Transcript An Introduction to Business Model Innovation

Prof Göran Roos
Thinker in Residence, South Australia
Chairman, VTT International
Honorary Professor at Warwick Business School, Warwick University
Visiting Professor in Innovation Management and Business Model Innovation, VTT Technical Research Centre of Finland
Visiting Professor in Business Performance and Intangible Asset Management, Centre for Business Performance, Cranfield
University, Cranfield
Senior Advisor, Asia Pacific, Aalto Executive Education Academy
Part-Time Professor, Strategic Design, Faculty of Design, Swinburne University of Technology
[email protected]
© Copyright Göran Roos 2011
Value Appropriation
Value Creation
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Efficiency Increasing Innovations
Innovations out of 5 different knowledge domains
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Explanatory Models
Explaining Reality
Universal Understanding
Abstract Presentation of Insights
Science
Art
Reductionist Approach
Integrative Approach
Medicine
Working Models
Improving Reality
Hermeneutic Understanding
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Expressing Models
Questioning Reality
Individual Understanding
Design
Practical Presentation of Insights
Exploring Models
Changing Reality
Subjective Understanding
Technology
Based
Innovation
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Design
Based
Innovation
Technologies that enable or delivers on the desired changes in the business
model or design objectives
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Source: F. Hacklin, C. Marxt, M. Inganäs, 2005, Technology acquisition through convergence: the role of dynamic
capabilities, 14th International Conference on Management of Technology, Vienna, May 22-26,
Design
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Desirable from the users point of view [i.e. they are better of in
their own opinion after the change]
Beneficial to the supplier
Positively impacting other stakeholders
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Source: Nyberg, M. and Lindström, M. (2005), “Muotoilun Taloudelliset Vaikutukset”, ETLA, Discussion papers No. 982, p. 20.
Design Council. The Impact of Design on Stock Market Performance. An Analysis of UK Quoted Companies 1994-2003. London 2004.
Design Methodology
Observation
Brainstorming
Rapid
Prototyping
Refining
Implementation
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Living Labs
A Living Lab is an embodied
research methodology for sensing,
prototyping, validating and refining
complex solutions in multiple and
evolving real life contexts.
In essence it applies a design
methodological approach within a
semi-open innovation framework
[Semi-open innovation framework
means that it builds on the principle of
crowd sourcing but the crowd is defined
and delimited by the originator of the
problem] to enhance the fast
prototyping co-creation thinking
when it comes to products, services
and solutions that are either
systemic in nature or part of a
greater systemic/holistic setting.
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Source: Helin, K. and J. Lehtonen “VOITTO: About Business Plan and Innovation”, Presentation
Effectiveness Increasing Innovations
Business Model Based Innovations
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Is the recipe of your business and is built around an in-depth
customer/consumer insight:
“Last year one million quarter inch drills
were sold. Not because people wanted
quarter inch drills but because they
wanted quarter inch holes.”
President of Black & Decker
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“What we sell is the ability of a 43year-old accountant to dress in black
leather, ride through small towns and
have people be afraid of him.”
Harley-Davidson marketing executive
You are producing romantic pocket
books for teenage females and younger
middle age females with lower levels of
education
You are distributing through bookshops
etc.
Your price the consumer is $1
Your distribution channel keeps 50%
Your author gets 20%
Your operating costs are 25%
Leaving you with 5% in contribution [or $0.05]
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Easton Press
Best materials, production and
presentation – no compromise
High price – high margin business
Revenue Logic: Value-based pricing
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RyanAir
Scale gives some purchasing discounts
Reverse auctioning of landing rights
gives positive cash flow
Operational excellence gives low
operating cost
Listing fees for all on-board goods
provides positive cash flow
Revenue Logic: Profit sharing with
airports + Hybrid/Media model
You get your profit
exceeds your revenue
from the base offering
© Copyright Göran Roos 2011
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A Value Proposition is an overall view of a company's bundle of products and services that are
of value to the customer.
The Target Customer is a segment of customers a company wants to offer value to.
A Distribution Channel is a means of getting in touch with the customer.
The Relationship describes the kind of link a company establishes between itself and the
customer.
The Value Configuration describes the arrangement of activities and resources that are
necessary to create value for the customer. Nornally these are expressed in IC-Navigator form
and using the (Stabell and Fjeldstad 1998) Value Logics
The identified Resources that can be deployed by the firm to create value including those that
form the basis for a competitive advantage
A Partnership is a voluntarily initiated cooperative agreement between two or more
companies in order to create value for the customer
The Cost Structure is the representation in money of all the means employed in the business
model.
The Revenue Model describes the way a company makes money through a variety of revenue
flows.
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Source: Osterwalder, A. “The Business Model Ontology A Proposition In A Design Science
Approach”, These, Ecole Des Hautes Etudes Commerciales, Universite De Lausanne, 2004
Performance
The dimensions that might matter in my business
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
Legitimacy is a generalized perception or assumption that the
actions of an entity are desirable, proper or appropriate within
some socially constructed system of norms, values, beliefs and
definitions.

Powerful
Urgency is the degree to which stakeholder claims call for
Dormant
immediate attention. A stakeholder group has an urgent
interest when its needs are of a time-sensitive nature and when
they are important or critical to its mission.

Power is the probability that an individual or group within a
relationship is in a position to carry out its own will despite
resistance bearing in mind that powerful stakeholders may be
able to exert influence which will affect a project either
negatively or positively. Power is the ability to control which
decisions are made and to facilitate the implementation of
these decisions. Power may be coercive, based on the use of
force or the threat of force; utilitarian, relying on material
persuasion or incentives; or normative, involving more
symbolic influence. When evaluating power, it is important to
consider whether each stakeholder group has the resources –
time, expertise, energy and/or technology – to achieve its ends.

Dangerous
Definitive
Demanding
Urgent
The most important stakeholders (at any point in time) are
definitive stakeholders
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Dominant
Source: Agle, B., Mitchell, R., and Sonnenfield, J., 1999, “What Matters to CEOs? An
Investigation into Stakeholder Attributes and Salience, Corporate Performance
and CEO Values”, Academy of Management Journal, 42, 5: 507‐525.
Dependent
Discretionary
Legitimate
Must be Identified and if necessary
segmented using value based
segmentation methods
• Intrinsic
• Instrumental
• Extrinsic
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Value derived
from the
appreciation of
the offering
Value derived
from the
possession of
the offering
Value derived
from the
deployment of
the offering
Exogenous and
endogenous
pressures
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Instrumental
value
Intrinsic
value
Extrinsic
value
Real company processes and actions which affect
the levels of human, organisational and
relational capital. More obviously, they also
affect financial performance.
Reduce
Which factors should be
reduced well below the
industry’s standard?
Eliminate
Which of the factors that the
industry takes for granted
should be eliminates?
A New
Value
Curve
Create
Which factors should be
created that the industry has
never offered
Raise
Which factors should be
raised well above the
industry’s standard?
Kim & Mauborgne 2005
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© Copyright Göran Roos 2011
Source: Osterwalder, A. “The Business Model Ontology A Proposition In A Design Science
Approach”, These, Ecole Des Hautes Etudes Commerciales, Universite De Lausanne, 2004
Relationship describes the kind of link a
company establishes between itself and the
customer.
All customer interactions between a firm
and its clients affect the strength of the
relationship a company builds with its
customers. But as interactions come at a
given cost, firms must carefully define what
kind of relationship they want to establish
with what kind of stakeholder.
The depth of a relationship goes from
transactional through repeat to
embedded
Profits from customer relationships are the
lifeblood of all businesses. These profits can
be achieved through:
the acquisition of new customers,
the enhancement of profitability of existing customers
[add on selling] and
the extension of the duration of existing customer
relationships [retention]
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The relationship mechanism can
either personalize a relationship,
contribute to customer trust, or
contribute to brand building.
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Infrastructure
Support
Activities
Human Resource Management
Technology development
Procurement
Primary
Activities
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Inbound
logistics
Operations
Outbound
logistics
Marketing
&
Service
Sales
Source: Porter, M.E. 1985: Competitive Advantage; Creating and Sustaining Superior Performance, The Free Press
Is all about transformation of inputs into outputs. The value resides solely in the resulting
output.
Economies of Scale
Primary resource cannot be Human
If primary resource is relational or organisational then transformation efficiency must be high
Economies of Learning [Repetition]
A Value Chain has an inherent drive towards efficiency
High
Effectiveness
V
A
L
U
E
C
H
A
I
N
Low
Low
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High
Efficiency
Infrastructure
Human Resource Management
Technology development
Procurement
Support
Activities
Find
someone
with a
problem
Acquire
the right
to address
the
problem
Develop
alternativ
e
solutions
Primary
Activities
Control/Evaluation
Execute
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Co-select
with
client one
solution
Source: Stabel, . B., Fjeldstad,Ø. D.: Configuring Value for Competitive Advantage: On chains, shops, and networks, SMJ, Vol 19, No 5, 1998
Is all about (re-)solving customer problems. The value resides in two in-separable
components: The solution and the individuals that came up with the solution.
Economies of Scope
Primary resource cannot be Monetary or Physical
If primary resource is relational or organisational then transformation efficiency must not be high
A Value Shop has an inherent drive towards effectiveness
VALUE SHOP
Effectiveness
High
Low
Low
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High
Efficiency
Infrastructure
Support
Activities
Human Resource Management
Technology development
Procurement
Promote Network
Primary
Activities
Manage Member Contracts
Service Provisioning
Infrastructure Operation
& Maintenance
© Copyright Göran Roos 2011
Source: Stabel, . B., Fjeldstad,Ø. D.: Configuring Value for Competitive Advantage: On chains, shops, and networks, SMJ, Vol 19, No 5, 1998
Is all about linking customers who are or wish to be interdependent. The value
resides in the enabling itself.
Network Economics
Primary resource cannot be Human or Monetary or Physical
transformation efficiency relating to Organisational or Relational must be on the level of
maximum marginal return
A Value Network has no inherent drive towards neither efficiency nor effectiveness
Effectiveness
High
Low
VALUE
NETWORK
Low
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High
Efficiency
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Owned or Controlled
By the Firm
Owned or Controlled
By the Firm
Additive
Additive
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Owned or Controlled
by the Other Party
Owned or Controlled
By the Firm
Owned or Controlled
By the Employee
AUTOPOIETICS
COGNITIVISTS
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CONNECTIVISTS
Decreasing
Marginal
Return
Value Chain
Increasing
Marginal
Return
Value Shop
Network
Economic
Return
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Value Network
Infrastructure
Support
Activities
Human Resource Management
Infrastructure
Technology development
Procurement
Support
Activities
Human Resource Management
Technology development
Infrastructure
Support
Activities
Human Resource Management
Find
someone
with a
problem
Technology development
Procurement
Primary
Activities
Inbound
logistics
Operations
Outbound
logistics
Marketing
&
Service
Acquire the
right to
address the
problem
Promote Network
Manage Member Contracts
Primary
Activities
Primary
Activities
Service Provisioning
Sales
Control/Evaluation
Execute
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Procurement
Develop
alternative
solutions
Co-select
with client
one solution
Infrastructure Operation
& Maintenance
Primary basis
For
Competitive Advantage
Possible basis
For
Competitive Advantage
in the late phase
Primary basis
For
Competitive Advantage
Possible basis
For
Competitive Advantage
in the late phase
Secondary basis
For
Competitive Advantage
Secondary basis
For
Competitive Advantage
Primary basis
For
Competitive Advantage
Secondary basis
For
Competitive Advantage
Secondary basis
For
Competitive Advantage
Primary basis
For
Competitive Advantage
Primary basis
For
Competitive Advantage
Possible basis
For
Competitive Advantage
in the early phase
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Industrial
Economics
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Network
Economics
Knowledge
Economics
To:
From:
Cognitivist
Epistemology
Balanced
Cognitivist/Connectionist
Epistemology
Balanced
Cognitivist/Autopoietic
Epistemology
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Balanced
Cognitivist/Connectionist
Epistemology
Connectionist
Epistemology
Balanced
Cognitivist/
Autopoietic
Epistemology
Balanced
Connectionist
/Autopoietic
Epistemology
Balanced
Autopoietic
Connectionist/Autopoietic
Epistemology
Epistemology
Value Chain / Cognitivist
Value Shop / Autopoietic
© Copyright Göran Roos 2011
Value Network / Connectivist
MONETARY PHYSICAL
MONETARY
PHYSICAL
Investment
In financial
instruments
Sales of
products
Relationship
RELATIONAL
arbitrage
Sale of IP,
ORGANISATIONAL processes &
knowledge
HUMAN
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Sales of
man-hours
REL.
ORG.
HUMAN
Investment
in assets
Investment
in building
links
Investment
in brands,
image and
systems
Recruitment
training,
conditions
Chemical
synthesis
Design
&
Chemical
effect
New
Processes
New
Knowledge
Use of other
company’s
assets
Word of
mouth
Access to
process
Co-learning
CRM
Systems
generate
IP
Developing
competence
through use
Produce
By
numbers
Developing
prototypes
Building &
Knowledge
developing codification,
relationships
new IP
Training
V
A
L
U
E
Effectiveness
Different [economic]
behaviour of resources
Different behaviour of
individuals
Value Shop
High
Coordination Costs
Coordination costs occur
in the interface between
different strategic logics
for two reasons:
C
H
A
I
N
Low
Low
High
Efficiency
Transaction Costs
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Value Levers
Increase
net
operating
profit
after tax
(NOPAT)
(I/S)
Increase
gross
profit
Decrease
operating
expenses
Shareholder
Value
Creation
Decrease
costs
Reduce
selling costs
Capital
deployment
Cost of
capital
Increase price
Increase volume
Improve mix
Improve process
Reduce cost of inputs
Improve warehouse
utilization
Increase productivity
Decrease staffing
Optimize scheduling
Reduce
distribution
costs
Reduce
administrative
costs
Improve
capital
allocation
(B/S)
© Copyright Göran Roos 2011
Increase
revenues
Optimize physical network
Decrease staffing
Use alternative distribution
Lower Customer Service
&
LowerManagement
I/S costs
Order
Costs
Lower Finance/Acctg. costs
Lower HR costs
Improve capital planning/
investment process
Reduce inventories
Reduce A/R increase A/P
N/A
Transformation
Benefit
• Profit-driven marketing efforts:
– Target “best” customers
– Offer “best” product mix
– Improve pricing management
• Proactive production planning
for inventory management
• Most profitable capacity
allocation/utilization
• Reduced sales management
layers
• Focus on high-profit accounts
• Improved inventory flow visibility
– Lower transportation costs
– Higher facilities utilization
– Less “fire fighting”
• Better carrier evaluation /mgmt.
• Higher quality Customer Service
• Improved Supply Chain visibility
– Improved order fill rates
– Significantly lower cost
– More consistent service
– Faster problem resolution
• Improved capital stewardship
– Increased capital
productivity
– Reduced inventory
investment
– Reduced receivables
investment
Effort-based pricing
A cost-based (or effort-driven) pricing model
Value-based pricing
A value-based (or perception-driven) pricing model
Profit Sharing
Revenue-sharing contract with primary customers
Licensing
Charging on copyright (the right to use the IP)
Loss Leader-pricing
Creating customer base (for later revenue) or
supporting sales of other parts of the product/service
offering
Hybrid/Media model
Vendor sells/leases ad space or information [space]
based on customer relationship
Channel charging
Vendor charges for carrying information relating to
other goods in/on its primary product/offering
Membership fee
Vendor charges for the right to take part in an activity
Negative Working capital
Vendor generates financial returns on the capital held
as a consequence of getting paid by its customers
before paying its suppliers
© Copyright Göran Roos 2011
Source: Osterwalder, A. “The Business Model Ontology A Proposition In A Design Science
Approach”, These, Ecole Des Hautes Etudes Commerciales, Universite De Lausanne, 2004
Technology based Innovations are combined with
Design Innovations and
Business Model Innovations
To address all dimensions of the customers value
drivers
© Copyright Göran Roos 2011
Owner of L.A. Times files for bankruptcy
December 09, 2008|James Rainey and Michael A. Hiltzik | Rainey and Hiltzik are Times staff writers.
In perhaps the starkest sign yet of trouble in the news business, media giant Tribune Co. -- owner of the Los
Angeles Times, KTLA-TV Channel 5 and other newspapers and TV stations -- filed Monday for
bankruptcy protection from creditors.
© Copyright Göran Roos 2011
Pearson "proud" over 2009 preliminary results
01.03.10 | Catherine Neilan
Pearson's chief executive has said everyone in the company "can be proud" of the preliminary
results for 2009, in which sales and profits grew "in a tough climate".
Penguin had a record year, growing sales above the £1bn mark for the first time - up 11% to
£1.002bn - however, profit slumped 10% to £84m, owing to one-off costs of £9m in relation to
the company's restructure midway through the year.
The Pearson group saw headline growth in sales of 17%, to £5.624bn, with growth at a
constant exchange rate up 4%, and adjusted operating profit also up 4%, to £858m. Operating
cash flow increased by 15% to £913m.
Pearson Education experienced "strong growth", thanks to "sustained investment and our
leadership position in learning services and technologies". The North American division grew
23% to £2.47bn, while adjusted operating profits were up by a third to £403m, with the
international arm, which includes the UK, growing sales 20% to £1.035bn. Profits increased
by 4% to £141m.
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6% of volume
45% of Profit Pool
In less then 3 years
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Improve existing business
Add new businesses
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Not to be copied or distributed in any form whatsoever without the express permission of the author. Sources in main document.
Business Model Innovation with emphasis on what to improve in my
present business?
© Copyright Göran Roos 2011
Not to be copied or distributed in any form whatsoever without the express permission of the author. Sources in main document.
The Book eco-system
The Radio play eco-system
The TV series eco-system
The Advertisement eco-system
The E-Distribution eco-system for books
The Mobile pay-as-you-go entertainment eco-system
The Peer-to-peer publishing eco-system
The Education eco-system
The Product placement eco-system
The Gaming eco-system
The Bundled product eco-system
© Copyright Göran Roos 2011
Not to be copied or distributed in any form whatsoever without the express permission of the author. Sources in main document.