Business model innovation

Business model innovation is the art of enhancing advantage and value

creation by making simultaneous—and mutually supportive—changes both to
an organization’s value proposition to customers and to its underlying
operating model. At the value proposition level, these changes can address
the choice of target segment, product or service offering, and revenue model.
At the operating model level, the focus is on how to drive profitability,
competitive advantage, and value creation through these decisions on how to
deliver the value proposition:
Where to play along the value chain
What cost model is needed to ensure attractive returns
What organizational structure and capabilities are essential to success
• A retailer must begin optimizing its business model by using deep “customer discovery”
techniques to identify what its target customers like and dislike in the product and shopping
experience, as well as their shopping patterns. It can then develop a value proposition that
serves those target customers and an operating model that enables the company to
effectively deliver it.

• A business model developed in this way evolves with changes in the environment, and the
value proposition continues to be aligned with the needs of consumers. The retailer should
also leverage opportunities that the operating model provides to create differentiating
features in its value proposition.
Four Approaches to Business Model
Innovation
• Companies hoping to drive growth through business model innovation
face a number of critical questions:
How broad should the scope of the effort be?
What’s the appropriate level of risk to take?
Is it a onetime exercise, or does it call for an ongoing capability?
• To answer those questions, it’s important to realize that not all business
model innovation efforts are alike. 
• Understanding the four distinct approaches to business model innovation
can help executives make effective choices in designing the path to
growth
 Impetus

Transform
The Reinventors The Mavericks
the core

Four Approaches to business

Focus Model Innovation

Expand into
The Adapters The Adventurers
non core

Defend against
Aspire for breakout
industry decline or
growth
disruption
• The reinventor approach is deployed in light of a fundamental industry
challenge, such as a new regulation, in which a business model is
deteriorating slowly and growth prospects are uncertain. In this situation,
the company must reinvent its customer-value proposition and realign its
operations to profitably deliver on the new superior offering.
• The adapter approach is used when the current core business, even if
reinvented, is unlikely to combat fundamental disruption. Adapters
explore adjacent businesses or markets, in some cases exiting their core
business entirely. Adapters must build an innovation engine to
persistently drive experimentation to find a successful “new core” space
with the right business model.
• The maverick approach deploys business model innovation to scale up
a potentially more successful core business. Mavericks—which can be
either startups or insurgent established companies—employ their core
advantage to revolutionize their industry and set new standards. This
requires an ability to continually evolve the competitive edge or
advantage of the business to drive growth.
• The adventurer approach aggressively expands the footprint of a
business by exploring or venturing into new or adjacent territories. This
approach requires an understanding of the company’s competitive
advantage and placing careful bets on novel applications of that
advantage in order to succeed in new markets.
Business model transformation

Business model innovation is critical to transformation. Many organizations

share a common set of concerns:
What type of business model shift will help us achieve breakout
performance?
How do we avoid jeopardizing the core business?
How do we build the capability to develop, rapidly test, and scale new
models?
Inspiring an organization to change is not a trivial undertaking, but given the
current strategic environment, it’s a critical one.
PRICING OF PRODUCTS AND SERVICES
• Banks develop models for pricing of products and services based on
certain fundamental parameters.
• They are market dynamics, risk perception, return expectations,
tenor/duration, resources position, ALM position and customer
profile.
• Balancing of these variables in the pricing model is an important
exercise banks have to undertake.
PRICING OF PRODUCTS AND SERVICES
• The fundamental concept of costing has to be in sync with asset
liability management practices.
• Pricing of retail assets products depend on MCLR (marginal cost of
fund based lending rates)
• Each bank has its cost structure based on the composition of deposit
mix. State Bank of India has the lowest MCLR among the PSBs
because the major chunk of its deposits is in current and low cost
savings bank deposit portfolios.
TECHNOLOGY MODELS
• The technology platform plays a major role in the retail banking initiatives.
Technology is the backbone of the process and delivery efficiency of banks.
• Technology models are either in- house or outsourced or partially
outsourced and partially in -house. Most of the PSBs models used to be in -
house but now a days they also adopt more efficient out sourced models.
• Due to stiff competition in retail banking, banks have brought many E-
banking products on their technology platform. Eg E -LOBBY, Mobile
banking, internet banking, payment systems through BHIM and other private
payment players; linking of tax payments like IT, GST, VAT, Custom duties to
banks core banking platform; Cheque truncation services
Segment targeting
• Retail banking success depends on banks understanding of different
segments and developing of appropriate products to meet these
segments. Though different products cater to different segments,
there are certain products like core products which cater to all
segments.
• Different bankers market their different products in different names
though they have common features.The idea of this is to make the
customers identify the bank with the particular name of the product.
CUSTOMER SEGMENTATION
• Their need pyramid will vary with the rise in their income levels.
• Bank develop their products based on their segmentation.
• Banks target their relevant segment for maximum conversion in to
business.
CUSTOMERS SEGMENTATION
• Customers can be segmented based on their income level. The income levels may vary
from bank to bank
INCOME LEVEL - CUSTOMER SEGMENT
(in lakhs)
Rs 2 – 10 - Mass market
Rs10 – 50 - Mass affluent
Rs 50 –100 - Super affluent
Rs 400 –Rs4000 - HNW
Rs4000 – Rs120,000 - Super HNW
Rs120,000 above - Ultra HNW
• Similarly customers can be segmented based on other variables such as age, gender,
profession, employment etc
VARIABLES
• Products and services can be structured on a niche basis one or any of
the above elements.
• Customers help banks to develop suitable products and services to
cater to the need spectrum of the customers.
• To understand customers need a look in to Maslow’s need hierarchy
theory of motivation.
MASLOW’S THEROY
• Abraham Maslow defined five needs of individuals at various stages of
their lives. The theory will help to understand how banks structure
products to match the different stages of the need pyramid of the
customers.
• Customer buy the products and services of the bank primarily to satisfy
their needs. If their needs and bank’s products match, there is absolute
synchrony. If the benefits promised by the bank to the customer are
delivered then there will be absolute satisfaction to the customer.
• Before reaching the level of self actualisation, they progress through four
other life stages. Banks offer products with differentiations for each of
these stages
MASLOW’S THEORY
Self
actualisation

Esteem
To understand customer’s need
a look in to Maslow’s need Social
hierarchy theory of motivation.
Safety

Physiological
sl no Need level Matching products
1 Physiological Core savings account
Personal accident cover
Housing loans

2 Security and safety

Fixed deposits
Tax planning & life
insurance products

3 Social needs Consumer loans

personal loans
car loans
retail gold loan
loans to professionals
Medi-claim policies
Mutual funds products

4 Esteem needs Second housing loan

Special term deposits
Term I nsurance products

5 Self ActualisationRetirement investments

Pensioners Loans
Senior citizen term deposits
Summary
• Fulfilment of customers’ requirements can be measured only from
the satisfaction level of the customers. The satisfaction will emanate
out of customers’ experience of the product and services offered by
different banks. The experience may vary across banks like public,
private and foreign banks.
• All banks strive to give their customers the best of experience. Most
often they succeed in retaining the customers until some other bank
causes a disruption. Then it is reinventing the wheel all over again.