Business model innovation

General Management Course
A.A. 2014/2015
Digital Transformation –
Business Model Innovation
Matteo Cristofaro, Ph.D. student General Management Course

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 What is a business model?
 The Business Model Canvas;
 Business Model Innovation;
 Blue Ocean Strategy for BMI;
 4 paths to BMI;
 What can go worng?;
 References.
Summary

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Digital transformation – A new portfolio of
capabilities

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A litterature review on 103 business models articles (Zot, Amit,
Massa, 2010) showed that 37% of these don’t define the concept of
“buiness model” at all and 19% refer to the work of other scholars.
This lack of definitional consistency and clarity represents a potential
source of confusion.
…we consider two definitions as agreeable:
“A business model describes the rationale of how an organization
creates,delivers,and captures value” (Osterwalder, 2010)
“A business model is a reflection of the firm realized strategy”
(Casedus, Masanell & Ricart, 2010)
Business model did not acquire prominence in the lexicon of the start-up community until the
mid-1990s.With the exponential growth in the usage of the term during the dot-com
boom, the early literal meaning of business model (and modeling) morphed into a new
meaning, referring to the creation of value in digital business.
What is a Business Model?

The Business Model Canvas
5 https://www.youtube.com/watch?v=QoAOzMTLP5s

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BMI (1)
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Business model innovation is the most powerful of the three types of
innovation. While continuous and discontinuous innovations in
products and services are important and necessary, the companies
that innovate in the structure of their businesses, particularly in
how they define their relationships with customers, become the
leaders. Business model innovators look at the market and see something
different than others see - they see possibilities that others have
overlooked, and they transform those possibilities into
competitive advantages, and profits.
Historically, breakthrough innovations have come from two sources:
entrepreneurs, and large-scale research and
development. Entrepreneurs are those who see the world
differently.

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Starting with e-commerce and more recently with interactive Web applications
and cloud computing, digital technology has created opportunities for new
business models.
Technology impacts two sides of business models: costs and revenues.
For example, the disintermediation of retailers adopted by Amazon and Dell
touches on both sides, as does the “pay per click” advertising-based search by
Google.
By contrast, revenue side is affected by the pricing model (such as the
“freemium” model adopted by Adobe, Skype and open source software
companies to give basic service away for free and charge premium prices for
value-added services).
On the cost side, cloud computing removes the need to invest up front in
expensive servers, thus turning capital expenditure into operational expenses
and lowering barriers to entry.
BMI (2)– Technology impact

BMI (3)
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There are 4 circumstances that often require business model
change:
1. The opportunity to democratize products in emerging markets
(e.g.Tata Nano) usually through disruptive innovation;
2. The opportunity to leverage a tested technology by bringing it
to a whole new market (e.g. offering military technologies in
the commercial space);
3. The opportunity to bring a job-to-be-done focus where one
does not yet exist. (e.g. Fedex didn’t compete through lower
prices or better marketing, but it concentrated on fulfilling an
enterely unmet customer need to receive packages far and more
reliably than any service than could);
4. The need to respond to a shifting basis of competition.

BMI (4)
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Schumpeter (1934) distinguishes between five types of innovations:
new products, new methods of production, new sources of supply, exploitation of
new markets,and new ways to organize business.
Incumbents often learn about new business models from entrants and
respond by incorporating these innovations (in full or in part) into their
own businesses. The possibility of competitive imitation, in turn, suggests
that entrants need to strategically choose whether to reveal their ideas
by competing through the new business model or, instead, to conceal
them by adopting a traditional, established logic of value creation and
value capture.
Firms should take into account the likely competitive effects before
revealing a business model innovation. Entrants should realize that
incumbents will react to innovations in two main ways:
1. Keeping their business model intact and adjust its tactical variables
(such as price);
2. Adopting a new business model so as to change their value creation
and capture logic.

Blue Ocean Strategy for BMI (1)
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4 ACTIONS FRAMEWORK

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Blue Ocean Startegy for BMI - Example
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Blue Ocean Startegy for BMI (5)
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Identify the highest and
evaluate what happens if
you eliminate or reduce
them. What value elements
disappear, and what would
you have to create to
compensate for their
absence?
Transform the Value
Proposition by asking the 4
actions framework
questions, considering the
impact on the cost side and
evaluate what elements you
need to change on the value
side.
Ask yourself the Four
Actions Framework
questions about each
business model Building
Block on the customer side
of the Canvas.

4 paths to BMI: WHAT
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Any business model is essentially a set of key decisions that collectively determine how a business
earns its revenue, incurs its costs, and manages its risks, innovations to the model may be viewed as
changes to those decisions:
WHAT Mix of Products or Services Should You Offer?
 Focused business models are most effective when they appeal to distinct market segments with
clearly differentiated needs. So if your business currently serves multiple segments, it may be best
to subdivide into focused units rather than try to apply one model.
 Search for commonalities across products. Commonalities aren’t just shared components
among different products. They may also be the capabilities needed to serve various product,
customer, and market segments. Consequently, companies can add to their mix products or services
that reflect new applications of their capabilities. For instance, in the late 1990s Amazon expanded
from books into music, video, and games.
 Create a hedged portfolio. Companies can select an assortment of products or markets to
reduce the overall riskiness of the business model.
 Postpone the decision. In many industries companies make firm decisions about prices well
before they actually sell anything. This, of course, often exposes them to risk. It’s risky to price
airplane seats early, for instance, because demand on any given route is highly contingent on
economic and other conditions and can vary by the time of day, the day of the week, or the week of
the month.

4 paths to BMI-WHEN
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WHEN ShouldYou MakeYour Key Decisions?
 Change the order of your decisions. shuffle the order
in which decisions are made in order to delay investment
commitments until pertinent information is known.
 Split up the key decisions. The lean start-up approach
divides up the key decisions. A venture starts with relatively
imprecise and limited hypotheses about where an
opportunity may lie. Multiple stages of information gathering
and “pivoting” follow, as the business model is revised to
arrive at the final, validated version
http://paulbuchheit.blogspot.it/

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WHO Are the Best Decision Makers?
 Appoint a better-informed decision maker. Google’s engineers, for
example, have extraordinary freedom to decide what development projects the
company should pursue, because Google believes they are better informed
about technologies and tastes than the company’s executives are.
 Pass the decision risk to the party that can best manage the
consequences. Amazon forwarded orders to book wholesalers or publishers,
who then often shipped the products directly to customers using Amazon
packaging.
 Select the decision maker with the most to gain.
Companies can also use the framework to make their innovation processes more
systematic and open, with business model reinvention becoming a continual,
inclusive process rather than a series of isolated, internally focused events.
When they do, they find that the resulting capabilities offer a sustainable
competitive advantage.
4 paths to BMI-WHO

4 paths to BMI-WHY
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WHY Do Key Decision Makers Choose asThey Do?
Many business model innovations, therefore, come from adjusting
decision makers’ motivations.There are three ways of doing this:
 Change the revenue stream;
 Synchronize the time horizons. Traditionally, sourcing relied
on competitive-bidding rituals that ensured low prices and
moderate but acceptable quality.
 Integrate the incentives. Companies without a trusted
intermediary can develop contractual arrangements and
management systems (such as the famous balanced scorecard) to
focus independent agents on maximizing an agreed-upon
outcome.

What can go wrong? (1)
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Many businesses change their model in pursuing growth, or when they perceive threats from
changes in the industry environment.
Consider growth. Understanding the logic of the core objectives goes a long way in alerting
managers when they are approaching the envelope for their size limit.
Every business has a natural size and at some point one simply needs to coast as opposed to
pursuing growth that violates the core underpinnings of the business model.
Consider business model changes driven by a desire to preserve competitive advantage.
Around 1999, Wal-Mart became worried about Target and its slightly more affluent
customer base. Wal-Mart tried to upgrade its offerings, “rationalize” (translate “reduce”)
its offerings. This undercut the “predictability” discussed earlier. Wal-Mart has lost the
trust of its core customer base, opening the door for more focused retailers like Aldi and
Dollar Stores. Wal-Mart is now migrating back to its core model, which was never really
threatened as its core customers were not going to shop atTarget.
Companies should not pursue business model reinvention unless they are
confident that the opportunity is large enough to warrant the effort.

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Concerns about business models can be traced to four common
problems associated with their creation and use. These
problems, which follow directly from the key terms in our
definition, are the following:
1. Flawed assumptions underlying the core logic;
2. Limitations in the strategic choices considered;
3. Misunderstandings about value creation and value capture;
4. Flawed assumptions about the value network.

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BMI it’s not a simple product innovation, but innovating simolutaneously
(in a coherent manner) across several elements of te business. Managers
should be on the lookout for common pitfalls, such as:
 Portfolio Bloat: an overlapping portfolio of experiments, none of
which has enough resources.
 Failure to scale-up: because of ambiguous pilot results.
 Pet Ideas: managers find to give up wrong ideas.
 Isolated efforts: teams work too distant from the business to influence
it.
 Internal Focus: near-sighted attention to the organization’s internal
needs at the expense of the unmet needs of the customers.
 Historical Bias: overvalue past models and under value forward
looking distruptive ideas.

What is Big Data? (1)
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The proliferation of digital products and services results in
consumers generating huge volumes of personal data across
all aspects of their lives, which is captured by organisations
through digital channels or devices.
Data about a person’s friendship networks, hobbies and
interests is captured on Facebook, while details of their
shopping patterns are captured by online retailers. In
addition to these relatively established data sources,
technological developments will continue to generate new sources of
consumer data that could offer unique insights into consumer
behaviour.

What is Big Data? (2)
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Organizations are exploring how large-volume data can usefully
be deployed to create and capture value for individuals,
businesses, communities, and governments (McKinsey
Global Institute, 2011). big data is fast becoming a tool that
not only analyzes patterns, but can also provide the predictive
likelihood of an event.
The challenge for businesses lies in how to harness, make
sense of, and use this information to generate some form of
competitive advantage. Businesses that can access these
new sources of data, analyse them and convert them into
insight on consumer behaviour, will be able to make
their products and services more relevant to their customers.

Big data and insights
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References
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 Osterwalder,A., Penguin,Y. (2010). Business Model Generation. JohnWiley & Sons, Inc., Hoboken, New Jersey.
 Shafera, S.M., Smitha, H.J., Linderb, J.C. (2005). The power of business models. Business Horizons. Vol. 48, pp.
199-207.
 Johnson, M.W., Christensen, C.M., Kagermann, H. (2008). Reinventing your Business model. Harvard Business
Review. December, pp. 50-59.
 Girotra, K. (2014). 4 paths to Business Model Innovation. Harvard Business Review. July-August, pp. 96-103.
 Lindgardt, Z., Reeves M, Stalk, G., Deimler, M.S.(2009). Business Model Innovation. Boston Consulting Group,
September.
 Casadeus-Masanell, R., Zhu, F. .(2013). Business model innovation and competitive imitation: the case of sponsor-
based business models. Strategic Management Journal.Vol. 34, No. 4, pp. 464-482.
 Kim,W.C.; Mauborgne, R. (2004). Blue Ocean Strategy. Harvard Business Review.Vol. 82, No. 10, pp. 76-84.
Matteo Cristofaro
Ph.D.student in Business Management&Accounting
Research fields: problem solving; decision making; management consulting; business modelling.
University of Rome 'TorVergata'
Faculty of Economics. Department of Business,Government and Philosphy.
E-mail matteo.cristofaro@uniroma2.it
Office +39(0)6-72595518 Fax +39(0)6-72595804
Home page http://economia.uniroma2.it/igf/dottorandi/72-429/matteo-cristofaro-
Linkedin www.linkedin.com/pub/matteo-cristofaro/51/695/401
Academia.Edu: https://uniroma2.academia.edu/MCristofaro
ResearchGate: https://www.researchgate.net/profile/Matteo_Cristofaro
Slideshare http://www.slideshare.net/matteocristofaro1

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