Handbook of Business Model Innovation: Tips & Tools on How to Innovate Business Models

Bibliography

1

What is Business Model

Innovation?

1 What is Business Model Innovation?

If you always do what you’ve always done, you’ll always get what you’ve always got.

- Henry Ford

In recent years, the importance of business model innovations has become increasingly apparent in research and practice (see, among others, Amit/Zott (2012), Chesbrough 2006, Johnson/Christensen (2008), Massa/Tucci (2014)). Before the subsequent chapters with tips & tools explain in detail the development of successful business model innovations, the following section will briefly discuss what is meant by business model innovations, what relevance they actually have for business practice, and how an innovation process can look like in the overall picture. The latter is described step by step in the following chapters.

A business model is the description of the way in which a company creates value for certain customers, creates and delivers this value and generates sustainable revenue growth from it (see Osterwalder/Pigneur (2010), p. 14). The business model is thus the implementation and concretization of a strategy and represents the link between strategy and the individual business processes (see Osterwalder/Pigneur (2010)).

In addition, the terms business idea, business model innovations and business plan are also to be understood as follows in the sense of a practice-oriented definition.

The business idea concerns only a part of the business model (such as an idea for a product or service innovation) and can at the same time be an impetus for a business model innovation (see below).

Unlike product, service, process and social innovations (see gray box below), a business model innovation should always involve changes to several building blocks of a business model at the same time (see Lindgardt et al. (2009), p. 2), and always contain a certain degree of novelty - either in its individual elements or seen as a whole (see Björkdahl/Holmén (2013)).

Finally, the business plan (at company level) or business case (at project level) is the written documented concept of a business model and provides additional information about steps of implementation and financing.

What is meant by business model innovation?

Innovations can be differentiated according to their subject area. The following types of innovations are available here:

Product innovations are innovations of a physically tangible product,

Service innovations are intangible and represent changes in the service industry,

Process innovations are planned changes in the process of manufacturing goods and creation of services, They serve to increase e,g, labor productivity (efficiency) and have a direct effect on the supply side,

Social/organizational innovations include changes in the organization of work and in social issues, This type of innovation can also be found under the term administrative innovation, Examples of this type of innovation are new remuneration or participation systems, expansion of tasks, bonus systems, social benefits and/or further training activities,

Business model innovations are targeted changes to existing business models or the creation of new ones, They are about gaining a competitive advantage by differentiating oneself from competitors, A business model describes how the company can generate added value and benefits for the customer and where the success potential of a business idea lies in terms of sales, costs and earnings, Business model innovations are far-reaching, strategic innovations because they change the fundamental structure of a business,

Since, by definition, a business model always comprises a company in its entirety or at least an entire business unit, implementing several completely different business models would be a complicated and complex task, Only one business model per business unit or company is therefore recommended (see Johnson (2010), p, 167),

Nonetheless, depending on the specific object of the innovation and the customer segment, it may make sense to use different design options. For example, completely different types of customer relationships or sales and communication channels may be required for the same product with different target groups. In addition, radical and disruptive innovations often require a different business model, i.e. in the end, these (often but not always!) are also business model innovations at the same time.

The importance of business model innovations for entrepreneurial practice is widely recognized in research (see Amit/Zott (2001), Chesbrough (2006)). Initial studies indicate that there is a positive correlation between business model innovations and the growth or success of a company (see Amit/Zott (2012); Massa/Tucci (2014)).

The Boston Consulting Group postulates in a study that innovations in business models are five times more successful than product/service innovations (Lindgardt et al. (2009)). A study by IBM reports similarly on business model innovations, and illustrates here an annual profit margin growth of more than 5% - also five times the product/service innovations (IBM 2006). Johnson/Christensen (2008) identified that 40% of the companies that have been included in the list of the world's 500 top-selling companies (Fortune Global 500 companies) over the last 25 years would have achieved this through business model innovation.

In this context, Clayton Christensen of Harvard Business School developed the Theory of Disruptive Innovation, which explains that start-up companies in particular introduce business models with a disruptive character into an established industry (for background information on the Theory of Disruptive Innovation, see the grey box below).

Theory of Disruptive Innovation

From his findings on patterns of industrial evolution, the US-American researcher Christensen (1997) recognized that so-called disruptive innovations often do not come from the incumbent companies themselves, but are introduced by new players such as start-up companies. However, the incumbent companies adopt the new technology much later or even too late to survive themselves. Christensen speaks here of a dilemma of disruptive innovation for established companies. For there are also rational reasons for not making a rapid change to technology that is not yet efficient (Christensen (1997)). Disruptive innovations often achieve increasing competitive advantages through simplicity, convenience, user-friendliness, accessibility and a favorable price for the customer. Christensen describes this disruptive technological change in eight phases as follows (source: Christensen (1997))

Technologies develop faster than market needs.

Incumbent companies tend to overengineer.

The emergence of a market vacuum for simple, cheap products that redefine customer value is occurring.

Disruptive innovations are easier, cheaper and/or more convenient.

Disruptive innovations initially do not meet the quality requirements of the mass market.

Disruptive innovations are initially only attractive for a small market segment.

Further development of disruptive innovations leads to the point that they will soon meet the basic requirements of the mass market.

Incumbent companies ignore disruptive innovations until it is too late.

There are many explanations for the challenges faced by established companies and market leaders when it comes to disruptive innovations. On the one hand, this may be due to (rather irrational) cultural/psychological reasons such as the arrogance and habituation of the current entrepreneurial success as well as the security and short-term thinking of managers.

But there can also be economic reasons: Leaving competence that has secured market leadership in the past is very risky and can mean the loss of the investment in terms of people, machines, know-how, etc. In addition, the cost structure of established companies (especially due to high fixed costs) often forces them to open up large markets, whereas markets from disruptive technologies are often very small at the beginning. It is therefore only rational to pursue consistent marketing and customer proximity, oriented towards the average customer (mass). This is accompanied by a focus on cost reductions, efficiency increases, optimization of existing processes and an emphasis on incremental innovations. This orientation is reflected in a corresponding efficiency culture, which in turn explains the cultural and psychological reasons mentioned above.

The following (general) recommendations can be derived from these findings by Christensen (1997):

Avoiding a purely strategic-systematic search for new markets and new technologies, but also the use of explorative approaches see chapter 2.2, as well as the Lean-Startup method see chapter 5.1).

Avoiding too quantitative and present oriented evaluation of new technologies or innovations.

Avoiding too strong orientation towards the existing, current average customers.

Not only think in purely product-oriented terms, but also consider innovating the entire business model (see chapter 4.4).

Do not conduct a classic customer segmentation, e.g. according to demographic factors (age, gender, etc.), but rather be aware of the so-called jobs-to-be-done concept (see chapter 4.3.2).

First a look into the niche (new markets) and only then into the development of a mass market.

Do not develop new markets, technologies, products and services with existing processes and values, but rather adapt processes and structures to disruptive innovations.

Due to the important significance of new (disruptive) business models, many companies are setting themselves the goal of increasing their innovation efforts in the development of business models (see Johnson (2010), IBM Corporation (2006)). Today, however, focusing solely on product and process innovation is not enough. From an industry perspective it can be assumed that according to the model of Abemathy/Utterback (see Abernathy/Utterback (1978), Utterback (1994)), the innovation rate must be increased over time by the development of new business models. In the following figure, the industry development model according to Abernathy/Utterback has been supplemented with a curve for business model innovations, following Massa/Tucci (2014).

Figure 1: Industry Development Model according to Abemathy/Utterback (1978) supplemented by business model innovations

Product innovations and subsequently process innovations can only temporarily increase the innovation rate and thus the competitiveness. Here, the innovation rate is understood as the ratio of the sales of innovations introduced in recent years to total sales in a given year. Over time, it is imperative from the industry's point of view to increase the efforts for innovations in the business model.

However, only a small percentage of the innovation budget is actually spent on developing business model innovations (see also Johnson (2010)). In addition, business practice shows a lack of effective methods and instruments for developing such new business models.

Due to the importance of the business model for a company, the process for business model innovations should always be systematic, structured and method-based. This ensures, among other things, that in such a complex and company-wide process, responsibilities are clarified, tasks are not forgotten and the basic process can be carried out effectively and efficiently. This is an essential success factor for business model innovations - as well as for product innovations.

In contrast to product innovations, business model innovations in research and practice have not yet established generally accepted process flows. Nevertheless, there are already some approaches of process models (Bucherer (2010)), which however - compared to the highly developed process models for product innovations - diverge considerably from each other. These process models differ not only in their level of detail and the terminology used, but can also be differentiated in the individual tasks, supporting methodologies and the sequence of phases. Particularly in the early innovation phase, the so-called fuzzy front end, major differences in the concepts are discernible to the extent that the impetus or source of business model innovation is seen differently depending on the author. In addition, there is hardly any practical advice in the literature as to which methodological procedures are recommended along the individual phases.

Since - as mentioned above - the existing process models for business model innovations neglect the early innovation phase or provide few practice-relevant hints for the methodical approach, a process model is presented below to close this gap. Based on the established stage-gate process by Cooper (2011), different phases are specified. These phases have decision points at certain points of the process. These so-called gates are there to continue, modify and/or possibly drop the project.

In order to avoid the justified criticism of the too strongly sequential character of the stage-gate process model, it is suggested at this point that the process should be executed in a prototyping phase with a so-called hypothesis-design-test-learn cycle according to the lean startup concept (Ries (2011)). Design thinking processes are structured in a similar way (see Müller-Roterberg (2018 and 2020)). This means that the concrete design of the business model innovation must be based on assumptions that are tested and learned from. For example, assumptions ("hypotheses") about customers' wishes, needs and problems can be tested early on in the form of experiments in order to learn from them for further development. Furthermore, the tasks in the individual process steps can be processed in the form of projects, which in turn can be carried out according to the principles of agile project management. Thus the process is implemented iteratively and agile.

Below is a brief summary of the steps for this iterative and agile process model for the development of business model innovations. A detailed description of this process model with tips & tools can be found in the next chapters.

Figure 2: Innovation Process for a Business Model

Chapter 2

Initiating

The trigger for the development of a business model innovation can be manifold and can be divided into internal and external triggers. These triggers can be the result of a systematic, strategic-planning approach (chapter 2.1), in which the goals to be pursued for new business models are derived by means of predictions and their analysis, and the necessary resources for realization are derived from these predictions, In other words, the necessary resources result from the goal pursued for a business model innovation, Furthermore, it is also possible that the trigger is the (limited) available resources themselves, from which the business model innovation results, This so-called effectuation approach is explained in chapter 2,2,

After the trigger for the review or new development of the existing business model has been given, an internal project for this purpose should be initiated by top management in the sense of a systematic approach, The measures required for this are outlined in chapter 2,3,

At the end of the initiation phase, the following question should be considered as a gate:

Are all prerequisites and requirements for the project clarified, which aims to develop a business model innovation?

Chapter 3

Company-/Environment-Analysis

In the next step, a more in-depth analysis of the current situation and future developments and trends both within the company and in the environment of the company can be carried out, For this purpose, the methods explained in chapter 3, such as trend analysis, PESTEL analysis, industry structure analysis, value chain analysis, core competence analysis or SWOT analysis, must be used,

Chapter 4

Business Idea Generation

As a source of new business model ideas, other methods in addition to company and environment analyses can systematically support the generation of business model innovations. The so-called Business Model Canvas by Osterwalder/Pigneuer (2010), for example, is suitable for developing ideas for new business models (see chapter 4.4).

Here, the business model is broken down into the different elements of a business model and for each element the design possibilities or options are considered. This allows new design options to be developed or recombined as a whole. It is recommended to include creativity techniques (chapter 4.2) and methods of customer orientation such as the customer journey (chapter 4.3).

Another way to generate business model innovations is the pattern-based approach (see chapter 4.7), which draws inspiration from other areas through the confrontation or adaptation of successful business models or parts.

It is becoming increasingly important that sustainability is taken into account in business models. Chapter 4.6 presents an approach to this end that, in addition to the economic dimension, explicitly considers ecological and social effects.

For a competition-oriented approach also the Blue Ocean strategy presented in chapter 4.8 can be used supplementing during the idea generation. Thus it is possible to recognize the dominant industry logic and to break through purposefully conventions. Here one should however always anticipate that the competitor will react to it. Business models, which create new market entrance barriers, are here particularly advantageous.

In an initial qualitative assessment, the best ideas can then be selected, e.g. using checklists or by applying a scoring model (more on the topic of assessing business models in chapter 7). Suitable evaluation criteria for this can be, for example, desirability from the customer's point of view, feasibility, viability, sustainability, scalability and adaptability to a dynamically changing environment.

At the decision point Gate 2 the following question must therefore be answered:

Is the new business model desirable from the customer's perspective, feasible, economical, sustainable, scalable and adaptable?

Chapter 5

Protoytyping

During the development of a business model, any change to an element or the choice of a new design option should be tested. It is recommended to formulate an assumption (hypotheses) about the desired effect of this change or design option in the sense of the lean startup approach (see chapter 5.1), to select a suitable test design, to conduct a test with the relevant target group and to learn from these results in order to be able to change course afterwards if necessary. Since the hypotheses to be tested should be available in a visualized, and in the broadest sense tangible, functional way, this is also called prototyping (for more information on what can be understood by the term prototype, see chapter 5.1).

Detailed recommendations for implementing the lean startup approach, which, contrary to its name, is very well suited to existing companies, can be found in chapter 5. This iterative execution of tests with the targeted further development of the company's own business model based on early customer feedback is a very target-oriented concept here.

At the decision point Gate 3 the following question must therefore be answered:

Which design options of the business model can be used, and which must be changed or even discarded?

Chapter 6

Creating a Business Plan

If the assumptions of the business model have been confirmed by customer feedback, a business plan can be developed on this basis. If it is the business model of the entire company, it is called a business plan, on the project level it is called a business case. Detailed instructions on how to develop a business plan/business case can be found in chapter 6. The business plan should also include a first draft of the implementation plan. This allows the implementation speeds/risks and expenses to be estimated.

Finally, the business model should be checked again for consistency of the individual elements and optimized if necessary. The positioning in terms of a unique selling proposition (USP) vis-à-vis competing offers should also be clearly identified.

Chapter 7

Selection and Decision-Making

The selection of a business model and the decision on its implementation is a far-reaching strategic decision that is the responsibility of top management. It is advisable to clarify already during the above-mentioned initiation who will act as the decision maker, which decision criteria will be applied with which evaluation methods and which information with which level of detail must be available for this. Only if this is defined in advance and communicated to all parties involved (especially the project team for the development of a business model), the selection and decision process can be carried out effectively and efficiently.

In addition to the above mentioned qualitative criteria desirability, feasibility, viability, sustainability, scalability and adaptability for checklist-like evaluation and especially for the analysis of profitability and risk, other methods can also be applied. A variety of suitable evaluation methods are listed in chapter 7. The scoring model (chapter 7.2.3) for comparing different business model alternatives and, above all, net present value calculations (chapter 7.3) for the revenue model are valuable decision-making aids in this context.

In addition to the decision on a business model, a formal decision should also be made on the implementation plan. This plan includes the aspects mentioned in the next section.

At the decision point Gate 4 the following question must therefore be answered:

Which business model is implemented how and when?

Chapter 8

Implementation and Monitoring

The implementation plan should include the following aspects:

Implementation plans with deadlines and dates and especially the milestones

Budgeting of the implementation (training costs, building a new infrastructure, etc.)

Selection of qualified (technical as well as social/communicative) team members for the implementation

Determine measures for implementation including the accompanying communication measures and

Definition of responsibilities and tasks during implementation.

Furthermore, the company and environment analysis explained above in phase 2 should be understood as a process step to be carried out permanently. On this basis, it is necessary to observe the trends and developments in the company's environment with continuous monitoring over a longer period of time. The underlying assumptions of the business model have to be questioned regularly in the sense of a premise control. The lean startup approach mentioned above (chapter 5.1) should also be used during implementation to identify the need for change through early feedback.

How success, obstacles and risks in the implementation of the business model can be identified at an early stage must also be clarified in advance. The methods from innovation accounting (see chapter 8.3), e.g. by collecting and analyzing suitable key figures, can be helpful here.

At the decision point Gate 5 the following question must therefore be answered:

Does the business model have to be adapted?

Finally, the business model must be regularly adapted to the dynamically changing environment on the basis of information from monitoring and management control.

Although the above steps from initiation to adaptation of the business model have been explained sequentially for clarity, this process also includes feedback in each phase, as indicated in figure 2. Depending on the company situation (large, existing company vs. small, newly founded company), not all steps are taken in such detail. Nevertheless, this process outlines a level of detail that is appropriate to the importance of the right business model for a company. In the following chapters, these individual steps will be explained in detail.

Gassmann, Oliver/ Frankenberger, Karolin/ Csik,

Michaela (2014): The Business Model Navigator: 55 Models That Will Revolutionise Your Business, Financial Times Prent., London/UK.

Osterwalder, Alexander / Pigneur, Yves (2010):

Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, New York: John Wiley & Sons.

Further information is available at:

www.innovationsratgeber.de

2

How to Initiate

Business Model

Innovations

2 How to Initiate Business Model Innovations

2.1 Strategic Planning Approach

2.2 Exploratory Approach

2.2.1 Principles of the Effectuation Approach

2.2.2 How to Proceed

2.3 Initiating Innovation Projects

2 How to Initiate Business Model

Innovations

The purest form of madness is to leave everything as it was and hope that something will change at the same time. - Albert Einstein

This chapter shows that the impetus for developing a business model innovation can be very diverse. Internal and external triggers can be found for this. The identification of these triggers can be the result of a systematic strategic-planning approach (chapter 2.1), in which the goals to be pursued for new business models are derived through forecasts and their analysis, and the necessary means for realization are derived from these forecasts. In other words, the necessary resources result from the pursued goal for a business model innovation. This strategic planning approach is outlined in chapter 2.1. On the other hand, it is also possible that the trigger is the (limited) available resources themselves, from which the business model innovation results. This so-called effectuation approach is explained in chapter 2.2.

After the trigger for the revision or new development of the existing business model has been given, an internal project should be initiated by the top management in the sense of a systematic approach. The measures required for this are outlined in chapter 2.3.

2.1 Strategic Planning Approach

The comparison of the existing business model with the (corporate) vision or strategy can be an internal trigger for the insight that there is an urgent need for action to revise the business model. A GAP analysis (see chapter 3.2.1.1) can show, for example, that with the existing business model a (turnover) gap will arise in the course of the next few years, which needs to be closed. To become aware of the strategic importance of business model innovations, it is helpful to think through a so-called do-nothing scenario. This means:

What might happen if we as a company did nothing?

What might the competitor do?

How might the customers react in the long term?

What risks might emerge? What opportunities might be missed?

With this in mind, the existing business model should also be regularly questioned. In other words, a systematic analysis of business model approaches that could substitute the company's own value proposition is necessary, even if this leads to the cannibalization of the company's own cash cows. This can lead to an early re-allocation of resources from the cash cows" to build a new business model.

Strategically thinking employees are also a fruitful internal source of inspiration, which may initially seem to affect only an insignificant part of the business model, but then show the need for business model innovation. Strategic thinking in this context means looking in all directions, as the diagram by Mintzberg