Topic 4 business model innovation

© 2010 IBM Corporation

Zaheer Travadi – Sr. Strategy & Transformation Consultant | Program Manager – WW STG Run Rate Marketing

Module 6 - Services innovationBusiness Model Innovation

© 2010 IBM Corporation2 IBM-SPJIMR – ACPS 2010

Step One: Check your OPPORTUNITY

Category Questions

After-Market Opportunity How competitive is your company’s total spend on the “Cost of Quality” relative to peers?

To what extent is there untapped opportunity in the after-market?

Services Growth Opportunity

To what extent is there an opportunity to materially impact top line growth with new services?

Are customers demanding these services or sourcing them from competition?

Strategic Importance To what degree can service provide a competitive advantage to the firm’s overall success?

To what degree would improvements in the service chain enable improvement across the enterprise?


Step Two: Check your MATURITY

Category Questions

Business Model Clarity How aligned is service’s value proposition with the core enterprise business strategy?

How well does the current service operational model support the direction service is headed?

Operational Maturity How integrated are the processes, data, tools, and management of the entire service chain?

How integrated is the service chain with sales, marketing and product development?

Service Offering Maturity How well do the firm’s service offerings match up with its customers shifting priorities?

How well do the firm’s service offerings align with core product offerings?


Top-line learnings about business model innovation

1 Business Model Innovation improves margins

2Three distinct types of Business Model Innovation have been identified

3All three types of Business Model Innovation can lead to financial success -- the right strategy and execution are key.

4Enterprise model innovation through collaborative innovation is the most predominant model.


Business Model Innovation improves margins

Operating Margin Growth in Excess of Peers

(Compound annual growth rate over 5 years)

OperationsInnovators

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Products/ Services/Markets

Innovators

Business Model

Innovators

Source: The Global CEO Study 2008: Expanding the Innovation Horizon

1


Business Model Innovation

Enterprise model Innovation

Three distinct types of business model innovation have been identified

Revenue model Innovation

• Gillette innovated the pricing model by giving away razors and making money on the blades

• Netflix shifted the revenue model from product / rental based to a subscription based annuity model

PRICING / REVENUE MODEL

VALUE PROPOSITION• Cirque du Soleil reconfigured offering and value elements to transform the circus experience

Industry model Innovation

INDUSTRY TRANSFORMATION

• Moving from one value chain to another, leveraging its brand across industries including airline, media and telecoms

HORIZONTAL MOVES

• Apple transformed the music industry through a new way of connecting hardware with software to download music with iPods/iTunes product & service combination

• Dell redefined the PC value chain and industry model by using a direct to customer sales model

INTEGRATION• Zara’s Fast Fashion model is supported by a highly integrated business model along its value chain

SPECIALIZATION• Bharti created a highly specialized Telco business model by focusing only on its key differentiators – marketing, sales and distribution – and partnering for everything else

EXTERNAL COLLABORATION• P&G’s innovative R&D collaboration model “connect & develop”, sourcing over 50% of ideas externally

2


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Source: IBM Institute for Business value analysis of Thomson ONE Banker financial data and company annual reports, 1997 – 2006

Revenue Industry/

Enterprise Model

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Each type of business model innovation, alone or together, can lead to financial success

10-year Stock CAGR versus Type of Business Model Innovation

3


Enterprise model innovation through collaborative innovation is the most prominent model

0 5 10 15 20 25 30

Enterprise Model

Revenue Model

Industry Model

# of Business Model Innovators focused on BMI Path

(Based on 35 best practice cases)

# of Companies

External Collaboration Specialization/Integration

Value Proposition Revenue / Pricing

Transformation Horizontal Moves 22

25

28

4


Approaches to industry model Innovation

Transforming the industry value chainCompanies are changing the “rules of the game” by challenging traditional value chains through disintermediation. Example: the “Dell Direct” model.

Transforming industries through horizontal movesDifferentiating expertise, experience and assets are moved aggressively to another industry value chain. Example: Virgin move from music industry to airline company.

© 2010 IBM Corporation10

IBM-SPJIMR – ACPS 2010

Approaches to revenue model innovation

Competing through new pricing and revenue models

Industry “rules of the game” are transformed through fundamental shifts in underlying pricing and revenue models, such as charging for ring tones or offering monthly subscriptions for DVDs

Innovating value proposition through reconfiguration

The opening of new, uncontested spaces generates a leap in customer value through reconfiguration of competitive factors, creation of unprecedented value propositions and completely new markets.



Approaches to enterprise model innovation

Integration / specialization continuum Integration requires execution of all business components across the enterprise while specialization requires collaboration and partnering on selected non-differentiating business components. Enterprise integration case-- Zara. Specialization case:--Bharti

Collaboration and partnering Organizations are redefining the extended enterprise as they seek collaboration in a selected number of business areas/components and partnerships ranging from supplier relationships to legal joint ventures – leading in some cases to value networks



Action step 1Understanding context and parameters

Age of Company

Industry

Financial Performance• Depending on age and

organizational legacy, companies are pursuing different business model innovation paths . . . e.g., enterprise model innovation is most relevant to companies 50 years and older

• Understanding implications will set the framework for decisions on both type and degree of business model innovation

• Nature of business model innovation opportunities vary by industry, depending on unique characteristics and maturity in each industry

• Understanding the nature of opportunities within – and across – industries allows identification of incremental or radical innovations

• Benchmark performance against industry peers, especially financial opportunities created through business model innovation



Focus on Integrating Service

Operations and Reducing Cost

Focus on Growing Services Revenue

Pursue Cost Reduction and New

Revenue Opportunities in

Parallel

Traditional After-Sales Support

Model

Defining a company’s overall strategic intent for service determines the overall service business model

Service Model Strategic Intent

Degree of Services Led Growth

Degree of Optimization

Take these steps to define strategic intent:

– Map all the activities the customer performs in using and maintaining the product throughout its lifecycle

– Understand the customer’s expectations for support and service throughout this lifecycle

– Identify a unique value proposition to customers and the enterprise

– Align the overall service strategy with the enterprise strategy

– Identify and prioritize opportunities for services revenue growth and cost reduction

The outcome of this assessment is a strategic intent that is:

– Clearly defined and actionable

– Aligned with competitive and market context

– Able to be effectively communicated to stakeholders



Action step 2Assessing current and desired positions to create path

High

Low

Revenue Model

Industry Model Enterprise Model

Moving from current to target position• Are there ways to reconfigure / re-allocated sources of revenue in your

business?

• How can you sell elements of your services / offerings differently?

• How can you reconfigure value elements in your business?

• How can you select and leverage unique assets & capabilities in your business that provide competitive

differentiation?

• What should you do vs where should you partner for optimal

value?

• How can you leverage new / emerging business models in your industries? From other industries?

• How does new/emerging technology change the parameters?

• Are you a leader of follower when it comes to industry change?

Current PositionTarget Position

Degree of Innovation

• How does the degree of innovation relate to your industry? How will it change in the future?

• Do you have the right balance?

Timing of Innovation

• Do you drive change in the industry, or is it imposed on you? Lead vs follow?

• What are the disruptive technologies or models emerging today?

BMI Path

• Which business model innovation paths are we / should you explore?

• Which ones are most aligned with our industry, capabilities, vision?



Leaders manage the services offering portfolio with the same degree of rigor as the product development portfolio

Strategy & Portfolio

Product Development Process

Project Execution

Metrics

Systems & Infrastructure

Teams & Organization

Select A ModelIdentify &

Address Gaps

Manage Like Product

Development

New Product Development Strategy and Delivery Framework

How Does This Apply To Services?

Strategy & Portfolio Do the offerings support the our business strategy & objectives? Are the services aligned to our customers’ needs &

expectations?

Service Offering Development Process Are our services well-defined? How quickly do they gain

traction in the marketplace? Do we have a process to sunset underperforming services?

Project Execution Are we launching services in a timely and efficient manner? Is there an appropriate sequence & timing for services’ launch?

Metrics Are we using the right metrics to measure team and process

performance? Do these metrics alert us to potential project pitfalls and process

improvements?

Systems & Infrastructure Do we have the right systems in place to enable our services

sales & delivery? Do other stakeholders have access to these systems?

Teams & Organization What are unique skills and capabilities required to execute

successfully? Is our organization and team structure consistent with services

delivery needs?



Action step 3Building capabilities

Industry models– Do you have a systematic way to envision future industry scenarios and implications

for your innovation strategy?

Revenue models– How can you exploit new / emerging revenue models as well as new value offerings,

and manage the implications for your business and competitive positioning? – Do you have a structured approach to thinking through revenue implications?

Enterprise models– Do you understand - and leverage - your unique capabilities and assets? – What capabilities and processes do you have in place to develop, maintain,

evaluate and terminate external collaboration for innovation?



Existing organizational and governance structures must be updated to reflect the new business model and management discipline

Organization Structure How is our organization structured today and what changes are required to support our new business model?

How can we balance the needs and interests of the global organization and geographies/business units?

What degree of services sales and delivery is currently performed by partners? What governance framework is required to enforce accountability and improve the timeliness

and effectiveness of decision-making?

Roles and Responsibilities

What are the new skills and capabilities required to execute the new business model? What capability gaps exist between the current and future state? How will we acquire these new capabilities (i.e. training, new hires, etc.)? Can we leverage

partners to fill these gaps? Is new headcount required for the transition to the new model and the subsequent steady

state?

Metrics and Measurements

What are the correct metrics to measure operational achievement against future state goals? Are these performance metrics aligned to our business plan for the global organization Are other internal and external stakeholders aligned with our business objectives? How often will we collect these measurements and make necessary adjustments to the

business?

Key Questions about Organization