This is the second part of a lecture I gave at Leuphana University Lüneburg in spring 2009

1. Managing Growth by Business Model Innovation
2nd-4th Session, Dr. oec. (HSG) Patrick Stähler
May 8-9th, 2009

2. Agenda
The deep fall of the music industry
The Pandesic Case or why elephants can’t dance
Some theory on
Financial measurements and strategy, the resource allocation process
Hidden flaws in strategy making
Starting points for business model innovation or is everything already invented?
Customer insights
Case: The undergarment industry
Value vs. architectural vs. revenue model innovation
Beware of the customer
What makes up a good strategy?
Dr. Patrick Stähler. Leuphana University Lüneburg 1

3. The deep fall of the music
(medium) industry

4. The bigger the capacity of the carrier medium became…
Longplay record Music CD iPod Shuffle
1000 min
45 min 74 min
Dr. Patrick Stähler. Leuphana University Lüneburg 3

5. …the worse the situation for the music industry got
Sales Music Media Industry global
in Bn. $ (1999-2007)
41 40 40
40 37
34 35
33
32
30
30
20
10
0
1999 2000 2001 2002 2003 2004 2005 2006 2007
Dr. Patrick Stähler. Leuphana University Lüneburg Source: www.musikindustrie.de 4

6. Guilty for the decline of the music industry were always the others, in
particular their best customers
Dr. Patrick Stähler. Leuphana University Lüneburg 5

7. The industry did what they knew best: More of the Same: More offerings
and fighting music lovers
Dr. Patrick Stähler. Leuphana University Lüneburg 6

8. Business model innovation come from outside the industry
Dr. Patrick Stähler. Leuphana University Lüneburg 7

9. The Pandesic Case: Analyze the case and give answers to
the following questions
Would you have invested in Pandesic at the beginning?
How were the market conditions for the new venture?
Were the right competencies at work at Pandesic? Were Intel & SAP the
right partners?
Make a short SWOT analysis of Pandesic
What did go wrong at Pandesic?
Dr. Patrick Stähler. Leuphana University Lüneburg 8

10. How did Pandesic end up like this?
The internet was seen as a sustaining
technology. They used well tested
management techniques from their
successful multinational mother
companies for a startup company and
failed miserably

11. Ok, let’s do an autopsy and find
out what went wrong?
- channels
- product development
- executive team

12. OK, let’s do some analytics
and theory

13. 1 2
40% gross 23% gross
profit profit
* You are in the same industry under the same
rules of competition
Dr. Patrick Stähler. Leuphana University Lüneburg 12

14. Think more about ROI not just sales margin, but be aware of what the
total assets are
Profit
ROI =
TotalAssets
ROI = ProfitMargin × AssetTurnover
NetIncome Sales
ROI = ×
Sales TotalAssets
Dr. Patrick Stähler. Leuphana University Lüneburg 13

15. Both cases have approx. the same profitability
1 = Department stores 2 = discounters
NetIncome Sales
ROI = ×
Sales TotalAssets
ROCII1 = 40% × 3 = 120% ROCII 2 = 23% × 5.5 = 126.5%
Figures are taken from Christensen, Raynor
Dr. Patrick Stähler. Leuphana University Lüneburg (2003), The innovator‘s solution, p. 106 14

16. Ok, let’s assume we are this
turkey here. Let’s call him
Joey
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17. Joey is a good student. He
learned that analytics will
help him to become a better
turkey.
Dr. Patrick Stähler. Leuphana University Lüneburg 16

18. So he introduces his well-being index that increases by the day since his
owner treats him so well…..
Joey’s confidence level that he lives in paradise
8
7
6
5
4
3
2
1
0
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19. Dr. Patrick Stähler. Leuphana University Lüneburg 18

20. Ok, I understand,
you think he is just
a turkey.
But think what you
usually do in
market analysis!
Dr. Patrick Stähler. Leuphana University Lüneburg 19

21. We have a view of the world of what made
us and our firm successful
Most assumptions are tacit
and unspoken
These assumptions help us
in normal circumstances very
well!
Dr. Patrick Stähler. Leuphana University Lüneburg 20

22. Our mental model our perception of our world. In a firm a dominant logic
of how things ought to be done exist
Market
reports
Customer
Feedback
Competitor
Analysis
Domiant logic of the firm
resides in the people
gets stronger with success
filters information
helps to get things done with out too
much coordination
gets strengthens by knowledge
The world according management, best practice and
to our firm benchmarking
is extremly important in a world of
sustaining innovations, but an impediment
to disruptive innovations
Dr. Patrick Stähler. Leuphana University Lüneburg 21

23. Hidden flaws in strategy making
Hidden flaws in strategy making
We believe that with analytical tools
of the past we can foresee the
future! For a sustaining world we
have the right tools! Lüneburg
Dr. Patrick Stähler. Leuphana University 22

24. Hidden flaws in strategy making
Typical flaws Our successful human rationality
Overconfindence in our our Our decision process is well suited
capabilities and in our ability to judge for normal environments
the future
The status quo bias: What we know Bounded rationality: impossible
to analyse all facts
can we analyze better and we love the
present Ecological rationality Mental
Ancoring: shortcuts to reach a quick decision
The double-sided sunk-cost problem that are good enough in normal
situations
The herding instinct: What the
others do can‘t be wrong! One reason Preference to be exactly wrong to
for Me-too Strategies. vaguely right
False consensus: confirmation bias,
selective recall, group thinking
Dr. Patrick Stähler. Leuphana University Lüneburg 23

25. Better management leads to
disaster in disruptive times:
Financial tools are great but be aware of Thelimitations of the tools
the better a company is managed
for sustaining innovations the less
capable it is to confront disruptive
innovations.

26. Disruptive technologies are disruptive because in first sight they look so
innocent
Initially, disruptive technologies do not attempt to bring better products to
established customers in existing markets.
They disrupt and redefine trajectories by introducing products and services that are
not as good as currently available products,
but have additional features that appeal to different market segment such as
reduced size, weight, complexity and lower power consumption.
Disruptive technologies emerge and progress on their own, uniquely defined
trajectories.
Particularly low-end disruption become better over time so they can serve the
most demanding customers as well and thereby replace the traditional technology
as well
based on: provenmodels.com and the Innovator's dilemma by Clayton M.
Christensen and the innovators solution by Clayton M. Christensen and Michael E.
Raynor
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27. IsEVERY
THINGalready
invented?

28. Well, let‘s start with something very mature – the tea bag
50 years old and
mature
Competition via the
form of the bag to
provide better taste
Dr. Patrick Stähler. Leuphana University Lüneburg 27

29. Is everything already invented? – Nope, even mature things can
be optimized when looking through the customers‘ eyes at the job
to be done
Tetley invented the drip-less
tea bag
It solved easily the everyday
problem of dripping
Result: premium of 13% over
regular tea (at Migros)
Dr. Patrick Stähler. Leuphana University Lüneburg 28

30. That’s how the firms
see their products

31. And that is reality
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32. Again some theory

33. Disruption can come from the low end of the market or from
nonconsumption
sustaining technology
bringing a better product into
an established market
most demanding
different measure of performance
performance customers
least demanding
customers low end disruption
addressing overserved customers
with a low cost business model
time
new market disruption
compete against nonconsumption
time
based on: the Innovator's dilemma by Clayton M. Christensen and the innovators solution by Clayton M.
Christensen and Michael E. Raynor, slide taken from provenmodels.com
Dr. Patrick Stähler. Leuphana University Lüneburg 32

34. If you are in a market
for giants...

35. .. and you play with
their rules you will get
nowhere…

36. „…but if you can create your own
rules of engagement than you
can compete even in a market
for giants. “
Dr. Patrick Stähler. Leuphana University Lüneburg 35

37. There is not just one strategy at a corporation
Questions:
Capital market
Which companies should I own?
owner strategy
In what businesses / markets
corporate strategy should I invest inside the
corporation?
What is the right business
business
strategy business strategy model to succeed?
category How should I structure my
category strategy
Customers
strategy offering?
product How should I manage this
… …
strategy product?
That‘s where business
model innovation start!
start!
Dr. Patrick Stähler. Leuphana University Lüneburg 36

38. The definition of a
business model Value Proposition
What value do we create
for our customers and for other
stakeholders?
Value Architecture
How do we create the value?
Revenue Model
How do we earn money?
Dr. Patrick Stähler. Leuphana University Lüneburg 37

39. Business model innovation
1. Value Innovation
(We offer a better value proposition for an
existing or new problem)
2. Architectural innovation
(We reconfigure the value chain so that a
better value proposition emerges)
3. Revenue model innovation
(We change the revenue mix and thereby
creating a better value proposition)

40. Where do we get a Value Innovation from? Let‘s find new customer
insights as a starting point
Customers’
insight
New value
proposition
Business model
innovation
Dr. Patrick Stähler. Leuphana University Lüneburg 39

41. „How can we find
customer insights? “
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42. „How about focus groups?“
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43. How can we find systematically new customer insights?
Buyer Utility Map
Delivery/ Comple-
Buy Usage Service Disposal
Assembly ments
Understand how the customers are How can we improve the buyer‘s utility
buying, using and disposing the product cycle?
Understand the whole lifecycle of Can we do more for the customer?
customers‘ utility Can we leave something to the
customer?
Dr. Patrick Stähler. Leuphana University Lüneburg Source: cp. Kim, W.C., Mauborgne, R., Knowing a Winning 42
Business Idea when you see one, HBR Sep-Oct. 2000

44. Where can I start in the buyer utility map? –
The Dyson Vacuum Cleaner
Starting
Buy Delivery Use Complements Service Disposal
Points
Customer
Productivity
Simplicity
Usability
++
Risk
Image &
fun
Enviromental
friendlyness
Dr. Patrick Stähler. Leuphana University Lüneburg 43

45. Blacksocks – We solve the world from its socks problems
Socks subscription
(2001-2008) Customer Insight
40'000 Buying socks is no fun
40'000
Putting socks in pairs even less
20% market share fun
in Switzerland* Good socks are a sign of „Being
well dressed“
30'000
25'000 Value Proposition
Blacksocks subscription solves
all problems
20'000 Always enough new socks
No pairing needed since all
socks are identical
12'000
10'000 Revenue Model
10'000 Upfront payment
Easy planning and negative
working capital
0
2001 2002 2005 2008
•* premium segment starting at 9CHF
Dr. Patrick Stähler. Leuphana University Lüneburg 44

46. Blacksocks – we save the world from socks problems
Putting
Starting Buy Delivery Use Washing Disposal
in pairs
Points
Customer
Productivity
Simplicity
Usability
Risk
Image &
fun
Enviromental
friendlyness
Dr. Patrick Stähler. Leuphana University Lüneburg 45

47. Dell – the classical business model innovator
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48. IKEA – democratic design
IKEA outsourced two value activities
(assembly and transport) to its customers
Thereby, it can offer substantially lower prices
for good design
Is this everything?
Think about the value
proposition and the
production economics!
Dr. Patrick Stähler. Leuphana University Lüneburg 47

49. Revenue model innovation – the forgotten business model innovation
type
Find new sources of revenue (Gratis-Zeitungen
are financed by advertising, always the prime
source of income for newspapers)
Let the same customer pay but differently
(postpaid vs. prepaid, bring the financing of the
deal along (GE Capital), single sale vs.
subscription (blacksocks)
Revenue model innovation change the economics
of a business. With an upfront subscription
payment the working capital is negative. Your
customer finances you
Dr. Patrick Stähler. Leuphana University Lüneburg 48

50. The strategy canvas of Bosch IXO: A clear profile of the value innovation
6 Traditional brands No-Name Bosch
5
4
3
2
1
0
-1
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51. Where does the value innovation of Bosch start?
Eliminate – Reduce – Create – Raise Matrix
Eliminate Create
technology talk • easy of use
• fun
Differentiation
cost reduction
• inspiring people
Reduce Raise
• performance • price
• heavy duty • home decoration
• men, muscle & sweat
Dr. Patrick Stähler. Leuphana University Lüneburg 50

52. Very business model innovation must have in the end a higher customer
utility
Customer
utility
customer
+ value
price
company
+ profit
costs
Dr. Patrick Stähler. Leuphana University Lüneburg 51

53. Beware of your existing
customers. They want
More-of-the-Same-for-
Less!
Dr. Patrick Stähler. Leuphana University Lüneburg

54. But also it takes time to
find new customers and
teach them the advantages
of your solution Dr.
Patrick
Stähler |
53

55. Even innovations that are self-evident & have no competition do not
diffuse easily. The example of lemon juice and the British Navy
Discovery that lemon juice prevents
scurvy in 1601
146 years
Confirmation of the results
1747
48 years
Introduction to the Navy
1795
70 years
Introduction to the Merchant navy
1865
Dr. Patrick Stähler. Leuphana University Lüneburg Source: Mosteller, 1981 cited in Rogers, 1995 54

56. Business model innovation demands often new consumer
behavior. Learning takes TIME and a GOOD REASON to do so!
Have you ever thought of, how
much knowledge consumer
have about the consumption
process?
Most consumer knowledge is
learned via from other peers
To implement a new business
model in the heads of the
consumer takes time!
Dr. Patrick Stähler. Leuphana University Lüneburg 55

57. What are the variables determining the rate of adoption of a business
model innovation?
1. Perceived Attributes of Innovations
• Relative advantage
• Compatability with existing knowledge 4. Nature of the Social System
• Complexity • Degree of network interconnectedness
• Consumer Knowledge • Norms
• Trialability
• Observability
Rate of Adoption of
Business model innovation
3. Communication Channels
2. Type of Innovation-Decision • Mass media
• Optional • Interpersonal (Word-of-Mouth)
• Collective
• Authority
Source: cp. Rogers,(1995), The Diffusion of
Dr. Patrick Stähler. Leuphana University Lüneburg Innovation, p.207 56

58. The adoption of a business model innovation is a long and cumbersome
process. Each customer has to go through all five phases
Knowledge Perception Decision Implementation Confirmation
• Do I know • What is my • Shall I decide • Shall I use it? • Does the
about the perception? to buy it? product fulfill
innovation • Positive? the value
Negative? proposition?
failure failure failure failure failure
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59. The S-curve is just the curve for successful innovations,
but most fail
diffusion
time
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60. Could you build up Tchibos business model from scratch?
Probably not!
Coffee Coffee plus Non-food 14 days Weekly world
program of goods
products
• 1950 • 15 • 9 years • 12 • 9 years
years years
Dr. Patrick Stähler. Leuphana University Lüneburg Source: Tchibo Website 59

61. Beware of your customer!
Customers can seldom image products that they do not know
Normal customers if asked want More for Less of what the industry is
already offering
Most demanding customers are great for finding sustaining
innovations but a threat for disruptive innovations
Traditional market research does not discover new demands. Market
research is a reason for strategy convergence
Most business model innovation come from the supplier side.
Thinking in Jobs-to-be-done helps to find new not solved customer
insights
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62. What makes up a good business model innovation or any good strategy?
Differentiation Focus
Trend
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63. It’s about finding the
right trend to surf!

64. It is about differentiation
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65. „Business model innovation is
about being
DIFFERENT!“
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66. NO, REALLY DIFFERENT!
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67. Dr.
Patrick
Stähler |
66

68. Dr.
Patrick
Stähler |
67