Managing Growth by Business Model Innovation
2nd-4th Session, Dr. oec. (HSG) Patrick Stähler

                 May 8-9th, ...
Agenda



    The deep fall of the music industry
    The Pandesic Case or why elephants can’t dance
    Some theory on
  ...
The deep fall of the music
(medium) industry
The bigger the capacity of the carrier medium became…



                     Longplay record                Music CD   iP...
…the worse the situation for the music industry got

                                        Sales Music Media Industry gl...
Guilty for the decline of the music industry were always the others, in
 particular their best customers




Dr. Patrick S...
The industry did what they knew best: More of the Same: More offerings
 and fighting music lovers




Dr. Patrick Stähler....
Business model innovation come from outside the industry




Dr. Patrick Stähler. Leuphana University Lüneburg           7
The Pandesic Case: Analyze the case and give answers to
 the following questions
      Would you have invested in Pandesic...
How did Pandesic end up like this?
The internet was seen as a sustaining
technology. They used well tested
management tech...
Ok, let’s do an autopsy and find
out what went wrong?
- channels
- product development
- executive team
OK, let’s do some analytics
and theory
1                                     2
                       40% gross                        23% gross
                ...
Think more about ROI not just sales margin, but be aware of what the
 total assets are




                               ...
Both cases have approx. the same profitability




          1          = Department stores                     2         ...
Ok, let’s assume we are this
turkey here. Let’s call him
Joey




Dr. Patrick Stähler. Leuphana University Lüneburg   15
Joey is a good student. He
learned that analytics will
help him to become a better
turkey.




Dr. Patrick Stähler. Leupha...
So he introduces his well-being index that increases by the day since his
 owner treats him so well…..


                 ...
Dr. Patrick Stähler. Leuphana University Lüneburg   18
Ok, I understand,
                                                    you think he is just
                               ...
We have a view of the world of what made
    us and our firm successful


                                                ...
Our mental model our perception of our world. In a firm a dominant logic
 of how things ought to be done exist



        ...
Hidden flaws in strategy making




Hidden flaws in strategy making
We believe that with analytical tools
of the past we c...
Hidden flaws in strategy making

         Typical flaws                                Our successful human rationality
  ...
Better management leads to
                                          disaster in disruptive times:
Financial tools are gre...
Disruptive technologies are disruptive because in first sight they look so
 innocent
      Initially, disruptive technolog...
IsEVERY
 THINGalready



invented?
Well, let‘s start with something very mature – the tea bag



                                                         50 ...
Is everything already invented? – Nope, even mature things can
 be optimized when looking through the customers‘ eyes at t...
That’s how the firms
see their products
And that is reality




Dr. Patrick Stähler. Leuphana University Lüneburg   30
Again some theory
Disruption can come from the low end of the market or from
 nonconsumption

                                              ...
If you are in a market
for giants...
.. and you play with
their rules you will get
nowhere…
„…but if you can create your own
                                          rules of engagement than you
                  ...
There is not just one strategy at a corporation


                                                                        ...
The definition of a
business model                                      Value Proposition
                                ...
Business model innovation
1. Value Innovation
     (We offer a better value proposition for an
     existing or new proble...
Where do we get a Value Innovation from? Let‘s find new customer
 insights as a starting point




                       ...
„How can we find
                   customer insights? “




Dr. Patrick Stähler. Leuphana University Lüneburg   40
„How about focus groups?“




Dr. Patrick Stähler. Leuphana University Lüneburg   41
How can we find systematically new customer insights?


Buyer Utility Map


                              Delivery/       ...
Where can I start in the buyer utility map? –
   The Dyson Vacuum Cleaner
Starting
                              Buy      ...
Blacksocks – We solve the world from its socks problems

                  Socks subscription
                           (...
Blacksocks – we save the world from socks problems

                                                                      ...
Dell – the classical business model innovator




Dr. Patrick Stähler. Leuphana University Lüneburg   46
IKEA – democratic design

             IKEA outsourced two value activities
             (assembly and transport) to its c...
Revenue model innovation – the forgotten business model innovation
 type

                                                ...
The strategy canvas of Bosch IXO: A clear profile of the value innovation


               6                              ...
Where does the value innovation of Bosch start?



                           Eliminate – Reduce – Create – Raise Matrix

...
Very business model innovation must have in the end a higher customer
 utility



                                        ...
Beware of your existing
       customers. They want
       More-of-the-Same-for-
       Less!




Dr. Patrick Stähler. Leu...
But also it takes time to
find new customers and
teach them the advantages
of your solution            Dr.
               ...
Even innovations that are self-evident & have no competition do not
 diffuse easily. The example of lemon juice and the Br...
Business model innovation demands often new consumer
 behavior. Learning takes TIME and a GOOD REASON to do so!


        ...
What are the variables determining the rate of adoption of a business
 model innovation?


1. Perceived Attributes of Inno...
The adoption of a business model innovation is a long and cumbersome
 process. Each customer has to go through all five ph...
The S-curve is just the curve for successful innovations,
 but most fail




                              diffusion




 ...
Could you build up Tchibos business model from scratch?
 Probably not!


Coffee                         Coffee plus       ...
Beware of your customer!

             Customers can seldom image products that they do not know
             Normal custo...
What makes up a good business model innovation or any good strategy?




                                               Di...
It’s about finding the
right trend to surf!
It is about differentiation
Dr. Patrick Stähler. Leuphana University Lüneburg   63
„Business model innovation is
                                  about being

                                  DIFFERENT!“...
NO,      REALLY                                      DIFFERENT!




 Dr. Patrick Stähler. Leuphana University Lüneburg    ...
Dr.
Patrick
Stähler |
66
Dr.
Patrick
Stähler |
67
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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

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

  1. 1. Managing Growth by Business Model Innovation 2nd-4th Session, Dr. oec. (HSG) Patrick Stähler May 8-9th, 2009
  2. 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. 3. The deep fall of the music (medium) industry
  4. 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. 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. 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. 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. 8. Business model innovation come from outside the industry Dr. Patrick Stähler. Leuphana University Lüneburg 7
  9. 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. 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. 11. Ok, let’s do an autopsy and find out what went wrong? - channels - product development - executive team
  12. 12. OK, let’s do some analytics and theory
  13. 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. 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. 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. 16. Ok, let’s assume we are this turkey here. Let’s call him Joey Dr. Patrick Stähler. Leuphana University Lüneburg 15
  17. 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. 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. 19. Dr. Patrick Stähler. Leuphana University Lüneburg 18
  20. 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. 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. 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. 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. 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. 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. 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. 27. IsEVERY THINGalready invented?
  28. 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. 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. 30. That’s how the firms see their products
  31. 31. And that is reality Dr. Patrick Stähler. Leuphana University Lüneburg 30
  32. 32. Again some theory
  33. 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. 34. If you are in a market for giants...
  35. 35. .. and you play with their rules you will get nowhere…
  36. 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. 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. 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. 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. 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. 41. „How can we find customer insights? “ Dr. Patrick Stähler. Leuphana University Lüneburg 40
  42. 42. „How about focus groups?“ Dr. Patrick Stähler. Leuphana University Lüneburg 41
  43. 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. 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. 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. 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. 47. Dell – the classical business model innovator Dr. Patrick Stähler. Leuphana University Lüneburg 46
  48. 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. 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. 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. 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. 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. 53. Beware of your existing customers. They want More-of-the-Same-for- Less! Dr. Patrick Stähler. Leuphana University Lüneburg
  54. 54. But also it takes time to find new customers and teach them the advantages of your solution Dr. Patrick Stähler | 53
  55. 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. 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. 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. 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. 59. The S-curve is just the curve for successful innovations, but most fail diffusion time Dr. Patrick Stähler. Leuphana University Lüneburg 58
  60. 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. 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. 62. What makes up a good business model innovation or any good strategy? Differentiation Focus Trend Dr. Patrick Stähler. Leuphana University Lüneburg 61
  63. 63. It’s about finding the right trend to surf!
  64. 64. It is about differentiation Dr. Patrick Stähler. Leuphana University Lüneburg 63
  65. 65. „Business model innovation is about being DIFFERENT!“ Dr. Patrick Stähler. Leuphana University Lüneburg 64
  66. 66. NO, REALLY DIFFERENT! Dr. Patrick Stähler. Leuphana University Lüneburg 65
  67. 67. Dr. Patrick Stähler | 66
  68. 68. Dr. Patrick Stähler | 67
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