate to continuously examine business model innovation.examine business model innovation.

It extensively works with multidisciplinary teams across "departments" It extensively works with multidisciplinary teams across "departments" and across hierarchies.and across hierarchies.

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

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

model innovation.model innovation. It maintains a portfolio of innovative business models It maintains a portfolio of innovative business models

that may even cannibalize the existing business model.that may even cannibalize the existing business model. It has the right physical space in place to allow It has the right physical space in place to allow

multidisciplinary business model project teams to multidisciplinary business model project teams to flourish. In other words, it has project/war rooms flourish. In other words, it has project/war rooms dedicated to a project during it's entire duration and dedicated to a project during it's entire duration and with lots of whiteboards and walls to post visuals.with lots of whiteboards and walls to post visuals.

Five strategic circumstances fueling Business Five strategic circumstances fueling Business Model InnovationModel Innovation

1.1. The opportunity to address the needs of large groups of potential customers who 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 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 complicated for them. This includes the opportunity to democratize products in emerging markets (or reach the bottom of the pyramid).emerging markets (or reach the bottom of the pyramid).

2.2. The opportunity to leverage a brand-new technology, wrapping the right business 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 model around it or the opportunity to leverage a tested technology in a whole new market.new market.

Cont…Cont…3.3. The opportunity to bring a job-to-be-done focus to a marketing-The opportunity to bring a job-to-be-done focus to a marketing-

driven industry. Such industries tend to make offerings into driven industry. Such industries tend to make offerings into commodities. But a jobs focus allows companies to redefine the commodities. But a jobs focus allows companies to redefine the industry profit formula.industry profit formula.

4.4. The need to fend off low-end disruptors. If Tata’s 1 Lakh The need to fend off low-end disruptors. If Tata’s 1 Lakh ($2300) Nano is successful, it will threaten other automobile ($2300) Nano is successful, it will threaten other automobile makers.makers.

5.5. The need to respond to a shifting basis of competition. The need to respond to a shifting basis of competition. Inevitably, what defines an acceptable solution in a market will Inevitably, what defines an acceptable solution in a market will change over time, leading core market segments to change over time, leading core market segments to commoditize.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

Current SuccessCurrent Success - It prevents companies - It prevents companies from asking themselves how their business from asking themselves how their business model could be replaced. model could be replaced.

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

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

Obstacles to Business Model Obstacles to Business Model InnovationInnovation

Obstacles to BMI…Obstacles to BMI… Lack of customer understandingLack of customer understanding - Of - Of

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

Required size of innovationsRequired size of innovations - In big - In big

companies a potential new business model companies a potential new business model must immediately demonstrate an must immediately demonstrate an opportunity of millions of additional opportunity of millions of additional revenue.revenue.