Growth by business model innovation, a lecture at Leuphana University

Managing Growth by Business Model Innovation 1st Session, Dr. oec. (HSG) Patrick Stähler March 13, 2009

Agenda Introduction of the course How do you think about innovation? Homework and survey! The Bosch Case: How to grow in a mature and highly competitive market A bit of theory: What is a business model innovation? Sustaining vs. disruptive innovations 1 Dr. Patrick Stähler. Leuphana University Lüneburg

And now let’s have some fun! 2 Dr. Patrick Stähler. Leuphana University Lüneburg

Let’s sneak into your heads Homework and Survey 3 Dr. Patrick Stähler. Leuphana University Lüneburg

What insights did you gain from your homework? 4 Dr. Patrick Stähler. Leuphana University Lüneburg

And the winner are…… 5 Dr. Patrick Stähler. Leuphana University Lüneburg

IT, internet, consumer electronic product companies are seen as more innovative than service, retail or banking, but….. --- -- -+ ++ +++ Apple * * Amazon Toyota You think that there are more Audi Nokia innovative industries like Smart consumer electronics or IT BMW Mercedes Zara, Aldi, Dell, ING-DiBa Siemens SONY redefined their “dull” industries Ryanair * through business model * Dell innovations IBM * Zara even in “dull” industries Samsung AirBerlin business model innovation Otto Versand can change the competitive Lufthansa * Aldi landscape HP Apple was a business model EasyJet Lidl innovation for the music Thalia * industry ING-DiBa Dacia Deutsche Bank Haspa Kaufhof *busi 0% 20% 40% 60% 80% 100% ness innovators 6 Dr. Patrick Stähler. Leuphana University Lüneburg

Sustaining innovations are rated high --- -- -+ ++ +++ first to market value-add sustaining innovations are rated highly bundle of products disruptive innovations are rated low new customer answers show typical behavior of current brand/image customers that have difficulties to see advantage more features self service cheaper 0% 20% 40% 60% 80% 100% 7 Dr. Patrick Stähler. Leuphana University Lüneburg

The Case

•Die Ausgangsituation At the beginning of the 1990s the world in the power tool industry was in perfect order Established brands in a growing,European market Competition was well defined and Bosch was the uncontested market leader 9 Dr. Patrick Stähler. Leuphana University Lüneburg

•Die Ausgangsituation And then the Chinese came along….. Over 200 new competitors in a short period of time 10 Dr. Patrick Stähler. Leuphana University Lüneburg

•Die Ausgangsituation …and the market stagnated at the same time. 11 Dr. Patrick Stähler. Leuphana University Lüneburg

•Die Ausgangsituation Dire consequences: A steep decline in the average price per sold tool and…. 5,9 Sales(Mio. units) 307 3,8 Sales (Mio. Euro) 329 88 Ø – price in Euro 78 69 64 67 62 65 58 52 56 Source: GfK 93 94 95 96 97 98 99 00 01 02 Do-it-yourself chains in Germany: 1993 bis 2002 12 Dr. Patrick Stähler. Leuphana University Lüneburg

… and declining market share for the established brands and exponential growth for the no-names and trade brands Market Share Powertools (Germany) 100% 6 27 29 33 No Names & Trade Brands Established 95 Brands 71 73 67 0% 1991 2000 2001 2002 Source: GfK, Do-it-yourself shops Strong increase of market share for no-names and trade brands Bosch Power Tools DIY 2002 with a market share of 33% but loss making 13 Dr. Patrick Stähler. Leuphana University Lüneburg

Simple task from your board: Defend market leadership Improve profitability

Which directions should we take? 15 Dr. Patrick Stähler. Leuphana University Lüneburg

How about this crazy idea? “How about making a power tool which is much weaker than the last generation but we make it also very handy and nicely designed. For that we charge a premium and market it to people who are not really into DIY. Great idea, isn’t it?” 16 Dr. Patrick Stähler. Leuphana University Lüneburg

The solution: Tools for the IKEA Generation 17

Here is the solution for Bosch: the IXO, the first power tool for the IKEA generation Bosch introduces the IXO to the market Instead of following the traditional mantra of “better, stronger, faster” Bosch used a new battery technology to make tools smaller and more user friendly Instead of going for the traditional market of MMS (men, muscles and sweat) the IXO addresses the soft DIYs that assembles its IKEA furniture but not more Thereby, it addresses a new, previously unserved market of non- customers The IXO is a typical value innovation that opened up new, uncontested markets 18 Dr. Patrick Stähler. Leuphana University Lüneburg

Shift from technology to user orientation since 2002 … … prior 2002 Technologie User and usage orientation orientation Building/repair, planning Building and and home decoration repairing reliable, very powerful and reliable, easy to use long-living products products and services unemotional inspiring people technology orientation 19 Dr. Patrick Stähler. Leuphana University Lüneburg

The traditional market: MMS or Men, Muscles and Sweat 20

New market: Addressing previously non-customers like soft DIYlers and particularly Dr. woman Patrick Stähler | 21

Changed consumer behavior The first power tool for the kitchen drawer 22 Dr. Patrick Stähler. Leuphana University Lüneburg

Bosch IXO is the world record holder in units sales IXO was first power tool with Li-Ionen technology IXO is the best selling power tool in the world 23 Dr. Patrick Stähler. Leuphana University Lüneburg

Growing market share and highly profitable Market share in power tools (DIY Shops Germany) 27 29 33 34 35 38 38 No Name / Trade Brands 40 38 29 34 31 25 26 Other Brands Bosch 37 37 36 34 33 33 33 '00 '01 '02 '03 '04 '05 '06 Source: GfK 24 Dr. Patrick Stähler. Leuphana University Lüneburg

OK, let’s do some analytics and theory 25

Bosch used the new battery technology for a disruptive value innovation Sustaining innovation = Serving today’s customers Extend performance in direction of what today’s customers like Advantages of Li-Ion Use the Li-Ion technology for stronger can be formed into a variety of shapes and more heavy duty tools and sizes so as to efficiently fill available space in the devices lighter than other—often much lighter. do not suffer from the memory effect low self-discharge rate of approximately Disruptive innovation = Finding new 5% per month, compared with over 30% customers with different needs per month in nickel metal hydride Use for a new market segments that batteries (Source Wikipedia) values different performance parameters like usability, handiness than traditional customers Performance of tool will be worse in parameters current customers value 26 Dr. Patrick Stähler. Leuphana University Lüneburg

Technology does not create value per se. A sustainable business model is needed X technology value enables creates business model 27 Dr. Patrick Stähler. Leuphana University Lüneburg

Let’s take a look at the innovation process at Bosch The idea of the IXO was born in the strategic planning process after the board order a strategic review of the Bosch Power Tool division It was clear for top management that they wanted to break the rules of the industry with a business model innovation The approach to the IXO was very analytical starting with a market analysis that showed that there was a market for smaller, weaker power tools Particularly women expressed their need for smaller power tools since they wanted to do some home decoration Top Management came finally up with the idea to create the IXO to serve the market Market research firms later calculated that Bosch will sell more of IXO than any competitor had done before. And then they lived forever happily……. 28 Dr. Patrick Stähler. Leuphana University Lüneburg

The real story: Driven by chance, luck, professionalism and the right people A young product manager (female) fresh out of university had the idea to make tools for her generation The head of product development (engineer) is open to experiments The development costs for a prototype of a power tool is not very high so that market test could be conducted with “real” products The president of Bosch Grün has no engineering background but gained his professional experiences in the fast-moving-consumer-goods industry The crisis and later the success of the IXO change the whole strategy of Bosch Grün towards a user driven company Processes were changed to support the new mantra of consumer-orientation What was once a disruptive move for the company is today’s business. 29 Dr. Patrick Stähler. Leuphana University Lüneburg

Creating Business model innovations is a creative and analytical process at the same time. There is a reason why god gave us two brain hemispheres 30 Dr. Patrick Stähler. Leuphana University Lüneburg

The definition of a business model Value Proposition What value do we create for our customers and for other stakeholders? Value Architecture How do we create the value? Revenue Model How do we earn money? 31 Dr. Patrick Stähler. Leuphana University Lüneburg

The business model is the DNA of a company 32 Dr. Patrick Stähler. Leuphana University Lüneburg

A business model is the simplified model of a business you can make it as detailed as needed but don‘t get lost in details Business Model Revenue Model Value Architecture Value Proposition For customers For other Product-/ Internal Value Arch. External Value Arch. Mix of stakeholders Market resources customer interface sources of and value Model value chain distribution channels revenues partnenrs communication customer information channels communication channels coordination value partners mechanisms active (suppliers, customers, competitors) passive (supplier of complementary goods 33 Dr. Patrick Stähler. Leuphana University Lüneburg

A business model is no strategy: A deliberate change of or an innovation in a business model can be a strategy Starting points for innovations Most business models are constructs of the past All components of a business Value Proposition model can be the starting points for innovation value innovation Architecture architectural innovation revenue model innovation Revenue Model In the end all business model innovation must be a value Business Model innovation to guarantee success 34 Dr. Patrick Stähler. Leuphana University Lüneburg

The strategy canvas of Bosch IXO: A clear profile of the value innovation 6 Traditional brands No-Name Bosch 5 4 3 2 1 0 -1 35 Dr. Patrick Stähler. Leuphana University Lüneburg

Where does the value innovation of Bosch start? Eliminate – Reduce – Create – Raise Matrix Eliminate Create technology talk • easy of use • fun Differentiation cost reduction • inspiring people Reduce Raise • performance • price • heavy duty • home decoration • men, muscle & sweat 36 Dr. Patrick Stähler. Leuphana University Lüneburg

A business model innovation is always about differentiation 37 Dr. Patrick Stähler. Leuphana University Lüneburg

We love clear profiles We have only a limited capacity for each category amazon is online books IKEA is crazy and modern furniture Otto is the mail order house Apple is the cool computer kid

What do you think as a customer about this idea? „ Our service is much worse than your competitors. We need your cooperation for transportation, moving and assembling for our service. But for all your hassle, you really get a great price! Great idea, isn‘t it?“ 39 Dr. Patrick Stähler. Leuphana University Lüneburg

„Scary to be this nail. Where will the hammer hit next time?“

„Business model innovation is about being DIFFERENT!“

REALLYDI NO, FFERENT!

And you can be innovative in ANY INDUSTRY!

Contact Dr. oec. (HSG) Patrick Stähler Partner & Founder fluidminds GmbH, the business innovators Gemeindestrasse 23 8032 Zürich Switzerland Tel: +41 79 770 27 09 www.fluidminds.ch Blog.business-model-innovation.com Ackknowledgement Pictures in the presentation taken from Toni_V (flickr), Bosch and others Graphics in part from Marty Neumeier, Neutron LCC 44 Dr. Patrick Stähler. Leuphana University Lüneburg