a user’s guide to generating viable strategic alternatives [working title]

BUSINESS MODEL INNOVATION

version: 23. Dec 2008

raw book chunk nr. 1 This first book chunk will not be part of the book as such. It is an outline of the structure of the book and gives you an overview of what content you will find in the book. This first raw chunk should give you a feel for what is coming. It’s our big picture. Consider it as a relatively advanced prototype of how we think this book should be constructed.

We are curious if you like it. Do you find it interesting? Is it clear? Is it relevant to you?

Are we missing out on some essential parts?

Please note that the design and style is still ad-hoc (by Yves and me ;-). The design team will start working on the book chunks in the coming months and will also be interested in your feedback. The design of the book will be an essential part of its success.

23. Dec. Switzerland, Alex & Yves

why bother? Business model innovation is on the radar of many executives and entrepreneurs as several recent studies show. But why exactly is business model innovation so important today? What has changed that makes it such a relevant topic. Why should business people look into this particular

field of innovation?

With two simple stories, the story of Neeraj, an entrepreneur, and the story Ted, a senior executive, we try to shed some light on the importance of business model innovation.

About him

Neeraj is a leading specialist in his field. No need to specify which one exactly. He recently decided to leave his company because he and his team invented a new product that his former employer didn’t want to commercialize. Neeraj is ambitious and he is convinced he can bring this new offer to the market with success, though he has no formal business education. Of course he was involved in business projects, but building a new company is a whole different animal.

Concrete challenges

Neeraj has a number of investors lined up, but he will have to win them with a convincing business plan. He has to think through all the

elements of his business, far beyond the product he wants to bring to the market. He has to draw a compelling big picture. For that he must come up with a solid business model, because it is the fundament of any sound business plan and the mother of success.

What he needs to keep in mind

A good product or service is not enough to succeed. More than ever before, every technology, product or service must be embedded in a solid business model. Neeraj should think through several business model options for his product before sticking to the one that looks best. Throughout this process of business model exploration he must adopt a customer’s perspective to come up with a model that can succeed.

Neeraj (39) Entrepreneur

Ted, 43 Senior Executive

About him

Ted is an experienced senior executive who knows the industry he works in better than anybody else in his company. He has a lot of war stories to tell. But Ted’s industry is shifting dramatically due to technological change, globalization and new consumer demands. Ted knows this and is searching for ways to help his company re-invent itself. He doesn’t want to end up like the music or car industry that proved incapable of adapting its business model fast enough. He wants his company to be like Nokia that successfully re-invented itself more than once.

His company

Ted’s company has been quite successful with their business model over the years. Yet,

this also brings a number of legacy costs with it. The organization is fine-tuned to the business model that worked in the past. Adapting or even changing this business model to assure future growth demanded by shareholders is no easy task.

His competitive environment

Ted’s industry is increasingly characterized by multiple business models. Just like in the airline industry several companies are competing with very different models. Ted also realizes that product and service innovation is just not enough anymore to stand out. He must address the big picture. He has to look at the entire business model to regain a competitive advantage and help position his company for the future.

relevant applicable

simple & visual beautiful

we want to give You, Ted and Neeraj a book about business models that is

Your time is valuable so we wont waste it. If you are holding this book in your hands it is likely that you want to learn as much as possible about business model innovation in as little time as possible. That is why we designed this book in a way that gives you only the essentials in a simple and visual form, illustrated through some colorful examples. And you probably don’t just want to learn about business model innovation, you most certainly also want to be able to apply. Therefore we translated all concepts used in the book into exercises and concrete workshop scenarios in order to assure that you can try them out immediately. In fact, rather than writing a book about business model innovation, we tried to design a

practical user’s guide for business model innovators. We also aimed at making this guide beautiful to increase the pleasure of consuming it – you tell us if we succeeded.

Business model innovation is a rapidly evolving field in which relevant examples change quickly. In addition it is an emerging field to which many business practitioners and researchers are constantly adding new insights. So while we shed some light on the basics in this guide, we refer to an interactive platform for an ongoing discussion among business model innovators: www.businessmodelhub.com

common language

design tools

reflection patterns

Everybody talks about business models and everybody seems to have a different understanding of what a business model actually is. That is a problem when you want to discuss your business model and innovate. In this book we describe a simple and elegant language that allows us to have valuable

discussions around business models. Such a joint language is the basis we need to describe, challenge, change or even invent business models in our organizations. It is the fundament that empowers us to move from ad-hoc business model innovation to systematic business model innovation.

Yesterday’s world was about choosing among a set of possible business models. Today’s and tomorrow’s world increasingly require the ability to generate new strategic alternatives in the form of innovative business models. Of course this requires a whole new set of creative methods and tools, which we found in the world

of design. Architects, product designers and user interface designers dispose of a whole arsenal of tools that should be of interest to business people. We adapted some of them to the business world to help craft alternative business models to achieve a competitive advantage.

Numerous authors have made valuable contributions that help us better understand an evolving and rapidly changing business landscape. Rather than adding another theory or refuting their ideas we aim at blending their contributions with the business model topic. We took a number of concepts of different authors

and translated them into “reflection patterns” that shall help us analyze and better understand different types of business models. These include “freemium” business models, two-sided markets, open business models, “long tail” business models and many more.

com

mon

lang

uag

e The starting point for any good discussion, meeting or workshop on business model innovation is a shared understanding of what a business model actually is. We need to use a shared concept that allows us to easily describe and discuss business models so we all talk about the same thing and start from the same point. The challenge for such a concept is that it must be simple, relevant and intuitively understandable, while not oversimplifying the complexities of how a company functions.

In the following pages we offer you such a concept that allows you to describe and think through the business model of your organization, your competitors or any other company that catches your interest. This concept has been applied and tested around the world and is already used in organizations such as IBM, Ericsson, Deloitte, the government of Canada and

many more.

Based on this shared language we can easily describe business models and manipulate them in order to create new strategic alternatives. Without such a shared concept it is nearly impossible to systematically challenge one’s business model and innovate.

We believe a business model can best be described through 9 basic building blocks that describe the logic of how a company intends to make money. In fact, it represents a blueprint of a company’s strategy that is then implemented through organizational structures, processes and systems.

value proposition

customer segments

distribution channels

customer relationships

key resources

key activities

partner network

cost structure

revenue streams

a business model describes the way you intend to make

money by creating and delivering value and it can be described by 9 basic

building blocks

which one of your client’s problems are you solving and why will he work with you

rather than with a competitor?

through which means does your

customer want to be reached and

addressed by you?

what type of relationships does

your customer expect you to establish and

maintain with him?

what are your customer’s needs, problems, desires

and ambitions?

what value are your clients really willing to pay for and how would they prefer to pay

for it?

what is the cost structure of your business model and is it in harmony with the core

idea of your business model?

what key activities do you need to perform in your

business model and how easily can they be done (by others)?

what can partners do better than you or at

a lower cost (and thus leverage your business model)?

what key resources does your business model require and

how difficult are they to copy (by others)?

record companies!

people!

large hardware revenues!some music revenues!

manu-facturing! marketing

& sales!

OEMs!

hardware design!

marketing!

seamless music

experience!

lovemark!

apple.com!

mass market!

iTunes store!

retail stores!

Apple stores!

iTunes software!

Apple brand!

iPod hardware!

people!

switching costs!

content &

agreements!

In 2001 Apple launched its iconic iPod brand of portable media players. The iPod works in conjunction with the iTunes software that allows transferring music and other content to the device from a computer. In addition iTunes can connect to the iTunes store via the Internet to purchase and download content online.

The combination of these items quickly disrupted the online music industry and gave Apple a dominant position in the market. Interestingly, Apple was not the first company to bring a portable media player to the market. Other competitors, such as Diamond Multimedia with its Rio brand of portable media players, were quite successful until they were outpaced by Apple.

So how did Apple build such a dominant position? Because they compete with a better business model. On the one hand they offer users a seamless music experience by combining a distinctively designed iPod series with the iTunes software and the iTunes online store. On the other hand they negotiated deals with all major record companies to offer access to the largest online music library. The twist to this is that they earn the lion’s share of their revenues from selling iPods, while using the integration with their online music store to protect themselves from competitors.

The specific building blocks of the iPod/iTunes business model are sketched-out on the opposite page

Example: Apple iPod/iTunes Business Model

[outline of each business model building block]

des

ign

tool

s

Companies that want to strive in today’s competitive landscape have to be experts in generating new and viable strategic alternatives. That is exactly where design thinking can help us. Designers are experts in the art of weaving together diverse sources of information, such as, for example, demographics, user needs, legal requirements and environmental factors to come up with novel solutions to wicked problems. The tools and methods that designers apply to solve design problems are the same tools that can help us come up with new and innovative business models.

A good product designer, for instance, will thoroughly understand a user, his needs, problems and aspirations. He will listen to many sources and look at the design challenge from several perspectives before starting to brainstorm about possible directions. He will sketch out different designs before modeling multiple rough

prototypes of various sizes and materials. He will test the different prototypes and slowly iterate towards a viable design before coming up with a final solution. It is a systematic approach to the creative process from which business strategists can learn a lot.

In this section we look at several design techniques form different design professions, such as architecture and product design and then translate these techniques to the business domain. Together with a set of workshop scenarios we outline how design thinking can help us:

•  generate business model options •  make business models tangible •  iterate towards viable business models

[apply the design technique to business model innovation ] [outline design technique in a design profession]

refle

ctio

n p

atte

rns

The business model canvas as we outlined it until here is a formidable tool to describe and generate business models. In combination with other existing concepts and theories it becomes a powerful tool that helps executives and entrepreneurs better understand common business model patterns. In this section we help business practitioners understand patterns such Open Business Models (Chesbrough), Long Tail Business Models (Anderson), Blue Ocean Strategies (Kim & Mauborgne), Ambidextrous Organizations (Tushman &

O’Reilly), Disruptive Business Models (Christensen), Double Sided Markets and Freemium Models.

The outlined concepts should serve business practitioners as reflection patterns for their own business models. It gives them a business model overview of various trends and movements described in some of the most successful business books.

[translation of concepts into business model reflection pattern] [outline of each concept]