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Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
Business Model Innovation
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Business Model Innovation

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  • 1. Viewpoints on Change STRATEGY & GROWTH ISSN: 1904-6758 – NR. 4 / 2012Business Model InnovationNew paths to creating growthand delighting customersCONTENTSP. 3 P. 20 P. 28 P. 30Article Article Model ArticleCreate growth through Facing the New Normal Discovery-driven Business model innovation asinnovative business models of Retail Banking innovation a response to increased com- petition in the energy sector
  • 2. STRATEGY & GROWTHEDITORIALWhy not? results. Rather promise little and surprise positively than BY NIELS AHRENGOT reaching for the stars and risking not quite reaching them – CEO, IMPLEMENT CONSULTING GROUP analogously to the above example. However, large innovations solely based on analyses of the past are rare. For even though the analysis is imperative in order to being able to understand and generalise and, thus,We are involved in a project for a global growth company scale, the tempo and complexity in our surrounding worldwhere we have recently carried out a project with focus on have reached a level where we need to change the bal-developing products faster and more efficiently. The project ance between value creation and our need for predictabil-was, in our opinion, a success. The client company, which is ity. Those of us who think analytically must learn to speakrecognised as one of the world’s leading experts within their an intuitive language, and those who think intuitively mustarea of expertise, was, basically, satisfied. However, because learn to communicate in an analytical mindset. Both sets ofthey act the way they do when clients are at their best, they competences are absolutely necessary. Even though innova-ask anyway: Seeing that we are capable of reducing the lead tion and intuitive thinking are closely linked, it is only whentime of a project from 600 to 300 days, why not reduce it to rationality and analysis are involved in the process that the100 days? large-scale commercial and business breakthroughs take place.It is, of course, quite the partykiller in a situation where wehad expected to get a pat on the shoulder for our efforts. Companies such as Apple, Google and Just Eat are good ex-But he is right. Why do we consider good results as final amples. Their development has been unpredictable, but theirwhen we are fully aware that in 12 months from now, we will value creation has been immense, because they have beenbe able to create the same percentage improvements one able to combine intuitive and analytical thinking. Whethermore time and once again 12 months later? Why do we not we, as Roger Martin, call it Design Thinking is of minor im-change our mindset radically, raise the bar and reap the full portance. We MUST be able to combine that which is ration-benefits now? And once again – not in 12 months, but in six al and analytical with that which is intuitive and irrational. Inmonths? this cross field, limitations turn into opportunities. This is also where the most successful companies operate and the bestRecently, we had the pleasure of discussing strategy with employees thrive, develop and generate most value.Roger Martin, Dean of the Rotman School of Management.According to Martin, today, most strategic work suffers from Thus, the question presented in the beginning of this articlea gap between analytical and intuitive thinking. This is pri- is just a logical consequence of the reality we live in and amarily caused by the fact that strategy has become an ana- question that we – who are well on in years – must get usedlytical discipline where predictability is rewarded more than to being asked: Why not?2 Viewpoints on Change
  • 3. ARTICLECreate growth throughinnovative business modelsUnderstanding the why, what and how of business model innovationby Morten HejlesenShort-term competitive advantage is ness should lie the aspiration to delight and influence key decisions throughcreated by exploiting existing business customers. It might seem deceptively rhetoric or regulations. Inside impedi-models. However, in the long term, simple, but, in reality, this core tenet is ments come in many shapes. Actionsall markets mature, competition challenged every day. of the past such as investments andintensifies and turbulence increases. strategic choices create commitmentsConsequently, new sources of growth Outside pressure from investors trig- that are hard to escape when customermust be explored, and fresh answers gers the desire to focus on short-term needs are changing. Often, the un-to enduring success must be found. optimisation putting long-term cus- derstanding of customer needs lacksThe answer used to be innovate or die. tomer and, thus, shareholder value depth or is based on false assumptions,But research shows that pouring more creation at risk. Diverse stakeholder thus limiting capabilities to conquer amoney into pure product innovation groups compete to capture attention differentiated position in the market-does not lead to improved performance.We need to dig deeper.To succeed in innovation and to WHAT IS CUSTOMER VALUE?seize new opportunities, the scopeof innovation must be expanded to The idea of ”delighting customers” can be translated into the equally simpleencompass the full business model, idea of ”creating value” for customers. But what exactly is customer value,and new processes must be mastered. and how can it be defined?This article explores how an innovativebusiness model is linked to customer Firstly, customer value cannot be equated with low price. More precisely,value creation, defines growth value creation is a trade-off between certain benefits and costs associatedopportunities and presents key success with the value proposition over its entire life cycle. The total value of owner-factors to exploit the potential of ship must be calculated to assess the value creation potential.business model innovation. Secondly, value lies in the eye of the beholder. Value is subjectively judged by the customer, which means that we must identify perceived benefits and costs. All insurance companies know this fact as they, in reality, sell productsRethink customer which, hopefully, are not used. Value is not related to product attributes, butvalue creation rather customer benefits. Thirdly, the value creation potential must be adjusted for the riskiness of theDelighting customers is the heartbeat value proposition. All innovators know this by heart. New products that areof every business relatively unknown are always harder to sell than well-known products be-While pundits claim that the only cause of a higher perceived risk.constant in the world of business is Taken altogether, customer value can be expressed as:change, one factor remains unchangedand stable. At the heart of any busi- Customer value = (perceived benefits – perceived life cycle costs) x (1 – perceived risk) Issue no. 4 / 2012 3
  • 4. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSplace. Management incentive structures However, excess post-war production in the 1970s and is still an effective ap-are aligned with a strong focus on ”run- capacity and a frugal culture created proach to customer-centric sales. Inning the business” rather than ”devel- the perfect storm, motivating compa- fact, many businesses are still on a jour-oping the business”. Mental blinders nies to find new ways of reaching the ney from delivering products to creat-tend to pop up resulting in a bias to run heart of their customers. Increasingly, ing solutions composed of both tangi-business as usual, and new ideas are generic products were differentiated ble products and intangible services.judged unattractive due to the risk of and associated with emotional and so- The trend has also been dubbed ser-cannibalising the current business. And cial benefits. The rise of branding and vitisation of manufacturing, which alsothe list continues. segmented marketing strongly indicat- highlights the shift towards designing ed a shift towards a broader concept all aspects of the customer experienceAltogether, the simple goal of delight- of customer value creation. The shift is as well as tailoring the experience toing customers is not that simple at all. beautifully portrayed in the TV series individual customer needs. CustomerEven though it has been proven time Mad Men about the American flourish- delight was no longer perceived as aafter time that customer-centric or- ing advertising industry in the 1950-60s result of simple products, but integrat-ganisations are the most successful, it and the boom of Madison Avenue ad ed solutions with a carefully designedis complex and challenging to walk the agencies. and value-adding layer of experiencestalk. Moreover, the ways in which or- that surrounded the core product.ganisations deliver valuable customer In parallel, the strong focus on tangibleexperiences have dramatically changed products was replaced with the idea In the 1990s, Joe Pine and Jim Gilmorein the past decades. of comprehensive value propositions portrayed the rise of the experience and selling total solutions to customers. economy in which they claim that workFocus on customer benefits Solution selling emerged as a discipline is a theatre and every business a stage.– not product attributesA quick glance at the history of delight-ing customers shows that focus has ex- WHO IS YOUR CUSTOMER?panded from fulfilling simple needs toaddressing the full range of advanced Simple questions usually turn out to be tough ones. Theodore Levitt asked:customer needs, and the scope of in- ”What business are you in?”. We also need to ask: ”Who is your customer?”.novation has been widened from ba- While the examples mentioned show the importance of the end user, valuesic products to integrated solutions. In creation should be managed for all touch points that your offerings have be-other words, the key driver has been fore reaching the final customer.growing attention to manipulating allparameters of the business ecosystem In the insulation industry, Rockwool has analysed and designed value proposi-in order to deliver customer value. tions for all customers involved with their core product. The chain of custom- ers includes building owners, architects, contractors, sub-contractors, install-In the days of mass production, ers and distributors. Moreover, a careful evaluation of different segmentscustomers were delighted by simple within each customer group needs to form the basis for the design of differ-products fulfilling basic needs and ent value propositions for every group.wants. Henry Ford famously dictated In the case of fast-moving consumer goods, all companies face similar chal-in 1909 that customers could have the lenges. Value creation cannot only focus on the end consumer, but shouldfunctional benefits of his Model T, while also consider the needs of the shoppers buying the goods, the retailers sellinghe cared less about fancy colours: ”Any the goods, the wholesaler distributing the goods and even external partnerscustomer can have a car painted any responsible for production. Before pouring a simple glass of milk, customercolour that he wants so long as it is needs must be served appropriately many different places in the total con-black”. Cars were black and nothing sumption chain.but black.4 Viewpoints on Change
  • 5. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSAccompanied by branding strategies experienced-based differentiation. Develop experience-based solutionsthat engaged all five senses and even Fuelled by financial meltdowns, rising to gain competitive advantageexperiences designed around the idea awareness of human impact on the en- As a consequence of increasing com-of catalysing personal transformations, vironment and increased global inter- petition in mature markets, new op-the experience-centric thinking supple- connectedness, most organisations are portunities in emerging markets andmented past logics of value creation. now consciously evaluating how to fulfil near-constant disruptions at the fringesOn the one hand, products developed altruistic benefits for customers. In oth- of most industries, focus on delightinginto solutions. On the other hand, fulfil- er words, how to incorporate elements customers plays a key role in gaining ament of functional needs was accom- of selfless concern for the welfare of foothold in a competitive marketplace.panied by addressing more sophisticat- others in their value propositions, e.g. Although the notion of creating blueed customer needs. cradle-to-cradle principles and the am- oceans is appealing, real-life experience bition to safeguard the planet for the often shows that competitors quicklyRecent developments in the ways of coming generation through company- invade uncontested space and capturedelivering customer value might be wide social responsibility, plays a still market share.considered as a counter-reaction to the more vital role in order to delight cus-mainly narcissistic attempts to achieve tomers (figure 1). To carry on delighting customers on a continuous basis, advanced manners of delivering value and creating com- petitive advantage are needed. Add to that the dramatic consequences of recent technological developments such as the internet that has created Functional an unprecedented range of opportuni- benefits ties to interact with and deliver value Efficiency to customers. By leveraging the power Excellence of emerging technologies, entirely new markets have been made accessible, and novel manners of interacting with customers have been created. Emotional Social benefits benefits Consider Danish telecom TDC that Feelings Status bundles telephony subscriptions with Aesthetic Esteem free access to millions of music tracks through the TDC Play service or the rise of internet-based portals for long- distance microfinancing and interac- tions with African entrepreneurs such as MYC4 and Kiva. Since Kiva was Altruistic founded in 2005, 636,949 lenders benefits have invested USD 255 million in poor Ethics entrepreneurs in remote areas of the Spirituality world. The entrepreneurs have grown their businesses and repaid 99% of the loans. Both examples highlight the re- cent explosion of colours on the palette Figure 1. Four dimensions of customer value creation of delivering valuable customer experi- Issue no. 4 / 2012 5
  • 6. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS panded from delivering basic products to crafting advanced business models. Professor Michael Porter captured this paradigmatic shift back in 1996 when Integrated Value-based Experience- he noted that a strategic fit among solutions solutions based solutions many activities is fundamental – not only to competitive advantage, but also Internal to the sustainability of that advantage. innovation Porter argued that it is considerably focus harder for a competing firm to match Basic Complex an array of interlocked activities than Basic products and products and it is merely to imitate a particular sales offerings services services force approach, match a process tech- nology or replicate a set of product features. Therefore, positions built on Simple needs Advanced needs systems of activities are far more sus- tainable than those built on individual External customer focus activities. Consequently, we have to revise the Figure 2. Customer and innovation focus matrix old dictum of ”building a better mouse- trap” to make the world beat a path to our door. Although more than 4,400 patents have been issued by the Unitedences. The message to old Ford is sim- Above all, the uniting discovery across States Patent and Trademark Office forple: Black is no longer the only option. the spectrum of opportunities is the new mousetraps, and it is the most fre- recognition of the need to carefully quently invented device in history, theWhile the shift can be described as consider and design all elements of the driver of long-term success resides notan overarching trend, it is evident that business model to address the specific only in the mousetrap itself, but in thesuccess can still be found in all quad- needs of the particular customer seg- complete business model.rants (Figure 2). Customer needs dif- ment. The explosion of colours on thefer across segments and markets. design palette has created an unprec- The business model view resonatesIndustries compete on different factors. edented range of opportunities to be with research on how to profit fromIn some cases, an attractive opportu- explored in order to find the right fit innovation. The mousetrap approachnity can be exploited by developing between the value proposition and the clearly plays an important role. A tightsimple and convenient products that customers. regime of patents, copyrights and tradeattract non-users and, thus, expand- secrets is one component of the equa-ing the current market. In other cases, tion, but to commercialise an innova-advanced experience-based solutionscan be leveraged to capture the prof- Develop new business models tion or exploit a new business strategy, complementary assets are needed suchitable high-end of an existing market. Innovate your business models as manufacturing capabilities, distribu-However, it is clear that competitive to reap superior returns tion channels, specialised services andadvantage as a rule of thumb is more In essence, the scope of creating cus- a sales force.sustainable when solutions are hard toimitate as well as based on deep and tomer value propositions and, thus,enduring customer relationships. competitive advantage has been ex-6 Viewpoints on Change
  • 7. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSWhat is a business model? is enabled by the organisation’s ability growth. to standardise and industrialise opera- The external perspective describesIn brief, a business model describes tions across the activity system. The how the value proposition is deliveredhow an organisation creates, delivers aim is not to add complexity, but to en- to the targeted customer segments. Toand captures value. More precisely, a able scalability through simple, but ef- reach the customers, the value propo-business model articulates the content, fective activity systems. sition is distributed and communicat-structure and governance of the activ- ed through a set of channels, and toity system that delivers a value propo- The activity system can be illustrated establish long-term customer relation-sition to the customer and enables using Alexander Osterwalder’s business ships, ways of building the relationshipeconomic value creation for all activity model canvas consisting of 4 dimen- have to be identified. E.g. car manu-system exchange partners. sions and 9 building blocks. facturers have established a number of customer clubs – both online andA simple example of customer needs The value perspective describes the offline – to build close connections tobeing fulfilled by radically different total market offering provided by the their customers.business models is car transportation. company. It consists of a value proposi-Getting from A to B and the freedom tion composed by an integrated solu- The internal perspective describesto choose when to go can be served tion of products and services. Typically, how the market offering is produced. Aby a car that is bought, leased, rented the core offering is linked to comple- number of tangible, intangible or finan-or even shared with co-owners through mentary offerings to create a compre- cial key resources must be leveraged tocar sharing services. The core product hensive customer experience. E.g. car create the value proposition through ais essentially the same, while the activ- manufacturers have recently begun to range of key processes. Strong brandsity system underlying the product cov- offer leasing contracts, which has prov- are important intangible resources, anders a spectrum of business model de- en to be an important complementary the design of processes both in backsign options. In all cases, value capture service to the core product that drives and front office functions is vital to economies of scale. Often, an external partner network is a key component Internal Value External of the value proposition, e.g. the finan- perspective perspective perspective cial service providers involved in the car leasing contracts mentioned in the Key Customer example. processes relationships The financial perspective describes how profit is made by identifying rev- enue streams and depicting the cost Partner Value Customer structure. Revenue comes in many network proposition segments shapes as the car example illustrates, and both financial components should be carefully designed to maximise prof- Key its and customer value. Channels resources The activity system is generic and can be used to systematically visual- ise and redesign any business model. Cost Revenue Furthermore, it creates a unified lan- drivers streams guage around the elusive business Financial model concept that can be used across perspective organisational functions and units. Issue no. 4 / 2012 7
  • 8. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS tomers and shareholders. Operating margin growth in excess of competitive peers Decide on what game to play before Per cent compound annual growth rate over 5 years innovating the business model Obviously, all companies have a busi- ness model. Therefore, the key question is whether all elements of the business 6 model deliberately have been thought through in a customer-centric way? 5 Does your company purposefully de- sign all elements of the business model, 4 or are you focusing most of your inno- 3 vation on improving the core product? 2 The complexity of grasping the en- tire activity system often leads to both 1 overlooked areas as well as activity systems with designs purely based 0 on the dominant logic of the indus- try. Consequently, in many cases, all -1 eggs are put into the product innova- Products/services/ Operations Business model tion basket searching for differentia- markets innovators innovators innovators tion through superior products while failing to see opportunities in other parts of the business model. In these cases, business model change is lim- Figure 3. Business model innovation outperforms other types of innovation ited and fundamentally responsive. Large changes occur when changes in the environment require action and response. However, taking a closer look at the business model on a continuous minded focus on product development basis in a proactive manner leads to aResearch undertaken by academics, tended to be a slippery slope. To in- number of potential opportunities forglobal consultancies and our experi- crease investments in R&D proved to customer value creation and growth.ence proves that a business model-cen- be fruitless, while a dual focus on both A proactive focus holds the promise oftric look at value creation is imperative innovating the business model and de- harvesting first-mover advantages, butto business success. An IBM study from livering superior products actually ena- obviously also the risk of designing a2006 found that innovating across the bled lowering the R&D spend. Apple business model that does not deliver asbusiness model had a much strong- – often described as business model in- expected.er correlation with operating margin novator par excellence – has managedgrowth over a five-year period than to significantly lower R&D spend as a Scrutinising the business model to dis-both product/service innovation and percentage of sales while growing en- cover new business opportunities plac-operations innovation. See figure 3. terprise value at an extraordinary pace. es the customer centre stage by asking if the fit between current activities andA 2010 survey of the world’s top 150 When executed in the right manner, customer needs maximises value crea-companies confirmed the findings and business model innovation quite simply tion for both customer and company.discovered, furthermore, that a single- delivers superior returns to both cus-8 Viewpoints on Change
  • 9. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS RESPONSIVE BUSINESS MODEL ORIENTATION PROACTIVE BUSINESS MODEL ORIENTATIONWhat are the sources Products, services and processes The entire business modelof differentiation?What business model Standard designs and exploitation Best fit with customer needs anddesigns are used? of the dominant logic of the industry exploration of alternative design patterns for the business modelWhen does the business Reactive change based on articulated Proactive change based on latent needsmodel change? needs of the customers of the customersWhat type of innovation Fast follower or late mover First-mover advantagesstrategy is pursued?What are the key risks in Disruptions from entrants, weak Novelty in approaches, complexityrelation to the business protectability and intense competition and unprofitable niche marketsmodel?How sustainable are Short-term due to weak protectability Long-term due to strong protectabilitycompetitive advantages?Figure 4. Proactive and responsive business model orientationFour areas should be investigated to to achieve important business goals. model dramatically. Few people areestablish a systematic overview of op- Launch a sticky value-added service, emotionally attached to their broad-portunities to exploit business model acquire customers through smart pric- band provider, while the compositiondesign to enhance customer value cre- ing models or partner with great com- of a music collection is fundamental toation. See figure 5. panies to leverage their brand power. signalling who we are and what we like. Adding a complementary music serviceAdjust the current business model to Consider the role of value-added ser- has helped reduce loss of market shareexploit opportunities in existing mar- vices in the telecom industry where through improved customer loyaltykets: Changing needs of existing cus- TDC’s launch of the previously men- and satisfaction in a highly competitivetomers and a turbulent environmen- tioned free music service TDC Play re- market.tal context present the opportunity to duced churn by 50% for existing broad-adjust the business model on a con- band customers back in 2009. The core As shown in the opportunity matrix,tinuous basis. While competitors are product is essentially unchanged, while business model innovation does notfocusing on improving products, sim- adding a service layer on top based on have to be radical. Simple moves canple incremental moves in other areas partnerships with the music industry achieve great results in existing mar-of the business model can be exploited changes the ”stickiness” of the business kets and discover new differentiation Issue no. 4 / 2012 9
  • 10. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS leads to important managerial deci- sions. Should all segments be served by the same business model while running the risk of opening a flank for competitors? Or should a radically new Expand Create business model be designed to serve New attractive sub-segments while canni- the market new markets balising the existing business model? Customers The dilemma is well-known in the tel- ecom industry where a range of low- cost players with no-frills value propo- Adjust fit to Disrupt the sitions based on online self-service Existing existing market existing market have disrupted the market several times. Recently, Danish low-cost mo- bile telephony provider Onfone was Incremental Radical acquired by TDC after having captured a large share of the low-end market populated with customers looking for Business model change convenient, simple and cheap telepho- ny. No-frills solutions, innovative pricing Figure 5. Typology of business model innovation opportunities models and technology-driven automa- tisation are classic ways of conquer- ing the low-end of an existing market. Ryanair and Google’s free web servicesfactors. times be achieved through small spring to mind.Redesign the current business mod- changes, and, thereby, a latent demandel to expand the market: Incremental can be converted into real demand. At the other end of the spectrum, thechange in the current business model Typically, non-customers are those who high-end of a market can be equally at-can be leveraged to expand the mar- are either unaware of your offering or tractive to explore through new busi-ket by attracting non-customers. For meet some sort of barrier to consump- ness models. Consider the makers ofexample, the practice of serving prod- tion. Understanding and removing the automated espresso machines pow-ucts in small and affordable sizes is a barriers are keys to expanding the mar- ered by easy-to-use coffee capsuleswidely used strategy by global con- ket. Understanding commonalities in such as Nespresso. By removing thesumer brands to enter emerging mar- the non-customer segments paves the risk of failing to brew the perfect cupkets. Seven out of ten Filipino smokers way for redesigning the business mod- of coffee and reducing the time it takesbuy their cigarettes by the stick rather els. to make a nice single-shot espresso,than by the pack, and as much as 68% an attractive niche of espresso drink-of Procter and Gamble’s shampoo busi- Launch a new business model to dis- ers has been identified. Whereas high-ness in the Philippines is generated by rupt the existing market: Investigating end disruptions typically are based onsachet sales. The core product is left the needs of current customers in a technology leap, low-end disruptionsunchanged, while innovative distribu- some cases leads to the discovery of can also be achieved by simplifying andtion setup and packaging changes are attractive sub-segments which are lowering costs.keys to success. not appropriately served by the cur- rent business model. The discovery of Launch a new business model to cre-Attracting non-customers can some- underserved or overserved customers ate new markets: Designing radically10 Viewpoints on Change
  • 11. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSnew business models can be leveraged 2.5 billion people at the so-called bot- model – both when strategising at busi-to create entirely new markets where tom of the pyramid live on less than ness unit level and when developinglarge groups of customers have been $2.50 per day and are by far the larg- new market offerings. Obviously, newlocked out. In some markets, minor est global socio-economic group. business models are not launched outbusiness model tweaks such as sachet Furthermore, fulfilling the vision leads of the blue, but rather closely alignedmarketing are simply not enough. A to value creation that, by far, goes be- with overarching strategic growth am-complete overhaul or even a new busi- yond pure economic value creation. bitions of the company. In other words,ness model is needed to commercialise a diagnosis of the strengths and weak-a value proposition for a new market. New market creation demands innova- nesses of current business modelsNew markets can be defined both geo- tive business models. Moreover, these needs to form the basis for any at-graphically such as bringing products emerging markets are often judged tempt to pursue one or more of thefrom developed markets to emerging unattractive to well-established compa- four opportunities.markets and as needs-based such as nies, because they start out small andfulfilling emerging customer needs. do not meet the expected growth rates Combine diverse knowledge perspec- to attract ordinary innovation invest- tives to create new business modelsA business model currently under de- ments. However, these markets often Becoming a business model innovatorvelopment illustrating the idea is the become large and profitable, and pa- can be compared to an artist shiftingcurrent debate concerning designing tience for growth pays off. style from painting with monochromea house for the poor that can be con- colours to using a palette with all thestructed for under $300 which keeps The four generic growth opportuni- vivid colours of the rainbow. Optionsa family safe, allows them to sleep at ties (see figure 6) can be explored and explode, and the number of possiblenight and gives them both a home and exploited by any company to sustain solutions for designing the next marketa sense of dignity. It is a grand chal- growth and delight customers. The offering increases. However, in order tolenge that surely can only be solved by common denominator is a proactive be successful, the colours on the pal-thinking innovatively about the entire posture that recognises the need to ette need to be picked carefully. Not allbusiness model. The potential is huge. cover all components of the business colours can be used for the next break- ADJUST FIT TO DISRUPT THE EXPAND CREATE EXISTING MARKET EXISTING MARKET THE MARKET NEW MARKETSCustomers Existing Existing New NewLevel of change Incremental Radical Incremental RadicalCharacteristics Improve the existing Develop new business Improve the existing Develop new business business model to model to exploit oppor- business model to fit model to exploit attract and retain tunities in either under- needs of customers opportunities in new customers in existing serviced high-end seg- in unserved markets markets or segments markets characterised ments or overserviced or segments of non- of non-customers by intense competition low-end segments customersFigure 6. Generic growth opportunities Issue no. 4 / 2012 11
  • 12. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS Context Macro factors, trends and technologies Internal Value External perspective perspective perspective Key Customer Resources and core competences processes relationships Customers and markets Capabilities Partner Value Customer Customers network proposition segments Key Channels resources Cost Revenue Financial drivers streams perspective Competitors Industry structure and competitive situation Figure 7. Four knowledge perspectivesthrough. In other words, the articulat- cisely, four distinct knowledge perspec- is the right approach, which entailsed or latent customer demand that is tives must be explored and combined evaluating market options and estab-targeted needs to be matched with the to extract insights and create the right lishing a foundation of deep customerbest possible business model. In order fit between the market and the busi- insights. A key point when moving be-to design new business models, op- ness model. yond simple tweaks of existing markettions must be limited and focused on offerings is the fact that asking whatthe most promising solutions to ex- Customers: The customer perspec- the customer wants will not be veryploit the demand. Therefore, all efforts tive has already been discussed. At all helpful in most cases.should start out informed. More pre- times, a customer-centric approach12 Viewpoints on Change
  • 13. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSFirstly, the mainstream customer only fers both constraints and possible so- rently satisfied in the marketplace.experiences what he or she already lutions. On the one hand, a number of Furthermore, an analysis of close com-knows and lacks knowledge about dif- constraints can be identified by analys- petitors can be used to spot industryferent options. The customer’s frame of ing macrofactors such as legal regu- orthodoxies and mental models thatreference is severely limited, and usu- lations, economic factors and soci- could be challenged. Whirlpool ob-ally customer ideas cannot be used to etal trends. Often, constraints can be served that all white goods were de-leap-jump competition. They tend to turned into great opportunities, which signed and sold with women in mind,be incremental and result in me-too producers of outdoor ashtrays discov- and they used that piece of competi-products. Secondly, the knowledge that ered when indoor smoking in public tive insight to create a new product linecan be accessed easily by asking the buildings was prohibited in Denmark for men and their garages. While thecustomer will most likely not be very some years ago. A simple change in idea might seem a bit sexist, businessunique. All competitors will have access regulations caused an instant boom in for Gladiator® GarageWorks is flourish-to the same knowledge through ana- demand. On the other hand, many po- ing, and American men are eager to in-lyst reports and industry market stud- tential solutions can be discovered by stall designer fridges in their garages.ies. One exception is the so-called lead studying the context. Both microtrendsusers who typically represent a tiny and macrotrends can provide answers To identify and break out of industryfraction of your customer base. They to great experience design. orthodoxies, the analysis should not beare characterised by their eagerness to restricted to close competitors whentweak, modify and rebuild your prod- Due to the explosion of small digi- bigger and bolder ideas are wanted.ucts. Looking at their modifications can tal sensors embedded in many con- Just as lead users and emerging tech-be helpful to identify emerging de- sumer products, it is easy to measure nologies can inspire the discovery ofmands, since they are usually ”ahead” almost everything that we do. Nike new business models, so can researchof the mass market. and Apple partnered and designed into analogous industries. Looking the Nike+ tracking device for runners. across industries helps identify emerg-Instead of asking the customers what Fitbit has developed a personal track- ing business model design patternsthey want, the best approaches for dis- ing device collecting real-time data on that can be imported from one industrycovering unique insights are to listen every step taken, stairs climbed and to another. Danish playground produc-and observe customers in their real-life calories burned. Both examples illus- er Indu basically copied Google’s busi-context. To get under the skin of the trate the booming interest in measuring ness model by offering ad-supportedcustomer, ethnographic research meth- and quantifying your everyday life. New playgrounds to schools and communi-ods must be used, and data should be technologies shape trends and can also ties for free. Looking across the indus-interpreted systematically to find the be mapped to identify design options. try value chain can also be used as asurprising insights which pave the way A key area of interest should be emerg- tool for identifying shifts in the industryfor innovation. While high-level quanti- ing technologies and careful analysis profit pool. Small changes in the loca-tative analysis of customers can set the of their possible implications for future tion of high profits in the value chaindirection, deep qualitative studies are business models. A simple but power- can be used to anticipate importantthe best option to find the latent needs ful exercise is to map 20-30 important changes and growth opportunities. Theto exploit. Sharpen knowledge through technology-based trends and concep- message is clear: When innovation am-exploring the full upstream chain of tualise a set of new solutions on the bition levels are high, an ordinary com-customers and understanding needs in basis of each of those trends. petitive analysis will not be sufficient.all phases of the customer journey frominitial consideration to disposal of a Competition: The competition Capabilities: The capability perspectivemarket offering. Put simply, get out of perspective should without a doubt is used to explore both internal and ex-the building and meet the customers. be explored. Competitive analysis can ternal capabilities and resources. Firstly, be used to single out those customer a mapping of internal capabilities andContext: The context perspective of- wants and needs which are not cur- resources can provide insight about Issue no. 4 / 2012 13
  • 14. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSunderused resources or underexploited of the four knowledge perspectives. design a simple service business on topbusiness capabilities. For instance, the Know your options before innovat- of a product line. But bold moves doservice business of many manufactur- ing. A broad and diverse foundation of require a decent amount of knowledgeing companies has been profession- knowledge simply makes it easier to and inspiration upfront.alised in recent years. At Danish wind be both innovative and goal-oriented.turbine manufacturer Vestas, the ser- However, the deep dive into emerging The bottom line is that analysis mustvice business is growing, while the to- technologies, latent customer needs always serve a purpose and enabletal turnover growth is under pressure. and inspiring business models should you to challenge world views. ThatServices accounted for EUR 214 million always be timeboxed and balanced also means that research efforts guid-in 2006 growing to EUR 700 million in with the innovation challenge at hand. ing business model innovation must be2011 out of a total turnover of EUR 6.4 There is no need to boil the ocean to designed to build surprising hypoth-billion.Secondly, resources and capabilitiesof the business ecosystem should be WHAT ARE THE CHARACTERISTICS OF A GREAT BUSINESS MODEL?mapped to identify partnering, collabo-ration and integration opportunities. A Not all business models are created equal, and some key factors must be con-highly profitable business model in the sidered when evaluating different design options. A delighted customer is thepublishing industry is to license for- ultimate goal of your business model, but to survive in the long run as a busi-gotten comic book characters to toy, ness, the challenge is not just creating customer value, but capturing value asmovie and computer game produc- well.ers. In that way, resources are exploitedin a new context through smart part- To capture value, your design must provide a high degree of protectabilitynering agreements. Consider Marvel through either legal or natural barriers. Legal barriers could be patents, tradeEntertainment’s lucrative licensing of secrets, copyrights or non-disclosure agreements. Natural barriers couldSpiderman and X-men to Hollywood be difficulty in reverse engineering your offering, switching costs or tacit-studios. If partnering opportunities are ness of relevant technology. To capture value, you must also have some de-lackluster, a business ecosystem can be gree of control over so-called complementary assets. Such assets are for in-designed when the right incentives are stance manufacturing capabilities, an effective distribution setup, a portfoliopresent. External app developers play of strong brands, innovative services and leverage of shared technologies. Ina vital role in Apple’s iPhone and iPad other words, the strength of your protection mechanisms and supporting as-success. More importantly, the use of sets will determine your ability to capture value.external developers and their resourc-es reduces the risk of failure for Apple At the end of the day, great business models are based on solid financial mod-and increases the speed of innovation els. To support your efforts in discovering the right financial model, considerat the same time. Bad apps die, while some of the questions below:Apple survives, and barriers of entry in • Do high switching costs create effective lock-in of customers?the app market are so low that a 12- • Can you easily scale your business model?year old app programmer can achieve • Does your business model produce recurring revenues?significant success. Apps are all about • Can you design the financial model so that you earn before you spend?survival of the fittest, and in the heat of • Is it possible to exploit a partner network to reduce your costs and risk?the battle Apple’s business model just • Does your business model exploit protection mechanisms?gets stronger and stronger. • Can you take advantage of existing assets and capabilities? • Can you redesign the cost structure to change the rules of the industry?Altogether, new business opportuni- • How can you rethink the in- and outflow of cash throughout bothties are discovered at the intersection development and launch of the business model?14 Viewpoints on Change
  • 15. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS Issue no. 4 / 2012 15
  • 16. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSeses as opposed to just testing and hidden gravitating force pulling all ef- impatience for profit but patience forvalidating predetermined hypotheses. forts towards small incremental moves. growth when it comes to businessWithout the will to deconstruct ortho- In many companies, you will find port- model innovation. Particularly in thedoxies, a desire to scan the periphery folios crowded with line extension cases of large disruptive moves. Focusand proactive leverage of analogies work and customer request projects on early profitability pushes the innova-from distant business models, your in- that extend the past into the future. tion efforts to find the markets in whichnovation success will be based on pure Obviously, these efforts are important unique capabilities will be uniquely val-luck. We have to question our assump- to be able to exploit current opportu- ued. Focus on fast growth makes youtions to change the rules of the game. nities. However, the second step in the slip back to well-known business mod- journey is to think about innovation els in well-known markets. like great investors. They purposefullyBuild capabilities for design a balanced portfolio of oppor- A company exhibiting strong top man-business model innovation tunities and put their scarce resources agement support for innovation is the to work by calculating risk versus po- Danish pump manufacturer Grundfos. tential return. Experience and research The company’s innovation intent explic-Expand the scope of innovation and show that a balanced approach has the itly states that Grundfos in 2025 in-build capabilities for high growth largest payoff potential. Add to that the tends to employ 75,000 people com-The first step in your journey to be- positive branding effects and employee pared to 16,000 in 2011, and that 50%come a business model innovator will engagement created in companies that of growth will come from new technol-be to expand the scope of innovation are actively ”changing the world” as ogy platforms. The ambitious intentto include all components of the busi- opposed to those companies just doing has been decomposed to a number ofness model. A key point is to actively ”more of the same”. To get started as a strategic innovation platforms, and tomanage all resources put into innova- business model innovator, management support the realisation, different inno-tion. While the product development anchoring, innovation capabilities and a vation processes have been designeddepartment is important, it is essential learning mindset have to be developed. for low-risk and high-risk bets. Low-to uncover and coordinate all innova- risk projects are managed accordingtion work undertaken across depart- Create a strong innovation intent: A to traditional stage gate developmentments. These investments in innova- simplistic view of business states that processes, whereas high-risk projectstion tend to be hidden in budgets, but you get what you measure. Hopefully, are rewarded for fast learning beforevery important in real life. In marketing, this is not always the case, but on the scaling up the business. In some cases,they design great websites to sup- other hand, the saying has some merit. companies seeking new growth beyondport product launches. In supply chain, Especially when it comes to risky bets, the core even decide to establish sepa-they invent new production methods. organisational incentives have to sup- rate organisational units to support theIn business development, they iden- port business model innovation. No one very different ways of working as illus-tify potential targets for acquisition to in the organisation will take on the risk trated in the case of Grundfos. A strongcreate synergies. As an alternative to of failing if corporate culture dictates innovation intent and a top manage-departmentalised work without coor- that failure is not an option. Therefore, ment team walking the talk are pivotaldination, companies actively pursuing innovation goals must be backed by to success.the benefits of business model inno- strong top management support and avation open up silos and coordinate very clear recognition that risk is an in- Ask yourself if you have a clear man-key activities. To get started, roles and tegral part of the game. When design- agement agenda for both renewingresponsibilities must be defined, and a ing new business models, incentives and reinventing the business model.process enabling coordination needs to should be aligned with fast learningbe designed. and not fast growth. Harvard professor Establish entrepreneurial front-end Clayton Christensen has put it nicely innovation teams: As more than 70%When innovating, there seems to be a by saying that you want to promote of the total life cycle cost of a product16 Viewpoints on Change
  • 17. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSis determined within the early stages of proactively looking for major customer managers with great people skills arethe innovation project, innovators can problems to solve and actively explor- a prerequisite when forming innova-substantially influence the outcome by ing the four knowledge perspectives tion teams. Common tools are also afocusing on the front end of innovation. described above. If teams are eager to key ingredient in and enabler of knowl-Success and failure are determined at focus on creating myriads of ideas to edge sharing and shared purpose. Fora very early stage, so spend a little to begin with, they run the risk of creating instance, everyone in the team needs tolearn a lot. ”solutions looking for problems”. This get tools which bring them ”out of the approach is counterintuitive and will building” to meet the customer and us-Firstly, the front-end innovation pro- lead to frustrations when they discover ers in order to observe, interview andcess must be extremely well-defined in that there is no or little match between co-create with them. Simple tools willorder to ensure the right focus. Often, market needs and product ideas. give your team a head start. If possible,the front end is notoriously fuzzy, teams should be co-located and evenwhich is a classic stepping stone to fail- Secondly, it is important to recognise work on the same weekdays in orderure. Instead, focus on installing a solid the need for establishing a shared vo- to maximise effectiveness. Framed bydiscovery-driven process where cross- cabulary and toolbox when bringing clear ambition levels and well-definedfunctional and multidisciplinary teams people together with diverse compe- deadlines, such teams will power yourled by heavyweight project managers tences. Innovation flourishes through innovation engine and be the key toare working on well-defined innovation cross-pollination, but without a com- identifying new paths to growth. Tochallenges derived from the innova- mon ”language” communication sti- support customer focus and businesstion strategy. Demand that teams are fles. Therefore, entrepreneurial project model innovation, the discovery-driv- Abstract Direct Design Generate insights Create ideas & solutions Analysis Synthesis Define Frame the challenge Discover Develop Collect data & knowledge Test & feedback Real Figure 8. The framework for discovery-driven innovation Issue no. 4 / 2012 17
  • 18. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSen innovation framework can be used.Each step of the framework is support-ed by an advanced toolbox and innova-tion best practices. Assumption NAsk yourself if you have strong innova-tion teams dedicated to exploring andexploiting new opportunities follow- Assumption N-1ing a well-defined and well-anchored Adjustment Adjustmentprocess. Assumption ... Exit 2 Exit 1Master learning-based implementa- Assumption 3 Adjustmenttion: Having defined a strong innova-tion intent and formed entrepreneurial Adjustment Assumption 2teams enable creation of new businessopportunities. However, the tricky partof the equation is often a successfullaunch – in particular, if you are ventur- Assumption 1ing beyond the existing business mod- Adjustmentel. Simply put, you must use a differentapproach based on fast learning cycleswhere you plan to learn.All new business concepts are funda-mentally an interlinked set of assump-tions which must be proved to holdtrue. But the assumptions are associ- Figure 9. A systematic approach to testing and implementing new opportunitiesated with different levels of risk, andinstead of doing a full launch to testeverything at once, you should learnsystematically about your assumptions. ties, but also enable you to combine at a higher level. The success of Apple feedback and extract new insights. A was not created overnight, but ratherDefine assumptions for each element guiding principle for business model through a step-by-step roadmap tak-of the business model, identify the level innovation efforts should be to reduce ing Apple from personal computersof risk and start by testing the most time-to-learning and increase the rate into the tablet market. The first steprisky assumptions. In the early phases of customer feedback. Figure 9 illus- away from the old core was the iPod,of innovation, testing rough prototypes trates how prioritised assumptions are and when success was ensured, theand lots of iterations with customers tested and followed up by adjustments second step was the launch of iTunes.will take you further, while test market- of the original concept – or even exit Hereafter, Apple ventured into mobileing and learning launches are used at if the concept does not prove to be a phones, copying the successful iPodlater stages. Moreover, it should be a valid solution. razor and blades business model –fundamental principle in your innova- expensive product and recurring rev-tion process to work on competing so- Apple is often touted as being a revo- enues through sale of cheap musiclutions at the early stages. Developing lutionary, but taking a closer look at tracks – with the invention of the Appconcepts in parallel will not only enable Apple also reveals careful learning- Store. Thereby, the risk of failing waslearning about individual opportuni- based strategies behind every move intelligently outsourced to app devel-18 Viewpoints on Change
  • 19. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSopers. Apple created a solid core Ask yourself if you have a strong learn- needed for gaining long-term competi-product and a strong dual-sided busi- ing orientation and proactively manage tive advantage. However, to stay trueness platform – a meeting place for high-risk opportunities with the goal of to the principles, we should not getApple’s customers and app develop- learning as fast and cheaply as possi- caught up in too much theorising, buters – while much risk was placed on the ble. just do it and learn along the way. Closeshoulders of app developers trying out the laptop, get out of the building anddifferent options. Apple was safe, while Altogether, the three principles should learn from your customers to discovera lot of apps failed. inform and guide all business model your future business models. innovation efforts, and, obviously, theApple’s ”open innovation” approach importance of the principles is cor-with strong reliance on a thriving eco- related with the level of risk. On thesystem also points to the fact that part- other hand, all innovation activitiesnering opportunities should be careful- and growth initiatives can benefit fromly considered when implementing new gaining a fresh perspective from busi-business models. Often, a great partner ness model thinking and from rethink-can both fortify competitive advan- ing your business model through thetage and create a shortcut by leverag- lens of discovery-driven innovation. Contacting their assets. Furthermore, different For further informationpartnering options are also a possible In a world characterised by exponen- please contact:way of escaping the invisible mental tially increasing turbulence, expanding Morten Hejlesen,blinders of the core business. your innovation horizon to encompass moh@implement.dk, the entire business model is timely andFurther inspiration about business model innovationBrown, Tim (2009). Change by Design, Jaruzelski, Barry, Dehoff, Kevin and Martin, Roger (2009). The Design ofHarperCollins Publishers Bordia, Rakesh (2005). ”Money Isn’t Business, Harvard Business School Press Everything”, strategy+businessChristensen, Clayton M. and Raynor, Osterwalder, Alexander and Pigneur,Michael E. (2003). The Innovator’s Johnson, Mark W. (2010). Seizing the Yves (2010). Business ModelSolution, Harvard Business School Press White Space, Harvard Business Press Generation, John Wiley & SonsHejlesen, Morten (2010). ”Danske Lay, Bill (2009). ”Getting Bullish on Sehested, Claus and Sonnenberg,pumper på afrikansk eventyr” i Business Model Innovation”, PRTM Henrik (2009). Lean Innovation,Innovationsantologi, Systime Børsens Forlag Markides, Constantinos C. (2008).IBM (2006). Expanding the Innovation Game-Changing Strategies, Jossey- Zook, Chris and Allen, James (2001).Horizon Bass Profit from the Core, Harvard Business School Press Issue no. 4 / 2012 19
  • 20. STRATEGY & GROWTHARTICLE BASED ON INTERVIEWS AND DISCUSSIONS WITH EXECUTIVES FROM LEADING RETAIL BANKS IN DENMARKFacing the New Normal of Retail BankingRegain customer trust and financial performance through innovative business models basedon simplicity, agility and transparency in every aspect of customer interactionsby Nicky Overgaard PedersenThe new normal: It is about making potentially radical changes to the manner in which banks THE IDEA IN BRIEFA disrupted industry operate and engage with their custom- ers. It is about designing new innova- The world economic turmoil hasThe term “financial innovation” has a disrupted the entire financial ser- tive business models with the ability tocertain ring to it that instantly brings vices sector, creating a new normal delight the customers by leveraging thethe root cause of the current world characterised by increased regula- banks’ core capability of putting moneyeconomic turmoil to mind. tory demands and a severe loss to work in a productive manner – with- out increasing the risk. of trust from the average retailWhen presented with this particular banking customer. More than ever,term, the average retail banking cus- the industry will have to innovate Characteristics of the new normaltomer is left with a reluctant and cau- in order to prosper and rebuild thetious mind, thinking of lost pensions, To fully understand the challenges that damaged image.enormous bailout plans and plain and retail banks are facing and why this has disrupted the entire financial services However, the traditional sourcessimple unfairness caused by “too smart sector, consider this: of innovation cannot be tappedinvestment bankers”. this time as they themselves have • he Occupy movement started T played a major part in getting toIt just does not smell right, and the im- in Spain in May 2011 as a protest where we are now: risky and com-perative customer experience metrics against the political system, unem- plex products.are suffering just as the general pub- ployment rates and corruption. Lesslic perception of the entire sector has than six months later, in Septem- To make up for the past and fit intotaken quite a beating. ber 2011, Occupy Wall Street was the new normal, retail banks must formed, and since then the move- expand the scope of their strategicFinancial innovation as the remedy ment has evolved into a worldwide innovation efforts. They have to protest against power vested in the look beyond products and servicesOn the other hand, financial innova- top 1% income earners and general and look at their entire businesstion is exactly what retail banks need in economic inequality. And it is all toorder to comply with “the new normal” model to regain trust and financial be blamed on the banks.they are facing. But how can one apply performance. • he disintermediation trend is chal- Tfinancial innovation without losing even In order to succeed, three essential lenging the traditional role of banksmore of the precious customers’ confi- as intermediaries. Today, it is not design principles must be applieddence? unusual to see private enterprises to every dimension of future busi- with higher credit ratings than the ness models:The answer to this is not about add- average bank. Boerse Stuttgart ising even more complexity to the finan- • Simplicity taking advantage of this by offeringcial products and services – quite the • Agility bonds issued by mid-cap companies,contrary. • Transparency effectively opening up for cheaper20 Viewpoints on Change
  • 21. FACING THE NEW NORMAL OF RETAIL BANKING and alternative “business-to-business ers faster. And to some extent, this has funding”. MANAGING THE CAPITAL COST proven to be a viable path.• ome banks are now considered to S OF RISK IS CRUCIAL be systemically important financial However, the primary focus for strate- institutions. They have been catego- Right now, it is all about survival by gic business development has been on rised as being “too big to fail” by trimming the balance sheet. ROE the product side. Developing the right policy makers. Currently, the total and credit ratings are imperative to set of products and services capable of capital ratio must not be lower than our ability to deliver superior cus- both serving existing customers as well 8%. Once Basel III has been fully tomer experience. as attracting new ones seemed to be implemented in 2014, that number Going forward, we will see that the one and only truth. will reach 13-14% depending on the only those with a solid financial size and systemic importance of the performance will have the freedom Over time, this product-oriented fo- bank. This alone will potentially lead to innovate: It is very expensive to cus has not only spawned increasingly to a decrease in ROE between 4-5% play the role of first mover. complex and risky products, but ironi- – if nothing is done. cally enough also made it even harder Developing new products is a risky to implement cost-effective straight-In other words, banks are forced to act business, and mitigating financial through processing solutions in thejust to maintain their ROE. Regulatory risk is the largest obstacle for inno- back office operations.demands are tightening, and the cost vation – but also the largest driver.of being a regular bank customer is The banks that find ways to man- Truly, this depicts an unfavourableincreasing – all in all, something that age this catch-22 will have a clear situation where the striving for higherdoes not go easy with low market con- advantage. profits from the product side is jeop-fidence, changed customer behaviours ardising the agility and transparency ofand expectations. Ken Adrian customer interactions. Head of Segment HouseholdFight for freedom to innovate Nordea Danmark Reduce risk through productAs a consequence of ROE being under innovationpressure in the years to come, all sails Rest assured, product development willare set to deleverage the books be- banking and cash management – areas continue to be a central topic as thecause without proper earnings, credit in which the customers bring their own risk and complexity are bound to beratings will be lowered, funding of capi- money to the table, so to speak. Still, reduced, thus requiring radical changestal will go up and products will become this is not enough. There is a strong to products and product structures.more expensive to the end customers, need for even more innovative thinking.which essentially affects the customer An example of this type of innovationexperience in a negative way. is the changes to the price and productThe fact is that a lot of retail banks The traditional sources of structure of home mortgage financing innovation cannot be tapped recently introduced by Nykredit andare in urgent need for deposits, and Totalkredit:Amazon-like promotions have begun this timepopping up, urging customers to “start 1. Under the new price structure, pricessaving now and get an instant givea- For decades, innovation in the finan- differ according to risk.way or bonus!”. cial sector has been more or less trivial. 2. For a combined mortgage, the loan- There has been a heavy focus on opti- to-value ratio of SDOs has beenNot all countries and regulations allow misation of internal processes to re- lowered from 80% to 60% for retailfor such instruments to be applied, so duce operating costs per customer as customers.instead focus is shifting towards private well as to be able to serve the custom- Issue no. 4 / 2012 21
  • 22. STRATEGY & GROWTHFACING THE NEW NORMAL OF RETAIL BANKING quote by the late Harvard professor Innovating the business TOO RISKY, TOO COMPLEX Theodore Levitt: models Traditionally, one of the primary “People don’t want to buy a quarter-inch sources of innovation has been cal- Clearly, financial products have not drill. They want a quarter-inch hole!” culators and engineers in product lost their strategic importance, but, development, spinning off increas- going forward, it is clear that retail This falls well into line with the current ingly complex and risky products. banks need to give a lot more credit to perception among leading retail bank- the services – and the entire business For obvious reasons, this can no ers in Denmark. The products are be- model – surrounding the products. longer be the case. The new nor- coming hygiene factors, i.e. nobody mal forces the entire industry to looks at them as stand-alone differen- If they fail to do so, providing complete rethink our offerings and business tiators in the battle for market shares and compliant advisory at the lowest models based on transparency and and customer attention. Instead, the possible risk based on the individual simplicity. bank advisers’ ability to transform knowl- customer needs becomes almost im- edge and insights into viable solutions Ove Feddersen possible. by communicating 1:1 with the custom- Head of Product Strategy er has become a crucial trait to be dis- Nykredit In other words, banks need to rethink played in every customer interaction. their business models and find new ways of creating, delivering and captur- ing value.Look beyond the products to increasethe customer experience FITTING INTO THE NEW NORMAL Already now, retail banks are facing REQUIRES CHANGEAs a direct outcome of the current eco- competition from new entrants and in-nomic turmoil and the derived changes novative business models. While many We are witnessing a global para-to the products, terms and conditions, of the new entrants are still operating digm shift in which banks needa great deal of existing retail custom- on the fringes of the industry with low to find new ways of operating iners are not only finding themselves in growth rates and market shares, they order to regain customer trust anda hard position, but, even more impor- should be taken very seriously. financial performance.tantly, they are having a difficult timeassessing the consequences of this The regulatory framework used Many of the players exhibit disrup-new situation. to “only” dictate the direction tive potential and possess the power in which we could innovate our to radically alter the rules of the gameThis implies that retail customers in business. One could say that the by targeting small niche segments inparticular are becoming heavily de- framework was “larger than us”, i.e. the existing market. Basically, the newpendent on superior advisory services, still giving us room to operate. players are exploiting attractive sub-and if anything positive has come out segments which are not appropriately With the regulatory demands weof the financial crisis, it is the wake- served by current business models. In are facing from Basel III etc., theup call to every retail bank constantly some cases, entirely new markets are framework will become “smallerreminding them to consider the needs created for customers who have been than us”, so unless we change radi-of the customers in every touch point, totally locked out of existing markets in cally, we simply will not fit into thechannel and type of interaction, while the past. new normal.bearing in mind that there is a crucialdiscrepancy between what custom- Ken Adrian Look out! New kids on the block!ers think and say they need and what Head of Segment Household An article by Rita McGrath states thatthey actually need and really want. This Nordea Danmark one of five large business trends indifference is best illustrated with the22 Viewpoints on Change
  • 23. FACING THE NEW NORMAL OF RETAIL BANKING2012 is that oblique competition will high streets. Besides that, Apple has a In 2010, users could buy theatre tick-become ubiquitous, emphasising that rather large amount of capital available. ets for Harry Potter, and, over time,enterprises traditionally were compet- Facebook Credits may actually end uping within industries, whereas competi- The question that banks should ask is: being the preferred currency for buyingtion can now come out of the blue and When will Apple open a bank near us? any media content over the Internet.take over entire markets. Perhaps not a traditional retail bank as The obvious question remains: Where we know it, but “just” some sort of add- will the retail banks be in that set-up?Take the average German consumer. on service that provides credit on theHe or she controls a total of six de- fly to purchase products in the store. Examples of new business modelsposit accounts, but only two of those Rather than risking instant “paralysisare placed in a bank. The other four Another example of a potential chal- by analysis” and complicating thingsare placed with iTunes, DIY stores, lenger to retail banks is Facebook with by trying to figure out how to inno-PlayStationNetwork, third party logis- staggering 800 million registered users. vate your business model, simply starttics providers etc. In 2009, something called “Facebook by looking at what is already going on Credits” was introduced rather silently. within – as well as outside – the finan-Now consider this: Apple has more Anyone could buy 50 credits for the cial sector and let that be an inspira-than 200 stores worldwide – stores price of $5 “to buy things (i.e. game-re- tional guideline for challenging yourthat are well-recognised by high-end lated content) on Facebook in an easy conventional wisdom. See examplesconsumers. More or less all placed on and safe manner”. on the next page. Issue no. 4 / 2012 23
  • 24. STRATEGY & GROWTHFACING THE NEW NORMAL OF RETAIL BANKING JAK – operating an interest-free savings Peer-to-peer lending by Zopa and loan system since 1970 Internal Value External Internal Value External perspective perspective perspective perspective perspective perspective Partner Key Value Customer Customer Partner Key Value Customer Customer network processes proposition relationships segments network processes proposition relationships segments System Mass education Traditional development/ & financing of Interest-free retail banking Private Membership- local economies maintenance Platform to based Traditional savings and customers equity Membership- connect lenders retail banking Local Promotion of loans partners based Customer with borrowers customers enterprises the interest- service Co- free economy Grants for stud- operatives Administration ies in interest- Venture Administration free economies capitalists & development Non-lending Key Channels businesses Key Channels Associations resources resources Courses about aspects of an Local branches On-line interest-free operated by ICT Local members for channels economy Companies platform volunteering members Financial Cost drivers Revenue streams Selling pay- Financial Cost drivers Revenue streams ment protec- Interest from perspective tion insurance perspective pre-savings The lending Fixed fee Low level Annual Employees Annual placed in Swe- platform Zopa added to their of general membership Loan service fee dish bonds (ICT platform) loan amount administration fee fees from lenders “At Zopa, people who have spare money lend it directly “We regard receiving money in exchange for labour as le- to people who want to borrow. There are no banks in the gitimate, however, we do not consider it legitimate to earn middle, no huge overheads and no sneaky fees, meaning money simply with money. In our opinion, it is unethical to everyone gets better rates”. lend money against interest”. The lending platform Zopa (an Internet marketplace) is of- JAK operates like a not-for-profit bank enterprise, trying fered to members, making it possible for them to connect to make one million SEK annually to add to equity, by of- traditional lenders with borrowers and save them both fering interest-free savings and loans through a total of money by “cutting out the middleman” (banks). just three products. The business model allows depositors to have a higher JAK is primarily driven by volunteer members for other return on investment by becoming direct lenders, hence members, and through grants and JAK Schools they are accepting risks normally taken by banks/VCs. At the same offering courses where participants receive more informa- time, the risk of lending e.g. £1,000 is reduced by splitting tion about how JAK works, discuss different aspects of an the amount into chunks of £100 each going to different interest-free economy and get tips on how to present JAK borrowers. in public. To reduce the risk even further, Zopa offers their lenders Currently, JAK has approx. 34,000 members, and the free-of-charge assistance in chasing up missing payments number is increasing every year. on behalf of the lender. The revenues are coming from charging borrowers fixed fees added to their loan amount, charging lenders a 1% an- nual service fee and selling payment protection insurance to borrowers.24 Viewpoints on Change
  • 25. FACING THE NEW NORMAL OF RETAIL BANKING Boerse Stuttgart is offering mid-cap Tradeshift provides an on-line invoicing companies a new way of accessing capital service and an instant payment feature Internal Value External Internal Value External perspective perspective perspective perspective perspective perspective Partner Key Value Customer Customer Partner Key Value Customer Customer network processes proposition relationships segments network processes proposition relationships segments Partner commu- Free on-line real Trading and Systems Automated nity that builds time e-invoicing exchange applications to & platform for suppliers over services Trade-to- Alternative Industrial or ”community” industry-related sell on AppStore development a global network Policy settlement source of mid-cap Large makers finance through Corporate B2B companies enterprises & capital market governance Angel Social network communities Technical governments Investors for businesses to App support communicate & developer Key Better rates & Channels Investors exchange docs. network Regulatory authorities resources conditions for The Stuttgart Private Non-lending both investor Stock Exchange equity Key Channels businesses Electronic & bond issuer Value-added regulated un- partners resources trading services and official market systems applications On-line order Venture Cloud-based On-line Data execution capitalists platform channels storage Financial Cost drivers Revenue streams Financial Cost drivers Revenue streams Clearing & perspective Fees charged settlement perspective ICT General IT development to be listed & fees development, & maintenance Sale administration Services Apps to trade on its maintenance markets of information & support With the launch of Bondm, the Stuttgart Stock Exchange Tradeshift is basically a social network for businesses to has introduced a new segment for bonds issued by indus- connect, communicate and exchange documents in real trial or industry-related mid-cap companies in the upper time. They provide an on-line invoicing service and an in- segment of the range in the need for finance. stant payment feature. TechCrunch sees this as a potential disruptive game changer – on the same scale as Skype The bond issuer gets access to another source than the which managed to disrupt the telecom industry. traditional bank offerings, and retail investors, on the other hand, get the opportunity to participate directly in the Compared to the traditional charge per transaction or bond subscription (primary market), which was originally conversion, Tradeshift offers free on-line real time e- reserved for institutional investors. invoicing for all suppliers over a global network. In return for free transactions, they offer their customers additional non-free services like master data subscriptions. Besides that, the revenue stream also includes financial services such as instant payments and exchange rate hedging. Finally, they have implemented a two-sided Apple-like platform around an AppStore fed by a partner community developing and selling apps. The list of customers includes prominent enterprises and organisations like ADETEF (the French international as- sistance agency of the Ministries for the Economy, Budget and Sustainable Development) with their 300,000 suppli- ers and UK National Health Service (the 5th largest buying organisation worldwide). Issue no. 4 / 2012 25
  • 26. STRATEGY & GROWTHFACING THE NEW NORMAL OF RETAIL BANKINGRegain customer trust and The lesson is that even the best and vation, which is something to be builtensure sustainable financial brightest product eventually becomes upon. Already, banks around the world a commodity, and the only thing left have begun to utilise the Internet forperformance is how the value proposition is being more than simple Internet and mobile served. banking services: “The social web”, i.e.Keeping in mind the root cause of the the sharing and exchange of informa-financial crisis combined with the char- Agility tion, is being utilised for customer in-acteristics of the new normal, retail teractions, real time problem solving Being a first mover is expensive – espe-banks must demonstrate superiority in and improving the customer experi- cially when the development of prod-customer service, capital risk manage- ence. ucts and services that you provide isment and operational excellence by ap- framed by tight regulations. And tight-plying three essential design principles “Social CRM” is definitely something er regulations are exactly what retailto every dimension of their business that should be thought into a sound in- banks are facing these days.model: novation framework. A great example• Simplicity The largest uncertainty is not about the of this is Danske Bank which has co-de-• Agility amount or scope of the coming regula- veloped their iPhone and iPad mobile• Transparency tions – it is about not knowing the con- banking app through a Facebook page sequences of those regulations. No one where users can propose features andSimplicity can foresee how the market will change provide feedback directly to the teamRetail banks should strive for becoming nor feel safe that the regulations will behind the app.an integral part of their customers’ life. not take away the last bit of possibilityEvery customer interaction is a chance to differentiate between the individual Transparencyto provide advice, build a relationship banks. To restore the confidence in the in-and, above all, learn about the custom- dustry as a whole will require moreers’ personal needs driving the financial The uncertainty characterising the fi- than changed behaviour of the indi-needs. nancial sector right now calls for “just- vidual banks. Currently, not everybody in-time” strategies, and as such this is adapting to the new capital require-In that sense, complexity is a real killer. emphasises the need to be extremely ments in a viable way, and that affectsNot only with regard to operational ef- agile. Besides the strategic aspect, agil- the entire industry.ficiency or the ability to rapidly change ity in terms of reacting to customer de-and react to changes in customer mands is a notable trait. On top of that, disintermediation isneeds and trends, but, more important- gradually pushing banks into unfavour-ly, complexity makes it difficult for the A business model to be inspired by: able market positions where more andcustomers to keep a high amount of Inditex which is one of the world’s more business is diverted into areasdaily interactions with their bank. largest fashion distributors. They have such as peer-to-peer lending and busi- completely changed the game of the ness-to-business funding.Besides that, simplicity is, by far, the market for affordable fashion by pur-hardest (product) attribute to copy and suing a high degree of vertical integra- In order to recover properly, the indus-potentially also a real game changer. tion. The turnaround time from idea to try needs to start “playing with open launch is 2-5 weeks versus 3-9 months cards” – externally to regain trust andA business model to be inspired by: for more traditional retailers, making internally to be able to act even moreGoogle Docs which disrupted the mar- it possible to dispatch new designs to agilely and to ensure complete andket for home office applications by pro- stores twice a week. compliant processes. Apparently, thisviding a “good enough” product expe- would be achieved by breaking downrience for free. Compared to fashion retailers, banks the functional and organisational silos. have a long history of ITC-driven inno- However, the thing is that even if break-26 Viewpoints on Change
  • 27. FACING THE NEW NORMAL OF RETAIL BANKINGing down the silos has been a mantra records to them in return for a platform not paying attention.for many years, there is an important where they can bypass expensive med-twist to it: Knowledge, insights and ical bills by getting advice from similar Traditionally, innovation in the indus-professionalism thrive in functional si- patients. try has not been disruptive. Much haslos, and those traits are imperatives for been about incremental changes toa great customer experience. As a cus- products, processes and back officetomer being serviced, we do not want Seize the moment operations, and we are still to witnessto experience the lag time caused by a radical game-changing move wherethe silos – we only want to experience Retail banks are in the middle of a per- the business model itself becomes thethe optimised process. fect storm. The entire financial sector is primary competitive differentiator. As a under heavy fire from regulatory au- consequence of the new normal, now isOne way of increasing the transparency thorities and policy makers, and their the perfect time to do just that.in the processes of the business model modus operandi is bound to change inis to make use of the enormous amount order to survive.of (large) data stored in the back officesystems – as well as in the minds of the Just like amber flushes up on the beachcustomers – for “real-time analytics” after a storm, so do new entrants, andduring customer interactions. innovative business models emerge Contact when an industry is being forced to in- For further informationA business model to be inspired by: novate. Unfortunately for the incum- please contact:PatientsLikeMe.com has managed bents, both amber and new entrantsto design a viable (disintermediat- Nicky Overgaard Pedersen, are hard to spot by others than theing) business model based on patients nop@implement.dk, trained eye – and that may very wellhanding over their personal medical +45 5138 7412 prove to be lethal for those who areFurther readingBraagaard, M. and Kirkegård, L. Gray D., Brown, S. and Macanufo, J. Markides, C. (2008). Game-ChangingImplement Consulting Group (2010). Gamestorming: A Playbook Strategies(2010). Strategy as Transformation for Innovators, Rulebreakers, and Changemakers Martin, R. L. (2009). The Design ofChristensen, C. M. and Raynor, M. E. Business(2003). The Innovator’s Solution King, B. (2010). BANK 2.0: How Customer Behaviour and Technology Osterwalder A. and Pigneur, Y.Christensen, C. M., Kaufman, S. P. and Will Change the Future of Financial (2010). Business Model Generation:Shih, W. (2008). Innovation Killers: How Services A Handbook for Visionaries, GameFinancial Tools Destroy Your Capacity Changers, and Challengersto Do New Things Issue no. 4 / 2012 27
  • 28. STRATEGY & GROWTHMODELDiscovery-driven innovationA systematic process for designing and implementing new business models Abstract Direct Design Generate insights Create ideas & solutions Analysis SynthesisDefineFrame thechallenge Discover Develop Collect data & knowledge Test & feedback RealFive guiding principles for 1) Enable radical 2) Prototype anddiscovery-driven innovation: collaboration and co-creation experiment to learn fast28 Viewpoints on Change
  • 29. DISCOVERY-DRIVEN INNOVATION Define What? A clear framing of the growth challenge, definition of ambition levels and joint commitment Why? To align the business model innovation project with the growth strategy and business goals Discover What? Research of opportunities within and across context, customers, competition and capabilities Why? Superior business concepts are formed on the basis of unique insights Direct What? Analysis of research findings and creation of growth opportunity maps to focus work efforts Why? Data needs to be filtered and interpreted into actionable directions and design principles Design What? Creative ideation and conceptualisation of new business ideas Why? To foster creativity and identify novel approaches to driving growth Develop What? Iterative concept testing, business modelling and learning based implementation Why? To reduce risks, new business concepts are adjusted through several iterations and market feedback 3) Focus on 4) Stretch goals and 5) Balance creativitycustomer value creation challenge conventions and focused analysis Issue no. 4 / 2012 29
  • 30. STRATEGY & GROWTHARTICLE BASED ON INTERVIEWS AND DEVELOPMENT PROJECTS WITH DONG ENERGYBusiness model innovation as a responseto increased competition in the energy sectorBy Thomas Børve and Johan LawaetzIncreased competition in the energy the game since it quickly led to intense Despite the increased need to differ-sector has stimulated many energy competition, but also expanded the entiate in the market, energy providerssuppliers to rethink the way they arena in which Danish energy provid- still have limited opportunities to dodo business. Because of the growing ers should now compete. The market so. For decades, the energy sector haswish among Danish organisations to opened to international competitors, looked for new ways to offer value ondo business in a more sustainable and as the industry has matured en- top of an increasingly commoditisedway, DONG Energy decided that one ergy providers have experienced an in- product, but there has never been aof the means to differentiate in the creased pressure on prices. real breakthrough in new ways to bun-market would be through what would dle products and innovate the businessbe known as the Climate Partnership In the meantime, societal trends and model – until now.concept. new customer needs have emerged and gone straight to the top of theThrough pilot projects, the conceptsoon proved to be more than just a global energy agenda. Private consum- Climate Partnerships ers as well as business customers arenew product in the portfolio as it was now concerned with CSR, CO2 emis- In May 2007, Novo Nordisk and DONGable to spur significant business valuefor customers. But to do so required a sions and the overall environmental im- Energy together launched the firstnew internal setup of the underlying pact in addition to getting a low price Climate Partnership in Denmark. Sincecompetences and processes related per MWh. As electricity is traded with then, DONG Energy has entered intoto sales and delivery within DONG full transparency on Nord Pool (the ex- more than 100 Climate PartnershipsEnergy. change of electricity), the product itself and developed a unique partnership was already very commoditised, but model with a variety of Danish organi- price competition was further fuelled sations. Companies, municipalities andChanging market conditions by the liberalisation. Moreover, shifting other organisations are constantly energy provider nowadays is much lessin the Danish energy sector faced with climate questions, and they complex and gives companies an even all share the common goal of decreas- larger economic incentive to do so. This ing environmental impact of their activ-In the past decade, the Danish en- has further increased the need for dif-ergy sector has experienced dramat- ities besides running financially healthy ferentiation between energy providers operations. Through the new Climateic changes. New EU directives in the and has resulted in an increased fo-1990s indicated that a new era was Partnership concept, DONG Energy set cus on expanding product offerings. A out to help companies do just that.soon to come with a new regulatory number of energy providers have goneframework. During 2000-2004, the from supplying just a single energyDanish energy sector was liberalised – DONG Energy has a long-term vision source to supplying a broad range of of providing clean and reliable energy.the fastest liberalisation of an energy fuels and services which now includesmarket in Europe. Climate Partnerships are an important e.g. financial services, price surveillance, element in the climate strategy that energy services, CO2 quotas and ener- has been developed to support thisThis dramatically changed the rules of gy savings consultancy.30 Viewpoints on Change
  • 31. BUSINESS MODEL INNOVATION AS A RESPONSE TO INCREASED COMPETITION IN THE ENERGY SECTORlong-term vision. The strategy commits offering a more comprehensive and energy. The purpose is to support andDONG Energy to support a significant customer-oriented value proposition strengthen innovation within climatereduction in CO2 emissions stemming providing significant business value technology, increase the demand forfrom energy production, and at the to business customers. The main idea renewable energy and strengthen cli-same time it serves as a strong driver of the concept was for both parties mate initiatives in private and publicfor differentiation. to execute energy savings and sup- organisations. port renewable energy sources. DONGProviding additional value by combin- Energy’s energy advisers locate and For the partner, the motivation behinding existing products and services help execute these energy savings. entering a Climate Partnership wouldBased on DONG Energy’s many years obviously be to obtain a reduction inof experience within energy savings When energy savings are realised, the operational costs by identifying and re-consultancy, the Climate Partnership entire or part of the reduction is used alising energy savings and increase rev-concept first and foremost aimed at to finance the purchase of renewable enue through enhanced differentiation. Photo: DONG Energy A/S Issue no. 4 / 2012 31
  • 32. STRATEGY & GROWTHBUSINESS MODEL INNOVATION AS A RESPONSE TO INCREASED COMPETITION IN THE ENERGY SECTOR Photo: DONG Energy A/S32 Viewpoints on Change
  • 33. BUSINESS MODEL INNOVATION AS A RESPONSE TO INCREASED COMPETITION IN THE ENERGY SECTORFor selected large customers with little case experience showed that it often A more complex sales processor no resources available to drive de- proved more valuable for the partner required new competences andvelopment projects themselves, DONG to carry out initiatives related to other customer involvementEnergy has, moreover, offered to take typical elements of the CSR agenda DONG Energy realised that position-on the project and help its customers such as ethical trade or improving the ing the idea of a Climate Partnershipthrough the process from establish- work environment. concept to organisations would imposeing a business case, selling the project great changes on the sales process.internally, analysing and discovering The second criterion was that the com- They understood that they would havepotential all the way to building the pany should have a large potential val- to target an entire set of new and moreimplementation plan. In short, DONG ue of differentiating through a renew- business-oriented stakeholders thanEnergy’s Climate Partnership concept able profile. This, for instance, included what they were used to from sellingbundles the best of its offerings to in- companies exposed to large and strate- electricity and gas.clude sourcing, energy savings, finan- gically important customers with toughcial solutions and project management demands for a renewable supply chain Through initial learning as well as threeinto a customised value proposition (including subcontractors). intensive pilot projects spread out onthat responds accurately to customers’ Denmark and Germany, DONG Energynew climate challenges, helping them Together these two criteria highlight- found that the customers’ decisionreduce costs and meet a new type of ed the customers for whom a Climate to enter the partnership was beingmarket demand. Partnership would be especially inter- pushed to the executive level. This was esting and to whom the market ap- due to the large investment of com- proach should be directed. pany resources and the high potentialWell-defined customer segment business value the concept was offer- One of the key ambitions when ing. Because of this, the decision pro-”To us, it was fundamental to be very DONG Energy launched the Climate cess grew longer and more complex.clear on who was going to use the new Partnership concept was to obtain a The broader and higher involvement ofapproach, and that it would only be for strategic differentiation in the busi- the customer organisation in the salescertain opportunities” ness market, but also to some degree process meant that DONG Energy’s in-Søren U. Schmidt, International Marketing, in the consumer market, compared to ternal sales processes as well as man-Director, Business Innovation and traditional energy providers. By help- agement and sales competences hadProducts & Solutions ing businesses, municipalities and other to be much more focused on selling organisations reduce their energy con- based on business value in order to sumption and establish a sustainable meet these needs. Based on this in-From the beginning, it was clear that profile, DONG Energy aimed at tapping sight, a value-oriented sales process,Climate Partnerships would not be for into the growing sustainable consumer including tools for i) creating interest,every market or every company. In or- trend through intensive marketing of ii) mapping stakeholder value, iii) es-der to identify the ideal customers to the partnerships’ positive effects on tablishing an initial value analysis withtarget, DONG Energy put together a both the climate and the business value the customer, iv) designing the finalsimple customer prioritisation model. obtained by the partner. proposal and v) preparing for final ne- gotiations at executive level, was devel-First of all, they realised that in or- In a business to business context, the oped by a small project group involvingder for the concept to be interesting task of differentiation is not merely a the people who would actually have tofrom a business perspective, the target marketing exercise. It also involves dra- lead and perform the sales themselves.company should spend a reasonable matic changes in organisation, process- In order to ensure reinforcement, aamount of their total costs on energy. es and competences. management structure, including goalsIn other words, the company should be and meeting agendas, was developedrelatively energy intensive. If not, the and implemented. Issue no. 4 / 2012 33
  • 34. STRATEGY & GROWTHBUSINESS MODEL INNOVATION AS A RESPONSE TO INCREASED COMPETITION IN THE ENERGY SECTOR”It is my experience that in the cases From silos to cross-functional teams drawbacks experienced when launch-where we successfully have applied a Running the pilots and actually start- ing the Climate Partnerships was that asolution-centric approach, we have more ing the delivery of Climate Partnerships great deal of the optimisation had beenfocus on what the solution does for the to customers soon proved to pose a done independently across functionscustomer and quite often even for the significant need for working in diverse and with too little attention to inter-customer of the customer” cross-functional teams. Over the years, action between processes and func-Søren U. Schmidt, International Marketing, DONG Energy has put a great deal of tions. The Climate Partnership conceptDirector, Business Innovation and effort into optimising the processes quickly forced new ways of combiningProducts & Solutions around sales and delivery. One of the internal resources to be able to deliver Internal perspective Value perspective External perspective Partner network Key processes Value proposition Customer relationships Customer segments Communication and marketing Supply of Co-branding renewable Energy energy advisory Energy-intensive companies with Strong high potential value Energy partnerships of greener profile production with B2B- Energy customers savings Sales and delivery Differentiation Key resources Channels opportunities Cross-function- al teams to sell, Executive deliver & manage level dialogue partnerships Renewable Value- energy oriented sales sources process Financial perspective Cost drivers Revenue streams Higher costs Recurring Renewable due to longer revenues through energy sales cycle Revenue from increased cus- production Start-up value added tomer loyalty investments services for new concept DONG Energy Business Model canvas34 Viewpoints on Change
  • 35. BUSINESS MODEL INNOVATION AS A RESPONSE TO INCREASED COMPETITION IN THE ENERGY SECTORwhat was being promised by market- Last but not least, a new Climate box for both selling and delivering theing campaigns and sales. A new setup Partnership also implied a process for concept were developed and imple-around delivery of Climate Partnerships DONG Energy to support the new part- mented.was necessary because of the need for ner in communicating the partnershipexperienced people from a range of and the new initiatives. This was done The concept has naturally implieddifferent functional areas and to en- through recommendations as to the increased costssure a competence match with cus- communication of the new climate ini-tomers. The team delivering a Climate tiatives as well as by delivering ready- ”In my view, it is very important as oftenPartnership would obviously not only to-use marketing material. In specific as possible to revisit the original businessconsist of a sales person, but also of cases, DONG Energy would, moreover, rationale throughout a change process inan energy adviser consultant, a com- offer the possibility of co-branding be- order to ensure that the increased costsmunication and marketing adviser, a tween DONG Energy and the partner deliver the expected long-term gain”project manager and a set of energy as was seen with e.g. Tivoli. In order to Søren U. Schmidt, International Marketing,specialists. Combining people with increase the probability that the pro- Director, Business Innovation andsuch diverse professional backgrounds posed changes for the customer would Products & Solutionsand competences and having them de- actually take place, all processes wereliver robust and comprehensive Climate designed to include heavy customer Developing, selling and deliveringPartnerships for customers have been a involvement. Climate Partnerships have implied in-key challenge throughout the process. creased costs. The concept has a dif- Alternative model to serve Germany ferent type and level of complexityHaving people from various functional In Germany, a slightly different model to it than traditional services. There isdepartments work together puts forth of selling and delivering the Climate more risk associated with it and a muchchallenges – not only at an individual Partnerships was chosen. The concept longer and complex sales cycle thanlevel, but also to existing processes and would, in essence, stay the same, but as traditional sales of electricity and gas.to how these processes were aligned. DONG Energy does not sell and sup- Thus, higher costs are related to bothAll the way from the initial energy ply directly to the end customers, but the sales and delivery of the Climatescreening process to realisation and distributes regionally through 600-700 Partnership concept.communication of the energy savings so-called Stadtwerke, a different ap-projects and the actual change in en- proach was needed. Not having a di- The main reason is that the projectergy supply. rect sales channel, but instead a vast binds up more resources that are more number of customers distributing ener- expensive due to the increased de-First of all, a need to align the sales and gy, DONG Energy decided to establish mand on highly specialised compe-delivery process evolved. In essence, a third party concept delivering Climate tences. These additional costs havethis meant that the process of identify- Partnerships directly to the Stadtwerke. to be seen in the light of the strategicing potential savings initiatives had to business advantages as well as the newbe part of the sales process in order to Early on, DONG Energy realised that revenue streams which the project hasprove the potential decrease in costs this meant a tighter conceptualisation created and will continue to create.that would go into the business case and a simpler version of both the so-behind the Climate Partnership agree- lution and the sales and delivery pro- Ensuring new and durable revenuement. cess. DONG Energy initiated a process streams to develop a Climate Partnership con-Secondly, the concept had to include a Seen through a DONG Energy business cept suited to the local Stadtwerke andwell-defined process for identifying in lens, the Climate Partnerships were a the organisations they would target.depth the potential revenue value from way to differentiate, spread risks and To help the Stadtwerke position them-using renewable energy and imple- ensure new revenue streams. By offer- selves and sell the idea, a well-definedmenting the new sourcing setup. ing energy advisory and support with process and a large ready-to-use tool- Issue no. 4 / 2012 35
  • 36. STRATEGY & GROWTHBUSINESS MODEL INNOVATION AS A RESPONSE TO INCREASED COMPETITION IN THE ENERGY SECTORthe realisation of energy savings ini- avoid the ”we have already tried that” ”We recognised that a change of thistiatives, DONG Energy obtained other attitude that often evolves when large character really would force managementsources of revenue than just from sup- organisations are forced to make more to get deeply involved in the pilot projectsplying energy. But most importantly, or less radical changes. with customers”the closer relationships with business Brian Hulvi Larsen, Head ofto business customers built through Commercial & Consumer Marketsthe Climate Partnerships have already ”When building the Climate Partnershipshown an increase in customer loyalty concept as well as the underlyingand ensured long-term commitment of business model, we became very aware Everything from actual content overcustomers and, thereby, durable sourc- that we had to develop the organisation standard project management taskses of revenue. accordingly. People and processes were such as agreeing on goals, processes, tuned at selling and delivering a much deliverables and KPIs as well as the less complex solution” kickoff and delivery of the pilot pro-”In some cases, we made the hard choice Brian Hulvi Larsen, Head of jects was done by all project partici-to stop a development process with a Commercial & Consumer Markets pants. Along the more rational and log-customer because there did not seem to be ical project tasks, the team took a workany business value in it for the customer” style preference test which helpedSøren U. Schmidt, International Marketing, A central aspect of the success was the ensure a better understanding of eachDirector, Business Innovation and strategy of heavy involvement of ex- other and promoted teamwork and in-Products & Solutions ternal and internal resources. The pro- creased trust throughout the project. ject was not to be a top-down project. External involvement in the form ofImplementing the Climate Partnership customers ensured a valuable outside- ”A key aspect of the success of theconcept in perspective. DONG Energy chose development process was that we chose notGreat possibilities were hidden in the to develop a prototype of the concept to let ourselves become carried away withClimate Partnership concept as a new and its processes, including roles and all the possibilities that suddenly arose. Itype of business model. The decision responsibilities, and then turned to two really believe we managed to keep focus”to combine existing products, solutions, pilot customers in Denmark. Over a Brian Hulvi Larsen, Head ofcompetences and resources in a new period of 2-3 months, DONG Energy Commercial & Consumer Marketsway helped and is still helping DONG and the pilot customers tested andEnergy find new ways of tackling the co-developed the concept further andincreased competition and price pres- gained valuable insight into which parts In order to ensure quality of the intensesure. This has been done by creating of the concept worked well and which involvement of internal and external re-significant business value for custom- parts had to be further developed. sources, an experienced project man-ers, and by doing so DONG obtains a agement team was put together. It wasreal differentiation in the market. Internal involvement was emphasised, important that a well-planned process especially in order to ensure that pro- was adhered to, for example in order toThe culture of DONG Energy is to a cesses and tools would survive the ensure progress and regular reviews oflarge extent a technical and process- transition from development to the op- material and other outputs.orientated one. Therefore, it was de- erational phase, but also because peo-cided that the concept should be man- ple from four different functional areas Another important aspect was thataged by a small group of dedicated with personal and professional diversity the programme manager would havepeople recruited from their daily op- would have to work closely together enough organisational power to beerational jobs. This was done in order with them for a long period of time. able to resist pressure from the line or-to ensure focus and progress and to36 Viewpoints on Change
  • 37. BUSINESS MODEL INNOVATION AS A RESPONSE TO INCREASED COMPETITION IN THE ENERGY SECTORganisation when they all of a sudden ships, new and long-lasting revenueand untimely would be in desperate sources while altogether helping to Contactneed to get the resources back in order make businesses both more energy ef- For further informationto handle their daily operational tasks ficient and able to differentiate them- please contact:taking time away from the project. selves in the market. Thomas Børve,All in all, DONG Energy’s Climate tbj@implement.dk,Partnership concept has been an exem- ”One of my biggest fears was that we +45 2338 0020plary case of how businesses can inno- would succeed in creating a fantasticvate their business model as a response new concept but fail in getting theto significant changes in the business organisation to adopt it, sell it and deliverenvironment. By rethinking the value it successfully to customers. I am notproposition and working cross-func- afraid anymore”tionally, the Climate Partnerships have Brian Hulvi Larsen, Head ofresulted in tighter customer relation- Commercial & Consumer Markets Issue no. 4 / 2012 37
  • 38. STRATEGY & GROWTHIMPLEMENT CONSULTING GROUP PUBLICATIONTaking your innovation furtherLean innovation book Lean Innovation nisations, and present a series of prin- IN BRIEF ciples that can be used to bring more ”The authors really show their expertise leadership into innovation initiatives. and passion, and just as good, they They also discuss methods for creating share page after page of great tools and a clearer focus on results and learning techniques for managing the often-hidden in innovative organisations’ core proces- guts of the innovation process.” ses. Langdon Morris, Ecco, LINAK, Rambøll Oil & Gas, Innovation Labs Exhausto and Coloplast are among the companies that have contributed Lean has created very good results examples of how this can be achieved. within production and administration in organisations all over the world. Title: ”Every company should take global But what happens when Lean meets Lean Innovation competition concerning knowledge Innovation? Does it destroy the creati- initiatives seriously” vity required for innovation, or can Lean Authors: improve the results in a business? Claus Sehested ”Most companies have a vast potential and Henrik Sonnenberg, hidden in their knowledge workers and in In Lean Innovation, Claus Sehested and Implement Consulting Group their overall innovation system” Henrik Sonnenberg reveal how the in- terplay between creativity and efficien- Publisher: ”There are leading lights in the form of cy can ensure that top management Børsens Forlag/ companies that have created a culture that visions are realised through innovation UK edition: Springer-Verlag brings unique solutions to the market” initiatives. Lean can boost innovation initiatives to a higher level and trans- Web and LinkedIn Group: form the company’s innovation proces- www.leaninnovation.eu ses into its most important strategic competence. For further information please contact Claus Sehested (cs@implement.eu, In their book, the authors of Lean +45 2338 0034) or Henrik Sonnenberg Innovation deal with key challenges (hso@implement.eu, +45 2338 0031) faced by managers in knowledge orga-38 Viewpoints on Change
  • 39. Visit our websitewww.implement.dk
  • 40. Implement Consulting Group is a Scandinavian consulting company with more than 250 employeesin Denmark, Sweden and Norway.We help private and public sector companies implement strategic change with impact.Denmark Sweden NorwaySlotsmarken 16 Tegnérgatan 35 Solheimsgaten 9DK-2970 Hørsholm SE-111 61 Stockholm NO-5058 BergenTel. +45 4586 7900 Tel. +46 8 723 13 12 Tel. +47 5590 1000www.implement.dk

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