EYInnovation A series about achieving growth through innovation Innovating for growth Companies that innovate their business model are more likely to achieve sustainable competitive advantage. Through our research, we identified issues in the external environment, including the major market and economic circumstances that affect business. In this issue, we explore how companies innovate their business model and provide case studies of how those companies that align business model, services or goods, and process innovation can gain competitive advantage. With ideas multiplying to meet consumer needs, maximize technological advances and capitalize on external opportunities, there is no end to the potential of innovation. However, the successful commercialization of an idea that generates business value depends on a business model that can support new approaches to driving sustainable growth. Only through innovation to the business model can a company achieve sustainable competitive advantage, structuring a proprietary internal platform that cannot be replicated as easily as goods or services and processes. Competitive advantage is no longer about geographic footprint or size. In a global economy that encompasses rapid-growth markets, mature economies and new emerging markets, competition can come from anywhere. While start-ups can structure a business model that supports the development of a new business, other organizations need to innovate their business model to achieve innovation in goods or services and processes. Today’s most innovative companies have therefore changed the business model from a set focus on geographies, local markets and product organizations to a more fluid focus on customer experience, value generation and problem-solving. Innovating the business model happens through an iterative, spiral approach to innovation that goes forward and backward from intuition to socialization, ideation, development and exploitation to further intuition, socialization, ideation and so on. ‘’Piloting a new business model is very difficult,’’ says Ragna Bell, Strategic Market Intelligence Leader at Ernst & Young LLP. “Business model innovation is often closely aligned to services or product innovation, and piloting includes iterative innovation of the business model, which must evolve to support the needs of the business.’’ Issue 3, 11 October 2012
Transcript
EYInnovationA series about achieving growth
through innovation
Innovating for growthCompanies that innovate their business model are more likely to achieve sustainable competitive advantage.
Through our research, we identified issues in the external environment, including the major market and economic circumstances that affect business. In this issue, we explore how companies innovate their business model and provide case studies of how those companies that align business model, services or goods, and process innovation can gain competitive advantage.
With ideas multiplying to meet consumer needs, maximize technological advances and capitalize on external opportunities, there is no end to the potential of innovation. However, the successful commercialization of an idea that generates business value depends on a business model that can support new approaches to driving sustainable growth. Only through innovation to the business model can a company achieve sustainable competitive advantage, structuring a proprietary internal platform that cannot be replicated as easily as goods or services and processes.
Competitive advantage is no longer about geographic footprint or size. In a global economy that encompasses rapid-growth markets, mature economies and new emerging markets, competition can come from anywhere.
While start-ups can structure a business model that supports the development of a new business, other organizations need to innovate their business model to achieve innovation in goods or services and processes. Today’s most innovative companies have therefore changed the business model from a set focus on geographies, local markets and product organizations to a more fluid focus on customer experience, value generation and problem-solving.
Innovating the business model happens through an iterative, spiral approach to innovation that goes forward and backward from intuition to socialization, ideation, development and exploitation to further intuition, socialization, ideation and so on.
‘’Piloting a new business model is very difficult,’’ says Ragna Bell, Strategic Market Intelligence Leader at Ernst & Young LLP. “Business model innovation is often closely aligned to services or product innovation, and piloting includes iterative innovation of the business model, which must evolve to support the needs of the business.’’
Issue 3, 11 October 2012
Case study: A business model to support managed innovation Innovation at Zytek, the clean vehicle technology specialist, is strengthened by a business model that supports ‘managed innovation’ - innovation that happens in a planned way, rather than on an ad-hoc basis. Zytek’s ownership structure (the Chairman and founder of Zytek shares ownership 50/50 with Continental, one of the largest tier one automotive suppliers in the world) heavily influences the company’s ability to take a managed innovation approach, that harnesses Zytek’s creative innovation and Continental’s corporate governance strengths - which are both essential to achieving a balance between profitability and the high levels of investment needed for development.
The Chairman and founder of Zytek, shares ownership 50/50 with Continental, one of the largest tier one automotive suppliers in the world.
Neil Heslington, Managing Director of Zytek says, “Being owned by a company used to quarterly reporting and monthly performance figures, we don’t do innovation for innovation’s sake — it is also cost-prohibitive in our industry. Innovation has to result in a product that achieves revenue for further investment in R&D. So, it’s a question of getting the balance right between appropriate investment and realizing the benefits from it.”
This kind of discipline helped Zytek win investment from the UK Government’s Regional Growth Fund (RGF) in the Midlands, through which the company will develop an electric powertrain technologies center. In addition to funding R&D, the RGF provides funding for training activities helping to ensure the success of the investment.
Case study: A collaborative business model to address funding Boston-Power, expert in energy storage, pursued a different business model that had no real precedence in the venture capital industry, adapting contract manufacturing agreements to form collaborative, teaming agreements.
“In a capital-intensive industry, this solved a major funding issue, enabling us to access spare capacity on manufacturing lines, paying a contract manufacturing fee per battery,” says Christina Lampe-Onnerud, Chairman of Boston-Power.
“We also included some of our management in the team to co-lead the factory to ensure work quality. It was a financial win-win. We were able to enter a capital-intensive industry through scalable manufacturing, while for our partner, we absorbed some of the costs associated with switching over to our product, including yield losses involved.”
Case study: Restructuring the business model for mass customizationHaier, the consumer electronics and home appliances company, innovated its business model to get closer to customers and increase efficiency, moving from mass production to mass customization. Diao Yunfeng, Managing Director for Overseas Business at Haier, explains:
“We changed our organizational structure from the traditional triangle structure to an ‘inverted triangle’ structure. In the traditional structure, the CEO and senior managers are on the top of the triangle, common employees are at the bottom of the triangle, and there are different layers of managers in the middle.
“This kind of organization brings problems. The employees at the bottom of the triangle are the ones who keep in touch with our customers every day, but they can’t make decisions as they need to report back to their upper-level managers. At the same time, decisions and instructions need delivering to all employees from the top to the bottom of the triangle. Both of these processes cost a lot in terms of time and obviously couldn’t be adapted to the internet era.
“To resolve this issue, we recombined our 80,000 employees into about 2,000 independent (or autonomous) operating units. We did this to break through the traditional hierarchical structure, allowing everyone to face the market. Every independent operating body works like a small company and is responsible for its own profit and loss. We also cut the middle management layers, and those that remain are now the resource suppliers or support units to the independent operating bodies rather than decision-makers.
“By making these organizational changes, we believe we are on the way to achieving our innovation aim, which is to satisfy our customers’ individual needs, shifting from mass production to mass customization,” concludes Yunfeng.
What insights can we draw?1. Aligning business model, goods and process innovation
encourages a fully integrated innovation approach, with each of the three elements supporting, rather than competing with, each other. This, in turn, strengthens and recalibrates competitive advantage, enabling the successful commercialization of ideas.
2. For traditional multinationals, devise a different corporate ownership structure in the business model to support managed innovation. This is essential to achieving a balance between profitability and the longer-term investment needed for development.
3. For businesses with intangible assets, structure a business model that distinguishes between IP that is integral to the business and IP that can be licensed to fund growth.
4. Adapt traditional approaches such as turning manufacturing agreements into collaborative, teaming agreements for win-win partnerships based on shared risk.
5. Business model innovation involves a greater commitment at leadership level than innovation to goods or processes. This aligns organizational investment with the strategic direction of the business and allows for shifts in how the organization thinks and operates.
How has this issue evolved?
Ongoing globalization, technological advances and the opportunities they bring have led to a massive surge in collaboration across different industries and markets involving customers, investors, suppliers, governments, financial institutions, competitors, academics and other companies Changes to the business model have become essential in order to manage this engagement, both in operational and financial terms.
In both rapid growth and more mature markets, the development of intangible assets in a web-based global market has changed the game. Companies in the entertainment industry, for example, had to innovate the business model to protect profits and prevent migration of assets from one sector to another as social networks threatened to destroy rather than increase the customer base.
The development of a new knowledge economy based not on size but on intangible goods or competencies has transformed the thinking.
Markus Heinen, Performance Improvement Advisory Leader for Germany, Switzerland and Austria at Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, says, “A trend is emerging that shows companies breaking away from traditional patents to strategic IP exploited by business models that enable the licensing of technology that is part of the core business.”
In this new competitive environment, companies seeking to capitalize on opportunity need to move fast and achieve scale. For example, an electric-car network operator innovated its business model so that the value of their IP would drive profitable growth. Their CEO explains, “We didn’t have the expertise to build a car, so we kept the IP for the machines, the software and other essentials to build the network, and outsourced car production and manufacturing. This enabled us to scale more quickly once we had succeeded.”
Markus Heinen says, “Enterprises need to be more platform-oriented — continuing to innovate the business model — in order to be able to transform faster.”
Why is this relevant?
Competition is heating up, and new markets are evolving. This means companies need creative solutions and new ways of thinking now more than ever. They must look beyond the quick fix, identifying and implementing long-term solutions for achieving profitable growth.
As companies look to innovate, it’s critical to consider the breadth that innovation covers within the organization. It’s no longer enough to look to product development or services, which are quickly and easily copied by competitors. Companies need to re-evaluate their entire business model to achieve sustainable growth in today’s market. This may require involvement from a variety of functional experts and collaborators, as well as leadership commitment.
Our recommendations
• Innovate the entire business model as well as services and goods or process. The difficulty of replication provides greater competitive advantage.
• Change your business model from being focused on geographies, local markets and products to one centered on customer experience, value generation and problem-solving.
• Analyze the business model from the perspective of a start-up and emulate that competitive approach.
• Break away from silos and build a corporate culture that encourages new ways of thinking and teamwork that integrates different functions.
• Gain leadership buy-in for changes to the business model that empower local management and enable direct interaction with customers.
• Evaluate the role that finance, tax, and supply chain — among others — might play in rethinking your business model. Today’s environment requires input from all parts of the organization.
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