Improving Customer Performance as a Guide for Business Model Innovation -

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Improving Customer Performance as a Guide for Business Model Innovation -
Case Studies and General Conclusions
By
Alexander Hohenberg
Leechgasse 8, A 8010 Graz Austria – alexander.hohenberg@edu.uni-graz.at
Antonio Osvaldo Ciriello
Linley Green Road, Herefordshire, UK – antoniociriello@aol.com
Wilhelm Graupner
Am Freigarten 10, A 8020, Graz Austria – willi_graupner@yahoo.com
April 23rd 2012

1 Abstract
This report is investigating at how “improving customer performance” is used as a business model innovation approach throughout different industries. As a methodology, case studies and their structured evaluation for commonalities and differences were chosen. Typically “improving customer performance” is established as a new business model which replaces the old ways of doing business. As it is providing better perceived value for the customer it always leads to differentiation of a certain supplier. This is always ONE of the strategic goals. Others can be market entry for a supplier accompanied by shaping a new business or situations driven by the customer, e.g. to outsource a part of the value chain in order to increase profitability or flexibility. Often stronger customer retention is a feature of the new model. A complete survey including conclusions for different markets is provided.
Keywords: business model innovation, total shareholder return, customer performance, innovation, differentiation, customer segment, crisis, cost, market entry, customer retention

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Improving Customer Performance as a Guide for Business Model Innovation -

  1. 1. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 1 Improving Customer Performance as a Guide for Business Model Innovation - Case Studies and General Conclusions By Alexander Hohenberg Leechgasse 8, A 8010 Graz Austria – alexander.hohenberg@edu.uni-graz.at Antonio Osvaldo Ciriello Linley Green Road, Herefordshire, UK – antoniociriello@aol.com Wilhelm Graupner Am Freigarten 10, A 8020, Graz Austria – willi_graupner@yahoo.com April 23 rd 2012 1 Abstract This report is investigating at how “improving customer performance” is used as a business model innovation approach throughout different industries. As a methodology, case studies and their structured evaluation for commonalities and differences were chosen. Typically “improving customer performance” is established as a new business model which replaces the old ways of doing business. As it is providing better perceived value for the customer it always leads to differentiation of a certain supplier. This is always ONE of the strategic goals. Others can be market entry for a supplier accompanied by shaping a new business or situations driven by the customer, e.g. to outsource a part of the value chain in order to increase profitability or flexibility. Often stronger customer retention is a feature of the new model. A complete survey including conclusions for different markets is provided. Keywords: business model innovation, total shareholder return, customer performance, innovation, differentiation, customer segment, crisis, cost, market entry, customer retention Notes:  This work is the result of a 6 weeks internship of Alexander Hohenberg at AVL UK Ltd. Under the given limitations some relevant questions were not addressed yet and priority was laid on getting the case studies published. Hence we strongly invite feedback to the authors through all relevant channels of communication.  All elements of this published work can be used if proper reference to the original material at www.change-the-rules.com/ is made.
  2. 2. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 2 Contents 1 Abstract...........................................................................................................................................1 2 List of Figures ..................................................................................................................................2 3 Introduction ...................................................................................................................................3 3.1 Relevance of the Topic ...........................................................................................................3 3.2 Definition of Business Model..................................................................................................3 3.3 Business model innovation (BMI)...........................................................................................4 3.4 Definition of Customer Performance.....................................................................................5 4 Methodology...................................................................................................................................5 5 Case Studies ....................................................................................................................................6 5.1 Summary ................................................................................................................................6 5.2 Nestle/ Nespresso.................................................................................................................10 5.3 Teekampagne.......................................................................................................................12 5.4 Xerox.....................................................................................................................................13 5.5 Hilti........................................................................................................................................13 5.6 IBM........................................................................................................................................15 5.7 Salesforce .............................................................................................................................17 6 Findings .........................................................................................................................................19 6.1 Commonalities Found in the Case Studies ..........................................................................19 6.2 Differences Found in the Case Studies.................................................................................20 6.3 Current State – Areas of “Attack“ for others .......................................................................20 6.4 Potential New Business Models ...........................................................................................21 7 Conclusions ...................................................................................................................................22 8 Acknowledgements ......................................................................................................................23 9 List of References..........................................................................................................................23 8.1 Additional sources ...........................................................................................................................23 2 List of Figures Figure 1: The Main Elements of a Business Model – adapted from Boston Consulting Group ........3 Figure 2: Business model vs. traditional innovators – From BCG ......................................................5 Figure 3: Full Overview and Characteristics of the chosen Case Studies. .........................................8 Figure 4: Summary of the chosen Case Studies. ................................................................................9 Figure 5: Nespresso Competitors since 1991. ...................................................................................10 Figure 6: Nespresso growth 2000-2009 .............................................................................................11 Figure 7: Business Model of a coffee dealer vs. the business model of Nespresso – the transparent blue areas highlight the Nespresso status vs. a coffee dealer. See also Figure 1. ..........................12 Figure 8: Hilti Sales 1950-2007. ...........................................................................................................14 Figure 9: Business Model of a tool supplier vs. the business model of Hilti fleet management – the transparent blue areas highlight the Hilti status vs. a tool supplier dealer..............................15 Figure 10: Danone process innovation - from ...................................................................................16 Figure 11: Celina network of independent agencies. .......................................................................16 Figure 12: Business Model of an IT supplier vs. the consulting business model of IBM – the transparent blue areas highlight the IBM status vs. an IT supplier dealer. See also Figure 1........17 Figure 13: Salesforce quarterly revenue growth ...............................................................................18 Figure 14: Salesforce business value delivered .................................................................................18 Figure 15: Boston Consulting Group Matrix ......................................................................................19
  3. 3. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 3 3 Introduction 1 3.1 Relevance of the Topic The topic of customer performance is vital for all suppliers – there is a good reason for statements like “your success is our success” or “we are here to make you successful”. If the customer loses business, most of their suppliers will, except e.g. consultants. However, no supplier will ever “make” a customer successful but the contribution to customer success can be essential. Let’s look at an example: In the late 1990s Apple couldn`t compete on price with others because of being a niche player designing both hardware and software. In 2001 they began introducing a series of successful products and services such as iTunes online music service and the iPhone which made Apple big. The success was built on a better customer experience – much beyond just designing, manufacturing and selling a device. So it was not only product innovation which made Apple succeed but also defining a workable business model for downloading music- something that had eluded the music industry for years. In the previous example let’s also not forget the driver: Apple, in crisis, realized it needed to do “something”. They chose giving the customer something that was a major step in the customer’s ability to deal with digital media such as music or images, or the internet – it improved customer experience or “performance” in that area. 3.2 Definition of Business Model So what is a business model – and what does business model innovation (BMI) mean ? The term business model itself has been the object of quite revealing research [26]. Here we have used the pragmatic approach of the Boston Consulting Group (BCG): a business model is built up by two essential elements- value proposition and operating model- each of them has three dimensions – see below. Figure 1: The Main Elements of a Business Model – adapted from Boston Consulting Group 1 1 http://www.bcg.com/documents/file36456.pdf Operating Model Value Proposition Target Segment(s) Products / Services Revenue Model Value Chain Cost Model Organisation Business Model
  4. 4. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 4 Value proposition:  Target Segment: Who is our target customer? Which of their needs do we seek to study?  Product or Service Offering: Which products do we offer to satisfy customer needs?  Revenue Model: How are we compensated for our offer? Operating model:  Value chain: How are we positioned to deliver on customer demand? What do we do internally? What do we outsource?  Cost model: How do we calculate costs to deliver profitably?  Organizing: How do we deploy and develop our employees to sustain and enhance our core competencies Companies typically operate on a certain business model to establish themselves. When faced with challenges in their market they aim at improvement actions, e.g. cost programs internally or product improvements, new products etc. The most fundamental way of improvement however from a business perspective is innovating on the business model side with the customer in mind – hence our title of this paper. 3.3 Business model innovation (BMI) Nowadays companies have to handle shorter product life cycles but also even shorter business model lifecycles. Trends like displacing activities to low-cost countries or growing systemic risk as global business become increasingly interconnected and require businesses to bolster and accelerate innovation. The discipline of BMI offers a new way to think about renewing competitive benefit and re-igniting growth in this challenging environment. In times of instability business model innovations are especially valuable. BMI can provide companies with a way to break out of intense competition and it can help address disruptions. Many companies utilized the crisis to reinvent themselves for their own benefit- rather than by simply deploying financial and operational tactics. Moreover, during times of crisis companies have to deal with less resistance of the employees. BMI may be more challenging than product or process innovation but it also delivers higher benefits. The Boston Consulting Group analyzed their database of innovators, segmenting them into business model innovators and product or process innovators. The result shows that both types of innovation achieved higher returns than the peer group but business model innovators earned an average premium that was more than four times higher than that earned by product or process innovators. In that analysis “return” was defined as total shareholder (TSR) return – as a premium over industry peers (see Figure 2). Even after ten years BMI delivered returns that were more sustainable. The Figure below shows what the experience is with BMI: 1. The total shareholder return for BMI is about 5 times higher than that of traditional innovators on a 3 years scale. 2. This value is a factor of 60 times on a 5 years scale and 3. It is about 1.5 times on a 10 years range.
  5. 5. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 5 While these factors seem somewhat inconclusive when analyzed with respect to their temporal evolution they are VERY CONCLUSIVE in one aspect: The total shareholder return for BMI is ALWAYS significantly higher than that of traditional innovators ! Figure 2: Business model vs. traditional innovators – From BCG 1 3.4 Definition of Customer Performance As we were aiming in this study on a highly comparative view of very different businesses we needed to be inclusive in the definition of customer performance. This is especially true when you compare business to business relationships with business to (end) customer situations. So here is the definition (after [49]) – customer performance is improved when: 1. The output for the customer is increased (perfect espresso in your cup vs. perfect coffee beans in a box, perfect availability of tools under any circumstances) and/or 2. The quality for the customer is increased (higher pixel resolution in a digital camera) and/or 3. The price or effort is decreased for the customer and/or 4. The access barrier or cost is lowered for the customer (e.g. intuitive user interface vs. having to read a manual for hours) 4 Methodology The objective of this study was to learn from well-known business cases. The approach is structured in 3 stages: a) First, it was necessary to search for suitable companies and also for interesting information about them. Then the best ones with respect to business success and available data were chosen for case studies. 1 http://www.bcg.com/documents/file36456.pdf
  6. 6. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 6 b) Second, a structured comparison of the collected data was made to allow for a consistent analysis. c) An analysis was made for commonalities and differences of the different solutions strategies. We tried to derive general conclusions from these case studies. Note: For the purpose of this paper we will define and measure success by successful market entry of a new business model. We will not be able within the scope of this paper to investigate the influence of this new business model on profitability of the supplier - an interesting follow-up topic. 5 Case Studies After studying the material of the available companies we decided to analyze the strategies of the following companies: Nestle, Teekampagne, Xerox, Hilti, IBM, and Salesforce. This gives us a good overview for the possibilities of change with respect to business models. We have decided to structure this Section in the Summary Section for the busy reader where we show a comparative and structured overview in two tables – the full version in Figure 3, the condensed one in Figure 4. 5.1 Summary In Figure 3 you can see the different details of the evaluated companies in a structure of 24 components:  Line 1: the sector of the company analyzed  Line 2: business to business (B2B) or business to customer (B2B)  Line 3 to 8: the 6 elements described in the business model concept shown in Figure 1. In this case we describe how these 6 elements are changed from the (former) competitor’s business model.  Line 9: the classical business model the company tried to overcome – in a nutshell.  Line 10: the new business model the company introduced – in a nutshell.  Line 11: the new contact for the company in the customer organization.  Line 12: the specific improvement that is introduced for the customer.  Line 13: the generic description of this improvement – in the sense of Section 3.4  Line 14: the new competitors in the shifted business model.  Line 15: the type of innovation that changes the business model.  Line 16: if known, margin / gross profit.  Line 17: unique selling proposition (USP)  Line 18: does the business model require to know your customer well – e.g. do you need to understand the customer’s business ?  Line 19: to which degree / percentage can the customer significantly configure the supplier’s product or service (estimate)  Line 20: to which degree / percentage can the supplier configure its product or service (estimate)  Line 21: the predominant old sales channel, corresponds to the classical business in Line 9  Line 22: the predominant new sales channel, corresponds to the new business in Line 10  Line 23: the business approach including the aspect of customer loyalty / retention  Line 24: additional information and comments Before going into further detail on this we want to comment on the abbreviated summary Table in Figure 4 with an “Executive Summary” of the structured comparison:
  7. 7. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 7 1. 7 companies / business cases were compared. 2. These 7 companies are representing 5 sectors of business. 3. 2 out of the 7 companies are predominantly business to customer suppliers – 5 operate mainly under B2B. The following 6 items summarize the changes in business model with respect to the concept in Figure 1: 4. 4 out of the 6 companies have not changed their customer segment when innovating the business model. The typical change is a customer segment smaller than before. 5. The new product / service portfolio is extended in 5 cases out of 6. In the remaining case it is smaller. 6. The revenue model has changed in 5 cases out of 6. 7. The value chain has changed in 5 cases out of 6 – it is mainly extended, i.e. also more complex which leads typically to a more simple delivery for the customer, as the supplier takes over the complexity. 8. The cost model has typically changed – in 6 out of 6 cases. 9. The organization has changed – at least slightly – in 6 out of 6 cases. 10. When comparing the old and the new business model in lines 9 and then 10 it is clear that in most cases the business has moved from a manufacturing and dealership approach to solutions for the customer. 11. The generic change of customer value with respect to Section 3.4 is a. Reduce effort for the customer in all 6 cases b. Improve quality in 4 cases c. Improve output in 3 cases 12. Line 10 shows that in 5 cases out of 6 the supplier has moved up in the value or consumption chain of the customer.
  8. 8. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 8 Figure 3: Full Overview and Characteristics of the chosen Case Studies. 13. The gross margin differences between the cases are substantial, partly due to the different sectors. A careful analysis is not possible within this paper. No.CategoryNespressoTeekampagneXeroxHiltiIBMSalesforce 1SectorFoodFoodOfficeProductsToolsITIT 2Businessto…B2CB2CB2BB2BB2BB2B 3NewSegmentreduced/newreducedsamesamesamesame 4NewProduct/Serviceextendedsmallerextendedextendedextendedextended 5RevenueModelextendedsameextendedextendedextendeddifferent 6NewValuechaindifferentstructuresameextendedextendedextendedextended 7NewCostModeldifferentstructurecostssavedextendedextendedextendeddifferent 8NewOrganizationnewnewpartlypartlypartlyyes 9ClassicalCoffeeDealerTeaDealerOfficeToolDealerConstructionToolsDealerITToolDealerSoftwareDealer 10NewBusinessModelCoffeeinCupTeaDealerwithBestPriceDocumentManagementToolFleetManagementBusinessSolutionsITSolution 11NewContactSameSame DocumentManagementinsteadof OfficeManagement OperationsManagementinsteadof Purchasing BusinessManagementinsteadofIT Department BusinessManagementinsteadofIT Department 12 ImprovementofCustomer Performance HighestQualityofCoffeeintheCup, readytodrink Reduceshoppingeffortandexpenses whilemaintaininghighestqualityoftea Letthecustomerfocusontheircore competenceandprovidedocument managementasaservice Ensurebestcustomerperformancevia guaranteedavailabilityofexcellent tools Providebestsolutiontoboostcustomer performancebasedondomainknow howincustomer'sbusiness Provideuserinterfaceatpointof service+thewholeinfrastructureto runsoftware+platformforeasy extensionofsoftware 13GenericImprovement ImproveQuality ReduceEffort ImproveQuality ReduceEffort ReducePrice ImproveQuality ReduceEffort ImproveOutput ReduceEffort ImproveOutput ReduceEffort ImproveQuality ImproveOutput ReduceEffort 14NewCompetitors Clones,CoffeeShops(service providers) Clones,E-shops Customer'sowndepartmentsor documentmanagementservice providers Customer'sowndepartmentsorservice providers Customer'sowndepartmentsorservice providers Customer'sowndepartmentsorservice providers 15InnovationCombineCoffee,MethodandToolOnlyonebrand-beatpriceviavolume Manage"Object"ofOfficeProduct(= Document) ProvideTools+Infrastructure+ Maintenance OptimizeApplicationofITforbusiness outcome ProvideSoftware+Infrastructure+ Maintenance 16Margin(GrossProfitin%)17%8%35%7%46%80% 17USPsfast,tasty,idiotprooftasty,cheapsimpleavailabilityoftools businessprocessknow+hardwareand software simple,betterperformance, collaborativeedge 18Knowyourcustomernononopartlyverywellno 19ConfigurationbyCustomer5%0%10%30%50%70% 20ConfigurationbySupplier95%100%90%70%50%30% 21SalesChannel(old)SupermarketSupermarket(Online)storesInternet,Hotline,HiltiCenterInternet,Hotline,(stores)TocustomerITdepartments 22SalesChannel(new) Nespressoshops, Hotline,Onlineshop InternetTocustomermanagementTocustomermanagementTocustomermanagementTohighercustomermanagement 23Businessapproach/Loyalty Nespressoclub (savingdata), Lockineffect(bychoiceoftabs) makingteatosomething special,qualityandassurance,tea subscription bynatureofservice-annual orlongercontracts Lockineffect thehigherthepercentageoftotal entirefleettheloweristheprice DifferentPositioningofIBMaspartner forperformance bynatureofservice-thecustomerdata areONSalesforce'sservers. 24AdditionalInformation me2problems firstb2bNOsuccess, thenb2csuccess patentmadein1976 tooknearly30yearstosucceed,focus onfood?! me2problems, fakeDarjeeling notapplicable. make3/4ofitsturnover withexpendablesupplies (Additionalmaterial) IBMGlobalBusiness Servicesfoundedin1991-> 50%turnover focusoncorecompetencies (soldlaptopdivisionin2004) focusoncorecompetencies (clouds),veryhighoperatingcosts-> stars(BCG-matrix)
  9. 9. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 9 14. In 4 cases out of seven it is not essential to know the customer very well – while this is essential in 2. This somewhat correlates with how much the customer can configure the solution. Either to a very low degree – so it is a “foolproof” solution OR to a higher degree as the solution offers flexibility to adapt to each customer. 15. The sales channel changes significantly – in 5 cases now sales means to involve (higher) customer management – the sales channel becomes more complex. Figure 4: Summary of the chosen Case Studies. No. Category Nespresso Teekampagne Xerox Hilti IBM Salesforce 1 Sector Food Food Office Products Tools IT IT 2 Business to… B2C B2C B2B B2B B2B B2B 3 New Segment reduced / new reduced same same same same 4 New Product / Service extended smaller extended extended extended extended 5 Revenue Model extended same extended extended extended different 6 New Value chain different structure same extended extended extended extended 7 New Cost Model different structure costs saved extended extended extended different 8 New Organisation new new partly partly partly yes 9 Classical Coffee Dealer Tea Dealer Office Tool Dealer Construction Tools Dealer IT Tool Dealer Software Dealer 10 New Business Model Coffee in Cup Tea Dealer with Best Price Document Management Tool Fleet Management Business Solutions IT Solution 13 Generic Improvement Improve Quality Reduce Effort Improve Quality Reduce Effort Reduce Price Improve Quality Reduce Effort Improve Output Reduce Effort Improve Output Reduce Effort Improve Quality Improve Output Reduce Effort 16 Margin (Gross Profit in %) 17% 8% 35% 7% 46% 80% 18 Know your customer no no no partly very well no 19 Configuration by Customer 5% 0% 10% 30% 50% 70% 20 Configuration by Supplier 95% 100% 90% 70% 50% 30% 21 Sales Channel (old) Supermarket Supermarket (Online) stores Internet, Hotline, Hilti Center Internet, Hotline, (stores) To customer IT departments 22 Sales Channel (new) Nespresso shops, Hotline, Online shop Internet To customer management To customer management To customer management To higher customer management
  10. 10. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 10 5.2 Nestle/ Nespresso Nestle was the first company to start offering instant coffee in order to reduce Brazil´s large coffee surplus. 2 Nestle made the patent on coffee capsules in 1976 but it took them nearly 30 years to succeed. At the beginning they tried to sell Nespresso machines to companies but they failed. 3 So they restarted with a new strategy selling it to customers and met success. The specific characteristic is that you can have an easy, fast and tasty cup of coffee rather than drinking a cup of instant coffee. With this solution everybody can have a high quality coffee neither being a barista, neither having an expensive coffee machine nor going to a café. In addition they stopped the price fight among competitors on the coffee market. Figure 5: Nespresso Competitors since 1991. 4 In 1991 the first competitor started his business imitating a capsule system and nowadays there are over 20. As patent runs out after 30 years Nespresso additionally has to deal with me too products (copied products for example capsules that fit in Nespresso machines). 5 2 http://www.nestle-family.com/our-company/english/assets/downloads/Nestle-History.pdf 3 http://oekkm.at/downloads/Folien_final_19-5-2010_Innovation_sprengt_alle_Grenzen.pdf 4 http://www.nestle.com/Common/NestleDocuments/Documents/Library/Presentations/Investors_Event s/Investors-Seminar-2010/Nestl%C3%A9-Nespresso-Jun2010-Girardot.pdf 4 http://www.nestle.com/Common/NestleDocuments/Documents/Library/Presentations/Investors_ Events/Investors-Seminar-2010/Nestl%C3%A9-Nespresso-Jun2010-Girardot.pdf 5 http://faculty.haas.berkeley.edu/rjmorgan/mba211/2010%20Final% 20Projects/Final% 20Paper%20-%20Morgan's%20Morons.pdf
  11. 11. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 11 But already in 2009 companies started producing capsules that fit so Nespresso changed their new machines that do not work with other capsules. Nespresso tries to attract new customers by (making) advertisement with George Clooney (since 2006) and bind its customers with the Nespresso club, both making the product something special. So Nespresso not just sells coffee but also life style. Also the razor and blades model/ Freebie marketing (cheap machine and expensive capsules) is used to acquire new customers. 6 Figure 6: Nespresso growth 2000-2009 4 6 http://www.time.com/time/magazine/article/0,9171,2053573,00.html
  12. 12. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 12 Figure 7: Business Model of a coffee dealer vs. the business model of Nespresso – the transparent blue areas highlight the Nespresso status vs. a coffee dealer. See also Figure 1. In the Figure above we have used the business model description adapted in this paper to show how Nespresso changed their business model with respect to that of a traditional coffee dealer. While this representation is a graphical one, our overview tables refer to the six segments in lines 3-8 (highlighted in light blue). 1. Nespresso cannot target all private coffee buyers (e.g. these who prefer “filter coffee”) and also can target customers who would have bought a cup of coffee in a coffee shop and now get this quality at home. So the customer segment was modified. 2. The value proposition was extended from selling coffee to providing excellent coffee in a cup. 3. The revenue model was modified as it includes now also the machines and customers with a strong binding to the Nespresso system. 4. The value chain is totally different – as the primary value is not in the packaged coffee anymore at all. 5. The cost model was extended to include the machines and of course the key to all – the packaging. 6. The organization was extended as Nespresso also runs their own sales organization and does not sell through others. 5.3 Teekampagne Teekampagne simply sells cheap tea with high quality. In order to keep the price low they buy the tea at auctions, offer just one sort and sell it only in large packages. 7 Their business strategy is to simplify the whole process beginning with the crop up to the sales. Teekampagne made it possible to offer luxury Darjeeling tea at low prices. Today there are some companies who sale fake Darjeeling but there is no real competitor because Teekampagne is the world leading importer of Darjeeling tea. 8 7 http://www.teekampagne.de/en/our-principle/campaign-method 8 http://www.bostonteacampaign.com/en-us/2_6/did-you-know-that.html Operating Model Value Proposition Target Segment(s) Products / Services Revenue Model Value Chain Cost Model Organisation Business Model
  13. 13. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 13 In order to bind customers they make Darjeeling tea something exclusive by informing customers about tea culture, the region of Darjeeling and quality control. They also make the tea kind of rare because you can “save” your tea via subscription. 5.4 Xerox In the past Xerox moved their business to support rather than just selling copiers. They consult other companies how to manage data and even offer data management as a service. In this situation Ducati needed an increasingly powerful partner for their IT management in case of the expansion of their production. Ducati grew very fast in a few years from 12,000 to 41,000 bikes so the outsourcing of many Ducati activities became necessary. Xerox helps to save time and costs by editing and translating technical manuals and other documents. As additional new way Xerox leas their office equipment connected with a fine support (of these copiers) and they are also in close contact with their customers. At http://www.consulting.xerox.com/case-studies/enus.html there are many quotes like the following in case studies about improving customer performance: …A Fortune 500 aerospace and defense company utilized Xerox Office Services to reduce costs 30-50%, optimize document processes, improve information security, and promote sustainability… …British Telecom is one of the world’s leading providers of communication solutions and services. With Xerox's help, they implemented enterprise print services to save them 10.4 million pounds over four years in office printing and 40% savings in reprographics… …Carillion plc., a leading UK support service and construction company, teamed with Xerox to implement managed print services that saved over £600,000 in the first 6 months… 5.5 Hilti Hilti is a producer of professional tools and was founded in 1941. A few years ago Hilti started leasing tools - the so called Fleet Management. A customer survey has shown that many customers don´t know how many tools they have at one building lot. So this was one of the reasons why Hilti had the idea of a Fleet Management. The other one was that they watched other markets and found out how other companies with big car fleets deal. However, before the system started they had to shift the whole administrative structure and so invest a lot of money. Furthermore, they had to make a pricing policy which was quite difficult because they didn´t know how customers would care about tools which don´t belong to them. But today the Hilti Fleet Management is successful and as a result Hilti grow fast in the last few years. Moreover, Hilti also sells expendable supplies/additional material which make ¾ of their turnover.
  14. 14. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 14 Figure 8: Hilti Sales 1950-2007 9 . The Hilti Fleet Management distinguishes itself from others by quick and good service. That means that in case of a defect or theft Hilti undertakes bureaucracy and other urgent tasks. This offer binds the customer close by to Hilti because the customer depends on their tools. 10 Additional by Hilti doesn´t give discount to their customers but they make framework agreements which promise lower prices the higher the total percentage of re-entire fleet is- the so called Share of Wallet. Nowadays other companies try to copy this system like Bosch and Würth but both have problems which Hilti does not have. Würth doesn´t produce tools so they have to buy them in addition. Bosch sells their tools on a retail basis and has problems to assure maintenance and repair service. In order to remain as a leading tool provider Hilti doesn´t save their noticed problems from the site in a system but they discuss them directly with the responsible product manager in order to fix the error or to fulfill the wishes of their customers as soon as possible. In order to be able to offer still better service and also reduce the costs, Hilti plans to open so called Shared Service Centers in the next few years which carry out central tasks. 11 9 http://www.im.ethz.ch/education/FS08/RV2008_Meyrat.pdf 10 www.alexandria.unisg.ch/export/DL/137350.pdf 11 http://www.stadler-heinle-schott.de/fileadmin/stadler-heinle- schott/webinhalte/downloads/pressespiegel/FTD_Durch_die_Wand_per_HILTI.pdf
  15. 15. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 15 Figure 9: Business Model of a tool supplier vs. the business model of Hilti fleet management – the transparent blue areas highlight the Hilti status vs. a tool supplier dealer. See also Figure 1. In the Figure above we have used the business model description adapted in this paper to show how Hilti changed their business model with respect to that of a traditional tool supplier. While this representation is a graphical one, our overview tables refer to the six segments in lines 3-8 (highlighted in light blue). 1. Hilti cannot target all tool users because not all will want to enter a fleet management agreement. 2. The value proposition was extended from selling tools to ensuring that functioning tools are fully available to the customer at any given time. 3. The revenue model was modified as it does not include selling tools but is based on fees for tool availability. 4. The value chain is totally different – as the primary value is not in the sold tool anymore but available tools in the customer’s hand. 5. The cost model was extended beyond tool cost to include the cost for maintaining availability under all circumstances. 6. The organization was extended as Hilti needs to run a full service organization to ensure availability. 5.6 IBM In the last few years IBM moved their business more and more to consultation. In 2002 they bought PricewaterhouseCoopers Consulting unit to be more competitive on the consulting market. In 2005 IBM sold their PC-unit. So after this, IBM focused completely on business customers. 12 Today they earn their income over 50 % by consulting other companies in many fields such as software, hardware, and business strategy and process innovation. Two examples of measurable customer performance improvement by IBM are Danone and Selina as shown below. 12 http://www.ibm.com/ibm100/us/en/icons/personalcomputer/ http://www-03.ibm.com/press/us/en/pressrelease/491.wss Operating Model Value Proposition Target Segment(s) Products / Services Revenue Model Value Chain Cost Model Organisation Business Model
  16. 16. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 16 Danone Danone is the world´s largest producer of fresh dairy products. But one of the tricky things is that the products take a long time to be produced but only a short time to expire (see Figure 10). They worked together with IBM to optimize their production process, improve their planning and scheduling and better integrate their supply chain to reduce both product waste and stock shortage. Now Danone generates high- quality production optimization plans within only 15 minutes, a process that used to take two days. Figure 10: Danone process innovation - from 13 Figure 11: Celina network of independent agencies. 13 Celina The insurance industry can be a complicated web of agents, underwriters and customers, all bound together by an endless number of policies and claim forms (See Figure 11). That´s why when Celina was looking for an advantage in competition against their much larger rivals, they chose to tighten the collaboration between themselves, 500 independent agents and their customers. Now Celina uses an IT-system which provides agents with simple and secure access to customer policy and claims data, payment processing and customer credit information. By these implementations Celina 13 ftp://ftp.software.ibm.com/software/solutions/soa/pdfs/SmartWorkBrochure1123.pdf 13 ftp://ftp.software.ibm.com/software/solutions/soa/pdfs/SmartWorkBrochure1123.pdf
  17. 17. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 17 reduced policy turnaround times from weeks to days, improved the service for both agents and customers, and realized significant savings in ongoing operations. 1413 Figure 12: Business Model of an IT supplier vs. the consulting business model of IBM – the transparent blue areas highlight the IBM status vs. an IT supplier dealer. See also Figure 1. In the Figure above we have used the business model description adapted in this paper to show how IBM changed their business model with respect to that of a traditional IT infrastructure supplier. While this representation is a graphical one, our overview tables refer to the six segments in lines 3-8 (highlighted in light blue). 1. IBM cannot target all infrastructure clients because not all will want to enter a consulting relationship. 2. The value proposition was extended from providing infrastructure to installing true “business solution” with a measurable impact on the customer’s profitability. 3. The revenue model was modified as it needs to include the consulting efforts. 4. The value chain is different – consulting included in addition to infrastructure. 5. The cost model was extended beyond infrastructure cost to include the cost for consulting. 6. The organization was extended as IBM needs consultants for the domain know how of the customer’s business. 5.7 Salesforce Salesforce was one of the first companies who offered cloud service which makes IT maintenance much easier so the customer can concentrate on his core business. They sell software as a service which means that the customer neither needs any kind of infrastructure nor software but only the internet. 15 15 Salesforce.com Operating Model Value Proposition Target Segment(s) Products / Services Revenue Model Value Chain Cost Model Organisation Business Model
  18. 18. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 18 Figure 13: Salesforce quarterly revenue growth 16 Salesforce has to deal with many other competitors but there are fewer who are flexible with their software. Most companies have special programs for each sector but Salesforce codes their software extra for every customer. 17 Another problem is to keep the system running and prevent it from hackers. Amazon had server problems already two times in 2011 so there was no access to the servers. 18 Figure 14: Salesforce business value delivered 15 16 Salesforce presentation AVL 17 http://www.computerwoche.de/software/crm/1861381/ 18 http://money.cnn.com/2011/04/22/technology/amazon_ec2_cloud_outage/index.htm, http://morganlinton.com/startup-monday-amazon-ec2-down-again-takes-instagram-foursquare-and- more- with-it/ 15 Salesforce presentation AVL
  19. 19. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 19 What we have noticed is that Salesforce has very high operating costs, which can signify that they invest a lot of money for marketing and promotion. This way of acting is mentioned as/ is called/ is the so called/ (the) star in the portfolio BCG- matrix which is a unit with high market share in a fast growing industry. The aim is to make the star as big as possible by reinvesting the whole income. 19 Figure 15: Boston Consulting Group Matrix 20 6 Findings 6.1 Commonalities Found in the Case Studies In the case studies that we looked at you can see four commonalties: (1) The first one is that companies develop new business models often in crisis of any kind. That means a crisis motivates the management to think about their strategies for tomorrow. Typical companies of this case are Nestle, Hilti and IBM. All of these had problems with their business and changed their business models in different ways (see later). It should be noted that in most cases a crisis is the reason for change, but there are also exceptions as for example the company Salesforce. It was founded in 1999 with an innovative business model which is still the same today: software as a service. The cooperation of Xerox and Ducati wasn´t the result of a real crisis. The reason was that the expansion of Ducati´s production required a bigger IT unit. In order to avoid this, Xerox takes over the data and documents management and in compensation to this they are named as their IT partner. (2) The second commonalty is that companies reached a commodity level with their product where price is the main buying criterion. Hence in all case studies you can see that companies look for new differentiators beyond just price when starting new business models. 19 http://www.bcg.com/documents/file13255.pdf 20 http://mamikikeyu.files.wordpress.com/2011/05/bcg-matrix.gif
  20. 20. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 20 (3) The third commonalty is that all companies improved their business model without changing their core competency. That means they know the market and its business and they changed only their strategy in different ways (see following part). (4) Fourth, in all cases the organization had to be changed in order to ideally support the new business model. Let´s now look at the differences of the case studies. 6.2 Differences Found in the Case Studies One can define at least three alternative ways for a new or an improved business model. 1) New ideas or products One example is Nestle with their system Nespresso which was developed and started in order to reduce Brazil´s large coffee surplus and also because of the fact that the world market price for coffee was very low after offering instant coffee. 21 Another example is Günter Faltin, the founder of Teekampagne. He started his company because of a sort of personal crisis. When he got the chair for Entrepreneurship on the “Freie Universität Berlin”, he asked himself how he could show his students that it is important to think very well about your idea before founding a company. His idea was offering luxury Darjeeling tea at low prices. 2) The business model of support When the company Hilti had difficulties selling their high-priced tools they, searched for an alternative sales system. 22 After a customer survey and studies of other markets (in this case car fleet management of big companies), they had the idea of the Hilti Fleet Management. From then on tools were also leased to customers. The product especially is distinguishes itself by a large support (in case of theft or broken tools). 23 This approach led to a strong relationship between Hilti and the customers. 3) The business model of consulting IBM acted kind of radical in the last few years. In 2002 they bought PricewaterhouseCoopers Consulting unit and they continuously extended this field. When due to competitors the PC unit wasn´t profitable any more IBM, decided to sell it in 2005. Nowadays they put their focus on consulting which earns them today over 50% of total revenue. Additionally they permanently improve their hardware in order to be competitive both in quality and price. 24 6.3 Current State – Areas of “Attack“ for others 21 http://www1.uni-hamburg.de/ami/lehre/Veranstaltungen/WS_0607/IMS/VL_IMS_06_10_27.pdf 22 http://www.ondernemenzondergrenzen.nl/uploaded_files/6_reinventing_your_business_model.pdf 23 http://www.us.hilti.com/holus/page/module/home/browse_main.jsf?lang=en&nodeId=-114864 24 http://www-03.ibm.com/systems/power/migratetoibm/footnotes/compare.html#footnote10
  21. 21. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 21 Every new business model also offers (new) areas for attack for others and if it is just the fact that the model can be copied with lessons learned and hence become more successful. From our point of view there are three possibilities to attack a product on the market. a) The new product can, but needn´t be copied with the same quality but it has to be offered at a more reasonable price. One example of this is Nespresso. The capsule system itself can be copied as well as the capsule that fits into Nespresso machines. Many companies tried to copy the capsules. As a reaction to this, Nespresso builds machines that only work with their own capsules. Thus Nespresso has continuously increased their turnover. Hilti is faced with the same problems: Their high- cost products can be copied and sold at a more reasonable price- no matter whether we talk about construction foam, dowels or tools. Salesforce has made a new approach by offering CRM- SaaS which worldwide supports customer data management. The danger that companies such as IBM with both good knowledge in soft- and hardware enter this market arises. Hence, one can observe through the lifetime of a new business model, first a strong USP, then appearance of competitors who typically grow in number over time leading to a saturation. b) Other companies could analyze the product and try to improve it, creating their own new USPs. One example of this would be by offering biologically degradable capsules as an alternative to Nespresso´s aluminum capsules. Now Nespresso offers a means to recycle their capsules. Jean- Paul Gaillard, former CEO of Nespresso, founded the “Ethical Coffee Company” and offers biologically degradable capsules made of plant- fibers. In 2011 he was accused of contravening Nespresso´s patent right but he claimed not to offend against any patents. c) Customer Relationship and sales are two highly essential points. In this connection you should analyze what your competitors do badly or worse than you. By doing this you can stand out from others. IBM as well as all other companies took this approach into consideration and found the optimum middle ground between support and cost. 6.4 Potential New Business Models In this chapter we discuss the question what a company can do to strengthen its position on the market and to find new business models as listed below.  Improvement of the product: It goes without saying that the product should be improved or sold at a more reasonable price or that support should be increased. This leads to a stronger position on the market.  Enlargement of the range of products: Salesforce, for example, could develop additional software and thus offer their service and their knowledge in software to further fields apart from CRM. It would also be possible to open the cloud system for the private market. IBM, however, could also seize the opportunity to copy Salesforce and thus enter the cloud- market both with hard- and software. Xerox has two ways to extend their software service: 1) By taking over the workout of documents (classical outsourcing).
  22. 22. Improving Customer Performance as a Guide for Business Model Innovation A. Hohenberg, A.O. Ciriello, W. Graupner April 2012 - www.change-the-rules.com/paper1.pdf P a g e 22 2) By installing a portal where documents are available for internal use and also for customers.  Sales management: Nespresso offers their products exclusively in shops. Since 2006 Nestle has also sold a more reasonable capsule system called Nescafe Dulce Gusto in supermarkets. Teekampagne could make use of their internet presence and install also real shops and advertise for them. A possible way for Nespresso could be the standardization of their capsules for the private and the business market in order to reduce costs. The danger, however, could be that company members use capsules of the company privately.  Exclusive software for hardware: The use of both software and hardware of the same company might be another interesting way to improve the customer relationship. Apple has been doing this successfully on the private market with e.g. iTunes and iPod. The question, however, remains whether this could also work on the business market. Nowadays however, it has become more common to offer “open” systems which do not depend on a certain hardware. Nevertheless, it would be possible to offer additional software features as incentives for free and thus make the customer buy the product.  Consulting: It is a fact that the use of technical software packages has become more and more difficult and that it takes a long time to be able to work with them. This is too demanding for some customers. So it would be an interesting new approach for IBM or another IT company to offer their support and experience to customers as a new or improved business model. 7 Conclusions With respect to business model innovation guided by improved customer performance the following observations were made through case studies and reviewing current literature.  Typically “improving customer performance” is established as a new business model which replaces the old ways of doing business. Measurable performance increase at the customer allows for a crystal clear business case of the supplier.  The higher perceived value for the customer always leads to differentiation of a certain supplier. This is always ONE of the strategic goals. Other goals can be market entry for a supplier accompanied by shaping a new business or situations driven by the customer, e.g. to outsource a part of the value chain in order to increase profitability or flexibility. Often stronger customer retention is a feature of the new model. • Companies develop new business models often in crisis of any kind. That means a crisis motivates the management to think about their strategies for tomorrow. Typical companies who did this successfully are Apple, Nestle, Hilti and IBM. • Business model innovation aiming at improving customer performance means to shift from a competition on cost for a service or a product to a competition in delivering higher customer value, typically moving up in the value chain. This approach is often adopted by “high end” suppliers who traditionally were attacked on price of their products or services. Hence defining, delivering and measuring customer performance improvement is imperative. As an alternative the perceived value has to obvious, as in the case of the great taste of Nespresso vs. filter coffee. • In our case studies all companies strongly modified their business model with small changes to their core competences.
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