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.
Mid of 2008 I was present at the kickoff in Amsterdam of a new book around Business Model Innovation. Together with Gert Steens, Patrick van der Pijl, and Mick Walvisch the first step on a new book from Alexander Osterwalder and Yves Pigneur was set.
Without going into all detailed steps Alex has made since then I would like to point you to a great initiative.
Alex has started together with Patrick: the Business Model Innovation Hub. The Hub is used as a community which not only reviews the chunks of the book as they come out. It mainly is a place where people with a strong common interest on Business Models meet. Therefore, besides the good stuff Alex produces, a lot interesting content is created by the community itself. Just to tickle your brains a bit:
- Deliberately unsustaining Business Models
- Tools for Business Model Innovation
- Open source licensing
- Business Model Patterns
- …
Just have a look at the presentation and see you at the Hub!
According to thought leaders within INSEAD customers are really in the driver’s seat when it comes to making or breaking a brand. Also different consumer trends indicate the same, such as Trendwatching.com for example. In the past people could be earmarked to fit within a certain stereotype, e.g. punkers during the 80′s. During this period brands were successful because the companies behind them choose those brands to grow successful.
People now shop their own identity together where trends are now merely used as an input. They do not fit within one simple box anymore which makes it more difficult to target segments in a traditional way. Furthermore customers become increasingly demanding every day. Failing to meet their expectations results worst case in them scandalizing your firm in public (example: BusinessWeek). They will share their grieves through the internet with the rest of the world more likely than they will call you.
So it is more difficult now to clearly segment customers and they have become more demanding and less forgiving, what can companies do?
Building a strong brand does not necessarily involves bringing the best proposition, product or service, to customers, it involves bringing your propositions consistently to your customers. How? By making sure that every Business Model Building Block is aligned with a clearly defined overall goal. So it not about bringing a product to the market and enhance it along the way to the extend that people do not recognize the initial proposition anymore. This makes customers feel disconnected. They will loose interest and will start doing business elsewhere.
In order to keep the connection with the client vivid firms should really ask themselves or even better their clients what it is they will bring to the market? Which problems will be solved? What pains will be relieved? Doing so and shaping the Business Model around it provides the basis companies need to be consistent to their clients, which will contribute to building their brands and reputation.
For laughter have a look at the complaint about SEARS below.
[pro-player]http://www.youtube.com/watch?v=974egVLlwQI[/pro-player]
Many people are interested in how a new Value Proposition is created. Of course, understanding this process and being able to execute it, provides a basis for continuously staying ahead of competitors; it would be the Holy Grail of business. In workshops I have used various methods such as Blue Ocean and TRIZ. These methods help to frame thoughts and give directions. What they do not do is provide you with a new Value Proposition gift wrapped.
Creating a new Value Proposition can be done in several ways, each of which differently partitioned into stages. Here is an example of how the creation process is broken down, brought in a very creative way; in an animated Chinese painting style. The movie clip is by Ada Kwok and is presently really popular on youtube. Clicking tot Ada’s website it is clear that the company does graphic business design. Ada has used succesfully as a mechanism to draw traffic to her site. This is yet an other example of how youtube can significantly boost the number of potential customers.
I really like how each of the creation phases is broken down and expresses in the video:
- Imagination
- Visualization
- Formation
- Transformation
- Bring to life
[pro-player]http://www.youtube.com/watch?v=ce9f0JP6eks&feature=fvst[/pro-player]
Recently HBR published an article about the difference in competition between the US and Europe and emerging markets, China in the article. Where in the US and Europe most customers demand excellent quality in China the largest segment is the “good enough” segment (62% share of market in 2005). The good enough segment is defined as “products of good quality, produced by local companies for a rapidly expanding group of value-seeking consumers with mid level incomes.” Distinguishment is made between premium, good enough, and low-end market segments.
The difference between “good enough” products and premium products is that “good enough” comes with only a limited number of features, rather than the full range, at a price significantly lower that foreign brands.
The shift in China towards “good enough” comes from two directions: Consumer that see their incomes grow shift from low-end products to the “good enough” segment, and consumers with a higher income move away from expensive foreign brands, towards locally produced products at an acceptable quality level.
What should multinationals seeking way into the Chinese market do when entering the market in China? When the market segment’s state is strong, companies should either maintain their premium status by holding of the “good enough” segment by lower costs and innovating to create a niche position. More interesting is the situation where the premium segment is weak or eroding. Then companies can choose to enter the market either from above, enter the market segment in order to hold off local competitors and the erosion of the premium segment, or enter the market from below. Entering from below means seek an alliance or even merger with a Chinese partner or even develop new products specifically for the Chinese market, applying new business model tailored to the Chinese situation. Doing so they can steel share from Chinese players and become market leader.
This all seams quite far away. After all it is about China. Why would “good enough” not apply in non-emerging markets? A large company like Philips now uses “Sense and Simplicity” for a slogan. Underlining the fact the company produces technological products that enhance life, without the hassle, complexity and frustration. The story goes that the company came to this shift in strategy when managers were given a DVD recorder to try at home. Most of them were no able to install it, let alone use it.
It is probably only a matter of time until more and more customers in the US and EU crave for simplicity, cutting out all features they will not use at a lower price, making the “good enough” market segment expanding far out of China. Consumer Vigilantes are already on the rise when their products and services bought are too complex to install it themselves.
During the Internet Bubble Business Model was one of the buzz words. Companies did not need a real strategy, a special competence, or even customers. The only thing needed was a web-based Business Model making vague promises about wild profits in a distant future (source Joan Magretta, HBR, 2002). Not strange that the term itself lost most of its power.
Now years further and wiser we know a business model definitely matters. Without a sound Business Model firms can launch as many new products and services they want to, only confusing customers more.
Companies with a sound Business Model know the value proposition, what the target client group is, which channels to use to approach them, what kind and type of relationship to maintain, what capabilities are required in-house or at a partner, how value is configurated, and of course how cost and revenue stream flow.
Having a proper Business Model not only clarifies things for you as a company; it helps to build and manage your reputation among your current and future clients.
Recently I stumbled upon an interesting article which states that we should not focus on the things we are good at, but concentrate on the areas we are not so great at. The theory behind it is based on researching to-be chess masters. Of course this differs 180 degrees from our common sense.
Applying this line of thinking to business it even becomes more interesting. Most companies have a strong focus on what they are good at, mainly because here the largest part of the cash flow is generated. In the excellent areas firms want to become ever more excellent, with trajectories such as Six Sigma. Nothing wrong here, unless you want to stay on top of business and innovate. Then you have to be aware of your current strengths, and more important where the room to grow is.
In the presentation I have plotted this concept on different Business Model areas.
Growth is something which can be realized in many different ways: operational excellence with Six Sigma trajectories; product or technology innovation, either incremental or radical; business model innovation; or plain old mergers and acquisitions (M&A). Of course calling it plain old does no justice to the complexity of these kinds of transitions. But fact is that when you only focus on bringing value which directly shows in your balance sheet M&A can provide you with a quick fix. The real challenge start then with Post Merger Integration (PMI), so after the purchase. According to Strategy Business to road to successful PMI goes by the cities Vision, Architecture of Change, Architecture of the New Company, and Leadership. Further research has shown that when success of M&A is compared to industry peers only 48.7% resulted in increased value. Most of the times M&A is quite costly, so how to increase the success and value?
In many cases failure of PMI is said to be based on things such as cultural differences, not only between companies, but also countries of origin. When failure is due to cultural aspects the new organisation lacks a common language which normally grows quite organic during years and of course a company’s leadership. Cultural differences can only be resolved through long, extensive projects in which everybody needs to get to know everybody and all have to agree, basically not an option when the goal is to increase value on the short run. Setting up a new business model, based on competencies and capabilities, does provide such a common language. Moreover PMI is the moment to set a new business model. Due to the central position of a business model in the ways business is done, this also reflects on the culture. Cultural differences can be overcome by creating a new common language, and culture, by setting a new business model.
Googling the internet “Blue Ocean” was already quite popular (12,900,000 hits). “Business Model Innovation” is a risen star here (6,800,000 hits). Combining the two only generates 75,400 hits. A bit strange… Not only do the two serve the same purpose, deliver growth and innovation to a company. The first can serve as a means of achieving the second.
Nowadays it is not just about mastering one approach; it is about mastering the ability to combine multiple and deliver growth. Perhaps a bit late, but why not… 2008 will bring more mixed models. Let me be the first to kick it off with a combination of the Blue Ocean Strategy as a methodology to come to Business Model Innovation.
From the 3rd till the 14th of December the United Nations Climat Change Conference was held in Bali. Again loads of attention were given to the subjects of sustainability. Nowadays the topic has really found grounds in society; it is even fashionable to concentrate on environmentally friendly goods and services.
In this light there is a new way of designing goods, called cradle-to-cradle. The concept is launched by Wiliam McDonough & Michael Braungart in their book Cradle to Cradle: Remaking the Way We Make Things. They advocate in favour of uncycling, not recycling. Why settle for the least harmful alternative when we could have something that is better–say, edible grocery bags! They offer several compelling examples of corporations that are not just doing less harm–they’re actually doing some good for the environment and their neighborhoods, and making more money in the process.
The basic idea behind the book is that we should eliminate our environmental footprint as much as possible. The book itself is a great example of the concept. It is designed in a different way than we are used to. It is printed on material which can be fully uncycled; the pages can be cleaned so that the ink can be re-used, the pages itself can be re-printed and fully re-used. In essence it is all about design.
Cradle to cradle requires re-thinking each part of the design, and the design as a whole. Using it as the new standard for design will lead to a necessity for innovating our business models as well. Firms core capabilities need to change, possibly also the partner network, leading to a re-newed value configuration. Companies applying the cradle-to-cradle philosophy will be able to create different, more intense, relations with their customers. Applying cradle-to cradle brings maximum benefits combining it with a new business model.
[pro-player]http://www.youtube.com/watch?v=IoRjz8iTVoo[/pro-player]
