CORPORATE ENTREPRENEURSHIP AND BUSINESS MODEL INNOVATION

MGT731_04_Value_scu.pptx

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Forms of Corporate Entrepreneurship

MGT731 Corporate Entrepreneurship and Innovation

Course Coordinator: Dr Robert Ogulin

Course Facilitator: Prof Uwe Schulz PhD

Paths for Corporate Entrepreneurship and Business Model Innovation

There are distinct paths for Business Model Innovation Value Creation and Capture

Business Model Innovation

Enterprise model (EM) Innovation

Innovating value chain roles by:

changing the extended enterprise to be more integrated or specialized

transforming networks with employees, suppliers, customers, and others

Revenue Model (RM) Innovation

Innovating how

revenue is generated

through:

new value propositions

pricing models

Industry model (IM) Innovation

Innovating the industry

value chain by:

moving into new industries

redefining existing ones

or creating entirely new value chains

Travadi, Z. (2010)Services Innovation/Business Model Inovation, IBM Consulting; https://www.slideshare.net/zahirnt/topic-4-business-model-innovation, accessed 14/11/2019

IBM Confidential

Revenue Model Innovation – Driving shifts in underlying pricing and revenue models

Companies are transforming the “rules of the game” in their industry by driving fundamental shifts in the underlying pricing and revenue models

Examples: Distinct Pricing and Revenue Model Innovations

Replacing traditional pay per individual product models with selling periodic use or access to products and services

Example: Newspapers & Magazines, movie rental subscription, mobile phones, pay TV channels

Subscription Model

The razor & blade model (also called “tied products model”) works by selling initial master product at a subsidized price or even at a loss, and making profit on high margin consumables that are essential

Examples: Gillette razor/blades, Computer printer/cartridge, mobile phone/air time

Razor & Blade Model

Many industries see a transition from a traditional product focus to service focus, often changing the traditional dichotomy of products vs service to a continuum and alignment

Examples: Electronics industry, e.g. IBMs replacing traditional product focus through service led “business solutions”

Product to Services Model

In several industries (e.g. Media and entertainment) digitization of content has created entirely new models, such as charging for different ring tones

Travadi, Z. (2010)Services Innovation/Business Model Inovation, IBM Consulting; https://www.slideshare.net/zahirnt/topic-4-business-model-innovation, accessed 14/11/2019

IBM Confidential

Enterprise Model Innovation – Collaboration & Partnering

Integration of business processes

Supply relationships

Joint R&D

Joint distribution

Joint ventures

Co-creation

Franchises

Equity

participation

Financial participation

Arm’s-length contract

Mergers and acquisitions

Partnerships

Collaborators seek collaboration in a selected number of business areas/components

Partnerships and collaboration range from supplier relationships to legal joint ventures, even leading to ‘value networks’

Collaboration partnership continuum

Example: Illy Café Value Network Collaboration

Biem, Alain & Caswell, Nathan. (2008). A Value Network Model for Strategic Analysis. Hawaii International Conference on System Sciences, Proceedings of the 41st Annual. 10.1109/HICSS.2008.43.

IBM Confidential

Industry Model Innovation – Transforming Traditional Industry Value Chains

Companies are changing the “rules of the game” by challenging traditional value chains through disintermediation

Most significant advances were enabled through the internet as new “direct models” allowed cutting out the middle man

Example: The “Dell Direct” Model

Direct path to the customer

Single point of accountability

Build-to-Order

Low cost leadership

Standards-based technology

Magretta J. (1998) The Power of Virtual Integration: An Interview with Dell Computer’s Michael Dell, Harvard Business Review, March–April 1998 Issue

IBM Confidential

Dell Direct Model

Efficient path to the customer (no intermediaries, organization around groups of customers with similar needs)

Single point of accountability (Dell directly)

Build-to-Order (custom configuration and ordering, lower inventory, better pricing and latest tech)

Low cost leadership (standards-based technologies developed collaboratively with industry partners, constant cost reduction)

Standards-based technology (unlike proprietary technologies, standards give customers flexibility and choice)

Industry Model Innovation – Leverage Resources and Assets through Horizontal Moves

Record Company

Retailer

Consumer

Music Artist

Agent

Airline

Consumer

Manufacturer

Music industry

Airline industry

Example: Virgin horizontal moves

Most prominent examples are leveraging brand assets to move aggressively from one value chain to another.

Companies are exporting differentiating expertise / experience / assets to a comparable part of another industry value chain

IBM Confidential

Examples

Business Model Innovation

Enterprise model Innovation

Revenue model Innovation

Gillette innovated the pricing model by giving away razors and making money on the blades

Netflix shifted the revenue model from product / rental based to a subscription based annuity model

PRICING / REVENUE MODEL

VALUE PROPOSITION

Cirque du Soleil reconfigured offering and value elements to transform the circus experience

INTEGRATION

Zara’s Fast Fashion model is supported by a highly integrated business model along its value chain

SPECIALIZATION

Bharti created a highly specialized Telco business model by focusing only on its key differentiators – marketing, sales and distribution – and partnering for everything else

EXTERNAL COLLABORATION

P&G’s innovative R&D collaboration model “connect & develop”, sourcing over 50% of ideas externally

Industry model Innovation

INDUSTRY TRANSFORMATION

Moving from one value chain to another, leveraging its brand across industries including airline, media and telecoms

HORIZONTAL MOVES

Apple transformed the music industry through a new way of connecting hardware with software to download music with iPods/iTunes product & service combination

Dell redefined the PC value chain and industry model by using a direct to customer sales model

Travadi, Z. (2010)Services Innovation/Business Model Inovation, IBM Consulting; https://www.slideshare.net/zahirnt/topic-4-business-model-innovation, accessed 14/11/2019

IBM Confidential

Profit Pools

Profit

Managers tend to think about profit in one of three ways:

accounting profit,

return on investment, or

cash-flow contribution.

Accounting Profit

Blueprint that defines how the company creates value for itself while providing value to the customer.

Revenue model: price × volume

Cost structure: direct costs, indirect costs, economies of scale. Cost structure will be predominantly driven by the cost of the key resources required by the business model.

Margin model: given the expected volume and cost structure, the contribution needed from each transaction to achieve desired profits.

Resource velocity: how fast we need to turn over inventory, fixed assets, and other assets – and, overall, how well we need to utilize resources – to support our expected volumes.

Johnson, MW, Christensen CM and Kagermann H (2008) Reinventing your business model, Harvard Business Review, December 2008

Are Innovation and Accounting Contradictory? Or can They Complement Each Other?

Innovation: typically associated with future-focused creativity.

Freedom to innovate

Accounting: associated with practicality, transparency, logical thinking, and stability.

Investment

Discussion: Are Accountants and CFOs Killing Innovation?

How do accounting principles inhibit innovation?

“What can you do when penny-pinchers get in the way of your disruptive ideas to make necessary, often disruptive, changes in your company?”

Source: https://knowledge.insead.edu/entrepreneurship/are-accountants-and-cfos-killing-innovation-2417

Value Based Management

Source: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/what-is-value-based-management, accessed 17/11/2019

Value maximization is the ultimate financial objective for a company.

Traditional financial performance measures, such as earnings or earnings growth, are not always good proxies for value creation.

To focus more directly on creating value, companies should set goals in terms of discounted cash flow value, the most direct measure of value creation. Such targets also need to be translated into shorter-term, more objective financial performance targets.

Return on Investment: A Measure of How Well we Leverage Resources, Capabilities and Competences in our Business Model.

The value tree helps to find leverage points across the resource pool of a corporation

We disregard taxes

Profit Pools

Profit Pools: Identify which Activities are Generating Disproportionately Large or Small Shares of Profits

Define where your value chain begins and ends….

Define the size of the pool…….

Determine how the profits are distributed across the value chain activities ……

…. clearly defined list of the individual value-chain activities that make up your profit pool.

……the total amount of profits being earned in all the value chain activities (May not be same as industry boundaries).

….. know the profits (as well as revenues, costs, and margins) of each value-chain activity.

Gadiesh, O & Gilbert, JL 1998, ‘How to Map Your Industry’s Profit Pool’, Harvard Business Review, vol. 76, no. 3, pp. 149–162

Mapping a Profit Pool: Summary

Framework for analysing how profits are distributed among the various activities that form an industry's value chain.

Gadiesh, O & Gilbert, JL 1998, ‘How to Map Your Industry’s Profit Pool’, Harvard Business Review, vol. 76, no. 3, pp. 149–162

Example/Discussion

Discuss the value chain

What are the value chain activities?

How big are they?

Where are the profits being made?

How can we change profitability?

Gadiesh, O & Gilbert, JL 1998, ‘How to Map Your Industry’s Profit Pool’, Harvard Business Review, vol. 76, no. 3, pp. 149–162

Diving into future profit pools

Value Pools in the Telecomm Industry

Network transformation will be necessary to enable new business models beyond the pipe and address changing customer expectations (e.g. new business models around IoT)

New business models leveraging emerging technologies will require strong collaboration with vertical industries and internet platforms.

Operating in the digital age requires corporate cultural change along with new organizational structures.

Digitization of the industry will require a transformation of existing policy and regulatory models

World Economic Forum 2017 Digitial Transformation Initiative Telecommunicatin Industries; http://reports.weforum.org/digital-transformation/wp-content/blogs.dir/94/mp/files/pages/files/dti-telecommunications-industry-white-paper.pdf accessed 14/10/2019

Sharing the Profit Pool

The Telecom Ecosystem

Value Creation by Initiative

Profit Pools in Banking

Perspectives on the UK retail banking market, 2012, Oliver Wyman

Value Migration in Mobility

BCG, 2018 Where to profit at tech transforms mobility, http://image-src.bcg.com/Images/BCG-Where-to-Profit-as-Tech-Transforms-Mobility-Aug-2018-R_tcm9-200577.pdf accessed 14/10/2019

The Fight for Profit Pools in Cars/Mobility

Summary

Scope of business model innovation: revenue-, enterprise- and industry-level

Profit pools

What are they and why are they important?

Steps for identifying profit pools

Examples and cases for shifting profit pools

Illy

Coffee maker

manufacturers

Coffee Growers

Cup manufacturers

Cafes

Consumer

Raw beans

Design IP

Design

training

Roast beans

Served cup

Of coffee

maker

cups

Roast beans

marketing

Person 1

Illy

Cup manufacturers

Coffee maker manufacturers

Coffee Growers

Cafes

Consumer

Raw beans

Design IP

Design

training

Roast beans

Served cup Of coffee

maker

cups

Roast beans

marketing