IT-Driven Business ModelsGlobal Case Studies in TransformationProf. Dr. Henning KagermannProf. Dr. Hubert OesterleDr. John...
“IT-Driven Business Models –Global Case Studies in Transformation” was written by …The Authors       Prof. Dr. Henning Kag...
The book is intended to inform an agenda for CEOs andexecutive managersThe book builds on an Economist Intelligence Unit s...
Chapter 1Enterprise Value from Customer Value
Chapter 1:How customer value determines enterprise valueGaining Customer Value from Customer                   Silent Comm...
Business executives are confronted with numerousuncertainties, as they have entered the second decade ofthe new century   ...
Aligning the delivery of superior customer value withincreasing enterprise value derives from strategy, fromoperational ex...
Six new or reconstituted macro-forces will reshape theglobal context for business decisions in the coming years           ...
1    Changes in globalization    As the world enters the second decade of    the new millennium, the process of    globali...
2    Demographics and urbanization                               The aging of industrial workforces is occurring          ...
3    Environmental concerns and resource shortages    After the Kyoto protocols were either not    ratified or ratified bu...
4    Increased governmental presence                               Financial services scandals, new kinds of              ...
5    Digital trust    Various digital connections have made    possible new kinds of relationships and    arrangements, bu...
6    Risk management    Whether in the 2008 terror attacks in Mumbai, the case of the rogue trader at Société    Générale,...
Corporate value derives from both market relationships andinternal processes, and both tangible and intangible factors
After 2010 the following factors will be crucial for creatingcustomer value and, by association, drive market successand e...
Business models beyond 2010 will increasingly apply tofull-blown solutions rather than just single productsEmotionCustomer...
Innovativeness of the business model is more importantthan innovativeness of the productWe argue that business models requ...
The key to most innovative business concepts isinformation technologyAn effective corporate information environment instan...
The recession has intensified the quest for enterprise ITvalue: New technologies and management practices haveforced pragm...
Apple as an example of the necessity and impactof business model transformationThe history of Apple in the first decade of...
Turning the information vision into reality: the technologydimensionEnterprise value largely depends on how quickly a comp...
People’s attitudes, regulatory constraints, insufficientmanagerial skills, and – last but not least – the complexityof org...
Enablers: Integration of these technologies is likely toprovide the main impulse for business model changeSecond generatio...
Checklist I Who in your sector exploits the potential of IT most consistently to enhance their business? When did you last...
Checklist II How long does your company need to get a product off the drawing board and onto the shelves? What is the quic...
For more information, please feel free to contact …                         Rebecca Nüesch                         Institu...
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IT-Driven Business Models

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A look at business model innovation's crucial role in today's global business environment . Showing organizations how business model innovation should be a key focus area in today's global economy, this book features cases from businesses around the globe that have developed customized business models and achieved spectacular levels of performance. • Case examples from well-known innovation leaders IKEA, Apple, Tata, SHARP, Saudi Aramco, De Beers, Telefonica, Valero Energy, LEGO, and Proctor & Gamble • Shows businesses how to get beyond traditional business models to take better advantage of emerging opportunities • Coauthored by former CEO of SAP AG, the world's largest provider of enterprise software Filled with interviews with key executives, this book reveals the role of technology in driving and enabling changes to fundamental facets of a business. Companies around the world are innovating their business models with tremendous results. IT-Driven Business Models shows interested organizations how they can start the process.

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IT-Driven Business Models

  1. 1. IT-Driven Business ModelsGlobal Case Studies in TransformationProf. Dr. Henning KagermannProf. Dr. Hubert OesterleDr. John M. JordanPublished by John Wiley & Sons, Inc. 2011
  2. 2. “IT-Driven Business Models –Global Case Studies in Transformation” was written by …The Authors Prof. Dr. Henning Kagermann Former CEO of SAP Prof. Dr. Hubert Oesterle Director of the Institute of Information Management University of St. Gallen, Switzerland Dr. John M. Jordan Professor in the Department of Supply Chain and Information Systems Smeal College of Business, Penn State University
  3. 3. The book is intended to inform an agenda for CEOs andexecutive managersThe book builds on an Economist Intelligence Unit study, on face-to-face interviews ofseveral hours with nearly 50 global CEOs and board members, and on findings from theacademic world, consulting firms, the software industry, and market research companies.The CEO agenda includes analyses of innovative business concepts as well as practicaladvice for realizing these concepts.ContentChapter 1 Enterprise Value from Customer ValueChapter 2 Customer Value from the Customer ProcessesChapter 3 More Customers and More for the CustomerChapter 4 Innovation and Personalization Trump CommoditizationChapter 5 Silent CommerceChapter 6 Strategy Compliant ManagementChapter 7 Value Chain RedesignChapter 8 IT’s Role in Business Model TransformationChapter 9 Conclusion
  4. 4. Chapter 1Enterprise Value from Customer Value
  5. 5. Chapter 1:How customer value determines enterprise valueGaining Customer Value from Customer Silent CommerceProcesses The best kind of fulfillment is one where the customer need not attend to anything.Customer processes are beginning to drive aneconomic shake-up, as the transformingrelationship between automotive OEMs and tier-1 Strategy Compliant Managementsuppliers is illustrating. Integrated data foundation promotes strategy compliant management.More Customers and More for theCustomer Value Chain RedesignThe battle is on for customer ownership, as Standards and platforms are initiating a wavecompanies want unprecedented access to and of value chain redesign.knowledge about customers. IT’s Role in Business ModelInnovation and Personalization Trump TransformationCommoditization While certain technologies may becomeIT is a necessary but not a sufficient condition for commoditized, good information andcreating a differentiated customer experience that information processes remain distinctive andsupports profitable business. valued.
  6. 6. Business executives are confronted with numerousuncertainties, as they have entered the second decade ofthe new century • “Free” is a common price point in information industries, such as “Free” newspapers or music, forcing firms to find new models for profitability. Developing • Pricing pressure is intensified by the rapid rise of developing economies economies, which are home to multiple new low-cost providers serving many markets. • The traditional model of the firm has been joined by other organizational New forms: quasi-governmental capitalist entities (Thales Group, Generalorganizational Motors, AIG), business ecosystems that link capabilities from multiple forms organizational “homes” (Apple’s iPhone software development network), and dispersed pools of volunteer talent with no revenue streams but category leading products (Linux, Wikipedia). • The attractive size of Asian markets is made problematic by culturalAsian markets issues, language barriers, the wide variation in intellectual property protection, and risks—everything from influenza outbreaks to terrorism and extreme weather.An enterprise’s financial health is largely a function of the value its customers gain fromits products and services. IT-Driven Business Models
  7. 7. Aligning the delivery of superior customer value withincreasing enterprise value derives from strategy, fromoperational excellence, and from the business modelAccording to co-author Kagermann’s definition, a business model consists of fourinterlocking elements that create and deliver value.Customer value proposition Profit formulaincluding target customers, the customer’s including the revenue model, cost struc-job to be done, and the offering which ture, profit margin model, and resourcesatisfies the problem or fulfills the need. Velocity (lead times, turns, etc).Key resources Key processesto deliver the customer value proposition including rules, metrics, and norms of be-profitably, potentially including people, havior that make the delivery of theequipment, technologies, partnerships, customer value proposition repeatable andbrand, etc. scalable. The business model determines the value of a company as it is supposed to facilitate profitable delivery of value to its customers.
  8. 8. Six new or reconstituted macro-forces will reshape theglobal context for business decisions in the coming years 1 4 Changes in globalization Increased governmental presence 2 5 Demographics and urbanization Digital trust 3 6 Environmental concerns and Risk management resource shortages
  9. 9. 1 Changes in globalization As the world enters the second decade of the new millennium, the process of globalization is in flux. China’s role in military and economic affairs, while not yet fully clear, will be larger and different than what most observers predicted. The figure shows but one facet of this expansion: dramatic increases in Chinese trade with Africa. Global problems such as climate change and capital mobility are exposing the limits of existing governance structures. The shift from a bipolar world dominated by the United States and USSR and their associated spheres towards a multipolar world has had broad implications. Among these are the rise of non-state organizations (which may be as fundamentally different as Doctors Without Borders and Al Qaeda) or new trade patterns between the so-called BRIC countries (Brazil, Russia, India, China) and developing countries.
  10. 10. 2 Demographics and urbanization The aging of industrial workforces is occurring against the backdrop of a foundational shift to a service-based economy. In addition, cities around the world are getting bigger and bigger, as agriculture declines in economic impact. Both employer- and employee- managed retirement portfolios have lost substantial value, complicating the demographic picture further. Developing economies typically have a much higher population growth, and thus different age pyramids, compared to OECD countries, as this exhibit illustrates. Older people consume more health care resources than younger people do, and those resources are becoming more expensive every year. In addition, elders constitute a distinctive market, one that requires new channels to market, more support to make use of products and services, and a variety of aids to handle the growing complexity of modern life.
  11. 11. 3 Environmental concerns and resource shortages After the Kyoto protocols were either not ratified or ratified but largely ignored, worldwide sentiment regarding the reality of climate change has shifted in light of evidence of the sort presented in this exhibit. Substantial policy commitments are emerging from many countries, and the cost of these mandates will ultimately fall on business. In addition, critical resources including water and key metals are getting scarce for either natural or political reasons. Meanwhile, the countless opportunities that will emerge from greater environmental awareness – whether in the areas of power generation, lighting, packaging, local framing, or many others – could well contribute to a new era of prosperity.
  12. 12. 4 Increased governmental presence Financial services scandals, new kinds of infrastructure vulnerability (as in the power grid, for example), and new standards for drug and medical device approvals will ratchet up the regulatory burden. Whether in mortgage origination and packaging, end-of-life requirements for electronics, or efforts to increase financial transparency – expect to see governments increase their presence and step up reporting requirements in most industries. Finally, stimulus packages in many countries (see exhibit) are partially reversing the trend toward privatization of major industries, as governments purchase damaged assets. In almost every U.S. industry vertical, the government is competing with, taxing, regulating, and/or subsidizing a given company, shaping the range of strategic possibilities. Other governments play similarly critical roles.
  13. 13. 5 Digital trust Various digital connections have made possible new kinds of relationships and arrangements, but they have also opened the door to innovative forms of fraud, data loss (see Exhibit 1.5), and other violations of trust such as electronic voting machine miscounting. Search technologies, which have become ubiquitous, are generally taken as objective when in fact their results reflect multiple agendas. At both the consumer and business-to-business levels, watch for new forms of trust to be required and enforced.
  14. 14. 6 Risk management Whether in the 2008 terror attacks in Mumbai, the case of the rogue trader at Société Générale, or AIG’s missteps with collateralized debt obligations, we have seen the substantial impact of insufficient attention to risks. While the pendulum may swing too far in the opposite direction, almost every business activity will operate under increased scrutiny, as the practice of risk management in its many forms is intensified.
  15. 15. Corporate value derives from both market relationships andinternal processes, and both tangible and intangible factors
  16. 16. After 2010 the following factors will be crucial for creatingcustomer value and, by association, drive market successand enterprise valueProduct and service integrationIn selected markets, an intelligent enterprise understands the needs and problems of its customers and, whenappropriate, offers them leading services at any time and in any location. It presents itself not as a company that sellsproducts, but as a solution provider that delivers comprehensive services to its customer’s unique processes.Customer accessAn intelligent enterprise finds target customers all over the world, i.e. beyond its traditional region and industry. It knowsthe customers, their requirements, and their decision-makers. A family hotel in Denmark, for example, reachescustomers via the Internet that it could not access through print advertising, tour operators, or travel agents.Customer retentionAn intelligent enterprise strengthens its partnership with a customer by building up expertise in the customer’s specificarea then using IT applications to support cooperation. The customer benefits from low transaction costs and in turnaccepts the higher switching costs for moving to a different supplier. A retail bank may get its customers used toconvenient Internet services so that they find it difficult to move to a different provider.EcosystemIf a company’s product is part of a broader solution for the customer, its success depends on the quality of the partnercompanies, which together form the supplier ecosystem. The more complicated a product or service is, the morespecialists are needed to produce and deliver the product. In other words, a customer no longer focuses on just theindividual product but on the supplier’s entire ecosystem. For instance, a skier is not looking for the best ski lift butrather the best ski resort, including hotels, ski schools, restaurants, and more. Accordingly, the resort must bundleoffers that come from a network of suppliers and contractors, presenting a single face to the customer.
  17. 17. Business models beyond 2010 will increasingly apply tofull-blown solutions rather than just single productsEmotionCustomers enjoy working with a company because it offers a specific brand, reliability, and convenience. Customerspurchase from a particular manufacturer because they associate a certain image with the brand, appreciate the servicecrew’s reliability, or have come to rely on the convenience, ease of use, or trustworthiness of the company’s IT-driveninterfaces. Employee loyalty, shareholder confidence in management, and trust in trading partners are other examplesof the place of emotion.CostsCompanies sometimes opt for high production volumes in order to better allocate fixed costs, especially for researchand development. They move facilities to cost-saving locations and coordinate global production activities in seamless,lean processes. Particularly in information-rich settings, marginal costs in many cases approach zero.PriceA company understands the value of its products and services and also knows what alternatives are available to thecustomer. It uses an intelligent revenue model to find the best long-term price. As we have seen, new pricing modelswill apply to full-blown solutions rather than just single products. Dynamic pricing, long practiced in the airline industry,has been adopted by other industries, whether parking spaces or tickets to sporting events.SpeedSpeed dictates how long a company holds the prize for the best business model. Speed in this context refers not onlyto delivery speed, but to how quickly an enterprise recognizes market changes and responds with an innovativebusiness concept. In some industries, time-to-market is less important than time-to-volume, which implies economies ofscale and potentially market share improvement.
  18. 18. Innovativeness of the business model is more importantthan innovativeness of the productWe argue that business models require sophisticated operationalization of severalparts, which we call business concepts. Such business concepts turn abstract theoryinto measurable actions. Examples include:• Being able to handle a sales order within 24 hours• Being accessible 24x7 to customers worldwide over the internet• Manufacturing goods in different countries, but managing processes centrally• Coordinating global research and development activities• Accommodating the regional needs of customers on all continents but still leveraging economies of scale that a global market leader can provide Business models need to be made up of a combination of business concepts.
  19. 19. The key to most innovative business concepts isinformation technologyAn effective corporate information environment instantiates the skills and intelligence of thecompany’s people, serving as a persistent institutional memory. New technologies for searchand data exploration as well as enterprise social networking can find either answers or peoplewith answers. In addition, an organization’s electronic intelligence “amplifies” humanintelligence. Such an information environment has several distinguishing characteristics, all ofwhich bear on the enablement of effective business concepts:• Electronic intelligence is not dependent on a particular person (in product catalogs, customer databases, for example).• Interaction through search, visualization, and other mechanisms allow human beings to manage the scale and complexity of modern information environments.• An effective corporate information environment records data faster (often in realtime), more cheaply, more reliably (automatically), and in more detail (clicks on a web page or temperature data for the manufacture of silicon wafers, for example).• An effective corporate information environment routes data immediately and to any location (stock market data or traffic information, for example).• An effective corporate information environment stores huge amounts of data (for orders, articles, or performance data, for example) for any desired period of time.• An effective corporate information environment has extremely powerful processing capabilities and can generate new value and insight by combining existing data (for determination of delivery dates, salary schedules, or product simulation, for example).
  20. 20. The recession has intensified the quest for enterprise ITvalue: New technologies and management practices haveforced pragmatism to be the byword of the entire industryBusiness managers are not concerned with IT per se, but they are concernedwith new, innovative business concepts based on IT. Unless managersunderstand what a new business concept can bring to customers and their owncompany, they cannot make sound investment decisions. The answer to the market’s challenges is to be found not in IT but in business models using IT.
  21. 21. Apple as an example of the necessity and impactof business model transformationThe history of Apple in the first decade of the 21st century encapsulates many of this book’s keymessages. Apple repeatedly has combined key elements of strategy and execution to reinvent both itsbusiness model and the entire industry. The company’s success during a turbulent period illustratesboth the necessity and the impact of business model transformation.Content of the case study: Gaining Enterprise Value from Customer Value Gaining Customer Value from Customer Processes More Customers and More for the Customer Business model innovation Innovation & Personalization Trump Commoditization at Apple Silent Commerce Strategy Compliant Management Value Chain RedesignFor more information see book, p. 15-21 IT’s Role in Business Model Transformation
  22. 22. Turning the information vision into reality: the technologydimensionEnterprise value largely depends on how quickly a company is able to identify andindividually design the four elements a superior business model consists of:• customer value proposition• profit formula• key resources• key processesThe question is: What has prevented companies from coming up with “more intelligent”business concepts in the past? And what leads us to expect they will do so in the future?
  23. 23. People’s attitudes, regulatory constraints, insufficientmanagerial skills, and – last but not least – the complexityof organizations represent the highest barriersInformation overload Unmanageable system complexityData is accumulating at many points in anorganization: enterprise databases, documents in Stand-alone systemsoffice software, datasets for technical design and Siloed (i.e. isolated) solutions and applications createrealization, data from intelligent devices, floods of e- integration gaps, slowing down the flow of information,mails, voice mails, and management broadcasts in rendering more error-prone processes, and increasingmultiple forms. In particular, Internet access to almost the complexity of procedures. Many new businessany information outside of the company has caused an concepts start with integrating processes andinformation overload that has already been described applications.in detail and lamented in many places. As Inadequate networkabilityorganizations grow in size and complexity, managersfind themselves spending more and more of their This term refers to the ability of any number (m) oflimited time coordinating activities in discussions and suppliers to speak the “same language” with anymeetings. number (n) of customers along interfaces between processes and systems. Inadequate m:n capabilitiesInformation deficiency loom as the biggest hurdle on the way to more efficient inter-enterprise processes.The fact that people are calling for more information inthe midst of such overload almost sounds absurd. But Insufficient flexibilityit is true that many processes could be accelerated Many companies complain about losing theirand countless inefficiencies avoided if capturing data flexibility. Process and office software can presentwas not so expensive, if companies could access all barriers, for example, if customer data cannot bedata recorded, and if the significance of existing data changed in different IT applications in parallel orwas clear to everybody involved. without remaining consistent.
  24. 24. Enablers: Integration of these technologies is likely toprovide the main impulse for business model changeSecond generation SOAs Cloud computingStarting around 2002, vendors invested heavily in the A simple definition states: “Cloud computing is on-demanddevelopment of service oriented architectures (SOAs). SOAs did access to virtualized IT resources that are housed outsidenot provide a “silver bullet”, solving challenges of cost, your own data center, shared by others, simple to use, paidperformance, flexibility, and robustness. As the name suggests, for via subscription, and accessed over the Web”.“orientation” required many changes to mindsets, budgeting, Businesses of every size will benefit from increasedexpectation management, and other behavior in and around efficiency, lowered cost, and reduced environmental impactenterprises. As the economy is recovering, the lessons will by utilizing various styles of cloud computing, whether aspersist, and what might be called “deployed SOA”, often in the software as a service, hardware virtualization, or third-partyform of services based business suites, will continue to deliver provision of commodity computing cycles.competitive and operational benefits. Knowledge management, Web 2.0Mobility Data warehouses, content management solutions, searchThe ability to capture and process data where it originates or is engines, and applications for teamwork are graduallyused would radically change many processes. The price- beginning to meet at least some of the high expectationsperformance ratio of technology for mobile communications regarding the way existing knowledge is used and how the(“mobility”) is improving at a rapid pace and contributing to information overload is managed. Information markets,national economic competitiveness across the globe. corporate social networks, automated document discovery, touch and gesture interfaces, and other tools areSensors, networks & “the internet of things” reinventing enterprise knowledge management.Miniaturization, standardization, changes in basic technology, New application areasand above all, the large quantities produced will make an almostinfinite range of applications profitable in the coming years. At The primary use of the new technologies mentioned is inthe same time, considerable work remains to be done at the products and services, but in products and services for thelevel of standards and applications to make all these billions of intelligent home, health care etc. Many companies aredevices work properly and together. finding new business areas for IT applications and use them in their processes.
  25. 25. Checklist I Who in your sector exploits the potential of IT most consistently to enhance their business? When did you last check whether new IT developments would enable you to revamp your business model? Do you offer the right products and services for the value chains with the most potentials? Which three value chains will determine your business five years from now? Is your enterprise positioned in the right value chains? Do you have globally standardized business processes? Do you know the profit margin generated by your key customers? Can you get all the information about a customer and your activities with them – globally, up to date, and in real time? Do you know which customers you are about to lose and why? Do you recognize changed market conditions faster than your main competitor? How quickly can you respond to your competitor’s marketing campaigns?
  26. 26. Checklist II How long does your company need to get a product off the drawing board and onto the shelves? What is the quickest you could manage? How long does your organization need to integrate a unit it has taken over? How mature is your information architecture compared to your toughest competitor’s? How many processes and systems do you use for processing orders? What are the critical success factors for your business? Which key figures do you use to asses your achievements of objectives? Are your managers aware of innovative business concepts in their sectors? Does IT drive sufficient innovation in your business? Who is responsible for the quality of the three most important business processes? Is your company aware of its IT related duties? Do you, as a manager, deal with the right IT things?
  27. 27. For more information, please feel free to contact … Rebecca Nüesch Institute for Information Management University of St. Gallen E-mail: rebecca.nueesch@unisg.ch Kagermann, H., Oesterle, H. and Jordan, J. M. (2011). IT-Driven Business Models – Global Case Studies in Transformation. Hoboken: John Wiley & Sons. ISBN 978-0-470-61069-5

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