Stoyan Tanev - Presentation from the CBS workshop 'Creating Value through Design'.

1. Business Model Design: Discovery, Re-invention & Innovation
Stoyan Tanev, Associate Professor
Department of Technology and Innovation
Faculty of Engineering
University of Southern Denmark
Odense
tan@iti.sdu.dk

2. 2
Agenda
•
Building business models (the Tower of Babel)
•
Business model frameworks
•
(N = 1; R = G) requirements for business innovation
•
Discovery or reinvention and innovation
–
Uncertainty vs risk framework
–
Lean startup approach (discovery)
–
Business model innovation frameworks
•
Risk-driven business models
•
Wide lens approach

3. 3
Building the Tower of Babel
•
A business model has two important functions
–
It must create value within the value chain network
–
it must capture a piece of value for the focal firm in that network
“Building a business model is like building the Tower of Babel”
Alexander Osterwalder
by Pieter Bruegel the Elder (1563)

4. 4
How?
•
How to find or design a business model that is stronger than competitors’ business models?

5. Good question, however …
•
How does the context of questioning influence the answer to the above question?
•
Is there any difference in designing the business models of new startups and existing firms?
•
How about the design of business models associated with new entrepreneurial projects in established firms?
•
Two emerging contexts of questioning
–
Lean startup approach (Blank, HBR, 2013; Ries, 2011)
–
Business model re-invention or innovation (Johnson et al., HBR, 2008; Johnson, 2010; Girotra & Netessine, 2014)
–
Temporal aspect of the distinction
5

6. 6
Business model frameworks
•
Provide logic of how to reach profitability as well as structure and language to talk about it
•
Go beyond idle talk
•
Help build products for which customers pay
•
Used to systematically describe, challenge, design, validate, test or invent ways to make money
•
Aim to be intuitive, yet comprehensive enough to capture the nuances of business operations

7. TIMG 5002 7
Four business model frameworks
Four-box framework:
Seizing the White Space
Six-function framework:
Open Innovation
Nine building blocks:
Business Model Canvas
Four-factor framework:
Business Model Discovery
Johnson, 2010
Chesbrough & Rosenbloom, 2002
Osterwalder & Pigneur, 2010
Muegge, 2012
http://www.timreview.ca/article/545
1) Customer value proposition
2) Profit formula
3) Key resources
4) Key processes
1) Value proposition
2) Market segment
3) Value chain
4) Cost structure/profit potential
5) Value network
6) Competitive strategy
1) Customer segments
2) Value propositions
3) Channels
4) Customer relationships
5) Revenue streams
6) Key resources
7) Key activities
8) Key partnerships
9) Cost structure
1) Importance (pain point)
2) Stakeholder value propositions
3) Profit formula
4) Capabilities (these include resources and processes)

8. Nenonen & Storbacka framework (2010)
8
Design principles
Resources
Capabilities
Market
Market & customer definition
•market definition
•firm’s market position
•market or channel strategy
•target customers
•market segmentation
Customers and brands
Market and customer management
•market making and shaping
•sales and account management
•customer experience management
•customer relationship management
•customer service management
Offering
Offering design
•offering components
•offering configurations Earnings logic
•profit from its operations
•pricing logic
•cost & asset structure
Technology
•Intellectual property rights
Offering management
•product/service development
•product/category management
•R&D
Operations
Operations design
•Make-or-buy decisions
•Modularity of production processes
Firm’s infrastructure
•physical & ICT
•geographical coverage Suppliers and partners
•raw material suppliers
•channel / research / production partners
Sourcing, production & delivery
•Supply chain management
•Manufacturing and assembly
•Management of the delivery channel
•Invoicing of delivered offerings
Management
Management system
•organizational structure
•roles and responsibilities
•remuneration
Human and financial resources
•Future competence supply
Management and leadership
•planning and control processes
•human resource development
•firm’s strategy process

9. Nenonen & Storbacka framework (2010)
9
Design principles
Resources
Capabilities
Market
Market & customer definition
•market definition
•firm’s market position
•market or channel strategy
•target customers
•market segmentation
Customers and brands
Market and customer management
•market making and shaping
•sales and account management
•customer experience management
•customer relationship management
•customer service management
Offering
Offering design
•offering components
•offering configurations Earnings logic
•profit from its operations
•pricing logic
•cost & asset structure
Technology
•Intellectual property rights
Offering management
•product/service development
•product/category management
•R&D
Operations
Operations design
•Make-or-buy decisions
•Modularity of production processes
Firm’s infrastructure
•physical & ICT
•geographical coverage Suppliers and partners
•raw material suppliers
•channel / research / production partners
Sourcing, production & delivery
•Supply chain management
•Manufacturing and assembly
•Management of the delivery channel
•Invoicing of delivered offerings
Management
Management system
•organizational structure
•roles and responsibilities
•remuneration
Human and financial resources
•Future competence supply
Management and leadership
•planning and control processes
•human resource development
•firm’s strategy process

10. Is there a best BM framework?
•
The one that can help you best in conceptualizing your business context
•
There is no business model framework fatalism
–
No single best framework the adoption of which would predefine the success of a business case
•
Nenonen & Storbacka (2010) argue for the importance of
–
Internal configurational fit of the business model elements
–
External configurational fit of the busines model to the business models of the partners
–
Independently of the business model framework
•
The application of one and the same business model framework can lead to different performance depending on the degree of configurational fit
10

11. A new context for business model design
•
Value is based on unique, personalized experiences of consumers
–
focus on one consumer experience at a time, even if serving 100 million consumers
–
(N = 1) pillar
•
No firm is big enough in scope and size to satisfy the experiences of one consumer at a time
–
access to global resources from a wide variety of other big and small firms
–
(R = G) pillar
11
Prahalad & Krishnan, The New Age of Innovation, 2008

12. The new house of innovation 12
Prahalad & Krishnan, The New Age of Innovation, 2008

13. (N = 1; R = G) framework for capability building
13
Prahalad & Krishnan, The New Age of Innovation, 2008

14. Business model evolution dynamics
14
Prahalad & Krishnan, The New Age of Innovation, 2008

15. Approaching business model innovation 15
Prahalad & Krishnan, The New Age of Innovation, 2008

16. Uncertainty vs risk framework
16
UNCERTAINTY
RISK
Technology uncertainty:
•
Whether the product functions as promised
•
meeting the delivery time-table
•
the vendor provides quality service
•
product side-effects
•
technology makes the existing one obsolete
Market uncertainty:
•
What are the needs to be met by the technology
•
how these needs would change
•
adoption of industry standards
•
speed of innovation
•
market size
Competitive uncertainty:
•
Newly emerging competitors;
•
new competitive product offerings;
•
new ways and tools used by others to compete
Execution risk
Co-innovation risk
Adoption chain risk
Adner, 2012
Yadav, Swami & Pal, Vikalpa 31(2), 57-74, 2006
Tanev & Rasmussen (2014)
Global operations uncertainty

17. Lean startup business model discovery
•
An entrepreneur is someone who turns uncertainties into risks
•
“Lean startups are human institutions designed to create new products and services under conditions of extreme uncertainty” - (Ries, 2011)
•
“A temporary organization designed to search for a repeatable and scalable business model” - Blank (2013)
•
Lean: “the biggest waste is creating a product or service that nobody needs”

18. Lean start-up principles http://theleanstartup.com/principles

19. Lean start-up principles http://theleanstartup.com/principles

20. Lean start-up principles http://theleanstartup.com/principles

21. How does lean relate to global? Lean Global Startup Approach?
•
Lean Global Startup – Tanev & Rasmussen (2014)
•
The lean start-up approach is inherently related to the relational / global business aspects of a new firm
–
Choosing the operational focus, activities, internal resources, capabilities and assets it is best at
–
Looking for complementary external resources and partnerships to complement the internal ones
•
Emergent nature of business model formulation
•
Early iternationalization challenges
–
Relevance of location in the business model – Onetti (2012)
•
Effectuation entrepreneurial approach – Sarasvathy (2001)
–
Technology business environments enhance the convergence of lean and global uncertainty issues
–
Explicit link between effectuation and born global firms
Andersson (2011)

22. 22
Slide 22
Steps to find a business model that is stronger than competitors’ models
(1) State assertions
(2) Validate assertions
(3) Learn
(1) State assertions
(2) Validate assertions
(3) Learn
Persevere
Pivot
Persevere
Pivot

23. 23
Use assertions as a driver
•
An assertion is a cause-effect statement about what a startup will do and what will happen as a result
–
“If startup does this, then this result will happen”
•
Examples
–
Value propositions for key stakeholders
–
Target customers who are most willing to pay
–
Growth formula
•
Each assertion is an untested hypothesis about how the startup will make money in a better way than competitors
•
As soon as feasible, build a minimum viable product (MVP) to test assertions

24. 24
Slide 24
Include minimum viable product in test process as soon as it is feasible
•
The minimum viable product (MVP) is that version of the product that enables the maximum amount of validated learning with the minimum amount of effort and the least amount of development time (Ries, 2011, p. 77).
•Build MVP that incorporates assertions: validated already and new ones

25. 25
Slide 25
Persevere or pivot
•
If logic is working, persevere with a new iteration that either refines assertions (by making changes) or emphasizes some of them (if the assertion is validated “as is”)
•
If the ideas are not working, pivot to a new logic with different assertions

26. 26
Slide 26
From prototypes to “awesome” products
•
Theoretical prototype
–
Expresses your idea as a well-structured mental image in which you outline the general shape of the solution
•
Virtual prototype
–
If I had to sell the solution today, how could I fake it in a way that feels realistic?
•
Minimum viable prototype (not product?)
–
A product having the minimum feature set required to work as a stand alone product while still solving a core problem
•
Minimum awesome product
–
A product that customers can not resist, a product that customers love, a product that is awesome
Furr & Dyer, 2014

27. Risk-driven business model innovation
•
Two major types of risk in business models
–
Information risks
•
A feature of the business model that requires to make decision without sufficient information
–
Incentive alignment risks
•
Risks arising when the incetives imposed by an emerging business model lead to actions that clash with the broader interests of a value chain
•
Four types of interventions that could enhance a business model by changing the
–
What, When, Who, Why (4Ws)
–
Link between operations management and BM literature
Girorta & Netessine, 2014

28. Business model innovation matrix
28
What
When
Who
Why
Select focused vs flexible business model
Delay decisions as much as possible
Transfer decision to best informed players
Change the profit or revenue streams to align incentives
Change the scope of decisions
Change the sequence of decisions
Tranfer decison rights to the party best able to tolerate the consequences
Synchronize the differing time horizons
Hedge or complement decisions with each other
Split decisions to obtain partial information before the decision is completed
Move the consequences (costs) of the decision to the arty that benefits the most
Pursue a strategy of vertical integration

29. A narrow lens leads to hidden traps
29

30. A wide lens: seeing the hidden traps
•
An ecosystem view uncovers hidden traps
•
Two distinct types of risk
–
Co-innovation risk
–
Adoption chain risk
30
Ron Adner, The Wide lens, 2012

31. Innovation risk framework
Ron Adner, The Wide lens, 2012

32. From value propositions to value blueprints
32
Ron Adner, The Wide lens, 2012

33. Sony reader value blueprint
33
Ron Adner, The Wide lens, 2012

34. Value blueprint for Amazon’s Kindle
34
Ron Adner, The Wide lens, 2012

35. 5 Levers of Ecosystem Reconfiguration
35
Ron Adner, The Wide lens, 2012

36. Better place: Ecostystem Reconfigured
Separate:
Car from the battery
Combine:
Battery + charging infrastructure + software
Relocate:
The company manages transactions with power providers
Add:
Battery switch stations + energy management system
Subtract:
Eliminates the need for a smart grid infrastructure to solve overload problems.
36
Ron Adner, The Wide lens, 2012

37. Principles for sequencing the successful construction of ecosystems
•
Minimum Viable Ecosystem (MVE)
–
the smallest configuration of elements that can be brought together and still create unique commercial value
•
Staged Expansion
–
the order in which additional elements can be added to the MVE so that
•
each new element benefits from the system already in place
•
each new element increases the value creation potential for the subsequent element to be added
•
Ecosystem Carryover
–
the process of leveraging elements that were developed in the construction of one ecosystem to enable the construction of a second ecosystem
37
Ron Adner, The Wide lens, 2012

38. Apple iPod’s staged path from MVE
38
Ron Adner, The Wide lens, 2012

39. Conclusions
39