Managing business model innovations
Traditionally, organizational business models have been driven by pre-specified plans to ensure adherence to organizational routines that have worked well for a company in the past. This approach was suitable for relatively stable and predictable business environments. However, the current era, which is characterized by an increasing pace of radical and unforeseen changes in the business environment, demands that the same routines and decisionmaking processes redefine themselves to become inherently pro-active and adaptive in nature. While, for some companies, this approach is needed to sustain the growth and the competitive advantage, it is almost necessary for others to survive. Even the market leaders are constantly under pressure to out think not only the existing competition but also unknown players that are coming up with new business ideas to threaten the leaders’ position in the future.
Most of the CEO's today are aware of the importance of the need for the pro-active and adaptive approach or Business Model Innovation, as confirmed by the IBM Global CEO Study 2006. According to the study, 65% of the CEO's stated that they will have to make fundamental changes in their businesses in the next two years, with business model innovation becoming a key competitive differentiator. The study also states that over 40% of the CEO's think that the most significant source of innovative ideas will come from the employees. So, chances are that if you are a successful and upwardly mobile program manager, you have either recently been or will be asked to manage a business model change program. Managing such large and critical initiatives that impact the core of any business is a daunting task itself where failure can mean a big career limiting move for more than just the project team. Given the results from the IBM study, switching jobs may not be an option as a company that is not embracing this change will eventually be extinct anyways.
This paper begins with a brief introduction to business model and innovation with contemporary examples of successful application in the industry. It proceeds to elaborate on the methodology and the techniques available for a program manager to successfully manage the associated in-flight business model changes. Finally it describes how a combination of advanced simulation techniques, strategy execution concepts, portfolio management models, organizational change management concepts and an innovative project management framework can give a project leader the critical know-how to not only manage these large initiatives but also foster an environment to encourage business model innovation.
Quest for Business Model Innovation
The 19th and the 20th centuries were rife with remarkable inventions in various fields. While Invention, which refers to a new concept or product derived from an idea or research is undoubtedly a mark of great intellect, it has little economic and societal value without Innovation. In other words, in order to monetize and popularize an invention, it is necessary to transform it into an innovation. A well known recent example of the difference between Invention and Innovation is Apple's iPod. Instead of creating a better MP3 player in a heavily competitive market, Apple proceeded to create not only a world class entertainment device, but an associated world class service as well. With successful invention but more importantly, innovation, Apple created a revolution instead of another evolution of music players, in the process transforming the entire industry.
However, commercialization is not the only reason for innovation. Non-profit organizations and revolutionary rural schemes like the Grameen Phone in Bangladesh and Gyandoot in India are living examples of how innovation can sustain itself in a charitable fashion. Irrespective of which industry it is applied to, innovation can be classified as:
a) Technological Innovation
b) Process Innovation
c) Product & Service Innovation, and
d) Business Model Innovation
The term “Business Model” itself is relatively young. While the term appeared for the first time in an academic journal in 1957, it has seen a significant rise in its importance only at the interface of the 20th and the 21st century with the advent and maturity of information technology. For example, more than 95% of papers that relate to Business Models were published post 2000 (Osterwalder, Pigneur; & Tucci, 2005). Also, until recently, there was not a common language amongst all about its definition and essence. One of the major reasons being the inability of business leaders in defining and communicating their business model(s) in a clear way (Linder and Cantrell). Also, in an era where companies continuously struggle to translate their micro-models like products, services or operations into action, a holistic thinking like a Business model appeared too complex to state lucidly. Osterwalder, et al, (Osterwalder, Pigneur; Ondrus; & Lathoud, 2005a) acknowledged these discrepancies and categorized the prevalent definitions into two approaches – value/customer-oriented and a activity/role-related, with the former representing the true essence of business model more accurately. They further proposed the Nine Business Model building blocks (Exhibit 1) and gave a comprehensive definition for a Business Model as:
“A conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital, to generate profitable and sustainable revenue streams”.(p. 17)
Exhibit 1 – Nine Business Model Building Blocks
There are several examples of how businesses have taken this definition, the nine building blocks of a business model and the power of innovation to reinvent the wheel. While some have done this incrementally, some have chosen to not only radically innovate themselves but the entire industry as well by adopting different types of business model innovation. Some examples are:
- Add complementary products and services that build on your existing business: Facebook.com emerged as a revolutionary social networking site in 2004 focused on students in universities. As the idea caught on from a small group in Harvard to most universities across the US, facebook's product manager, Mark Zuckerberg opened the site to not only high school students but also to non-students around the world.
- Combine solutions to help the market grow faster: As we look at the cell phone industry, the products and services continue to evolve as the carriers and manufacturers continue to try to “out do” each other. By adding text messages, e-mail functionality, web browsing, cameras, games, and MP3 compatibility, more users are willing to pay more for these conveniences.
- Prices that lower operating costs: In the 1990s, HP analyzed their corporate PC sales and realized that pricing was the same no matter how many systems were sold to their customer. Pricing and incentive models were created to drive additional sales. These models benefited both HP as well as lowering costs for their customers.
- Lower development costs by co-development: By contributing to communities like Project Management Institute (PMI®), businesses can be viewed as industry leaders and share best practices in a non-competitive way. Another way to lower development costs is by utilizing co-development with outside firms. By leveraging resources/core competencies from each company both parties can benefit where neither would have been able to accomplish alone.
- Search, Learn, Assess and Adopt: Often, examples of unique and innovative business models can be found from outside the industry one is concerned with. It is important to learn and assess these examples to adapt to the company's business model. For example, bagborrowandsteal.com took the Netflix model and applied it to the fashion industry. Targeted at women fashion, it offers fashion accessories and handbags for monthly rentals, which can be returned after a specific time period.
Seven ways to Manage Business Model Innovation
Most project managers are beginning to realize that managing business model innovations need more than just applying principles of project management. Following are seven frameworks that can be used to successfully manage business model transitions. These frameworks need to be considered as seven spokes of the business model transition wheel and an equal importance needs to be given to all of them to increase the probability of success. These frameworks are:
- Strategy Execution
- Program Modelling & Simulation
- Portfolio Management
- Project Planning & Control
- Change Management
- Team Management
- Communication Management
Innovation involves charting a course in unknown waters and usually has a lot of uncertainty built in. As the need for innovation increases firms that rely on well thought out strategies start to struggle in balancing the existing execution plans with the new ones. The only way to succeed here is have innovation and execution built in into the core of your strategy. What one needs is a plausible starting point and then to experiment, learn and adapt. For an existing business, executing strategy is about making sure that all levels of the organization clearly understand the strategy and they are held totally accountable for performing at or above the known standards. When the company is in the process of changing its business model, the strategy is just a hypothesis and should be questioned and verified frequently. A program manager's responsibility is to not blindly execute a “hypothesis” but integrate “Strategy Validation” steps in the overall plan. But never forget that execution is still the critical key to success as Thomas Edison once said “Vision without execution is just a hallucination”
Program Modelling and Simulation
A new Business Model has a complex set of varieties. These varieties are in terms of technology, customers, products, prices, economic conditions, people, work culture, and ethics. These varieties can be combined to create a predictive model that can be used to simulate forecasts of how the business model change would behave over time. The intelligence of the model comes from careful definition of the business conditions, the behavior rules of the independent varieties, the dynamics of the interactions between these varieties, the frequency of such interactions and a whole slew of other patterns that must be programmed into the model. With a large amount of uncertainty pre-built into any new idea (remember this is the road not taken), everything we can do to assess the risk or simulate the results of our strategy will help us not only make better but less expensive decisions. It is very important that we create “virtual program models” very early in our transformation process and continuously use them as we progress through our journey to incorporate both the external and internal learning's.
Program modelling is especially useful in Project decision-making by looking at problems as a whole and articulating the complete set of relationships, interactions, and uncertainties. Project planning and simulated models can be exploited to provide real time information, as well as linking to risk-analysis, time recording, costing, estimating, and other aspects of Project control. Decision makers can virtually explore future direction opportunities in a safe, cost-effective forum without having to experiment on a real system. This helps in moving from traditional “rear-view” analysis to the ability to see the predictable future, control it and take actions today to attain tomorrow's goals.
Today we have the frameworks, tools and the computing power available to us to virtually model our programs. It is advisable not to build the whole model at once but rather take a modular approach where components are added a little at a time while continuously testing and validating the outputs at each stage.
According to A Guide to the Project Management Body of Knowledge (PMBOK® Guide) (2000 ed.) the definition of a Portfolio is “A collection of projects or programs and other work that are grouped together to facilitate effective management of that work to meet strategic business objectives. The projects or programs in the portfolio may not necessarily be interdependent or directly related” (PMI, 2000, p 367). Someone once said that the best way to eat an elephant is “one bite at a time”, so when we are looking at the enormous task of changing our business model, we need to accomplish the change through clearly defining and managing a set of related projects that all have the same strategic objective. Portfolio management gives us the ability to ensure that not only have we chartered multiple projects and related work to accomplish the same strategic objective, but we also have the framework and tools to manage them as a group, study the impact of collective success and individual failure and provide the required visibility of the entire portfolio to executive management.
With 100's of different types of projects being executed in an organization at any given time, it is not uncommon to have conflicts (of priorities and resources). The most expensive project management software in the world coupled with the best project management processes still won't help if the organization continues to approve too many new projects and fails to support those already underway. Grouping the business transformation projects into a single portfolio allows the business to make the right decisions for all the projects under the transformation portfolio. Although as a portfolio manager you have to be very careful of not letting unrelated projects be added to the portfolio so that they can get the required funding and attention. It is also important to “kill” or get rid of projects and initiatives that are in direct conflict with or obstacles to the transformation. This will help drive the importance of the business model change throughout the organization and send a clear message that the company is serious about the change.
The portfolio of projects launched to create the transformation should also be balanced from a risk-reward standpoint. Charter some projects that will show visible improvements in the business model and short terms wins. Nothing succeeds like success. Balancing these short term reward projects with other long term, high risk change initiatives will help keep the motivation up and the organization focused.
Project Planning and Control
Managing business model innovation programs also require innovative thinking for planning and control. While the foundational principles of project management still apply we have to be flexible about how much we plan and control depending on the phase the transformational effort is in. In the initial phases of the transformation the focus should be on project modelling, simulation and risk management as there are a lot of unknowns and the strategy is still being validated. Creating detailed plans with a large number of activities, complex dependencies may be a wasted effort as the plan may become outdated in a week. The control processes in the initial stages also need to be flexible as most of the work is done by self-directing teams that like to maintain the control within the group. The project leaders role in the initial stages may be limited to providing the required visibility to the executive management and removing obstacles. As the strategy gets defined and the path to the new business model becomes clearer, the program management needs to move towards relentless execution. This would mean detailed plans and tight control to make sure that the transformation is happening at the required velocity. Exhibit 2 shows the different project management focuses that may be required during the transformation lifecycle.
Exhibit 2 – Required project planning & control effort
The three primary organizational components supporting a business's services and products are: structure, processes, and culture. Structure includes all facets of the organization that “organize” the direction of its purpose, such as: vision, mission, strategy, policy, functional departments or work groups, etc. Processes includes how the services and product direction gets executed or is systematized. And culture represents the behaviours that occur within an organization as a result of the positive and negative reinforcement indoctrinations.
These three components are interrelated. If you alter (or attempt to alter) the form of one, it affects the form of the other two components and does not naturally lead toward the desired state that you might expect. For instance, if you attempt to change a work-group process, that process lies within a greater structure which has policies that drive ingrained behaviours. So, any process-change project plan that a project manager attempts to apply must also have a structural and cultural change management assessment and plan within it in order to be successfully implemented and sustained.
There are many good change management methodologies being offered today. ADKAR for instance, creates a matrix approach to addressing the human side of change by cross-referencing the stages people must move through to identify and internalize a change and the organizational mediums (structures) used to effectively take people through those stages of change (see Exhibit 3 below).
Exhibit 3 – ADKAR matrix
Fundamental change is often resisted mightily by the people it most affects: those in the trenches of the business. Thus managing change is absolutely essential and incredibly difficult. Very often we do not give enough or early thought to integrating formal change management activities in our program plan. The business model change will end up impacting most of the structure, processes and people in the organization and we should incorporate a formal change management framework and a dedicated team to execute the defined activities. We need to think about the structures we can establish or address that will direct us (force us) to integrate change management into the innovation process.
Typically, when companies decide to introduce a new product or service that is atypical for the organization, a dedicated project development team is given a remote location. By being considered a “company within a company” allows for an open exchange of information among departments, interdependent teams, who have access to end users early on and throughout the design process. This is more likely to exhibit the combination of behaviors that lead to more successful business ideas. It is a good probability that the core team formed to lead the business model innovation will be global, multi cultural, consisting of some of the brightest stars in the organization and hence a very tough team to lead. No matter how many tools are available, how many processes that are documented, or amount of customer insight, a new business model will only be as successful if the people executing the process are successful. A rowing race captain cannot win a race themself. It takes a fully dedicated team each doing their best to win. To have a “high – impact team” it is very important to design the right environment and right performance and monitoring processes. These teams should usually be self- directing work teams as they are the most productive in that environment. Larson & LaFasto, in their article Teamwork: What must go right/What can go wrong (1989, p. 39) laid out the 8 necessary conditions for effective teamwork. These are:
- A clear and elevating goal
- Results- driven structure
a. Clear roles & accountabilities
b. An effective communication system
c. Monitoring individual performance and feedback
d. Fact-based judgements
- Competent team members
a. Technical competency
b. Personal competency
- Unified commitment
- Collaborative climate
- Standards of excellence
- External support and recognition
- Principled leadership
It is very different (and challenging) managing and interacting with a “high-impact” team that is working on changing the core of your business vs. a normal project team implementing a regular initiative with defined processes and standards. As mentioned above most of these teams flourish in a self-directing mode and should not be micromanaged. It is important that the project leader gets to know all the team members and establishes good professional relationships with them. An additional challenge is to understand the different cultures and behaviour patterns if it is a global team. Members from Brazil, India, China and Europe may have very different team dynamics and social etiquettes. It is also important to add team building exercises in the beginning of the plan so that the diverse members can start functioning as a unified group.
The communication problem has become the number one cliche of our time. Good communication not only ensures that all opportunities to communicate the vision are being used, but there is a deliberate effort to capture the hearts and minds of all the stakeholders involved in the business model transformation. Like Change Management a detailed Communication Strategy and Plan needs to be developed for the transformation effort. A communication plan is a distribution structure describing what information goes to whom, when, and how. Objectives are best understood when we make sure that the right message goes to the right people, in the right form/manner, at the right frequency, at the right time. Project Leaders should be checking for understanding constantly to ensure that there are no misunderstandings. There is a need to pay special attention to the roles and responsibilities of internal and external team members, as well as key stakeholders. Exhibit -4 shows a sample high level communication plan template that can be used to communicate effectively and obtain feedback.
Exhibit 4 – High Level Communication Plan
A project leader would spend most of her/his time in ensuring effective communication is happening. This time and effort needs to be planned and budgeted for in the overall transformation effort. The project leader should also ensure that the senior management team is incorporating the change message in their day to day activities. The business model change will usually be driven top down so the executive team should become role models for this change.
With increasing competitiveness in the marketplace, technological innovation is increasingly difficult to bring about. Businesses are increasingly becoming aware that while importance of superior technology cannot be undermined, an investment in R&D to bring about the same takes substantial time and effort. Add to that the problems associated with a young workforce, regulatory concerns and globalization, focusing on Product/Service and Process Innovation alone could be a recipe for disaster in the long run. These approaches would lead to only incremental gains and fail to take into account the advantages and growth margins provided through a holistic Business model innovation. As an example, the IBM Global CEO Study 2006 reported that, when compared to their respective competitive peers, Business Model Innovators had 25 times stronger correlation with five year operating margin growth compared to Products, Services or Market Innovators.
This does not suggest, in any way, that superior Products, Services or Technology are not important. In fact, they are the fundamental driving forces behind business model innovation. However, focusing on them alone will only result in a small and sustained growth while Business Model Innovators will enjoy higher profits. Importantly, as soon as a particular company's competitors realize the importance of the latter, the company will either have to redefine itself to lead or survive or worse, face extinction. For example, with the arrival of Netflix.com, Blockbuster had to rethink its strategy to regain its position as the market leader while providing value to the customer. Building upon its strength of existing nationwide stores, Blockbuster came up with an idea similar to that of Netflix, with the added convenience of being able to return the videos to the Blockbuster store instead of having to mail them back to the hub. By innovating its business model, Blockbuster not only averted the threat that Netflix posed but actually raised the bar for competition in the industry. To manage the business model innovations and the transformation journey the project leader has to also start thinking “out of the box”. There are no predefined standards that teams can be held accountable to; there are instances when the project charter may have to be revised often. Flexibility is the key. The seven frameworks defined in this paper are useful tools to help manage these transformations, but ultimately “Experiment, Learn and Adapt” is the key to success. So get ready for the biggest challenge of your project management career!
Davenport, T. (2007) Building Your Companies Innovation retrieved on 5/24/07 from http://www.babsonknowledge.org/2006/03/building_your_companys_innovat.htm
Hamm S. & and Symonds, W. C. (2006, November 27) Mistakes Made On The Road To Innovation. Business Week 4011 26-31. Retrieved from http://www.businessweek.com/magazine/content/06_48/b4011421.htm
IBM Global Business Services, (2006) Expanding the Innovation Horizon, IBM Global CEO Study
Kotter, J. P., (2007, January) Leading Change: Why Transformation Efforts Fail. Harvard Business Review 85 (1) 96-103.
Larson & LaFasto, F (1989). Teamwork: What must go right/what can go wrong Thousand Oaks, CA: Sage Publications.
Linder, J. & Cantrell, S. (2000). Changing Business Models: Surveying the Landscape Accenture Institute for Strategic Change. Retrieved from http://www.accenture.com/NR/rdonlyres/0DE8F2BE-5522-414C-8E1B-E19CF86D6CBC/0/Surveying_the_Landscape_WP.pdf
Madhukar, S (2004) Economics of low-cost air travel Retrieved from http://www.domain-b.com/industry/aviation/20040716_low-cost.htm
Osofsky, M (2006) Business Model Innovation retrieved on 6/1/07 from http://blog.pdma.org/2006/10/business-model-innovation.html
Osterwalder, A., Pigneur, Y., & Tucci, C.L. (2005) Clarifying Business Models: Origins, Present and Future of the Concept, Communications of the Association for Information Systems, 16(1)
Osterwalder, A., Pigneur, Y., Ondrus, J., and Lathoud, B., (2005a) Skype's Disruptive Potential in the Telecom Market: A Systematic comparison of Business Models, Preliminary Draft. Retrieved from http://www.businessmodeldesign.com/publications/Skype's%20Disruptive%20Potential%20Potential%20in%20the%20Telecom%20Market%20-%20A%20systematic%20comparison%20of%20business%20models.pdf
Project Management Institute. (2000) A guide to the project management body of knowledge (PMBOK®) (2000 ed.). Newtown Square, PA: Project Management Institute.
Raffi, F. & Kampas, P. (2002, November) How to identify your enemies before they destroy you? Harvard Business Review, 80 (11) 115-123
Springwise.com (2005) Fashion and Beauty Retrieved from http://www.springwise.com/fashion_beauty/bag_borrow_or_steal_1/
Telco 2.0™ (2007) The Telco 2.0 methodology — Business Model Innovation Retrieved from http://www.telco2.net/blog/2007/05/the_telco_20_methodology_busin.html
©2007 Arora, Bullivant @ Bhatnagar
Originally published as part of 2007 PMI Global Congress Proceedings - Atlanta, GA