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Understanding Business Model Innovation

as a way towards higher returns.

A recent Boston Consulting Group study highlights how companies that pursued product and process-driven innovation delivered a premium over the average shareholder return in their industry. However, companies that pursued business model innovation earned an average return that was more than four times higher compared to product or process innovators. Furthermore, companies that pursued business model innovation delivered more sustainable returns i.e. even after 10 years, business model innovators continued to outperform industry peers. Reason enough to consider applying it for your next innovation challenge!

by Alberto Mucci

So, what is business model innovation?

Business model innovation is at its core a methodology, bringing together innovation processes methodologies such as design thinking and lean startup and combining it with financial modelling techniques. Its ultimate goal is to help project teams understand, test & implement profitable business models able to sustain a product, service or an entire company.

Both methodologies have a positive and negative side to them.



Design Thinking & Lean Startup

Design thinking & lean startup are predominantly focused on the desirability of a new product or service (do people really want this new thing we are building?) and have the ultimate aim to understand if it's worth investing time, resources and money into pursuing the development and implementation of a new product or service idea.

Focusing on desirability first helps understand if people really want what we are building but does not ensure a financially sustainable business is built.

Financial Modeling

Financial modelling starts from the opposite end, from the “viability” side of the equation, and seeks to understand how much potential revenue an idea for a new product or service could generate before launching it.

By focusing on revenue from step 1, Financial Modeling risks stifling interesting new ideas just because there is not an obvious sustainable business model to them.

Focusing on desirability first helps understand if people really want what we are building but does not ensure a financially sustainable business is built.

Alberto Mucci, Made

Combining Design thinking & Financial modelling

Business model innovation brings together both methodologies.

  1. using design research to uncover human needs (do people want what I am building? What is the real need I am solving?)
  2. using financial modelling to uncover assumptions related to both willingness to pay (how much is someone going to pay for my product?)
  3. analysing people’s behavior (How often will they use my product? In what context?).

There are varying definitions of what a business model is. One of the most accepted is that a business model is how an organization produces, captures & delivers value.

What is particular about business model innovations, is that they usually encompass 3 or more of Alex Osterwalder’s business model canvas’ subsections making them more complex to execute compared to other forms of innovations and involving multiple units within a same company.



Business Model Innovation in the food industry

We recently worked with a client launching a post-Covid B2B offering in the food delivery industry.

We started with the idea & intuition of the founder. In order to further explore it we started a qualitative research track in order to validate the user interest while in parallel already started exploring potential business models as well as crunching the numbers to have a rough first estimate of the sustainability of the business.

Furthermore, by crunching the numbers from step one we were able to extrapolate a number of assumptions - for example the cost of the meal, the frequency of order as well as how the pick-up moment was envisioned - and use such data input as assumptions to be tested during the validation interviews.

Once we conducted the user interviews with customers, we were able to refine many of the assumptions underlying the financial models, change them and understand better what model worked best before moving forward with it.



Hilti, using Business Model Innovation to transform their business

Hilti, a European company selling construction tools, surprised the market by successfully migrating from a standard selling model to a renting model. Next to their products, Hilti now offers many services for construction companies.

Hilti’s business transformation is a benchmark case for European companies from the mechanical and systems engineering sector. In such a sector, until recently, innovation was traditionally brought to market by gradually introducing improvements in small and reliable steps in close coordination with the customers. But the ever-increasing penetration of the industry with software is making tools increasingly intelligent, allowing them to communicate with each other and with the cloud. These technical possibilities are leading to an evolution and revolution in terms of business models.

Hilti’s step from being a seller of products to becoming a provider of complete solutions goes beyond additional service and traditional after sales services or spare part provision: it’s called fleet management. The fleet management idea at Hilti is derived from the automotive industry and comes as a one-stop package. Customers, and especially economically-savvy business customers, appreciate a one-stop service which is tailored to their individual needs and optimizes their own productivity. In return, they are prepared to pay a significantly higher price.

The returns for the company were staggering. As Harvard Business school case study shows, Hilti, which had about 22,000 employees and made about 4.5 billion Swiss Francs (or $4.589 billion USD) in sales in 2015, managed 1.5 million tools under fleet management contracts in 40 countries, resulting in a contract value of more than 1.2 billion Swiss Francs (approximately $1.4 billion USD).”



How to get buy-in for BMI if you are working at a large company (the hardest part)

As a manager of a large company or organizations, your focus is usually on a specific part of your company’s or organization’s value chain. If for example you work in the pricing department, your interaction with a new product or service will be limited to one part of a chain of decisions. If on the other hand you are a technical R&D manager, you are usually working on specific technologies to improve existing products.

When you are working in a large organization you need to think of the development of the new product or service model as the tip of the tip of the iceberg of a much larger process of buy-in, internal lobbying and alignment of the different business units.

It would be naive - and likely lead to failure - if you just start experimenting with business model innovation without any internal prep work, especially if BMI is something new for your organization.



Buy-In

One R&D manager in the insurance industry we talked to, told us it took a long time of internal preparation and lobbying to get buy-in and the alignment of different company business units. The particular manager had to get legal, payments, IT and compliance excited about his project before seeking sponsorship from the board.

On the other hand, it took him only 3 months to develop the prototype of this new insurance product dedicated to bike owners once everyone was aligned.

All R&D managers stated that the secret to success is to treat your internal quest to bring a business model innovation mindset to your organization as a long internal pitching session, to treat each stakeholder as an investor to convince and bring on board.

Help from external parties

Another manager underlined the importance of working with an external party during the process of getting internal buy-in, as consultants and agencies bring perspectives of different projects and industries to the table as well as add credibility, speed and time to market to the success of the project. The external party is often less risk averse as internal stakeholders, helping you to push things forward.

Do the homework

In order to bring them over the line, you have to do the homework upfront. For example, as one of the managers shared, if you are going to talk to the payments units to pitch the idea and you have identified a new payment solution as the optimal one for your new products & service, you should prepare slides explaining the solution as well as showing the cost and time associated to changing the current IT payment solution.

The effort will have to be done for each company business unit touched by the business model innovation. So, start with the Osterwalder canvas, map out your idea, understand what business units would be affected and who you should talk to in that unit and prepare your pitch.

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