Who is your customer? What does the customer value? How do you deliver value to customers at an appropriate cost? Business models that focus on the who, what, and how to clarify managerial choices and their consequences underpin the operations of successful organizations

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Business Model Innovation
Olivier Serrat
2015

2. Sri Kalika Devi
Almost 80 years ago, Joseph Schumpeter, the
prophet of innovation, distinguished five types:
(i) a new good, (ii) a new method of production,
(iii) a new market, (iv) a new source of supply of
raw materials, and (v) (the carrying out of) a new
organization of any industry (or market). The
body of knowledge he engendered then lay
dormant until the end of the 20th century, with
precious few other insights. In modern parlance,
the five cases were reinterpreted as product,
process, market, input, and organizational
innovations; references to a sixth, innovation in
services—a sector that did not exist in his time—
began to show up in the mid-1990s.

3. On Business Model Innovation
Business model innovation is now the rage. This kind of
innovation is often more valuable and transformative than the
other types: it reduces risks and, conversely, allows more risks
to be taken. It has also, perforce, encouraged organizational
innovation; for instance, internet-sped innovative processes
and structures include peer-to-peer and open-source
organization, collaborative mechanisms that would have been
inconceivable to our parents, let alone Joseph Schumpeter.
Innovation is the successful exploitation of new ideas. Then
again, if it is deemed a competence and not just a process,
innovation is the ability to deliver new value to clients,
audiences, and partners.

4. The Theory of the Business
The concept of
value and the
differentiation it
rests on are
integral to
business, and
therefore to
business model
innovation. For
consumption or
use, every
organization strives
to sell products
and services that
customers value.
Value added is what a customer
expects. It follows that the
notion of value should
dominate any discussion of
business models. A business
model is not an explanation of
how a company hopes to make
money; it is not strategy either.
A business model is the core
design, the logic, that enables
an organization to capture,
create, and deliver value to
meet explicit or latent needs
(and in so doing derive some
form of profit itself).

5. Possible Innovation Targets
Business
Structure
Capital
Formation
Alliances
Organization
Structure Type
Decision-Making
Processes
Process to
Improve
Processes
Facilities
Infrastructure
Facilities
Effectiveness
Information
Technology
Infrastructure
Employee and
Contractor Mix
Employee
Experience
Supply Chain
Manufacturing
Communication
Distribution
System
Products and
Services
Product Offering
Product Availability
Technology
(Evident)
Technology
(Hidden)
Research and
Development
Manufacturing
Sales Model
Distribution
User Interface
Packaging
Functionality
Lifecycle Model
Sustainability
After-Sales Service
Customer
Service
Communication
Service Process
Customer
Experience
Brand and Image
Advertising
Communication
Process
Feedback
Customer
Relationship
Management
Administration
Information
Stocks and
Flows
Automation
Insourcing and
Outsourcing of
Services

6. Examples of Business Models
Auction Bait and Hook Bricks and Clicks Bricks and Mortar
Chemical Leasing Collective Direct Sales Disintermediation
Fee In Fee Out Franchise Freemium
Industrialization of
Services
Low-Cost Carrier Loyalty Monopoly
Multi-Level
Marketing
Network Effects Online Content Online Delivery Open Source
Service
Servitization of
Products
Subscription
Traffic and
Advertizing
Other Business
Models

7. Key Elements of a Business Model
Chesbrough
Value Proposition
Market Segment
Value Chain
Cost Structure and
Target Margins
Value Network
Competitive
Strategy
Hamel
Core Strategy
Strategic Resources
Customer Interface
Value Network
Johnson
Customer Value
Proposition
Profit Formula
Key Resources
Key Processes
Mullins and
Komisar
Revenue Model
Gross Margin Model
Operating Model
Working Capital
Model
Investment Model
Osterwalder
and Pigneur
Customer Segments
Value Propositions
Channels
Customer
Relationships
Revenue Streams
Key Resources
Key Activities
Key Partnerships
Cost Structures
Skarzynski and
Gibson
Who Do We Serve?
What Do We
Provide?
How Do We Provide
It?
How Do We Make
Money?
How Do We
Differentiate and
Sustain an
Advantage?

8. Further Reading
• Chesbrough, Henry. 2003. Open Innovation: The New
Imperative for Creating and Profiting from Technology.
Harvard Business School Press.
• Hamel, Gary. 2002. Leading the Revolution: How to Thrive in
Turbulent Times by Making Innovation a Way of Life. Harvard
Business School Press.
• Johnson, Mark. 2010. Seizing the White Space: Business
Model Innovation for Growth and Renewal. Harvard Business
School Press.
• Morris, Langdon. 2003. Business Model Warfare: The Strategy
of Business Breakthroughs. InnovationLabs.

9. Further Reading
• Mullins, John and Randy Komisar. 2009. Getting to Plan B:
Breaking Through to a Better Business Model. Harvard
Business School Press.
• Osterwalder, Alexander and Yves Pigneur. 2010. Business
Model Generation: A Handbook for Visionaries, Game
Changers, and Challengers. Wiley.
• Skarzynski, Peter and Rowan Gibson. 2008. Innovation to the
Core: A Blueprint for Transforming the Way Your Company
Innovates. Harvard Business School Press.

10. Further Reading
• Serrat, Olivier. 2009. Value Cycles for Development Outcomes.
Manila: Asian Development Bank.
www.adb.org/publications/value-cycles-development-
outcomes
• ――. 2009. Harnessing Creativity and Innovation in the
Workplace. Manila: Asian Development Bank.
www.adb.org/publications/harnessing-creativity-and-
innovation-workplace
• ――. 2010. Sparking Innovations in Management. Manila:
Asian Development Bank.
www.adb.org/publications/sparking-innovations-
management

11. Further Reading
• ――. 2010. Design Thinking. Manila: Asian Development
Bank. www.adb.org/publications/design-thinking
• ――. 2011. A Primer on Intellectual Capital. Manila: Asian
Development Bank. www.adb.org/publications/primer-
intellectual-capital
• ――. 2012. Business Model Innovation. Manila: Asian
Development Bank. www.adb.org/publications/business-
model-innovation

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