Business model innovation will be the next big differentiator for companies aspiring innovation leadership. Innovation leaders are breaking away from the pack by allocating increasingly more resources to business model innovation1. And they are right. Research has illustrated that more value is to be expected from business model innovation, than from any other form of innovation. Business model innovation has a higher impact on business results.
Guest post by Freek Duppen
As the knowledge partner of the World Innovation Forum, Capgemini Consulting has recently completed its global innovation survey on the current state of innovation. The study offers a unique perspective by looking at the differences in behavior of innovation leaders vis-à-vis laggards across five key areas (strategy, capabilities, technology, innovation function, and spending) in order to identify what drives the success of companies that view themselves as successful innovators.
The study is based on an online survey, generating responses from 375 executives (representing the full range of industries, regions, functional specialties, and seniority) and 13 follow-up interviews – to get a better understanding of the context of the findings and to add depth to the result interpretation.
In summary, this study reveals that:
- Given the strategic priority companies allocate to innovation and their corresponding spending plans, the maturity of their formal innovation governance structure lags behind considerably. To overcome many of the innovation bottlenecks encountered, it is time to establish an innovation function that is able to deal with this kind of innovation governance and decision-making.
- Furthermore, there is an enormous unlocked potential for innovation in the involvement of external parties in the innovation process. Innovation leaders may have out-paced their peers by simply being better at involving external parties, leveraging a much broader innovation network and increasing innovation potential.
- The study also shows that more value, in terms of impact on business results, is to be expected from business model innovation, than from any other form of innovation. Targeting new business opportunities in emerging markets is much more likely to be successful when approached outside of the traditional competitive landscape.
The whole topic of business model innovation receives ever more attention. Looking at what has been published recently still there is a strong tendency to focus on business to consumer (B2C), incl. cases and examples.
Business to business (B2B) seems to be ignored. Odd, because understanding business model innovation in a B2B context and being able to deliver successful models is more challenging, but also much more rewarding.
The Challenges
Most challenging aspect is typically the value chain. By the term value chain not the typical Porter kind of value chain is meant, but a series of interlinked activities, performed by various entities that deliver customer value.
Based on this view a value chain does not exist within companies, but amongst companies active within industries form value chains together.
Typical B2B business model innovation impacts either the positions more closely to the end users (forward business model innovation) or the positions that supply the firm that aims to change its business model (backward business model innovation).
With forward and well as backward business model innovation the current situation will change. Effectively the power within the chain and therefore the margins firms make are about the change. Nobody likes change…
Typically it seems that for most forward business model innovations it is extremely difficult not to disturb current relations with direct customers.
For innovating B2B business models a thorough understanding of all entities active throughout the chain is required. How is value being built up with each stage in the chain? Who is the captain that has most power over rest of the chain? What trends are influencing the value chain? Etc.
The Rewards
Most value chains seem difficult to change. The way firms have done business has not changed within recent years and leadership of companies is reluctant to start experimenting. Only in situations of entering new markets or when competition forces to apply other business models, companies step away from status quo.
Traditionally the B2B side of value chain is one that hasn’t seen much change in financials as well over the last years. Only by competition and crisis companies have been forced to lower their costs via optimization. Margins seem to be stuck; there is no room to be found to improve them.
Via business model innovation companies are able to step out of the margin squeeze and apply new ways they create and capture their value, and with better numbers. The concept is simple:
- backward business model innovation
For all resources and activities that can be sourced in a better way; more efficient, more effective or simply cheaper the cost concerned with that specific element of the business model lowers, having a direct positive impact on margin for the overall business model. Means to improve sourcing can be e.g. via new forms of partnerships. - forward business model innovation
Value builds as the product or service that is created by the value chain becomes closer (in terms of proximity) to the end user. Leapfrogging forward has the potential to extremely grow margins. Coping with some of the challenges mentioned must be taken care off, if the goal is not to upset the current set of companies too much.
Even though the concept is simple the process itself is rather delicate. Deciding when to move forward and engage with others and partners pas proven to be critical to the business model success. If applied wrong there could be damage done to the existing models; if done well B2B business model innovation is extremely rewarding.
Recently the book Business Model Generation has received much attention. For many people it has truly caused a disruption in the way they look at Business Models. Discussing the book and the model it is striking that most people concentrate solely on how to create new business models… For most large corporations this provides challenges, they already have at least one Business Model, but most often many more. Typically Business Model are found within large organizations at the level of a Product-Market Combination.
The slides below provide some first guidance in how to optimize your Business Model; change it to better fit with the inside and outside world. Most important to bear in mind is that a Business Model in term is success is valuated by its’ customers and ecosystems, changing it requires closing the gap with requirements from the outside world and the current Business Model basis. Doing this in a more consistent way will increase performance and strengthen the brand.
For the last couple of months no news program or website is talking about hardly anything else the the global economic crisis and the effects it has on every kind of business within all sectors. Surviving for many companies suddenly became key rather then expanding portfolios.
Traditionally companies need to grow value in order to keep Mr. Shareholder happy. Growth means higher demand for shares and therefore higher rates. Mr. Shareholder sees his total share value growing.
Most companies have basically two ways to achieve value growth:
- Increase market size and share, by innovation or acquisition
- Reduce costs
The last way is normally not that popular during economic upturn, but is immediately on top of mind during economic downturn. Cost reduction programs tends to be rather spreadsheet driven hunting for the large cost chunks rather than assessing cost versus value.
Together with Daan Giesen I have come to an approach which enables growth by setting a stronger brand experience based on reduction of number of current business models. Organizational functions and capabilities can bebuild around these strong business models, showing opportunities to reduce cost without weakening the organizational capabilities.
Within the coming months more on the Business Model Convergence approach will be shared with you. However, if you cannot wait feel free to use the contact form.
Working together with companies on various innovation projects and reshaping their Business Models it is often the case that a new project explicits a need to move into a different part of the current value chain. With Value Chains in this case I mean different organizations and enitities, consisting of resources and knowledge stream, all involved in the creation and delivery of value to customers (source: ValueChains.org).
Moving up ahead of the current value chain and tap into it requires organizations most often to work together with different parties, already present in the chain. Strange situations occur that organizations that are presently treated as customers, become in fact new channels for approaching end-users further down the chain. The current customers need to become partners with which driving business is taken to the next level. Of course this sounds more simple than it in fact is. Existing relations need to be re-shaped in way that also for the current customer, so the new channel, the still is a sound basis for doing business. Thinking win-win is key here. In establishing new partnerships companies try to reduce risks as much a possible, preferably in a early stage. Concentrating on possible financial benefits, this results in trying to create a position in which most of the value created together with the partner is heading in your direction. In contrast with this real partnerships first try to build maximum value together, and then divide this between them.
