6 years, 8 months ago

Business model innovation: The fifth path

In the Harvard Business Review of July-August 2014, the article “Four paths of business model innovation” by Karan Girotra and Serguei Netessini was published. A very interesting read, especially for managers looking for a framework identifying opportunities to rethink their existing business model.

They describe business model innovation as: At its simplest, it demands neither new technologies nor the creation of brand-new markets: It’s about delivering existing products that are produced by existing technologies to existing markets. And because it often involves changes invisible to the outside world, it can bring advantages that are hard to copy.”

Contrary to the visual, model based approach that is presented by Alexander Osterwalder’s Business Model Canvas, Girotra and Netessini present a set of questions to consider as a manager. According to them, a business model is “essentially a set of key decisions that collectively determine how a business earns its revenue, incurs its costs, and manages its risks. We view innovations to the model as changes to those decisions: what your offerings will be, when decisions are made, who makes them, and why. Successful changes along these dimensions improve the company’s combination of revenue, costs, and risks.”

In this post I will consider Girotra and Netessini’s framework in the context of the Business Model Canvas and discuss the value arising from the differences between these two approaches.

WHAT mix of products or services should you offer?

Business Model Canvas focus for product mix questionsThe first question asked by Girotra and Netessini is about your offering. In terms of the business model canvas this focusses on the Value Proposition or the combination of multiple propositions you offer. Also the Key Resources and Customer Segments are reviewed when answering this question and considering the options presented.

The authors suggest one should consider to Focus narrowly” on a very small set of products and services. Your proposition is clear, you will have a strong focus, and since you will need a relative stable revenue stream, product selection is key. The downside is that you are not fulfilling all customer needs and you will miss potential revenue from related items.

Secondly, the authors suggest to “Search for commonalities across products”. Reusing key resources in the different propositions you bring to the market increases your buying power, lowers risks and improves flexibility.

Thirdly, a “Hedged Portfolio” is an option to consider. Aiming at different markets and/or delivering alternative propositions makes you less vulnerable for fluctuation in demand. You lower the risks in your business model.

WHEN should you make your key decisions?

Business Model Canvas focus for key decision timingThe second question asked by Girotra and Netessini is about timing. Entrepreneurs are used to taking decisions when not all information is available or clear. This brings risks to the table. Time is not an aspect made explicit in the Business Model Canvas. The aspects discussed under the WHEN-questions are mainly related to revenue and costs.

The authors present a series of options. You might be able to “postpone decisions”. E.g. dynamic pricing based on real-time demand information is an important chance to optimize revenue streams. Combining historical customer data, profiling customers and applying predictive analytics is opening new opportunities.

Another option you might want to consider is to “change the order of your decisions”. Is it really necessary that costs are ahead of revenue? Are there opportunities to move fixed costs towards variable costs, lowering capex and risk. If you choose to make your cost structure flexible, the ability to rapidly adapt to changing demand is a challenge you here: Are you able to scale up on time if demands is rising?

By “splitting up key decisions” you move away from a single all-or-nothing decision. In line with the Lean start-up movement, Girotra and Netessini see the upside of pivoting. A step-by-step implementation approach is very helpful in understanding and adjusting your business model quickly.

WHO are the best decision makers?

Business Model Canvas focus for value networksThe third question asked by Girotra and Netessini is about people. Both inside your organization and in the network with customers and suppliers lie opportunities to improve speed and quality of decision making. Although cost and revenue are important to take into account, focus here is on Key Partners, Key Activities and Key Resources.

The authors present a series of options regarding decision makers. First thing to consider is the option to “appoint a better informed decision maker”. Inside your organization you are advised to move decision making to the lowest level possible, where employees are closer to primary business activities. Employee empowerment going back to sociotechnical systems already gave directions to implement this. But even outsourcing decisions to outside the company, where suppliers monitor and adjust the stocks of their customers is an option for some. Here, new possibilities arise from well implemented (Big) Data Management and, again, predictive analytics.

Can you “pass the decision risk to the party that can best manage the consequences”? For instance, can you move inventory costs and risks to your suppliers? In these cases, you need to be able to integrate incentives (see third point under WHY).

An aspect that I found hard to understand is the suggested option to “select the decision maker with the most to gain”. The authors use an example of a value proposition that has proven to be a hard sell. In those cases the seller can consider to lower the risk of the buyer to step in. Maybe you can share the created advantage with the customer (no-cure-no-pay) instead of asking a fixed price? This seems to be an open door and the example is more about pricing instead of decision maker selection.

WHY do key decision makers choose as they do?

Business Model Canvas focus for key decision makingThe fourth question asked by Girotra and Netessini seems to be about the ultimate goal and vision, but it’s not. In this part of the framework, the focus is on the composition of the Value Proposition and the Revenue Streams and again, timing is important.

The authors present a series of options. Can you “change the revenue stream”? Instead of buying or selling a product, you consider what is important for you or your customer to do with the product. You charge for the time the product is used instead of charging for the product itself. This brings opportunities to align incentives in the value network.

By “synchronizing the time horizons” the downsides of traditional competitive bidding rituals can be overcome. Competitive bidding typically gives you low price and moderate quality, and if you are in the game for a longer relation, synchronizing timeframes is a great opportunity. Girotra an Netessini describe how intermediaries can add value here.

Finally, “integrating incentives” for all actors in a value network will benefit outcome for the consumer. In the recent US health reform, all parties involved in a patient’s treatment agreed to measure performance according to the outcome for the patient. From my own practice, a large telecom provider rewarded its main IT-provider on the basis of its own customer satisfaction. No more fining and discussions, but a true partnership!

The focus on risk and time creates a valuable approach

Although one can apply the business model canvas to a network, Girotra and Netessini have a stronger focus on the value network. This helps business managers, innovators and business architects to consider the forces in the network and design a better model for the value chain as a whole and/or the individual business as a part of the network. Risk is a prominent factor in the approach presented by Girotra and Netessini and the process of developing, evolving and implementing the model is a key aspect in the four questions asked. Time is explicitly mentioned in the proposed approach, which is not taken into account in Osterwalder’s business model canvas.

On the other hand, Girotra an Netessini state that their four paths are about existing products, markets and technologies, but in some of their examples new technologies (e.g. dynamic pricing tools for airlines and the Objective Logistics solution making a difference in a Boston restaurant) play a crucial role in fully benefiting from the innovation. The four paths are oriented on optimizing business models, rather than designing a complete new business model.

If you are starting from scratch or you are in pursuit of a disruptive change, the questions that are presented in the Harvard Business Review article will not really help you. But during a creative phase supported with the business model canvas, and before implementing the newly designed model, the proposed questions will be very beneficial to optimizing your model.

The fifth path: Channels and Relations

Girotra an Netessini are not discussing the opportunities arising from innovation in Customer Relations and Channels. This can lead to missing business model innovation opportunities from these particular angles. I suggest adding a fifth path of business model innovation to their approach, with three aspects to consider. With the “open question starters” What, When, Who and Why already addressed, HOW is the logical first word in this suggested add-on:

HOW can we reach and involve customers in our value network?

  • Change and add channels in the different stages of customer interaction;

  • Describe the relations you want with your customer segments;

  • Look at service and interaction as a competitive edge.

In following blog posts I will elaborate on these questions and the considerations arising from them.