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Business Model Innovation An iterative approach towards organization-wide value creation
By Mathias Cobben and Han Driessen
IN A BLINK
IN A BLINK
Innovation is essential to an organization’s survival. Nevertheless, room for innovation is far too often tightly sanctioned within organizations. As a consequence, potential value may be overlooked or disregarded. Business model innovation effectively facilitates overcoming this issue. A business model defines how an organization creates, delivers and captures value. As a business model consists of external and internal perspectives, both of which are responsible for driving value creation, it is important to take both factors into account when engaging in innovation. In this paper, we not only offer an iterative process designed to guarantee comprehensive oversight, we also suggest two methods for facilitating its implementation: Service Design and Agile principles. Service Design helps to sense the external perspective of the business model in greater detail. Agile principles, on the other hand, allow the internal perspective of the business model to respond swiftly. As a result, balancing Agile principles and Service Design will allow organizations to create organization wide value. In a closing remark, we address scaling and propose a heuristic for its integration with business model innovation.
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1 The need for business model innovation As extreme change in the external environment is quickly becoming the new norm, organizations
face the choice between innovating and becoming irrelevant. More competition, lower barriers for
competitor participation and a highly informed customer base drive organizations toward the most
obvious of both options: the innovation path. Innovation intuitively brings to mind imagery of
scientists in lab coats fiddling with the latest technology. Accordingly, most people think of
innovation as something that is done at the back-end of the organization. On top of this, there is the
common misconception that innovation is about developing new products and services only.
However familiar this may sound, such assumptions enormously limit the necessary room for
innovation within an organization. The consequence is that the playing field for innovators and their
space for value creation both become very small.
In this paper, we argue that innovation should span the organization’s entire business model in
order to tackle the challenges that come with change, and maximize value creation. We will
propose a framework for doing so and relate it to existing methodologies.
If innovation spans the entire business model of the organization and becomes everyone’s
responsibility, defining whose job it is seems redundant. Nonetheless, doing so is an important part
of illustrating what we consider potential areas of implementation within our proposed approach to
innovation.
Given the broad coverage of the term organization, one could argue that each department
comprises its own smaller organization, one which requires its own unique business model. An IT
department, for instance, deals with (internal) customers and manages suppliers. Innovation,
therefore, is obliged to span the entire business model of the IT department, not just software
development or new technology sourcing. Similar arguments could be made for other parts of an
organization. The suggested plan for business model innovation therefore clearly reaches beyond a
mere strategic level and can be implemented as is required in practice.
The main target groups for business model innovation can best be described as follows:
1. Core product and service providers are delivering a certain product or service as a
main objective. Without this product or service, there is no value for customers and
therefore no organization. All private or public enterprises, profits and non-profits belong
to this category.
2. In-company customer oriented product and service providers are woven around one
or more products or services. They help to leverage the value of a core product or service
and have an indirect but measurable relationship with revenues. They are usually
customer oriented and part of a larger organization. Customer care and communication
departments are examples of such secondary product and service providers.
3. In-company non-customer oriented product and service providers have no direct
relationship with the organization’s customers, but they are essential to providing a
product or service. Despite their internal focus, they must consider how they can help
more client-focused parts of the organization deliver value. Examples are IT or logistics
departments.
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2 Setting the scene
2.1 What is a business model?
A business model describes the rationale of how one creates, delivers, and captures value.i Value
can be developed on the level of an entire organization or within its departments and also on a
personal level. Providing sustainable value implies mapping out and innovating the underlying
business model on a regular basis.
Of the many available business model frameworks, the Business Model Canvas developed by
Alexander Osterwalder stands out due to both its widespread use by practitioners and solid
academic roots. For these reasons, we have generated a simplified interpretation of his framework:
Value
At the center of the business model, value represents the proposition delivered to a customer or
user for a specific price. It is the answer to a problem or the satisfaction of a need. Value can be
delivered in many ways; it could either be a product or service which delivers certain attributes such
as originality, customization, design, usability, brand and status, or it could simply “get the job
done”.
External perspective
The Business Model Canvas has an externally oriented component consisting of customers,
channels with which to reach them and a desired relationship that one strives to maintain. Together,
these aspects define how revenues are generated.
Customers come in certain segments if they require different and specific propositions, channels of
interaction and/or relationships. They can also have a different willingness to pay or may vary in
profitability. There is no golden rule for customer segmentation but recognizable patterns do occur:
mass markets (few or no segmentation), niche markets, and highly diversified markets are amongst
them.
Channels are the concrete, or “hard”, means of connection between the customer segments and
the value proposition. They describe how a value proposition gains recognition, is evaluated,
purchased, delivered and receives feedback. These processes may each have a different channel,
i, Osterwalder A., Pigneur Y,, Smith A., (2010), Business Model Generation: John Wiley and Sons Ltd., Hoboken
BUSINESS MODEL
customerschannels
relationships
revenues
resourcesactivititespartners
costs
VALUE
EX
TER
NA
L INTE
RN
AL
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for example a website, phone line, store, sales team, and so on. It is also worth defining whether
such channels are owned or managed through partners.
Customer relationships describe the intangible, or “soft”, connections between the customer
segments and the value proposition. They define how an organizations deal with customers.
Examples on this level are personal and dedicated assistance, self-service, and co-creation.
Revenues are made when a value proposition successfully lands in a customer segment through
the employment of specific channels and relationships. They can be transactional (one time) or
recurring and come in different forms such as asset sales, rent, license, subscriptions and
advertising fees. Pricing can be fixed or variable.
Internal perspective
An internal system should also be able to provide the value proposition. The internally oriented
aspect of the business model thus consists of the required resources, activities, and partners
necessary to enable delivery. Together, they determine the costs to be incurred.
Resources are the collection of assets required to deliver a value proposition. They come in many
forms, such as physical assets, human resources, and intellectual property in the form of patents.
Financial assets such as cash or stock options are also part of an organization’s resources.
Activities describe what a company must do in order to provide value. A few examples include
production, problem solving, the managing of networks and platforms, and training. There are
however, many more possibilities.
Partners are third parties that assist in value creation. They range from suppliers and strategic
alliances to joint ventures. Advantageous motives for partnerships include risk-reduction and
economy of scale claims with regard to certain required resources and activities.
Costs are incurred in the pursuance of resources, activities and partnerships. They can be fixed or
variable.
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2.2 What is business model innovation?
Innovation is a broad topic, making it hard to define in an unambiguous way. As substitute for a
concise definition, we have listed a few quotes describing innovation below before diving into the
business model innovation framework we propose.
Based on the above definitions and quotations, it is fair to conclude that innovation has quite a bit of
overlap with business model terminology. It is inherent in finding and solving challenges in order to
satisfy needs. The new value delivered can take different forms, such as products, services, and
processes for instance. New resources, activities, or partnerships facilitate innovation. This means
that practically the entire business model is covered.
Accordingly, innovating the business model simply means changing the established internal and
external perspectives in order to create new value.
In addition, innovation generally leads to prosperity, and it also has unpredictable and potentially
disruptive effects. Its process, therefore, should be one of intelligently organized trial and error,
where implementation defines success. This makes the process inherently iterative.
“Innovation is the specific instrument of entrepreneurship… the act that endows resources with a new capacity to create wealth.”
- Peter Drucker
“The introduction of new goods (…), new methods of production (…), the opening of new markets (…), the conquest of new sources of supply (…) and the carrying out of a new organization of any industry”
– Joseph Shumpeter
“To make changes in something established, especially by introducing new methods, ideas, or products”
– Oxford Dictionaries
"An innovation is something original, new, and important - in whatever field - that breaks in to or obtains a foothold in a market or society."
- Frankelius, P, Journal of High Technology Management Research
“Innovation is the application of new solutions that meet new requirements, inarticulate needs, or existing market needs. This is accomplished through more effective products, processes, services, technologies, or ideas that are readily available to markets, governments and society.”
- Wikipedia
“Trial and error drives innovation: The cost of experimenting with products in their context is lower than ever.”
- Luke Johnson, Financial Times
“Disruptive innovation describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.”
- Clayton Christensen
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3 A framework for business model innovation
3.1 Overview
Given the fact that innovation is clearly an iterative process, we propose a business model innovation framework consisting of four distinctive stages, of which the last consequently feeds into the first. Similar models have been proposed in both practitioner and academic literature alike, providing us a robust and proven foundation for further exploration i.
iBeckman, S. L., & Barry, M. 2007. Innovation as a learning process: Embedding design thinking. California Management Review, 50(1): 25-56.
Brown, T. 2008. Design Thinking. Harvard Business Review, 86(6): 84-92.
INTERNAL
observe
analyse
develop & test
design
SERVICEDESIGN
"SENSE"
AGILETHINKING
"RESPOND"
BUSINESS MODEL
OUTSIDE THE BUILDING
INSIDE THE BUILDING
customerschannels
relationships
revenues
resourcesactivititespartners
costs
value creation
3. Design
While deeper insights into the customers, user needs and the context are developed in the observation and analysis stages, this step focuses on designing solutions to discovered challenges. Large amounts of ideas, concepts and solutions are created and consecutively prioritized.
2. Analyze
When information is collected, it is important to make sense of it. The focus here is primarily on recognizing patterns in the data and investigating reasons for potential outliers. Representing the information and findings in a way that makes it easy to communicate is important for later use.
1. Observe
Observation recognizes that, for innovation, it is important to gather profound information on the environment in which a product or service is performed. Collecting information on the customers or users, their problems and aspirations, all within the larger context in which they operate, is the first step towards finding and solving the challenges they face.
4. Develop & Test
Solutions should be developed and tested. The focus is on delivering a solution that fits the needs and aspirations. The most important goal here is to figure out whether the underlying assumptions regarding the challenge and the customer are correct. This phase allows for gathering new information, therefore leading into the observation stage beginning the cycle anew.
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We argue that the starting point, in any case, should be to map the current business model. This
allows for a general overview and stimulates reflection on both the higher level of the business
model and the details at of each stage. Both the current and a future business model can be
mapped at this time.
Within the business model innovation framework, none of the phases is more important than the
other. Some organizations design and develop on a continual basis, for example. This is typical for
R&D based enterprises with a strong emphasis on the back-end of the organization. Such
emphasis is not problematic by nature. Nonetheless, we want to stress the importance of making
the leap towards observing developed solutions in a customer context and drawing conclusions
based on thorough analysis.
Either way, we assert that organizations should maintain an appropriate balance between the four
stages, get out of the building and make sure to test the fundamental hypothesis they have about
their business model in an external environment. Using the following methods may greatly help to
maintain the optimal balance.
3.2 Implementation perspective
There is an enormous body of practitioner literature offering techniques that fit our business model
innovation frameworki, with new techniques developed daily. They range from participative
observation to innovation accounting, data mining and Agile user story mapping. Furthermore, their
usability and performance tends to be very case-specific with, more often than not, techniques that
have been customized to fit specific situations. All things considered, attempting a comprehensive
analysis of their impact and frequency in general terms would not do justice to a field in such
continuous motion.
Accordingly, our ambition in this paper is therefore to provide advice with regards to implementation
in the form of heuristic principles, or simple rules of thumb that fit two dominant methodological
streams, namely Agile thinking and Service Design.
i The references below are a compilation of the information resources that inspire our practice, and are no attempt at completeness whatsoever:
Blank, S. G. (2006). The four steps to the epiphany: successful strategies for products that win: Cafepress.com.
Brown, T. (2008). Design Thinking. [Article]. Harvard Business Review, 86(6), 84-92.
Ideo. (2009). Human centered design tool kit - A free innovation guide for social enterprises and NGOs worldwide: Ideo.
Kim, W. C., & Mauborgne, R. (2005). Blue ocean strategy: How to create uncontested market space and make competition irrelevant: Harvard Business Press.
Martin, R. (2009). The design of business: Why design thinking is the next competitive advantage: Harvard Business School Press.
McGrath, R. G. (2011). Failing By Design. [Article]. Harvard Business Review, 89(4), 76-83.
Read, S., Sarasvathy, S., Dew, N., Wiltbank, R., & Ohlsson, A.-V. (2010). Effectual Entrepreneurship: Routledge.
Ries, E. (2011). The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses: Crown Publishing Group.
Verganti, R. (2009). Design Driven Innovation: Changing the Rules of Competition by Radically Innovating What Things Mean: Harvard Business Press.
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4 Complementary methods for business model innovation As innovation is not a particularly new domain, there are plenty of methods for approaching it. This
implies that there is no need for reinventing the wheel. Nonetheless, it is a worthwhile exploration to
identify existing methods that complement each other and amplify the business model innovation
outcome. Below, we will present and interrelate the two different approaches in our framework and
explain why they deserve proper attention in any innovation related endeavor.
4.1 Service Design – Sense
Service Design is a methodology that focuses on making products or services useful, usable, and
desirable from a client’s point of view; efficient, effective, and distinctive from a supplier’s point of
view.i
It is also an iterative process with phases quite similar to those depicted in our model above. It is
fair to say, however, that Service Design puts a more distinct emphasis on the external perspective
of our model and is more concerned with the customer’s perspective. Service Design is therefore
concerned with sensing the external environment.
As a matter of illustration, we will dive deeper into four principles of Service Design thinkingii that
have strong practitioner value when iterated within the model.
1. Customer-centric
The customer is at the heart of the observation and analysis. This goes beyond gathering statistics.
Profoundly understanding the customer revolves around grasping his or her aspirations and
challenges. It requires discovering the obstacles a customer encounters when attempting to
achieve certain goals in order to remove them. When a customer buys a product or service, it
seldom has a functional component alone. More often than not, social and emotional goals weigh in
heavily.
2. Co-creative
Always strive to involve customers and stakeholders when developing new products and/or
services. A clear oversight of all needs, expectations, and interests at play will allow you to see
connections and conflicts early on. Stakeholders can be inside or outside your organization. It is of
utmost importance for all stakeholders to express their ideas and exhibit a proactive attitude when
taking on a challenge, as opposed to simply writing down each other’s requirements. For example,
stakeholders may hold the power to unlock channels to your customer, enabling interaction
otherwise not possible. It pays off to understand them if you want to develop a win-win solution for
the customer.
3. Sequencing and evidencing
Product and service delivery takes place over time and consists of many different stages. This
should be acknowledged from the start. Customers probably go through different phases. At first,
there is awareness, when a customer realizes a product or service exists. Next, the customer will
evaluate whether the value proposition connects with his or her needs and aspirations. When i Birgit Mager’s definition in the book This is Service Design thinking (2010), Marc Stickdorn, Jacob Schneider’ Bis Publishers ii Inspired by: Stickdorn M., Schneider J. (2010), This is Service Design Thinking: Bis Publishers
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evaluated positively, a purchase will take place in a certain way, at a certain time and in a particular
location. The same goes for the delivery. At last, an after sales relationship will be maintained with
the customer.
While a product or service provider may not always explicitly express these phases, they are most
certainly there. More importantly, they are all interconnected. Failure in one phase may jeopardize
the entire process. Mapping out and evidencing all sequences of the process is essential to
designing a comprehensive solution.
4. Telescoping
Keeping the bigger picture in mind is important when it comes to leveraging contingencies. When
observing or analyzing details, it can be difficult to see potential opportunities when they arise. A
purely holistic approach may not yield concrete results due to the fact that one is continuously
operating on an abstract level. The most productive practice will switch between the details and the
bigger picture as often as possible. Developing such telescopic ability allows you to develop
concrete solutions while leveraging chance events and new information as they become available.
4.2 Agile – Respond
Just like Service Design, Agile is an iterative approach with phases similar to the model we have
proposed. The main difference is that Agile has a stronger focus on the internal aspects of the
business model. It is the part that responds to the external environment. This means that Agile is
generally concerned with the design and development of solutions in a way that can handle change
or even welcomes it.
The following Agile principles help to illustrate how practitioners can implement the proposed
iterative model.i
1. Validity over reliability
Validity means finding a truly fitting value proposition for a certain customer. Reliability, on the other
hand, is about performing a value proposition in a reliable and predictable way. Since our approach
to value creation is one that spans the entire business model, it is necessary to first discern a valid
amount of fit between the internal and the external perspectives before organizing resources and
activities for scaling. Reliable scaling is an important issue, but it only makes sense after finding a
valid value proposition. Also, designing and developing solutions with a focus on validity allows for
new discoveries. In contrast, a focus on reliability tends to sacrifice creativity and new ideas for
existing solutions, whether or not they are a good fit for the customer.
2. Working products and services
Allowing for testing and the creation of new information, working products and services lay the
groundwork for generating customer feedback. By using this approach, one avoids its exact
opposite: trying to generate a nearly complete list of requirements in order to develop all features
over a long period of time, only to find out that your list of requirements is not all that complete and
your customer has changed his mind in the meantime. Building minimal viable products and
i Hofman R., Maurer M. (2013) BlinkPaper - Business Agility: Sense and Respond: BlinkLane Consulting (Dutch only)
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services that focus on key value parameters allows you to get feedback quickly and change course
when necessary.
3. Prioritization is key
The consequence of building minimum viable products and services is that setting priorities
becomes crucial. Deciding which product or service feature is important should not be a matter of
compromise in the design or development team, but rather a process embedded in thorough user
understanding. In addition, it is important to stress that prioritizing is a task separate from planning.
One may be tempted to relegate lower priorities to a later date, however this implies that such
judgments have been sufficiently validated. In fact, only the subsequent round of customer
feedback will bring valid priorities to light.
4. Multidisciplinary teams over functional domains
Prioritizing requires information to travel fast. This means information flows beyond the functional
domains of an organization while following the building blocks of the business model. Participants in
the innovation process should understand that traditional reporting might not be suitable and may
even become obsolete. They must work together in small multidisciplinary teams, on a daily basis,
with a clear and shared objective. Well-structured innovation teams should be a reflection of the
business model, allowing the handover of information from one player to the next and therefore
ensuring that decisions are based on valid and up-to-date information.
5 Scaling a business model
Because the business model innovation process is cyclical and
based on experimentation, one might wonder when scaling and
full-fledged implementation come into play. The general idea
behind the iterations is for the business model to become more
and more internally and externally validated, resulting in less
operational and market-related uncertainty over time. Scaling
should thus be viewed as an objective that is interwoven into business model innovation from the
start, not as a sequential task. Theoretically speaking, the scale of the cycles therefore has the
potential to grow continuously, much like the visualization of a Fibonacci sequence (above).
Nonetheless, large-scale execution always remains dependent on risk appetite and the acceptance
of certain leaps of faith, meaning that this approach for implementation is more a rule of thumb than a
rigid formula for success. In summary, a successful iteration will validate that a tested value
proposition connects to the customer’s needs. Only in this case, scaling becomes an option. If not,
another iteration on a similar or even smaller scale may be more appropriate.
In this paper, we would like to scratch the surface of how we believe scaling relates to business
modeling. We do not aim to explain an elaborate approach towards scaling, as the phenomenon
deserves proper attention as a subject of further research.
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6 Conclusion As organizations are required to navigate an environment trademarked by continuous change,
maneuverability becomes essential. We therefore strive to help organizations walk the innovation
path by suggesting a framework that can act as a compass rather than a rigid roadmap. Concluding
this paper, we would like to give a synopsis containing the key takeaways regarding business model
innovation.
We kicked off by stating that a business model defines how one creates, delivers, and captures
value. It consists of external and internal perspectives, both of which drive value creation. It is
important to take both factors into account when engaging in innovation.
• External perspective: Customers, channels and relationships responsible for driving revenues
• Internal perspective: Resources, activities and partnerships responsible for incurring costs
Consequently, we defined business model innovation as an experimental and iterative process in
which four distinctive steps can be repeated until a satisfying result is achieved.
• Observe: collecting information • Analyze: interpreting information • Design: designing and prioritizing solutions • Develop & test: developing and testing solutions
Implementation is facilitated by Service Design and Agile thinking principles alike. They respectively
help to make sense of the external perspective in order to organize the internal perspective and its
ability to respond swiftly. Accordingly, balancing Agile and Service Design allows organizations to
create more value by innovating across the entire business model.
The most important Service Design principles are:
• Customer-centric • Co-creative • Sequencing and evidencing • Telescoping
The most important Agile principles are:
• Validity over reliability • Working products and services • Prioritization is key • Interdisciplinary teams over functional domains
Finally, we discussed that scaling relates to business model innovation as an objective that must be
incorporated from the start. Scale is able to grow when successful iterations take place.
About the authors Mathias Cobben MA MGM
Mathias Cobben (1984) is consultant at BlinkLane. His primary expertise is in Business Model Innovation and Design Thinking. Furthermore, he investigated Intrapreneurship, or how to make organizations innovative and entrepreneurial. Doing so, Mathias has coached MBA students and professionals in translating ideas to business cases. He holds a Masters in General Management degree of Vlerick Business School and spent time at the University of California at Berkeley as a design student. Han W. Driessen MA MBA
Han Driessen (1968) co-founded BlinkLane Consulting. Han has over 15 years of consulting experience, serving clients in a broad range of industries and geographies on issues such as strategy, IT governance and strategic sourcing. He currently focuses on helping clients to innovate their business model and transform their organization for the future.
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Copyright © 2013 BlinkLane Consulting. All rights reserved. The prior written permission of BlinkLane Consulting is required to reproduce all or any part of this document, in any form whether physical or electronic, for any purpose.
About BlinkLane Consulting BlinkLane Consulting is an advisory firm founded in 2007. In our 6-year lifespan, we have evolved together with our clients. We continuously innovate our services to keep delivering the value our clients need in order to deal with today’s challenges. We help our clients increasing business value from IT investments, act more agile and innovative and transform their organizations for the future. For 2013, we focus on the following four themes:
• Business & IT Fusion • Strategic Sourcing • Business Agility • Business Model Innovation