Generating options for a new Business ModelGeoff Eagleson

How can we generate options for a new Business Model whether for an organisation in trouble or for one that

senses an inflection point in its performance?

• Unstructured brainstorming is inadequate

• Data mining is of limited value

• Market Research that assesses demand for non-existent products is dubious

• We know where to look:– Underexploited resources and capabilities– Untapped insight into customers– Future trends– Our and others’ experiences.

• What we need is a process – it is all about framing. Source: Coyne, Clifford & Dye (2007)

How do I generate options for a new Business Model?

Business Modeloptions

Leverageexisting

R & C

Leveragemarket

intelligence

Leverage insights about future

trends

Leveragethe experiences

of self and others

Generating options for a new Business ModelRoad Map:

How can we facilitate option generation? By leveraging:

– Existing Resources and Capabilities• Audits of Resources and Capabilities

– Market intelligence• Blue Ocean; Disruptive BMs

– Insights about future trends• Scenario planning; Visioning; Enacting

– Experiences of self and others• Reverse engineering; Intuition, Entrepreneurial approach.

Applied to the AGSM in 1988 and an organisation chosen by your residential team

Generating options for a new Business Model:Caveats

• This is not a “numbers game”; this is “Do or die”.

• This is more of an art than a science.

• Beware of exiting your current core too soon. (Estimated to be10% of revenue stalls by Olson et al. (2008) – Reading 3). That is, make sure that you understand the real root causes of the decline.

• Personal expectations, agendas and prejudices will play an important role.

Generating options for a new Business Model: Leverage existing Resources.

Resource Strategic Importance

Relative Strength

Sustainable Value Capture

Tangible (physical, financial, administrative, legal)

1.

2.

3.

Intangible (IP, reputation, technology, culture)

1.

2.

3.

Human (staff, customers, skills, know-how)

1.

2.

3.

VIRO: Appraising the strategic value of a Resource

Valuable?

– Relevant to customer needs; contributes to differentiation or cost advantage

Imitable?

– At risk of imitation by rivals, durability, mobility, substitutability

Rare?– “Are you, or can you aspire to be best in class among the competition?”

(Quinn & Hilmer, 1993)

Organisation?

– Organizational architecture, property rights, bargaining power, complementary resources or capabilities

Source: J. Barney, 2007 - Reading 7 in SM 1

Auditing your resources:Questions to frame your analysis.

• Identify the operational drivers through a du Pont analysis

• What are your ‘crown jewels’?

• What are your scarce resources?

• “What business are we in?”

• “What business could we be in?”

• “What business should we be in?”

Generating options for a new Business Model: Leverage existing Capabilities.

• Analyse the value chain. Product related; customer related; corporate. (Zook (2007) – Reading 5)

• Expose the asymmetries between your organisation and the competition. Who uses you rather than a competitor? What capabilities allow you able to serve these customers differently? (Miller, Eisenstat & Foote (2002) – Reading 6)

• What is the last function you would outsource?

• Think beyond functions to organisational wide capabilities.

Capabilities Audit: Start with the Value Chain

Firm Infrastructure

Human Resource Management

Technology Development

Procurement

Inbound Logistics

Operations Outbound Logistics

Marketing & Sales

Margins

Service

Support Functions

Primary Functions

A “Core Capability” is a business process, strategically understood (Stalk, Evans & Shulman, 1992)

Functional capabilities:

FUNCTION CAPABILITY EXEMPLARS

Corporate Financial management Exxon, GEManagement Strategic control Emerson Electric

Coordinating global SBUs ABB, Shell

R&D Research capability Merck, Xerox Development of innovative new products Sony, 3M, Intel

Product Design Design capability Apple, Swatch

Manufacturing Efficient volume manufacturing YKKContinuous Improvement in production ToyotaFlexibility Benetton, Nucor

Marketing Brand management Coke, Proctor & Gamble

Sales & Distribution Order processing speed & accuracy Amazon.comEfficiency and speed of distribution Federal Express

Service Customer Service Ritz Carlton

Organisational capabilities:

• Continuously innovate– Product and services (3M)

– Processes (Toyota)

• Control– Processes (McDonald’s)

– Behaviour (Professional service firm)

• Manage information– Producing new information (J & J)

– Better analysing (Insurance)

– Sourcing and synthesising (Japanese trading houses)

– Learning from experience (Shell)

• Manage long-run structural advantages– Rivalry proposition (Oz building materials)

– Customer relationships (Pharmas)

– Supplier relationships (Bank insurance)

– Regulation (Merck).

• Renew– Engagement (Woolworths)

– DevelopmentSources: Stukey, Doman & Thwaites, 193 Turner & Crawford, 1998S

Generating options for a new Business Model: Leverage market intelligence.

• Leverage the asymmetries between your organisation and the competition: – Who uses you rather than a competitor? Why? (Miller, Eisenstat & Foote

(2002) – Reading 6)

• Use the Blue Ocean framework– Change the basis of competition– Serve those who are non-customers (Kim & Mauborgne (1995) – Reading x in SM 1)

• Devise a disruptive Business Model– What are the barriers that constrain consumption?– Who could be customers? (Christensen, Johnson & Rigby (2002) – Reading 4)

Blue Ocean :Yellow Tail’s “strategy canvas”

UninformedDrinker

WineConnoisseur

Price-sensitiveDrinker

ConvenientAvailability

How

Who

What did Yellow TailEliminate/Reduce/Raise/Create?

Eliminated

Enological terminology and distinctions

Aging qualities

Above-the-line marketing

Raised

Price versus budget wines

Retail Store involvement

Reduced

Wine complexity

Wine range

Vineyard prestige

Created

Easy drinking

Ease of selection

Fun and adventure

A New

Value Curve

Reduce

Eliminate Create

Raise

Which factors should be reduced well below industry standards?

Which factors should be created that the industry has never offered?

Which factors should be raised well above the industry’s standard?

Which of the factors that the industry takes for granted should be eliminated?

Leverage market intelligence through a disruptive Business Model. Basic assumptions:

•The pace of technological progress in almost every industry outstrips the ability of customers in any given tier of the market to make effective use of the improved versions of a product. Technologies that aren't good enough to address customers' needs at one point typically improve to provide more than enough performance for those same customers at a later point.

•Companies earn attractive profit margins when they stretch their products up-market, targeting customers in a more demanding tier who are not yet satisfied by existing offerings. A down-market move toward customers who are already satisfied by available products yields profit margins that aren't nearly as attractive.

•Innovations that help incumbent companies earn higher margins by selling better products to their best customers are sustaining, not disruptive. Sustaining innovations comprise both simple, incremental engineering improvements as well as breakthrough leaps up the trajectory of performance improvement.

•In contrast to sustaining innovations, disruptive innovations appeal to customers who are unattractive to the incumbents. Although disruptive innovations typically involve simple adaptations of known technologies, entrants almost always beat incumbents at this game because established companies lack the motivation to win.

Source: Christensen, Johnson, & Rigby,(2002) – Reading 4.

The Model of Disruptive Innovation

High

Low

Pe

rfo

rma

nce

TimeSource: Christensen and Raynor (2003)

Sustaining Innovations

Disruptive Innovations

Performance that average customers can utilize

Customers notsatisfied by current

products

Customers over serviced by current

products

Generating options for a new Business Model :Leverage your experience and think like an

entrepreneur.

Source: Timmons & Spinelli (2003)

Sources of ideas for opportunities

%Prior work 58.3 (previous role / employment, consulting project)Network

21.7 (social or business)Thinking by analogy 11.3Partner

8.7

But be aware of cognitive biases:

Novice entrepreneurs look for: Experienced entrepreneurs look for:

Novel ideas

Based on new technology

Superiority of product or service

Potential to change the industry

Intuitively appealing

Solving customers’ problems

Favourable financial returns:

positive cash flow, quick revenue

generation

Short sales cycles

Manageable risk

Potential for obtaining helpful input / collaboration from others

Source: Baron & Ensley (2006)

What personal attributes help an entrepreneur to identify opportunities?

• AlertnessA cognitive framework that assists entrepreneurs in being alert to opportunities. Those who possess such a schema show a tendency to search for and notice change and market disequilibria, to respond to information that does not match their current schemas, and to adjust existing schemas on the basis of such non-matching information.

20

• Bisociation

Personal attributes sought in leaders of new growth opportunities:

GE under Jeff Immelt requires five traits in the leaders of growth:

– External focus

– Imagination and creativity

– Decisive

– Inclusive

– Deep domain expertise.

Generating options for a new Business Model :Leverage the experiences of others.

What do all the following products have in common?

• Cirque de Soleil

• Spider Man movies

• Roller Blades.

The question you ask determines the answer you get.

• Reverse engineer and ask about a great idea: what question would have enabled me to see this opportunity first?

Generating options for a new Business Model :Leverage insights about the future.

Possible events

What we see

Reality

http://www.petatv.com/tvpopup/video.asp?video=tyson_heflin&Player=wm

The Basic Scenario Planning Process

1. Assess the current situation

2. Gather the data

3. Identify the driving forces

4. Generate alternative scenarios

5. Assess the implications for your environment

6. Assess the implicationsfor your org.

7. Define strategy & plans

8. Implement & monitor

Consider the AGSM in 1988. What options could it have considered to proactively transform itself?

• Its core business was the full-time MBA.

• It had been fully funded by the Commonwealth Government but that funding was expected to be slowly withdrawn.

• It was the first educational institution that was given the right to pay above award wages from its own income, on the condition that it instituted a performance management system “with bite”.

• What could it have done to protect its future? What were the options for a new Business model apart from introducing an Open Learning Program (the precursor to the EMBA).

Consider the AGSM in 1988:Six teams, six tools:

• Resource audit

• Capabilities audit

• Blue Ocean framework

• Disruptive Business Model

• Leverage the experience of self and others

• Scenario planning

Choose one of the organisations represented in your team and use a different tool from the one used earlier

to generate options for a new Business Model.

• Resource audit

• Capabilities audit

• Blue Ocean framework

• Disruptive Business Model

• Leverage the experience of self and others

• Scenario planning

References

Baron & Ensley, 2006

Christensen, C.M. & Raynor, M.E. 2003, The innovator’s solution: creating and sustaining successful growth, Harvard Business School Publishing, Boston, Mass.

Coyne, K. P., Clifford, P. G. & Dye, R. 2007, “Breakthrough thinking from inside the box”, Harvard Business Review, December, pp.71-78.

Stalk, G., Evans, P. & Shulman, L. E. 1992, “Competing on capabilities: the new rules of corporate strategy”, Harvard Business Review, March-April, pp.57-69.

Stukey, J., Doman, A. & Thwaites, R. 1993,”Distinctive and leveragable competencies”, in The case for core process design, McKinsey and Company, pp. 57-75.

Timmons & Spinelli, 2003