We have four top-line findings from our business model research Business model innovation improves margins Business model innovations can be grouped into three distinct types All 3 types can bring financial success, given the right strategy and execution The predominant model uses collaboration for enterprise innovation
From the 2006 CEO Study we saw that companies focusing on business model innovation enjoyed margin growth far in excess of peers who focused on products and services or operations. Product innovators had flat margin growth while those who focused on operations alone had declining margins over 5 years. Companies who innovate operations or products & services in combination with business model do better than those who ignore business model innovation. Business model innovation differentiates an organization and brings long term growth.
From our framework, we found three types, or paths to business model innovation. Industry innovators may move into a new industry (Virgin), redefine an existing one (Dell) or create an entirely new value chain (iPod/iTune) Revenue innovators develop new value propositions (Cirque du Soleil) and pricing models (Gillette) Enterprise innovators may become more integrated in their operations (Zara), or they may become more specialized by focusing on core functions and partnering for the others (Bharti). They also may fundamentally change the way they collaborate with partners. (P&G) We’ll explain each more thoroughly, but first let’s look at financial results of various approaches
We looked at compound annual growth rate of stock over 10 years Found that all types of business model innovation led to good numbers Each type of business model innovation, alone or in combination can lead to financial success. Starbuck combined all three types to grow its value over 30%. Goldcorp, a mining company using the Internet to collaborate, grew more than 20% -- an example of the enterprise model category.
Half of the cases we studied, in fact, used innovative collaborative techniques to change the business model of the enterprise. In Goldcorp’s case, it was the use of the Internet to open analysis of mining data to experts all over the world. In P&G it was opening R&D to outside scientists. One pattern we noticed suggested that enterprise model innovation is especially relevant to older companies.
Looking at the industry path – within and across industries: Dell redefined the PC value chain and industry model by using a direct to customer sales model Efficient path to customer with single point of accountability Build-to-order capability with latest technology lowers inventory and pricing Standards-based technologies (based on PCI bus) developed collaboratively with industry partners reduced costs Apple transformed the music industry through a new way of connecting hardware with software to download music -- a product & service combination. As an example of horizontal move across industries -- Virgin moved its brand assets from music to airline industries, staying just one step away from the consumer in each of those value chains.
Now let’s look at the revenue path – in terms of both pricing and value: Gillette innovated the pricing model by giving away razors and making money on the blades Netflix shifted the revenue model from product / rental to a subscription based annuity model Another flavor of revenue model innovation is value innovation… first-time ever value spaces, example is Southwest Airlines Southwest jumped ahead of competitors by focusing on “friendly service” through point-to-point departures and eliminating seating class choices Also Cirque du Soleil, which reconfigured offering and value elements to transform the circus experience Circuses traditionally attracted children and were a declining segment of the live performance market… margins were low and competition was stiff and unorganized… increasing concern about animal treatment Cirque du Soleil promotes the show and not the easily replaceable performers; no animals, so humane treatment not an issue; no dialogue so that productions appeal to diverse, global audiences; adults not children are audience, so can charge higher prices
The enterprise path covers integration, specialization and collaboration Enterprise model of business model innovation often relates to a company’s position along the integration – specialization continuum In this context integration refers to analyzing all business components – people, processes and technology -- and organizing their internal operations for maximum effectiveness and efficiency. On the specialization side of the continuum a company selects components that are differentiating, and which it should allow other organizations take on. We use component business maps to break down business processes and create an operating model based on desired business model A company like Zara, the Spanish fashion retailer, integrates all business processes within its enterprise A company like Bharti partners on all but the most differentiating parts of its business, in this case, marketing, sales and distribution. For technology infrastructure it uses other companies. Collaboration and partnerships make up the most frequent approach to enterprise model inovation -- They can take all kinds of shape based on financial participation and integration of business processes On one end of the spectrum is traditional supplier contracts and on the other, legal joint ventures In the middle are some of the really innovative partnerships, such as P&G and Bharti Proctor & Gamble has a “connect and develop” approach to new product research … it partners with external scientists …35% new products sourced externally Companies that choose to specialize and join with other specialized companies create a value network
What steps should a company takes to innovate its business model? First we look at various parameters that make up the entire business context for this particular company – age, industry, and its financial performance as benchmarked against peers All of that information of course determines what actions can and should be taken – in terms of type and degree of innovation. Knowledge of current business model innovations within the industry are essential. Here’s where a company must make a choice to follow business model innovators in its industry, lead the innovation in the industry with an entirely new business model… or jump into another industry or value chain. Financial performance can help decide how much change is needed, and where financial opportunities are.
Next, there’s the work that goes into defining a company’s current and target positions so a path can be created Assessments related to industry model innovation tackle these questions How can you leverage new / emerging business models in your industries? From other industries? How does new/emerging technology change the parameters? Are you a leader of follower when it comes to industry change? Revenue model questions Are there ways to reconfigure / re-allocated sources of revenue in your business? How can you sell elements of your services / offerings differently? How can you reconfigure value elements in your business? Enterprise model questions How can you select and leverage unique assets & capabilities in your business that provide competitive differentiation? What should you do yourself vs where should you partner for optimal value? A path is created by assessing answers in relation to most effective degree and timing of innovations.
Once the path to business model innovation is designed, a company can start building capabilities. This requires systematic ways to envision future change in industry, looking at revenue implications and operationalizing enterprise changes with the organization or with external partners.
Module 6 - Services innovation Business Model Innovation
How aligned is service’s value proposition with the core enterprise business strategy?
How well does the current service operational model support the direction service is headed?
Business Model Clarity
How well do the firm’s service offerings match up with its customers shifting priorities?
How well do the firm’s service offerings align with core product offerings?
Service Offering Maturity
How integrated are the processes, data, tools, and management of the entire service chain?
How integrated is the service chain with sales, marketing and product development?
Operational Maturity Questions Category
Top-line learnings about business model innovation 1 Business Model Innovation improves margins 2 Three distinct types of Business Model Innovation have been identified 3 All three types of Business Model Innovation can lead to financial success -- the right strategy and execution are key. 4 Enterprise model innovation through collaborative innovation is the most predominant model.
Business Model Innovation improves margins Operating Margin Growth in Excess of Peers (Compound annual growth rate over 5 years) Operations Innovators Products/ Services/Markets Innovators Business Model Innovators Source: The Global CEO Study 2008: Expanding the Innovation Horizon 1 -1% 0% 1% 2% 3% 4% 5% 6%
Three distinct types of business model innovation have been identified Business Model Innovation Enterprise model Innovation INTEGRATION
Zara’s Fast Fashion model is supported by a highly integrated business model along its value chain
Bharti created a highly specialized Telco business model by focusing only on its key differentiators – marketing, sales and distribution – and partnering for everything else
P&G’s innovative R&D collaboration model “connect & develop”, sourcing over 50% of ideas externally
2 Revenue model Innovation
Gillette innovated the pricing model by giving away razors and making money on the blades
Netflix shifted the revenue model from product / rental based to a subscription based annuity model
PRICING / REVENUE MODEL VALUE PROPOSITION
Cirque du Soleil reconfigured offering and value elements to transform the circus experience
Industry model Innovation INDUSTRY TRANSFORMATION
Moving from one value chain to another, leveraging its brand across industries including airline, media and telecoms
Apple transformed the music industry through a new way of connecting hardware with software to download music with iPods/iTunes product & service combination
Dell redefined the PC value chain and industry model by using a direct to customer sales model
Each type of business model innovation, alone or together, can lead to financial success -20% 0% 20% 40% 60% 80% 100% 120% Southwest Microsoft Starbucks Google Napster ING Direct POSCO Target Coca-Cola IBM Nokia Apple Netflix eBay Amazon.com Progressive Capital One Eli Lilly P&G Goldcorp Li & Fung Bharti Telecom Infosys Dell Source: IBM Institute for Business value analysis of Thomson ONE Banker financial data and company annual reports, 1997 – 2006 Revenue Industry/ Enterprise Model Revenue / Enterprise Model Enterprise / Industry Model Industry / Revenue Model Revenue Model Enterprise Model Industry Model 10 year Stock CAGR 10-year Stock CAGR versus Type of Business Model Innovation 3
Enterprise model innovation through collaborative innovation is the most prominent model # of Business Model Innovators focused on BMI Path (Based on 35 best practice cases) # of Companies External Collaboration Specialization/Integration Value Proposition Revenue / Pricing Transformation Horizontal Moves 22 25 28 4
Approaches to industry model Innovation Transforming the industry value chain Companies are changing the “rules of the game” by challenging traditional value chains through disintermediation. Example: the “Dell Direct” model. Transforming industries through horizontal moves Differentiating expertise, experience and assets are moved aggressively to another industry value chain. Example: Virgin move from music industry to airline company.
Approaches to revenue model innovation Competing through new pricing and revenue models Industry “rules of the game” are transformed through fundamental shifts in underlying pricing and revenue models, such as charging for ring tones or offering monthly subscriptions for DVDs Innovating value proposition through reconfiguration The opening of new, uncontested spaces generates a leap in customer value through reconfiguration of competitive factors, creation of unprecedented value propositions and completely new markets.
Approaches to enterprise model innovation Integration / specialization continuum Integration requires execution of all business components across the enterprise while specialization requires collaboration and partnering on selected non-differentiating business components . Enterprise integration case-- Zara. Specialization case:--Bharti Collaboration and partnering Organizations are redefining the extended enterprise as they seek collaboration in a selected number of business areas/components and partnerships ranging from supplier relationships to legal joint ventures – leading in some cases to value networks
Action step 1 Understanding context and parameters Age of Company Industry Financial Performance
Depending on age and organizational legacy , companies are pursuing different business model innovation paths . . . e.g., enterprise model innovation is most relevant to companies 50 years and older
Understanding implications will set the framework for decisions on both type and degree of business model innovation
Nature of business model innovation opportunities vary by industry, depending on unique characteristics and maturity in each industry
Understanding the nature of opportunities within – and across – industries allows identification of incremental or radical innovations
Benchmark performance against industry peers, especially financial opportunities created through business model innovation
Defining a company’s overall strategic intent for service determines the overall service business model
Take these steps to define strategic intent:
Map all the activities the customer performs in using and maintaining the product throughout its lifecycle
Understand the customer’s expectations for support and service throughout this lifecycle
Identify a unique value proposition to customers and the enterprise
Align the overall service strategy with the enterprise strategy
Identify and prioritize opportunities for services revenue growth and cost reduction
The outcome of this assessment is a strategic intent that is:
Clearly defined and actionable
Aligned with competitive and market context
Able to be effectively communicated to stakeholders
Focus on Integrating Service Operations and Reducing Cost Focus on Growing Services Revenue Pursue Cost Reduction and New Revenue Opportunities in Parallel Traditional After-Sales Support Model Service Model Strategic Intent Degree of Services Led Growth Degree of Optimization
Action step 2 Assessing current and desired positions to create path High Low Revenue Model Industry Model Enterprise Model Moving from current to target position
Are there ways to reconfigure / re-allocated sources of revenue in your business?
How can you sell elements of your services / offerings differently?
How can you reconfigure value elements in your business?
How can you select and leverage unique assets & capabilities in your business that provide competitive differentiation?
What should you do vs where should you partner for optimal value?
How can you leverage new / emerging business models in your industries? From other industries?
How does new/emerging technology change the parameters?
Are you a leader of follower when it comes to industry change?
Current Position Target Position
Degree of Innovation
How does the degree of innovation relate to your industry? How will it change in the future?
Do you have the right balance?
Timing of Innovation
Do you drive change in the industry, or is it imposed on you? Lead vs follow?
What are the disruptive technologies or models emerging today?
Which business model innovation paths are we / should you explore?
Which ones are most aligned with our industry, capabilities, vision?
Leaders manage the services offering portfolio with the same degree of rigor as the product development portfolio New Product Development Strategy and Delivery Framework
How Does This Apply To Services?
Strategy & Portfolio
Do the offerings support the our business strategy & objectives?
Are the services aligned to our customers’ needs & expectations?
Service Offering Development Process
Are our services well-defined? How quickly do they gain traction in the marketplace?
Do we have a process to sunset underperforming services?
Are we launching services in a timely and efficient manner?
Is there an appropriate sequence & timing for services’ launch?
Are we using the right metrics to measure team and process performance?
Do these metrics alert us to potential project pitfalls and process improvements?
Systems & Infrastructure
Do we have the right systems in place to enable our services sales & delivery?
Do other stakeholders have access to these systems?
Teams & Organization
What are unique skills and capabilities required to execute successfully?
Is our organization and team structure consistent with services delivery needs?
Strategy & Portfolio Product Development Process Project Execution Metrics Systems & Infrastructure Teams & Organization Select A Model Identify & Address Gaps Manage Like Product Development