BUSINESS MODEL

INNOVATION

Presented By…..
Radha Rani
M. S. Ramaiah Institute of
Management
 Business Innovation
Definition :

Business innovation involves a wide spectrum of

original concepts, including development of new
ways of doing business, new business models,
business application of technology and
communications, new management techniques,
environmental efficiency, new forms of
stakeholder participation, telecommunication,
transport and finance.
Business Innovation & Growth
Strategies
 Types of Innovation
Competence Enhancing Vs. Destroying
Innovation:

 Competence enhancing innovation builds on existing

knowledge & skills.
 Whether an innovation is competence enhancing or
competence destroying depends on whose perspective is
being taken.
 An innovation can be competence enhancing to one
firm, while competence destroying for another.
 Types of Innovation…

Architectural Innovation Vs. Component

Innovation :

 Architectural innovation is an innovation that

changes the overall design of a system or the way its
components interact with each other.

 Component innovation is an innovation to one or

more components that does not significantly affect
the overall configuration of the system.
 Types of Innovation…
Radical Vs. Incremental :
 Incremental innovations take the existing product or offering and
make small- step improvements to the original technology and design.
Incremental improvements add up to produce a great deal of chance in
an offering over time.

 Radical innovations can create an essentially different kind of product

or offering with a new combination of types of value produced. The
new products and services would require customers to radically
change there past behavior with the promise of gaining equally
dramatically new value. They are disruptive technologies that permit
entire industries and markets to transform or even disappear.
 Types of Innovation…
Technical vs. Social Innovations:

 Innovation does not have to be technical does not

indeed have to be a “thing” altogether.

 Management, that is the “useful knowledge” that

enables man for the first time to render
productive people of different skills & knowledge
working together in an “organization” is an
innovation of the 19th century.
 Business Model Innovation
 Business Model Innovation (BMI) refers to the
creation, or reinvention, of a business itself.

 A Business Model Innovation results in an

entirely different type of company that competes
not only on the value proposition of its offerings,
but aligns its profit formula, resources and
processes to enhance that value proposition,
capture new market segments and alienate
competitors.
 Business model innovation rests not in the technology or
product or service, but in the business model itself.

 Business model is a broad-stroke picture of how an

innovative concept will create economic value for the
ultimate user, for the firm and its shareholders and
partners.

 It considers the infrastructure required to move the

product/service to the market in a manner that it is both
easy and convenient for customers and profitable for the
firm.
 Evolution of Business
Model Innovation (BMI)
Theory
The BMI concept was explored by :
 Clayton Christensen, a Professor at the
Harvard Business School
 Mark Johnson of Innosight, and
 Henning Kagermann of SAP in their
feature article “Reinventing Your
Business Model” published in December
2008 Harvard Business Review.
 Role of BMI
 Business Model Innovation is needed as one of the
core elements of a successful market disruption.

 First,a simplifying technology is needed to spark the

disruption, a new business model is then needed to
maximize the reach of the technology and a
comprehensive value network must finally evolve to
support it.
 Key Principles of BMI
Theory
 According to their construct, a business model
consists of four interlocking elements that,
taken together, create and deliver value.
 Innovation can occur in one or more of these
areas simultaneously :
 Customer Value Proposition
 Profit Formula
 Key Resources
 Key Processes
Customer Value Proposition
 A successful company is one that has found a way to create
value for customers — i.e. a way to help customers get an
important job done. By job we mean a fundamental problem,
in a given situation, that needs a solution.
 The best customer value proposition is an offering that gets
that job–and only that job–done perfectly. The lower the
price of the offering and the better the match between the
offering and the job, the greater the overall value generated
for the customer.
 The more important the job is to the customer, the lower the
level of customer satisfaction with current options, and the
better your solution is than your competitors’ at getting the
job done, the greater the value for your company.
 Profit Formula
 The profit formula is the blueprint that defines how
the company creates value for itself.
 It consists of the following:
 Revenue model Price × Volume
 Cost structure Assets; direct and indirect costs; and a
model of how, and whether, scale affects costs
 Margin model How much does each transaction need
to net to cover the cost structure and deliver target
profits?
 Resource velocity How much revenue do we need to
generate per dollar of assets and per dollar of fixed costs,
and how quickly?
 Key Resources
 The key resources (or assets) are the people,
technology, products, facilities, equipment and
brand required to deliver the value proposition to
the targeted customer.

 Thefocus here is on the key elements that create

value for the customer and company, and the
way those elements interact.

 Every company also has generic resources that

do not create competitive differentiation.
 Key Processes
 Successful companies have operational and
managerial processes that allow them to
deliver value in a way they can successfully
repeat and increase in scale.

 These may include such recurrent tasks as

training, development, manufacturing,
budgeting, planning, sales and service.

 Key processes also include a company’s

rules, metrics and norms.
Business Model Innovation
Cycle
 1. Environmental Framing
 The first step to business model innovation is building a
multi-disciplinary “business model innovation team”
with people from business, process, technology,
customer segments, Design, R&D, HR...

 Get the team to understand the business model

environment (Social, Legal, Competitive and
Technological Landscape). Then frame the business
model design space.
 2. Business Model Innovation
 Within this design space the team can start generating different business
model prototypes. One example can be a Metamodel with 9 business model
building blocks that can help describe business models.
 This can serve as a basis for iterative business model design thinking and
innovation.
 The team and a number of designated executives can then select one or
several of the business model prototypes for implementation and testing.
 If several business models are selected this is called a business model
portfolio that can be like in the financial world (portfolio management with
risks, returns and investments...)
 3. Organizational Designs
 Based on the business model portfolio the company should
reflect on how to best translate the models into business units
and business processes, called as organizational design.
 The underlying Information Systems are designed to support
the implementation of the selected business models (e.g. e-
business systems, balanced scorecards, data mining, etc.)
 Then the right people have to be brought in to implement the
design, the business processes and the supporting
technologies.
 4. Business Model
Implementation
 Business Model Implementation involves
transforming models (business model, organizational
model, process model, information systems model)
into reality.
 After securing the external (e.g. venture capital) or
internal (e.g. budgets) financial funding the business
has to be built and run.
 The process doesn't end here! Business model
innovation is a continuous and iterative process that
ends with a business model (portfolio) evaluation and
re-starts with the framing of the changing business
environment - even for successful business models...
 Types of Business Model
Innovation
Three main types of business model innovations,
which can be used alone or in combination :

 Industry Models

 Revenue Models

 Enterprise Models
 All three types (or combinations) of business
model innovation can lead to successful
financial results.
 There is no significant variation in financial
performance across the different types of
business model innovation.
 With a sound strategy and strong execution,
any of the paths can lead to success.
 The best business model innovation
strategies provide a strong fit between the
competitive landscape for a particular
industry and the organization's strengths,
shortcomings and characteristics such as
age and size.
 Because of its prevalence as a successful
innovation strategy, Enterprise Model
Innovation, emphasizing collaboration and
partnerships, should be a key
consideration for executives as they
respond to change.
 Financial Crisis - An Opportuni

 Business model innovation is difficult to achieve because :

 It affects so many parts of an organization
 It needs the buy-in of so many different people.
 It requires the right organizational structures & sense of
urgency to make it happen.
 All these conditions are easier to achieve during an economic
downturn.
 People resist change much less when the survival of their
company and ultimately their jobs are at stake.
 Most people resist change in good times.
 This is the best opportunity a company will get to position itself
for the future of business model innovation.
 Characteristics of an organization that
wants BMI
 Its board explicitly gives the management the mandate to continuously
examine business model innovation.

 It extensively works with multidisciplinary teams across "departments" and

across hierarchies.

 Ithas mechanisms that allow innovative business model ideas to be evaluated

by peers during a first phase, rather than "just by managers”.
 Cont…
 It involves the customer in the process of business
model innovation.
 It maintains a portfolio of innovative business models that
may even cannibalize the existing business model.
 It has the right physical space in place to allow
multidisciplinary business model project teams to flourish. In
other words, it has project/war rooms dedicated to a project
during it's entire duration and with lots of whiteboards and
walls to post visuals.
Five strategic circumstances fueling Business
Model Innovation
1. The opportunity to address the needs of large groups of potential customers who are
shut out of a market entirely because existing solutions are too expensive or complicated
for them. This includes the opportunity to democratize products in emerging markets (or
reach the bottom of the pyramid).

2. The opportunity to leverage a brand-new technology, wrapping the right business model
around it or the opportunity to leverage a tested technology in a whole new market.
 Cont…
3. The opportunity to bring a job-to-be-done focus to a marketing-
driven industry. Such industries tend to make offerings into
commodities. But a jobs focus allows companies to redefine the
industry profit formula.

4. The need to fend off low-end disruptors. If Tata’s 1 Lakh

($2300) Nano is successful, it will threaten other automobile
makers.

5. The need to respond to a shifting basis of competition.

Inevitably, what defines an acceptable solution in a market will
change over time, leading core market segments to
commoditize.
 Examples of BMI where the
business model is the core
value proposition
 Tata–TataNano 1 Lakh ($2300) city car
 Apple–iTunes Store + iPod
 WalMart–Discount retailing
 Hilti–Power tools leasing/subscription
 FedEx–Guaranteed overnight delivery
 Southwest–Low-cost regional air travel
 Obstacles to Business Model
Innovation
 Current Success - It prevents companies from
asking themselves how their business model
could be replaced.

 RiskAvoidance - People are often unwilling to

take risks on a personal level, but also as an
organization. It is easier to stick with the status
quo.

 Organizational Structures - Because they are

not designed for new business models to
emerge. They sustain the status quo.
 Obstacles to BMI…
 Lack of customer understanding - Of course
organizations understand their customers, but
not good enough to design new business models
that address their emerging needs.

 Required size of innovations - In big

companies a potential new business model must
immediately demonstrate an opportunity of
millions of additional revenue.