FT.com: Business Model Innovation


This article by Dr. Oliver Gassman was so spot on, we just had to share it….. A very precise, brief explanation of business model innovation. Thanks FT.com! 

The danger in missing the innovation moment

Companies fail to identify future opportunities because they do not have fresh business models

Have you ever wondered why hyper-successful companies like Nokia or Kodak suddenly lose their edge? How companies such as Commodore Computers, Grundig, Nakamichi, Newsweek or Polaroid could possibly fail?

They all had abundant research and development resources, top employees and a profound knowledge of their markets. But they had another thing in common: they all missed the moment when they should have left their successful path to rethink their business models. They missed out on radical innovation because they were too busy managing daily business and serving current clients – instead of looking for future opportunities.



It seems the business model

Products and companies do not differentiate winners from losers; it is the right business models that do. Of BCG’s 25 most innovative companies in 2013, 14 are business model innovators. For example, Apple became the biggest music retail seller without selling one CD; Netflix reinvented the video business without operating a single video store. Google continues to attack new industries with its data-based services and devices; Google’s products from glasses, to self-driving cars to smart thermostats are just a means for increasing and leveraging Google’s data-based consumer insights.

Business model innovation is more profitable and more sustainable than product innovation and is badly needed in Europe today.

How are we addressing this issue in business schools? Too often business schools preach interdisciplinary research and team thinking while teaching in functional silos such as strategy, marketing, operations or finance. Global competition requires a more holistic approach to business development that typically reflects business model thinking.

Managers taking a business model view ask who-what-how-why questions for every new product, for every new company and for every new process they develop. Who is our target customer? What are we offering our customer? How do we deliver the value proposition? And why does the business model generate profit? These questions are interdependent and often touch the dominant logic of an industry.

Business model innovators like Google, Amazon, Nestlé, Hilti and Daimler revolutionised their industries by overcoming its dominant logic. Amazon has become the biggest bookseller in the world even though it does not own a single brick-and-mortar store; Skype is the largest telecommunications provider worldwide even though it does not own any network infrastructure.

But overcoming the dominant logic of their industry remains the biggest barrier for experienced managers. Some innovators do it accidentally, some intuitively, but rather seldom as a systematic leadership task.

Compare this to engineering and engineering schools. Every engineer learns design rules for new product development in their first year, but business schools do not teach how to design new business models. Business engineering still seems to be an art that only a few gifted entrepreneurs such as Steve Jobs and Larry Page have mastered.

There are design rules and patterns for business model innovation, but they are rarely actively developed and taught. Developing a business model is a craft that can be learnt.

Research at St Gallen on more than 350 of the largest business model revolutions within the past 50 years found that 90 per cent of all business model innovations are based on 55 core patterns.

For example, when Nestlé invented Nespresso capsules in 1986 it revolutionised the coffee market and today 5bn capsules are sold annually. Nespresso’s strategy of selling its coffee machines for very little, while charging €80 per kg for coffee is based on Gillette’s razor-and-blade business model. Nestlé combined it with a lock-in pattern, where customers cannot switch to competitors’ cheaper products.

Executives, business engineers and innovators have to learn systematically how to develop new business models. Our action research as well as in-house company projects shows that executives can learn these patterns by being confronted with concrete and challenging questions. For example, how would Nespresso run your business? It is amazing how creative managers become once they begin to think in this way.

The biggest challenge is learning how to unlearn. This is a challenge that should be taken up by business schools.

The author is professor of technology management at the University of St Gallen

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FT.com: Business Model Innovation

Digital business models: winning in digital channels

What does it take for established firms to develop winning strategies in online, social marketing channels?

How can legacy firms establish digital business models?

What are the key issues to winning in online, social and viral channels?

These were some of the questions I was asked to discuss in a recent keynote talk: Digital Businessmodels (in Norwegian).
A highly engaged crowd, packed to the ceiling with more than 125 people and a long waiting list, gave a great setting for shedding some light on some of these crucial areas.

Key conclusion: Today’s marketing managers are failing hard at using the strategic opportunities of social and digital technologies. You don’t have to like social media, but you need to understand it. Most don’t. They need to as the speed of digital disruption is only increasing.

RA PaperRead the full article here.

Digital business models: winning in digital channels

Kodak and its inability to change: a tale for many

The Jan 14th issue of The Economist published a truly excellent article on disruptive innovation and change management. We’ve long known of Kodak´s troubles. But few mainstream newspapers or magazines have written such an insightful piece as this.

Kodak was, as the Economist writes, the Google of its days. Highly inventive, highly innovative and successfully rolling out new, sustaining innovations. This lead to a 90% market share in film (can you spell market leader) and 85% of camera sales in the US. Well into the 1990’s, Kodak was rated as one of the world’s most valuable brands.

“By 1976 Kodak accounted for 90% of film and 85% of camera sales in America. Until the 1990s it was regularly rated one of the world’s five most valuable brands”. In fact, In 1996, Kodak was ranked the world’s fourth most-valuable brand behind Disney, Coca-Cola and McDonald’s….

Then digital hit. At least, that’s what most people seem to believe.
But in reality, Kodak had been sitting on the Digital Camera and digital technology since 1973. Only they were afraid of the consequences…

Kodak engineer, Steven Sasson is credited with inventing the first digital camera in 1975 (first prototypes in 1973). Only to put it away for years…..when the company started developing its digital strategies, it was too little, too half-hearted and eventually too late. Starting 2000, the speed and size of the digital shift increased to the point of driving Kodak into a death spiral. Yet, Kodak was attemting to innovate. Using the framework of the Innovation Pyramid , Kodak did innovate on level one (Design and marketing) and level two (Products). The company failed, however, in level eight (business model innovation). So despite its launch of digital products, the lack of transformation on the business model level led to the eventual death of Kodak.

On January 19th 2012, Kodak officially announced the results of some 15 years of failed transformation. The company filed for “Voluntary Chapter 11 Business Reorganization” or Bankruptcy. For special interest, you can read the filing here.

The company´s success and downturn makes for a world class case study in the failures of leading change.
This 2006 Businessweek article “Mistakes Made On The Road To Innovation..
.” paints some of the inner life challenges Kodak had. Analyzing Kodak against the likes of Apple, DELL, IBM and Cisco, reveals what could have been if the company had been able to change.

At it´s peak Kodak employed 144.000 people. Today it has less than 14.000. Soon, only a handful. Analyzing this article reveals layers of layers of innovation challenges. The last Kodak moment? is an article students and executives should study and learn from. It holds a series of truths valid for all companies across all industries: successful innovation requires successful change management.

For a truly amazing 368 slide journey in the history of Kodak, we urge everyone to view this incredible presentation by Christian Sandstrom.

Trying to understand the decline of Kodak from a stock market analyst perspective is also very revealing. For an analysis of how stock analysts look at the paradigm shifts in disruptive innovation, lean back and enjoy this slideshow.

All images from The Economist.


Making disruptive innovation work for you

The big challenge in “The Innovator’s Dillema” and the body of research called “Disruptive innovation” is: Can Large, Established Companies truly innovate?

Innovation researcher Bettina von Stammn asks in her book “Is disruptive innovation within a large company possible?” (von Stamm, 2008). And the reality for a lot of firms has been no, we have not been able to reinvent ourselves. We have been getting disrupted and pushed to the sides. Do you remember Myspace, Compaq, Kodak, Borders Bookstores, video rentals, encyclopedias and laptops…… These are all examples of companies or product lines getting highly disrupted.

The classic literature concludes that disruptive innovation in established firms is extremely difficult. But a new body of research is emerging. This one is different. This one shows how large firms are learning to deal with and use the innovator’s dillemma to their own advantage. One such article is
The Empire Strikes Back: How Xerox and other big corporations are harnessing the force of disruptive innovation”. Clayton M. Christensen and Scott D. Anthony, both of Innosight, has written an excellent article on how to master radical innovation in established companies.

Using the case of Xerox (remember, Xerox, with the copiers?), the authors state “ It is a classic story of the “innovator’s dilemma.” Xerox struggled to defend against threats at the low end of its business, failed to create growth in new markets, and found itself on the brink of irrelevance, if not extinction”.

But today, the company is reinveting itself. Moving it’s focus from being “a printer company” to “helping clients simplify business processes” has allowed Xerox to find new avenues for growth. One such avenue is document management services, including buying 74.000 new employees and pusing R&D into not new copiers, but into services.

The authors line up three suggestions for companies seeking more disruptive innovation.

1. Pushing beyond Core Competencies
2. Embracing business-model innovation
3. Managing the old and the new differently

Now, interestingly, most material taught in business schools is “stay with your core competencies”, not push beyond it. Equally, few business schools have traditionally been training managers in radical business model innovation.

Thankfully, work from Innosight and the Business Model Generation team, lead by Alexander Osterwalder is developing the tools and making business model innovation become a reality for companies worldwide. Emerging research on firms like Apple is showing how innovation can become a core competency in itself. Now we just have to step up the number of strategic innovation programs in business schools worldwide. That’s easy.

Since first writing this post, I’ve been teaching strategic innovation both at our Business School and a number of executive consulting programs. I am greatly pleased to see how quickly people ‘get’ strategic innovation, once they have a framework to explain it.
Moving from ‘understanding’ to ‘doing’ is harder, but with training and coaching, every single employee can become a true innovator.
Because, we firmly belive; “Innovation should be everyone’s job”.