EA Voices

Business Model Innovation: follow the customer, or others will!

Investing in the channel innovation, aligned with the customer relation you aspire, is crucial to come and/or stay in the picture of your intended audiences. We underlined this in the blog post in which I reviewed the HBR-article on Four paths of business model innovation. In this blog post we look into the specific case of channel innovation in fast food, were middle man pop-up to deliver chain restaurant food to homes.

Channel innovation in fast food in The Netherlands

Recently a video on Ring ‘n Bring (in Dutch) caught my attention. They deliver products from fast-food chains like Burger King, McDonalds and KFC. They have no official relation with these companies, but just stand in line like everyone else, place the order of their customer, check, pack and deliver. They also have an on demand button, by means of which you can send  Ring ‘n Bring to any other restaurant you like and let them place your order. Next to the website, they communicate with customers via email, telephone and WhatsApp.

For McDonalds in The Netherlands it is challenging to deal with this new player. On the one hand, this is an extra channel to the market, but on the other hand,  it is a channel they cannot control very well.  McDonalds decided to give this entrepreneur a hard time by making him stop using their name and logo. Not very successful, since “Donald’s Place” is still easily recognizable for any customer. Furthermore, Ring ‘n Bring employees are hard to distinguish from any other person waiting in the line for their orders to be taken.

Channel innovation in fast food in the UK

In the UK, ‘Munchie Man’ Paul Appleby is running a similar concept and seems to be successful.

And also in the UK the fast food chains are not welcoming the new revenue stream with open arms, using arguments on the usage of the brand and trade name and stating doubts about the food quality, without giving proper recommendations or setting requirements for storing and transporting their food.

Channel innovation in fast food in the Philippines

McDonalds in Europe should (an probably is) considering the options to react to the underlying customer needs that make these services pop-up. Delivering BigMacs is very common in for instance The Philippines, where ‘McDelivery’ is a success since 2005, run by McDonalds Philippines. This neutralizes their arguments about food quality and safety regarding delivery services in the Netherlands and the UK. (Or are health and quality standards of Philippians lower?)

Channel innovation is business model innovation

Channel innovations are relatively easy to implement, compared to product innovations and customer innovations. Channels are changing fast and customers are switching channels faster than McDonalds can open new restaurants. Fast food restaurants need very clear insight in the reasons why people are going to their restaurants. The fact that these delivery services pop-up and are successful underlines that a large group of (young) customers is not willing to move themselves in the direction of the food they want, and that they expect the food to move in their direction, whenever and wherever they are. There are clear parallels with how the music and movie industry reacted to channel innovation disrupting their business models. (What will a Spotify for fast food look like?? Is there a market for a subscription to unlimited amounts of fast food from any restaurant?)

If companies are not able to deliver against changed expectations, they will lose a group of customers to any other company that ís. Business model innovations, including the introduction of new channels, are hard to handle by existing (large) companies, but they just cannot be ignored in this era of ever-changing (digital) demands.

For McDonalds, it is a challenge to integrate delivery into their franchise formula. How will franchisees survive when the revenue is moving from their stores or restaurants, to the central website? They should be able to crack this nut, as many delivery oriented (pizza) chains are franchise models. But the McDonalds business model is not only about franchising, but also about renting locations. This part is at serious risk, or at least is changing. Expensive, visible locations are less of a differentiator when delivering the food.

‘McDelivery’ is working in the Philippines, so why push back in Europe? The challenge is known to the McDonalds organization, since I couldn’t have state it better than Ray Kroc on the McDonalds Philippines website. But “The right place at the right time” is defined only by your customers!

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Until quite recently, IT security was the exclusive domain of security specialists. However, in the last couple of years, organizations have started to realize that IT-related risks cannot be seen in isolation, and should be considered as an integral part of Enterprise Risk and Security Management (ERSM). ERSM includes methods and techniques used by organizations to manage all types of risks related to the achievements of their objectives.

It is only natural to place ERSM in the context of Enterprise Architecture (EA), which provides a holistic view on the structure and design of the organization. Therefore, it is not surprising that EA methods such as TOGAF include chapters on risk and security (although the integration of these topics in the overall approach is still open for improvement), and a security framework such as SABSA shows a remarkable similarity to the Zachman framework for EA. And as a corollary, it also makes perfect sense to use the ArchiMate language to model risk and security aspects.

The previous blog post in this series outlined a method for EA-based ERSM with ArchiMate. This article proposes an initial mapping of risk and security concepts to ArchiMate concepts, and illustrates how these concepts can be used as a basis for performing an organization-wide risk assessment.

ArchiMate mapping of risk concepts

Most of the concepts used in ERSM standards and frameworks can easily be mapped to existing ArchiMate concepts. And since ERSM is concerned with risks related to the achievement of business objectives, these are primarily concepts from the motivation extension. 

• Any core element represented in the architecture can be an asset, i.e., something of value susceptible to loss that the organization wants to protect. These assets may have vulnerabilities, which may make them the target of attack or accidental loss.

• A threat may result in threat events, targeting the vulnerabilities of assets, and may have an associated threat agent, i.e., an actor or component that (intentionally or unintentionally) causes the threat. Depending on the threat capability and vulnerability, the occurrence of a threat event may or may not lead to a loss event.

• Risk is a (qualitative or quantitative) assessment of probable loss, in terms of the loss event frequency and the probable loss magnitude (informally, ‘likelihood times impact’).

• Based on the outcome of a risk assessment, we may decide to either accept the risk, or set control objectives (i.e., high-level security requirements) to mitigate the risk, leading to requirements for control measures. The selection of control measures may be guided by predefined security principles. These control measures are realized by any set of core elements, such as business process (e.g., a risk management process), application services (e.g., an authentication service) or nodes (e.g., a firewall).

ArchiMate mapping of risk concepts

Using one of the extension mechanisms as described in the ArchiMate standard, risk-related attributes can be assigned to these concepts. The Factor Analysis of Information Risk (FAIR) taxonomy, adopted by The Open Group, provides a good starting point for this.

Qualitative risk assessment

If sufficiently accurate estimates of the input values are available, quantitative risk analysis provides the most reliable basis for risk-based decision making. However, in practice, these estimates are often difficult to obtain. Therefore, FAIR proposes a risk assessment based on qualitative (ordinal) measures, e.g., threat capability ranging from ‘very low’ to ‘very high’, and risk ranging from ‘low’ to ‘critical’. The following picture shows how these values can be linked to elements in an ArchiMate model, and how they can be visualized in ‘heat maps’:

• The level of vulnerability (Vuln) depends on the threat capability (TCap) and the control strength (CS). Applying control measures with a high control strength reduces the vulnerability level.

• The loss event frequency (LEF) depends on both the threat event frequency (TEF) and the level of vulnerability. A higher vulnerability increases the probability that a threat event will trigger a loss event.

• The level of risk is determined by the loss event frequency and the probable loss magnitude (PLM). 

Qualitative risk assessment

The example below shows a simple application of such an assessment. A vulnerability scan of the payment system of an insurance company has shown that the encryption level of transmitted payment data is low (e.g., due to an outdated version of the used encryption protocol). This enables a man-in-the-middle attack, in which an attacker may modify the data to make unauthorized payments, e.g., by changing the receiving bank account. For a hacker with medium skills (medium threat capability) and no additional control measures, this leads to a very high vulnerability (according to the vulnerability matrix above). Assuming a low threat event frequency (e.g., on average one attempted attack per month), according to the loss event frequency matrix, the expected loss event frequency is also low. Finally, assuming a high probable loss magnitude, the resulting level of risk is high. As a preventive measure, a stronger encryption protocol may be applied. By modifying the parameters, it can be shown that increasing the control strength to ‘high’ or ‘very high’, the residual risk can be reduced to medium. Further reduction of this risk would require other measures, e.g., measures to limit the probable loss magnitude.

Risk analysis example

By linking risk-related properties to ArchiMate concepts, risk analysis can be automated with the help of a modeling tool. In this way, it becomes easy to analyze the impact of changes in these values throughout the organization, as well as the effect of potential control measures to mitigate the risks. For example, the business impact of risks caused by vulnerabilities in IT systems or infrastructure can be visualized in a way that optimally supports security decisions made by managers.

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?

The 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?

The 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?

The 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?

The 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.