20 February 2020 | Why this book? 90 percent of all business model innovations simply recombine existing ideas and concepts from other industries! The Business Model Navigator introduces 55 successful business model patterns, which can serve as blueprints for any business model innovation effort. Additional tools are available at: www.bmi-lab.ch
Business Model Innovation
A business model provides a holistic picture of how a company creates and captures value by defining the Who, the What, the How, and the Why of a business. Innovating a business model means changing at least two of those dimensions.
One of the key challenges of business model innovation is to overcome the dominant firm and industry logic.
The Business Model Navigator helps you to successfully structure the path towards an innovative business model and guides you through the process.
Recombination and creative imitation of 55 business model patterns are powerful tool to break out of the box and generate ideas for new business models.
Change management is a key success factor in any business model innovation project – identifying barriers and enablers is crucial for implementing a business model innovation.
Who: The Customer – Who are our target customers? Customers, who pay you, are always at the very heart of every business model.
What: The Value Proposition – what do we offer to customers? This defines your offerings (products and services) and describes how you cater for target customers’ needs.
How: The Value Chain – How do we produce our offerings? In order to put your value proposition into effect you need to carry through various processes and activities in conjunction with related resources and capabilities and their coordination along the company’s value chain make up the next dimension of business model design.
Why: The Profit Mechanism – Why does it generate profit? This dimension, which includes aspects such as cost structures and revenue-generating mechanisms, clarifies what it is that makes a business mode financially viable. It provides an answer to the central question that every company needs to ask: how do we produce value for our shareholders and stakeholders? Or simpler: why does the business model work commercially?
The only way to create a new business is to stop looking at what your competitors are doing. There are three challenges to innovating business model.
Challenge No. 1: Thinking outside of one’s own dominant industry logic. To come up with ideas for an innovative business model, it is essential to overcome the dominant logic residing within an industry or company. New ideas can only be found beyond the confines of current concepts.
Challenge No. 2: Difficulty of thinking in terms of business models rather than of technologies and products. It is not always the technology that brings unprecedented success, but rather its innovative application in the form of an innovative business model.
Challenge No. 3: The lack of systematic tools. (Business model innovation myths.) Innovation is the principal task of any manager. Merely supervising daily business would not warrant the high salaries that managers receive. Inspiring and driving innovation on a business level separates administrators from inspiring leaders. These leaders need an entrepreneurial mindset and the capabilities to innovate.
The Business Model Navigator is an action-oriented methodology that permits any company to break with its dominant industry logic and innovate its business model. It has been shown to work in all manner of organisations, industries and companies. It builds on the central idea that successful business models can be constructed through creative imitation and recombination.
The business models we have analysed comprise the vast majority of all those that have been successfully developed over the past 50 years, plus a number of pioneering ones from the past 150 years. In addition to analyzing successful business models, we also used our experience to examine why a company’s business model failed to work.
- Transfer: An existing business model is ported to a new industry (e.g. Razor and Blade to the coffee industry). Most companies use this strategy.
- Major advantages: other companies serve as blueprints and their mistakes can be avoided, enabling you to become an innovation leader in your industry.
- Major challenge: leaving enough room for experimentation and adaptation.
- Combine: Transfer and combine two business models. Especially innovative companies can even use three business models simultaneously (for example, Nestlé uses the Razor and Blade, Lock-in and Direct Selling patterns for Nespresso).
- Major advantage: synergies decrease the likelihood that competitors will imitate your business model.
- Major challenge: planning and execution become highly complex.
- Leverage: A company uses a successful business model for another product range (e.g. from Nestlé Nespresso to Nestlé Special.T and Nestlé BabyNes). Only the most innovative businesses can pull this off.
- Major advantages: ability to capitalise on experiences and synergies; manageable risk.
- Major challenge: balancing change and stability.
Step 1 – Initiation: Analysing your ecosystem
Herbert Simon, who received a Nobel Prize for his work on bounded rationality, pointedly remarked: ‘Problem solving involves not only the search for alternatives but the search for the problems themselves’.
Business models are often analysed in too much detail, caught up in the company’s daily struggles. Thus it’s a good idea to visualise examining the problem not from ground level, but from 30,000 feet up: this is sure to permit a better understanding of the dominant logic of the industry as a whole.
We recommend describing your business model on the basis of the four core dimensions who-what-how-why. The following questions will help you with this task:
- Who? (customers)
–What customers and customer segments do we mainly serve?
–What kinds of relationships do our customers expect and how do we maintain them?
–Who are our most important customers?
–Who are the other important stakeholders that need to be considered?
–What distribution channels do we use to serve our customers?
–Who influences our customers (opinion leaders, stakeholders, users)?
–Do different departments address the same customer segments differently?
–What people are behind our customers? Will the same people be here for the next ten years? (The people behind customers are often neglected, especially in B2B dealings.)
- What? (value proposition)
–What customer problems do we solve and what needs do we meet?
–What are the products and services we put in place to accomplish this?
–What is the perceived customer value? Usually this is not the same thing as a product or service’s technical specifications.
–What value or benefit do we create for customers? How do we communicate it?
–How do our offerings differ from those of our competitors? What alternatives do customers have?
–Does our current business model meet our customers’needs fully?
- How? (value chain)
–What key resources are behind our offerings and value proposition (e.g. physical, labour, financial resources, intellectual property)?
–What competencies and key activities do we need?
–Does our value chain make full use of our core competencies?
–Who are our most important partners? What is their relation to our business and what do they bring us?
–Who are our most important suppliers and partners and what do they contribute?
- Why? (profit mechanism)
–Why will the customer pay for our product or service?
–What are our main sources of income?
–How is the income generated? What are customers willing to pay for?
–What are our main costs and the most significant cost drivers?
–What are the main financial risks in our current revenue model?
Understanding the actors: customers (what do customers of today and future need?), partners (suppliers, distributors, solution providers, or those participating indirectly such as researchers, consultants or associations, contribute in some significant way to creating value for customers), and competitors.
Analysing influencing factors: (1) technologies and (2) mega trends.
(1) Social media as a key feature to engage with customers
(2) Sharing community and networks
(3) Physical Freemium and digital Add-on
(4) Digitally reloaded products
(5) Sensor as a service
(6) Integrated digital and physical experience
(7) From analytics to big data
- Mega trends: Pericles recognised the importance of looking ahead towards the future: ‘It is not a matter of predicting the future accurately, but rather being ready for it’.
Checklist for actor and influencing factor analysis
- Who are the relevant actors in my business model?
- What are their needs and what factors influence them?
- How have they changed over time?
- What does this imply for my business model?
- Will changes in the competitive environment create opportunities for a new business model? If so, which one’s?
- What, if any, significant business model innovations have occurred in my industry in the past?
- What were the catalysts of change?
- What technologies currently influence my business model?
- How are technologies changing?
- What will technologies look like in three, five, seven, or ten years
- How are future technologies affecting my business model?
- What trends in my ecosystem are relevant for me?
- How do these trends affect the various actors in my business model?
- Do they tend to amplify or minimise the weaknesses and strengths of my business model?
- In small groups of three or four employees, describe your business model in detail using the four dimensions as shown in the magic triangle: Who-What-How-Why (see above).
- Think about why your current business model may not survive or where its weaknesses lie. Keep actors and drivers of change as elements of your ecosystem in mind.
- Write a eulogy for your business model based on the above findings.
- Write down what you’ve learnt and present your conclusions to the other groups.
Step 2 – Ideation: Adapting patterns
The basic idea is to apply the 55 identified patterns to your own business model and thereby generate new ideas for your business.
The 55 patterns can be applied in two ways, using either the similarity or the confrontation principle.
Using the similarity principle to adapt patterns
You begin with pattern cards for business models in related industries and progress to more dissimilar patterns, which you then adapt to your own business model.
To apply the similarity principle, the steps to be carried out are as follows:
- Define your search criteria to identify related industries. For example, if you are a utility company in the energy industry you might consider the following search criteria: non-storable goods (service industry), deregulation (telecommunications), high volatility (financial industry), commodities (chemical industry), from product to solution (tool manufacturers), capital-intensive (railways).
- Next, based on your predefined search criteria and related industries, select patterns from the pool of 55 that are already used in the industries you have identified. Ideally, work with six to eight patterns.
- Now apply the identified patterns to your own business model. Develop concrete ideas for each pattern as they might work in your company and address the challenges you have recognised.
- Should you fail to find a viable idea for business model innovation at the first attempt, repeat the process. You may want to expand your search criteria and include additional business models in your analysis.
The most important question to ask with the similarity principle is: ‘How will adapting pattern X to my company change my business model?’
Using the confrontation principle to adapt patterns
You compare your current business model with scenarios in completely unrelated industries, and study the extremes in respect of their potential impact on your own current business model.
The confrontation principle is especially useful in situations where your problem statement is still hazy or largely unknown: for example, if you have recognised that you need to take action (on account of diminishing returns, increased competition with lower margins, etc.), but have not been able to establish a specific plan. At the same time, the confrontation principle offers an excellent approach to a proactive exploration of potential business model innovations.
The confrontation principle is applied as follows:
- The first step involves the selection of six to eight patterns from the 55 available business models that have a markedly different logic from those prevalent in your own industry. Use your intuition to choose the patterns. We also obtained positive results in some workshops by letting teams pick ten patterns quite at random, then discussing them briefly, and finally selecting a few interesting ones. It is a good idea to limit the amount of time participants are given to take their decision, to reinforce the spontaneous, intuitive element in this step.
- Next, challenge your business model with the patterns that have been selected. We have found that working with real-life examples works best here, to push team members to break with their regular patterns of thought. ‘How would company X manage our business?’ To improve comprehension, we suggest reformulating this question in terms of thinking of company X’s actually acquiring your business and seeing how this would change the management style and logic of the company.
- You need to devise more than one idea per business model card. This isn’t always an easy task, especially in these extreme cases. At the beginning, participants often find that they have to force themselves to come up with ideas for every pattern.
If you do not have enough good ideas after a first run, simply repeat the above steps using different business models as an impetus. Using the confrontation principle generally requires a team charged with positive creative energy.
Successful ideation processes
Pattern adaptation. We first try to generate as many ideas as possible. The development of ideas comes in two phases: first, each person comes up with ideas individually after looking at the pattern cards, and the participants then discuss them, building on them, modifying and contributing to them.
These phases may be mutually exclusive or approached iteratively to address additional parameters. The workshop can be organised in different ways. (Purpose of the workshop is to get as many as possible perspectives on various business model patterns.)
You should plan on running at least two to three rounds of ideation: most participants will reach the height of their creativity during the second round. The third round is meant to unleash any final and deep-seated creative potential. Generally it will be helpful to try a different approach in each round. Experienced moderators are instrumental in joining up the dots between the dominant industry logic and new business models.
Moderators will be most likely to maintain the appropriate level of abstraction needed for ideation if they come from outside the industry. Cross-industry workshops bringing together people from various companies that do not compete in the market and led by a neutral moderator can be very fruitful as well.
8 Success factors in the pattern adaptation phase. The 8 success factors should be presented as the rules of the game or even handed out on paper to participants before the start of the session.
- Get it all out: Before spending time on generating new ideas, be sure to get any existing ones out first. This allows participants to focus fully on pattern-based ideation and ensure that they are not hung up on their old ideas.
- No limits to creativity: Anything goes! It is important to establish the basis that there is room for each and every idea. Participants must be free from the fear that their suggestion might be ‘wrong’, for this would inhibit creativity and spoil the process. Obviously, negative or snide comments have no place in ideation.
- No copyright: At this ideation stage, ideas do not carry a copyright. You work on the principle that every idea belongs to everyone and is available to be built upon and developed by all the team members. It is of no consequence who puts forward the idea in the first place, and there is no need to count how many ideas any team member has contributed. Ideas emerge and are developed through teamwork.
- Quantity has precedence over quality: At this stage too, it is more important to generate a multitude of ideas. Those that are ‘off the wall’ may turn out to be the most exciting and bring the group into interesting new territory. Participants should be encouraged to produce as many ideas as possible: the time will come later to evaluate them.
- Avoid negativity: Responses such as, ‘But we’ve already tried that!’ are counter-productive and have no part in the ideation process. A creative way of bringing this home is to post several such conversation-stoppers around the room at the beginning of a session to serve as a reminder.
- Ten seconds: To make sure ideas or associations don’t get lost, write them down within ten seconds. It’s amazing how quickly a creative flash can disappear over the horizon. Help participants to follow this rule by providing plenty of pens and paper.
- Cast the net wide: Regardless of whether an idea is likely to be implemented or looks strategically important, the focus should be on generating radical rather than incremental ideas in the ideation phase. It is generally a relatively simple matter to trim a radical idea down to make it an implementable, incremental version of itself. On the other hand, trying to scale up an incremental idea into a radical one is virtually impossible because of our existing thought patterns.
- Anecdotes and asking the right questions: It is important that the moderators ask participants the right questions while the cards are being analysed to ensure that they think about every single pattern in detail. The use of anecdotes can also greatly help to stimulate thought. An example might be the McDonald’s story referred to above, because projecting it on to how you could radically simplify your own company in a similar way is sure to produce a myriad of ideas for change, along the lines of lean processes, elimination of complexity and scalability, and so on. Application of McDonald’s KISS principle (keep it simple, stupid) in some way makes sense for any business.
How to select ideas – the NABC method. The NABC method (Need, Approach, Benefits, and Competition) of the venture capitalists has proved to be very valuable for business model idea evaluation and selection. Very often it will be useful to cluster the ideas that come up by general concept and then make a selection from each cluster. Next comes the ‘elevator pitch’.
A useful method at this point is the iterative approach used in design thinking. A cycle consists of the following four steps:
- Development: Once the above process has been terminated, the most promising idea that has emerged is developed into a concept to be presented according to the NABC principle.
- Sharing: Each group presents their ideas to the other participants in an elevator pitch style: it should be precise, short, headline-driven and underlined with the core facts. The name ‘elevator pitch’ comes from the idea that a person should be able to convey the main ideas of a concept within the timespan of an elevator ride. If you were to meet an investor or decision maker in the elevator, how would you explain your idea?
- Water-holing: After each presentation, the group receives give-and-take feedback. Any answers from the presenting group should only be points of clarification: they will not respond to any criticisms directly, thus ensuring that they listen receptively and absorb what they hear rather than entering into futile discussion. All criticisms are held over to be considered in the next round. Venture capitalists call this ‘water-holing’, because the teams are refreshed and strengthened by the new ideas expressed.
And of course, all criticism offered during feedback must be constructive, to the exclusion of destructive conversation-stoppers. It is legitimate, for example, to question assumptions that are contained in the presentation of a business idea. Generally speaking, the criteria will be openly discussed without a hidden agenda. The appearance of any such conflicts must be addressed directly and openly by the moderator.
- Redesign: In the final phase, any weaknesses and challenges that have been uncovered are addressed by way of new ideas. This may involve revisiting previous ideas and/or examining new business models. Assumptions are re-evaluated and new impulses taken in and developed into a new NABC pitch. The selection of ideas in teams supports both acceptance and efficiency. If the process is not moving forward, it may make more sense to start over and either drop the current idea or combine it with one that was eliminated earlier.
Step 3 – Integration: Shaping your business model
Before an innovation can be viable, the new ideas must be shaped into a coherent business model (who-what-how-why) that meets your company’s internal requirements and is consistent with the external environment. A successful business model innovation will not only break with the dominant industry logic, but also have a high level of internal consistency without being based on an established model.
Internal consistency. Internal consistency may be defined as presenting a harmony between the who-what-how-why dimensions.
To ensure that the who-what-how-why question is well balanced, we recommend describing your new business model in detail on the basis of these four dimensions. Table 2.2 provides a detailed checklist to help you complete this step.
- Who are our target customers?
- Stakeholder group:
- For whom do we generate (added) value?
- Distribution channels:
- By way of what channels do we reach our customers?
- Are these channels integrated with our other business activities?
- Do the channels correspond to our customers’ needs?
- Customer segments:
- Have we segmented our customer base?
- What business relationship is to be sought in respect of each customer segment?
- Value proposition:
- What customer problem are we attempting to solve?
- What customer needs do we try to satisfy?
- What segment-specific products and services do we offer our customers?
- What value do we generate for our customers?
- How does our value proposition differ from that of the competition?
- Value proposition:
- Internal resources:
- What resources are essential to ensure that we deliver on our value proposition?
- How can we allocate the resources efficiently?
- Activities and competencies:
- What activities are essential to ensure that we deliver on our value proposition?
- What activities are we equipped to carry out with our existing competencies?
- What new activities and what competencies do we need in addition?
- Who are our most important partners?
- Who are our main suppliers?
- What activities can our main partners undertake or what essential competencies do they have?
- What do our main partners get out of working with us and how can we bind them to us?
- Internal resources:
- Cost drivers:
- What are the principal costs in our business model?
- What are the financial risks?
- How do we address them
- Revenue streams:
- What are our sources of revenue?
- What is the customer willing to pay for?
- How do customers willing to pay for?
- How do customers pay at present?
- How should they pay in the future?
- How much does each revenue stream contribute to the overall turnover?
- Cost drivers:
Once the four dimensions fit internally, you will have secured a competitive advantage for your company that cannot be easily imitated by your competitors.
External consistency. External consistency refers to the fit between your new business model and the company’s environment. How well does your new business model satisfy stakeholders’needs and how well equipped are you to answer to the prevailing trends and competition? As such, this step involves examining your environment in the context of your new business model. Because your environment is continually evolving, it is very important to bear it constantly in mind throughout the new business model development process.
Step 4 – Implementation: Realising your plans
Implementation, probably the most difficult task in business model innovation.
Taking a step-by-step approach when rolling out your business model innovation. Rather than trying to implement it in one fell swoop, it is wise to develop prototypes and test them on a small scale. This will minimise the risks and create opportunities to learn more about the process and adapt your strategy accordingly.
The basic process consists of a three-step cycle.
Design. Business model innovation consists of the three steps of initiation, ideation and integration. By the end of the design phase, you will normally have come up with one or two innovative business models that have coherent dimensions.
Prototype. Ideas need to be physically prototyped before they can be accurately evaluated and refined. Architects have lived by these words for a long time, always building a model before they actually constructed a building. A prototype is graspable and helps people to trust new products. Rapid prototyping is especially useful in this context since it allows for quick and cheap testing where the risk is very manageable. The strengths and weaknesses of your ideas will rapidly come to light.
How do you build a prototype for business model innovation? Such a prototype can take on a variety of forms, ranging from detailed presentations to business plans and pilot projects in small markets. The only really important thing to remember is not to waste too much time or money on figuring out the minutiae of your prototypes. The inherent uncertainty does not justify such expenditures.
Interdisciplinary teams with a wide range of experience and knowledge are the most effective. Complete the whole of each design cycle in an iterative manner. Your initial rudimentary business model prototypes will be succeeded by more sophisticated prototypes, and this will help you to define the details of your business model.
Test. Testing your prototypes will determine which dimensions of the new business model work and which ones don’t. Important stakeholders both within the company and outside of it, potential customers and suppliers, should be invited to give feedback. The important thing is to collect as much information about your prototype as possible. Everything you learn is then incorporated into the next round of prototyping to make better and more refined prototypes. On occasion you may even have to completely discard a prototype and explore other avenues instead. Abandoning prototypes can in fact be a blessing in disguise in the innovation process. Failure is a major source of learning, and the Stanford Design Thinking experience has shown that failure is often essential to finding new ways of refining an existing idea or even discovering an entirely new idea.
The following are the ten keys to success in the Design-Prototype-Test cycle:
- Openness: Just because we don’t do it doesn’t mean it’s no good.
- Courage: ‘Fortune favours the brave’.
- Iteration: The good makes way for the better, making for continuous improvement and better results.
- Diversity: Teams should consist of a balanced mixture of both divergent and convergent thinkers.
- Change: Recognise and specifically follow up on pivotal moments.
- Summaries: Record what you have learnt after each cycle.
- Failure: We all need to learn, and failure leads to progress. Learning is more important than measuring results.
- Challenge: Ask any number of questions, for they increase output during implementation.
- Coach: Make strategic use of pivot thinkers who master both divergent and convergent thinking to speed up processes.
- Directions: Be open to ‘dark horses’that can lead you in an entirely different direction.
Don’t waste too much time calculating business cases; you’d be better off assessing your business model qualitatively:
- Which is the best market to test our business model?
- Where can we get early customer feedback?
- What are the technological opportunities and risks?
- Which key customers would jump to use our new business model?
- Business plans create elaborate dreams based on assumptions. Prototypes test assumptions and push you to learn. What you do is more important than what you think.
Business model innovation has to be implemented top-down with four sections: Driver Change, Define a Plan of Action, and Define Structures and Goals, and Build Capabilities.
A- Drive Change
Systematic mistakes in choosing between ideas can have a variety of causes, among which are the following seven psychological phenomena:
- Status quo bias: It is natural to want to preserve the status quo, and human nature being what it is we tend to defend the dominant industry logic against a conflicting new business model. It is important to understand that this does not necessarily imply being afraid of change.
- Centre-stage effect: Present someone with three options and they are most likely to go for the middle course. This is true for almost all countries; generally, people don’t like extremes.
- Anchoring: Once a number (however random) has been suggested, all future alternatives will be measured by it. Experienced car salesmen are well aware of this pathology: they will almost always start by showing the customer a model with all the extras, and its high price lodges in the customer’s mind, making other cars seem cheaper. Similarly, if a project business worth US $300 million to top management and in fact ‘only’ US $50 million are effectively generated, management is likely to find this result disappointing – regardless of how useful this was for the company’s growth.
- Sunk costs: Even when a company has not managed to capitalise on an innovation, it is much easier to abandon a US $50,000 project than a US $3 million one.
- Frequency validity effect: The more frequently we hear a fact, the more likely we are to believe it. Boards of directors will often be willing to believe ridiculous forecasts, just because they have heard them over and over again. Letting go of indoctrinated ideas is incredibly difficult.
- Zero-risk bias: Option A, where a relatively small risk is eliminated, will be preferred to option B, where a much larger risk is drastically reduced. This is true even if the expected value of option B is greater than that of option A. In other words, we are ready to give up a whole lot for a sense of security. A new business model with a high net present value will always be seen as more risky than investing in the existing business.
- Bandwagon effect: In 1951 Solomon Asch conducted conformity experiments to demonstrate the power of peer pressure. Humans have a tendency to follow the herd. As long as there are no dissenting voices or if the boss has argued convincingly, most employees will jump on the bandwagon despite having personal doubts.
Rules for good decision-making
- Innovation usually occurs in conditions of high uncertainty.
- Make sure you have a solid grasp of the facts on which to base your decision.
- Keep the number of decision-makers to a minimum. The presence of anyone who does not need to be directly involved will just make the process more cumbersome.
- Analyse underlying causes.
- Keep asking why.
- Be open to your gut feelings. Intuition is based on experience and subconscious knowledge; it can be very helpful in making complex decisions.
- Avoid cognitive biases. The first step is to be aware of them. It will be easier to implement your decision if you can achieve a consensus among decision-makers.
- Be courageous. You can fix mistakes, but indecision keeps everyone from doing their job. Address power struggles and conflicts of interest openly.
- Learn from your mistakes. We all make mistakes, but do try not to make the same ones twice.
B- Define a Plan of Action
Develop a vision. Every change management initiative requires a clear, long-term vision. Where is our company headed? Where will it be in three, five, seven years? Why do we need to change? Communicate your vision clearly.
A vision is a dream with a deadline. If you don’t define by when you want to realise your vision, it remains a dream. If you don’t have a dream because you are too taken up with everyday deadlines, you will remain stuck where you are.
Earn a few quick wins. Harvest the low-hanging fruit first. In business model innovation a quick win may take the form of positive customer feedback, successful negotiation with an important partner, or even obtaining a first contract once the new business model is in place. Success at this level is important because it provides a sense of security to your business in transformation. It indicates that you’re moving in the right direction and helps to silence the cynics. Make a celebration out of these quick wins to generate positive momentum for the entire business.
C- Define Structures and Goals
Set the structures. Business model innovations can be put into practice in various ways: as part of the existing business, integrated in a new business unit, or even as their own independent company. External circumstances will dictate which one is the best form to use.
Define goals. SMART approach: Specific: Goals must be specific and precise; Measurable: Goals must be clearly measurable; Acceptable: Goals must be accepted by the team; Realistic: Goals must be reachable; Time-bound: Goals must be achievable within a given time-frame.
Implement performance management systems. It is important to measure the performance of individual employees, teams and even the innovation itself over various dimensions. Dashboards can help you to keep track of your progress and make any necessary changes if you find you are veering off course. The progress made should be measured against your goals, but it may also serve to spur competition between teams.
D Build Capabilities
While the right knowledge is a prerequisite for developing capabilities, it still needs to be applied correctly. In other words, the team must stay with the new business model right through until the launch.
Select the right team. Team selection checklist:
- Does the team include members from all relevant functional areas such as marketing, technology, strategy, logistics, manufacturing and purchasing?
- Are customers and potential customers included or at least represented?
- Are there enough members who are capable of thinking outside the box?
- Have we included team members from outside our industry?
- Does the team have enough motivation to overcome the initial organisational inertia?
- Are we sure this isn’t just a theoretical exercise? Are there enough practical team members who know about day-to-day business?
- Is the team well-connected to the rest of the company, but at the same time far enough removed to do its own thing?
- Is there a team member who can act as catalyst to push the project forward?
- Does the process require an external moderator?
- Do we have a sponsor within top management?
Build missing capabilities
Three ways to build missing capabilities
- Develop the capabilities internally: Capabilities can be developed in-house through learning on the job, recruiting new employees, or organising training sessions. But this is a very time-intensive process that requires a great deal of patience.
- Partner with others: Partners can bring whatever capabilities you may need to your business. This is easier to accomplish than hiring employees for the same purpose.
- Buy capabilities or businesses: While this is the most rapid strategy for acquiring capabilities, it is also the riskiest.
Establish a culture of innovation
Culture can be actively shaped by management.
Successful business model innovation demands an open culture and the ability to see failures as a source of learning. This is the paradox: the doubters are right nine times out of ten when they reject a new business model idea, but if the doubters rule the company then innovation has no chance and the company will be overtaken by its competitors. A strong innovation culture will help you to create the necessary momentum to break out of your dominant industry logic. But it won’t be easy. Humans are creatures of habit and you will need to work tirelessly to make everyone realise how much more exciting innovation is than the status quo.
- Add-on: Additional charge for extras. The core offering is priced competitively, but there are numerous extras that drive the final price up. In the end, the customer may pay more than was originally assumed. Customers benefit from a variable offer that they can adapt to their specific needs.
- Affiliation: Your success is my success. The focus lies in supporting others to sell products successfully, thus benefiting directly from successful transactions. Affiliates usually have some kind of pay-per-sale or pay-per-display system. The company itself gains access to a more diverse potential customer base without any additional active sales or marketing efforts.
- Aikido: Convert competitors’ strengths to weaknesses. Aikido is a Japanese martial art in which the strength of an attacker is used against himself. As a business model, Aikido allows a company to offer something diametrically opposed to the image and mindset of the competition. The novelty of the value proposition attracts the type of customer who prefer ideas or concepts that diverge from the mainstream.
- Auction: Going once, going twice…sold! Auctioning involves selling a product or service to the highest bidder. The final price is attained at a predetermined moment or when no higher bid has been received. This allows a company to sell at the highest price acceptable to customers. The customer benefits from the opportunity to exert an influence on the price of the product.
- Barter: Tit for tat. Barter is a method of exchanging goods with no transfer of money. In the business context the customer provides something of value to the sponsoring organisation. The goods exchanged do not have to have a direct connection and are likely to be valued differently by each party.
- Cash Machine: Coining money with negative working capital. According to the Cash Machine concept, the customer pays up-front for the products sold before the company has to cover the associated expenses. This results in increased liquidity that can be used to amortise debts or fund investments in other areas.
- Cross-selling: Killing two birds with one stone. In this model, services or products from an outside business are added to the offerings, thus leveraging existing key skills and resources. In retail especially, companies can easily provide additional products and offerings that are not linked to their main focus. In this way more potential customer needs can be satisfied and additional revenue generated with relatively few changes to the existing infrastructure and assets.
- Crowdfunding: Taking finance by swarm. A product, project or entire start-up is financed by a group of investors who wish to support the underlying idea, typically via the Internet. If the critical mass is achieved, the idea will be realised and investors receive special benefits, usually proportionate to the amount of money they have provided.
- Crowdsourcing: Outsourcing to the crowd. The solution to a task or problem is adopted by an anonymous crowd, typically via the Internet. Contributors receive a small reward or have a chance to win a prize if their solution is chosen for production or sale. Customer interaction and inclusion can foster a positive relationship with them and subsequently increase sales and revenue for the company.
- Customer Loyalty: Incentives for long-lasting fidelity. Customers are retained and loyalty assured by providing value over and above the actual product or service itself, for example through incentive-based programs. The goal is to enhance loyalty by creating an emotional connection or simply rewarding it with special offers. Customers are bound to the company voluntarily, and this protects future revenue.
- Digitisation: Digitising physical products. This pattern relies on the ability to turn existing products or services into digital versions of themselves, which thus offer advantages over tangible products, such as easier and more rapid distribution. Ideally, the digitisation of a product or service should not reduce the perceived customer value.
- Direct Selling: Skipping the middleman. Direct Selling refers to a scenario whereby a company’s products are not sold through an intermediary but are available directly from the manufacturer or service provider. In this way, the company avoids the retail margin or any additional costs associated with the middleman. These savings can be passed on to the customer. The pattern helps to establish a uniform distribution model and the direct contact enhances customer relationships.
- E-commerce: Online business for transparency and savings. Direct Selling refers to a scenario whereby a company’s products are not sold through an intermediary but are available directly from the manufacturer or service provider. In this way, the company avoids the retail margin or any additional costs associated with the middleman. These savings can be passed on to the customer. The pattern helps to establish a uniform distribution model and the direct contact enhances customer relationships.
- Experience Selling: Products appealing to the emotions. The value of a product or service is increased by an additional customer experience offered with it. This opens the door to higher customer demand and a commensurate increase in the prices charged. The customer experience needs to be adapted accordingly, for example by appropriate promotion or additional shop fittings.
- Flat Rate: ‘All you can eat’ – unlimited consumption at a fixed price. In this model, a single fixed fee is charged for a product or service, regardless of actual usage. The user benefits from a simple cost structure while the company benefits from a constant revenue stream.
- Fractional Ownership: Timeshare makes for efficient usage. Fractional Ownership describes the sharing of a certain asset class among a group of owners. Typically, the asset is capital-intensive but is only required on an occasional basis. While the customer benefits from the owner rights, the entire capital does not have to be provided by him or her alone.
- Franchising: All for one and one for all. The franchisor owns the brand name, products and corporate identity and licenses them to independent franchisees who bear the risk of local operations. Revenue is generated as part of the franchisees’ revenue and orders. The benefit for the franchisee is in the marketing of well-known brands and the availability of know-how and support.
- Freemium: Choosing between free basic and paid premium versions. The basic version of an item is offered for free in the hope of eventually persuading customers to purchase a premium version. The free offering attracts the highest volume of customers possible for the company, while revenue is generated by the (generally smaller) volume of premium customers.
- From Push to Pull: Customers create a value vortex. This pattern describes the strategy of a company to decentralise and thus add flexibility to the company’s processes in order to be more customer-focused. To respond rapidly and flexibly to new customer needs, any part of the value chain – including production or even research and development – may be affected.
- Guaranteed Availability: Assured access to the product. This pattern makes the customer’s needs central to decisions within the enterprise and the shaping of the value proposition. It can be applied to all aspects of the business.
- Hidden Revenue: Seeking alternative sources. The logic that the income of the business depends on the users is abandoned. Instead, the main source of revenue comes from a third party, who cross-finances whatever free or low-priced offering attracts the users. A very common application of this model is financing through advertisements: the customers so attracted are of value to the advertisers, who then fund the offering. This concept facilitates the concept of separation of revenue and customer.
- Ingredient Branding: Brand within a brand. This is the inclusion of a branded ingredient originating from a different supplier into a product. The principal product is then advertised as containing the ingredient product and stressing the added value it brings to the customer. The positive association with the ingredient brand is projected on to the product and increases its attractiveness.
- Integrator: Involvement all the way down the line. A company functioning on the Integrator model has command of the majority of the steps in the value-adding process, including all resources and capabilities in terms of value creation. Efficiency gains, economies of scope and reduced dependency on suppliers result in a decrease in costs and may increase the stability of value creation.
- Layer Player: Benefiting from specialised know-how. A Layer Player is a specialised company limited to providing one value-adding step to different value chains. This step is typically offered within a variety of independent markets and industries. The company benefits from economies of scale and often leads to more efficient production. Furthermore, the established special expertise can result in a higher quality process.
- Leverage Customer Data: Making use of what you know. New value is created by collecting customer data and preparing it in beneficial ways for internal usage or transmission to interested third parties. Revenues are generated by either selling the data directly to others or leveraging them for the company’s own purposes, e.g. to increase the effectiveness of advertising.
- Licensing: Commercialising intellectual property. Here, the efforts are focused on developing intellectual property that can be licensed to other manufacturers. Thus this model relies not on the realisation and utilisation of knowledge in the form of creating products, but attempts to transform these intangible assets into money. Licensing gives a company the freedom to focus on research and development and allows the provision to third parties of knowledge that would otherwise be left unused.
- Lock-in: Forcing loyalty with high switching costs. Here, customers are locked into a vendor’s world of products and services. Transferring custom to another vendor is impossible without incurring substantial switching costs. The Lock-in is effected either by technological mechanisms or a high level of interdependencies of products or services.
- Long Tail: Many a mickle makes a muckle, or little and often fills the purse. Rather than concentration on blockbusters, the main bulk of revenues is generated through a ‘long tail’ of niche products which, individually, neither demand high volumes nor allow a high margin. If a wide variety of these products is offered in sufficient amounts, the profits from the resulting accumulated small sales can add up to a significant amount.
- Make More of It: Multiply competencies outside your core business. Know-how and other assets available in the company are not only used to build its own products, but are also offered to other companies. Thus slack resources are used to create additional revenue besides those generated directly by the company’s core value proposition.
- Mass Customisation: Off the rack individualism. Customising products through mass production once seemed to be an impossible endeavour, but this has now changed with the development of modular products and production systems that enable efficient individualisation of products. As a result, individual customer needs can be met under mass production conditions and at competitive prices.
- No Frills: Whatever, as long as it’s cheap. No Frills value creation focuses on the necessary minimum to deliver the core value proposition of a product or service, which will thus typically be very basic. Cost savings are shared with the customer, usually resulting in a customer base with lower purchasing power or purchasing willingness.
- Open Business: Leverage collaborative value creation. In Open Business models, collaboration with partners in the ecosystem becomes a central source of value creation. Companies pursuing an Open Business model actively search for novel ways of working together with suppliers, customers or complementors to open up and extend their business.
- Open Source: Working together to create a free solution. In Open Source software engineering, the source code of a software product is not proprietary, but is made freely accessible for anyone. Generally, this could be applied to any technological details of any product. Others can contribute to the product, but also use it freely as solely user. Money is typically earned with services that are complimentary to the product, such as consulting and support.
- Orchestrator: Directing the value chain. In this model, the company’s focus is on the core competencies within the value chain. The other segments of the value chain are outsourced and actively coordinated. This allows the company to reduce costs and to benefit from suppliers’ economies of scale. The focus on core competencies can enhance performance.
- Pay Per Use: Pay as you go. In this model, the actual usage of a service or product is metered, that is to say, the customer pays on the basis of what is effectively consumed. In this way the company attracts customers who wish to benefit from the additional flexibility, which might be priced higher.
- Pay What You Want: Whatever it’s worth to you. The buyer pays any desired amount for a given commodity, sometimes even zero. In some cases, a minimum floor price may be set, and/or a suggested price may be indicated as guidance for the buyer. The attraction for the customer is the ability to influence the price, while the seller benefits from a larger number of customers.
- Peer to Peer: Dealing from person to person. This model (often abbreviated as P2P) is based on a cooperation among individuals belonging to an homogeneous group. The organising company offers a meeting point, normally an online database and communication service, which connects these individuals. Examples of transactions are the offering of personal items for rent, provision of certain products or services, or the sharing of information and experiences.
- Performance-based Contracting: Basing fees on results. The price of a product here is based not on its physical value, but on the performance or valuable outcome it delivers in the form of a service. Performance-based contractors are often strongly integrated into the value creation process of their customers. Special expertise and economies of scale result in lower production and maintenance costs, that can be passed on to the customer.
- Razor and Blade: Bait and hook. The basic product is cheap or given away for free, while the consumables are expensive and sold at high margins. The price of the initial product lowers customers’ barriers to purchase, while the subsequent recurring sales cross-finance it. Usually, these products are technologically bound to each other to anchor this effect more firmly.
- Rent Instead of Buy: Pay for the temporary right to use. Here, instead of buying a product, the customer rents it. This reduces the capital typically needed to gain access to the product. The company itself benefits from higher profits on each product, as it is paid for the duration of the rental period. Both parties benefit from greater efficiency in product utilisation, given that time of non-usage, which unnecessarily ties capital down, is reduced.
- Revenue Sharing: Win–win with symbiosis. Revenue Sharing refers to the practice of sharing revenues with one’s stakeholders, such as complementors or even rivals. One party obtains a share of the revenue from another that benefits from the increased value of its customer base.
- Reverse Engineering: Taking lessons from competitors. This pattern refers to obtaining a competitor’s product, taking it apart and using the information obtained to produce a similar or compatible product. Because no great investment in research or development is necessary, these products can be offered at a lower price than the original one.
- Reverse Innovation: Learning from good-enough solutions. Simple inexpensive products that have been developed within and for emerging markets are also sold in industrial countries. The adjective ‘reverse’ here refers to the difference from the usual process whereby new products are developed in industrial countries and adapted to fit emerging market needs.
- Robin Hood: Take from the rich and give to the poor. The same product or service is made available to ‘the rich’ at a much higher price than to ‘the poor’, so that the bulk of the profits are generated from the wealthy customer base. While serving ‘the poor’ is not profitable per se, it creates economies of scale that other providers cannot achieve. Additionally, it has a positive effect on the company’s image.
- Self-service: Putting the customer to work. Part of the value creation of the service or product is transferred to the customer in exchange for a lower price. This is particularly suited for process steps that add relatively little perceived value for the customer, but in fact incur high costs. Customers benefit from efficiency and time savings. Efficiency may even be increased, as in some cases the customer is able to execute a value-adding step more quickly and in a more target-oriented manner than the company.
- Shop in Shop: Piggybacking. Instead of opening new branches, the company finds a partner whose branches can profit from integrating its offerings, resulting in effect in a small shop within another shop (a win–win situation). The hosting store can benefit from a larger number of customers and a constant revenue in the form of rent, while the hosted company gains access to cheaper resources such as space, location or workforce.
- Solution Provider: Finding all you need at the one-stop shop. A Solution Provider offers comprehensive coverage of products and services in a particular domain, consolidated at a single point of contact. Special know-how is provided for the customer to increase efficiency and performance. As a Solution Provider, a company can prevent revenue losses by extending the service it provides and so add value to the product. Additionally, close contact with the customer allows greater insight into customers’ habits and needs, which can be used to improve the products and services.
- Subscription: Taking a season ticket to services. The customer pays a regular fee, typically on a monthly or annual basis, to gain access to a product or service. While customers mostly benefit from lower usage costs and general service availability, the company generates a more steady income stream.
- Supermarket: Large selection and small prices under one roof. A company sells a large variety of readily available products and accessories under one roof. Generally, the assortment of products is large but the prices are kept low. More customers are attracted to the wide range of goods on offer, while economies of scope yield advantages for the company.
- Target the Poor: Customers at the base of the earnings pyramid. Here, the product or service offered targets the customer positioned at the base of the pyramid rather than the premium customer. The customers with lower purchasing power benefit from affordable products. While the company generates small profits with each product sold, it benefits from the higher sales numbers usually associated with the scale of the customer base.
- Trash to Cash: Turning old rubbish into new cash. Used products are collected and either sold in other parts of the world or transformed into new products. The profit scheme is essentially based on low-to-no purchase prices. Resource costs for the company are practically eliminated, while the supplier’s waste disposal is either provided free of charge or with reduced associated costs. This pattern also addresses customers’ potential environmental awareness ideals.
- Two-sided Market: Attracting indirect network effects. A Two-sided Market facilitates interactions between multiple interdependent groups of customers. The value of the platform increases as more groups or individual members of each group use it. The two sides frequently come from disparate groups, for example businesses on the one hand and private interest groups on the other.
- Ultimate Luxury: More for more. This pattern describes the strategy of a company that concentrates on the upper end of society’s pyramid, whereby it can distinguish its products or services strongly from others. High standards of quality or exclusive privileges are the main focus to attract this kind of customers. The investments necessary to achieve differentiations are met by the relatively high prices that can be charged and which generally allow very high margins.
- User Design: The customer as inventive entrepreneur. In this pattern, the customer is both the manufacturer and the consumer. As an example, an online platform provides the customer with the necessary support to design and merchandise the product, e.g. product design software, manufacturing services, or an online shop to sell the product. Thus, the company function is limited to supporting its customers in their undertakings and so benefits from their creativity. The customer benefits from the opportunity to realise entrepreneurial ideas without having to establish the necessary infrastructure. Revenue is then generated by the actual sales.
- White Label: Own brand strategy. A White Label producer allows other companies to distribute its goods under their brand name, which thus appear to be made by them. The same product or service is often sold by multiple marketers under different brands. In this way various customer segments can be satisfied with the same product.