Business Model Innovation

Business Model Innovation

• Reshapes industries and redistributes billions in value
• Business models that didn't exist before 1960 account for over 90% of the total market capitalization in retailing
• Business models that didn't exist before 1980 account for 100% of the computer industry
• In the most recent 10-year period, 13 of the 26 Fortune 500 entrants succeeded due to business model innovations
• Established corporations struggle to create innovative business models, as most are created by start-ups
• The elements and processes of building business models lack codified understanding

Key elements in Business Model Innovation

• Understanding the strengths and limitations of existing business models is key
• Understanding the logic and interdependencies amongst the elements of existing business models is key
• Helps businesses know when to leverage their core business vs when to implement a new one
• Clumsiness in creating new business models has led to the belief that companies can only successfully innovate “close to the core.”

Defining a Business Model

• Consists of four interdependent elements that create and deliver value
• Begins with a value proposition: a product/service that helps customers perform a task more effectively, conveniently, and affordably
• "Job" refers to a fundamental problem in the customer’s situation needing a solution
• Every job needing a fix has functional, emotional, and social dimensions that define the experiences in purchase and use

Resources in Business Models

• The value proposition defines the resources a business needs to deliver it
• Resources are things like people, technology, products, suppliers, distribution channels, equipment, facilities, brands, and cash
• Resources can be hired/fired, bought/sold, built, or destroyed

Processes in Business Models

• Processes coalesce as a company uses its resources to deliver the value proposition
• Some processes are visible, codified, monitored, and managed consciously
• Other processes are habitual ways of working that evolve over time in response to repetitive tasks
• Processes can become followed by assumption rather than explicit decision, becoming part of the organizational culture

Value and Profit Formula

• Value proposition defines value for the customer
• Profit formula defines value for the company and its owners
• Resources and processes describe how that value is delivered to both the customer and the company
• Sequence in assembling the four boxes of the business model varies by circumstance, creating bi-directional links between the value proposition, profit and resources
• The sequence typically occurs clockwise from the value proposition, when the value proposition is dictated by product functionality and reliability
• When cost heavily influences the value proposition, the pieces are put in place counter-clockwise, with prices/margins set first

Disruptive Innovation

• Negligence or failure in business model innovation is why leading incumbent firms typically fail when confronted by disruptive attackers
• Three enabling elements to each disruption: technological innovation, a disruptive business model, and a new value network
• Technological innovation transforms a complicated technological problem into something simple enough for less-skilled people resulting in decentralization
• Simplifying technology in tech was microprocessors
• In organic chems simplifying tech was reaction mechanisms
• In medicine simplifying tech is diagnosing diseases by their cause, not symptom

Disruptive Business Model

• Simplifying technology must be embedded in a disruptive business model
• Resources, processes, and profit formula must also enable it to deliver the simple, affordable solution to the customer in a cost-effective way
• The Digital Equipment Corporation had microprocessors available but could not profitably sell a computer for less than $50,000 because their existing business model would not allow it

Value Network

• An ecosystem that contains the disruptive business model
• Suppliers, distributors, and customers have similar value propositions and profit formulae and tend to develop products in a similar rhythm
• If a firm tries to grow a disruptive business within the value network, that value network will force the disruptive business model to conform to its development rhythms, profit formulae, and value proposition

Corporate Evolution and Innovation

• A company that was the leader in the rear-most plane of competition never becomes the leader in the new, disruptive plane, unless it establishes a completely different business unit underneath the corporate umbrella
• The resources, processes, and profit models required to succeed in the original plane of competition are different than those required to succeed in the new one
• Disruption is a process, not an event
• Individual business units rarely evolve, however a corporation can evolve through business model innovation

IBM: An Illustration

• IBM was the only mainframe company that became a leading maker of minicomputers by creating a different business unit
• IBM setup another seperate business unit to be a leading maker of personal computers
• IBM proactively constructed an entirely new value network to accelerate the emergence of microprocessor-based computers
• As the original business models got disrupted, IBM sold off or shut down most of these hardware business units, as it grew its services and IT consulting business units

Innovation Opportunities

• Markets can be conceived geographically as concentric circles
• Before modern technology emerges, activity occurs in the largest circle and are addressed where and when they arise in people’s lives.
• Sophisticated high-performance technology drives industry "centralization”
• People take their problems to a central location where someone with expertise and capital can solve them
• The cost and inconvenience of this centralized structure spawns a reciprocal process of “decentralization”
• Successive generations of disruptive innovations make the products/services more affordable/simple
• Slide rules were used for computing before digital computing drove a centralization of the industry
• Disruptive innovations decentralized the industry again, in step-by-step fashion
• A minicomputer brought computing to corporations’ engineering departments, a desktop computer brought it to offices and homes

Competitive Dynamics

• Head-on competition amongst competitors with similar business models drives prices up as competitors vie to make better products for more attractive margins
• The type of competition that drives decentralization leads to lower prices

Types of Opportunities

• New-market disruptions occur when there is a broader circle beyond the one being served , in which people must use inconvenient cobbled-together solutions
• There are opportunities for low-end disruption with lower-cost business models if competitors have overshot what customers can use

Factors that Minimize the Need for a New Business Model

• Disruptiveness can only be expressed relative to a competitor or your own business model
• An innovation can be disruptive to competitors, but not to your own business model and vice versa
• If P&G were to formulate a low-cost response to the disruption of its products by store brands it would require a new business model.

Business model types

• Solution shops
• Value adding process businesses
• Facilitated network businesses -Business model innovation can occur within each of these types -Industries transform the most when a business model innovator substitutes one type for another in an industry

Solution Shops Structure

• Resources and processes are structured to diagnose and recommend fixes for complicated problems
• Examples: consulting firms, advertising agencies, research and development organizations, some law firms, custom manufacturing firms, activities in hospitals/specialist physicians’ practices
• Solution shops tend to do unique work for each customer so people are willing to pay very high prices for the services
• They get paid through a fee-for-service revenue model

Value-Adding Process Businesses Structure

• Bring in things that are incomplete/broken, add value, and ship them out, repaired or more complete
• Examples: Retailing, restaurants, automobile manufacturing, petroleum refining, educational institutions and angioplasties
• Value-adding process businesses typically have a fee-for-outcome revenue model
• Ability to deliver results reside in equipment and practiced processes
• Prices can be quoted in advance and outcomes guaranteed and most concepts of strategy derived from value chain business

Facilitated Network Business structure

• Institutions in which the same people buy/sell, deliver/receive things from each other
• Mutual insurance companies and telecommunications companies are facilitated network businesses
• Has effective business models for the care of chronic illnesses and the companies are those that facilitate the effective operation of the network.

Disruption within business models

• When technology simplifies products for use by new groups, disruption occurs within a business model type
• The Boston Consulting Group disrupted McKinsey within the solution shop class
• Toyota has disrupted General Motors and Medco is disrupting retail pharmacies within adding process business models classes
• Traditional wire-line telephone companies are being disrupted by facilitators
• Geek Squad changes IT from a solution shop to a value-adding process business model
• E-bay is disrupting retail as value adding transforming into facilitated network businesses and YouTube turns video entertainment from a VB to a facilitated network business

Integration and competition

• Integration is how processes link resources within a business model
• The customer’s purpose makes clear the type and amount of integration required
• Many companies find it hard to respond to a competitor because most are structured in ways that mirror product or customer categories

Productive Integration

• The first occurs when two different products compete for the same job
• The second occurs when the need to do two jobs arises together

Explore business model innovation, its impact on industries, and its role in value redistribution. Understand the strengths and limitations of existing business models. Learn why established corporations often struggle with business model innovation.