Business Model Innovation is a hot topic today. In its bi-annual CEO study, IBM concluded in 2008 after interviewing 1130 CEOs in 40 countries across 32 industries, that two thirds of the companies are implementing extensive innovations in their companies, especially around their business models.
In the last decade new technology has enabled close to zero cost of reproduction, storage and delivery of everything that can be made digital. It has enabled business model transparency, ways to interact and communicate with external actors, and tools to collaborate and globally distribute innovation and value creation. The increased transparency together with a cultural change, forces companies to not only focus on increasingly demanding customers, but on all affected stakeholders. Companies are bombarded by change, and business models need to be adjusted for companies to keep up. Important to keep in mind is that business models change but economic laws do not. For tips on how to approach business model innovation read 10 Tips on Business Model Innovation.
Three tools for Business Model Innovation
The matrix, that has recieved some great attention, consists of 40 principles developed to solve complex inventive problems on the vertical axis, and 8 business model components on the horizontal axis generating 320 areas for Business Model Innovation.
A systematic approach to identify Business Model Innovation opportunities is to identify the different parameters that can be innovated upon, and the different principles for innovation.
The Business Model Innovation Matrix is based on 40 principles to solve complex problems that were originally developed for technical inventions and published 1969 in the book Algorithm of Inventing, by Genrich Altshuller. The principles were a result of an analysis of 200000 inventions and has become a cornerstone in TRIZ. Now 40 years later the principles has been further developed based on the results of analyzing close to three million inventive solutions in science, arts, politics, engineering and business.
The Business Model Innovation Matrix consists of the 40 principles on the vertical axis and the business model components and the horizontal axis. As there is no dominant and widely accepted definition of the term business model I use the components below to explain the framework. If you prefer another business model template, with other components, you can of course apply the principles of innovation on that model.
Often discussions on Business Model Innovation are limited to the improvement of value propositions. By creating the matrix with the 8 parameters presented below and the 40 Principles of Innovation I have 320 unique areas to generate ideas for Business Model Innovation.
Business Model Components
- Value recipient - Who are we providing value for?
- Value Proposition - What values are we providing?
- Delivery - How are the values delivered?
- Assets, Capabilities & Activities - What internal and external assets, capabilities and activities are needed?
- External Relationships - What forms of external relationships are needed?
- Control Mechanisms - How is the value creation and extraction controlled?
- Benefit and Revenue Model - How are benefits and revenues generated?
- Costs and Harms - What are the costs and harms?
Some combinations of principles and business model components are easier than others and I will exemplify with Principle 1 applied on each of the components presented above.
When using Principle 1 - Segmentation the objective is to divide the business model parameter into independent parts, make the system or objects easy to disassemble or increase the degree of fragmentation or segmentation.
Value recipient
- Can we segment the value recipients into micro-niches?
- Can we go from mass market to mass customization?
- Can we provide value for sub-groups of the value recipient?
Example: Spreadshirt
Design and sell your own t-shirts with a free online shop
Value Proposition
- Can we unbundle value propositions into different parts or modules?
- Can we move from one service level to several different service levels?
Example: RyanAir
You get nothing but the seat in the basic value proposition
Delivery
- Can we deliver the value proposition in parts?
- Can the value recipient be part of the assembly?
Example: IKEA
Providing disassembled furniture for the user to assemble
Assets, Capabilities & Activities
- Can we unbundle important assets, capabilities or activities into several smaller ones?
- Can we more effectively use the unbundled resources?
- Can we improve deployment of individual skills?
- Can we use flexible systems to respond to individual conditions?
Example: P&G
Providing technology and IP to its competitor Clorox instead of launching competing product
External Relationships
- Can we go from one large partnership to several smaller ones?
- Can we go from one organization to a franchise concept?
Example: McDonalds
Probably the world's most famous franchise
Control Mechanisms
- Can we control the value proposition by controlling parts of the value creation or value extraction?
- Can we control the value proposition by controlling the underlying assets, capabilities or activities?
Example: Myriad Genetics
Controlling underlying databases and patents
Benefit and Revenue Model
- Can we divide the object for transaction into smaller parts?
- Can we divide the payments into smaller payments?
Example: American Express
One of the first to create a worldwide credit card network
Costs and Harms
- Can we use temporary workers for the value proposition?
- Can we use short term contracts with external actors?
- Can we distribute costs and harms by diversification?
Example: Goldcorp
The famous GoldCorp Challenge
The basic idea underlying the tool is to identify assets and capabilities that are really valuable and identify how value could be created by combining own and external assets and capabilities into new value propositions.
I have developed a tool I call the Value Proposition Explorer to clarify the space around an originally stated value proposition by broadening or narrowing the scope. The basic idea underlying the tool is to identify assets and capabilities that are really valuable and identify how value could be created by combining own and external assets and capabilities into new value propositions. The outcome of repeating this several times is a hierarchical list of value propositions, from which the company is able to select and assess business opportunities.
The tool should not be mixed with the idea of positioning a company in the right place of a value chain (One-sided business models) but a tool to break free from the value chain thinking. A value proposition can be directed not only to the company's existing customers, but other stakeholders, traditionally not considered to be customers (see Two-sided, Horizontal and Multi-layer business models). A value proposition does not have to be based on developed products and services (even though that is almost always the definition) but what one actor has to offer another actor:
An example
P&G is constantly looking for ways to leverage its assets through its external business development and connect & develop initiatives. Based on the original value proposition of Pampers diapers you now find lots of co-branded or co-commercialized products such as bibsters, wipes, swim pants, underwear and concepts going upwards in the Value Proposition Hierarchy Explorer. At the same time P&G is offering to license technologies and IPR relating to developed odor controlling bio-component film to be used in human contact products, cleaning devices, medical supplies such as bandages and hospital bedding, and even to use the technology in airline cabine space to control odors and smoke.
Finding own, others' or joint value propositions
When searching for valuable assets and capabilities, it is important to not only focus on own business model and industry, but also the potential need of others:
• How can we strengthen own value propositions?
• How can we strengthen others' value propositions?
• How can we create joint value propositions with others?
Ideality is a simple yet powerful tool to generate new ideas for business models. It is a tool that instead of starting from current business model and current value propositions, starts from the theoretical ideal situation.
Ideality is a simple yet powerful tool to generate new ideas for business models. It is a tool that instead of starting from current business model and current value propositions, starts from the theoretical ideal situation. The theoretical ideal situation can be defined as all potential benefits at no costs or other harms. Using Ideality helps you look at the constraints of a business model and creates out of the box ideas. The most common approach is to apply Ideality on value propositions and analyze the ideal value proposition from the value recipients’ perspective. However, Ideality can be used as a tool to improve all business model components.
- Value recipient - Who would be the ideal customer and other value recipients?
- Value Proposition - What would be the ideal value proposition?
- Delivery - How would the values ideally be delivered?
- Assets, Capabilities & Activities - What internal and external assets, capabilities and activities would be ideal?
- External Relationships - What external relationships would be ideal?
- Control Mechanisms - What would be the ideal way to protect value and profits?
- Benefit and Revenue Model - What would be the ideal benefits, and revenue model?
- Costs and Risks - What are all costs and risks that theoretically could be removed?
Ideal for who?
What is ideal for one stakeholder is often not ideal for another. Customers want perfect products and services for free, not to be in a lock-in and get the value delivered instantly while the suppliers want to provide better-than-competition products and services, and make a profit from it. By mapping out what would be ideal for the different stakeholders, contradictions and constraints can be identified. To solve contradictions is a classical way to improve business models. Below an example looking at the value proposition from the customer perspective.
Working backwards
With the ideal situation identified, the next step is to work backwards to something that is achievable. This is carried out by a systematically decreasing benefits and/or increasing costs and harms.
http://bit.ly/3O8V5ub
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