In his book “the Business Model Innovation Factory”, Saul Kaplan warns that incumbent firms in many industries with successful business models run the risk of being ‘netflixed’ and cannot just ‘do what they have always done’ and expect to be successful in the future. Blockbuster had a very successful business model but could not compete with the disruptive innovation that was Netflix. Many other industries have encountered the same problem – camera film Vs digital, CDs Vs MP3 etc. etc. The problem is not just about new technology coming on stream. The problem is that firms tend to focus on a particular business model over time, and fail to adapt to disruptive threats. Successful business models have a shorter shelf-life nowadays, and the successful firms are the ones that adapt their business models in the face of disruptive threats and technological innovation. Think Apple. Think Amazon. These companies operate a portfolio of business models and are constantly innovating. The iPhone was not just an innovation in technology, it was a new business model entirely, allowing 3rd part developers to create apps, allowing them to sell them in the App store, and generate even more revenue for Apple. If you asked anyone what Amazon’s business model is, they would probably reply ‘they sell stuff online’. Amazon is a massive IT company that just happen to ‘sell stuff online’ too. With EC2 and AWS, it enables much of cloud computing. With direct to Kindle publishing, they have a similar business model to Apple’s app store (with very healthy margins of ~ 60%).
What industries are next for disruption? Education? No doubt. Clay Christensen has argued that even the top universities will face disruption from MOOC’s such as Udacity, EdX and Coursera.
What about financial services? There is a tsunami of disruptive technologies that currently exist (or are very close) that could cause serious disruption to financial services in the next 5 years.
Q: What can financial services firms do?
A: They need to start focusing on business model innovation. They need to become more open when it comes to services innovation. They need to create an innovation mindset in the organisation.
I will be blogging on various topics relating to business model design and innovation management, but today, I want to introduce the ‘Business Model Canvas’. The BMC is one of the most useful tools out there to help people innovate their business model. Alex Osterwalder (the leading figure in thinking on business model innovation) defines a business model as how a firm organises itself to create, capture and deliver value. He developed the BMC (see image below) which is a widely adopted tool that innovators can use to describe their existing business model and to brainstorm and innovate new business models.
Image courtesy of http://www.businessmodelgeneration.com
From working with many companies, and facilitating workshops on business model innovation for them, I have found that the business model canvas can help people to think about their business models in a radically different way.
Too often, people can be focused on a much too narrow range of indicators – e.g. revenue, costs or technology performance. Of course, all these things are important, but there are many other aspects to the business model of an organisation that also must be addressed. Innovators need to start thinking about their business models in a holistic fashion.
Starting at the right hand side of the canvas, we have our customers. These are the users (or segments of users) that we offer value to. So, for example, a mobile network operator may have business customers as well as residential ones. The next most important block is the ‘value proposition’. This is the product or service offering (or bundle of products/services) that we make to our customer. Mark W. Johnson refers to this as the jobs-to-be-done, the offering that you make to your customer (or potential customer).
The ‘channels’ are how you reach your customer. This encompasses the physical or virtual channel by which you deliver value to your customer (anything from a high street shop to a website or even a mobile network or electricity grid). Channels also cover the ‘how’ you get your message to your customer i.e. your marketing channels (radio or print, TV or Social Media). The relationship box refers to the relationship that you have with your customers. This covers things such as; loyalty, trust, as well as the user experience (UX) that our customer segments have when engaging with the value proposition.
If you get these 4 boxes in that canvas to work like clockwork, then revenue will flow back to you. In order to deliver the value proposition to the customer segments, through the channels with good relationships, there are some issues we need to deal with on the left hand side of the canvas.
Key resources are the things we need to have in order to deliver this value. These include tangible and intangible resources (e.g. buildings, equipment, intellectual property or staff, as well as other resources depending on the nature of the business). The key activities are the things we need to perform in order to deliver the value. These could encompass activities like R&D, manufacturing, marketing etc. The partner network box recognises that businesses may not be able to form all of the activities required to deliver value in-house, and that we may need to partner up in order to deliver value. Activities that may be outsourced to a partner can include, but are not limited to, logistics, manufacturing, legal etc.
Finally, all of these things (resources, activities and partnership agreements) are costs to the business and are represented as part of the cost structure box in the canvas. Hopefully the revenues will exceed these costs and our business model will be sustainable.
Once the existing business model canvas for the firm has been created, the next phase is to carry out a detailed SWOT analysis on the existing business model to assess its strengths, weaknesses, opportunities and threats so as to identify areas where the business model can be improved in the future.
It is recommended that organisations engage in a process of continuous business model innovation so that they can continue to create new value for customers and prevent themselves from being ‘netflixed’ (i.e. replaced by a disruptive innovation in the marketplace).
If you are interested in business model innovation check out this book:
I promise you it will be the most useful business book you have ever read.