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Why Develop a New Business Model at all?
New business models have turned entire industries upside down in recent years. Apple, for example, was able to completely change the music industry thanks to iTunes, or Nestlé was able to sell its Nespresso capsules for 10 times more then the actual market price for coffee. In fact, not only products and services are developing ever faster, but also the business model must be regularly upgradet or even redesigned to maintain the company's survival in the long run.
Strikingly, management is often not aware of this challenge. According to a study by etventure on the topic of digital transformation in Germany, only 21% of the companies surveyed believe that the development of new digital business models is part of digital transformation (etventure 2019). This is surprising and contrasts the fact that companies such as Apple or Uber only became successful through business model innovation.
„ A new product or service alone will no longer be enough for success in the digital area.“
What exactly is a business model. The frequent perception is that a company manufactures product X and sells it (successfully for years) in segment Y. But this is too short-sighted, as we will see in the maturity model below. Apple has basically sold music via iTunes, music, which it actually not even produced itself. It also has not invented digital music. But it has managed to revolutionize the music industry with its ingenious business model.
The following definition by Alexander Osterwalder sheds some light on this:
A business model (BM) describes the fundamental principle of how an organization creates, conveys and captures value. The emphasis is on "fundamental principle" or better "mechanism". A business model innovation aims at innovating the mechanism by which a company makes money. Apple has succeeded in doing just that with its business model for digital music.
"A business model describes the mechanism by which an organization creates, communicates, and captures value."
Alexander Osterwalder und Yves Pigneur
The Big Five are the best-known and often cited examples. But a company does not have to revolutionize an industry. In fact, the development of new business models is possible for the restaurant owner or craftsman as well as for the manufacturer of pharmaceuticals or diagnostics. The Corona crisis showed how quickly the exisitng business model can be wiped away and alternative business model have emerged. What companies often lack, is the methodology and competencies to develop or even fundamentally renew their business model.
Those who want to arm themselves against future crises and generate substantial revenues must break away from the rules of existing business models and adopt a new mindset. But before we look at the "how," the following section will first take a closer look at the concept of business model mechanics.
Many well-known business models, such as those of Google or Amazon, are already digital. We therefore see business model development as the generic term and dispense with the addition of digital. If you would like to learn more about explicitly digital business models and their specific mechanics, you can find more on our blog site.
The Four Levels of Business Model Maturity
This model distinguishes between the ability of companies to operate passively, actively or strategically with business models. You can determine your own maturity level using the simplified criteria.
The strategic step towards a user-centric approach can be accomplished at level 3.
Companies aiming at business model innovation need to be at level 3, where the focus switches to customer value. "What added value can the company offer?" And only then, "What is the appropriate technical solution?" Here, the emphasis is on the mechanism of a business model: "How are different business functions logically connected to each other". A well-known example is Gilette's "Razor-blade" model. The important point here is that all areas of the business are interconnected. To visualize this interaction and to illustrate that all key functions are mechanistically linked, the Business Modell Canvas methodology uses "stories" as tool. This forces the creation of very strong business models. Other well-known examples are DELL, Netflix or Nintendo's Wii.
One important aspect to accomplish level 3 maturity is to counteract silo thinking and align the entire company (or division or product portfolio) to achieve maximum customer benefits. This stage is a prerequisite for a successful digital transformation, as the digital economy is driven by customer-centricity.
Companies like Apple and Amazon operate at level 4 and regularly launch new business models on the market. At level 4, business models are not only designed to successfully establish products in the market, but new business models are continuously developed to stay ahead of the competition - sometimes even at the price of cannibalizing the old one. Because these companies construct proactively business models, they are far less susceptible to market changes or competition. In fact, they are market drivers and game changers.
If we take another look at the etventure study mentioned above, it becomes clear why the topic of business models is not receiving the necessary attention in German SMEs. They are most of the time still at level 1, understandable because this has been the successful model for a long time. Nevertheless, anyone who wants to drive forward the digital transformation of the company cannot avoid developing strategic competencies to at least level 3 maturity.
Why not try it out for yourself using these criteria to place your own company onto the four levels? Or give us a call, if you want to dive deeper into the topic.
„Business model innovation is all about value capturing for the company, its customers and stakeholders.“
The American company Gilette sells its razors at a low price and thus attracts customers. The blades required, on the other hand, are significantly more expensive and also have to be renewed regularly - a lucrative business model that can only work so well because all company divisions are interconnected.
The business mechanics behind this model is also callend "bait and hook".
The maturity model illustrates the different levels of a company's ability to develop new business models - its compentence to master business model innovation.
At level 1 are companies whose focus is on developing products or services and selling them in specific market segments. The underlying business model is typical for many industry sectors and is not perceived consciously anymore. This approach is characteristic of the industrial economy in the 20th century, which is characterized by optimization of products and production. Successful and technically oriented companies in particular find it difficult to leave this stage and get to the next level.
At level 2, a company begins to understand its own business model using suitable methods and is ready for further optimization. The Business Model Canvas method is very well suited for visualization and inter-disciplinary discussions. We observe, that this method is used as a kind of checklist or to change certain areas, for example, a new pricing model or the conversion of a software product into a software as a service model. In doing so, there is a risk that one merely builds around existing product or service offerings and miss opportunities.
The Existing and the New Business Model
Existing and successful companies face the dilemma that they have to take care of their operational business and therefore often have neither time nor personnel available to develop a new business model. A new business model also carries risks and it does not deem necessary to jeopardize the company's success with new adventures. Why develop a new business model? Ours works!
But unfortunately, this attitude is too short-sighted, as illustrated by the well-known double-S curve: Sooner or later, most business models lose profitability or disappear altogether. The issue is, before a new business model can generate truly profit to replace the old one, it needs some lead time. And this is the crux of the matter. When does a company need to have a new, functioning business model in place? The current one is still going well, alternatives seem too immature and risky. This attitude becomes a problem when other companies enter the market with new business models or there are unforeseen changes in the economy. Then it is usually too late to create a new business model from scratch.
Double-S-curve of business models.
Where are we today on the S-curve? Determining that with absolute certainty is difficult. Companies that look at business models early on make themselves less dependent on unforeseen market changes or disruptive technical developments. Ideally, you make yourself a pioneer.
Even the successful iTunes model is currently being revamped and relaunched by Apple. Companies at level 3 or 4 leave nothing to chance, but proactively design and test new business models all the time. This enables them to react much more quickly to market changes or, better yet, to steer the market themselves. This does not only apply to corporations. Even the pizzeria that quickly sets up a delivery service in Corona_ times saved itself through the crisis with a new business model. Sounds trivial, and it's not a business model innovation either. But then why haven't all pizzerias done it this way? For a medical technology manufacturer, it looks more complex. But here, too, developments for new business models are clearly emerging. It is much easier to speed-up business model design and implementation from a draft stage through an continuous and active process
"Constant engagement with business model design allows a company to navigate through crises more easily."
Philips is transforming itself into a medical technology manufacturer.
You don't always have to look to the USA. Philips, known for household appliances, built a new business model a few years ago and has become a medical device manufacturer. Philips was able to compensate for the revenue dip in the household sector during the Corona crisis with its medical products business.
This sounds logical, but the question for smaller and medium-sized companies remains, how they are supposed to carry out business model development in parallel with limited resources. The solution is to use agile frameworks. Agile methods are designed to iteratively develop products but also business models. This means that a business model project can be started with considerably fewer resources, its feasibility and market attractiveness can be tested quickly via prototypes, and only, when data look promising, the implementation starts full force. This significantly reduces the initial risk.
In our view, a very effective method for the agile development of business models is the "Business Model Generation" method by Osterwalder and Pigneur, as we introduce here in detail.
In the next section, we will take a closer look at the general process. After all, similar to innovation management, a modern company must be able to further develop its business model in parallel with its day-to-day business.
The Process to Business Model Innovation
If you want to develop a business model parallel to your daily business, you have to create the necessary structures and plan the business model development as a project with time and budget constraints. Two points are essential:
The willingness to experiment with different business models and
Testing business model prototypes with future customers or beta users.
The traditional approach with elaborated analyses, numerous ROI scenarios and comprehensive business plans are tedious and therefore SMEs tend to quickly terminate such business model design initiative. The idea to enter the market with a fully developed, perfect business model is the wrong approach and actually quite risky. The better approach is to experiment with business models. This may sound unusual, but methods such as the Business Model Canvas or Lean Startup offer the necessary frameworks and tools. Quick readjustments and adaptability to the market needs are often more important than the big strategic concept. Just look at the early days of Amazon, they tried out a few business models before they finally established their online book store business, which was the foundation for their today's success.
The aforementioned methods offer procedures for testing the business model or certain aspects of it in the market and obtaining further information. The techniques are not complicated. Rather, there is often a certain reluctance to test and discuss concepts or prototypes with customers. But this is exactly the weak point of the classic level 1 approach to business models. People prefer to use historical data or make assumptions about what might happen in the future. However, current market data, information about future technical developments and particularly knowledge about what the customer expects in the future are needed. These insights cannot be obtained in the office.
Lean startup is an agile method for building products or business models quickly and in a resource-friendly manner. At its core is a cycle of build - measure - learn, typical for all agile methods. The result is the so called "minimal viable product" (MVP). The method was published in 2008 by Eric Ries.
Business model development involves all business functions. The Business Model Canvas promotes interdisciplinary communication and requires actions outside the office, e.g. customer interaction or technical feasibility in the lab.
It is recommended to consider the implementation of the new business model as a change project.
The figure above outlines the basic approach and highlights the two fundamental points: experimentation and early interaction with (potential) customers. Generally, several cycles or iteration are needed. One should not be misled by 5-day sprint techniques. They work well, if you want to use such hackathon to kick off the development process, explore possibilities, or familiarize yourself with certain methods. However, business model development takes time, especially when products or services need to be adapted or developed. It is just as true for the examples of iTunes or Amazon's online business, because these business models were not born overnight either.
„80% of the respondents stated that digital transformation is also accompanied by a change of the corporate culture.“
Etventure "Digitale Transformation 2018"
Anyone who wants to take their company to level 3 will have understood that a new business model will affect all areas of the company. This is even more true if it takes place in the context of a digital transformation initiative. In order to help co-workes to view the change positive, the implementation must not be seen as a pure strategy project, but rather as a change project in which all employees are involved. For example, if silo thinking is not stopped, rapid implementation may be hindered by resistance from a single department. "Change starts in the head" is not just a saying, but an elementary component of any further development. The willingness to do so is the prerequisite for being able to develop a new business model.
Companies that have little experience with agile frameworks sometimes need an "eye-opening experience" to realize with what ease and how quickly success can be achieved. In this case, it is a good idea to initially set up business model projects as an initiative alongside with daily operations in which new approaches are tried out without risk. We offer this in our consulting services.
Do Small to Medium-Size Enterprises really
Need to Innovate their Business Model?
Yes - business model development is not just for large corporations or startups. It should be part of every company - remember the pizza restaurant during the Corona pandemic? The challenges and urgencies certainly depend on the particular industry. But nevertheless, the importance is underestimated as many small and medium-sized companies are still at level 1. With increasing use of digital technologies, the ability to innovate business models is becoming a prerequisite for remaining successful. It forces to focus on customer benefits. It gives answers to how to benefit from digital sales, how to employ AI oder blockchain technologies?
Again, SMEs usually don't have the human resources for a strategy office or the financial resources to set up an incubator or even a spin-out. But that is not required. Other concerns are that business model development must be a groundbreaking innovation or on the opposite that this is merely an abstract strategy exercise. Neither of these are true either. In fact, it is about offering added value to the customer, remaining competitive, reacting faster to market changes, and ultimately becoming a driver of market change itself.
Agile frameworks help to minimize initial investments and risks. Especially companies with little experience in the user-centric approach benefit tremendously and will take the step to successful digital transformation more easily. Those who have gone through a development cycle at least once will quickly gain confidence and recognize the benefits - promised!
Take a look at our offer and talk to us. We will be happy to support you on your journey.
We design and implement with you
Your innovative (digital) business model
Do you have a high-quality product or a smart service, but the desired sales stay on the moderate side or even fail to materialize? Would you like to develop a future-proof business model or revolutionize your industry? We accompany you on the way to your new business model.
We use agile frameworks and are data-driven
An important tool for the architect are models made of cardboard or wood to present his or her ideas, discuss them with the client and develop them further. In analogy, we see ourselves as business model architect and use the Business Modell Canvas as tool to prototyping of business models.
We see ourselves as architects, and view
business model development holistically
We not only design business models, but also conduct the necessary market intelligence and capacity analyses for you, test for profitability and accompany you through the development process, designing, testing and implementing. We also support you in changing the corporate culture.
Option 1 - Get familiar
Exit level 1 and take the next step to level 2 of business model development
Learning agile methods for
business model development
Analysis of your current GM with the new method
Design of first prototypes for better business models
Option 2 - Design
Climb to level 3 and become fit for digital business model innovation
Running through several development cycles
Business analysis of the new prototypes
Market intelligence for prioritized prototypes
Interaction with potential customers to test ideas
Requirements to level up to the new value proposition
Decision basis to kick-off development & implementation
Option 2 and 3 each contain the elements of the previous option
Option 3 - Implement
Establish your company at level 3 and implement your new business models
Final design of the new business model
Business analysis of the new business model
Market intelligence for final business model
Extensive testing with potential customers
Feasibility study and optimization of the value proposition
Alignment with the
Planning & support of implementation
Alignment of the organization to the new business model
Fine-tuning and Launch
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