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José SantosProfessor in the Prac/ce of Global Management, INSEAD
& Visi/ng Professor, MIT
Bert SpectorAssociate Professor of Interna/onal Business and Strategy, Northeastern University
& Visi/ng Professor of Organiza/onal Behavior, INSEAD
Ludo Van der HeydenProfessor of Technology and Opera/ons Management
& Solvay Chaired Professor of Technological Innova/on, INSEAD
Version: Utah Winter Opera/ons Conference, Park City, Jan 29th 2010
Towards a Theory ofBusiness Model Innova>on
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Increasing AAen>on to Concept: Academia• First appearances:
-‐ in abstract: Lang (1947)
-‐ in subject index: Mertes (1949)
-‐ in ar/cle /tle: Jones (1960)• Rising interest star>ng with Internet boom (Ghaziani & Ventresca, 2005):
-‐ 166 ar/cles between 1975 and 1994
-‐ 1,563 between 1995 and 2000
• Deeper and wider occurrences since then:
Evans & Wurster, 1999; Timmers, 2000; Hamel, 2000; Mahadevan, 2000; Afuah & Tucci, 2001; Amit & Zo`, 2001; European Commission, 2002; Elliot, 2002; Magre`a, 2002; Mansfield & Fourie, 2004 …
• Special sessions and journal issues:
-‐ Session in Academy of Management 2009
-‐ Special Issue of Long Range Planning on Business Models (Exp Feb 2010)
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Increasing Diffusion of the Concept:Examples from Business & Society at Large
• Widespread belief that BMI will be responsible for significantly largerimpact on firm performance than new products / services (Pohle &Chapman, 2006)
• President Obama’s and Thomas Friedman’s comments on the automobileindustry needing to change business models
• Rick Gurnon, Head of the MassachuseAs Mari>me Academy: "The pirateshave a great business model that works for them: See ships, take ransom,make millions," he told reporters.
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But
• No agreement on defini>on, leading to increasedconfusion (incl. in academia) about the term
• Focus on start-‐ups / new technologies
• Confusion between single business and a (mul/-‐business) corpora>on
• No men/on of people
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Business Model ≠ Business Strategy• Tradi/onal Business Strategy: market (who) &product (what) & value chain (how)
• Business Model: only the how!
• BM is to be dis>nguished from the market (who?)and product strategies (what?) -‐ and fromtechnology strategies
• Having defined the 3 dimensions of the BusinessStrategy, one can compute the profit func>on (or theperformance model)
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Business Strategy: three “gurus”Porter (1979, 1996):
-‐ compe//ve strategy: 5 forces (HBR 1979)
-‐ choice of ac>vi>es (HBR 1996 “What is strategy?”)
Prahalad (and Hamel) (1990):
-‐ core competences
Kim & Mauborgne (2004):
-‐ Blue Ocean Strategy : a process for new product-‐market spaces
Ps: none has a men>on to business model the way we define it
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Business Model ≠ Start-‐up issue• In fact, business model innova/on has been aroundall the /me and is hardly something new: SEARS,GM, Ford, McDonalds…
• Related mostly (exclusively) with market (who?)and the product innova>on (what?)
• These are business constructs that are related to“business models” -‐ in fact many of these start-‐updied b/c they had no BM
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An example: the downfall of GM• 1921: Sloan buys a chao/c GM from Durant (who had established it 13 y earlier)
who “had no concept of the business” and establishes the Policy CommiAee (PC)and establishes the mul>-‐divisional corpora>on (product-‐process matrix: Cadillacon top, Chevrolet at bo`om, …)
• 1924: Puts division heads on the PC (shareholders like Dupont complain) to favorcollabora/on that was missing -‐ he separates PC into two: Administra>on and(Corporate) Execu>ve CommiAees
• 1946: Drucker has full access to GM and a`ests to the “linking” governancevirtues of the two commi`ees
• 1958: Donner dismantles Sloan’s “par/cipa/ve decentraliza/on” and removesdivisional managers from the main commi`ees (unfair process dis-‐engagement)
• In view of resistance from divisional managers, he takes further control and makesbusiness decisions: removes Chevrolet from low-‐end segment (opening up marketfor smaller cars), mandates increased shared parts …
• 1965: creates GMA(ssembly)D dismantling the Bus Units : Vega disaster (1970)
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Ques>ons for discussion?• Management maAers: The Policy Commi`ee was the key linking
mechanism for GM and ensured value-‐adding by the corporate center ontop of the value adding by the BUs (an example of synergy in corporatestrategy through management -‐ dis/nct from pormolio)
• OM cannot be seen only as wri>ng algorithms (rou>nes) for op>mizingphysical (or informa>on) flows: let us be careful to consider the role ofmanagement instead of trying to op/mize management away
• Are we going to leave that terrain to others?
-‐ OB studies organiza/onal networks and rela/onships at will … but noac/vi/es in their models, only managers
-‐ Strategy: for them business model is another term for strategy …
-‐ Entrepreneurship: mostly concerned with start-‐ups (cfr. Strategy)
• What is the opportunity for OM?
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Defini>on #1 : Business Model
1) A configura>on of ac>vi>es
& their (material, informa>onal) linkages
2) A set of organiza>onal units that performthose ac>vi>es
& their (managerial) rela>onships (including of a governance type)
In sum: supply chain with managerial rela>ons
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A Model for Business Models
OrganizationalUnit
OrganizationalUnit
OrganizationalUnit
OrganizationalUnit
OrganizationalUnit
OrganizationalUnit
OrganizationalUnit
OrganizationalUnit
ActivityActivity ActivityActivity ActivityActivity ActivityActivityTransactional Linkage
Transactional Linkage
RelationalLinkage
RelationalLinkage
RelationalLinkage
RelationalLinkage Relational
LinkageRelationalLinkage
TransactionalLinkage
TransactionalLinkage
Transactional Linkage
Transactional Linkage
Value ChainPartner Focal Firm
Value ChainPartner
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BM: what it is and what it is not• What it is:
-‐ ac/vi/es AND-‐ organiza/onal units AND-‐ their rela/ons/linkages
• What it is not:-‐ business strategy OR-‐ product or market characteris/cs OR-‐ technology OR-‐ ac/vi/es (by themselves) OR-‐ any combina/on of the above
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Example 1: ZARA
Step 2: Simplify« hits » & producelibrary of designs
Step 1: Scanfashionshows
PurchaseRaw Mat
Step 3: FinalDesign ofnext batch
Mfg
Shoppingexperience
Dist
Step 2: Shoppers (and storemgers) « pull » next design
(shape) & designers « adapt »
Step 3: Designers« pull » next RM batch
Observa>on #1:ZARA SUPPLY CHAIN
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Observa>on #2 :Management Rela>onships
1) Start-‐up of ZARA Quick Response: CEO runsthe La Coruna store and the factory
2) “New Product CommiAee”: designer, supplychain manager, commercial manager co-‐govern opera/ons
3) Store managers: fully engaged in opera/ons
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Example 2: Accor
A Mul>-‐business corpora>on withcentral ac>vi>es
(real estate, new format development,financing, franchising, overseeing
business leaders, …)
ACCOR
Business
Process
S e r v i c e O f f e r
Flow line:Inflexible
Job shop:Flexible
Luxury Comfort Minimal
Sofitel
Novotel
Ibis
F1
BasicYes No
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Example 3: Luqhansa Group
A Business Model Change that is purelya change in managerial rela>onships
The old Lufthansa:Functional Organization
The new Lufthansa Group:Service Holding
President
VPHR
VPFinance
VPMktg
TechnikPassengerCatering
PassengerCatering
TechnikPassengerCatering
Technik
President
Technik Passenger Catering
HRFinMktg
FinMktg
HRFinMktg
HR
Cargo Cargo Cargo
Cargo
HR
Fin
Mktg
BMC at Luqhansa
BMC at Nissan: in the other direc>on
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Defini>on #3a:Business Model Change
A reconfigura>on of ac/vi/es, organiza/onal units,their linkages and rela/onships.
In short:
reac>va>ng, reposi>oning/reloca>ng,
relinking, regoverning
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A Model for BMC
Linkages betweenac>vi>es
Posi>oning betweenac>vi>es
Setof ac>vi>es
Loca>on of ac>vi>es
Businessmodel
Innova>on
Businessmodel
Innova>on
Remove
Augment
RelinkingInsource
On-‐shore
Off-‐shore
OutsourceRegovern
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Defini>on #3b:Business Model Innova>on
The defini/on of a business model that is newand valuable for a given product-‐market (or
business in the SIC sense).
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Implica>ons for Prac>ce : BU Level
• BMI offers opportunity for lean value crea>on
• BMI does not require breakthrough technologies or heavyinvestment in new product/market/business development
• People & rela>onships are as much a part of a businessmodel as technology linkages & economic exchanges
• All BMI is competency destruc>ve & will requiretransforma/onal behavioral change
• It takes considerable >me (and much more so than productor market innova/on) -‐ which is also why it gets li`le billing
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Further argumenta>onon behalf of BM:
corporate theorizing that is dis/nct andnew compared with the typicalpormolio/synergy dichotomy
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Defini>on #4:The BMI-‐Conducive Corpora>on
A corpora(on that maximizes theopportunity / likelihood that BMI (or BMC)will emerge from within its business units
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Implica>ons for Prac>ce : Corporate Level• To create BMI-‐Conducive Corpora>on, corporateexecu/ves need to engage in both structural &behavioral change
• Loose horizontal coupling combined with deepsense of organiza/onal jus/ce & mutualengagement (cfr. Fair process) will maximizeopportuni/es for BMI from within BUCs
• Corpora/ons can develop crea>ve white space tomaximize BMI exchange across BUCs
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Toward the BMI-‐Conducive Corpora>on
Crea>ve White SpaceHigh autonomy
High cross-‐unit learningLow Autonomy
High cross-‐unit learning
High AutonomyLow cross-‐unit learning
Low AutonomyLow cross-‐unit learning
Horizontal CouplingHorizontal Coupling
Low High
High
Low
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Towards a Theory of BMI: summary
• A defini>on of Business Model (BM) that brings in ac/vi/es, theirorganiza/onal units (and hence people), and their linkages and rela/onships
• A concept should be part of OM and elevates OM into the strategy space (in away that supply chain design does not)
• It re-‐imports management into OR/OM
• It provides a unique space, next to:
-‐ finance (an input)
-‐ marke/ng (product-‐market issues)
-‐ entrepreneurship (not only for start-‐ups)
-‐ strategy and OB (let us add some ac/vi/es)