Business model innovation – Part I

Intro

In a recent post corporate entrepreneurship was presented as a tool for organizations to adapt and gain a competitive advantage in times of high uncertainty. Another tool useful in the similar context is business model innovation (Chesbrough, 2007; Osterwalder and Pigneur, 2010). The business model, as any subject of change and innovation such as product, process, organizational or marketing (OECD, 2005), can be developed and its development managed (Amit et al., 2011; Giesen et al., 2009, Implement, 2012; Wells, 2013). However, the business model differs from other subjects of innovation such as products in the sense that it is an abstract idea that represents and supports high-level thinking (Bryman and Bell, 2010) and is thus a social and conceptual construct (Gassmann et al., 2012, Harari, 2015).

Elements

The business model gives a holistic picture of a focal subject be it an organization, a system, a business unit or a technology (Chesbrough, 2010; Wirtz, 2011) and helps explain:

  1. How the focal subject creates value
  2. What value is created,
  3. How the focal subject delivers value
  4. How revenue is generated

(Amit and Zott, 2010; Schnider and Speith, 2013)

Building blocks

In order to make the business model concept more useful the four elements above can be further broken down into nine building blocks according to Osterwalder and Pigneur (2010).

I. Key activities
II. Key partnerships
III. Key resources
IV. Value proposition
V. Customer segment
VI. Distribution channels
VII. Customer relationships
VIII. Cost drivers
IX. Revenue streams

The different building blocks are in short explained below with an organization as the business model focal subject:

I ) In an organization focused on production the key activities can be R&D, HR management, marketing and sales, operations as well as in and outbound logistics and services (Porter, 1984; Osterwalder, 2004).

II ) Partnerships are agreements which allow organizations to create value and gain access to external resources, capabilities and activities (Sommer, 2012).

III ) Resources form organizational capabilities and can broken down into human, tangible and intangible resources. Tangible resources have a physical form such as machines and buildings whereas intangible ones such as intellectual property or brand are not physical (Grant, 2010). Resources and activities are connected as the activities share resources (Johnson et al., 2008)

IV ) The value proposition targets the specific need of a customer segment (including stakeholders if one wishes) and is based on the capabilities of the focal subject and/or its partners (Chesbrough, 2006; Osterwalder, 2004). In essence the value proposition is the bundle of benefits that the business model focal subject offers its customers (remember: the focal subject of a business model can be anything from a business to a technology). A value proposition can further include the full spectrum of the cost of capital (not only the financial returns to debt and equity holders) thus it returns the different types of capital utilized in production such as natural, human and social capital (Haque, 2011; Osterwalder and Pigneur, 2010)

V ) In the customer segment building block the target group is described and defined. Progressive organizations do not stop when the answer to “who is the customer?” is clear, they move forward and include other stakeholders which the business model affects such as the environment (Osterwalder and Pigneur, 2010; Sommer, 2012).

VI ) The distribution channels are the tools through which an organization communicates and delivers its value proposal to its key customers and other stakeholders (Osterwalder and Pigneur, 2010).

VII )  Customer relationships can range within a spectrum from close to distant. A community, personal-service and co-creation are examples of close relationships whereas self-service through automated cashiers in a food market is an example of distant customer relations (Osterwalder and Pigneur, 2010).

VIII ) This building block describes the costs, such as fixed, variable, direct and indirect costs, inferred through the operation of the business model (Johnson et al., 2008; Osterwalder and Pigneur, 2010).

IX ) This final building block represents how an organization manages to capture the value it generates through its activities. There are several types of revenue streams such as lending, selling, licensing or advertising. Furthermore, revenue streams can have different pricing mechanisms such as subscription, auction or fixed price (Osterwalder and Pigneur, 2010, Sommer, 2012).

To be continued…

In part II I will dive deeper into the “innovation” part of business model innovation.

Refrences
Amit, R. & Zott, C. (2010). Business model innovation: creating value in times of change. Working paper, Madrid: IESE Business School – University of Navarra’

Bryman, A. & Bell, E. (2011). Business research methods. (3. ed.) Oxford: Oxford University Press.

Bucherer, B., Eisert, U. and Gassmann, O. (2012) Towards Systematic Business Model Innovation: Lessons from Product Innovation Management. Creativity and innovation management, 21(2): 183-198.

Chesbrough, H. (2007). Business model innovation: it’s not just about technology anymore. Strategy & Leadership 32 (6): 12-17.

Chesbrough, H. (2010). Business model innovation: Opportunities and barriers. Long range planning 43, 354- 363

Giesen, E., Riddleberger, E., Christner, R. & Bell, R. (2009). Seizing the advantage – When and how to innovate your business mode. IBM Global Business Services: Executive Report.

Grant, R.M. (2010). Contemporary strategy analysis: text and cases. (7. ed.) Hoboken, N.J.: John Wiley & Sons.

Harari, Y.N. (2015). Sapiens: en kort historik över mänskligheten. (1. utg.) Stockholm: Natur & kultur.

Haque, U. (2011). The new capitalist manifesto: building a disruptively better business. Boston, Mass.: Harvard Business Press.

Implement (2012). Business Model Innovation: New paths to creating growth and delighting customers. Viewpoints on change, strategy and growth 12. Implement consultancy group

Johnson, M.W.; Christensen, C.M. & Kagermann, H. (2008): Reinventing Your Business Model, Harvard Business Review, 86 (12): 50-59.

OECD/Eurostat (2005), Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd Edition, The Measurement of Scientific and Technological Activities, OECD Publishing.

Osterwalder, A. (2004): The Business Model Ontology – a proposition in a design science approach. Universite de Lausanne, Ecole des Hautes Etudes Commerciales: Ph.D. thesis.

Osterwalder, A. & Pigneur, Y. (2010). Business model generation [Elektronisk resurs] : a handbook for visionaries, game changers, and challengers. Hoboken: John Wiley & Sons

Porter M.E. (1984) Competitive Advantage. New York: Free Press. Found in Grant, R.M. (2010). Contemporary strategy analysis: text and cases. (7. ed.) Hoboken, N.J.: John Wiley & Sons.

Sommer, A. (2012). Managing Green Business Model Transformations [Elektronisk resurs]. Berlin, Heidelberg: Springer Berlin Heidelberg.

Wells, P.E. (2013). Business models for sustainability [Elektronisk resurs]. Cheltenham: Edward Elgar Publishing.

Wirtz, B. W. (2011) Business Model Management: Design – Instruments – Sucess Factors. Speyer : University of Speyer

Zott, C., Amit, R. & Massa, L. (2011). The Business Model: Recent Developments and Future Research. Journal of Management, 37(4): 1019-1042

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