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

The offer is only one building block to fulfill the value proposition

One of the beauties of the business model thinking is that we learn to see a business totally different if we really apply stringent thinking and dissect a business into its building blocks. And one of the most important concepts is that the value proposition is not the product. Why?All elements of a business model have to fulfill the value proposition

It’s not the product that creates value but the value proposition. The whole value architecture including the product, the revenue model and the team & values all have to deliver the value the value proposition is proposing.

Deadly business with a value proposition that customers and democracies need

A simple, a bit eccentric example illustrates this. Take manstopper ammunition that is for very good reasons banned by the Hague Convention in international warfare.

Manstopper ammunition does not sound like a lovable product and in terms of Alex canvas as a good value proposition?

Actually, manstopper ammunition is the offer and not the value proposition. A good, and even meaningful value proposition depends from your customers, the job-to-be-done and the benefit you create for your customers. Continue reading The offer is only one building block to fulfill the value proposition

Business Model Innovation and Story Telling: How to get the story right!

Framing the business model so it can be quickly but well understood by others is core. So, how do we do it? By Paul Hobcraft

You have come to end of a fairly long week. You have finally finished your Business Model Canvas. Finally you have a working hypothesis of something that is going to challenge some of the existing business models around. You should feel pleased; it took a lot of hard work to get to that point.

Laid out on one piece of paper is something that could have real business value yet although you can see where the dots connect, you begin to wonder if others will see the same compelling value, to invest in it, to back it, to simply support it and encourage you to continue.
Tell Your Story

Completing a business model and identifying its critical parts is only that first step, the hard part is getting it off the ‘drafting board’ and making it something tangible and potentially commercially viable for those around you to engage with.

What is the next step in executing this potential game changing business model

Each new business model needs a compelling story – a narrative..

We really need to learn how to craft a story, to tell the narrative around why your business model idea stands out and is worth other people’s time and consideration. This business model narrative along with your business model you are potentially better placed to test it, to talk about it, to validate it, to make it ‘sing for others’. You are out to get engagement and contributions everywhere, from everyone, as you tell the story, describe your potential new business model you gain from their reaction and improve your understanding of the real need for your idea. Continue reading Business Model Innovation and Story Telling: How to get the story right!

Business Models, Long Range Planning, Baden-Fuller and latency

Long Range Planning, a prestigious academic journal on strategy, discovered the topic of Business Models and Strategy. It dedicated a whole Special Issue to Business Models. I have mixed feelings regarding the Special Issue. On the one hand it is great that academia takes up such an important topic; on the other hand, it is shows again that academia is a self-referential system which has a strong bias to not-invented-here syndrome since most authors do not reference earlier works that were published outside their closed community of Strategy professors. Sad. Many of the ideas I have read at other places before.

Already in May, I have heard that Long Range Planning had published a Special Issue on Business Models. Today, I got hands on it thanks to Andres Sundelin from The Business Model DataBase.

You can access the article via http://www.sciencedirect.com/science/journal/00246301 as a guest. Very interesting topics like “Business Models as Models” by C. Baden-Fuller and M. Morgan or “Business Models, Business Strategy and Innovation” by D.J. Teece are included, so the Special Issue is definitely worthwhile reading.  That is the happy part of the Special Issue.

C. Baden-Fuller, M. Morgan, Henry Chesbrough and business model

What makes me sad about the issue is the closed and self-referential world of the academia in Strategy Research. The topic was broadly covered in early 2000 at least in two Ph.D. theses, I know. However, so far I have found only two citation to Alex Osterwalder’s work in the article “Business Model Innovation: Opportunities and Barriers” by Henry Chesbrough and in the article by Wirtz & al.. Thanks Henry, that you take your open innovation approach also your research. Thanks Bernd.

I hoped to find some background on Business Models in Baden-Fullers and Morgan’s article. Negative. They seemed to have not heard from Osterwalder before, they do not cite him. They are not mentioning ideas of Gary Hamel on business concept innovation from 2000, a concept very close to business model innovation. They cite only their own kind. They still live in their closed community where it is extremely important from whom the idea is coming, even when the original idea is 10 years old and not even cited. That is what I call a long latency!

Origin of business model thinking

The origin in business model thinking dates back to the information management researchers that were building information systems. To do so, they needed models of the reality. They talked about data models, process models, enterprise models and later about business models. When the first Internet entrepreneurs were talking about their strategy, they talked naturally about their business model since that was a language familiar to them. From there, the term transcended to Strategy. E.g., I wrote my Ph.D. thesis exactly at this crossing of information systems and strategy. My supervisors were Prof. Beat Schmid, background in computer science and Prof. Georg von Krogh, a strong researcher in Strategy. Quite a balancing act.

Business model is just a model of a business

When I was writing from 1997 to 2000 my Ph.D. thesis, Prof. von Grogh told me that I needed a unit of analysis for my research. I know the traditional culprits like industry or firm but they did not fit into what we saw in the New Economy. Industry boarders become meaningless; competition came from competitors you had not even heard before.

Therefore, my answer to Georg was very simple: I used the business model as my unit of analysis. He said fine. Just define it. Well, easy said difficult done. I was positive at the beginning that there must be something since we all got Masters of Business Administration so Business should be defined. Nope. Not really.

And again, it was Peter Drucker who had worked on this. He asked the simple questions “What business are you in?” and “What is the purpose of a business”.  And this is exactly what a business model should answer when used for.

[If you want to know something about the origins of business model thinking and my contribution to the topic read chapter two of my Ph.D. from summer 2001 at Google Books. I translated part of that chapter for a workshop Prof. Yves Pigneur and Alexander Osterwalder (a German speaker) organized in summer 2002, when they started their research on business models. (added Jan. 5th, 2017)]

Chesbrough and Rosenbloom (2002) explain the antecedents to the business model concept in their article “The Role of the Business Model in Capturing Value from Innovation: Evidence from Xerox Corporation’s Technology Spinoff Companies”. It is interesting that it was not the academic world that saw the necessity to have the business in focus for strategy but the real world. The business is where the competition is. Welcome to the real world.

Let’s commit a thoughtcrime

In formulated strategy we use a lot of words like innovative, based on core competencies, market driven, customer centric, operational excellence, best-in-class, top quality, leveraging existing brand, etc…. You named it and of course business model and business model innovation are now part of these buzz words. Are they still meaningful or did we forget the deeper concepts behind the words? Do we use the technocratic jargon to signal others that we are the experts?

doublethink by duncan

As I have argued in my last post, I think we use in strategy and in management in general too many generic and meaningless words. And I think we use also too many meaningless graphs and pictures to say nothing as a matter of fact. Visualization does not help you if your strategy is bad. Sorry, Alex for this 😉 .

Every decent firm claims in restructuring that it is concentrating on its core competencies when divesting or closing parts of its firm. Well, and often it is the same firm that argued some time ago that it was necessary to buy this now divested firm since it wanted to offer full service to its customers. We have so many words for “Sorry, it did not work. We just could not make it work”. Why are we so afraid about the truth?

Management Newspeak

In management we have invented Newspeak. Original, Newspeak is a fictional language in the novel Nineteen Eighty-Four by George Orwell. The basic idea behind Newspeak is to remove all shades of meaning from language. While in Orwell’s novel the government tries to introduce Newspeak to the people in order to make the people more compliant to its will, in the case of management it is our own fault. We managers use our own Newspeak and we have taken all meaning out of it. Continue reading Let’s commit a thoughtcrime

Does a customer care about your corporate strategy?

The question what  a good strategy is is difficult to answer. With hindsight it is easy: A good strategy is one that works. But in foresight? Many formulated, intended strategies are plain boring, generic and not customer centric, but focused on investors. Many business model innovators on the other hand have clear strategies that are focused on customers and on the value proposition.

Boring strategies

“We earn a premium on our cost of capital”

“We form the best team in industry”

“We help our customer to be more successful”

“We ensure sustainable development”

Have you found out which company has these pillars for its strategy?

Probably not. The strategy is so generic and interchangeable that it fits for almost any large company.

Are you attracted as a customer to this company?

Probably not, since so many companies claim to help customers to be more successful.

Does this spur emotions in you?

Definitely not! It is just plain boring!

How about this company: It claims that it is driven by “passion of success” that rests on “four cornerstones”: “superior brands”, “superior supply chain”, “superior talent in lean organizations”.

Do you know which company it is?

No, since it is so generic. It could stand for many companies in many industries. It is boring. It does not give the company any real purpose to exit.

Value centric strategies

So how about this:

“to organize the world’s information and make it universally accessible and useful.” Continue reading Does a customer care about your corporate strategy?

Karstadt: Death of a legend (business model)

The German retail and travel conglomerate Arcandor AG formerly known as KarstadtQuelle AG filed on June 9th 2009 for insolvency. It claims that the financial crisis is the reason. It had asked the German government in May for state aid but the government refused. But is the financial crisis the real reason for the dire situation? I do not think so. The business models of its retail activities (Karstadt and Quelle) are just dead. The management did not innovate on its business model and that is the reason for failure.

Most writers and bloggers take the music industry as a prime example for an industry that failed to innovate its core business model. But there are many other industries where failure to innovate its core business lead to their decline. A sad prime example of missed innovation is Karstadt, a large department store chain in Germany and Quelle, a German mail order powerhouse.

The Karstadt case is typical for a corporation that business model is dated. Instead of rejuvenating its business model or finding new business ideas the old business model is defended and by consolidating the industry even reinforced.

The next lesson is that all activities at corporate level like selling non-core assets do not solve your problems of an ailing business model. The solution must be found on the business level not on a corporate level. If you cannot fix it, than sell or close it early. Success in business is not defined on corporate level but by its business model!

In May 2009, the CEO of Arcandor, Mr. Eich asked for “a state guarantee to temporarily bridge the gap of the currently non-functioning financial markets.” [update: link no longer available] Arcandor did not want to have any handouts nor a state participation in the company. It promised that it will repay the loan “to the last penny.” It claimed that the credit crunch is the main reason for its financial stress.

But is this really true?

The only constant in retailing is business model innovation

Retail markets in general are dynamic markets where new business models destroy old ones and create new fortunes. Zara, Aldi, H&M, IKEA or Carefour all reinvented their retail category and made their owners rich. But since the whole market did not grow as fast as the newcomers, the incumbents suffered losses in market shares and sales. Continue reading Karstadt: Death of a legend (business model)

What is the purpose of your business?

Beginning of the week, I had a long discussion with Dr. oec. Susan Müller and  Prof. Dr. Thierry Volery, two researchers at the University of St. Gallen. They want to figure out how high the excess return is earned by business model innovators. They want to know which kind of business innovation like value innovation or architectural innovation leads to what kind of über return or excess return.

Very interesting question in particular since most researchers including myself are still using case studies to make our point.

What made the discussion even more interesting was that we discussed what a business model is. There are several technical definitions like mine but for us more interesting was why the term became so prominent in the last years. With the term business model the word business returned to prominence in the conversation on strategy. Continue reading What is the purpose of your business?