Business Model Innovation

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Business Model Innovation
Reinventing Your Business Model

Innovative business models reshape industries and drive tremendous growth. The
framework outlined in this presentation is based on the HBR article “Reinventing
Your Business Model,” co-authored by Christensen. It includes instructional slides,
case examples, and template slides. Topics include Customer Value Proposition,
Profit Formula, Key Resources and Processes.
November 30, 2012
ORIGINAL PROJECT DETAILS
http://pptlab.com/ppt/HBR-Reinventing-Your-Business-Model-17

PPT Lab (www.pptlab.com) is the only crowdsourced
presentation design service. Get consulting-quality
presentations at a fraction of the cost!
www.PPTLab.com
support@pptlab.com Each month, we will create well over 50 slides of for our members.
As a member, you will drive what business slides we create by
submitting your own presentation projects to our team. All
presentations will be created by a team of management
consultants and follow the Consulting Presentation Framework.

PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 2

Contents

 Overview 4

 Business Model Innovation Approach 12

 Business Model Elements 18

 Case Examples 22

 Templates 25


Contents

 Overview

 Business Model Innovation Approach

 Business Model Elements

 Case Examples

 Templates


Business model innovation requires a strong customer value proposition,
viable profit formula, and access to key resources and processes…
Executive Summary (1 of 2)

Innovative business models can reshape industries and drive tremendous growth. However, many
organization find business model innovation difficult. The framework outlined in this presentation is
based on the HBR article “Reinventing Your Business Model,” authored by Mark Johnson, Clayton
Christensen, and Henning Kagermann.
A successful business model has 3 key components:

1• Customer Value Proposition. The model helps customers perform a specific “job,” which
alternative offerings don’t effectively address.
2• Profit Formula. The model generates value for your organization through such factors as revenue
model, cost structure, margins, and inventory turnover.

3• Key Resources and Processes. Your organization has the people, technology, products,
equipment, facilities, and brand required to deliver the defined value proposition to the target
customers. It also must have the processes to leverage these resources.

1 2 3
Customer Value
Proposition + Profit Formula
+ Key Resources
and Processes = Successful
Business Model

Source: Reinventing Your Business Model, Johnson, Christensen, Kagermann (2008)


… and can transform industries, catapulting a company’s value
Executive Summary (2 of 2)

Business model innovations redistributed billions of dollars worth of value:
• Retailer discounts like Wal-Mart and Target entered the market with pioneering business models—
they now account for over 75% of the total valuation of the retail sector
• Low-cost US airlines now account for 55 of the market value of all carriers
• In 2003, Apple introduced the iPod with the iTunes store and became a $10 billion product in just 3
years (accounting for almost 50% of Apple’s revenue)—Apple’s market cap grew uncannily from
around $1 billion in early 2003 to over $150 billion by late 2007
Eleven of the 26 companies born in the last 25 years that grew into a Fortune 500 companies in the
past 10 years achieved this through business model innovation.

Note all market statistics taken from the article published in 2008.



Even though there is very strong awareness of the need for business
model innovation, it is a very rare occurrence
Business Model Innovation – Awareness and Failure

There is strong awareness of the need … but stories of business model
for business model innovation … innovation from well-established
companies like Apple, are very rare!
Why is this?

• A 2005 survey by the Economist Intelligence Unit • An American Management Association study
revealed over 50% of executives believe business found that only 10% of innovation investments at
model innovation will become even more important global companies are focused on developing new
for success than product or service innovation business models
• A 2008 IBM survey of corporate CEOs revealed • Two key problems drive in lack of model
the same innovation:
• Almost all CEO respondents reported the need • Lack of definition. Little formal study has
to adapt their business models been into the dynamics and processes of
• More than 68% said that extensive changes business model development
were needed • Lack of understanding. Few organizations
understand their existing business model well
enough—the premise behind its development,
its natural interdependencies, and its strengths
and limitations



Before we innovate the model, first, we should consider if we need to alter
our model due to market changes
Existing Business Model – Business Model Assessment

Q: Do we need to consider altering our business model?

A: Follow these steps…

1• Articulate what makes your existing model successful. For instance,
what customer problem does it solve? How does it make money for
our business?

2• Watch for signals that the current model needs changing, such as
new entrants on the horizon.
3• Decide whether reinventing the model is worth the effort. The
answer is “yes” only if the new business model changes the industry
or market.



These are 5 circumstances that often require business model change
Business Model Innovation – Five Circumstances for Model Innovation

An opportunity to… A need to…

1 2 3 4 5
The opportunity to The opportunity to The opportunity to bring The need to fend off The need to respond to
address through capitalize on a new a job-to-be-done focus low-end disrupters a shifting basis of
disruptive innovation technology by wrapping where one currently competition—it is
the needs of large a new business around does not yet exist—this inevitable that what
groups of potential it or the opportunity to is common in industries defines an acceptable
customers who are leverage a tested where companies focus solution in a market
shut out of the market technology by on products or now will change over
entirely because introducing it to a new customers segments, time, leading core
existing solutions are market which lead them to market segments to
too expensive or refine existing products commoditize
complicated for them more and more

EXAMPLES
• This includes the • Brand new technology • FedEx entered the • Mini-mills were • Hilti changed its
opportunity to with new business package delivery threatening new business model in part
democratize products model—what Apple did market not by entrants to integrated due to the lower global
in emerging markets, with MP3 players competing in price or steel mills by making manufacturing costs—
such as Tata Motors’s • Leveraging existing marketing—it focused steel at much lower as a result, low-end
Nano car model technologies—offering on fulfilling an unmet costs entrants began
military technologies customer need of infringing on the high-
commercially better speed and end power tools market
reliability



Sometimes, business model innovation isn’t needed to leverage a game-
changing opportunity in the market
Existing Business Model – Old Business Model Assessment

Q: When can we just use the old model?

A: When you can fulfill the new customer value proposition…

1• With your current profit formula
2• Using most, if not all, of your current key resources and processes

3• Using the same set of core metrics, rules, and norms you now use to
run your business
Examples include when P&G introduced
Swiffer and Febreze products
leveraging its existing business model

Companies should not undertake business model innovation lightly.



We should pursue a business model reinvention only if we are confident
the opportunity is large enough to warrant the effort
Existing Business Model – Business Model Effort Assessment

Q: Will the business model innovation yield acceptable results?

A: Probably “yes” if you can answer “yes” to the following:

1• Can you nail the job with a focused, compelling customer value
proposition?

2• Can you devise a model in which all the elements of customer value
proposition, profit formula, key resources, and key processes work
together to get the job done in the most efficient way possible?
3• Can you create a new business development process unrestrained by
the negative influences of the core business?
4• Will the new business model disrupt competitors?



Contents

 Overview



 Case Examples

 Templates


The approach to business model innovation follows 3 steps
Business Model Innovation Approach

1 2 3
FOCUS ON THE CONSTRUCT A COMPARE NEW MODEL
OPPORTUNITY BLUEPRINT WITH EXISTING

• Success starts not by thinking about • Construct a blueprint laying out how • Compare the new business model with
business models—it starts with thinking your company will fulfill that need at a your existing one to see how much
about the opportunity to satisfy a real profit you’d have to change it to capture the
customer who needs a job done • This plan has 4 elements: opportunity
• Once you do this, you will know if you
1. Customer Value Proposition can use your organization or need to
build out a separate new business unit
2. Profit Formula
• Remember, every successful company
3. Key Resources is already fulfilling a real customer need
4. Key Processes with an effective business model—
whether that model is explicitly
understood or not

New business models often look unattractive to internal and external stakeholders at
the outset—to see past the borders, companies need a new roadmap.



The blueprint of a business model consists of 4 elements—Customer Value
Proposition, Profit Formula, Key Resources, and Key Processes …
Business Model Elements (1 of 2) 1 2 3

1 2
Customer Value
Profit Formula
Proposition

The Customer Value proposition and Profit Formula define value
for the customer and the company

The Key Resources and Key Processes describe how that value
will be delivered to both the customer and the company

3 4
Key Resources Key Processes



… the Profit Formula along with Key Resources and Processes define how
the Customer Value Proposition can be profitably fulfilled
Business Model Elements (2 of 2) 1 2 3

1 • Target customer
Customer Value • Job to be done to solve an important
Proposition problem or fulfill an important need
• Offering that satisfies the problem or fulfills
the need

2 • Revenue Model. How much money can be
made
Profit Formula • Cost Structure. How costs are allocated
• Margin model. How much each sale should
net to achieve desired profit levels
• People 3 • Resource Velocity. How quickly resources
need to be used to support target volumes
• Technology
Key Resources
• Equipment
• Information 4 • Processes
• Rules and Metrics
• Channels Key Processes
• Norms. E.g. opportunity size needed
• Partnerships, Alliances for investment, approach to customers
• Brand and channels



Companies adapting a new business model should be patient for growth
Business Model Innovation – Adaption and Revision

• The secret to adapting a successful business model is patience
• Successful new businesses typically revise their business models four times on the road to profitability
• While a thorough, well-considered business model innovation process can often shorten this cycle,
successful incumbents must tolerate initial failure and grasp the need to course correct along the
way
• Companies have to focus on learning and adjusting as much as on strategy execution
• Companies with new business model should be patient for growth (to allow the market opportunity to
unfold)—but impatient for profit (as an early validation that the model works)
• Established companies’ attempts at transformational growth typically arise from product and
technology innovations—their efforts are often characterized by prolonged development cycles and
fitful attempts to find a market

A profitable business model is the best early indication of a viable model.



There are invisible, institutional barriers that thwart adoption of a new
business model
Business Model Innovation – Institutional Barriers

In any organization, the fundamental understanding of the core business model often fades into institutional memory
—but it lives on within the organization’s rules, norms and metrics. These are the immediate barriers
against any new model taking root in an existing company.

Examples of Institutionalized Rules, Norms, and Metrics

FINANCIAL OPERATIONAL OTHER

• Gross margins • End-product quality • Pricing
• Opportunity size • Supplier quality • Performance demands
• Unit pricing • Owned versus outsourced • Product-development life cycles
• Unit margin manufacturing • Basis for individuals’ rewards and
• Breakeven period • Customer service incentives

• Net present value calculations • Channels • Brand parameters

• Fixed cost investments • Lead times

• Credit items • Throughput

Because of these institutionalized rules, norms, and metrics, companies oftentimes
launch a separate brand or business unit for the business model.



Contents

 Overview



 Case Examples

 Templates


1 2

The Customer Value Proposition addresses how you
Customer Value
Profit Formula
Proposition

will help the customer complete an important job 3 4

Customer Value Proposition

OVERVIEW DETAILS

 A successful company has found a way to • To invent or re-invent a business model, you must first identify a clear customer
help customers get an important “job” done value proposition
—where job is a fundamental problem in a
• The most important attribute of a customer value proposition is precision—how
given situation that requires a solution
perfectly it addresses the customer to be done and nothing else
 The more important the job is to the
customer, the lower the level of customer • This precision is often difficult to achieve
satisfaction with current options for getting • Organizations trying to create the new often neglect to focus on one single job
the job done, and the better your solution is
—they dilute efforts by attempting too many things
than existing alternatives (and lower the
price), the greater the customer value • One way to generate a precise customer value proposition is to think about the 4
proposition (CVP) common barriers keeping people from getting a particular job done:
 Opportunities for creating CVP are greatest • Insufficient wealth
when alternative products have not been
designed with the real job in mind and you • Insufficient access
can design an offering that gets that job • Insufficient skill (e.g. QuickBooks broke the skill barrier for small business
done perfectly
owners without accounting knowledge)
• Insufficient time (e.g. MinuteClinic broke the time barrier for patients with minor
health issues)

It is impossible to invent or reinvent a business model without first identifying a clear
customer value proposition.



1 2

The Profit Formula defines how the company creates
Customer Value
Profit Formula
Proposition

value for itself and the customer 3 4

Profit Formula

OVERVIEW DETAILS

 The profit formula is the blueprint that • For a business model to be viable, it must be able to make the company money
defines how the company creates value for • Many high-tech startups have figured out the customer value proposition, but not
itself while providing value to the customer
the profit formula and thus do not have a viable business model
 The profit formula consists of:
• They operate under the misguided notion that if they attract a large enough
– Revenue model: price x volume user base through the value proposition, the profit formula will naturally follow
– Cost structure: direct costs, indirect • Examples:
costs, economies of scale
• For Tata Motors to launch its low budget Nano model (with a target price point
– Margin model: given the expected of only $2,500), the company had significantly drop gross margins and
volume and cost structure, the
contribution needed for each sale to drastically reduce many elements in the cost structure
achieve desired profits • For power tool manufacturer Hilti to shift into a contract management program
– Resource velocity: how fast we need to and adopt a lease/subscription model, it had to change all major components
turn over inventory, fixed assets, and of the profit formula: revenue stream (pricing, payment plans, how to think
other assets to support our expected about volume), cost structure (additional sales development and contract
volume and achieve anticipated profits management costs), and supporting margins and transaction velocity

People often mistakenly interchange “profit formula” and “business model”—but, how
you make profit is only one piece of the model.



1 2

A company must now consider the Key Resources and
Customer Value
Profit Formula
Proposition

Processes to deliver that value in its proposition 3 4

Key Resources and Key Processes

OVERVIEW DETAILS

 Key resources are assets, such as people, • The key resources and key processes relate strongly to how defined value
technology, products, facilities, equipment, proposition is delivered
channels, and brand required to deliver the
• E.g. for a professional services firm, the key resources are its people and key
value proposition to the targeted customers
processes are people-related (training and development, recruiting)
 The focus is on the key elements that
create value for the customer and the • E.g. for a packaged goods company, key resources include strong brands and
company strategic channel retailers ; and key processes include associated brand-
building and channel-management processes
 Key processes of successful companies are
characterized by operational and • Many times, it is not the individual resources and processes that make the
managerial processes that allow them to difference, but their relationships with one another
deliver value in a way that be successfully
repeated and scaled • Companies will almost always need to integrate their key resources and processes
in a unique way to get a job done perfectly for a set of target customers—when
 These include recurrent processes like
they do, they almost always create sustainable competitive advantage
training, development, manufacturing,
planning, sales, and service • Focusing first one the value proposition and profit formula makes clear how these
 Key processes also include the resources and processes need to interrelate
organization’s rules, metrics, and norms • Rules, norms, and metrics are typically the last element to emerge in a developing
business model—business models need to have the flexibility to change in their
early years

These key resources and key processes portray how value will be delivered to both the
customers and company.



Contents

 Overview



 Case Examples

 Templates


Hilti innovated its business model by moving from a products company
into a service-oriented one
Case Example: Hilti

Hilti capitalized on a significant opportunity to increase profitability by turning products into a service. Rather than
selling tools at increasingly lower prices, it began selling a “just-the-tool-you-need-when-you-need-it, no-repair-or-
storage-hassles” service. This non-trivial change in customer value proposition required a shift in all parts of its
business model.

TRADITIONAL POWER TOOL COMPANY HILTI’S TOOL FLEET MANAGEMENT SERVICES

Leasing a comprehensive fleet of tools
Customer Sales of industrial and professional
to increase contractors’ on-site
Value Proposition power tools and accessories
productivity

Higher margins; asset heavy; monthly
Profit
Low margins, high inventory turnover payments for tool maintenance, repair,
Formula
and replacement

Distribution channel, low-cost Strong direct-sales approach, contract
Key Resources and
manufacturing plants in developing management, IT systems for inventory
Key Processes
countries, R&D management and repair, warehousing



Dow Corning innovated its business model by creating a distinct business
unit targeting low-end customers through a completely different channel
Case Example: Dow Corning

Down Corning, a traditionally high-margin business, found new opportunities in low-margin offerings by setting up a
separate business unit that operates in an entirely different way. By fundamentally differentiating its low-end and
high-end offerings, the company avoided cannibalizing its traditional business even as it found new profits
at the low end.

ESTABLISHED BUSINESS NEW BUSINESS UNIT

Customer Customized solutions, negotiated No frills, bulk prices, sold through the
Value Proposition contracts internet

Spot-market pricing, low overhead to
Profit High-margin, high-overhead retail prices
accommodate lower margins, high
Formula pay for value-added services
throughput

Key Resources and IT system, lowest-cost processes,
R&D, sales, and service orientation
Key Processes maximum automation



Contents

 Overview



 Case Examples

 Templates


Insert headline
Business Model Blueprint Template

Company situational overview.

ESTABLISHED BUSINESS MODEL NEW BUSINESS MODEL

Customer
Value Proposition

Profit
Formula

Key Resources and
Key Processes


Insert headline
Business Model Blueprint Template (Alternate)
ESTABLISHED BUSINESS MODEL NEW BUSINESS MODEL

Customer
Value Proposition

Profit
Formula

Key Resources

Key Processes


Insert headline
Five Circumstances for Model Innovation

An opportunity to… A need to…

1 2 3 4 5
The opportunity to The opportunity to The opportunity to bring The need to fend off The need to respond to
address through capitalize on a new a job-to-be-done focus low-end disrupters a shifting basis of
disruptive innovation technology by wrapping where one currently competition—it is
the needs of large a new business around does not yet exist—this inevitable that what
groups of potential it or the opportunity to is common in industries defines an acceptable
customers who are leverage a tested where companies focus solution in a market
shut out of the market technology by on products or now will change over
entirely because introducing it to a new customers segments, time, leading core
existing solutions are market which lead them to market segments to
too expensive or refine existing products commoditize
complicated for them more and more

HIGH MEDIUM N/A N/A HIGH


Insert headline
Business Model Elements Template

Customer Value
Proposition

• Insert filler text

Profit Formula

Key Resources

• Insert filler text Key Processes
• Insert filler text • Insert filler text


PPT Lab (www.pptlab.com) is the only crowdsourced
presentation design service. Get consulting-quality
presentations at a fraction of the cost!
www.PPTLab.com
support@pptlab.com Each month, we will create well over 50 slides of for our members.
As a member, you will drive what business slides we create by
submitting your own presentation projects to our team. All
presentations will be created by a team of management
consultants and follow the Consulting Presentation Framework.


Business Model Innovation

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