Business Model Innovation

Business Model Innovation QueO Innovation and Strategy Consulting Maggie Fikkert maggief@queo.co.za +27 83 6 222 222

the alchemy of business model innovation

abandon outmoded thinking

Why?

But the world has always changed

But technology has always changed

But business has always changed

It s because those that can t adapt

But its also about value creation

In order to add more value at less cost change is needed change is the process by which the future invades our lives -> Alvin Toffler

Change, Innovation

Types of innovation business model innovation product & service innovation process innovation technology innovation

So, tell me more about Business Model Innovation.

A business model describes the rationale of how an organisation creates, delivers, and captures value Osterwalder & Pigneur

Osterwalder & Pigneur (2009)

the main challenge

think outside-of-the box

insanity: doing the same thing over and over again and expecting different results Albert Einstein

what s your business model?

customer needs technological change legal environment How are you handling external forces? proactively or reactively? competition social environment

how do you change a business model and innovate?

Or do we just re-invent the wheel

Enough already! Examples please!

Renting and leasing in the sector of tooling machines? New business models for SMEs in the Italian tooling machine sector The opportunity for this innovation, has been introduced by the disruptive effect of the economic downturn on manufacturing firms.

MinuteClinic http://www.minuteclinic.com/ Traditional Approach Who Everybody Everybody Business Model Innovation What How Usually full treatment Services covered by health insurance Special treatment for additional cost A range of specialist Special facilities One central location Solution shops Focus on basic treatments Quick Convenient Affordable Generalists Located in shopping malls / inside CVS pharmacies Multiple locations Retail model Now there are more than 500 MinuteClinic locations in 26 states and the District of Columbia. With more than 9 million patient visits, we are proud of our 95 percent customer satisfaction rating. MinuteClinic helps individuals, employers and health insurance companies expand access and reduce the costs of health care. Source: Marc Sniukas

Grameen Bank KEY PARTNERS KEY ACTIVITIES VALUE PROPOSITION RELATIONSHIPS CUSTOMERS KEY RESOURCES CHANNELS COST CENTRES REVENUE STREAMS Business Model Canvas template by : businessmodelgeneration.com Content by Marc Sniukas

Grameen Bank Who What Traditional Approach (Rich and middle class) people who are reliable to pay back the credits or have enough assets as security. Classic loans, usually for larger sums to buy assets. Business Model Innovation Low income clients Poor people who would not get any loans from traditional banks (especially women) Small loans to unbanked people How Strong risk management The returns from the interests belong to the bank/ shareholders Profit focus About 97% make their payments. The borrowers are the owners of the bank. The profit of the bank goes back to the owners. There is no collateral. No lawyers. Social business focus Source: Marc Sniukas

Some of the 2010 Top Business Models

Goldcorp exploiting mines geology prize 500 000 $US research mining CUSTOMER RELATIONSHIPS DISTRIBUTION CHANNELS CUSTOMER SEGMENTS low costs through open exploration REVENUE STREAMS Goldcorp publicly shared all of its geological data and offered US$ 500 000 in prizes for determining where they might find the next 6 million ounces of gold

NetJets: Fractional Ownership In a world where technology development is accelerating and product / service innovation has become an off the shelf service, more and more organisations are using business model innovation to create compelling, sustainable and differentiated growth platforms http://www.growthagenda.com/growth-agenda/business-model-innovation/business-model-innovation

NetJets popularised the concept of fractional private jet ownership. Using an innovative business model, NetJets individuals and corporations access to private jets, a service previously unaffordable to most customers. Mutual funds provide another example of value creation through increased accessibility. This innovative financial product made it possible even for those with modest wealth to build diversified investment portfolios.

Operating Margin Growth in Excess of Competitive Peers compound annual growth rate over five years [Source: IBM, CEOs are expanding the innovation horizon: important implications for CIOs]

Benefits Cited by Business Model Innovators percent of respondents [Source: IBM, Global CEO Study 2006]

Within each path, organisations adopt a set of levers to innovate their business model Business Model Innovation Industry model Innovation Revenue model Innovation Enterprise model Innovation IBM Corporation (2007) INDUSTRY TRANSFORMATION Apple transformed the music industry through a new way of connecting hardware with software to download music with ipods/itunes product & service combination Dell redefined the PC value chain and industry model by using a direct to customer sales model HORIZONTAL MOVES Moving from one value chain to another, leveraging its brand across industries including airline, media and telecoms PRICING / REVENUE MODEL Gillette innovated the pricing model by giving away razors and making money on the blades Netflix shifted the revenue model from product / rental based to a subscription based annuity model VALUE PROPOSITION Cirque du Soleil reconfigured offering and value elements to transform the circus experience INTEGRATION Zara s Fast Fashion model is supported by a highly integrated business model along its value chain SPECIALISATION Bharti created a highly specialised Telco business model by focusing only on its key differentiators marketing, sales and distribution and partnering for everything else EXTERNAL COLLABORATION P&G s innovative R&D collaboration model connect & develop, sourcing over 50% of ideas externally

Industry Model Innovation Industry Transformation New models are transforming traditional industry value chains Value Chain Transformation Companies are changing the rules of the game by challenging traditional value chains through disintermediation Most significant advances were enabled through the internet as new direct models allowed cutting out the middle man Example: The Dell Direct Model 1.Direct path to the customer 2.Single point of accountability 3.Build-to-Order 4.Low cost leadership 5.Standards-based technology 67

Industry Model Innovation Horizontal moves Companies leverage assets through horizontal moves Horizontal Moves Companies are exporting differentiating expertise / experience / assets to a comparable part of another industry value chain Most prominent examples are leveraging brand assets to move aggressively from one value chain to another. 68

Revenue Model Innovation Pricing/Revenue Models Driving shifts in underlying pricing and revenue models Revenue / Pricing Model Innovation Companies are transforming the rules of the game in their industry by driving fundamental shifts in the underlying pricing and revenue models In several industries (e.g. Media and entertainment) digitisation of content has created entirely new models, such as charging for different ring tones Examples: Distinct Pricing and Revenue Model Innovations 69 Subscription Model Razor & Blade Model Product to Services Model Replacing traditional pay per individual product models with selling periodic use or access to products and services Example: Newspapers & Magazines, movie rental subscription, mobile phones, pay TV channels The razor & blade model (also called tied products model ) works by selling initial master product at a subsidized price or even at a loss, and making profit on high margin consumables that are essential Examples: Gillette razor/blades, Computer printer/cartridge, mobile phone/air time Many industries see a transition from a traditional product focus to service focus, often changing the traditional dichotomy of products vs service to a continuum and alignment Examples: Electronics industry, e.g. IBMs replacing traditional product focus through service led business solutions

Revenue Model Innovation Value Proposition Innovating the value proposition through reconfiguration Value Innovation. Creating Value while Reducing Costs Value Innovators open new, uncontested spaces, and generate a leap in customer value They reconfigure factors of competition and the value they bring to the customer Unprecedented value propositions and therefore create completely new markets Example: Southwest Airlines Value Curve of Southwest Airlines High 4 Southwest Create 3 Average Airlines Raise 2 Reduce Eliminate Car Transport 1 70 Low 0 Price Meals Lounges Seating Class Choices Source. Mauborgne, Kim: Blue Ocean Strategy, 2004 Hub Connectivity Friendly Service Speed Frequent Point-to- Point Departures

designing blue oceans

Blue Ocean Strategy Retail Banking

explore extraordinary value creation

Two worlds Red Ocean Strategy Blue Ocean Strategy Compete in existing market space. Beat the competition. Exploit existing demand. Create uncontested market space. Make the competition irrelevant. Create and capture new demand. Make the value-cost trade-off. Break the value-cost trade-off. Align the whole system of a strategic firm's activities with its choice of differentiation or low cost. Align the whole system of a firm's activities in pursuit of differentiation and low cost. VALUE INNOVATION

Value Innovation Value innovation is created in the region where a company s actions favorably affect both its cost structure and its value proposition to buyers. Cost savings are made by eliminating and reducing the factors an industry competes on. Buyer value is lifted by raising and creating elements the industry has never offered. Over time, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates. Costs Value Innovation Buyer Value

Four Actions of Visualising Strategy The four steps of visualising strategy builds on the six paths of creating blue oceans and involves a lot of visual stimulation in order to unlock people s creativity. 1. Visual Awakening 2. Visual Exploration 3. Visual Strategy Fair 4. Visual Communication Compare your business with your competitors by drawing your as is strategy canvas. See where your strategy needs to change. Go into the field to explore the six paths to creating blue oceans. Observe the distinctive advantages of alternative products and services. See which factors you should eliminate, create, or change. Draw your to be strategy canvas based on insights from field observations. Get feedback on alternative strategy canvases from customers, competitors customers, and noncustomers. Use feedback to build the best to be future strategy. Distribute your before-andafter strategic profiles on one page for easy comparison. Support only those projects and operational moves that allow your company to close the gaps to actualise the new strategy.

BOS Logic: Reconstruct market boundaries Boundaries of Competition Industry Strategic Group Buyer Group Scope of Product and Service Offerings Functional-emotional Orientation of an Industry Time/Trends Head-to-Head Competition Focuses on rivals within its industry Focuses on competitive position within strategic group Focuses on better serving the buyer group Focuses on maximizing the value of product and service offerings within the bounds of its industry Focuses on improving priceperformance with the functionalemotional orientation of this industry Focuses on adapting to external trends as they occur Creating New Market Space Looks across alternative industries Looks across strategic groups within its industry Redefines the buyer group of the industry Looks across to complementary product and service offerings that go beyond the bounds of its industry Rethinks the functional-emotional orientation of its industry Participation in shaping external trends over time

Multi-sided Platform brings together two or more distinct but interdependent groups of customers. Such platforms are of value to one group of customers only if the other groups of customers are also present. The platform creates value by facilitating interactions between the different groups. A multi-sided platform grows in value to the extent that it attracts more users, a phenomenon known as the Network Effect. For example, the more people that use Google search, the more data the company has, and that data is the raw material for refining its search results further. And the greater its market share in search, the more advertisers wants their ads placed on Google to reach the largest audience NineSigma Amazon & Netflix Business model patterns Osterwalder & Pigneur (2009) & http://www.getoffthedrawingboard.com/2010/03/22/what-is-a-multi-sided-platform/

Top-line findings from Business Model Innovation study 1 Business Model Innovation improves margins 2 There are three distinct paths for business model innovation 3 Each of these paths (or combination) can lead to financial success; the right strategy and execution are key 4 Enterprise model innovation through collaborative innovation is the most prominent model IBM Corporation (2007)

Okay Interesting But how can we do it?

change is the process by which the future invades our lives -> Alvin Toffler

business people don t just need to understand designers better; they need to become designers Roger Martin, Dean Rotman School

1. identify interdisciplinary stakeholders -> set-up team

2. understand (business) environment > frame problem

various starting points / depending on context CORE CAPABILITIES PARTNER NETWORK ACTIVITY CONFIGURATION VALUE PROPOSITION CUSTOMER RELATIONSHIPS DISTRIBUTION CHANNELS CUSTOMER SEGMENTS COST STRUCTURE REVENUE STREAMS [Osterwalder (2004) The Business Model Ontology]

3. suspend reality -> ideate

4. bring back reality -> prototype

5. chose suitable design -> decide

6. sketch out projects & workload -> draw implementation plan

7. outline key indicators to follow -> choose measures

8. select the right teams and people -> make responsible

9. execute the plan -> manage implementation & change

10. evaluate, learn and redesign -> manage improvement

Definitely not! Every new beginning comes from some other beginning s end Roman philosopher, mid-1st century AD Maggie Fikkert maggief@queo.co.za +27 83 6 222 222