Viewpoints on Change       STRATEGY & GROWTH                                                ISSN: 1904-6758 – NR. 4 / 2012...
STRATEGY & GROWTHEDITORIALWhy not?                                                                  results. Rather promis...
ARTICLECreate growth throughinnovative business modelsUnderstanding the why, what and how of business model innovationby M...
STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSplace. Management incentive structures      However, exce...
CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSAccompanied by branding strategies              experienced-based differen...
STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS                                                         ...
CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSWhat is a business model?                   is enabled by the organisation...
STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS                                                         ...
CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS                                   RESPONSIVE BUSINESS MODEL ORIENTATION  ...
STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS                                                         ...
CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSto create entirely new markets where            tom of the pyramid live on...
STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS                                                         ...
CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSexperiences what he or she already         lutions. On the one hand, a num...
STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSbusiness capabilities. For instance, the      Know your o...
CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS                                                   Issue no. 4 / 2012   15
STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSvalidating predetermined hypotheses.         forts toward...
CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSthe innovation project, innovators can         problems to solve and activ...
STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSEach step of the framework is support-ed by an advanced t...
CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSproduct and a strong dual-sided busi-       ing orientation and proactivel...
STRATEGY & GROWTHARTICLE BASED ON INTERVIEWS AND DISCUSSIONS WITH EXECUTIVES FROM LEADING RETAIL BANKS IN DENMARKFacing th...
FACING THE NEW NORMAL OF RETAIL BANKING   and alternative “business-to-business                                           ...
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
Viewpoint on Business Model Innovation
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Viewpoint on Business Model Innovation

  1. 1. Viewpoints on Change STRATEGY & GROWTH ISSN: 1904-6758 – NR. 4 / 2012Business Model InnovationNew paths to creating growthand delighting customersCONTENTSP. 3 P. 20 P. 28 P. 30Article Article Model ArticleCreate growth through Facing the New Normal Discovery-driven Business model innovation asinnovative business models of Retail Banking innovation a response to increased com- petition in the energy sector
  2. 2. STRATEGY & GROWTHEDITORIALWhy not? results. Rather promise little and surprise positively than BY NIELS AHRENGOT reaching for the stars and risking not quite reaching them – CEO, IMPLEMENT CONSULTING GROUP analogously to the above example. However, large innovations solely based on analyses of the past are rare. For even though the analysis is imperative in order to being able to understand and generalise and, thus,We are involved in a project for a global growth company scale, the tempo and complexity in our surrounding worldwhere we have recently carried out a project with focus on have reached a level where we need to change the bal-developing products faster and more efficiently. The project ance between value creation and our need for predictabil-was, in our opinion, a success. The client company, which is ity. Those of us who think analytically must learn to speakrecognised as one of the world’s leading experts within their an intuitive language, and those who think intuitively mustarea of expertise, was, basically, satisfied. However, because learn to communicate in an analytical mindset. Both sets ofthey act the way they do when clients are at their best, they competences are absolutely necessary. Even though innova-ask anyway: Seeing that we are capable of reducing the lead tion and intuitive thinking are closely linked, it is only whentime of a project from 600 to 300 days, why not reduce it to rationality and analysis are involved in the process that the100 days? large-scale commercial and business breakthroughs take place.It is, of course, quite the partykiller in a situation where wehad expected to get a pat on the shoulder for our efforts. Companies such as Apple, Google and Just Eat are good ex-But he is right. Why do we consider good results as final amples. Their development has been unpredictable, but theirwhen we are fully aware that in 12 months from now, we will value creation has been immense, because they have beenbe able to create the same percentage improvements one able to combine intuitive and analytical thinking. Whethermore time and once again 12 months later? Why do we not we, as Roger Martin, call it Design Thinking is of minor im-change our mindset radically, raise the bar and reap the full portance. We MUST be able to combine that which is ration-benefits now? And once again – not in 12 months, but in six al and analytical with that which is intuitive and irrational. Inmonths? this cross field, limitations turn into opportunities. This is also where the most successful companies operate and the bestRecently, we had the pleasure of discussing strategy with employees thrive, develop and generate most value.Roger Martin, Dean of the Rotman School of Management.According to Martin, today, most strategic work suffers from Thus, the question presented in the beginning of this articlea gap between analytical and intuitive thinking. This is pri- is just a logical consequence of the reality we live in and amarily caused by the fact that strategy has become an ana- question that we – who are well on in years – must get usedlytical discipline where predictability is rewarded more than to being asked: Why not?2 Viewpoints on Change
  3. 3. ARTICLECreate growth throughinnovative business modelsUnderstanding the why, what and how of business model innovationby Morten HejlesenShort-term competitive advantage is ness should lie the aspiration to delight and influence key decisions throughcreated by exploiting existing business customers. It might seem deceptively rhetoric or regulations. Inside impedi-models. However, in the long term, simple, but, in reality, this core tenet is ments come in many shapes. Actionsall markets mature, competition challenged every day. of the past such as investments andintensifies and turbulence increases. strategic choices create commitmentsConsequently, new sources of growth Outside pressure from investors trig- that are hard to escape when customermust be explored, and fresh answers gers the desire to focus on short-term needs are changing. Often, the un-to enduring success must be found. optimisation putting long-term cus- derstanding of customer needs lacksThe answer used to be innovate or die. tomer and, thus, shareholder value depth or is based on false assumptions,But research shows that pouring more creation at risk. Diverse stakeholder thus limiting capabilities to conquer amoney into pure product innovation groups compete to capture attention differentiated position in the market-does not lead to improved performance.We need to dig deeper.To succeed in innovation and to WHAT IS CUSTOMER VALUE?seize new oppor-tunities, the scopeof innovation must be expanded to The idea of ”delighting customers” can be translated into the equally simpleencompass the full business model, idea of ”creating value” for customers. But what exactly is customer value,and new processes must be mastered. and how can it be defined?This article explores how an innovativebusiness model is linked to customer Firstly, customer value cannot be equated with low price. More precisely,value creation, defines growth value creation is a trade-off between certain benefits and costs associatedopportunities and presents key success with the value proposition over its entire life cycle. The total value of owner-factors to exploit the potential of ship must be calculated to assess the value creation potential.business model innovation. Secondly, value lies in the eye of the beholder. Value is subjectively judged by the customer, which means that we must identify perceived benefits and costs. All insurance companies know this fact as they, in reality, sell productsRethink customer which, hopefully, are not used. Value is not related to product attributes, butvalue creation rather customer benefits. Thirdly, the value creation potential must be adjusted for the riskiness of theDelighting customers is the heartbeat value proposition. All innovators know this by heart. New products that areof every business relatively unknown are always harder to sell than well-known products be-While pundits claim that the only cause of a higher perceived risk.constant in the world of business is Taken altogether, customer value can be expressed as:change, one factor remains unchangedand stable. At the heart of any busi- Customer value = (perceived benefits – perceived life cycle costs) x (1 – perceived risk) Issue no. 4 / 2012 3
  4. 4. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSplace. Management incentive structures However, excess post-war production in the 1970s and is still an effective ap-are aligned with a strong focus on ”run- capacity and a frugal culture created proach to customer-centric sales. Inning the business” rather than ”devel- the perfect storm, motivating compa- fact, many businesses are still on a jour-oping the business”. Mental blinders nies to find new ways of reaching the ney from delivering products to creat-tend to pop up resulting in a bias to run heart of their customers. Increasingly, ing solutions composed of both tangi-business as usual, and new ideas are generic products were differentiated ble products and intangible services.judged unattractive due to the risk of and associated with emotional and so- The trend has also been dubbed ser-cannibalising the current business. And cial benefits. The rise of branding and vitisation of manufacturing, which alsothe list continues. segmented marketing strongly indicat- highlights the shift towards designing ed a shift towards a broader concept all aspects of the customer experienceAltogether, the simple goal of delight- of customer value creation. The shift is as well as tailoring the experience toing customers is not that simple at all. beautifully portrayed in the TV series individual customer needs. CustomerEven though it has been proven time Mad Men about the American flourish- delight was no longer perceived as aafter time that customer-centric or- ing advertising industry in the 1950-60s result of simple products, but integrat-ganisations are the most successful, it and the boom of Madison Avenue ad ed solutions with a carefully designedis complex and challenging to walk the agencies. and value-adding layer of experiencestalk. Moreover, the ways in which or- that surrounded the core product.ganisations deliver valuable customer In parallel, the strong focus on tangibleexperiences have dramatically changed products was replaced with the idea In the 1990s, Joe Pine and Jim Gilmorein the past decades. of comprehensive value propositions portrayed the rise of the experience and selling total solutions to customers. economy in which they claim that workFocus on customer benefits Solution selling emerged as a discipline is a theatre and every business a stage.– not product attributesA quick glance at the history of delight-ing customers shows that focus has ex- WHO IS YOUR CUSTOMER?panded from fulfilling simple needs toaddressing the full range of advanced Simple questions usually turn out to be tough ones. Theodore Levitt asked:customer needs, and the scope of in- ”What business are you in?”. We also need to ask: ”Who is your customer?”.novation has been widened from ba- While the examples mentioned show the importance of the end user, valuesic products to integrated solutions. In creation should be managed for all touch points that your offerings have be-other words, the key driver has been fore reaching the final customer.growing attention to manipulating allparameters of the business ecosystem In the insulation industry, Rockwool has analysed and designed value proposi-in order to deliver customer value. tions for all customers involved with their core product. The chain of custom- ers includes building owners, architects, contractors, sub-contractors, install-In the days of mass production, ers and distributors. Moreover, a careful evaluation of different segmentscustomers were delighted by simple within each customer group needs to form the basis for the design of differ-products fulfilling basic needs and ent value propositions for every group.wants. Henry Ford famously dictated In the case of fast-moving consumer goods, all companies face similar chal-in 1909 that customers could have the lenges. Value creation cannot only focus on the end consumer, but shouldfunctional benefits of his Model T, while also consider the needs of the shoppers buying the goods, the retailers sellinghe cared less about fancy colours: ”Any the goods, the wholesaler distributing the goods and even external partnerscustomer can have a car painted any responsible for production. Before pouring a simple glass of milk, customercolour that he wants so long as it is needs must be served appropriately many different places in the total con-black”. Cars were black and nothing sumption chain.but black.4 Viewpoints on Change
  5. 5. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSAccompanied by branding strategies experienced-based differentiation. Develop experience-based solutionsthat engaged all five senses and even Fuelled by financial meltdowns, rising to gain competitive advantageexperiences designed around the idea awareness of human impact on the en- As a consequence of increasing com-of catalysing personal transformations, vironment and increased global inter- petition in mature markets, new op-the experience-centric thinking supple- connectedness, most organisations are portunities in emerging markets andmented past logics of value creation. now consciously evaluating how to fulfil near-constant disruptions at the fringesOn the one hand, products developed altruistic benefits for customers. In oth- of most industries, focus on delightinginto solutions. On the other hand, fulfil- er words, how to incorporate elements customers plays a key role in gaining ament of functional needs was accom- of selfless concern for the welfare of foothold in a competitive marketplace.panied by addressing more sophisticat- others in their value propositions, e.g. Although the notion of creating blueed customer needs. cradle-to-cradle principles and the am- oceans is appealing, real-life experience bition to safeguard the planet for the often shows that competitors quicklyRecent developments in the ways of coming generation through company- invade uncontested space and capturedelivering customer value might be wide social responsibility, plays a still market share.considered as a counter-reaction to the more vital role in order to delight cus-mainly narcissistic attempts to achieve tomers (figure 1). To carry on delighting customers on a continuous basis, advanced manners of delivering value and creating com- petitive advantage are needed. Add to that the dramatic consequences of recent technological developments such as the internet that has created Functional an unprecedented range of opportuni- benefits ties to interact with and deliver value Efficiency to customers. By leveraging the power Excellence of emerging technologies, entirely new markets have been made accessible, and novel manners of interacting with customers have been created. Emotional Social benefits benefits Consider Danish telecom TDC that Feelings Status bundles telephony subscriptions with Aesthetic Esteem free access to millions of music tracks through the TDC Play service or the rise of internet-based portals for long- distance microfinancing and interac- tions with African entrepreneurs such as MYC4 and Kiva. Since Kiva was Altruistic founded in 2005, 636,949 lenders benefits have invested USD 255 million in poor Ethics entrepreneurs in remote areas of the Spirituality world. The entrepreneurs have grown their businesses and repaid 99% of the loans. Both examples highlight the re- cent explosion of colours on the palette Figure 1. Four dimensions of customer value creation of delivering valuable customer experi- Issue no. 4 / 2012 5
  6. 6. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS panded from delivering basic products to crafting advanced business models. Professor Michael Porter captured this paradigmatic shift back in 1996 when Integrated Value-based Experience- he noted that a strategic fit among solutions solutions based solutions many activities is fundamental – not only to competitive advantage, but also Internal to the sustainability of that advantage. innovation Porter argued that it is considerably focus harder for a competing firm to match Basic Complex an array of interlocked activities than Basic products and products and it is merely to imitate a particular sales offerings services services force approach, match a process tech- nology or replicate a set of product features. Therefore, positions built on Simple needs Advanced needs systems of activities are far more sus- tainable than those built on individual External customer focus activities. Consequently, we have to revise the Figure 2. Customer and innovation focus matrix old dictum of ”building a better mouse- trap” to make the world beat a path to our door. Although more than 4,400 patents have been issued by the Unitedences. The message to old Ford is sim- Above all, the uniting discovery across States Patent and Trademark Office forple: Black is no longer the only option. the spectrum of opportunities is the new mousetraps, and it is the most fre- recognition of the need to carefully quently invented device in history, theWhile the shift can be described as consider and design all elements of the driver of long-term success resides notan overarching trend, it is evident that business model to address the specific only in the mousetrap itself, but in thesuccess can still be found in all quad- needs of the particular customer seg- complete business model.rants (Figure 2). Customer needs dif- ment. The explosion of colours on thefer across segments and markets. design palette has created an unprec- The business model view resonatesIndustries compete on different factors. edented range of opportunities to be with research on how to profit fromIn some cases, an attractive opportu- explored in order to find the right fit innovation. The mousetrap approachnity can be exploited by developing between the value proposition and the clearly plays an important role. A tightsimple and convenient products that customers. regime of patents, copyrights and tradeattract non-users and, thus, expand- secrets is one component of the equa-ing the current market. In other cases, tion, but to commercialise an innova-advanced experience-based solutionscan be leveraged to capture the prof- Develop new business models tion or exploit a new business strategy, complementary assets are needed suchitable high-end of an existing market. Innovate your business models as manufacturing capabilities, distribu-However, it is clear that competitive to reap superior returns tion channels, specialised services andadvantage as a rule of thumb is more In essence, the scope of creating cus- a sales force.sustainable when solutions are hard toimitate as well as based on deep and tomer value propositions and, thus,enduring customer relationships. competitive advantage has been ex-6 Viewpoints on Change
  7. 7. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSWhat is a business model? is enabled by the organisation’s ability The external perspective describes to standardise and industrialise opera- how the value proposition is deliveredIn brief, a business model describes tions across the activity system. The to the targeted customer segments. Tohow an organisation creates, delivers aim is not to add complexity, but to en- reach the customers, the value propo-and captures value. More precisely, a able scalability through simple, but ef- sition is distributed and communicat-business model articulates the content, fective activity systems. ed through a set of channels, and tostructure and governance of the activ- establish long-term customer relation-ity system that delivers a value propo- The activity system can be illustrated ships, ways of building the relationshipsition to the customer and enables by using a simple model consisting of have to be identified. E.g. car manu-economic value creation for all activity 4 dimensions and 9 building blocks. facturers have established a numbersystem exchange partners. of customer clubs – both online and The value perspective describes the offline – to build close connections toA simple example of customer needs total market offering provided by the their customers.being fulfilled by radically different company. It consists of a value proposi-business models is car transportation. tion composed by an integrated solu- The internal perspective describesGetting from A to B and the freedom tion of products and services. Typically, how the market offering is produced. Ato choose when to go can be served the core offering is linked to comple- number of tangible, intangible or finan-by a car that is bought, leased, rented mentary offerings to create a compre- cial key resources must be leveraged toor even shared with co-owners through hensive customer experience. E.g. car create the value proposition through acar sharing services. The core product manufacturers have recently begun to range of key processes. Strong brandsis essentially the same, while the activ- offer leasing contracts, which has prov- are important intangible resources, andity system underlying the product cov- en to be an important complementary the design of processes both in backers a spectrum of business model de- service to the core product that drives and front office functions is vital tosign options. In all cases, value capture growth. economies of scale. Often, an external partner network is a key component of the value proposition, e.g. the finan- Internal Value External cial service providers involved in the perspective perspective perspective car leasing contracts mentioned in the example. Key Customer processes relationships The financial perspective describes how profit is made by identifying rev- enue streams and depicting the cost structure. Revenue comes in many Partner Value Customer shapes as the car example illustrates, network proposition segments and both financial components should be carefully designed to maximise prof- its and customer value. Key Channels resources The activity system is generic and can be used to systematically visual- ise and redesign any business model. Furthermore, it creates a unified lan- Cost Revenue guage around the elusive business drivers streams model concept that can be used across Financial organisational functions and units. perspective Issue no. 4 / 2012 7
  8. 8. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS Decide on what game to play before Operating margin growth in excess of competitive peers innovating the business model Per cent compound annual growth rate over 5 years Obviously, all companies have a busi- ness model. Therefore, the key question is whether all elements of the business model deliberately have been thought 6 through in a customer-centric way? Does your company purposefully de- 5 sign all elements of the business model, or are you focusing most of your inno- 4 vation on improving the core product? 3 The complexity of grasping the en- 2 tire activity system often leads to both overlooked areas as well as activity 1 systems with designs purely based on the dominant logic of the indus- 0 try. Consequently, in many cases, all eggs are put into the product innova- -1 tion basket searching for differentia- Products/services/ Operations Business model tion through superior products while markets innovators innovators innovators failing to see opportunities in other parts of the business model. In these cases, business model change is lim- ited and fundamentally responsive. Figure 3. Business model innovation outperforms other types of innovation Large changes occur when changes in the environment require action and response. However, taking a closer look at the business model on a continuous basis in a proactive manner leads to aResearch undertaken by academics, tended to be a slippery slope. To in- number of potential opportunities forglobal consultancies and our experi- crease investments in R&D proved to customer value creation and growth.ence proves that a business model-cen- be fruitless, while a dual focus on both A proactive focus holds the promise oftric look at value creation is imperative innovating the business model and de- harvesting first-mover advantages, butto business success. An IBM study from livering superior products actually ena- obviously also the risk of designing a2006 found that innovating across the bled lowering the R&D spend. Apple business model that does not deliver asbusiness model had a much strong- – often described as business model in- expected.er correlation with operating margin novator par excellence – has managedgrowth over a five-year period than to significantly lower R&D spend as a Scrutinising the business model to dis-both product/service innovation and percentage of sales while growing en- cover new business opportunities plac-operations innovation. See figure 3. terprise value at an extraordinary pace. es the customer centre stage by asking if the fit between current activities andA 2010 survey of the world’s top 150 When executed in the right manner, customer needs maximises value crea-companies confirmed the findings and business model innovation quite simply tion for both customer and company.discovered, furthermore, that a single- delivers superior returns to both cus-minded focus on product development tomers and shareholders. Four areas should be investigated to8 Viewpoints on Change
  9. 9. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS RESPONSIVE BUSINESS MODEL ORIENTATION PROACTIVE BUSINESS MODEL ORIENTATIONWhat are the sources Products, services and processes The entire business modelof differentiation?What business model Standard designs and exploitation Best fit with customer needs anddesigns are used? of the dominant logic of the industry exploration of alternative design patterns for the business modelWhen does the business Reactive change based on articulated Proactive change based on latent needsmodel change? needs of the customers of the customersWhat type of innovation Fast follower or late mover First-mover advantagesstrategy is pursued?What are the key risks in Disruptions from entrants, weak Novelty in approaches, complexityrelation to the business protectability and intense competition and unprofitable niche marketsmodel?How sustainable are Short-term due to weak protectability Long-term due to strong protectabilitycompetitive advantages?Figure 4. Proactive and responsive business model orientationestablish a systematic overview of op- Launch a sticky value-added service, emotionally attached to their broad-portunities to exploit business model acquire customers through smart pric- band provider, while the compositiondesign to enhance customer value cre- ing models or partner with great com- of a music collection is fundamental toation. See figure 5. panies to leverage their brand power. signalling who we are and what we like. Adding a complementary music serviceAdjust the current business model to Consider the role of value-added ser- has helped reduce loss of market shareexploit opportunities in existing mar- vices in the telecom industry where through improved customer loyaltykets: Changing needs of existing cus- TDC’s launch of the previously men- and satisfaction in a highly competitivetomers and a turbulent environmen- tioned free music service TDC Play re- market.tal context present the opportunity to duced churn by 50% for existing broad-adjust the business model on a con- band customers back in 2009. The core As shown in the opportunity matrix,tinuous basis. While competitors are product is essentially unchanged, while business model innovation does notfocusing on improving products, sim- adding a service layer on top based on have to be radical. Simple moves canple incremental moves in other areas partnerships with the music industry achieve great results in existing mar-of the business model can be exploited changes the ”stickiness” of the business kets and discover new differentiationto achieve important business goals. model dramatically. Few people are factors. Issue no. 4 / 2012 9
  10. 10. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS sions. Should all segments be served by the same business model while running the risk of opening a flank for competitors? Or should a radically new business model be designed to serve Expand Create attractive sub-segments while canni- New balising the existing business model? the market new markets The dilemma is well-known in the tel- Customers ecom industry where a range of low- cost players with no-frills value propo- sitions based on online self-service Adjust fit to Disrupt the have disrupted the market several Existing existing market existing market times. Recently, Danish low-cost mo- bile telephony provider Onfone was acquired by TDC after having captured Incremental Radical a large share of the low-end market populated with customers looking for convenient, simple and cheap telepho- Business model change ny. No-frills solutions, innovative pricing models and technology-driven automa- Figure 5. Typology of business model innovation opportunities tisation are classic ways of conquer- ing the low-end of an existing market. Ryanair and Google’s free web services spring to mind.Redesign the current business mod- changes, and, thereby, a latent demandel to expand the market: Incremental can be converted into real demand. At the other end of the spectrum, thechange in the current business model Typically, non-customers are those who high-end of a market can be equally at-can be leveraged to expand the mar- are either unaware of your offering or tractive to explore through new busi-ket by attracting non-customers. For meet some sort of barrier to consump- ness models. Consider the makers ofexample, the practice of serving prod- tion. Understanding and removing the automated espresso machines pow-ucts in small and affordable sizes is a barriers are keys to expanding the mar- ered by easy-to-use coffee capsuleswidely used strategy by global con- ket. Understanding commonalities in such as Nespresso. By removing thesumer brands to enter emerging mar- the non-customer segments paves the risk of failing to brew the perfect cupkets. Seven out of ten Filipino smokers way for redesigning the business mod- of coffee and reducing the time it takesbuy their cigarettes by the stick rather els. to make a nice single-shot espresso,than by the pack, and as much as 68% an attractive niche of espresso drink-of Procter and Gamble’s shampoo busi- Launch a new business model to dis- ers has been identified. Whereas high-ness in the Philippines is generated by rupt the existing market: Investigating end disruptions typically are based onsachet sales. The core product is left the needs of current customers in a technology leap, low-end disruptionsunchanged, while innovative distribu- some cases leads to the discovery of can also be achieved by simplifying andtion setup and packaging changes are attractive sub-segments which are lowering costs.keys to success. not appropriately served by the cur- rent business model. The discovery of Launch a new business model to cre-Attracting non-customers can some- underserved or overserved customers ate new markets: Designing radicallytimes be achieved through small leads to important managerial deci- new business models can be leveraged10 Viewpoints on Change
  11. 11. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSto create entirely new markets where tom of the pyramid live on less than ness unit level and when developinglarge groups of customers have been $2.50 per day and are by far the larg- new market offerings. Obviously, newlocked out. In some markets, minor est global socio-economic group. business models are not launched outbusiness model tweaks such as sachet Furthermore, fulfilling the vision leads of the blue, but rather closely alignedmarketing are simply not enough. A to value creation that, by far, goes be- with overarching strategic growth am-complete overhaul or even a new busi- yond pure economic value creation. bitions of the company. In other words,ness model is needed to commercialise a diagnosis of the strengths and weak-a value proposition for a new market. New market creation demands innova- nesses of current business modelsNew markets can be defined both geo- tive business models. Moreover, these needs to form the basis for any at-graphically such as bringing products emerging markets are often judged tempt to pursue one or more of thefrom developed markets to emerging unattractive to well-established compa- four opportunities.markets and as needs-based such as nies, because they start out small andfulfilling emerging customer needs. do not meet the expected growth rates Combine diverse knowledge perspec- to attract ordinary innovation invest- tives to create new business modelsA business model currently under de- ments. However, these markets often Becoming a business model innovatorvelopment illustrating the idea is the become large and profitable, and pa- can be compared to an artist shiftingcurrent debate concerning designing tience for growth pays off. style from painting with monochromea house for the poor that can be con- colours to using a palette with all thestructed for under $300 which keeps The four generic growth opportuni- vivid colours of the rainbow. Optionsa family safe, allows them to sleep at ties (see figure 6) can be explored and explode, and the number of possiblenight and gives them both a home and exploited by any company to sustain solutions for designing the next marketa sense of dignity. It is a grand chal- growth and delight customers. The offering increases. However, in order tolenge that surely can only be solved by common denominator is a proactive be successful, the colours on the pal-thinking innovatively about the entire posture that recognises the need to ette need to be picked carefully. Not allbusiness model. The potential is huge. cover all components of the business colours can be used for the next break-2.5 billion people at the so-called bot- model – both when strategising at busi- through. In other words, the articulat- ADJUST FIT TO DISRUPT THE EXPAND CREATE EXISTING MARKET EXISTING MARKET THE MARKET NEW MARKETSCustomers Existing Existing New NewLevel of change Incremental Radical Incremental RadicalCharacteristics Improve the existing Develop new business Improve the existing Develop new business business model to model to exploit oppor- business model to fit model to exploit attract and retain tunities in either under- needs of customers opportunities in new customers in existing serviced high-end seg- in unserved markets markets or segments markets characterised ments or overserviced or segments of non- of non-customers by intense competition low-end segments customersFigure 6. Generic growth opportunities Issue no. 4 / 2012 11
  12. 12. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS Context Macro factors, trends and technologies Internal Value External perspective perspective perspective Key Customer Resources and core competences processes relationships Customers and markets Capabilities Partner Value Customer Customers network proposition segments Key Channels resources Cost Revenue Financial drivers streams perspective Competitors Industry structure and competitive situation Figure 7. Four knowledge perspectivesed or latent customer demand that is tives must be explored and combined evaluating market options and estab-targeted needs to be matched with the to extract insights and create the right lishing a foundation of deep customerbest possible business model. In order fit between the market and the busi- insights. A key point when moving be-to design new business models, op- ness model. yond simple tweaks of existing markettions must be limited and focused on offerings is the fact that asking whatthe most promising solutions to ex- Customers: The customer perspec- the customer wants will not be veryploit the demand. Therefore, all efforts tive has already been discussed. At all helpful in most cases.should start out informed. More pre- times, a customer-centric approachcisely, four distinct knowledge perspec- is the right approach, which entails Firstly, the mainstream customer only12 Viewpoints on Change
  13. 13. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSexperiences what he or she already lutions. On the one hand, a number of Furthermore, an analysis of close com-knows and lacks knowledge about dif- constraints can be identified by analys- petitors can be used to spot industryferent options. The customer’s frame of ing macrofactors such as legal regu- orthodoxies and mental models thatreference is severely limited, and usu- lations, economic factors and soci- could be challenged. Whirlpool ob-ally customer ideas cannot be used to etal trends. Often, constraints can be served that all white goods were de-leap-jump competition. They tend to turned into great opportunities, which signed and sold with women in mind,be incremental and result in me-too producers of outdoor ashtrays discov- and they used that piece of competi-products. Secondly, the knowledge that ered when indoor smoking in public tive insight to create a new product linecan be accessed easily by asking the buildings was prohibited in Denmark for men and their garages. While thecustomer will most likely not be very some years ago. A simple change in idea might seem a bit sexist, businessunique. All competitors will have access regulations caused an instant boom in for Gladiator® GarageWorks is flourish-to the same knowledge through ana- demand. On the other hand, many po- ing, and American men are eager to in-lyst reports and industry market stud- tential solutions can be discovered by stall designer fridges in their garages.ies. One exception is the so-called lead studying the context. Both microtrendsusers who typically represent a tiny and macrotrends can provide answers To identify and break out of industryfraction of your customer base. They to great experience design. orthodoxies, the analysis should not beare characterised by their eagerness to restricted to close competitors whentweak, modify and rebuild your prod- Due to the explosion of small digi- bigger and bolder ideas are wanted.ucts. Looking at their modifications can tal sensors embedded in many con- Just as lead users and emerging tech-be helpful to identify emerging de- sumer products, it is easy to measure nologies can inspire the discovery ofmands, since they are usually ”ahead” almost everything that we do. Nike new business models, so can researchof the mass market. and Apple partnered and designed into analogous industries. Looking the Nike+ tracking device for runners. across industries helps identify emerg-Instead of asking the customers what Fitbit has developed a personal track- ing business model design patternsthey want, the best approaches for dis- ing device collecting real-time data on that can be imported from one industrycovering unique insights are to listen every step taken, stairs climbed and to another. Danish playground produc-and observe customers in their real-life calories burned. Both examples illus- er Indu basically copied Google’s busi-context. To get under the skin of the trate the booming interest in measuring ness model by offering ad-supportedcustomer, ethnographic research meth- and quantifying your everyday life. New playgrounds to schools and communi-ods must be used, and data should be technologies shape trends and can also ties for free. Looking across the indus-interpreted systematically to find the be mapped to identify design options. try value chain can also be used as asurprising insights which pave the way A key area of interest should be emerg- tool for identifying shifts in the industryfor innovation. While high-level quanti- ing technologies and careful analysis profit pool. Small changes in the loca-tative analysis of customers can set the of their possible implications for future tion of high profits in the value chaindirection, deep qualitative studies are business models. A simple but power- can be used to anticipate importantthe best option to find the latent needs ful exercise is to map 20-30 important changes and growth opportunities. Theto exploit. Sharpen knowledge through technology-based trends and concep- message is clear: When innovation am-exploring the full upstream chain of tualise a set of new solutions on the bition levels are high, an ordinary com-customers and understanding needs in basis of each of those trends. petitive analysis will not be sufficient.all phases of the customer journey frominitial consideration to disposal of a Competition: The competition Capabilities: The capability perspectivemarket offering. Put simply, get out of perspective should without a doubt is used to explore both internal and ex-the building and meet the customers. be explored. Competitive analysis can ternal capabilities and resources. Firstly, be used to single out those customer a mapping of internal capabilities andContext: The context perspective of- wants and needs which are not cur- resources can provide insight aboutfers both constraints and possible so- rently satisfied in the marketplace. underused resources or underexploited Issue no. 4 / 2012 13
  14. 14. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSbusiness capabilities. For instance, the Know your options before innovat- of a product line. But bold moves doservice business of many manufactur- ing. A broad and diverse foundation of require a decent amount of knowledgeing companies has been profession- knowledge simply makes it easier to and inspiration upfront.alised in recent years. At Danish wind be both innovative and goal-oriented.turbine manufacturer Vestas, the ser- However, the deep dive into emerging The bottom line is that analysis mustvice business is growing, while the to- technologies, latent customer needs always serve a purpose and enabletal turnover growth is under pressure. and inspiring business models should you to challenge world views. ThatServices accounted for EUR 214 million always be timeboxed and balanced also means that research efforts guid-in 2006 growing to EUR 700 million in with the innovation challenge at hand. ing business model innovation must be2011 out of a total turnover of EUR 6.4 There is no need to boil the ocean to designed to build surprising hypoth-billion. design a simple service business on top eses as opposed to just testing andSecondly, resources and capabilitiesof the business ecosystem should bemapped to identify partnering, collabo- WHAT ARE THE CHARACTERISTICS OF A GREAT BUSINESS MODEL?ration and integration opportunities. Ahighly profitable business model in the Not all business models are created equal, and some key factors must be con-publishing industry is to license for- sidered when evaluating different design options. A delighted customer is thegotten comic book characters to toy, ultimate goal of your business model, but to survive in the long run as a busi-movie and computer game produc- ness, the challenge is not just creating customer value, but capturing value asers. In that way, resources are exploited well.in a new context through smart part-nering agreements. Consider Marvel To capture value, your design must provide a high degree of protectabilityEntertainment’s lucrative licensing of through either legal or natural barriers. Legal barriers could be patents, tradeSpiderman and X-men to Hollywood secrets, copyrights or non-disclosure agreements. Natural barriers couldstudios. If partnering opportunities are be difficulty in reverse engineering your offering, switching costs or tacit-lackluster, a business ecosystem can be ness of relevant technology. To capture value, you must also have some de-designed when the right incentives are gree of control over so-called complementary assets. Such assets are for in-present. External app developers play stance manufacturing capabilities, an effective distribution setup, a portfolioa vital role in Apple’s iPhone and iPad of strong brands, innovative services and leverage of shared technologies. Insuccess. More importantly, the use of other words, the strength of your protection mechanisms and supporting as-external developers and their resourc- sets will determine your ability to capture value.es reduces the risk of failure for Appleand increases the speed of innovation At the end of the day, great business models are based on solid financial mod-at the same time. Bad apps die, while els. To support your efforts in discovering the right financial model, considerApple survives, and barriers of entry in some of the questions below:the app market are so low that a 12- • Do high switching costs create effective lock-in of customers?year old app programmer can achieve • Can you easily scale your business model?significant success. Apps are all about • Does your business model produce recurring revenues?survival of the fittest, and in the heat of • Can you design the financial model so that you earn before you spend?the battle Apple’s business model just • Is it possible to exploit a partner network to reduce your costs and risk?gets stronger and stronger. • Does your business model exploit protection mechanisms? • Can you take advantage of existing assets and capabilities?Altogether, new business opportuni- • Can you redesign the cost structure to change the rules of the industry?ties are discovered at the intersection • How can you rethink the in- and outflow of cash throughout bothof the four knowledge perspectives. development and launch of the business model?14 Viewpoints on Change
  15. 15. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS Issue no. 4 / 2012 15
  16. 16. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSvalidating predetermined hypotheses. forts towards small incremental moves. growth when it comes to businessWithout the will to deconstruct ortho- In many companies, you will find port- model innovation. Particularly in thedoxies, a desire to scan the periphery folios crowded with line extension cases of large disruptive moves. Focusand proactive leverage of analogies work and customer request projects on early profitability pushes the innova-from distant business models, your in- that extend the past into the future. tion efforts to find the markets in whichnovation success will be based on pure Obviously, these efforts are important unique capabilities will be uniquely val-luck. We have to question our assump- to be able to exploit current opportu- ued. Focus on fast growth makes youtions to change the rules of the game. nities. However, the second step in the slip back to well-known business mod- journey is to think about innovation els in well-known markets. like great investors. They purposefullyBuild capabilities for design a balanced portfolio of oppor- A company exhibiting strong top man-business model innovation tunities and put their scarce resources agement support for innovation is the to work by calculating risk versus po- Danish pump manufacturer Grundfos. tential return. Experience and research The company’s innovation intent explic-Expand the scope of innovation and show that a balanced approach has the itly states that Grundfos in 2025 in-build capabilities for high growth largest payoff potential. Add to that the tends to employ 75,000 people com-The first step in your journey to be- positive branding effects and employee pared to 16,000 in 2011, and that 50%come a business model innovator will engagement created in companies that of growth will come from new technol-be to expand the scope of innovation are actively ”changing the world” as ogy platforms. The ambitious intentto include all components of the busi- opposed to those companies just doing has been decomposed to a number ofness model. A key point is to actively ”more of the same”. To get started as a strategic innovation platforms, and tomanage all resources put into innova- business model innovator, management support the realisation, different inno-tion. While the product development anchoring, innovation capabilities and a vation processes have been designeddepartment is important, it is essential learning mindset have to be developed. for low-risk and high-risk bets. Low-to uncover and coordinate all innova- risk projects are managed accordingtion work undertaken across depart- Create a strong innovation intent: A to traditional stage gate developmentments. These investments in innova- simplistic view of business states that processes, whereas high-risk projectstion tend to be hidden in budgets, but you get what you measure. Hopefully, are rewarded for fast learning beforevery important in real life. In marketing, this is not always the case, but on the scaling up the business. In some cases,they design great websites to sup- other hand, the saying has some merit. companies seeking new growth beyondport product launches. In supply chain, Especially when it comes to risky bets, the core even decide to establish sepa-they invent new production methods. organisational incentives have to sup- rate organisational units to support theIn business development, they iden- port business model innovation. No one very different ways of working as illus-tify potential targets for acquisition to in the organisation will take on the risk trated in the case of Grundfos. A strongcreate synergies. As an alternative to of failing if corporate culture dictates innovation intent and a top manage-departmentalised work without coor- that failure is not an option. Therefore, ment team walking the talk are pivotaldination, companies actively pursuing innovation goals must be backed by to success.the benefits of business model inno- strong top management support and avation open up silos and coordinate very clear recognition that risk is an in- Ask yourself if you have a clear man-key activities. To get started, roles and tegral part of the game. When design- agement agenda for both renewingresponsibilities must be defined, and a ing new business models, incentives and reinventing the business model.process enabling coordination needs to should be aligned with fast learningbe designed. and not fast growth. Harvard professor Establish entrepreneurial front-end Clayton Christensen has put it nicely innovation teams: As more than 70%When innovating, there seems to be a by saying that you want to promote of the total life cycle cost of a producthidden gravitating force pulling all ef- impatience for profit but patience for is determined within the early stages of16 Viewpoints on Change
  17. 17. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSthe innovation project, innovators can problems to solve and actively explor- a prerequisite when forming innova-substantially influence the outcome by ing the four knowledge perspectives tion teams. Common tools are also afocusing on the front end of innovation. described above. If teams are eager to key ingredient in and enabler of knowl-Success and failure are determined at focus on creating myriads of ideas to edge sharing and shared purpose. Fora very early stage, so spend a little to begin with, they run the risk of creating instance, everyone in the team needs tolearn a lot. ”solutions looking for problems”. This get tools which bring them ”out of the approach is counterintuitive and will building” to meet the customer and us-Firstly, the front-end innovation pro- lead to frustrations when they discover ers in order to observe, interview andcess must be extremely well-defined in that there is no or little match between co-create with them. Simple tools willorder to ensure the right focus. Often, market needs and product ideas. give your team a head start. If possible,the front end is notoriously fuzzy, teams should be co-located and evenwhich is a classic stepping stone to fail- Secondly, it is important to recognise work on the same weekdays in orderure. Instead, focus on installing a solid the need for establishing a shared vo- to maximise effectiveness. Framed bydiscovery-driven process where cross- cabulary and toolbox when bringing clear ambition levels and well-definedfunctional and multidisciplinary teams people together with diverse compe- deadlines, such teams will power yourled by heavyweight project managers tences. Innovation flourishes through innovation engine and be the key toare working on well-defined innovation cross-pollination, but without a com- identifying new paths to growth. Tochallenges derived from the innova- mon ”language” communication sti- support customer focus and businesstion strategy. Demand that teams are fles. Therefore, entrepreneurial project model innovation, the discovery-driv-proactively looking for major customer managers with great people skills are en innovation framework can be used. Abstract Direct Design Generate insights Create ideas & solutions Analysis Synthesis Define Frame the challenge Discover Develop Collect data & knowledge Test & feedback Real Figure 8. The framework for discovery-driven innovation Issue no. 4 / 2012 17
  18. 18. STRATEGY & GROWTHCREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSEach step of the framework is support-ed by an advanced toolbox and innova-tion best practices.Ask yourself if you have strong innova- Assumption Ntion teams dedicated to exploring andexploiting new opportunities follow-ing a well-defined and well-anchored Assumption N-1process. Adjustment Adjustment Assumption ...Master learning-based implementa- Exit 2 Exit 1tion: Having defined a strong innova- Assumption 3 Adjustmenttion intent and formed entrepreneurialteams enable creation of new business Adjustment Assumption 2opportunities. However, the tricky partof the equation is often a successfullaunch – in particular, if you are ventur-ing beyond the existing business mod- Assumption 1el. Simply put, you must use a different Adjustmentapproach based on fast learning cycleswhere you plan to learn.All new business concepts are funda-mentally an interlinked set of assump-tions which must be proved to holdtrue. But the assumptions are associ-ated with different levels of risk, and Figure 9. A systematic approach to testing and implementing new opportunitiesinstead of doing a full launch to testeverything at once, you should learnsystematically about your assumptions. feedback and extract new insights. A was not created overnight, but ratherDefine assumptions for each element guiding principle for business model through a step-by-step roadmap tak-of the business model, identify the level innovation efforts should be to reduce ing Apple from personal computersof risk and start by testing the most time-to-learning and increase the rate into the tablet market. The first steprisky assumptions. In the early phases of customer feedback. Figure 9 illus- away from the old core was the iPod,of innovation, testing rough prototypes trates how prioritised assumptions are and when success was ensured, theand lots of iterations with customers tested and followed up by adjustments second step was the launch of iTunes.will take you further, while test market- of the original concept – or even exit Hereafter, Apple ventured into mobileing and learning launches are used at if the concept does not prove to be a phones, copying the successful iPodlater stages. Moreover, it should be a valid solution. razor and blades business model –fundamental principle in your innova- expensive product and recurring rev-tion process to work on competing so- Apple is often touted as being a revo- enues through sale of cheap musiclutions at the early stages. Developing lutionary, but taking a closer look at tracks – with the invention of the Appconcepts in parallel will not only enable Apple also reveals careful learning- Store. Thereby, the risk of failing waslearning about individual opportuni- based strategies behind every move intelligently outsourced to app devel-ties, but also enable you to combine at a higher level. The success of Apple opers. Apple created a solid core18 Viewpoints on Change
  19. 19. CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELSproduct and a strong dual-sided busi- ing orientation and proactively manage tive advantage. However, to stay trueness platform – a meeting place for high-risk opportunities with the goal of to the principles, we should not getApple’s customers and app develop- learning as fast and cheaply as possi- caught up in too much theorising, buters – while much risk was placed on the ble. just do it and learn along the way. Closeshoulders of app developers trying out the laptop, get out of the building anddifferent options. Apple was safe, while Altogether, the three principles should learn from your customers to discovera lot of apps failed. inform and guide all business model your future business models. innovation efforts, and, obviously, theApple’s ”open innovation” approach importance of the principles is cor-with strong reliance on a thriving eco- related with the level of risk. On thesystem also points to the fact that part- other hand, all innovation activitiesnering opportunities should be careful- and growth initiatives can benefit fromly considered when implementing new gaining a fresh perspective from busi-business models. Often, a great partner ness model thinking and from rethink-can both fortify competitive advan- ing your business model through thetage and create a shortcut by leverag- lens of discovery-driven innovation. Contacting their assets. Furthermore, different For further informationpartnering options are also a possible In a world characterised by exponen- please contact:way of escaping the invisible mental tially increasing turbulence, expanding Morten Hejlesen,blinders of the core business. your innovation horizon to encompass moh@implement.dk, the entire business model is timely and +45 4138 0012Ask yourself if you have a strong learn- needed for gaining long-term competi-Further inspiration about business model innovationBrown, Tim (2009). Change by Design, Jaruzelski, Barry, Dehoff, Kevin and Martin, Roger (2009). The Design ofHarperCollins Publishers Bordia, Rakesh (2005). ”Money Isn’t Business, Harvard Business School Press Everything”, strategy+businessChristensen, Clayton M. and Raynor, Osterwalder, Alexander and Pigneur,Michael E. (2003). The Innovator’s Johnson, Mark W. (2010). Seizing the Yves (2010). Business ModelSolution, Harvard Business School Press White Space, Harvard Business Press Generation, John Wiley & SonsHejlesen, Morten (2010). ”Danske Lay, Bill (2009). ”Getting Bullish on Sehested, Claus and Sonnenberg,pumper på afrikansk eventyr” i Business Model Innovation”, PRTM Henrik (2009). Lean Innovation,Innovationsantologi, Systime Børsens Forlag Markides, Constantinos C. (2008).IBM (2006). Expanding the Innovation Game-Changing Strategies, Jossey- Zook, Chris and Allen, James (2001).Horizon Bass Profit from the Core, Harvard Business School Press Issue no. 4 / 2012 19
  20. 20. STRATEGY & GROWTHARTICLE BASED ON INTERVIEWS AND DISCUSSIONS WITH EXECUTIVES FROM LEADING RETAIL BANKS IN DENMARKFacing the New Normal of Retail BankingRegain customer trust and financial performance through innovative business models basedon simplicity, agility and transparency in every aspect of customer interactionsby Nicky Overgaard PedersenThe new normal: It is about making potentially radical changes to the manner in which banks THE IDEA IN BRIEFA disrupted industry operate and engage with their custom- ers. It is about designing new innova- The world economic turmoil hasThe term “financial innovation” has a disrupted the entire financial ser- tive business models with the ability tocertain ring to it that instantly brings vices sector, creating a new normal delight the customers by leveraging thethe root cause of the current world characterised by increased regula- banks’ core capability of putting moneyeconomic turmoil to mind. tory demands and a severe loss to work in a productive manner – with- out increasing the risk. of trust from the average retailWhen presented with this particular banking customer. More than ever,term, the average retail banking cus- the industry will have to innovate Characteristics of the new normaltomer is left with a reluctant and cau- in order to prosper and rebuild thetious mind, thinking of lost pensions, To fully understand the challenges that damaged image.enormous bailout plans and plain and retail banks are facing and why this has disrupted the entire financial services However, the traditional sourcessimple unfairness caused by “too smart sector, consider this: of innovation cannot be tappedinvestment bankers”. this time as they themselves have • The Occupy movement started played a major part in getting toIt just does not smell right, and the im- in Spain in May 2011 as a protest where we are now: risky and com-perative customer experience metrics against the political system, unem- plex products.are suffering just as the general pub- ployment rates and corruption. Lesslic perception of the entire sector has than six months later, in Septem- To make up for the past and fit intotaken quite a beating. ber 2011, Occupy Wall Street was the new normal, retail banks must formed, and since then the move- expand the scope of their strategicFinancial innovation as the remedy ment has evolved into a worldwide innovation efforts. They have to protest against power vested in the look beyond products and servicesOn the other hand, financial innova- top 1% income earners and general and look at their entire businesstion is exactly what retail banks need in economic inequality. And it is all toorder to comply with “the new normal” model to regain trust and financial be blamed on the banks.they are facing. But how can one apply performance. • The disintermediation trend is chal-financial innovation without losing even In order to succeed, three essential lenging the traditional role of banksmore of the precious customers’ confi- as intermediaries. Today, it is not design principles must be applieddence? unusual to see private enterprises to every dimension of future busi- with higher credit ratings than the ness models:The answer to this is not about add- average bank. Boerse Stuttgart ising even more complexity to the finan- • Simplicity taking advantage of this by offeringcial products and services – quite the • Agility bonds issued by mid-cap companies,contrary. • Transparency effectively opening up for cheaper20 Viewpoints on Change
  21. 21. FACING THE NEW NORMAL OF RETAIL BANKING and alternative “business-to-business ers faster. And to some extent, this has funding”. MANAGING THE CAPITAL COST proven to be a viable path.• Some banks are now considered to OF RISK IS CRUCIAL be systemically important financial However, the primary focus for strate- institutions. They have been catego- Right now, it is all about survival by gic business development has been on rised as being “too big to fail” by trimming the balance sheet. ROE the product side. Developing the right policy makers. Currently, the total and credit ratings are imperative to set of products and services capable of capital ratio must not be lower than our ability to deliver superior cus- both serving existing customers as well 8%. Once Basel III has been fully tomer experience. as attracting new ones seemed to be implemented in 2014, that number Going forward, we will see that the one and only truth. will reach 13-14% depending on the only those with a solid financial size and systemic importance of the performance will have the freedom Over time, this product-oriented fo- bank. This alone will potentially lead to innovate: It is very expensive to cus has not only spawned increasingly to a decrease in ROE between 4-5% play the role of first mover. complex and risky products, but ironi- – if nothing is done. cally enough also made it even harder Developing new products is a risky to implement cost-effective straight-In other words, banks are forced to act business, and mitigating financial through processing solutions in thejust to maintain their ROE. Regulatory risk is the largest obstacle for inno- back office operations.demands are tightening, and the cost vation – but also the largest driver.of being a regular bank customer is The banks that find ways to man- Truly, this depicts an unfavourableincreasing – all in all, something that age this catch-22 will have a clear situation where the striving for higherdoes not go easy with low market con- advantage. profits from the product side is jeop-fidence, changed customer behaviours ardising the agility and transparency ofand expectations. Ken Adrian customer interactions. Head of Segment HouseholdFight for freedom to innovate Nordea Danmark Reduce risk through productAs a consequence of ROE being under innovationpressure in the years to come, all sails Rest assured, product development willare set to deleverage the books be- banking and cash management – areas continue to be a central topic as thecause without proper earnings, credit in which the customers bring their own risk and complexity are bound to beratings will be lowered, funding of capi- money to the table, so to speak. Still, reduced, thus requiring radical changestal will go up and products will become this is not enough. There is a strong to products and product structures.more expensive to the end customers, need for even more innovative thinking.which essentially affects the customer An example of this type of innovationexperience in a negative way. is the changes to the price and productThe fact is that a lot of retail banks The traditional sources of structure of home mortgage financing innovation cannot be tapped recently introduced by Nykredit andare in urgent need for deposits, and Totalkredit:Amazon-like promotions have begun this timepopping up, urging customers to “start 1. Under the new price structure, pricessaving now and get an instant givea- For decades, innovation in the finan- differ according to risk.way or bonus!”. cial sector has been more or less trivial. 2. For a combined mortgage, the loan- There has been a heavy focus on opti- to-value ratio of SDOs has beenNot all countries and regulations allow misation of internal processes to re- lowered from 80% to 60% for retailfor such instruments to be applied, so duce operating costs per customer as customers.instead focus is shifting towards private well as to be able to serve the custom- Issue no. 4 / 2012 21

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