It’s the business model, stupid! A wake-up call for incumbents like Daimler

News is full of cool technologies like drones, blockchains or autonomous cars and their disruptive character. Traditional firms have switched to innovation mode and have now cool digital transformation units to use these new technologies. Everybody is happy. Great, isn’t it?
Or wait? Can this really work that easy?

I just had a project with a company that has set up an innovation unit to push innovation. They have great people who are very salient with all the tools we use today in holistic innovation management like Design Thinking, Scrum or Lean Startups.

However, when management wanted to use the 3 horizon framework, originally from McKinsey but later further developed by Paul Hobcraft, to map their innovation projects on the 3 horizon matrix, we had problems to rank the projects to the 3 horizons.

The entrepreneurial side: The missing side of innovation

The reason was simple. The focus of the projects was on technology and not on customer’s side of innovation or on the business model. Somehow, it seems that the project managers were happy to have installed the new fancy technology but have forgotten the entrepreneurial side of innovation.

It is important to remember what Michael Schrage has said to innovation:

Innovation is not what you innovators do… It is what customers and clients adopt.

Not only the customer side was missing but also the side how they wanted to use the technology in their business. The following illustration shows the relationship between technology and value creation.

The business model creates the value, not directly the technology*

How could that have happened in a company that has the tools and innovation managers that know how to apply the tools?

Not tools, the right mindset to think in business model is missing

Well, tools are one side, the mindset of the top managers to really question your current business is another. There is so much talk today that companies should disrupt themselves and that they have to set up ambidextrous organizations to do so. Well, the easy part is setting up cool skunk works, the difficult part is to question yourself who you are. That is the tough part.

Your identity is very closely related to your dominant business model your company runs. The difficult part is to question yourself who you are and who do you want to be in the future due to the new technology. Your identity is very closely related to your current success as a dominant incumbent based on a dominant business model.

If you are a successful bank, you will digitalize a bank and not think about how sexy payment services are and how you can create payment services where you do not need a bank anymore like Paypal, Apple Pay or Google Wallet do. Actually, it is pretty much the end of your career when you work in payment operation center of a traditional bank, even that payment is the service that keeps customers today with their banks.

Daimler thinks in car registrations; Tesla in customers’ relations.

If you are a successful luxury car brand, you digitalize the current business model (eg. offering even more hardware options to individualize the cars as Daimler is doing it with its Smart Factory initiative) and not rethink really who you are, how technology will change the way what a car is and what will be a software function or what will be hardware and why customers really buy your cars and how this can change. Of course, Daimler tries a lot of new business initiatives outside their core business like Car2Go, MyTaxi or Moovel, but with the softwareication of their core product and its implication on the core business model, they are pretty late. Think how long it took the German car industry to understand the power of maps. With the acquisition of Here, they try to change that. However, they are some 10 years later than Google and still, most cars have fixed installed maps in their navigation systems that can only be updated at a car dealer.

Tesla just showed that with a simple software update how to update the car (hardware) when it extended with an over-the-air software update the range of their cars in lieu of hurricane Irma. Will a hardware company like Daimler ever understand that Tesla is not just E-mobility but the master of using software to build a real-time relationship with the driver and their cars? Daimler sells cars via dealers and has no direct contact with its customers. Tesla has a continuous relationship with its customers.

That’s the major difference in their business model. The electric engine is just one part of their different business model.

It is not the technology that matters, but what you with technology to serve your customers better.

Technology does not help you to disrupt yourself, it is what you want to do with the technology

So what helps to overcome the focus on technology and focus on what business model innovation you can create with the technology. It is actually an unlearning and learning journey at the same time while unlearning is the most difficult part of the whole trip.

  1. Find a CEO and top managers that want to spend their most precious resource, their time, on the process to question themselves and what made them successful. That time is the precondition of Disruption and the scarcest resource in a firm. See “Who is in charge of business model innovation.
  2. Introduce Business Model Thinking in your firm by using the business model framework (important to include the Team & Value element) in all your strategy and innovation process. Put traditional thinking in industries aside and focus on customers and why they buy and not on markets.
  3. Understand the business idiosyncrasies of an upcoming technology. That is your Technology Insight. It’s always worthwhile to look at advanced companies that have an edge in understanding what is businesswise possible with a new technology. Apple disrupted Nokia because it did not sell hardware like Nokia anymore but a relationship including access to a new ecosystem that together created a whole new value proposition to customers.
  4. Try to understand the open assumption behind your business. To do so describe the business model (not just on the canvas since space is limited.) Be honest and frank to yourself. Otherwise, an external competitor will find the weaknesses of your business model.
  5. Try to unveil the tacit assumptions in your business and industry like how you measure success in your industry like registrations of your brand. Here it helps to describe the revenue model and how you measure success and how you promote people. That is the resource allocation process which is often more powerful than the official formulated strategy (see work of Joseph Bower that formed the foundation of the disruptive technology theory by Clayton Christensen).
  6. Find insights into the behavior of your current customers. Think why these people buy your products, what jobs they solve with your products and why they love your products (or not).
  7. Find insights into the jobs-to-be-done of your unserved customers and “low-end” customers.
  8. Now, work can start to experiment with all the different insights to explore new business models.
  9. ……

Well, the rest of this learning journey is different from firm to firm and different from technology to technology. So have a good journey, dear incumbents since otherwise newcomers will eat you for lunch.

*This illustration is translated from my Ph.D. from 2001. Stähler, Patrick (2001). Geschäftsmodelle in der digitalen Ökonomie, Josef Eul Verlag, Lohmar.

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