Business Model Innovation An iterative approach towards organization-wide value creation

By Mathias Cobben and Han Driessen

IN A BLINK

IN A BLINK

Innovation is essential to an organization’s survival. Nevertheless, room for innovation is far too often tightly sanctioned within organizations. As a consequence, potential value may be overlooked or disregarded. Business model innovation effectively facilitates overcoming this issue. A business model defines how an organization creates, delivers and captures value. As a business model consists of external and internal perspectives, both of which are responsible for driving value creation, it is important to take both factors into account when engaging in innovation. In this paper, we not only offer an iterative process designed to guarantee comprehensive oversight, we also suggest two methods for facilitating its implementation: Service Design and Agile principles. Service Design helps to sense the external perspective of the business model in greater detail. Agile principles, on the other hand, allow the internal perspective of the business model to respond swiftly. As a result, balancing Agile principles and Service Design will allow organizations to create organization wide value. In a closing remark, we address scaling and propose a heuristic for its integration with business model innovation.

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1 The need for business model innovation As extreme change in the external environment is quickly becoming the new norm, organizations

face the choice between innovating and becoming irrelevant. More competition, lower barriers for

competitor participation and a highly informed customer base drive organizations toward the most

obvious of both options: the innovation path. Innovation intuitively brings to mind imagery of

scientists in lab coats fiddling with the latest technology. Accordingly, most people think of

innovation as something that is done at the back-end of the organization. On top of this, there is the

common misconception that innovation is about developing new products and services only.

However familiar this may sound, such assumptions enormously limit the necessary room for

innovation within an organization. The consequence is that the playing field for innovators and their

space for value creation both become very small.

In this paper, we argue that innovation should span the organization’s entire business model in

order to tackle the challenges that come with change, and maximize value creation. We will

propose a framework for doing so and relate it to existing methodologies.

If innovation spans the entire business model of the organization and becomes everyone’s

responsibility, defining whose job it is seems redundant. Nonetheless, doing so is an important part

of illustrating what we consider potential areas of implementation within our proposed approach to

innovation.

Given the broad coverage of the term organization, one could argue that each department

comprises its own smaller organization, one which requires its own unique business model. An IT

department, for instance, deals with (internal) customers and manages suppliers. Innovation,

therefore, is obliged to span the entire business model of the IT department, not just software

development or new technology sourcing. Similar arguments could be made for other parts of an

organization. The suggested plan for business model innovation therefore clearly reaches beyond a

mere strategic level and can be implemented as is required in practice.

The main target groups for business model innovation can best be described as follows:

1. Core product and service providers are delivering a certain product or service as a

main objective. Without this product or service, there is no value for customers and

therefore no organization. All private or public enterprises, profits and non-profits belong

to this category.

2. In-company customer oriented product and service providers are woven around one

or more products or services. They help to leverage the value of a core product or service

and have an indirect but measurable relationship with revenues. They are usually

customer oriented and part of a larger organization. Customer care and communication

departments are examples of such secondary product and service providers.

3. In-company non-customer oriented product and service providers have no direct

relationship with the organization’s customers, but they are essential to providing a

product or service. Despite their internal focus, they must consider how they can help

more client-focused parts of the organization deliver value. Examples are IT or logistics

departments.

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2 Setting the scene

2.1 What is a business model?

A business model describes the rationale of how one creates, delivers, and captures value.i Value

can be developed on the level of an entire organization or within its departments and also on a

personal level. Providing sustainable value implies mapping out and innovating the underlying

business model on a regular basis.

Of the many available business model frameworks, the Business Model Canvas developed by

Alexander Osterwalder stands out due to both its widespread use by practitioners and solid

academic roots. For these reasons, we have generated a simplified interpretation of his framework:

Value

At the center of the business model, value represents the proposition delivered to a customer or

user for a specific price. It is the answer to a problem or the satisfaction of a need. Value can be

delivered in many ways; it could either be a product or service which delivers certain attributes such

as originality, customization, design, usability, brand and status, or it could simply “get the job

done”.

External perspective

The Business Model Canvas has an externally oriented component consisting of customers,

channels with which to reach them and a desired relationship that one strives to maintain. Together,

these aspects define how revenues are generated.

Customers come in certain segments if they require different and specific propositions, channels of

interaction and/or relationships. They can also have a different willingness to pay or may vary in

profitability. There is no golden rule for customer segmentation but recognizable patterns do occur:

mass markets (few or no segmentation), niche markets, and highly diversified markets are amongst

them.

Channels are the concrete, or “hard”, means of connection between the customer segments and

the value proposition. They describe how a value proposition gains recognition, is evaluated,

purchased, delivered and receives feedback. These processes may each have a different channel,

i, Osterwalder A., Pigneur Y,, Smith A., (2010), Business Model Generation: John Wiley and Sons Ltd., Hoboken

BUSINESS MODEL

customerschannels

relationships

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for example a website, phone line, store, sales team, and so on. It is also worth defining whether

such channels are owned or managed through partners.

Customer relationships describe the intangible, or “soft”, connections between the customer

segments and the value proposition. They define how an organizations deal with customers.

Examples on this level are personal and dedicated assistance, self-service, and co-creation.

Revenues are made when a value proposition successfully lands in a customer segment through

the employment of specific channels and relationships. They can be transactional (one time) or

recurring and come in different forms such as asset sales, rent, license, subscriptions and

advertising fees. Pricing can be fixed or variable.

Internal perspective

An internal system should also be able to provide the value proposition. The internally oriented

aspect of the business model thus consists of the required resources, activities, and partners

necessary to enable delivery. Together, they determine the costs to be incurred.

Resources are the collection of assets required to deliver a value proposition. They come in many

forms, such as physical assets, human resources, and intellectual property in the form of patents.

Financial assets such as cash or stock options are also part of an organization’s resources.

Activities describe what a company must do in order to provide value. A few examples include

production, problem solving, the managing of networks and platforms, and training. There are

however, many more possibilities.

Partners are third parties that assist in value creation. They range from suppliers and strategic

alliances to joint ventures. Advantageous motives for partnerships include risk-reduction and

economy of scale claims with regard to certain required resources and activities.

Costs are incurred in the pursuance of resources, activities and partnerships. They can be fixed or

variable.

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2.2 What is business model innovation?

Innovation is a broad topic, making it hard to define in an unambiguous way. As substitute for a

concise definition, we have listed a few quotes describing innovation below before diving into the

business model innovation framework we propose.

Based on the above definitions and quotations, it is fair to conclude that innovation has quite a bit of

overlap with business model terminology. It is inherent in finding and solving challenges in order to

satisfy needs. The new value delivered can take different forms, such as products, services, and

processes for instance. New resources, activities, or partnerships facilitate innovation. This means

that practically the entire business model is covered.

Accordingly, innovating the business model simply means changing the established internal and

external perspectives in order to create new value.

In addition, innovation generally leads to prosperity, and it also has unpredictable and potentially

disruptive effects. Its process, therefore, should be one of intelligently organized trial and error,

where implementation defines success. This makes the process inherently iterative.

“Innovation is the specific instrument of entrepreneurship… the act that endows resources with a new capacity to create wealth.”

- Peter Drucker

“The introduction of new goods (…), new methods of production (…), the opening of new markets (…), the conquest of new sources of supply (…) and the carrying out of a new organization of any industry”

– Joseph Shumpeter

“To make changes in something established, especially by introducing new methods, ideas, or products”

– Oxford Dictionaries

"An innovation is something original, new, and important - in whatever field - that breaks in to or obtains a foothold in a market or society."

- Frankelius, P, Journal of High Technology Management Research

“Innovation is the application of new solutions that meet new requirements, inarticulate needs, or existing market needs. This is accomplished through more effective products, processes, services, technologies, or ideas that are readily available to markets, governments and society.”

- Wikipedia

“Trial and error drives innovation: The cost of experimenting with products in their context is lower than ever.”

- Luke Johnson, Financial Times

“Disruptive innovation describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.”

- Clayton Christensen

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3 A framework for business model innovation

3.1 Overview

Given the fact that innovation is clearly an iterative process, we propose a business model innovation framework consisting of four distinctive stages, of which the last consequently feeds into the first. Similar models have been proposed in both practitioner and academic literature alike, providing us a robust and proven foundation for further exploration i.

iBeckman, S. L., & Barry, M. 2007. Innovation as a learning process: Embedding design thinking. California Management Review, 50(1): 25-56.

Brown, T. 2008. Design Thinking. Harvard Business Review, 86(6): 84-92.

INTERNAL

observe

analyse

develop & test

design

SERVICEDESIGN

"SENSE"

AGILETHINKING

"RESPOND"

BUSINESS MODEL

OUTSIDE THE BUILDING

INSIDE THE BUILDING

customerschannels

relationships

revenues

resourcesactivititespartners

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value creation

3. Design

While deeper insights into the customers, user needs and the context are developed in the observation and analysis stages, this step focuses on designing solutions to discovered challenges. Large amounts of ideas, concepts and solutions are created and consecutively prioritized.

2. Analyze

When information is collected, it is important to make sense of it. The focus here is primarily on recognizing patterns in the data and investigating reasons for potential outliers. Representing the information and findings in a way that makes it easy to communicate is important for later use.

1. Observe

Observation recognizes that, for innovation, it is important to gather profound information on the environment in which a product or service is performed. Collecting information on the customers or users, their problems and aspirations, all within the larger context in which they operate, is the first step towards finding and solving the challenges they face.

4. Develop & Test

Solutions should be developed and tested. The focus is on delivering a solution that fits the needs and aspirations. The most important goal here is to figure out whether the underlying assumptions regarding the challenge and the customer are correct. This phase allows for gathering new information, therefore leading into the observation stage beginning the cycle anew.

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We argue that the starting point, in any case, should be to map the current business model. This

allows for a general overview and stimulates reflection on both the higher level of the business

model and the details at of each stage. Both the current and a future business model can be

mapped at this time.

Within the business model innovation framework, none of the phases is more important than the

other. Some organizations design and develop on a continual basis, for example. This is typical for

R&D based enterprises with a strong emphasis on the back-end of the organization. Such

emphasis is not problematic by nature. Nonetheless, we want to stress the importance of making

the leap towards observing developed solutions in a customer context and drawing conclusions

based on thorough analysis.

Either way, we assert that organizations should maintain an appropriate balance between the four

stages, get out of the building and make sure to test the fundamental hypothesis they have about

their business model in an external environment. Using the following methods may greatly help to

maintain the optimal balance.

3.2 Implementation perspective

There is an enormous body of practitioner literature offering techniques that fit our business model

innovation frameworki, with new techniques developed daily. They range from participative

observation to innovation accounting, data mining and Agile user story mapping. Furthermore, their

usability and performance tends to be very case-specific with, more often than not, techniques that

have been customized to fit specific situations. All things considered, attempting a comprehensive

analysis of their impact and frequency in general terms would not do justice to a field in such

continuous motion.

Accordingly, our ambition in this paper is therefore to provide advice with regards to implementation

in the form of heuristic principles, or simple rules of thumb that fit two dominant methodological

streams, namely Agile thinking and Service Design.

i The references below are a compilation of the information resources that inspire our practice, and are no attempt at completeness whatsoever:

Blank, S. G. (2006). The four steps to the epiphany: successful strategies for products that win: Cafepress.com.

Brown, T. (2008). Design Thinking. [Article]. Harvard Business Review, 86(6), 84-92.

Ideo. (2009). Human centered design tool kit - A free innovation guide for social enterprises and NGOs worldwide: Ideo.

Kim, W. C., & Mauborgne, R. (2005). Blue ocean strategy: How to create uncontested market space and make competition irrelevant: Harvard Business Press.

Martin, R. (2009). The design of business: Why design thinking is the next competitive advantage: Harvard Business School Press.

McGrath, R. G. (2011). Failing By Design. [Article]. Harvard Business Review, 89(4), 76-83.

Read, S., Sarasvathy, S., Dew, N., Wiltbank, R., & Ohlsson, A.-V. (2010). Effectual Entrepreneurship: Routledge.

Ries, E. (2011). The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses: Crown Publishing Group.

Verganti, R. (2009). Design Driven Innovation: Changing the Rules of Competition by Radically Innovating What Things Mean: Harvard Business Press.

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4 Complementary methods for business model innovation As innovation is not a particularly new domain, there are plenty of methods for approaching it. This

implies that there is no need for reinventing the wheel. Nonetheless, it is a worthwhile exploration to

identify existing methods that complement each other and amplify the business model innovation

outcome. Below, we will present and interrelate the two different approaches in our framework and

explain why they deserve proper attention in any innovation related endeavor.

4.1 Service Design – Sense

Service Design is a methodology that focuses on making products or services useful, usable, and

desirable from a client’s point of view; efficient, effective, and distinctive from a supplier’s point of

view.i

It is also an iterative process with phases quite similar to those depicted in our model above. It is

fair to say, however, that Service Design puts a more distinct emphasis on the external perspective

of our model and is more concerned with the customer’s perspective. Service Design is therefore

concerned with sensing the external environment.

As a matter of illustration, we will dive deeper into four principles of Service Design thinkingii that

have strong practitioner value when iterated within the model.

1. Customer-centric

The customer is at the heart of the observation and analysis. This goes beyond gathering statistics.

Profoundly understanding the customer revolves around grasping his or her aspirations and

challenges. It requires discovering the obstacles a customer encounters when attempting to

achieve certain goals in order to remove them. When a customer buys a product or service, it

seldom has a functional component alone. More often than not, social and emotional goals weigh in

heavily.

2. Co-creative

Always strive to involve customers and stakeholders when developing new products and/or

services. A clear oversight of all needs, expectations, and interests at play will allow you to see

connections and conflicts early on. Stakeholders can be inside or outside your organization. It is of

utmost importance for all stakeholders to express their ideas and exhibit a proactive attitude when

taking on a challenge, as opposed to simply writing down each other’s requirements. For example,

stakeholders may hold the power to unlock channels to your customer, enabling interaction

otherwise not possible. It pays off to understand them if you want to develop a win-win solution for

the customer.

3. Sequencing and evidencing

Product and service delivery takes place over time and consists of many different stages. This

should be acknowledged from the start. Customers probably go through different phases. At first,

there is awareness, when a customer realizes a product or service exists. Next, the customer will

evaluate whether the value proposition connects with his or her needs and aspirations. When i Birgit Mager’s definition in the book This is Service Design thinking (2010), Marc Stickdorn, Jacob Schneider’ Bis Publishers ii Inspired by: Stickdorn M., Schneider J. (2010), This is Service Design Thinking: Bis Publishers

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evaluated positively, a purchase will take place in a certain way, at a certain time and in a particular

location. The same goes for the delivery. At last, an after sales relationship will be maintained with

the customer.

While a product or service provider may not always explicitly express these phases, they are most

certainly there. More importantly, they are all interconnected. Failure in one phase may jeopardize

the entire process. Mapping out and evidencing all sequences of the process is essential to

designing a comprehensive solution.

4. Telescoping

Keeping the bigger picture in mind is important when it comes to leveraging contingencies. When

observing or analyzing details, it can be difficult to see potential opportunities when they arise. A

purely holistic approach may not yield concrete results due to the fact that one is continuously

operating on an abstract level. The most productive practice will switch between the details and the

bigger picture as often as possible. Developing such telescopic ability allows you to develop

concrete solutions while leveraging chance events and new information as they become available.

4.2 Agile – Respond

Just like Service Design, Agile is an iterative approach with phases similar to the model we have

proposed. The main difference is that Agile has a stronger focus on the internal aspects of the

business model. It is the part that responds to the external environment. This means that Agile is

generally concerned with the design and development of solutions in a way that can handle change

or even welcomes it.

The following Agile principles help to illustrate how practitioners can implement the proposed

iterative model.i

1. Validity over reliability

Validity means finding a truly fitting value proposition for a certain customer. Reliability, on the other

hand, is about performing a value proposition in a reliable and predictable way. Since our approach

to value creation is one that spans the entire business model, it is necessary to first discern a valid

amount of fit between the internal and the external perspectives before organizing resources and

activities for scaling. Reliable scaling is an important issue, but it only makes sense after finding a

valid value proposition. Also, designing and developing solutions with a focus on validity allows for

new discoveries. In contrast, a focus on reliability tends to sacrifice creativity and new ideas for

existing solutions, whether or not they are a good fit for the customer.

2. Working products and services

Allowing for testing and the creation of new information, working products and services lay the

groundwork for generating customer feedback. By using this approach, one avoids its exact

opposite: trying to generate a nearly complete list of requirements in order to develop all features

over a long period of time, only to find out that your list of requirements is not all that complete and

your customer has changed his mind in the meantime. Building minimal viable products and

i Hofman R., Maurer M. (2013) BlinkPaper - Business Agility: Sense and Respond: BlinkLane Consulting (Dutch only)

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services that focus on key value parameters allows you to get feedback quickly and change course

when necessary.

3. Prioritization is key

The consequence of building minimum viable products and services is that setting priorities

becomes crucial. Deciding which product or service feature is important should not be a matter of

compromise in the design or development team, but rather a process embedded in thorough user

understanding. In addition, it is important to stress that prioritizing is a task separate from planning.

One may be tempted to relegate lower priorities to a later date, however this implies that such

judgments have been sufficiently validated. In fact, only the subsequent round of customer

feedback will bring valid priorities to light.

4. Multidisciplinary teams over functional domains

Prioritizing requires information to travel fast. This means information flows beyond the functional

domains of an organization while following the building blocks of the business model. Participants in

the innovation process should understand that traditional reporting might not be suitable and may

even become obsolete. They must work together in small multidisciplinary teams, on a daily basis,

with a clear and shared objective. Well-structured innovation teams should be a reflection of the

business model, allowing the handover of information from one player to the next and therefore

ensuring that decisions are based on valid and up-to-date information.

5 Scaling a business model

Because the business model innovation process is cyclical and

based on experimentation, one might wonder when scaling and

full-fledged implementation come into play. The general idea

behind the iterations is for the business model to become more

and more internally and externally validated, resulting in less

operational and market-related uncertainty over time. Scaling

should thus be viewed as an objective that is interwoven into business model innovation from the

start, not as a sequential task. Theoretically speaking, the scale of the cycles therefore has the

potential to grow continuously, much like the visualization of a Fibonacci sequence (above).

Nonetheless, large-scale execution always remains dependent on risk appetite and the acceptance

of certain leaps of faith, meaning that this approach for implementation is more a rule of thumb than a

rigid formula for success. In summary, a successful iteration will validate that a tested value

proposition connects to the customer’s needs. Only in this case, scaling becomes an option. If not,

another iteration on a similar or even smaller scale may be more appropriate.

In this paper, we would like to scratch the surface of how we believe scaling relates to business

modeling. We do not aim to explain an elaborate approach towards scaling, as the phenomenon

deserves proper attention as a subject of further research.

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6 Conclusion As organizations are required to navigate an environment trademarked by continuous change,

maneuverability becomes essential. We therefore strive to help organizations walk the innovation

path by suggesting a framework that can act as a compass rather than a rigid roadmap. Concluding

this paper, we would like to give a synopsis containing the key takeaways regarding business model

innovation.

We kicked off by stating that a business model defines how one creates, delivers, and captures

value. It consists of external and internal perspectives, both of which drive value creation. It is

important to take both factors into account when engaging in innovation.

• External perspective: Customers, channels and relationships responsible for driving revenues

• Internal perspective: Resources, activities and partnerships responsible for incurring costs

Consequently, we defined business model innovation as an experimental and iterative process in

which four distinctive steps can be repeated until a satisfying result is achieved.

• Observe: collecting information • Analyze: interpreting information • Design: designing and prioritizing solutions • Develop & test: developing and testing solutions

Implementation is facilitated by Service Design and Agile thinking principles alike. They respectively

help to make sense of the external perspective in order to organize the internal perspective and its

ability to respond swiftly. Accordingly, balancing Agile and Service Design allows organizations to

create more value by innovating across the entire business model.

The most important Service Design principles are:

• Customer-centric • Co-creative • Sequencing and evidencing • Telescoping

The most important Agile principles are:

• Validity over reliability • Working products and services • Prioritization is key • Interdisciplinary teams over functional domains

Finally, we discussed that scaling relates to business model innovation as an objective that must be

incorporated from the start. Scale is able to grow when successful iterations take place.

About the authors Mathias Cobben MA MGM

Mathias Cobben (1984) is consultant at BlinkLane. His primary expertise is in Business Model Innovation and Design Thinking. Furthermore, he investigated Intrapreneurship, or how to make organizations innovative and entrepreneurial. Doing so, Mathias has coached MBA students and professionals in translating ideas to business cases. He holds a Masters in General Management degree of Vlerick Business School and spent time at the University of California at Berkeley as a design student. Han W. Driessen MA MBA

Han Driessen (1968) co-founded BlinkLane Consulting. Han has over 15 years of consulting experience, serving clients in a broad range of industries and geographies on issues such as strategy, IT governance and strategic sourcing. He currently focuses on helping clients to innovate their business model and transform their organization for the future.

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About BlinkLane Consulting BlinkLane Consulting is an advisory firm founded in 2007. In our 6-year lifespan, we have evolved together with our clients. We continuously innovate our services to keep delivering the value our clients need in order to deal with today’s challenges. We help our clients increasing business value from IT investments, act more agile and innovative and transform their organizations for the future. For 2013, we focus on the following four themes:

• Business & IT Fusion • Strategic Sourcing • Business Agility • Business Model Innovation