Workshop 3: Open Innovation

and Business Model

MGT3011
Innovation
Week 8 Managing Innovation
Overview
To explore open innovation
To analyse business model innovation
To consider Osterwalder’s Business Model Canvas
To explore the activity based view of business models
To identify the challenges of business model innovation
Business Model Innovation
Introduction to Business Models

Peter Drucker defined the term — “assumptions about what a company gets
paid for” — which is part of Drucker’s “theory of the business.”

A business model is the conceptual structure supporting the viability of a

business, including its purpose, its goals and its plans for achieving them

Business models are “at heart, stories — stories that explain how enterprises
work. 
◦ Has two parts: “Part one includes all the activities associated with making
something: designing it, purchasing raw materials, manufacturing, and so
on. Part two includes all the activities associated with selling something:
finding and reaching customers, transacting a sale, distributing the
product, or delivering the service” (Magretta, 2002).
Introduction to Business Models
A business model can be described as a firms approach for value
creation, delivery and capture through the definition of a value
proposition and the description of the underlying ‘business
architecture’ (Amit and Zott, 2001; Casadesus-Masanell and Ricart,
2010; Chesbrough, 2010).

“Describes the rationale of how an organisation creates, delivers

and captures value” (Osterwalder and Pigneur, 2010: 14).

Consist of interdependent activities (Zott et al., 2011; Amit and

Zott, 2012), that can transcend firm boundaries (Zott and Amit,
2010; George and Bock, 2010) and are often co-created by various
actors (Chesbrough and Schwartz, 2007).
What is a BM (Demil and Locoq,
2010)
Three core components: its resources and competences, its
organizational structure and its propositions for value delivery.

Org structure - includes its value chain of activities, i.e. the various
discrete process it is involved in, and its value network, i.e. the
(maybe quite complex) web of relations its creates with external
stakeholders (suppliers, customers, competitors, regulators).

Firms may address value propositions to various kinds of ‘customers’

- end consumers, suppliers, complementors, competitors or
sponsors - particularly in the case of multisided markets
Examples
Amazon

Ryanair

Air BnB
Amazon Business Model Evolution
https://hbr.org/2016/07/how-amazon-adapted-its-business-model-to-in
dia
The Business Model Canvas (Osterwalder, 2010)
https://www.youtube.com/watch?v=QoAOzMTLP5s
https://www.youtube.com/watch?v=2FumwkBMhLo
The Business Model Canvas
 Customer Segments
• Mass market

• Niche market

• Segmented market

• Multi-sided platforms

(Osterwalder and Pigneur 2010)

 Value Propositions
• The reason why customers turn to one company over another.

• Solves a customer problem or satisfies a customer need.

• Each Value Proposition consists of a selected bundle of products

and/or services that caters to the requirements of a specific
Customer Segment

• Some Value Propositions may be innovative and represent a new

or disruptive offers. Others may be similar to existing market
offers, but with added features and attributes.

(Osterwalder and Pigneur 2010)

 Value Propositions in Business
Henry Chesbrough, 2006
simply describes the value
proposition as the value
created for users by the
offering.
A formal approach to modelling value
propositions allows managers to seize
mental models, understand and
communicate value propositions,
improve their implementation,
compare them to the competition and
eventually foster innovation.
(Osterwalder, 2003).
The ultimate
success of a
Economic theory holds that the technology being its
value of a firm is equal to the usefulness
present value of the expected (Boer, 1999)
future cash flows the company
will generate (Damodaran,
2002).
Valuations of healthcare companies are largely driven by
the quality of the organisation’s technology portfolio it is
critical to note that good science does not necessarily
equate to a viable business proposition and elegant
technical solutions are not, in themselves sufficient to
drive investment.
(Anderson & Hill, 2006 and Cosh et. al, 2007)
 Value Propositions
• Values may be quantitative (e.g. price, speed of service) or
qualitative (e.g. design, customer experience).

• Newness

• Performance

• Customisation

• “Getting the job done”

(Osterwalder and Pigneur 2010)

Value Propositions
• Price

• Design

• Brand/status

• Cost reduction

• Risk reduction

(Osterwalder and Pigneur 2010)

 Value Propositions
• Assessibility

• Convenience/usability

• Combination of elements

• For whom are we creating value?

• Who are our most important customers?

(Osterwalder and Pigneur 2010)

The Benefits and Challenges of
Value Propositions
The value proposition concept is frequently used by practitioners
(Anderson et al. 2006;O ’Dell and Grayson 1999; Payne et al. 2005; Terho et
al. 2012).
Frow and Payne (2008) reported that, of the 200 companies they had
studied, 65% used the concept.

While the value proposition concept is key to S-D logic, it remains:

- poorly defined (Skalem et al., 2015)
- under researched (Skalem et al., 2015)
- lacks proper strategic underpinning (Lanning, 2003)
- has “frozen value” (Narmann, 2001)
- focused on a narrow dyadic, customer-supplier perspective (Frow et
al., 2014)
 Considering Value propositions from
a customer perspective

Value Propositions need to explore

• What value do we deliver to the customer?

• What customer problem are we helping to solve?
• Which customer needs are we satisfying?
• What is the customer “job” to be done?
 Value Propositions
VP is the reason why customers turn to one company over
another

It solves a customer problem or satisfies a customer need

Each value proposition consists of a selected bundle of products

and/or services that caters to the requirements of a specific
customer segment

Some VP may be innovative & represent a new offer. Others may

be similar to existing market offers but with added features &
attributes
Value Propositions
Values may be quantitative
(price, speed of service etc) or
qualitative (design, customer
experience etc)
Value created by: Newness,
performance, customization,
design, brand/status, price, cost
reduction, risk reduction,
accessibility,
convenience/usability etc.
Value Propositions
The compelling story is
the benefit that the
customer derives from
the product or service
◦ It is often intangible
The compelling story
answers the questions:
◦ Why the interest?
◦ What problem does
this solve?
SO WHAT…?
Value Propositions
 Clear and easy to understand
 It communicates the benefits a customer will get
from purchasing and using your products and/or
services.
 It says how it’s different or better than the
competitor’s offering
 It avoids hype (like ‘never seen before amazing
miracle product’), superlatives (‘best’) and business
jargon (‘value-added interactions’).
 It can be read and understood in about 5 seconds.
Value Propositions
Value Proposition Canvas

The Value Proposition Canvas has two sides:

1. the Customer Profile you clarify your customer
understanding.
2. the Value Map you describe how you intend to
create value for that customer. You achieve Fit p.
40 between the two when one meets the other.
Value Proposition Canvas
Products and Services
• Physical/tangible Goods, such as
manufactured products.
• Intangible Products such as
copyrights or services such as
after-sales assistance.
• Digital Products such as music
downloads or services such as
online recommendations.
• Financial Products such as
investment funds and insurances
or services such as the financing of
a purchase.
Pain Relievers vs Gain Creators
Great value propositions focus on pains
that matter to customers, in particular
extreme pains.
- Feel Better?
- Save Money?
- Eliminate Risk?

Gain creators don’t need to address every

gain identified in the customer profile.
Focus on those that are relevant to
customers and where your products and
services can make a difference
- Create savings
- Outperform current offerings
- Produce positive outcomes/help
achieve an aspiration…
 Your customers are the
judge, jury, and executioner
of your value proposition.
They will be merciless if
you don’t find fit!

If a pain reliever or gain creator doesn’t fit anything, it may not be

creating customer value. Don’t worry if you haven’t checked all
pains/ gains—you can’t satisfy them all. Ask yourself, how well
does your value proposition really fit your customer?
 Channels
• How a company communicates with and reaches its Customer
Segments to deliver a Value Proposition

• Communication, distribution, and sales Channels comprise a

company's interface with customers.

• Channels are customer touch points that play an important role

in the customer experience.

(Osterwalder and Pigneur 2010)

 Channels
• They serve several functions
• Raising awareness among customers about a company’s
products and services
• Helping customers evaluate a company’s Value Proposition
• Allowing customers to purchase specific products and
services
• Delivering a Value Proposition to customers
• Providing post-purchase customer support.

(Osterwalder and Pigneur 2010)

 Channels - Questions
• Through which Channels do our Customer Segments want to be
reached? How are we reaching them now?

• How are our Channels integrated?

• Which ones work best?

• Which ones are most cost-efficient?

• How are we integrating them with customer routines?

(Osterwalder and Pigneur 2010)

Channels
(Osterwalder and Pigneur 2010)

(Osterwalder and Pigneur 2010)

 Customer Relationships
• Describes the types of relationships a company establishes with specific
Customer Segments

• A company should clarify the type of relationship it wants to establish with

each Customer Segment.

• Relationships can range from personal to automated.

• Customer relationships may be driven by the following motivations:

• Customer acquisition
• Customer retention
• Boosting sales (upselling)

(Osterwalder and Pigneur 2010)

 Customer Relationships
• Personal assistance

• Dedicated personal assistance

• Self-service

• Automated Services

• Communities

• Co-creation

(Osterwalder and Pigneur 2010)

 Customer Relationships -
Questions

• What type of relationship does each of our Customer

Segments expect us to establish and maintain with
them?
• Which ones have we established?
• How costly are they?
• How are they integrated with the rest of our business
model?

(Osterwalder and Pigneur 2010)

 Revenue Streams
• The cash a company generates from each Customer
Segment (costs must be subtracted from revenues to
create earnings

• A business model can involve two different types of

Revenue Streams:
• Transaction revenues resulting from one-time
customer payments
• Recurring revenues resulting from ongoing
payments to either deliver a Value Proposition to
customers or provide post-purchase customer
support
(Osterwalder and Pigneur 2010)
 Revenue Streams
• Asset sale

• Usage fee

• Subscription fee

• Lending/Renting/Leasing

• Licencing

• Brokerage fee

• Advertising

• Others??

(Osterwalder and Pigneur 2010)

 Revenue Streams
• For what value are our customers really willing to pay?

• For what do they currently pay?

• How are they currently paying?

• How would they prefer to pay?

• How much does each Revenue Stream contribute to

overall revenues?

(Osterwalder and Pigneur 2010)

(Osterwalder and Pigneur 2010)
 Key Resources
• The most important assets required to make a
business model work

• Every business model requires Key Resources.

• These resources allow an enterprise to create and offer

a Value Proposition, reach markets, maintain
relationships with Customer Segments, and earn
revenues.

• Different Key Resources are needed depending on the

type of business model.
(Osterwalder and Pigneur 2010)
 Key Resources
• Key resources can be:
• Physical,
• Financial,
• Intellectual
• Human.

• Key resources can be owned or leased by the company

or acquired from key partners

(Osterwalder and Pigneur 2010)

 Key Resources- Questions
• What Key Resources do our Value Propositions require?

• Our Distribution Channels?

• Customer Relationships?

• Revenue Streams?

(Osterwalder and Pigneur 2010)

 Key Activities - Questions
• The most important things a company must do to make its
business model work

• Every business model calls for a number of Key Activities.

• These are the most important actions a company must take to

operate successfully.

• Like Key Resources, they are required to create and offer a Value
Proposition, reach markets, maintain Customer Relationships,
and earn revenues.

• Like Key Resources, Key Activities differ depending on business

model type.
(Osterwalder and Pigneur 2010)
 Key Activities - Questions
• Production

• Problem Solving

• Platform/network

• What Key Activities do our Value Propositions require?

• Our Distribution Channels?
• Customer Relationships?
• Revenue streams

(Osterwalder and Pigneur 2010)

 Key Partnerships
• The network of suppliers and partners that make the business
model work

• Four different types of partnerships:

• Strategic alliances between non-competitors
• Coopetition: strategic partnerships between competitors
• Joint ventures to develop new businesses
• Buyer-supplier relationships to assure reliable supplies

• Who are our Key Partners? Who are our key suppliers? Which
Key Resources are we acquiring from partners? Which Key
Activities do partners perform?

(Osterwalder and Pigneur 2010)

 Key Partnerships
• Motivations for forming partnerships?

• Optimisation and economies of scale

• Reduction of risk and uncertainty

• Acquisition of particular resources and activities

• Co-opetition?

• Co-creation?

(Osterwalder and Pigneur 2010)

 Cost Structure
• All costs incurred to operate a business model

• What are the most important costs inherent in our business

model?
• Which Key Resources are most expensive?
• Which Key Activities are most expensive

• Cost structures: Cost driven versus value driven

• Costs : fixed costs, variable costs, economies of scale, economies

of scope

(Osterwalder and Pigneur 2010)

Facebook
Activity-Based View of the
Business Model

Categorise into design elements and design themes (Zott and Amit, 2010)

Design elements - examine the content, structure and governance of activities

in order to identify the business model offering.
◦ Design content considers the selection of activities performed.
◦ Design structure identifies how activities are linked.
◦ Design governance classifies the key actors involved with each activity.

The design themes “orchestrate and connect the elements of the activity
system” (Zott and Amit, 2010: 221) and so are intertwined within the design
elements.
Design Themes

Novelty
Lock-in
Complementaries
Efficiency
Business Model Patterns

• Long tail business model – selling less of more

•Aggregate sale of nice items can be as lucrative as

selling more of less

• Needs strong platforms to make niche content ready to

buyers
Business Model Patterns

• Multisided Platform – Bring together two or more

distinct customer segments

•Value only happens for one group of customers if the

other is present

•Network effect

(Osterwalder and Pigneur 2010)

Google

(Osterwalder and Pigneur 2010)

Google

(Osterwalder and Pigneur 2010)

Free as a Business Model

(Osterwalder and Pigneur 2010)

Free as a Business Model
Free as a Business Model
Free as a Business Model
Business Model Epicentres
•Business model innovation can come from
anywhere

(Osterwalder and Pigneur 2010)

Business Model Design – Scenario
Planning
See handout
Adapt or Innovate your Business Model?

BMI can provide opportunities during periods of rapid economic growth

and times of turmoil

Need to select the right business model for the economic environment
and emerging market opportunities

Need to consider the internal factors which influence the organisations

ability to change

During times of extensive change companies often need to harness

disruptive technologies, go after new customer segments or dislodging
competitors
How to Innovate Your BM?

Adapt org structures and activities with which value creation is achieved (Eg Kumar et
al., 2000; Voepel et al., 2004; Johnson et al., 2008

Requires firms to adapt their tangible and intangible resource base accordingly (George
and Bock, 2011).

Various authors have emphasised the role of experiments, trial and error approach's
and the relevance of learning (McGrath, 2010; Sosna et a., 2010).

Organisational learning processes nurture a firms capability to create new BM as they

integrate and deploy external knowledge into new resources and competencies
required to implement new BMs (Gebauer et al., 2012; Berghman et al., 2013)
 How to Innovate your BM
(Amit and Zott, 2012)
◦ By adding novel activities, e.g. through forward
or backward integration- “content”.

◦ By linking activities in novel ways - “structure.”

◦ By changing one or more parties that perform

any of the activities- “governance.”
How to Innovate your BM (Amit
and Zott, 2012)
What perceived needs can be satisfied through the new model design?
What novel activities are needed to satisfy these perceived needs? (business
model content innovation)
 How could the required activities be linked to each other in novel ways?
(business model structureinnovation)
 Who should perform each of the activities that are part of the business model?
Should it be the company? A partner? The customer?
What novel governance arrangements could enable this structure? (business
model governance innovation)
How is value created through the novel business model for each of the
participants?
What revenue model fits with the company’s business model to appropriate
part of the total value it helps create?
How to Innovate your BM (Giesen et al., 2010)
The 3 A’s critical to successful design and execution
◦ Aligned
◦ Analytical
◦ Adaptable
How to Innovate your BM (Giesen et al., 2010)
How to Innovate Your BM (Innosight,
2016)

Identify “white space” growth opportunities

Generate valuable, new ideas

Successfully enter emerging markets

Create new systems, rules, and metrics

https://www.youtube.com/watch?v=hst_Faxk04c
Business Models Versus Strategy
Casadesus-Masanell and Ricart (2010) state, “business models are reflections
of the realized strategy” (p. 204).

Strategy shapes the development of capabilities that can alter current business
models in the future.

Strategy is about building dynamic capabilities aimed at responding efficiently

to future and existing contingencies (Ambrosini and Bowman, 2009).

Strategy (a long-term perspective) sets up dynamic capabilities (a medium-

term perspective) which then constrain possible business models (present or
short-term perspective) to face either upcoming or existing contingencies.

“Every organization has some business model” and “not every organization has
a strategy” (Casadesus-Masanell and Ricart, 2010, p. 206) versus: The business
model presents a means for the coherent implementation of a strategy (Dahan
et al., 2010).
Business Model Hub – Osterwalder, 2016
Evaluating Business Models
Evaluating Business Models
Evaluating Business Models

See handout
BMI as an Organisational Capability
(Mergzer, 2014)
BMI is a high order capability – allows it to not only
renew its core offering (product or service) but also its
entire logic of doing business including value creating and
delivery aspects

3 core dimensions of BMI related capabilities

◦ Identification of opportunities for new business models
◦ Design of new business models to address such an
opportunity
◦ Implementation of the new business model
BMI as an Organisational Capability
(Mergzer, 2014)

These dimensions are akin to Teece (1997) who

aggregated dynamic capabilities into 3 categories –
◦ Sensing – ability to recognise change and
consequently identify commercial opportunities and
threats
◦ Seizing – how these opportunities and threats are
addressed and exploited
◦ Reconfiguring – adaptation of a firms resource base.
 Challenges of BMI

•Obstruction and confusion among employees (Amit and Zott, 2001;

Chesbrough and Rosenbloom, 2002; Chesbrough, 2010; Christensen
and Raynor, 2003)

•Vague understanding of the business model process. Need to trial

and error – costly…

•BM innovation is subject to behavioural and cognitive processes -

rely on individual reasoning and judgement abilities to sense and
seize opportunities and to internally reallocate resources (Alexiev et
al., 2010).
 Challenges of BMI

A firms capabilities to renew and change a business model are

determined by the underlying values and beliefs of the
organisational members (Rashid et al., 2004; Matsler et al., 2013;
Buschgens et al., 2013).
◦ Depends on organisational culture (Wiewiora et al., 2013; Aspara
et al., 2013)
◦ Leadership
◦ Incentives
◦ Training
◦ Risk taking
◦ Flexible routines
◦ Removing organisational inertia
 BMI is a Top
Management Issue
•Show strategic foresight and a long term perspective,

•Manage the process of organizational change and development of new

organizational structures required by new business models,

•Promote new business models internally and externally,

•Strengthen a supporting corporate culture,

•Support employees in taking initiatives and risks,

•Handle the ambidextrous operation of the existing and the new model in parallel,
and secure sufficient funding and investments required for the development of new
business models. (Stampfi. 2013)
 BMI and SMEs
•Often reactive – outside in and inside in

•SMEs generally lack a BMI leadership strategy

•Lack BMI leadership skills

Large Companies Struggle with BMI
too (Girotra and Netessine 2013)

•Lack of top management support and attention

•Reluctance to experiment

•Failure to pivot
Reflection

•What are the differences between open and closed

innovation?

•How can an organisation undertake business model

innovation?
• How do they identify opportunities?
• What are the challenges in undertaking business
model innovation?
Tutorial Activity in your Assignment
Groups

Design a customer empathy map for

target customers of eXRt Intelligent
Healthcare ‘Magic Glass’