INNOVATIONS AS A FACTOR OF BUSINESS MODELS DYNAMICS IN METALLURGICAL COMPANIES. Jan BRZÓSKA

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1 INNOVATIONS AS A FACTOR OF BUSINESS MODELS DYNAMICS IN METALLURGICAL COMPANIES Jan BRZÓSKA Politechnika Śląska Wydział Organizacji i Zarządzania ul.roosevelta Zabrze, Poland, EU, Jan.Brzoska@polsl.pl Abstract Proceeding globalization, increase of competition influence, increasing crisis symptoms, but also new cooperation possibilities are challenging for the companies. They are often related to changes in the strategic and operational management. The changes are reflected by new principles and structures of business models (that describe the idea of run business), where different forms of innovation play special role. Thus, business models that are capable of generating and diffusing innovations are more and more important. Determination of their role and meaning in the adopted and executed strategies and operations performed by the companies is often the condition that provides competitive edge and profits. Purpose of the paper is to present business model concept based on the principles of so called new age of innovation, emphasizing the meaning of social infrastructure (human resources), business models and technical infrastructure. Based on own research in companies operating in the metallurgical sector, the following thesis is put: introduction of process and product innovations affects the changes of the business model structure. The research object concerns an important theoretical and practical scientific problem within the discipline of management, in particular business modelling of companies. Within the last decade, the issue of constructing business models was very interesting as regards both science and research among foreign and domestic researchers and practical users. Subject of the research is average commercial and production companies within metallurgical sectors that do not belong to corporative structures. Keywords: Innovations, business models, metallurgical companies, dynamics 1. INTRODUCTION An interesting cognitive issues is the look at innovation as an important element of strategy structure as well as business models corresponding with them. In particular, structures and principles of constructing modern business models are of particular importance, where different forms of innovation play special role. Specifying their role and meaning for strategic solutions adopted by companies condition attaining competitive edge that decide about their development and functioning on the market. Thus, within the last period, issues related to building business models able to apply innovations are very interesting within scientific and research field, both for practitioners and theorists Purpose of the paper is to present business model concept based on the principles of so called new age of innovation, emphasizing the meaning of social infrastructure (human resources), business models and technical infrastructure. Based on own research in companies operating in the metallurgical sector, the following thesis is put: introduction of process and product innovations affects the changes of the business model structure. Subject of the research is average commercial and production companies within metallurgical sectors that do not belong to corporative structures. Results of research are presented using case studies of two selected companies. The first of them is commercial and designing company engaged also in running steel product service centres. The second on is long hot rolled steel products rolling mill. 2. ROLE OF INNOVATION IN BUSINESS MODELS CONCEPTS In one of the most thorough papers devoted to building business models A. Afuah [1] presented a company business model as a set of tasks, methods and time for their performance, using own resources in order to

2 create the highest quality for customer and guarantee a position to take over goodwill [1]. It says that in practice, innovations can be applied within all its elements, however they are necessary to create value for customer [1]. K. Obłój [5] defines business model differently, treating it as combination of company strategic concept and technology of its practical execution understood as a construction of value chain that allows for efficient operation and restoration of resources and skills". In his considerations, he distinctly emphasizes the need to combine the adopted company strategy with its ongoing business that conditions its effectiveness. G. Hamel [4] presented and interesting study of companies business models meaning in the context of innovativeness. Business model is treated in it as the basis of innovative business concept. In the author s opinion, especially within the areas of the most modern sectors, new models of running a business destroy the old order by far more than introduction of new technologies. G. Hamel proposes a structure of such model (considering it as understandable and complete) that is based on four most important elements :base strategy, strategic resources,connection and relationship with customers, network value [4]. Very interesting and innovative approach to creation of strategy based on innovations is presented by W. Chan Kim and R. Mauborgne [3]. The presented strategy is called a blue ocean (as distinct from current concept of competing commonly called red ocean strategy ) and is based on value innovation. The mentioned authors presented the principles, tools and diagrams of operations that allow construction as well as utilization of new market space. In their opinion, it is a space free from competition. Such space can be created only by the whole system of operations leading to gradual increase of value, both for customer and the whole company. The system is focused on searching for nee market area capturing demand in it [5].. Creators of so called new age innovations principles C. K. Prahalad and M. S. Krishnan[6] find the business model as one of the most important element of business transformation structure.pillars of the transformation are two principles: 1. Value is based on exceptional personalized experience and expectations of customers. Companies must focus on individualization of value for customer. Regardless of the customers number, attention should be centrally focused on the position of a single person. The pillar is identified as N = All companies have the access to the global ecosystem that also covers resources. Attention of the companies is focused on the access to the resources, not only on possessing them. This pillar is identified as R = G. In the performed studies, innovative business model is developed based on these rules, considering that it is proper for development of knowledge-based economy that represents the basis of innovativeness both domestic and regional. Business model according to so called new era innovation is based on configuration of social architecture and technical architecture connected by business processes. 3. CONCEPT OF THE METHOD TO EXAMINE THE BUSINESS MODEL CHANGES The developed business model is the basis of the method used to analyse the dynamics of change of its structures in relation to a given company. This model is schematically presented in figure 1.These changes were related to various innovations introduced in the company to high extent.

3 Exploit of global resources Individual value for client -R=G C=1 business model (profitability is based on the innovations ) Social architecture Operations processes and Technical architecture Employment Strategic competences Knowledge resources Processes map Business processes Type and structure of the value chain Attained competitive edge and its sources Material resources (size and structure of property, characteristics of the potential of supplies source, organization) ICT resources Competitors Resources of Environments Dostawcy information, knowledge and their utilization R+D Fig.1 Scheme of the concept of the method to examine the business model changes in the company (Source : own study) These could be product, process, organization and marketing or social innovations. Business model based on principles (theory) of new age innovation covering social and technical architecture as well as business models binding them allows for analysing changes and creating concepts of company development [2].

4 4. CASE STUDIES 4.1 Trading and service company of metallurgical products (Company 1). The examined company has been established in 1999 and in 2012 attained sales at level ca. 12 million EUR and its economy value added (EVA) is at the level thousand EUR. At the end of 2012, the examined company employed 105 employees. Within the Company, research of the business model change within was performed. Within this period, the company changed the business model from trading company to servicing and trading company by starting the servicing centres of steel products. Efficiency of the extended scope of services was related to high extent to introduction of modern systems of customer services based on close relations and prosumer orientation (marketing innovation).method, which diagram is presented in Fig. 1, was used to examine the business model changes in the company in question. Business model structure changes results are presented in table 1. When analysing changes in the business model structure, one must note the observed changes in the employment structure as well as development of employees competences that allow for developing value chain shaping competitive edge. It is safe to say that application of many types of innovations is related to both changes in the technical and social architecture and entails the need to apply new business processes. Tab.1 Changes of elements of business model the examined Company 1 within Period Social architecture Employment(%S hare of university degreee empl) (42 ) (38) ( 42) (68) (72) (72) (76) Strategic competences Trading competences: sales of metallurgical products and construction materials. customer service: Main new competences :ingineering service of metallurgical products production of steel structures. CRM and construction of prosumer nature contacts Knowledge resources Limited scope of formal information and knowledge. Information and knowledge gained individually by employees. Significantly increased range of formal information and knowledge (trainings).information and knowledge gained individually by employees Less meaning of utilization of hidden knowledge. Technical architecture

5 Material resources Logistics and property resources used while retail and wholesale sale. Modern devices for plastic working, metal working and production of steel structures.. Well organized procurement system(leading manufacturers of metallurgical products). ICT resources Basic IT solutions within the scope of accountancy and sales. Information about customers and competition used in hidden knowledge (narrow scope) Controlling IT system, CRM system, engineering designing systems, metal working control systems, steel structures modelling IT systems (industrial scanners). Developed ICT. Using cloud computing. Initially Software as a Service, then Platform as a Service. Operations and processes Processes map Business processes Business processes: procurement, sales of metallurgical products, marketing on the metallurgical products market. Poorly developed HR processes. Outsourcing of transportation services. Cleaning services and plant security. Business processes: metallurgical products service, procurement, production of metallurgical products, metallurgical products market marketing, designing and advisory. Insourcing of transportation services. Developed HR process (selection of staff, motivation system). Controlling process, risk management process. Outsourcing of cleaning services and building security. Type and structure of the value chain Simple chain of value source of creating the value based wholesale and retail. Developed chain of value, adaptation of the whole chain to the customer s needs, Creating source based on specialist services; to less extent of trade. Resources of information, knowledge and their utilization Insignificant support by IT systems in business processes. Use of hidden information and knowledge. Strong support of business models by IT systems. Intensive development of information resources utilization to create explicit knowledge. Information to implement innovation.

6 Attained competitive edge and its sources 1. Cost edge in metallurgical products sales obtained because of relatively low fixed costs and competences while purchasing metallurgical products.. Edge resulting from location 1. Edge resulting from differentiation of service and design services attained mostly by design and service competences and relationships with customers. Edge resulting from availability (location, e-business). Cost edge in metallurgical products sales obtained because of relatively low fixed costs Source : own study 4.2 Hot rolled steel products rolling mill (Company 2) The examined company has been established in 1994 as a result of restructuring of large metallurgical holding operating as a joint stock company, where employees were the major shareholders. At the end of 2012, attained sales at level ca. 45 million EUR and its economy value added (EVA) is at the level thousand EUR.. At the end of 2012, the examined company employed 232 employees. Within , change of the business model took place in the company. Within that time, slow changes of business model took place because for many years innovations were implemented to a very limited scope or not at all. The applied business model was based on limited assortment of long steel products, hot rolling technology, production property leased on favourable conditions and relatively low costs of work. Changes of the business model took place after process innovation were introduced together with new products.. When analysing changes in the business model structure (table1), one must note the observed changes in the employment structure as well as development of employees competences that allow for some development of value chain shaping competitive edge. It is safe to say that applied product and process innovations changed technical architecture to higher extent than social in the analysed model. In case of business processes, the observed changes concerned modernization of production processes and application of these processes, such as quality management, project management and using BSC. Tab. 2 Changes of elements of business model of the examined Company 2 within Periods Social architecture Employment(% Share of univer.degree em.) (6) (6 ) ( 6 ) ( 7) (8) (10) (10) Strategic competences Production related: production of metallurgical products (long rolled products). Competences related to charge suppliers cooperation.. Main new competences : related to cooperation with charge suppliers from outside EU. Competences related to cooperation

7 Knowledge resources Limited scope of formal knowledge (and information. Information and knowledge obtained individually by employees ( narrow scope limited mostly to technical knowledge).. Increased scope of formal information and knowle--dge (training). Information and knowledge obtained individually by employees (wider scope extending beyond knowledge). Technical architecture Material resources, characteristics of the potential Property resources at average technical level. used to production of typical long products (squares, bars, flat bars). Capital exceeding value of the leased property. Using equity to invest in new technologies and products.modern technical devices for servicing metallurgical products. Well organized system of delivers from outside EU.. ICT resources (systems) Basic IT solutions within the scope of production control, sales. Information about customers a used in hidden knowledge Modern production control systems. Controlling and accountancy IT system (including BSC), CRM system. Business processes Processes map Business processes Business processes: production and sale sot warehouses of classic long metallurgical products, purchase of charge, marketing of metallurgical products. HR process rigid motivation system, limited trainings. Main new processes : service of metallurgical product, purchase of charge, project management. HR process - motivation system related to effects (BSC), more trainings. Type and structure of the value chain Value chain creating the value based on effective production of typical long products (shapes). More developed value chain creating value based on effective production of both typical and innovative long products as well as metallurgical service. Information resources and their used in Insignificant support by IT systems in business processes. Use of hidden information and knowledge. Support of production processes and services with modern information systems. Utilization of information to

8 processes build explicit knowledge. Attained competitive edge and its sources The edge is based on price / standard quality /ratio concerning manufactured long products (shapes) 1. The edge is based on price The edge is based on differentiation and flexibility of services. Source : own study 5. CONCLUSIONS Business model based on so called new era innovation shows the company functioning changes caused by innovation implementation. In particular, one can analyse business model structure changes, such as technical and social architecture as well as business processes. The performed examinations show that companies which have implemented and still implement various innovations, exhibit changes in the structure of their business model. The introduced new production resources or ICT systems are accompanied by development of knowledge resources and increase of employees competences. Favourable changes in employment structure took place in both of the companies. In case of Company 2, radical (considering conditions and scale of the company) innovations were introduced that significantly changed the business model. Analysis of business processes changes dynamics in the examined companies show their development oriented at better relationships with customers, extended product offer and diversified services. In the management processes, risk management and strategic controlling using Balanced Scorecard play more important role. Competition and search for new demand necessitates reorientation of companies; business models based on radial innovations will used to more and more extent..application of innovation in building new models is the grounds of their resistance to imitation capacity and loss of effectiveness. REFERENCES [1] AFUAH A. Business models. A Strategic Management Approach, McGraw-Hill Irwin, 2004, p.2-8 [2] BRZÓSKA J. Dynamika procesów biznesowych ważny element restrukturyzacji rozwojowej, in Zarządzanie porocesami restrukturyzacji.koncepcje I strategie.,ed...borowiecki R., Jaki A.,Uniwersytet Ekonomiczny w Krakowie, Kraków 2012,p [3] CHAN K, MAUBORGNE R., Blue Ocean Strategy. How to Create Uncontested Market Space and Competition Irrelevant. Harvard Business School Press, 2005,p.38 [4] HAMEL G., Leading the revolution, Harvard Business School Press 2002,60-73 [5] OBŁÓJ K. Tworzywo skutecznych strategii, PWE, Warszawa 2002,p.97 [6] PRAHALAD C.K.,KRISHNAN MS New Age of Innovation, Mc Graw Hill, 2008, p.15 and next.