Business Model Innovation
BUS305 BUSINESS MODEL DESIGN AND IMPLEMENTATION
Implementing Business Model Innovation in New Ventures
Asia Pacific College of Business and Law
Emmanuel Tenakwah
25 October 2022
CRICOS Provider No. 00300K (NT/VIC) I 03286A (NSW) | RTO Provider No. 0373
1
2
Recognition of Traditional owners and Indigenous cultures
Charles Darwin University acknowledges the traditional custodians of the land on which we’re meeting and pays respect to Elders both past and present and extends that respect to all Aboriginal and Torres Strait Islander people.
Understand start-up risks
Understand business model implementation challenges and barriers in new ventures
Understand how to overcome BMI Implementation Barriers in new ventures
3
Objectives
3
Introduction
4
4
Founders and employees working in new ventures are used to frequent changes (so‐called “pivots”) on key strategic dimensions to ensure the survival of their young firms.
Active internal resistance to change in new ventures is therefore, in general, less pronounced than in established firms (although exceptions are of course possible).
Implementing an innovative business model is likely viewed more as an opportunity than a challenge in young ventures.
New ventures have a short history, and the inertial forces that could derail BMI implementation in these firms are typically much weaker than in established firms.
Risk and uncertainty are inherent characteristics of the entrepreneurship process.
Most entrepreneurs are risk‐averse.
They are keenly interested in minimising risks to increase the likelihood of survival (and success) of their ventures.
5
Managing risks in start-ups
Risk and uncertainty are inherent characteristics of the entrepreneurship process. Although some people believe that entrepreneurs are risk takers and, like gamblers, enjoy situations in which the stakes are high and the odds are against them, in general, this is not the case (and certainly not supported by scientific evidence)8 Most entrepreneurs are risk‐averse. They are keenly interested in minimising risks to increase the likelihood of survival (and success) of their ventures.
5
6
Managing risks in start-ups
6
Startup risks generally cluster around five types:
(i) demand‐side risks (e.g., customer acceptance of the offering may not be as expected);
(ii) supply‐side risks (e.g., the risk associated with the management team, the product/service, the technology, partners, and vendors);
(iii) competition risks (e.g., imitation of the offering by competitors);
(iv) capital market risks (e.g., funding, timing, and value at exit); and (v) environmental (e.g., macroeconomic, regulatory, and political) risks.
7
Exhibit 10.1 suggests that business model implementation encompasses the steps involved in moving from a business model prototype to a full‐fledged, thriving organization that works well with the new business model (creating internal fit); making sure that the new business model and the organization mesh fluidly with their ecosystem (creating external fit); and adapting and aligning strategies (creating strategic fit). In other words, successful implementation implies the comprehensive creation of fit, so the new business model can be fully operational and fulfill its intended purpose for the focal firm.
7
Understand start-up risks
Understand business model implementation challenges and barriers in new ventures
Understand how to overcome BMI Implementation Barriers in new ventures
8
Objectives
8
New ventures thus face the so‐called “sharks dilemma,” namely, under which circumstances do they choose partners with high potential for abuse of market power or misappropriation over less risky partners?
9
Dependence on External Third Parties: The Sharks Dilemma
A particular risk that needs to be highlighted for new ventures implementing business model innovations is their potential dependence on third parties. As we have seen throughout the book, business model innovations are often boundary‐spanning, which means that not all of the activities in the business model are performed by the focal firm, but some (including important ones) are outsourced to external providers. This creates a tension between the need for partners on the one hand, and the potentially damaging use of market power and misappropriation of the venture's own ideas, intellectual property, and other valuable resources by these very same partners (or “sharks”) on the other hand. New ventures thus face the so‐called “sharks dilemma,” namely, under which circumstances do they choose partners with high potential for abuse of market power or misappropriation over less risky partners?
One example of how the “sharks dilemma” might play out in the digital economy is the increasing dependence of new ventures on powerful digital platforms such as the Apple and Google app stores, Amazon Marketplace, eBay, or Facebook and Instagram.12 These platforms are changing the ways in which founders launch and operate their ventures. The unique dependencies that entrepreneurs experience when transacting through digital platforms seem contradictory to the traditional independence of entrepreneurship. Scholars have coined the term “dependent entrepreneurship” to reflect the dependencies that entrepreneurs must successfully navigate on digital platforms, and to emphasize the new form of entrepreneurship that such platforms create.13 The increasingly tight grip of tech giants like Apple and Alphabet (the parent company of Google) over the distribution of digital offerings to individual consumers is purported to have contributed to a distinct shift from B2C to B2B over the past decade.14
9
Business model innovations are often boundary‐spanning, which means that not all the activities in the business model are performed by the focal firm, but some (including important ones) are outsourced to external providers.
Tension between the need for partners and the potentially damaging use of market power and misappropriation of the venture's ideas, intellectual property, and other valuable resources by these partners (or “sharks”).
10
Dependence on External Third Parties: The Sharks Dilemma
A particular risk that needs to be highlighted for new ventures implementing business model innovations is their potential dependence on third parties. As we have seen throughout the book, business model innovations are often boundary‐spanning, which means that not all of the activities in the business model are performed by the focal firm, but some (including important ones) are outsourced to external providers. This creates a tension between the need for partners on the one hand, and the potentially damaging use of market power and misappropriation of the venture's own ideas, intellectual property, and other valuable resources by these very same partners (or “sharks”) on the other hand. New ventures thus face the so‐called “sharks dilemma,” namely, under which circumstances do they choose partners with high potential for abuse of market power or misappropriation over less risky partners?
One example of how the “sharks dilemma” might play out in the digital economy is the increasing dependence of new ventures on powerful digital platforms such as the Apple and Google app stores, Amazon Marketplace, eBay, or Facebook and Instagram.12 These platforms are changing the ways in which founders launch and operate their ventures. The unique dependencies that entrepreneurs experience when transacting through digital platforms seem contradictory to the traditional independence of entrepreneurship. Scholars have coined the term “dependent entrepreneurship” to reflect the dependencies that entrepreneurs must successfully navigate on digital platforms, and to emphasize the new form of entrepreneurship that such platforms create.13 The increasingly tight grip of tech giants like Apple and Alphabet (the parent company of Google) over the distribution of digital offerings to individual consumers is purported to have contributed to a distinct shift from B2C to B2B over the past decade.14
10
11
Internal Governance and Leadership Problems
In addition to their young age, entrepreneurial ventures possess several unique characteristics that distinguish them from established firms, especially publicly traded ones, and that have implications for their governance and leadership.
11
Less separation of ownership and control.
Composition and size of the founding team - lack of clear definition of roles and responsibilities.
Resource constraints, especially at the early stages of firm development.
Members of the board of directors (BOD) may have significant financial stakes in the business.
Problematic entrepreneurial leadership traits such as narcissism and hubris.
Business model‐specific barriers such as – complexity, inertia, lack of business model know‐how, lack of able and willing leaders, and lack of agreement about the right model applies to new ventures as well.
The probability that a business model innovation will be successfully implemented in a new venture may be inversely related to the number and variety of business model stakeholders involved in its design.
12
Implementation Challenges in new ventures
The previously mentioned business model‐specific barriers for established firms – complexity, inertia, lack of business model know‐how, lack of able and willing leaders, and lack of agreement about the right model (see Chapter 10) – also apply to new ventures, in particular to the challenge of managing complexity. The probability a business model innovation will be successfully implemented in a new venture may be inversely related to the number and variety of business model stakeholders involved in its design. This is due to the stakeholders' diverse and often diverging preferences, incentives, bargaining power, and possibilities for value appropriation that need to be considered and balanced. The greater the number and diversity of stakeholders, the higher the risk that some of them will mount opposition or even drop out of the business model at some point during implementation. Given that young focal firms in general do not have direct managerial control over their surrounding network of partners and suppliers, and suffer from low brand recognition, lack of legitimacy, and/or low bargaining power, they may become increasingly dependent on this network. This in turn heightens the risk that the business model will encounter problems – or even fall apart – during implementation.21
12
Organisational Inertia
13
A second barrier to creating internal fit, organizational inertia, refers to the forces that constrain the mindset and behavior of firm managers, motivating them to keep doing what they have done in the past.11 It refers to passive resistance to BMI implementation from organization members, which may be rooted in:
Past investments in assets, capabilities, routines, relationships, and contracts that are difficult to redeploy or unwind, and that therefore create strong path dependencies;12
An organizational culture that does not support experimentation with new business models, and which may even be characterized by a deep‐rooted fear of failure;
A strong “dominant logic” of the existing business model within the focal firm that imposes cognitive constraints on managers, preventing them from switching collectively to a new mindset and embracing a new model.13
13
The forces that constrain the mindset and behaviour of firm managers, motivating them to keep doing what they have done in the past:
Past investments in assets, capabilities, routines, relationships, and contracts that are difficult to redeploy or unwind and create strong path dependencies;
A culture that does not support experimentation with new business models and which may even be characterized by a deep‐rooted fear of failure;
A strong “dominant logic” of the existing business model within the focal firm imposes cognitive constraints on managers.
Characteristics and systemic, boundary‐spanning nature of business models create additional challenges that must be addressed.
14
Business Model‐Specific Barriers
14
15
Business Model‐Specific Barriers
15
(i) high complexity and number of changes due to internal and external interdependencies,
(ii) lack of specific business model know‐how,
(iii) lack of able and willing leaders who can drive business model change within the focal firm, and
(iv) confusion or lack of agreement about the right model going forward.
Understand start-up risks
Understand business model implementation challenges and barriers in new ventures
Understand how to overcome BMI Implementation Barriers in new ventures
16
Objectives
16
To effectively address barriers to BMI implementation in new firms, a thorough analysis must first be conducted to identify the relevant issues.
A common denominator of all these solutions, however, is that they aim at de‐risking the new venture.
Effective risk management approaches - business planning, building trust with external stakeholders, lowering dependence on third parties, using strategic considerations in adopting a revenue model, and improving internal governance.
17
Overcoming barriers to BMI implementation
17
Business Planning
18
18
Business planning refers to thinking through a new venture with an innovative business model thoroughly and systematically.
Facilitates venture development and organising.
Should not be restrained to armchair theorising – go out into the field, talk to people (customers, industry experts, regulators, competitors, suppliers, and others) and ask for their feedback, and collect data to check viability.
Building Trust with Business Model Stakeholders by Using Symbolic Actions
19
19
Research has identified symbolic action strategies that entrepreneurial managers in both new ventures can use to create the right impression and establish trust :
(i) personal credibility,
(ii) professional organisation,
(iii) organisational achievement, and
(iv) stakeholder relationship quality.
20
20
Defense mechanisms:
legal protection (e.g., from patents),
secrecy (e.g., trade secrets), and
timing (i.e., involving risky partners at a later stage, when the costs of knowledge and resource leakages are smaller).
“Plan B” (i.e., alternative providers lined up) and strengthening the ownership of key managers (e.g., by investing in the startup).
21
Countering the Sharks Dilemma: Defense Mechanisms That Work
21
22
Choosing a Revenue Model Strategically
Three main revenue model types have been identified.34 The first is the straightforward paid revenue model, where a product or service is provided in exchange for a stated price. Paid models can be further broken down into subscription revenue models, where payments are made on a recurrent and stable basis, and transaction payments models, where payments are made per transaction. Past studies have shown a positive relationship between product quality and the effectiveness of a paid revenue model; consumer awareness and low advertising rates have also been cited as factors. The second type of revenue model is the advertising revenue model. Under this model, users do not pay for a product, but revenue is earned through the ads that are bought by advertisers and shown to users. Prior work has shown this model to be more effective when the advertising rate is higher, and aversion to ads is lower. This revenue model has also been linked to lower product quality. Finally, the third dominant revenue model is the freemium model, where two products are offered – a premium paid version and a more basic (and/or ad‐sponsored) free version. Spotify and Dropbox are two examples. Some positive aspects of freemium models cited in the literature include the segmentation of customers and the “trial” aspect prior to purchase. Self‐cannibalization is a potential concern, however.
22
Paid revenue model, where a product or service is provided in exchange for a stated price. Paid models can be further broken down into subscription revenue models, where payments are made on a recurrent and stable basis, and transaction payments models, where payments are made per transaction.
The advertising revenue model - users do not pay for a product, but revenue is earned through the ads that are bought by advertisers and shown to users.
The third dominant revenue model is the freemium model, where two products are offered – a premium paid version and a more basic (and/or ad‐sponsored) free version.
Ventures with new business models must prevent governance and leadership crises by adopting strong governance principles from day one.
Boards of Directors
Ownership
Top Management Leadership
23
Establish Good Governance
23
This session has discussed the Business Model Innovation Implementation of new ventures. Specifically, we have:
Discussed start-up risks
Discussed business model implementation challenges and barriers in new ventures
Discussed how to overcome BMI Implementation Barriers in new ventures
24
Summary
24
Three things I have enjoyed today are?
Three new things you learnt (What you didn’t know before the class)
What do you like to know more about?
25
Logging off
25
We will discuss Business Model Innovation Strategy in the Digital Age.
26
Next Week
Read: Chapter 12 of the text and the weekly list of activities on learnline
26