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Business Model BibleCreating Value through Innovation<br />The art and science of innovation<br />
Part 1:Introducing Business Model Innovation<br />The art and science of innovation<br />
Business Model Innovation: challenging the assumptions a company holds about the way it creates value.<br />The Edengene D...
Introduction<br />The purpose of this document…<br /><ul><li>There are thousands of ways to target new customers, or creat...
However, there are a limited number of structured ways that youcan alter the way you play in the value chain, partner with...
Edengene’s “Business Model Bible” lays out more than 50 ways of creating value or making money, illustrated by thought pro...
Innovation has never been more important. Edengene’s “Business Model Bible” is designed to provide inspiration and act as ...
<ul><li>Punched card data processing equipment</li></ul>“Computing Tabulating Recording Corporation”<br />IBM is one compa...
Automatic meat slicer
Time keeping systems
Punched card equipment
Browning automatic rifles
MI carbine
The Manhattan Project (atomic bombs)
IBM mainframes
Chip sets
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Edengene Business Model Bible


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The introduction to the Edengene business model bible. This is the first in our weekly serial that will cover pricing models, product and service models, distribution models, market models and emerging technology models.

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Edengene Business Model Bible

  1. 1. Business Model BibleCreating Value through Innovation<br />The art and science of innovation<br />
  2. 2. Part 1:Introducing Business Model Innovation<br />The art and science of innovation<br />
  3. 3. Business Model Innovation: challenging the assumptions a company holds about the way it creates value.<br />The Edengene Definition<br />
  4. 4. Introduction<br />The purpose of this document…<br /><ul><li>There are thousands of ways to target new customers, or create new value propositions
  5. 5. However, there are a limited number of structured ways that youcan alter the way you play in the value chain, partner with your stakeholder network, align your product portfolio against customer need and therefore the way that your business makes money
  6. 6. Edengene’s “Business Model Bible” lays out more than 50 ways of creating value or making money, illustrated by thought provoking global examples across a wide range of different industries
  7. 7. Innovation has never been more important. Edengene’s “Business Model Bible” is designed to provide inspiration and act as an reference tool for any innovator</li></li></ul><li>A corporation is a living organism; it has to continue to shed its skin. Methods have to change. Focus has to change. Values have to change. The sum total of those changes is complete transformation.<br />Andrew Grove, Founder of Intel Corporation<br />
  8. 8. <ul><li>Punched card data processing equipment</li></ul>“Computing Tabulating Recording Corporation”<br />IBM is one company that has continually challenged assumptions about its business model<br />1893<br />1940s<br />1980s<br />1924<br />1960s<br />2000s<br /><ul><li>Weighing scales
  9. 9. Automatic meat slicer
  10. 10. Time keeping systems
  11. 11. Punched card equipment
  12. 12. Browning automatic rifles
  13. 13. MI carbine
  14. 14. The Manhattan Project (atomic bombs)
  15. 15. IBM mainframes
  16. 16. IBM PCs
  17. 17. Chip sets
  18. 18. Services
  19. 19. Consulting
  20. 20. Innovation
  21. 21. R&D</li></ul>(Source: IBM Annual Report )<br />
  22. 22. There are many ways to innovate around business model, all equally valid in the right situation <br /><ul><li>There are simple and complex ways to innovate the business model from changing the basic pricing model to entirely rethinking the way a company does business, requiring significantly less or more change to leadership and people, organisational structures, and business processes depending on the model chosen
  23. 23. Every level of business model innovation can make a radical change to the way a company is perceived and how it performs
  24. 24. Each organisation must judge for itself the degree of innovation appropriate to the underlying business model based on internal and external factors, incorporating industry circumstance, existing business capability and the commitment of the business’s leadership
  25. 25. What is appropriate to one company will not be necessarily appropriate to another company, even at the same time in the maturity cycle, in the same peer industry
  26. 26. Innovating along the business model spectrum – from the simplest to the most complex of innovations – can bring significant reward</li></ul>Pricing model changes, leaving the product or service the same <br />Simple<br />Fundamentally change the rules in a given marketplace<br />Complex<br />
  27. 27. Circumstances, capabilities and commitment determine what type of business model innovation is appropriate<br />Business Model Innovation Considerations<br />Circumstance<br />Capability<br />Commitment<br /><ul><li>How mature is the industry? What are competitors doing? How happy or unhappy are customers?
  28. 28. The more an industry matures, the more opportunities there will be for disruptive market-based business model innovation
  29. 29. Conversely, in young, fast-growth industries, there are often unique opportunities to connect to customers with smart pricing and product or service-based business model innovation
  30. 30. Where are the business’s strengths (and weaknesses)? What capabilities can be leveraged?
  31. 31. What resources are required (and available)? What boundaries and options are available – build, buy or partner?
  32. 32. IBM employed all three of these approaches in its shift from manufacturing to services
  33. 33. This is about a change in mindset at board level – increased flexibility – and then throughout the company. The CEO’s role undoubtedly becomes more important
  34. 34. What is the business’s leadership and employee base’s appetite for change?
  35. 35. The more disruptive the business model innovation, the more commitment required to deliver. Whilst obvious, this is critical
  36. 36. Massive organisational and cultural change will be required for more disruptive business model innovation, as well as a more straight-forward change in activities</li></li></ul><li>Edengene has developed a framework to look at the spectrum of possible business model innovation<br />Business Lifecycle<br />Financial return<br />Exactly how a company approaches business model innovation will depend on the level of organisational upheaval that its executive team, employees and stakeholders are willing to tolerate<br />The impact of innovation can be broad and deep touching people, organisational structures, and business processes<br />There is a clear correlation between the level of disruption both to the market and to the organisation and the return a company can reasonably expect – higher risk, higher return<br />Based<br />4. Market<br />Based<br />3. Distribution<br />Based<br />2. Product/service<br />Based<br />1. Pricing<br />5. Technology<br />Based<br />Complex<br />Simple<br />(Increasing organisational disruption)<br />
  37. 37. Business Model Category 1: Pricing<br /><ul><li>Pricing is one of the most fundamental tenets of a business model, and also one of the most basic disruptors that an industry innovator can employ. Innovating around pricing models isn’t about just changing pricing – it’s about redesigning how money is made and how to monetise customers
  38. 38. From cost-plus pricing, which calculates the cost of the product then includes an additional margin to generate profit, to value-based pricing which factors in how much a customer values the service and therefore how much they are willing to pay as well as the adjacent market forces of competitors’ positioning, pricing depends on understanding the customer
  39. 39. Under pressure from entrepreneurial innovators and unable to protect core revenue models, industries are beginning to experiment with pricing strategies.
  40. 40. Loss-leading, skimming and discounting are all traditional pricing tactics. Innovative pricing models go further, not only reflecting the demand for popular products, but beginning to embed risk-reward mechanisms by creating more transparent contracts between supplier and customer
  41. 41. Key to the success of pricing-based business models is to match customers’ perceptions of value with their ability to pay to maximise sales volume, revenues and profits</li></li></ul><li>Vodafone – Using pricing innovation to create a new market<br />Based<br />Pricing<br />Assumption challenged<br />Pay the bill at end of the month<br />Results<br />Massive market expansion<br /><ul><li>Vodafone capitalised on a first-to-market position with a market leading product (the Vodafone network) to create a large installed customer base
  42. 42. Building from this success, the company expanded into multiple markets to maximise business model and product revenue streams
  43. 43. Vodafone did this by challenging industry conventions that driving up annual revenue per user (ARPU) was the only way to create value and that the way to do this was via monthly subscription
  44. 44. The company revolutionised the industry when it introduced its “pay-as-you-go” pricing option bringing wholly new customers into the market for mobile phones
  45. 45. Increased payment flexibility allowed the company also to further increase profitability</li></ul>Pay per performance<br />Demand driven pricing<br />Pay as you go<br />
  46. 46. Business Model Category 2: Products and Services<br /><ul><li>Business model innovation based around product and service development and delivery is not necessarily about traditional New Product Development i.e. beginning with opportunity area, developing concepts and launching those products that pass market testing hurdles
  47. 47. Product and service model innovation uses customers as the starting point to understand what it is they want today and might want tomorrow, and then looking at the current portfolio of products/services and exploring how best to capitalise on opportunities
  48. 48. Generating profits from existing (and future) product or service platforms can involve re-targeting existing products/services, or bundling in a complementary product or service wrap with an existing product, re-segmenting a customer group and then repositioning a range of existing/variant products
  49. 49. Tesco’s Product Pyramid is a classic example of an “unmet” customer need where the grocer saw an opportunity to sell 8 pork sausages priced at anything from 49p (for “Value” lines) to £2.29 (for “Finest” traditionally made) – providing each segment of their customer base with a relevant product
  50. 50. Exemplar product innovation often meets a need that customers have yet to identify and fills it with an innovative and indispensible product or service: Starbuck’s famous “Third Way” created the café environment that customers had not realised they were missing and offset a decline in coffee-drinking</li></li></ul><li>Apple – Building off existing capabilities to reinvent itself as a music distributor and a mobile communications leader<br />Based<br />Product/service<br /><ul><li>Apple combined software and hardware production to found the personal computing market with a truly innovative product for the home or small business that specifically met those customers’ distinctive needs – creating at the same time a generation of Apple brand champions
  51. 51. Since then, Apple has leveraged its hardware design and software capabilities and unique user interfaces to diversify into music distribution and, more recently, mobile communications.
  52. 52. The company subsequently built the iTunes platform as a distribution channel for music downloads that would drive sales of its iPod MP3/4 player, where it makes the majority of its profit
  53. 53. Apple has made a further leap with the launch of the iPhone, which combines the company’s trademark style-conscious design and user interfaces and has moved to open source coding to allow 3rd party companies to create applications that will run on the iPhone</li></ul>Assumption challenged<br />Credible cutting edgetechnology must be complex and aimed at the ‘digirati’<br />Results<br />Achieved phenomenal success with the introduction of the iPod and portfolio of accessories<br />First to market<br />Blockbuster profit<br />Profit multiplier<br />
  54. 54. Business Model Category 3: Distribution<br /><ul><li>Distribution represents the channels through which companies communicate with and offer their value propositions to the end customer. Customer touch points and distribution channels have exponentially increased in the last decade giving companies an unparalleled access to the consumer
  55. 55. Distribution-based business model innovation is far more than the opportunity to increase the number of channels to market
  56. 56. Distribution innovation provides the framework to create value chain disambiguation and reorganise distribution to make money in new ways and make distribution a fundamental part of the customer experience
  57. 57. Zopa, the online peer-to-peer money exchange use the “marketplace” model to cut out traditional brokers and mount a challenge on established banking practice. Zopa matches borrowing to lending and its early success has enabled the company to prosper and expand into new territories.
  58. 58. Sony has also revolutionised its business model through distribution using its PlayStation 3 as a pre-installed platform for the new Blu-ray high definition DVD player creating a vast “installed base” to help it win the high definition format war
  59. 59. Exemplar distribution innovation creates new market opportunities and represents a powerful tool for differentiation and competitive advantage</li></li></ul><li>Based<br />Distribution<br />Nespresso – Engaging with customers directly to guarantee their loyalty<br /><ul><li>Nestlé tackled the distribution problem that many consumer product companies face – lack of direct access to their end consumers to break the stranglehold on distribution dominated by the grocery channel
  60. 60. Nestlé pioneered the portioned coffee market. Together with manufacturing partners including Alessi and Miele, the company created stylish coffee machines sold as part of the company’s “Trilogy” system.
  61. 61. The product included the machine, exactly portioned Grand Cru coffees, and customized, convenient service, sold directto individual consumer for in-home use, small businesses and on-trade customers
  62. 62. Buyers of the Nespresso espresso coffee machine became “Club Members” buying Nespresso capsules on an ongoing basis, by phone, fax or post or direct over the Internet
  63. 63. The business has had a compound growth rate of 30% over the last 5 years and now has sales of over half a billion – with high profits from capsule sales</li></ul>Assumption challenged<br />Fast movingconsumer goods are sold via grocery channel<br />Results<br />Nestlé Nespresso surpassed one billion CHF revenue at the end of 2006 with year on year growth of 42%<br />Marketplace<br />Installed base<br />Direct to the consumer<br />
  64. 64. Business Model Category 4: Market<br /><ul><li>Market-based business model innovation can revolutionise businesses and entire industries, breaking the mould and forcing competitors to adapt, follow or become obsolete
  65. 65. This category of innovation is typically disruptive, entirely rethinking the way the way a company does business, requiring significantly less or more change to leadership and people, organisational structures, and business processes
  66. 66. When Prudential created Egg as a standalone business, many analysts and commentators were sceptical about an insurer being able to challenge the existing order in banking – not only was this highly disruptive example of business model extremely successful, it irrevocably changed the face of banking
  67. 67. Market-based innovation is generally easier for challengers than incumbents with substantial assets, customer bases and market perceptions: Kodak has been attempting to transform its business model for some years, as their fundamental market proposition for over 100 years disappears in the face of the digital revolution</li></li></ul><li>Based<br />Market<br />Ryan Air – Thinking the unthinkable and reinventing an entire industry with the creation of the budget airline<br /><ul><li>Ryanair re-invented the airline industry to become Europe’s 4th largest airline and largest budget airline by challenging the business assumption that air travel was a costly and therefore occasional method of travel, for which airlines had to provide a complete flying experience
  68. 68. The company stripped out many of the accepted service elements, such as predictable pricing and seat allocation, multi channel access for booking and provision of food and drink for free to remove cost, creating a budget service for the functional traveller, thus enabling a much larger group of consumers (and businesses) to fly, and fly more often
  69. 69. Ryanair also shook up the operational model of the industry, improving turnaround times to optimise aircraft utilisation
  70. 70. While Michael O’Leary concentrates on a cost leadership model, he does this with a keen eye on sustainable top-line growth, for example, boosting revenues by the hard pre-flight and onboard sale of add-ons</li></ul>Assumption challenged<br />Airlines must providea complete flying experience<br />Results<br />Revenue growth2005-6 = 28%<br />Profit growth2005-6 = 12%<br />Intimidation<br />Second to market<br />Cost leadership<br />
  71. 71. Business Model Category 5: Technology<br /><ul><li>E-commerce is revolutionizing the way that we do business, giving rise to new kinds of business models. While some are genuinely new, such as Opensource, others harness the power of technology to reinvent tried-and-tested models
  72. 72. Bartering and Brokerage models are examples of business models that have been renewed via technology and are now commonly facilitated by eMarketplaces, which have broadened their applicability to a wide array of goods and services
  73. 73. Web-enabled business models are developing as rapidly as the internet itself with new variations being established every year. The majority of the first generation e-commerce business models were driven by advertising, extending the traditional media broadcast model
  74. 74. Revenues were generally derived not from the content and services themselves, but from the advertising messages that were blended in via banners. Many of these companies operated on a build-first, monetize-later strategy with uncertain revenue models which struggled to ever achieve profitability
  75. 75. While some, such as Peer-to-Peer have yet to prove themselves financially, more recent models including Freemium are rapidly gaining in popularity by offering basic business services that become incorporated into operating structures requiring premium upgrades for support</li></li></ul><li>LinkedIn – Allowing free access to its site to create traffic for its paid-for services<br />Based<br />Technology<br /><ul><li>LinkedIn is a business-oriented social networking site launched in May 2003 mainly used for professional networking
  76. 76. Originally conceived as the “premier provider of professional networking tools for hiring managers, job seekers and professional service providers”, LinkedIn offered a free referral-based service
  77. 77. Recruiting has emerged as one of the most popular applications of LinkedIn’s online networking tools
  78. 78. Most recently LinkedIn launched another new paid-for service, LinkedIn Surveys, that enables market researchers and investors to solicit market intelligence from LinkedIn’s network of over 30 million professionals worldwide, leveraging the membership base and LinkedIn’s deep profile information on all its members
  79. 79. LinkedIn is currently growing at a rate of half a million new members a week </li></ul>Assumption challenged<br />The core product or service is where the money is made<br />Results<br />More than 30 million members from around the world, representing more than 170 industries, 150 countries, and including executives from all Fortune 500 companies<br />Mashup/ e-models<br />Peer-to-Peer<br />Freemium<br />