Growth by business model innovation, a lecture at Leuphana University, 2nd part

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This is the second part of a lecture I gave at Leuphana University Lüneburg in spring 2009

This is the second part of a lecture I gave at Leuphana University Lüneburg in spring 2009

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  • 1. Managing Growth by Business Model Innovation 2nd-4th Session, Dr. oec. (HSG) Patrick Stähler May 8-9th, 2009
  • 2. Agenda The deep fall of the music industry The Pandesic Case or why elephants can’t dance Some theory on Financial measurements and strategy, the resource allocation process Hidden flaws in strategy making Starting points for business model innovation or is everything already invented? Customer insights Case: The undergarment industry Value vs. architectural vs. revenue model innovation Beware of the customer What makes up a good strategy? Dr. Patrick Stähler. Leuphana University Lüneburg 1
  • 3. The deep fall of the music (medium) industry
  • 4. The bigger the capacity of the carrier medium became… Longplay record Music CD iPod Shuffle 1000 min 45 min 74 min Dr. Patrick Stähler. Leuphana University Lüneburg 3
  • 5. …the worse the situation for the music industry got Sales Music Media Industry global in Bn. $ (1999-2007) 41 40 40 40 37 34 35 33 32 30 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 Dr. Patrick Stähler. Leuphana University Lüneburg Source: www.musikindustrie.de 4
  • 6. Guilty for the decline of the music industry were always the others, in particular their best customers Dr. Patrick Stähler. Leuphana University Lüneburg 5
  • 7. The industry did what they knew best: More of the Same: More offerings and fighting music lovers Dr. Patrick Stähler. Leuphana University Lüneburg 6
  • 8. Business model innovation come from outside the industry Dr. Patrick Stähler. Leuphana University Lüneburg 7
  • 9. The Pandesic Case: Analyze the case and give answers to the following questions Would you have invested in Pandesic at the beginning? How were the market conditions for the new venture? Were the right competencies at work at Pandesic? Were Intel & SAP the right partners? Make a short SWOT analysis of Pandesic What did go wrong at Pandesic? Dr. Patrick Stähler. Leuphana University Lüneburg 8
  • 10. How did Pandesic end up like this? The internet was seen as a sustaining technology. They used well tested management techniques from their successful multinational mother companies for a startup company and failed miserably
  • 11. Ok, let’s do an autopsy and find out what went wrong? - channels - product development - executive team
  • 12. OK, let’s do some analytics and theory
  • 13. 1 2 40% gross 23% gross profit profit * You are in the same industry under the same rules of competition Dr. Patrick Stähler. Leuphana University Lüneburg 12
  • 14. Think more about ROI not just sales margin, but be aware of what the total assets are Profit ROI = TotalAssets ROI = ProfitMargin × AssetTurnover NetIncome Sales ROI = × Sales TotalAssets Dr. Patrick Stähler. Leuphana University Lüneburg 13
  • 15. Both cases have approx. the same profitability 1 = Department stores 2 = discounters NetIncome Sales ROI = × Sales TotalAssets ROCII1 = 40% × 3 = 120% ROCII 2 = 23% × 5.5 = 126.5% Figures are taken from Christensen, Raynor Dr. Patrick Stähler. Leuphana University Lüneburg (2003), The innovator‘s solution, p. 106 14
  • 16. Ok, let’s assume we are this turkey here. Let’s call him Joey Dr. Patrick Stähler. Leuphana University Lüneburg 15
  • 17. Joey is a good student. He learned that analytics will help him to become a better turkey. Dr. Patrick Stähler. Leuphana University Lüneburg 16
  • 18. So he introduces his well-being index that increases by the day since his owner treats him so well….. Joey’s confidence level that he lives in paradise 8 7 6 5 4 3 2 1 0 Dr. Patrick Stähler. Leuphana University Lüneburg 17
  • 19. Dr. Patrick Stähler. Leuphana University Lüneburg 18
  • 20. Ok, I understand, you think he is just a turkey. But think what you usually do in market analysis! Dr. Patrick Stähler. Leuphana University Lüneburg 19
  • 21. We have a view of the world of what made us and our firm successful Most assumptions are tacit and unspoken These assumptions help us in normal circumstances very well! Dr. Patrick Stähler. Leuphana University Lüneburg 20
  • 22. Our mental model our perception of our world. In a firm a dominant logic of how things ought to be done exist Market reports Customer Feedback Competitor Analysis Domiant logic of the firm resides in the people gets stronger with success filters information helps to get things done with out too much coordination gets strengthens by knowledge The world according management, best practice and to our firm benchmarking is extremly important in a world of sustaining innovations, but an impediment to disruptive innovations Dr. Patrick Stähler. Leuphana University Lüneburg 21
  • 23. Hidden flaws in strategy making Hidden flaws in strategy making We believe that with analytical tools of the past we can foresee the future! For a sustaining world we have the right tools! Lüneburg Dr. Patrick Stähler. Leuphana University 22
  • 24. Hidden flaws in strategy making Typical flaws Our successful human rationality Overconfindence in our our Our decision process is well suited capabilities and in our ability to judge for normal environments the future The status quo bias: What we know Bounded rationality: impossible to analyse all facts can we analyze better and we love the present Ecological rationality Mental Ancoring: shortcuts to reach a quick decision The double-sided sunk-cost problem that are good enough in normal situations The herding instinct: What the others do can‘t be wrong! One reason Preference to be exactly wrong to for Me-too Strategies. vaguely right False consensus: confirmation bias, selective recall, group thinking Dr. Patrick Stähler. Leuphana University Lüneburg 23
  • 25. Better management leads to disaster in disruptive times: Financial tools are great but be aware of Thelimitations of the tools the better a company is managed for sustaining innovations the less capable it is to confront disruptive innovations.
  • 26. Disruptive technologies are disruptive because in first sight they look so innocent Initially, disruptive technologies do not attempt to bring better products to established customers in existing markets. They disrupt and redefine trajectories by introducing products and services that are not as good as currently available products, but have additional features that appeal to different market segment such as reduced size, weight, complexity and lower power consumption. Disruptive technologies emerge and progress on their own, uniquely defined trajectories. Particularly low-end disruption become better over time so they can serve the most demanding customers as well and thereby replace the traditional technology as well based on: provenmodels.com and the Innovator's dilemma by Clayton M. Christensen and the innovators solution by Clayton M. Christensen and Michael E. Raynor Dr. Patrick Stähler. Leuphana University Lüneburg 25
  • 27. IsEVERY THINGalready invented?
  • 28. Well, let‘s start with something very mature – the tea bag 50 years old and mature Competition via the form of the bag to provide better taste Dr. Patrick Stähler. Leuphana University Lüneburg 27
  • 29. Is everything already invented? – Nope, even mature things can be optimized when looking through the customers‘ eyes at the job to be done Tetley invented the drip-less tea bag It solved easily the everyday problem of dripping Result: premium of 13% over regular tea (at Migros) Dr. Patrick Stähler. Leuphana University Lüneburg 28
  • 30. That’s how the firms see their products
  • 31. And that is reality Dr. Patrick Stähler. Leuphana University Lüneburg 30
  • 32. Again some theory
  • 33. Disruption can come from the low end of the market or from nonconsumption sustaining technology bringing a better product into an established market most demanding different measure of performance performance customers least demanding customers low end disruption addressing overserved customers with a low cost business model time new market disruption compete against nonconsumption time based on: the Innovator's dilemma by Clayton M. Christensen and the innovators solution by Clayton M. Christensen and Michael E. Raynor, slide taken from provenmodels.com Dr. Patrick Stähler. Leuphana University Lüneburg 32
  • 34. If you are in a market for giants...
  • 35. .. and you play with their rules you will get nowhere…
  • 36. „…but if you can create your own rules of engagement than you can compete even in a market for giants. “ Dr. Patrick Stähler. Leuphana University Lüneburg 35
  • 37. There is not just one strategy at a corporation Questions: Capital market Which companies should I own? owner strategy In what businesses / markets corporate strategy should I invest inside the corporation? What is the right business business strategy business strategy model to succeed? category How should I structure my category strategy Customers strategy offering? product How should I manage this … … strategy product? That‘s where business model innovation start! start! Dr. Patrick Stähler. Leuphana University Lüneburg 36
  • 38. 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? Dr. Patrick Stähler. Leuphana University Lüneburg 37
  • 39. Business model innovation 1. Value Innovation (We offer a better value proposition for an existing or new problem) 2. Architectural innovation (We reconfigure the value chain so that a better value proposition emerges) 3. Revenue model innovation (We change the revenue mix and thereby creating a better value proposition)
  • 40. Where do we get a Value Innovation from? Let‘s find new customer insights as a starting point Customers’ insight New value proposition Business model innovation Dr. Patrick Stähler. Leuphana University Lüneburg 39
  • 41. „How can we find customer insights? “ Dr. Patrick Stähler. Leuphana University Lüneburg 40
  • 42. „How about focus groups?“ Dr. Patrick Stähler. Leuphana University Lüneburg 41
  • 43. How can we find systematically new customer insights? Buyer Utility Map Delivery/ Comple- Buy Usage Service Disposal Assembly ments Understand how the customers are How can we improve the buyer‘s utility buying, using and disposing the product cycle? Understand the whole lifecycle of Can we do more for the customer? customers‘ utility Can we leave something to the customer? Dr. Patrick Stähler. Leuphana University Lüneburg Source: cp. Kim, W.C., Mauborgne, R., Knowing a Winning 42 Business Idea when you see one, HBR Sep-Oct. 2000
  • 44. Where can I start in the buyer utility map? – The Dyson Vacuum Cleaner Starting Buy Delivery Use Complements Service Disposal Points Customer Productivity Simplicity Usability ++ Risk Image & fun Enviromental friendlyness Dr. Patrick Stähler. Leuphana University Lüneburg 43
  • 45. Blacksocks – We solve the world from its socks problems Socks subscription (2001-2008) Customer Insight 40'000 Buying socks is no fun 40'000 Putting socks in pairs even less 20% market share fun in Switzerland* Good socks are a sign of „Being well dressed“ 30'000 25'000 Value Proposition Blacksocks subscription solves all problems 20'000 Always enough new socks No pairing needed since all socks are identical 12'000 10'000 Revenue Model 10'000 Upfront payment Easy planning and negative working capital 0 2001 2002 2005 2008 •* premium segment starting at 9CHF Dr. Patrick Stähler. Leuphana University Lüneburg 44
  • 46. Blacksocks – we save the world from socks problems Putting Starting Buy Delivery Use Washing Disposal in pairs Points Customer Productivity Simplicity Usability Risk Image & fun Enviromental friendlyness Dr. Patrick Stähler. Leuphana University Lüneburg 45
  • 47. Dell – the classical business model innovator Dr. Patrick Stähler. Leuphana University Lüneburg 46
  • 48. IKEA – democratic design IKEA outsourced two value activities (assembly and transport) to its customers Thereby, it can offer substantially lower prices for good design Is this everything? Think about the value proposition and the production economics! Dr. Patrick Stähler. Leuphana University Lüneburg 47
  • 49. Revenue model innovation – the forgotten business model innovation type Find new sources of revenue (Gratis-Zeitungen are financed by advertising, always the prime source of income for newspapers) Let the same customer pay but differently (postpaid vs. prepaid, bring the financing of the deal along (GE Capital), single sale vs. subscription (blacksocks) Revenue model innovation change the economics of a business. With an upfront subscription payment the working capital is negative. Your customer finances you Dr. Patrick Stähler. Leuphana University Lüneburg 48
  • 50. 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 Dr. Patrick Stähler. Leuphana University Lüneburg 49
  • 51. 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 Dr. Patrick Stähler. Leuphana University Lüneburg 50
  • 52. Very business model innovation must have in the end a higher customer utility Customer utility customer + value price company + profit costs Dr. Patrick Stähler. Leuphana University Lüneburg 51
  • 53. Beware of your existing customers. They want More-of-the-Same-for- Less! Dr. Patrick Stähler. Leuphana University Lüneburg
  • 54. But also it takes time to find new customers and teach them the advantages of your solution Dr. Patrick Stähler | 53
  • 55. Even innovations that are self-evident & have no competition do not diffuse easily. The example of lemon juice and the British Navy Discovery that lemon juice prevents scurvy in 1601 146 years Confirmation of the results 1747 48 years Introduction to the Navy 1795 70 years Introduction to the Merchant navy 1865 Dr. Patrick Stähler. Leuphana University Lüneburg Source: Mosteller, 1981 cited in Rogers, 1995 54
  • 56. Business model innovation demands often new consumer behavior. Learning takes TIME and a GOOD REASON to do so! Have you ever thought of, how much knowledge consumer have about the consumption process? Most consumer knowledge is learned via from other peers To implement a new business model in the heads of the consumer takes time! Dr. Patrick Stähler. Leuphana University Lüneburg 55
  • 57. What are the variables determining the rate of adoption of a business model innovation? 1. Perceived Attributes of Innovations • Relative advantage • Compatability with existing knowledge 4. Nature of the Social System • Complexity • Degree of network interconnectedness • Consumer Knowledge • Norms • Trialability • Observability Rate of Adoption of Business model innovation 3. Communication Channels 2. Type of Innovation-Decision • Mass media • Optional • Interpersonal (Word-of-Mouth) • Collective • Authority Source: cp. Rogers,(1995), The Diffusion of Dr. Patrick Stähler. Leuphana University Lüneburg Innovation, p.207 56
  • 58. The adoption of a business model innovation is a long and cumbersome process. Each customer has to go through all five phases Knowledge Perception Decision Implementation Confirmation • Do I know • What is my • Shall I decide • Shall I use it? • Does the about the perception? to buy it? product fulfill innovation • Positive? the value Negative? proposition? failure failure failure failure failure Dr. Patrick Stähler. Leuphana University Lüneburg 57
  • 59. The S-curve is just the curve for successful innovations, but most fail diffusion time Dr. Patrick Stähler. Leuphana University Lüneburg 58
  • 60. Could you build up Tchibos business model from scratch? Probably not! Coffee Coffee plus Non-food 14 days Weekly world program of goods products • 1950 • 15 • 9 years • 12 • 9 years years years Dr. Patrick Stähler. Leuphana University Lüneburg Source: Tchibo Website 59
  • 61. Beware of your customer! Customers can seldom image products that they do not know Normal customers if asked want More for Less of what the industry is already offering Most demanding customers are great for finding sustaining innovations but a threat for disruptive innovations Traditional market research does not discover new demands. Market research is a reason for strategy convergence Most business model innovation come from the supplier side. Thinking in Jobs-to-be-done helps to find new not solved customer insights Dr. Patrick Stähler. Leuphana University Lüneburg 60
  • 62. What makes up a good business model innovation or any good strategy? Differentiation Focus Trend Dr. Patrick Stähler. Leuphana University Lüneburg 61
  • 63. It’s about finding the right trend to surf!
  • 64. It is about differentiation Dr. Patrick Stähler. Leuphana University Lüneburg 63
  • 65. „Business model innovation is about being DIFFERENT!“ Dr. Patrick Stähler. Leuphana University Lüneburg 64
  • 66. NO, REALLY DIFFERENT! Dr. Patrick Stähler. Leuphana University Lüneburg 65
  • 67. Dr. Patrick Stähler | 66
  • 68. Dr. Patrick Stähler | 67