Business model innovation

General Management Course

A.A. 2014/2015

Digital Transformation –

Business Model Innovation

Matteo Cristofaro, Ph.D. student General Management Course

Matteo Cristofaro, Ph.D. student General Management Course 2

What is a business model?

The Business Model Canvas;

Business Model Innovation;

Blue Ocean Strategy for BMI;

4 paths to BMI;

What can go worng?;

References.

Summary

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Digital transformation – A new portfolio of

capabilities


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A litterature review on 103 business models articles (Zot, Amit,

Massa, 2010) showed that 37% of these don’t define the concept of

“buiness model” at all and 19% refer to the work of other scholars.

This lack of definitional consistency and clarity represents a potential

source of confusion.

…we consider two definitions as agreeable:

“A business model describes the rationale of how an organization

creates, delivers, and captures value” (Osterwalder, 2010)

“A business model is a reflection of the firm realized strategy”

(Casedus, Masanell & Ricart, 2010)

Business model did not acquire prominence in the lexicon of the start-up community until the

mid-1990s.With the exponential growth in the usage of the term during the dot-com

boom, the early literal meaning of business model (and modeling) morphed into a new

meaning, referring to the creation of value in digital business.

What is a Business Model?


The Business Model Canvas

5 https://www.youtube.com/watch?v=QoAOzMTLP5s Matteo Cristofaro, Ph.D. student General Management Course

https://www.youtube.com/watch?v=QoAOzMTLP5s

6 Matteo Cristofaro, Ph.D. student General Management Course

BMI (1)

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Business model innovation is the most powerful of the three types of innovation. While continuous and discontinuous innovations in products and services are important and necessary, the companies that innovate in the structure of their businesses, particularly in how they define their relationships with customers, become the leaders. Business model innovators look at the market and see something different than others see - they see possibilities that others have overlooked, and they transform those possibilities into competitive advantages, and profits.

Historically, breakthrough innovations have come from two sources: entrepreneurs, and large-scale research and development. Entrepreneurs are those who see the world differently.


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Starting with e-commerce and more recently with interactive Web applications and cloud computing, digital technology has created opportunities for new business models.

Technology impacts two sides of business models: costs and revenues.

For example, the disintermediation of retailers adopted by Amazon and Dell touches on both sides, as does the “pay per click” advertising-based search by Google.

By contrast, revenue side is affected by the pricing model (such as the “freemium” model adopted by Adobe, Skype and open source software companies to give basic service away for free and charge premium prices for value-added services).

On the cost side, cloud computing removes the need to invest up front in expensive servers, thus turning capital expenditure into operational expenses and lowering barriers to entry.

BMI (2)– Technology impact


BMI (3)

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There are 4 circumstances that often require business model change:

1. The opportunity to democratize products in emerging markets (e.g. Tata Nano) usually through disruptive innovation;

2. The opportunity to leverage a tested technology by bringing it to a whole new market (e.g. offering military technologies in the commercial space);

3. The opportunity to bring a job-to-be-done focus where one does not yet exist. (e.g. Fedex didn’t compete through lower prices or better marketing, but it concentrated on fulfilling an enterely unmet customer need to receive packages far and more reliably than any service than could);

4. The need to respond to a shifting basis of competition.


BMI (4)

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Schumpeter (1934) distinguishes between five types of innovations: new products, new methods of production, new sources of supply, exploitation of new markets, and new ways to organize business.

Incumbents often learn about new business models from entrants and respond by incorporating these innovations (in full or in part) into their own businesses. The possibility of competitive imitation, in turn, suggests that entrants need to strategically choose whether to reveal their ideas by competing through the new business model or, instead, to conceal them by adopting a traditional, established logic of value creation and value capture.

Firms should take into account the likely competitive effects before revealing a business model innovation. Entrants should realize that incumbents will react to innovations in two main ways:

1. Keeping their business model intact and adjust its tactical variables (such as price);

2. Adopting a new business model so as to change their value creation and capture logic.


Blue Ocean Strategy for BMI (1)



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4 ACTIONS FRAMEWORK


Blue Ocean Startegy for BMI - Example


Blue Ocean Startegy for BMI (5)

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Identify the highest and

evaluate what happens if

you eliminate or reduce

them. What value elements

disappear, and what would

you have to create to

compensate for their

absence?

Transform the Value

Proposition by asking the 4

actions framework

questions, considering the

impact on the cost side and

evaluate what elements you

need to change on the value

side.

Ask yourself the Four

Actions Framework

questions about each

business model Building

Block on the customer side

of the Canvas.


4 paths to BMI: WHAT

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Any business model is essentially a set of key decisions that collectively determine how a business earns its revenue, incurs its costs, and manages its risks, innovations to the model may be viewed as changes to those decisions:

WHAT Mix of Products or Services Should You Offer?

Focused business models are most effective when they appeal to distinct market segments with clearly differentiated needs. So if your business currently serves multiple segments, it may be best to subdivide into focused units rather than try to apply one model.

Search for commonalities across products. Commonalities aren’t just shared components among different products. They may also be the capabilities needed to serve various product, customer, and market segments. Consequently, companies can add to their mix products or services that reflect new applications of their capabilities. For instance, in the late 1990s Amazon expanded from books into music, video, and games.

Create a hedged portfolio. Companies can select an assortment of products or markets to reduce the overall riskiness of the business model.

Postpone the decision. In many industries companies make firm decisions about prices well before they actually sell anything. This, of course, often exposes them to risk. It’s risky to price airplane seats early, for instance, because demand on any given route is highly contingent on economic and other conditions and can vary by the time of day, the day of the week, or the week of the month.


4 paths to BMI-WHEN

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WHEN Should You Make Your Key Decisions?

Change the order of your decisions. shuffle the order

in which decisions are made in order to delay investment

commitments until pertinent information is known.

Split up the key decisions. The lean start-up approach

divides up the key decisions. A venture starts with relatively

imprecise and limited hypotheses about where an

opportunity may lie. Multiple stages of information gathering

and “pivoting” follow, as the business model is revised to

arrive at the final, validated version

http://paulbuchheit.blogspot.it/


http://paulbuchheit.blogspot.it/

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WHO Are the Best Decision Makers?

Appoint a better-informed decision maker. Google’s engineers, for example, have extraordinary freedom to decide what development projects the company should pursue, because Google believes they are better informed about technologies and tastes than the company’s executives are.

Pass the decision risk to the party that can best manage the consequences. Amazon forwarded orders to book wholesalers or publishers, who then often shipped the products directly to customers using Amazon packaging.

Select the decision maker with the most to gain.

Companies can also use the framework to make their innovation processes more systematic and open, with business model reinvention becoming a continual, inclusive process rather than a series of isolated, internally focused events. When they do, they find that the resulting capabilities offer a sustainable competitive advantage.

4 paths to BMI-WHO


4 paths to BMI-WHY

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WHY Do Key Decision Makers Choose as They Do?

Many business model innovations, therefore, come from adjusting decision makers’ motivations. There are three ways of doing this:

Change the revenue stream;

Synchronize the time horizons. Traditionally, sourcing relied on competitive-bidding rituals that ensured low prices and moderate but acceptable quality.

Integrate the incentives. Companies without a trusted intermediary can develop contractual arrangements and management systems (such as the famous balanced scorecard) to focus independent agents on maximizing an agreed-upon outcome.


What can go wrong? (1)

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Many businesses change their model in pursuing growth, or when they perceive threats from changes in the industry environment.

Consider growth. Understanding the logic of the core objectives goes a long way in alerting managers when they are approaching the envelope for their size limit.

Every business has a natural size and at some point one simply needs to coast as opposed to pursuing growth that violates the core underpinnings of the business model.

Consider business model changes driven by a desire to preserve competitive advantage. Around 1999, Wal-Mart became worried about Target and its slightly more affluent customer base. Wal-Mart tried to upgrade its offerings, “rationalize” (translate “reduce”) its offerings. This undercut the “predictability” discussed earlier. Wal-Mart has lost the trust of its core customer base, opening the door for more focused retailers like Aldi and Dollar Stores. Wal-Mart is now migrating back to its core model, which was never really threatened as its core customers were not going to shop at Target.

Companies should not pursue business model reinvention unless they are confident that the opportunity is large enough to warrant the effort.



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Concerns about business models can be traced to four common

problems associated with their creation and use. These

problems, which follow directly from the key terms in our

definition, are the following:

1. Flawed assumptions underlying the core logic;

2. Limitations in the strategic choices considered;

3. Misunderstandings about value creation and value capture;

4. Flawed assumptions about the value network.



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BMI it’s not a simple product innovation, but innovating simolutaneously (in a coherent manner) across several elements of te business. Managers should be on the lookout for common pitfalls, such as:

Portfolio Bloat: an overlapping portfolio of experiments, none of which has enough resources.

Failure to scale-up: because of ambiguous pilot results.

Pet Ideas: managers find to give up wrong ideas.

Isolated efforts: teams work too distant from the business to influence it.

Internal Focus: near-sighted attention to the organization’s internal needs at the expense of the unmet needs of the customers.

Historical Bias: overvalue past models and under value forward looking distruptive ideas.


What is Big Data? (1)

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The proliferation of digital products and services results in

consumers generating huge volumes of personal data across

all aspects of their lives, which is captured by organisations

through digital channels or devices.

Data about a person’s friendship networks, hobbies and

interests is captured on Facebook, while details of their

shopping patterns are captured by online retailers. In

addition to these relatively established data sources,

technological developments will continue to generate new sources of

consumer data that could offer unique insights into consumer

behaviour.


What is Big Data? (2)

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Organizations are exploring how large-volume data can usefully be deployed to create and capture value for individuals, businesses, communities, and governments (McKinsey Global Institute, 2011). big data is fast becoming a tool that not only analyzes patterns, but can also provide the predictive likelihood of an event.

The challenge for businesses lies in how to harness, make sense of, and use this information to generate some form of competitive advantage. Businesses that can access these new sources of data, analyse them and convert them into insight on consumer behaviour, will be able to make their products and services more relevant to their customers.


Big data and insights


References

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Osterwalder, A., Penguin, Y. (2010). Business Model Generation. John Wiley & Sons, Inc., Hoboken, New Jersey.

Shafera, S.M., Smitha, H.J., Linderb, J.C. (2005). The power of business models. Business Horizons. Vol. 48, pp. 199-207.

Johnson, M.W., Christensen, C.M., Kagermann, H. (2008). Reinventing your Business model. Harvard Business Review. December, pp. 50-59.

Girotra, K. (2014). 4 paths to Business Model Innovation. Harvard Business Review. July-August, pp. 96-103.

Lindgardt, Z., Reeves M, Stalk, G., Deimler, M.S.(2009). Business Model Innovation. Boston Consulting Group, September.

Casadeus-Masanell, R., Zhu, F. .(2013). Business model innovation and competitive imitation: the case of sponsor-based business models. Strategic Management Journal. Vol. 34, No. 4, pp. 464-482.

Kim, W.C.; Mauborgne, R. (2004). Blue Ocean Strategy. Harvard Business Review. Vol. 82, No. 10, pp. 76-84.


Matteo Cristofaro

Ph.D. student in Business Management&Accounting

Research fields: problem solving; decision making; management consulting; business modelling.

University of Rome 'Tor Vergata'

Faculty of Economics. Department of Business, Government and Philosphy.

E-mail [email protected]

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Business model innovation

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