Viewpoint on Business Model Innovation

Viewpoints on Change
STRATEGY & GROWTH ISSN: 1904-6758 – NR. 4 / 2012

Business Model Innovation
New paths to creating growth
and delighting customers

CONTENTS

P. 3 P. 20 P. 28 P. 30

Article Article Model Article
Create growth through Facing the New Normal Discovery-driven Business model innovation as
innovative business models of Retail Banking innovation a response to increased com-
petition in the energy sector

STRATEGY & GROWTH

EDITORIAL

Why 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 world
where 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 speak
recognised as one of the world’s leading experts within their an intuitive language, and those who think intuitively must
area of expertise, was, basically, satisfied. However, because learn to communicate in an analytical mindset. Both sets of
they 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 when
time of a project from 600 to 300 days, why not reduce it to rationality and analysis are involved in the process that the
100 days? large-scale commercial and business breakthroughs take
place.
It is, of course, quite the partykiller in a situation where we
had 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 their
when we are fully aware that in 12 months from now, we will value creation has been immense, because they have been
be able to create the same percentage improvements one able to combine intuitive and analytical thinking. Whether
more 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. In
months? this cross field, limitations turn into opportunities. This is also
where the most successful companies operate and the best
Recently, 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 article
a gap between analytical and intuitive thinking. This is pri- is just a logical consequence of the reality we live in and a
marily caused by the fact that strategy has become an ana- question that we – who are well on in years – must get used
lytical discipline where predictability is rewarded more than to being asked: Why not?

2 Viewpoints on Change

ARTICLE

Create growth through
innovative business models
Understanding the why, what and how of business model innovation
by Morten Hejlesen

Short-term competitive advantage is ness should lie the aspiration to delight and influence key decisions through
created 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. Actions
all markets mature, competition challenged every day. of the past such as investments and
intensifies and turbulence increases. strategic choices create commitments
Consequently, new sources of growth Outside pressure from investors trig- that are hard to escape when customer
must 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 lacks
The 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 a
money 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 scope
of innovation must be expanded to
The idea of ”delighting customers” can be translated into the equally simple
encompass 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 innovative
business 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 associated
opportunities 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 products
Rethink customer which, hopefully, are not used. Value is not related to product attributes, but
value creation rather customer benefits.

Thirdly, the value creation potential must be adjusted for the riskiness of the
Delighting customers is the heartbeat value proposition. All innovators know this by heart. New products that are
of 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 unchanged
and stable. At the heart of any busi- Customer value = (perceived benefits – perceived life cycle costs) x (1 – perceived risk)

Issue no. 4 / 2012 3

STRATEGY & GROWTH

CREATE GROWTH THROUGH INNOVATIVE BUSINESS MODELS

place. 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. In
ning 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 also
the list continues. segmented marketing strongly indicat- highlights the shift towards designing
ed a shift towards a broader concept all aspects of the customer experience
Altogether, the simple goal of delight- of customer value creation. The shift is as well as tailoring the experience to
ing customers is not that simple at all. beautifully portrayed in the TV series individual customer needs. Customer
Even though it has been proven time Mad Men about the American flourish- delight was no longer perceived as a
after 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 designed
is complex and challenging to walk the agencies. and value-adding layer of experiences
talk. Moreover, the ways in which or- that surrounded the core product.
ganisations deliver valuable customer In parallel, the strong focus on tangible
experiences have dramatically changed products was replaced with the idea In the 1990s, Joe Pine and Jim Gilmore
in 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 work
Focus on customer benefits Solution selling emerged as a discipline is a theatre and every business a stage.
– not product attributes
A quick glance at the history of delight-
ing customers shows that focus has ex-
WHO IS YOUR CUSTOMER?
panded from fulfilling simple needs to
addressing 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, value
sic 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 all
parameters 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 segments
customers 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 should
functional benefits of his Model T, while
also consider the needs of the shoppers buying the goods, the retailers selling
he cared less about fancy colours: ”Any
the goods, the wholesaler distributing the goods and even external partners
customer can have a car painted any
responsible for production. Before pouring a simple glass of milk, customer
colour 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.



Accompanied by branding strategies experienced-based differentiation. Develop experience-based solutions
that engaged all five senses and even Fuelled by financial meltdowns, rising to gain competitive advantage
experiences 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 and
mented past logics of value creation. now consciously evaluating how to fulfil near-constant disruptions at the fringes
On the one hand, products developed altruistic benefits for customers. In oth- of most industries, focus on delighting
into solutions. On the other hand, fulfil- er words, how to incorporate elements customers plays a key role in gaining a
ment 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 blue
ed 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 quickly
Recent developments in the ways of coming generation through company- invade uncontested space and capture
delivering 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

STRATEGY & GROWTH


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 United
ences. The message to old Ford is sim- Above all, the uniting discovery across
States Patent and Trademark Office for
ple: 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, the
While the shift can be described as consider and design all elements of the
driver of long-term success resides not
an overarching trend, it is evident that business model to address the specific
only in the mousetrap itself, but in the
success 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 the
fer across segments and markets. design palette has created an unprec-
The business model view resonates
Industries compete on different factors. edented range of opportunities to be
with research on how to profit from
In some cases, an attractive opportu- explored in order to find the right fit
innovation. The mousetrap approach
nity can be exploited by developing between the value proposition and the
clearly plays an important role. A tight
simple and convenient products that customers.
regime of patents, copyrights and trade
attract 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 solutions
can be leveraged to capture the prof-
Develop new business models tion or exploit a new business strategy,
complementary assets are needed such
itable 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 and
advantage as a rule of thumb is more
In essence, the scope of creating cus- a sales force.
sustainable when solutions are hard to
imitate as well as based on deep and tomer value propositions and, thus,
enduring customer relationships. competitive advantage has been ex-



What 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 delivered
In brief, a business model describes tions across the activity system. The to the targeted customer segments. To
how 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 to
structure 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 relationship
sition 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 number
system exchange partners. of customer clubs – both online and
The value perspective describes the offline – to build close connections to
A 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 describes
Getting from A to B and the freedom tion of products and services. Typically, how the market offering is produced. A
to 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 to
or even shared with co-owners through hensive customer experience. E.g. car create the value proposition through a
car sharing services. The core product manufacturers have recently begun to range of key processes. Strong brands
is essentially the same, while the activ- offer leasing contracts, which has prov- are important intangible resources, and
ity system underlying the product cov- en to be an important complementary the design of processes both in back
ers a spectrum of business model de- service to the core product that drives and front office functions is vital to
sign 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

STRATEGY & GROWTH


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 a
Research undertaken by academics, tended to be a slippery slope. To in- number of potential opportunities for
global 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 of
tric look at value creation is imperative innovating the business model and de- harvesting first-mover advantages, but
to business success. An IBM study from livering superior products actually ena- obviously also the risk of designing a
2006 found that innovating across the bled lowering the R&D spend. Apple business model that does not deliver as
business model had a much strong- – often described as business model in- expected.
er correlation with operating margin novator par excellence – has managed
growth 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 and
A 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 to



RESPONSIVE BUSINESS MODEL ORIENTATION PROACTIVE BUSINESS MODEL ORIENTATION

What are the sources Products, services and processes The entire business model
of differentiation?

What business model Standard designs and exploitation Best fit with customer needs and
designs are used? of the dominant logic of the industry exploration of alternative design patterns
for the business model

When does the business Reactive change based on articulated Proactive change based on latent needs
model change? needs of the customers of the customers

What type of innovation Fast follower or late mover First-mover advantages
strategy is pursued?

What are the key risks in Disruptions from entrants, weak Novelty in approaches, complexity
relation to the business protectability and intense competition and unprofitable niche markets
model?

How sustainable are Short-term due to weak protectability Long-term due to strong protectability
competitive advantages?

Figure 4. Proactive and responsive business model orientation

establish 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 composition
design to enhance customer value cre- ing models or partner with great com- of a music collection is fundamental to
ation. See figure 5. panies to leverage their brand power. signalling who we are and what we like.
Adding a complementary music service
Adjust the current business model to Consider the role of value-added ser- has helped reduce loss of market share
exploit opportunities in existing mar- vices in the telecom industry where through improved customer loyalty
kets: Changing needs of existing cus- TDC’s launch of the previously men- and satisfaction in a highly competitive
tomers 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 not
focusing on improving products, sim- adding a service layer on top based on have to be radical. Simple moves can
ple 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 differentiation
to achieve important business goals. model dramatically. Few people are factors.

Issue no. 4 / 2012 9

STRATEGY & GROWTH


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 demand
el to expand the market: Incremental can be converted into real demand. At the other end of the spectrum, the
change 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 of
example, 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 capsules
widely used strategy by global con- ket. Understanding commonalities in such as Nespresso. By removing the
sumer brands to enter emerging mar- the non-customer segments paves the risk of failing to brew the perfect cup
kets. Seven out of ten Filipino smokers way for redesigning the business mod- of coffee and reducing the time it takes
buy 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 on
sachet sales. The core product is left the needs of current customers in a technology leap, low-end disruptions
unchanged, while innovative distribu- some cases leads to the discovery of can also be achieved by simplifying and
tion 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 radically
times be achieved through small leads to important managerial deci- new business models can be leveraged



to create entirely new markets where tom of the pyramid live on less than ness unit level and when developing
large groups of customers have been $2.50 per day and are by far the larg- new market offerings. Obviously, new
locked out. In some markets, minor est global socio-economic group. business models are not launched out
business model tweaks such as sachet Furthermore, fulfilling the vision leads of the blue, but rather closely aligned
marketing 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 models
New 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 the
from developed markets to emerging unattractive to well-established compa- four opportunities.
markets and as needs-based such as nies, because they start out small and
fulfilling emerging customer needs. do not meet the expected growth rates Combine diverse knowledge perspec-
to attract ordinary innovation invest- tives to create new business models
A business model currently under de- ments. However, these markets often Becoming a business model innovator
velopment illustrating the idea is the become large and profitable, and pa- can be compared to an artist shifting
current debate concerning designing tience for growth pays off. style from painting with monochrome
a house for the poor that can be con- colours to using a palette with all the
structed for under $300 which keeps The four generic growth opportuni- vivid colours of the rainbow. Options
a family safe, allows them to sleep at ties (see figure 6) can be explored and explode, and the number of possible
night and gives them both a home and exploited by any company to sustain solutions for designing the next market
a sense of dignity. It is a grand chal- growth and delight customers. The offering increases. However, in order to
lenge 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 all
business 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 MARKETS

Customers Existing Existing New New

Level of change Incremental Radical Incremental Radical

Characteristics 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 customers

Figure 6. Generic growth opportunities

Issue no. 4 / 2012 11

STRATEGY & GROWTH


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 perspectives

ed 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 customer
best 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 market
tions must be limited and focused on offerings is the fact that asking what
the most promising solutions to ex- Customers: The customer perspec- the customer wants will not be very
ploit 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 approach
cisely, four distinct knowledge perspec- is the right approach, which entails Firstly, the mainstream customer only



experiences 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 industry
ferent options. The customer’s frame of ing macrofactors such as legal regu- orthodoxies and mental models that
reference 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 line
can be accessed easily by asking the buildings was prohibited in Denmark for men and their garages. While the
customer will most likely not be very some years ago. A simple change in idea might seem a bit sexist, business
unique. 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 microtrends
users who typically represent a tiny and macrotrends can provide answers To identify and break out of industry
fraction of your customer base. They to great experience design. orthodoxies, the analysis should not be
are characterised by their eagerness to restricted to close competitors when
tweak, 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 of
mands, since they are usually ”ahead” almost everything that we do. Nike new business models, so can research
of 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 tracking business model design patterns
they want, the best approaches for dis- ing device collecting real-time data on that can be imported from one industry
covering 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-supported
customer, 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 a
surprising insights which pave the way A key area of interest should be emerg- tool for identifying shifts in the industry
for 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 chain
direction, deep qualitative studies are business models. A simple but power- can be used to anticipate important
the best option to find the latent needs ful exercise is to map 20-30 important changes and growth opportunities. The
to 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 from
initial consideration to disposal of a Competition: The competition Capabilities: The capability perspective
market 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 and
Context: The context perspective of- wants and needs which are not cur- resources can provide insight about
fers both constraints and possible so- rently satisfied in the marketplace. underused resources or underexploited

Issue no. 4 / 2012 13

STRATEGY & GROWTH


business capabilities. For instance, the Know your options before innovat- of a product line. But bold moves do
service business of many manufacturing. A broad and diverse foundation of require a decent amount of knowledge
ing 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 must
vice business is growing, while the to- technologies, latent customer needs always serve a purpose and enable
tal turnover growth is under pressure. and inspiring business models should you to challenge world views. That
Services 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 be
2011 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 and

Secondly, resources and capabilities
of the business ecosystem should be
mapped to identify partnering, collabo- WHAT ARE THE CHARACTERISTICS OF A GREAT BUSINESS MODEL?
ration and integration opportunities. A
highly 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 the
gotten 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 as
ers. 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 protectability
Entertainment’s lucrative licensing of through either legal or natural barriers. Legal barriers could be patents, trade
Spiderman and X-men to Hollywood secrets, copyrights or non-disclosure agreements. Natural barriers could
studios. 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 portfolio
a vital role in Apple’s iPhone and iPad of strong brands, innovative services and leverage of shared technologies. In
success. 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 Apple
and 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, consider
Apple 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 both
of the four knowledge perspectives. development and launch of the business model?



Issue no. 4 / 2012 15

STRATEGY & GROWTH


validating predetermined hypotheses. forts towards small incremental moves. growth when it comes to business
Without the will to deconstruct ortho- In many companies, you will find port- model innovation. Particularly in the
doxies, a desire to scan the periphery folios crowded with line extension cases of large disruptive moves. Focus
and 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 which
novation 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 you
tions 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 purposefully
Build 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 intent
to include all components of the busi- opposed to those companies just doing has been decomposed to a number of
ness model. A key point is to actively ”more of the same”. To get started as a strategic innovation platforms, and to
manage 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 designed
department 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 according
tion work undertaken across depart- Create a strong innovation intent: A to traditional stage gate development
ments. These investments in innova- simplistic view of business states that processes, whereas high-risk projects
tion tend to be hidden in budgets, but you get what you measure. Hopefully, are rewarded for fast learning before
very 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 beyond
port 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 the
In 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 strong
create 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 pivotal
dination, companies actively pursuing innovation goals must be backed by to success.
the benefits of business model inno- strong top management support and a
vation 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 renewing
responsibilities 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 learning
be 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 product
hidden gravitating force pulling all ef- impatience for profit but patience for is determined within the early stages of



the 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 a
focusing 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. For
a very early stage, so spend a little to begin with, they run the risk of creating instance, everyone in the team needs to
learn 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 and
cess must be extremely well-defined in that there is no or little match between co-create with them. Simple tools will
order 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 even
which is a classic stepping stone to fail- Secondly, it is important to recognise work on the same weekdays in order
ure. Instead, focus on installing a solid the need for establishing a shared vo- to maximise effectiveness. Framed by
discovery-driven process where cross- cabulary and toolbox when bringing clear ambition levels and well-defined
functional and multidisciplinary teams people together with diverse compe- deadlines, such teams will power your
led by heavyweight project managers tences. Innovation flourishes through innovation engine and be the key to
are working on well-defined innovation cross-pollination, but without a com- identifying new paths to growth. To
challenges derived from the innova- mon ”language” communication sti- support customer focus and business
tion 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

STRATEGY & GROWTH


Each step of the framework is support-
ed by an advanced toolbox and innova-
tion best practices.

Ask yourself if you have strong innova-
Assumption N
tion teams dedicated to exploring and
exploiting new opportunities follow-
ing a well-defined and well-anchored Assumption N-1
process. Adjustment
Adjustment
Assumption ...
Master learning-based implementa- Exit 2 Exit 1
tion: Having defined a strong innova- Assumption 3 Adjustment
tion intent and formed entrepreneurial
teams enable creation of new business
Adjustment Assumption 2
opportunities. However, the tricky part
of the equation is often a successful
launch – in particular, if you are ventur-
ing beyond the existing business mod- Assumption 1
el. Simply put, you must use a different Adjustment
approach based on fast learning cycles
where you plan to learn.

All new business concepts are funda-
mentally an interlinked set of assump-
tions which must be proved to hold
true. But the assumptions are associ-
ated with different levels of risk, and Figure 9. A systematic approach to testing and implementing new opportunities
instead of doing a full launch to test
everything at once, you should learn
systematically about your assumptions.
feedback and extract new insights. A was not created overnight, but rather
Define 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 computers
of risk and start by testing the most time-to-learning and increase the rate into the tablet market. The first step
risky 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, the
and 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 mobile
ing and learning launches are used at if the concept does not prove to be a phones, copying the successful iPod
later 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 music
lutions at the early stages. Developing lutionary, but taking a closer look at tracks – with the invention of the App
concepts in parallel will not only enable Apple also reveals careful learning- Store. Thereby, the risk of failing was
learning 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 core



product and a strong dual-sided busi- ing orientation and proactively manage tive advantage. However, to stay true
ness platform – a meeting place for high-risk opportunities with the goal of to the principles, we should not get
Apple’s customers and app develop- learning as fast and cheaply as possi- caught up in too much theorising, but
ers – while much risk was placed on the ble. just do it and learn along the way. Close
shoulders of app developers trying out the laptop, get out of the building and
different options. Apple was safe, while Altogether, the three principles should learn from your customers to discover
a lot of apps failed. inform and guide all business model your future business models.
innovation efforts, and, obviously, the
Apple’s ”open innovation” approach importance of the principles is cor-
with strong reliance on a thriving eco- related with the level of risk. On the
system also points to the fact that part- other hand, all innovation activities
nering opportunities should be careful- and growth initiatives can benefit from
ly 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 the
tage and create a shortcut by leverag- lens of discovery-driven innovation. Contact
ing their assets. Furthermore, different For further information
partnering 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 0012
Ask yourself if you have a strong learn- needed for gaining long-term competi-

Further inspiration about business model innovation

Brown, Tim (2009). Change by Design, Jaruzelski, Barry, Dehoff, Kevin and Martin, Roger (2009). The Design of
HarperCollins Publishers Bordia, Rakesh (2005). ”Money Isn’t Business, Harvard Business School Press
Everything”, strategy+business
Christensen, Clayton M. and Raynor, Osterwalder, Alexander and Pigneur,
Michael E. (2003). The Innovator’s Johnson, Mark W. (2010). Seizing the Yves (2010). Business Model
Solution, Harvard Business School Press White Space, Harvard Business Press Generation, John Wiley & Sons

Hejlesen, 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

STRATEGY & GROWTH

ARTICLE BASED ON INTERVIEWS AND DISCUSSIONS WITH EXECUTIVES FROM LEADING RETAIL BANKS IN DENMARK

Facing the New Normal of Retail Banking
Regain customer trust and financial performance through innovative business models based
on simplicity, agility and transparency in every aspect of customer interactions
by Nicky Overgaard Pedersen

The new normal: It is about making potentially radical
changes to the manner in which banks THE IDEA IN BRIEF
A disrupted industry
operate and engage with their custom-
ers. It is about designing new innova- The world economic turmoil has
The term “financial innovation” has a disrupted the entire financial ser-
tive business models with the ability to
certain ring to it that instantly brings vices sector, creating a new normal
delight the customers by leveraging the
the root cause of the current world characterised by increased regula-
banks’ core capability of putting money
economic 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 retail
When 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 normal
tomer is left with a reluctant and cau- in order to prosper and rebuild the
tious 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 sources
simple unfairness caused by “too smart
sector, consider this: of innovation cannot be tapped
investment bankers”.
this time as they themselves have
• The Occupy movement started
played a major part in getting to
It 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. Less
lic perception of the entire sector has than six months later, in Septem- To make up for the past and fit into
taken 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 strategic
Financial 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 services
On the other hand, financial innova-
top 1% income earners and general and look at their entire business
tion is exactly what retail banks need in
economic inequality. And it is all to
order 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 banks
more of the precious customers’ confi- as intermediaries. Today, it is not design principles must be applied
dence? 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 is
ing even more complexity to the finan- • Simplicity
taking advantage of this by offering
cial products and services – quite the • Agility
bonds issued by mid-cap companies,
contrary. • Transparency
effectively opening up for cheaper


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 the
just 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 unfavourable
increasing – all in all, something that
age this catch-22 will have a clear situation where the striving for higher
does not go easy with low market con-
advantage. profits from the product side is jeop-
fidence, changed customer behaviours
ardising the agility and transparency of
and expectations. Ken Adrian
customer interactions.
Head of Segment Household
Fight for freedom to innovate Nordea Danmark
Reduce risk through product
As a consequence of ROE being under innovation
pressure in the years to come, all sails
Rest assured, product development will
are set to deleverage the books be-
banking and cash management – areas continue to be a central topic as the
cause without proper earnings, credit
in which the customers bring their own risk and complexity are bound to be
ratings will be lowered, funding of capi-
money to the table, so to speak. Still, reduced, thus requiring radical changes
tal 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 innovation
experience in a negative way.
is the changes to the price and product

The 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 and
are in urgent need for deposits, and
Totalkredit:
Amazon-like promotions have begun this time
popping up, urging customers to “start 1. Under the new price structure, prices
saving 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 been
Not all countries and regulations allow misation of internal processes to re- lowered from 80% to 60% for retail
for 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

STRATEGY & GROWTH


quote by the late Harvard professor Innovating the business
TOO RISKY, TOO COMPLEX Theodore Levitt: models
Traditionally, one of the primary “People don’t want to buy a quarter-inch
sources of innovation has been cal- Clearly, financial products have not
drill. They want a quarter-inch hole!”
culators and engineers in product lost their strategic importance, but,
development, spinning off increas- going forward, it is clear that retail
This falls well into line with the current
ingly complex and risky products. banks need to give a lot more credit to
perception among leading retail bank-
the services – and the entire business
For obvious reasons, this can no ers in Denmark. The products are be-
model – surrounding the products.
longer be the case. The new nor- coming hygiene factors, i.e. nobody
mal forces the entire industry to looks at them as stand-alone differen-
If they fail to do so, providing complete
rethink our offerings and business tiators in the battle for market shares
and compliant advisory at the lowest
models based on transparency and and customer attention. Instead, the
possible risk based on the individual
simplicity. bank advisers’ ability to transform knowl-
customer needs becomes almost im-
edge and insights into viable solutions
Ove Feddersen possible.
by communicating 1:1 with the custom-
Head of Product Strategy
er has become a crucial trait to be dis-
Nykredit In other words, banks need to rethink
played in every customer interaction.
their business models and find new
ways of creating, delivering and captur-
ing value.
Look beyond the products to increase
the customer experience FITTING INTO THE NEW NORMAL
Already now, retail banks are facing
REQUIRES CHANGE
As a direct outcome of the current eco- competition from new entrants and in-
nomic turmoil and the derived changes novative business models. While many
We are witnessing a global para-
to the products, terms and conditions, of the new entrants are still operating
digm shift in which banks need
a great deal of existing retail custom- on the fringes of the industry with low
to find new ways of operating in
ers are not only finding themselves in growth rates and market shares, they
order to regain customer trust and
a hard position, but, even more impor- should be taken very seriously.
financial performance.
tantly, they are having a difficult time
assessing the consequences of this The regulatory framework used Many of the players exhibit disrup-
new situation. to “only” dictate the direction tive potential and possess the power
in which we could innovate our to radically alter the rules of the game
This implies that retail customers in business. One could say that the by targeting small niche segments in
particular are becoming heavily de- framework was “larger than us”, i.e. the existing market. Basically, the new
pendent on superior advisory services, still giving us room to operate. players are exploiting attractive sub-
and if anything positive has come out segments which are not appropriately
With the regulatory demands we
of the financial crisis, it is the wake- served by current business models. In
are facing from Basel III etc., the
up call to every retail bank constantly some cases, entirely new markets are
framework will become “smaller
reminding them to consider the needs created for customers who have been
than us”, so unless we change radi-
of the customers in every touch point, totally locked out of existing markets in
cally, we simply will not fit into the
channel and type of interaction, while the past.
new normal.
bearing in mind that there is a crucial
discrepancy between what custom- Ken Adrian Look out! New kids on the block!
ers think and say they need and what Head of Segment Household An article by Rita McGrath states that
they actually need and really want. This Nordea Danmark one of five large business trends in
difference is best illustrated with the



2012 is that oblique competition will high streets. Besides that, Apple has a In 2010, users could buy theatre tick-
become ubiquitous, emphasising that rather large amount of capital available. ets for Harry Potter, and, over time,
enterprises traditionally were compet- Facebook Credits may actually end up
ing within industries, whereas competi- The question that banks should ask is: being the preferred currency for buying
tion can now come out of the blue and When will Apple open a bank near us? any media content over the Internet.
take over entire markets. Perhaps not a traditional retail bank as The obvious question remains: Where
we know it, but “just” some sort of add- will the retail banks be in that set-up?
Take the average German consumer. on service that provides credit on the
He or she controls a total of six de- fly to purchase products in the store. Examples of new business models
posit accounts, but only two of those
Rather than risking instant “paralysis
are placed in a bank. The other four Another example of a potential chal-
by analysis” and complicating things
are placed with iTunes, DIY stores, lenger to retail banks is Facebook with
by trying to figure out how to inno-
PlayStationNetwork, third party logis- staggering 800 million registered users.
vate your business model, simply start
tics providers etc. In 2009, something called “Facebook
by looking at what is already going on
Credits” was introduced rather silently.
within – as well as outside – the finan-
Now consider this: Apple has more Anyone could buy 50 credits for the
cial sector and let that be an inspira-
than 200 stores worldwide – stores price of $5 “to buy things (i.e. game-re-
tional guideline for challenging your
that are well-recognised by high-end lated content) on Facebook in an easy
conventional wisdom. See examples
consumers. More or less all placed on and safe manner”.
on the next page.

Issue no. 4 / 2012 23

STRATEGY & GROWTH


JAK – operating an interest-free savings
Peer-to-peer lending by Zopa and loan system since 1970

Internal Value External Internal Value External
perspective perspective perspective perspective perspective perspective
Partner Key Value Customer Customer Partner Key Value Customer Customer
network processes proposition relationships segments network processes proposition relationships segments
System Mass education Traditional
development/ & financing of Interest-free retail banking
Private Membership- local economies
maintenance Platform to based Traditional savings and customers
equity Membership-
connect lenders retail banking Local Promotion of loans
partners based
Customer with borrowers customers enterprises the interest-
service Co-
free economy Grants for stud- operatives
Administration ies in interest-
Venture Administration free economies
capitalists & development
Non-lending
Key Channels businesses Key Channels Associations
resources resources Courses about
aspects of an Local branches
On-line interest-free operated by
ICT Local members for
channels economy Companies
platform volunteering members

Financial Cost drivers Revenue streams
Selling pay- Financial Cost drivers Revenue streams
ment protec- Interest from
perspective tion insurance
perspective pre-savings
The lending Fixed fee Low level Annual
Employees Annual placed in Swe-
platform Zopa added to their of general membership Loan
service fee dish bonds
(ICT platform) loan amount administration fee fees
from lenders

“At Zopa, people who have spare money lend it directly “We regard receiving money in exchange for labour as le-
to people who want to borrow. There are no banks in the gitimate, however, we do not consider it legitimate to earn
middle, no huge overheads and no sneaky fees, meaning money simply with money. In our opinion, it is unethical to
everyone gets better rates”. lend money against interest”.

The lending platform Zopa (an Internet marketplace) is of- JAK operates like a not-for-profit bank enterprise, trying
fered to members, making it possible for them to connect to make one million SEK annually to add to equity, by of-
traditional lenders with borrowers and save them both fering interest-free savings and loans through a total of
money by “cutting out the middleman” (banks). just three products.

The business model allows depositors to have a higher JAK is primarily driven by volunteer members for other
return on investment by becoming direct lenders, hence members, and through grants and JAK Schools they are
accepting risks normally taken by banks/VCs. At the same offering courses where participants receive more informa-
time, the risk of lending e.g. £1,000 is reduced by splitting tion about how JAK works, discuss different aspects of an
the amount into chunks of £100 each going to different interest-free economy and get tips on how to present JAK
borrowers. in public.

To reduce the risk even further, Zopa offers their lenders Currently, JAK has approx. 34,000 members, and the
free-of-charge assistance in chasing up missing payments number is increasing every year.
on behalf of the lender.

The revenues are coming from charging borrowers fixed
fees added to their loan amount, charging lenders a 1% an-
nual service fee and selling payment protection insurance
to borrowers.



Boerse Stuttgart is offering mid-cap Tradeshift provides an on-line invoicing
companies a new way of accessing capital service and an instant payment feature

Internal Value External Internal Value External
perspective perspective perspective perspective perspective perspective
Partner Key Value Customer Customer Partner Key Value Customer Customer
network processes proposition relationships segments network processes proposition relationships segments
Partner commu- Free on-line real
Trading and Systems Automated
nity that builds time e-invoicing
exchange applications to & platform for suppliers over services
Trade-to- Alternative Industrial or
”community” industry-related sell on AppStore development a global network
Policy settlement source of
mid-cap Large
makers finance through Corporate B2B
companies enterprises &
capital market governance Angel Social network communities
Technical governments
Investors for businesses to App
support
communicate & developer
Key Better rates & Channels Investors exchange docs. network
Regulatory
authorities
resources conditions for The Stuttgart Private Non-lending
both investor Stock Exchange equity Key Channels businesses
Electronic & bond issuer Value-added
regulated un- partners resources
trading services and
official market
systems applications
On-line order Venture Cloud-based On-line
Data execution capitalists platform channels
storage

Financial Cost drivers Revenue streams Financial Cost drivers Revenue streams
Clearing &
perspective Fees charged settlement
perspective
ICT General
IT development to be listed & fees development,
& maintenance Sale administration Services Apps
to trade on its maintenance
markets of information & support

With the launch of Bondm, the Stuttgart Stock Exchange Tradeshift is basically a social network for businesses to
has introduced a new segment for bonds issued by indus- connect, communicate and exchange documents in real
trial or industry-related mid-cap companies in the upper time. They provide an on-line invoicing service and an in-
segment of the range in the need for finance. stant payment feature. TechCrunch sees this as a potential
disruptive game changer – on the same scale as Skype
The bond issuer gets access to another source than the
which managed to disrupt the telecom industry.
traditional bank offerings, and retail investors, on the other
hand, get the opportunity to participate directly in the Compared to the traditional charge per transaction or
bond subscription (primary market), which was originally conversion, Tradeshift offers free on-line real time e-
reserved for institutional investors. invoicing for all suppliers over a global network. In return
for free transactions, they offer their customers additional
non-free services like master data subscriptions. Besides
that, the revenue stream also includes financial services
such as instant payments and exchange rate hedging.
Finally, they have implemented a two-sided Apple-like
platform around an AppStore fed by a partner community
developing and selling apps.

The list of customers includes prominent enterprises and
organisations like ADETEF (the French international as-
sistance agency of the Ministries for the Economy, Budget
and Sustainable Development) with their 300,000 suppli-
ers and UK National Health Service (the 5th largest buying
organisation worldwide).

Issue no. 4 / 2012 25

STRATEGY & GROWTH


Regain customer trust and The lesson is that even the best and vation, which is something to be built
ensure sustainable financial brightest product eventually becomes upon. Already, banks around the world
a commodity, and the only thing left have begun to utilise the Internet for
performance is how the value proposition is being more than simple Internet and mobile
served. banking services: “The social web”, i.e.
Keeping in mind the root cause of the the sharing and exchange of informa-
financial crisis combined with the char- Agility tion, is being utilised for customer in-
acteristics of the new normal, retail teractions, real time problem solving
Being a first mover is expensive – espe-
banks must demonstrate superiority in and improving the customer experi-
cially when the development of prod-
customer service, capital risk manage- ence.
ucts and services that you provide is
ment and operational excellence by ap-
framed by tight regulations. And tight-
plying three essential design principles “Social CRM” is definitely something
er regulations are exactly what retail
to every dimension of their business that should be thought into a sound in-
banks are facing these days.
model: novation framework. A great example
• Simplicity The largest uncertainty is not about the of this is Danske Bank which has co-de-
• Agility amount or scope of the coming regula- veloped their iPhone and iPad mobile
• Transparency tions – it is about not knowing the con- banking app through a Facebook page
sequences of those regulations. No one where users can propose features and
Simplicity can foresee how the market will change provide feedback directly to the team
Retail banks should strive for becoming nor feel safe that the regulations will behind the app.
an integral part of their customers’ life. not take away the last bit of possibility
Every customer interaction is a chance to differentiate between the individual Transparency
to provide advice, build a relationship banks. To restore the confidence in the in-
and, above all, learn about the custom- dustry as a whole will require more
ers’ personal needs driving the financial The uncertainty characterising the fi- than changed behaviour of the indi-
needs. nancial sector right now calls for “just- vidual banks. Currently, not everybody
in-time” strategies, and as such this is adapting to the new capital require-
In that sense, complexity is a real killer. emphasises the need to be extremely ments in a viable way, and that affects
Not only with regard to operational ef- agile. Besides the strategic aspect, agil- the entire industry.
ficiency or the ability to rapidly change ity in terms of reacting to customer de-
and react to changes in customer mands is a notable trait. On top of that, disintermediation is
needs and trends, but, more important- gradually pushing banks into unfavour-
ly, complexity makes it difficult for the A business model to be inspired by: able market positions where more and
customers to keep a high amount of Inditex which is one of the world’s more business is diverted into areas
daily interactions with their bank. largest fashion distributors. They have such as peer-to-peer lending and busi-
completely changed the game of the ness-to-business funding.
Besides that, simplicity is, by far, the market for affordable fashion by pur-
hardest (product) attribute to copy and suing a high degree of vertical integra- In order to recover properly, the indus-
potentially also a real game changer. tion. The turnaround time from idea to try needs to start “playing with open
launch is 2-5 weeks versus 3-9 months cards” – externally to regain trust and
A business model to be inspired by: for more traditional retailers, making internally to be able to act even more
Google Docs which disrupted the mar- it possible to dispatch new designs to agilely and to ensure complete and
ket for home office applications by pro- stores twice a week. compliant processes. Apparently, this
viding a “good enough” product expe- would be achieved by breaking down
rience for free. Compared to fashion retailers, banks the functional and organisational silos.
have a long history of ITC-driven inno- However, the thing is that even if break-



ing down the silos has been a mantra records to them in return for a platform not paying attention.
for many years, there is an important where they can bypass expensive med-
twist to it: Knowledge, insights and ical bills by getting advice from similar Traditionally, innovation in the indus-
professionalism thrive in functional si- patients. try has not been disruptive. Much has
los, and those traits are imperatives for been about incremental changes to
a great customer experience. As a cus- products, processes and back office
tomer being serviced, we do not want Seize the moment operations, and we are still to witness
to experience the lag time caused by a radical game-changing move where
the silos – we only want to experience Retail banks are in the middle of a per- the business model itself becomes the
the optimised process. fect storm. The entire financial sector is primary competitive differentiator. As a
under heavy fire from regulatory au- consequence of the new normal, now is
One way of increasing the transparency thorities and policy makers, and their the perfect time to do just that.
in the processes of the business model modus operandi is bound to change in
is to make use of the enormous amount order to survive.
of (large) data stored in the back office
systems – as well as in the minds of the Just like amber flushes up on the beach
customers – for “real-time analytics” after a storm, so do new entrants, and
during customer interactions. innovative business models emerge Contact
when an industry is being forced to in- For further information
A business model to be inspired by: novate. Unfortunately for the incum- please contact:
PatientsLikeMe.com has managed bents, both amber and new entrants
to design a viable (disintermediat- Nicky Overgaard Pedersen,
are hard to spot by others than the
ing) business model based on patients nop@implement.dk,
trained eye – and that may very well
handing over their personal medical +45 5138 7412
prove to be lethal for those who are

Further reading

Braagaard, M. and Kirkegård, L. Gray D., Brown, S. and Macanufo, J. Markides, C. (2008). Game-Changing
Implement Consulting Group (2010). Gamestorming: A Playbook Strategies
(2010). Strategy as Transformation for Innovators, Rulebreakers, and
Changemakers Martin, R. L. (2009). The Design of
Christensen, C. M. and Raynor, M. E. Business
(2003). The Innovator’s Solution King, B. (2010). BANK 2.0: How
Customer Behaviour and Technology Osterwalder A. and Pigneur, Y.
Christensen, C. M., Kaufman, S. P. and Will Change the Future of Financial (2010). Business Model Generation:
Shih, W. (2008). Innovation Killers: How Services A Handbook for Visionaries, Game
Financial Tools Destroy Your Capacity Changers, and Challengers
to Do New Things

Issue no. 4 / 2012 27

STRATEGY & GROWTH

MODEL

Discovery-driven innovation
A systematic process for designing and implementing new business models

Abstract

Direct Design
Generate insights Create ideas & solutions

Analysis Synthesis

Define
Frame the
challenge

Discover Develop
Collect data & knowledge Test & feedback

Real

Five guiding principles for 1) Enable radical 2) Prototype and
discovery-driven innovation: collaboration and co-creation experiment to learn fast


DISCOVERY-DRIVEN INNOVATION

Define
What? A clear framing of the growth challenge, definition of ambition levels and joint commitment
Why? To align the business model innovation project with the growth strategy and business goals

Discover
What? Research of opportunities within and across context, customers, competition and capabilities
Why? Superior business concepts are formed on the basis of unique insights

Direct
What? Analysis of research findings and creation of growth opportunity maps to focus work efforts
Why? Data needs to be filtered and interpreted into actionable directions and design principles

Design
What? Creative ideation and conceptualisation of new business ideas
Why? To foster creativity and identify novel approaches to driving growth

Develop
What? Iterative concept testing, business modelling and learning based implementation
Why? To reduce risks, new business concepts are adjusted through several iterations and market feedback

3) Focus on 4) Stretch goals and 5) Balance creativity
customer value creation challenge conventions and focused analysis

Issue no. 4 / 2012 29

STRATEGY & GROWTH

ARTICLE BASED ON INTERVIEWS AND DEVELOPMENT PROJECTS WITH DONG ENERGY

Business model innovation as a response
to increased competition in the energy sector
By Thomas Børve and Johan Lawaetz

Increased competition in the energy the game since it quickly led to intense Despite the increased need to differ-
sector has stimulated many energy competition, but also expanded the entiate in the market, energy providers
suppliers to rethink the way they arena in which Danish energy provid- still have limited opportunities to do
do business. Because of the growing ers should now compete. The market so. For decades, the energy sector has
wish among Danish organisations to opened to international competitors, looked for new ways to offer value on
do business in a more sustainable and as the industry has matured en- top of an increasingly commoditised
way, DONG Energy decided that one ergy providers have experienced an in- product, but there has never been a
of the means to differentiate in the creased pressure on prices. real breakthrough in new ways to bun-
market would be through what would dle products and innovate the business
be known as the Climate Partnership
In the meantime, societal trends and model – until now.
concept.
new customer needs have emerged
and gone straight to the top of the
Through pilot projects, the concept
soon proved to be more than just a
global energy agenda. Private consum- Climate Partnerships
ers as well as business customers are
new product in the portfolio as it was
now concerned with CSR, CO2 emis- In May 2007, Novo Nordisk and DONG
able to spur significant business value
for customers. But to do so required a sions and the overall environmental im- Energy together launched the first
new internal setup of the underlying pact in addition to getting a low price Climate Partnership in Denmark. Since
competences and processes related per MWh. As electricity is traded with then, DONG Energy has entered into
to sales and delivery within DONG full transparency on Nord Pool (the ex- more than 100 Climate Partnerships
Energy. change of electricity), the product itself and developed a unique partnership
was already very commoditised, but model with a variety of Danish organi-
price competition was further fuelled sations. Companies, municipalities and
Changing market conditions by the liberalisation. Moreover, shifting other organisations are constantly
energy provider nowadays is much less
in the Danish energy sector faced with climate questions, and they
complex and gives companies an even all share the common goal of decreas-
larger economic incentive to do so. This ing environmental impact of their activ-
In the past decade, the Danish en- has further increased the need for dif-
ergy sector has experienced dramat- ities besides running financially healthy
ferentiation between energy providers operations. Through the new Climate
ic changes. New EU directives in the and has resulted in an increased fo-
1990s indicated that a new era was Partnership concept, DONG Energy set
cus on expanding product offerings. A out to help companies do just that.
soon to come with a new regulatory number of energy providers have gone
framework. During 2000-2004, the from supplying just a single energy
Danish energy sector was liberalised – DONG Energy has a long-term vision
source to supplying a broad range of of providing clean and reliable energy.
the fastest liberalisation of an energy fuels and services which now includes
market in Europe. Climate Partnerships are an important
e.g. financial services, price surveillance, element in the climate strategy that
energy services, CO2 quotas and ener- has been developed to support this
This dramatically changed the rules of gy savings consultancy.


BUSINESS MODEL INNOVATION AS A RESPONSE TO INCREASED COMPETITION IN THE ENERGY SECTOR

long-term vision. The strategy commits offering a more comprehensive and energy. The purpose is to support and
DONG Energy to support a significant customer-oriented value proposition strengthen innovation within climate
reduction in CO2 emissions stemming providing significant business value technology, increase the demand for
from energy production, and at the to business customers. The main idea renewable energy and strengthen cli-
same time it serves as a strong driver of the concept was for both parties mate initiatives in private and public
for differentiation. to execute energy savings and sup- organisations.
port renewable energy sources. DONG
Providing additional value by combin- Energy’s energy advisers locate and For the partner, the motivation behind
ing existing products and services help execute these energy savings. entering a Climate Partnership would
Based on DONG Energy’s many years obviously be to obtain a reduction in
of experience within energy savings When energy savings are realised, the operational costs by identifying and re-
consultancy, the Climate Partnership entire or part of the reduction is used alising energy savings and increase rev-
concept first and foremost aimed at to finance the purchase of renewable enue through enhanced differentiation.

Foto: DONG Energy A/S

Issue no. 4 / 2012 31

STRATEGY & GROWTH


Foto: DONG Energy A/S



For selected large customers with little case experience showed that it often A more complex sales process
or no resources available to drive de- proved more valuable for the partner required new competences and
velopment projects themselves, DONG to carry out initiatives related to other customer involvement
Energy has, moreover, offered to take typical elements of the CSR agenda DONG Energy realised that position-
on the project and help its customers such as ethical trade or improving the ing the idea of a Climate Partnership
through the process from establish- work environment. concept to organisations would impose
ing a business case, selling the project great changes on the sales process.
internally, analysing and discovering The second criterion was that the com- They understood that they would have
potential all the way to building the pany should have a large potential val- to target an entire set of new and more
implementation plan. In short, DONG ue of differentiating through a renew- business-oriented stakeholders than
Energy’s Climate Partnership concept able profile. This, for instance, included what they were used to from selling
bundles the best of its offerings to in- companies exposed to large and strate- electricity and gas.
clude sourcing, energy savings, finan- gically important customers with tough
cial solutions and project management demands for a renewable supply chain Through initial learning as well as three
into a customised value proposition (including subcontractors). intensive pilot projects spread out on
that responds accurately to customers’ Denmark and Germany, DONG Energy
new climate challenges, helping them Together these two criteria highlight- found that the customers’ decision
reduce costs and meet a new type of ed the customers for whom a Climate to enter the partnership was being
market demand. Partnership would be especially inter- pushed to the executive level. This was
esting and to whom the market ap- due to the large investment of com-
proach should be directed. pany resources and the high potential
Well-defined customer segment
business value the concept was offer-
One of the key ambitions when ing. Because of this, the decision pro-
”To us, it was fundamental to be very
DONG Energy launched the Climate cess grew longer and more complex.
clear on who was going to use the new
Partnership concept was to obtain a The broader and higher involvement of
approach, and that it would only be for
strategic differentiation in the busi- the customer organisation in the sales
certain opportunities”
ness market, but also to some degree process meant that DONG Energy’s in-
Søren U. Schmidt, International Marketing, in the consumer market, compared to ternal sales processes as well as man-
Director, Business Innovation and traditional energy providers. By help- agement and sales competences had
Products & Solutions ing businesses, municipalities and other to be much more focused on selling
organisations reduce their energy con- based on business value in order to
sumption and establish a sustainable meet these needs. Based on this in-
From the beginning, it was clear that profile, DONG Energy aimed at tapping sight, a value-oriented sales process,
Climate Partnerships would not be for into the growing sustainable consumer including tools for i) creating interest,
every market or every company. In or- trend through intensive marketing of ii) mapping stakeholder value, iii) es-
der to identify the ideal customers to the partnerships’ positive effects on tablishing an initial value analysis with
target, DONG Energy put together a both the climate and the business value the customer, iv) designing the final
simple customer prioritisation model. obtained by the partner. proposal and v) preparing for final ne-
gotiations at executive level, was devel-
First of all, they realised that in or- In a business to business context, the oped by a small project group involving
der for the concept to be interesting task of differentiation is not merely a the people who would actually have to
from a business perspective, the target marketing exercise. It also involves dra- lead and perform the sales themselves.
company should spend a reasonable matic changes in organisation, process- In order to ensure reinforcement, a
amount of their total costs on energy. es and competences. management structure, including goals
In other words, the company should be
and meeting agendas, was developed
relatively energy intensive. If not, the
and implemented.

Issue no. 4 / 2012 33

STRATEGY & GROWTH


”It is my experience that in the cases From silos to cross-functional teams drawbacks experienced when launch-
where we successfully have applied a Running the pilots and actually start- ing the Climate Partnerships was that a
solution-centric approach, we have more ing the delivery of Climate Partnerships great deal of the optimisation had been
focus on what the solution does for the to customers soon proved to pose a done independently across functions
customer and quite often even for the significant need for working in diverse and with too little attention to inter-
customer of the customer” cross-functional teams. Over the years, action between processes and func-
Søren U. Schmidt, International Marketing, DONG Energy has put a great deal of tions. The Climate Partnership concept
Director, Business Innovation and effort into optimising the processes quickly forced new ways of combining
Products & Solutions around sales and delivery. One of the internal resources to be able to deliver

Internal perspective Value perspective External perspective

Partner network Key processes Value proposition Customer relationships Customer segments

Communication
and marketing Supply of Co-branding
renewable
Energy energy
advisory Energy-intensive
companies with
Strong
high potential value
Energy partnerships
of greener profile
production with B2B-
Energy customers
savings
Sales and
delivery

Differentiation
Key resources Channels
opportunities
Cross-function-
al teams to sell, Executive
deliver & manage level dialogue
partnerships

Renewable Value-
energy oriented sales
sources process

Financial perspective
Cost drivers Revenue streams

Higher costs Recurring
Renewable
due to longer revenues through
energy
sales cycle Revenue from increased cus-
production Start-up
value added tomer loyalty
investments
services
for new
concept

DONG Energy Business Model canvas



what was being promised by market- Last but not least, a new Climate box for both selling and delivering the
ing campaigns and sales. A new setup Partnership also implied a process for concept were developed and imple-
around delivery of Climate Partnerships DONG Energy to support the new part- mented.
was necessary because of the need for ner in communicating the partnership
experienced people from a range of and the new initiatives. This was done The concept has naturally implied
different functional areas and to en- through recommendations as to the increased costs
sure a competence match with cus- communication of the new climate ini-
tomers. The team delivering a Climate tiatives as well as by delivering ready- ”In my view, it is very important as often
Partnership would obviously not only to-use marketing material. In specific as possible to revisit the original business
consist of a sales person, but also of cases, DONG Energy would, moreover, rationale throughout a change process in
an energy adviser consultant, a com- offer the possibility of co-branding be- order to ensure that the increased costs
munication and marketing adviser, a tween DONG Energy and the partner deliver the expected long-term gain”
project manager and a set of energy as was seen with e.g. Tivoli. In order to Søren U. Schmidt, International Marketing,
specialists. Combining people with increase the probability that the pro- Director, Business Innovation and
such diverse professional backgrounds posed changes for the customer would Products & Solutions
and competences and having them de- actually take place, all processes were
liver robust and comprehensive Climate designed to include heavy customer Developing, selling and delivering
Partnerships for customers have been a involvement. Climate Partnerships have implied in-
key challenge throughout the process. creased costs. The concept has a dif-
Alternative model to serve Germany ferent type and level of complexity
Having people from various functional In Germany, a slightly different model to it than traditional services. There is
departments work together puts forth of selling and delivering the Climate more risk associated with it and a much
challenges – not only at an individual Partnerships was chosen. The concept longer and complex sales cycle than
level, but also to existing processes and would, in essence, stay the same, but as traditional sales of electricity and gas.
to how these processes were aligned. DONG Energy does not sell and sup- Thus, higher costs are related to both
All the way from the initial energy ply directly to the end customers, but the sales and delivery of the Climate
screening process to realisation and distributes regionally through 600-700 Partnership concept.
communication of the energy savings so-called Stadtwerke, a different ap-
projects and the actual change in en- proach was needed. Not having a di- The main reason is that the project
ergy supply. rect sales channel, but instead a vast binds up more resources that are more
number of customers distributing ener- expensive due to the increased de-
First of all, a need to align the sales and gy, DONG Energy decided to establish mand on highly specialised compe-
delivery process evolved. In essence, a third party concept delivering Climate tences. These additional costs have
this meant that the process of identify- Partnerships directly to the Stadtwerke. to be seen in the light of the strategic
ing potential savings initiatives had to business advantages as well as the new
be part of the sales process in order to Early on, DONG Energy realised that revenue streams which the project has
prove the potential decrease in costs this meant a tighter conceptualisation created and will continue to create.
that would go into the business case and a simpler version of both the so-
behind the Climate Partnership agree- lution and the sales and delivery pro- Ensuring new and durable revenue
ment. cess. DONG Energy initiated a process streams
to develop a Climate Partnership con-
Secondly, the concept had to include a Seen through a DONG Energy business
cept suited to the local Stadtwerke and
well-defined process for identifying in lens, the Climate Partnerships were a
the organisations they would target.
depth the potential revenue value from way to differentiate, spread risks and
To help the Stadtwerke position them-
using renewable energy and imple- ensure new revenue streams. By offer-
selves and sell the idea, a well-defined
menting the new sourcing setup. ing energy advisory and support with
process and a large ready-to-use tool-

Issue no. 4 / 2012 35

STRATEGY & GROWTH


the realisation of energy savings ini- avoid the ”we have already tried that” ”We recognised that a change of this
tiatives, DONG Energy obtained other attitude that often evolves when large character really would force management
sources of revenue than just from sup- organisations are forced to make more to get deeply involved in the pilot projects
plying energy. But most importantly, or less radical changes. with customers”
the closer relationships with business Brian Hulvi Larsen, Head of
to business customers built through Commercial & Consumer Markets
the Climate Partnerships have already ”When building the Climate Partnership
shown an increase in customer loyalty concept as well as the underlying
and ensured long-term commitment of business model, we became very aware Everything from actual content over
customers and, thereby, durable sourc- that we had to develop the organisation standard project management tasks
es of revenue. accordingly. People and processes were such as agreeing on goals, processes,
tuned at selling and delivering a much deliverables and KPIs as well as the
less complex solution” kickoff and delivery of the pilot pro-
”In some cases, we made the hard choice Brian Hulvi Larsen, Head of jects was done by all project partici-
to stop a development process with a Commercial & Consumer Markets pants. Along the more rational and log-
customer because there did not seem to be ical project tasks, the team took a work
any business value in it for the customer” style preference test which helped
Søren U. Schmidt, International Marketing, A central aspect of the success was the ensure a better understanding of each
Director, Business Innovation and strategy of heavy involvement of ex- other and promoted teamwork and in-
Products & Solutions ternal and internal resources. The pro- creased trust throughout the project.
ject was not to be a top-down project.
External involvement in the form of
Implementing the Climate Partnership customers ensured a valuable outside- ”A key aspect of the success of the
concept in perspective. DONG Energy chose development process was that we chose not
Great possibilities were hidden in the to develop a prototype of the concept to let ourselves become carried away with
Climate Partnership concept as a new and its processes, including roles and all the possibilities that suddenly arose. I
type of business model. The decision responsibilities, and then turned to two really believe we managed to keep focus”
to combine existing products, solutions, pilot customers in Denmark. Over a Brian Hulvi Larsen, Head of
competences and resources in a new period of 2-3 months, DONG Energy Commercial & Consumer Markets
way helped and is still helping DONG and the pilot customers tested and
Energy find new ways of tackling the co-developed the concept further and
increased competition and price pres- gained valuable insight into which parts In order to ensure quality of the intense
sure. This has been done by creating of the concept worked well and which involvement of internal and external re-
significant business value for custom- parts had to be further developed. sources, an experienced project man-
ers, and by doing so DONG obtains a agement team was put together. It was
real differentiation in the market. Internal involvement was emphasised, important that a well-planned process
especially in order to ensure that pro- was adhered to, for example in order to
The culture of DONG Energy is to a cesses and tools would survive the ensure progress and regular reviews of
large extent a technical and process- transition from development to the op- material and other outputs.
orientated one. Therefore, it was de- erational phase, but also because peo-
cided that the concept should be man- ple from four different functional areas Another important aspect was that
aged by a small group of dedicated with personal and professional diversity the programme manager would have
people recruited from their daily op- would have to work closely together enough organisational power to be
erational jobs. This was done in order with them for a long period of time. able to resist pressure from the line or-
to ensure focus and progress and to



ganisation when they all of a sudden ships, new and long-lasting revenue
and untimely would be in desperate sources while altogether helping to Contact
need to get the resources back in order make businesses both more energy ef-
For further information
to handle their daily operational tasks ficient and able to differentiate them-
please contact:
taking time away from the project. selves in the market.
Thomas Børve,
All in all, DONG Energy’s Climate tbj@implement.dk,
Partnership concept has been an exem- ”One of my biggest fears was that we +45 2338 0020
plary case of how businesses can inno- would succeed in creating a fantastic
vate their business model as a response new concept but fail in getting the
to significant changes in the business organisation to adopt it, sell it and deliver
environment. By rethinking the value it successfully to customers. I am not
proposition and working cross-func- afraid anymore”
tionally, the Climate Partnerships have Brian Hulvi Larsen, Head of
resulted in tighter customer relation- Commercial & Consumer Markets

Issue no. 4 / 2012 37

STRATEGY & GROWTH

IMPLEMENT CONSULTING GROUP PUBLICATION

Taking your innovation further
Lean innovation book

Lean Innovation nisations, and present a series of prin-
IN BRIEF ciples that can be used to bring more
”The authors really show their expertise leadership into innovation initiatives.
and passion, and just as good, they They also discuss methods for creating
share page after page of great tools and a clearer focus on results and learning
techniques for managing the often-hidden in innovative organisations’ core proces-
guts of the innovation process.” ses.
Langdon Morris,
Ecco, LINAK, Rambøll Oil & Gas,
Innovation Labs
Exhausto and Coloplast are among
the companies that have contributed
Lean has created very good results
examples of how this can be achieved.
within production and administration
in organisations all over the world.
Title: ”Every company should take global
But what happens when Lean meets
Lean Innovation competition concerning knowledge
Innovation? Does it destroy the creati-
initiatives seriously”
vity required for innovation, or can Lean
Authors: improve the results in a business?
Claus Sehested ”Most companies have a vast potential
and Henrik Sonnenberg, hidden in their knowledge workers and in
In Lean Innovation, Claus Sehested and
Implement Consulting Group their overall innovation system”
Henrik Sonnenberg reveal how the in-
terplay between creativity and efficien-
Publisher: ”There are leading lights in the form of
cy can ensure that top management
Børsens Forlag/ companies that have created a culture that
visions are realised through innovation
UK edition: Springer-Verlag brings unique solutions to the market”
initiatives. Lean can boost innovation
initiatives to a higher level and trans-
Web and LinkedIn Group: form the company’s innovation proces-
www.leaninnovation.eu ses into its most important strategic
competence. For further information please contact
Claus Sehested (cs@implement.eu,
In their book, the authors of Lean +45 2338 0034) or Henrik Sonnenberg
Innovation deal with key challenges (hso@implement.eu, +45 2338 0031)
faced by managers in knowledge orga-


Visit our website
www.implement.dk

Implement Consulting Group is a Scandinavian consulting company with more than 250 employees
in Denmark, Sweden and Norway.

We help private and public sector companies implement strategic change with impact.

Denmark Sweden Norway
Slotsmarken 16 Tegnérgatan 35 Solheimsgaten 9
DK-2970 Hørsholm SE-111 61 Stockholm NO-5058 Bergen
Tel. +45 4586 7900 Tel. +46 8 723 13 12 Tel. +47 5590 1000

www.implement.dk

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