Growth by business model innovation, a lecture at Leuphana University, 2nd part

Managing Growth by Business Model Innovation2nd-4th Session, Dr. oec. (HSG) Patrick Stähler

May 8-9th, 2009

Agenda

Dr. Patrick Stähler. Leuphana University Lüneburg

▪ The deep fall of the music industry

▪ The Pandesic Case or why elephants can’t dance

▪ Some theory on

▪ Financial measurements and strategy, the resource allocation process

▪ Hidden flaws in strategy making

▪ Starting points for business model innovation or is everything already invented?

▪ Customer insights

▪ Case: The undergarment industry

▪ Value vs. architectural vs. revenue model innovation

▪ Beware of the customer

▪ What makes up a good strategy?

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The deep fall of the music(medium) industry

The bigger the capacity of the carrier medium becam e…

45 min 74 min

1000 min

Longplay record Music CD iPod Shuffle

Dr. Patrick Stähler. Leuphana University Lüneburg 3

…the worse the situation for the music industry got

41 40 4037

34 35 3332

30

0

10

20

30

40

1999 2000 2001 2002 2003 2004 2005 2006 2007

Sales Music Media Industry globalin Bn. $ (1999-2007)

Dr. Patrick Stähler. Leuphana University Lüneburg 4Source: www.musikindustrie.de

Guilty for the decline of the music industry were a lways the others, in particular their best customers


The industry did what they knew best: More of the Same: More offeringsand fighting music lovers


Business model innovation come from outside the indus try


The Pandesic Case: Analyze the case and give answer s to the following questions

▪ Would you have invested in Pandesic at the beginning?

▪ How were the market conditions for the new venture?

▪ Were the right competencies at work at Pandesic? Were Intel & SAP the right partners?

▪ Make a short SWOT analysis of Pandesic

▪ What did go wrong at Pandesic?


How did Pandesic end up like this? The internet was seen as a sustaining technology. They used well tested management techniques from their successful multinational mother companies for a startup company and failed miserably

Ok, let’s do an autopsy and find out what went wrong? - channels- product development- executive team

OK, let’s do some analytics and theory

40% gross profit

1

23% gross profit

2

*You are in the same industry under the same rules of competition


Think more about ROI not just sales margin, but be aware of what the total assets are


verAssetTurnoinProfitMarg ×=ROI

sTotalAsset

Sales

Sales

NetIncomeROI ×=

sTotalAsset

Profit=ROI

13

Both cases have approx. the same profitability


1 2= Department stores = discounters

sTotalAsset

Sales

Sales

NetIncomeROI ×=

%1203%401 =×=ROCII %5.1265.5%232 =×=ROCII

Figures are taken from Christensen, Raynor (2003), The innovator‘s solution, p. 106 14


Ok, let’s assume we are this turkey here. Let’s call him Joey

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Joey is a good student. He learned that analytics will help him to become a better turkey.

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So he introduces his well-being index that increase s by the day since his owner treats him so well…..


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Joey’s confidence level that he lives in paradise

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18Dr. Patrick Stähler. Leuphana University Lüneburg

Ok, I understand, Ok, I understand, Ok, I understand, Ok, I understand, you think he is just you think he is just you think he is just you think he is just a turkey.a turkey.a turkey.a turkey.But think what you But think what you But think what you But think what you usually do in usually do in usually do in usually do in market analysis!market analysis!market analysis!market analysis!



We have a view of the world of what made us and our firm successful

These assumptions help us in normal circumstances very well!

Most assumptions are tacit and unspoken

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Our mental model our perception of our world. In a firm a dominant logic of how things ought to be done exist

The world according to our firm

Competitor Analysis

Customer Feedback

Market reports


Domiant logic of the firm▪ resides in the people▪ gets stronger with success▪ filters information▪ helps to get things done with out too

much coordination▪ gets strengthens by knowledge

management, best practice and benchmarking

▪ is extremly important in a world of sustaining innovations, but an impediment to disruptive innovations

Hidden flaws in strategy making


Hidden flaws in strategy makingWe believe that with analytical tools of the past we can foresee the future! For a sustaining world we have the right tools! 22

Hidden flaws in strategy making

Our successful human rationality

▪ Our decision process is well suited for normal environments

▪ Bounded rationality: impossible to analyse all facts

▪ Ecological rationality Mental shortcuts to reach a quick decision that are good enough in normal situations

▪ Preference to be exactly wrong to vaguely right


Typical flaws▪ Overconfindence in our our

capabilities and in our ability to judge the future

▪ The status quo bias: What we know can we analyze better and we love the present

▪ Ancoring: ▪ The double-sided sunk-cost problem▪ The herding instinct: What the

others do can‘t be wrong! One reason for Me-too Strategies.

▪ False consensus: confirmation bias, selective recall, group thinking

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Financial tools are great but be aware of the limitation s of the tools

Better management leads to disaster in disruptive times:The better a company is managed for sustaining innovations the less capable it is to confront disruptive innovations.

Disruptive technologies are disruptive because in f irst sight they look so innocent

▪ Initially, disruptive technologies do not attempt to bring better products to established customers in existing markets.

▪ They disrupt and redefine trajectories by introducing products and services that are not as good as currently available products ,

▪ but have additional features that appeal to different market segment such as reduced size, weight, complexity and lower power consumption.

▪ Disruptive technologies emerge and progress on their own, uniquely defined trajectories.

▪ Particularly low-end disruption become better over time so they can serve the most demanding customers as well and thereby replace the traditional technology as well


based on: provenmodels.com and the Innovator's dilemma by Clayton M. Christensen and the innovators solution by Clayton M. Christensen and Michael E. Raynor

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Is EVERY THING already

invented?

Well, let‘s start with something very mature – the t ea bag

▪ 50 years old and mature

▪ Competition via the form of the bag to provide better taste


Is everything already invented? – Nope, even mature things can be optimized when looking through the customers‘ ey es at the job to be done

▪ Tetley invented the drip-less tea bag

▪ It solved easily the everyday problem of dripping

▪ Result: premium of 13% over regular tea (at Migros)


That’s how the firms see their products

And that is reality


Again some theory

Disruption can come from the low end of the market or from nonconsumption

based on: the Innovator's dilemma by Clayton M. Christensen and the innovators solution by Clayton M. Christensen and Michael E. Raynor, slide taken from provenmodels.com

diffe

rent

mea

sure

of p

erfo

rman

ce

time

new market disruptioncompete against nonconsumption

perf

orm

ance

time

low end disruptionaddressing overserved customers with a low cost business model

sustaining technologybringing a better product intoan established market

most demanding customers

least demanding customers


If you are in a marketfor giants...

.. and you play withtheir rules you will getnowhere…


„…but if you can create your own rules of engagement than you can compete even in a market for giants. “

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There is not just one strategy at a corporation


owner strategy

corporate strategy

business strategy business strategy

category strategy category strategy

product strategy … …

Questions:

▪ Which companies should I own?

▪ In what businesses / markets should I invest inside the corporation?

▪ What is the right business model to succeed?

▪ How should I structure my offering?

▪ How should I manage this product?

Capital m

arket

Custom

ers

That‘sThat‘sThat‘sThat‘s wherewherewherewhere businessbusinessbusinessbusinessmodel model model model innovationinnovationinnovationinnovation startstartstartstart!!!!

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What value do we createfor our customers and for other stakeholders?

Value Proposition

How do we create the value?Value Architecture

How do we earn money?Revenue Model

The definition of a business model

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Business model innovation1. Value Innovation

(We offer a better value proposition for an existing or new problem)

2. Architectural innovation (We reconfigure the value chain so that a better value proposition emerges)

3. Revenue model innovation (We change the revenue mix and thereby creating a better value proposition)

Where do we get a Value Innovation from? Let‘s find new customer insights as a starting point

Business model innovation

New value proposition

Customers’ insight


„How can we find customer insights? “


„How about focus groups?“


BuyBuy Delivery/ AssemblyDelivery/ Assembly UsageUsage Comple-

mentsComple-ments ServiceService DisposalDisposal

How can we find systematically new customer insight s?

Source: cp. Kim, W.C., Mauborgne, R., Knowing a Winning Business Idea when you see one, HBR Sep-Oct. 2000

Buyer Utility Map

▪ Understand how the customers are buying, using and disposing the product

▪ Understand the whole lifecycle of customers‘ utility

▪ How can we improve the buyer‘s utility cycle?

▪ Can we do more for the customer?▪ Can we leave something to the

customer?


Where can I start in the buyer utility map? –The Dyson Vacuum Cleaner

DisposalServiceComplementsUseDeliveryBuy

CustomerProductivity

Simplicity

Usability

Risk

Image & fun

Enviromental friendlyness

++

StartingPoints


Blacksocks – We solve the world from its socks proble ms

10'00012'000

25'000

40'000

0

10'000

20'000

30'000

40'000

2001 2002 2005 2008

Socks subscription(2001-2008) Customer Insight

� Buying socks is no fun� Putting socks in pairs even less

fun� Good socks are a sign of „Being

well dressed“

Value Proposition� Blacksocks subscription solves

all problems� Always enough new socks � No pairing needed since all

socks are identical

Revenue Model� Upfront payment � Easy planning and negative

working capital

20% market sharein Switzerland*

•* premium segment starting at 9CHFDr. Patrick Stähler. Leuphana University Lüneburg 44

Blacksocks – we save the world from socks problems

DisposalPuttingin pairs

WashingUseDeliveryBuy

CustomerProductivity

Simplicity

Usability

Risk

Image & fun

Enviromental friendlyness

StartingPoints


Dell – the classical business model innovator


IKEA – democratic design

▪ IKEA outsourced two value activities (assembly and transport) to its customers

▪ Thereby, it can offer substantially lower prices for good design

Is this everything?Is this everything?Is this everything?Is this everything?Think about the value Think about the value Think about the value Think about the value proposition and the proposition and the proposition and the proposition and the production economics!production economics!production economics!production economics!


Revenue model innovation – the forgotten business mo del innovation type

▪ Find new sources of revenue (Gratis-Zeitungen are financed by advertising, always the prime source of income for newspapers)

▪ Let the same customer pay but differently (postpaid vs. prepaid, bring the financing of the deal along (GE Capital), single sale vs. subscription (blacksocks)

▪ Revenue model innovation change the economics of a business. With an upfront subscription payment the working capital is negative. Your customer finances you


The strategy canvas of Bosch IXO: A clear profile o f the value innovation

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6 Traditional brands No-Name Bosch


Where does the value innovation of Bosch start?

Eliminate� technology talk

Reduce• performance• heavy duty• men, muscle & sweat

Raise• price• home decoration

Create• easy of use• fun• inspiring people

cost

red

uctio

n

Diff

eren

tiatio

n

Eliminate – Reduce – Create – Raise Matrix


Very business model innovation must have in the end a higher customer utility

Customerutility

price

costs

company profit

customervalue+

+



Beware of your existing customers. They want More-of-the-Same-for-Less!

Dr. Patrick Stähler | 53

But also it takes time to find new customers and teach them the advantages of your solution


Even innovations that are self-evident & have no co mpetition do not diffuse easily. The example of lemon juice and the British Navy

Discovery that lemon juice preventsscurvy in 1601

Confirmation of the results 1747

Introduction to the Navy 1795

Introduction to the Merchant navy 1865

146 years

48 years

70 years

Source: Mosteller, 1981 cited in Rogers, 1995 54

Business model innovation demands often new consume r behavior. Learning takes TIME and a GOOD REASON to do so!

▪ Have you ever thought of, how much knowledge consumer have about the consumption process?

▪ Most consumer knowledge is learned via from other peers

▪ To implement a new business model in the heads of the consumer takes time!


What are the variables determining the rate of adop tion of a business model innovation?

1. Perceived Attributes of Innovations• Relative advantage• Compatability with existing knowledge• Complexity• Consumer Knowledge• Trialability• Observability

2. Type of Innovation-Decision• Optional• Collective• Authority

3. Communication Channels• Mass media• Interpersonal (Word-of-Mouth)

4. Nature of the Social System• Degree of network interconnectedness• Norms

Rate of Adoption of Business model innovation

Source: cp. Rogers,(1995), The Diffusion of Innovation, p.207 56Dr. Patrick Stähler. Leuphana University Lüneburg

The adoption of a business model innovation is a lo ng and cumbersome process. Each customer has to go through all five p hases

Knowledge

•Do I know about the innovation

Perception

•What is my perception?

•Positive? Negative?

Decision

•Shall I decide to buy it?

Implementation

•Shall I use it?

Confirmation

•Does the product fulfill the value proposition?


failure failure failure failure failure

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The S-curve is just the curve for successful innova tions, but most fail

time

diffu

sion


Could you build up Tchibos business model from scra tch? Probably not!

Source: Tchibo Website

Coffee

• 1950

Coffee plus

• 15 years

Non-foodproducts

• 9 years

14 days program

• 12 years

Weekly world of goods

• 9 years


Beware of your customer!

▪ Customers can seldom image products that they do not know▪ Normal customers if asked want More for Less of what the industry is

already offering▪ Most demanding customers are great for finding sustaining

innovations but a threat for disruptive innovations▪ Traditional market research does not discover new demands. Market

research is a reason for strategy convergence▪ Most business model innovation come from the supplier side. ▪ Thinking in Jobs-to-be-done helps to find new not solved customer

insights


What makes up a good business model innovation or a ny good strategy?


Focus

Trend

Differentiation

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It’s about finding the right trend to surf!


It is about differentiation63

„Business model innovation is

about being

DIFFERENT!“


NO, REALLY DIFFERENT!


Growth by business model innovation, a lecture at Leuphana University, 2nd part

Business

Transcript of Growth by business model innovation, a lecture at Leuphana University, 2nd part