Business Model Innovation:

Opportunities and Barriers

Presenter: Alaa Seraj
 Barriers to Business Model Innovation

• Conflicts with existing model and resources – disruption of current business

model
• Understanding of these barriers is imperative
• Experimentation + effectuation + successful leadership of organizational
change = overcome barriers
 Technology and business model

• Technology is leveraged only through business model – when economic

value is commercialized (familiar technology OR licensing OR new business
model needed to make new technology valuable)
• In terms of Value : Mediocre Technology + Great Business Model > Great
Technology + Mediocre Business Model
 Business Model – Richard Rosenbloom

• Value Proposition
• Market segment identification + revenue generation mechanism
• Structure of value chain + assets to support the model
• Revenue mechanisms
• Cost Structure and profit potential
• Position within value network – supplier and customer links
• Competitive Strategy
 Xerox – Business Model Innovation
Experiments
• 35 tech projects across 5 research labs
• Those that resonated with Xerox’s business model stayed, others exited
• Xerox focused on increasing print volumes (plus big money in consumables)
• Significant industrial research activity in man-machine interfaces lacked obvious ways to increase volume
(Example - improved identification of copier malfunction)
• Most new technologies exited with the researchers fed up of internal delays but most failed outside as well.
The few successful ones used very different business models compared to Xerox itself.
• Learning: Value from new business model >= Value from new technology. Companies like Xerox are better
at innovating new technologies, but they should focus on developing new business models too
 Xerox – Business Model Innovation: 3Com
• Experimentation in BM innovation needs trial and error – cannot be planned – 3Com led to Ethernet which was valuable in
other ways than it was intended
• 3Com commercialized the Ethernet networking protocol enabling Xerox to use a single wiring harness to support a variety
of equipment configurations in its copiers and printers and connect its proprietary devices and options.
• Xerox leased the Ethernet technology to Metcalfe, who worked with DEC and Intel to create a standard around the
Ethernet protocol.
• This technology proved to hold a much greater opportunity for creating value: in developing and controlling an important
industry standard for networking computers, printers, and file servers.
• License from Xerox, and the Ethernet standard that was supported by DEC and Intel, he raised venture capital and started
3Com. Targeted Unix (using the business model of a systems company with its own distribution organization: not too
dissimilar from that of Xerox itself) and later IBM PC, due to the burgeoning LAN Market (Metcalfe changed his business
model: initially intending to develop his own direct sales force, but soon shifting to distributing his products through
retailers and value-added resellers e many of whom were entries in his directory of LAN dealers.
• Ethernet turned out to be far more valuable as an independent product and standard for local area networking - 3Com
limited its business to designing add-in boards to provide networking capabilities to IBM compatible personal computers
and shared laser printers. This new sustainable business model led to a new company altogether which could not have
grown within Xerox
 In Rainbows – Radiohead – BM Innovation

• ‘In Rainbows’ CD released online- fans could pay what they wished
• Music Recording Industry - traditional model in crisis so new model was needed – not clear how the new
model would turn out
• The online release brought more revenue and made the album more widespread after a 60-day initial
online release
• Result: increased sales of CDs, collector boxes and ticket sales for the band’s world tour
• The revenue lost in the initial release was more than covered for by greater publicity
• Pharma industry model also under crisis – its time for BM Experimentation
• J&J experiment - drug offered to European health ministries with a novel proviso: If the drug is not
efficacious in 90% of their patients, the ministries need not pay for it. Results not clear for this experiment
 Barriers to Business Model Innovation- The
reason for decreased experimentation
• Amit and Zott – Studied business model innovation in terms of novelty, lock-in and efficiency - Conflict with traditional
configurations of firm assets - managers are likely to resist experiments that threaten company value
• Clayton Christensen – Disruptive Technology and Disruptive Innovation: Emerging technologies ignored considering
existing business model due to conflict of resources
• Research with Richard Rosenbloom - success of established business models strongly influence the information that
subsequently gets routed into or filtered out of corporate decision processes
• Prahalad and Bettis’ earlier notion of a ‘dominant logic’ of how the firm creates value and then captures value. Amid all
the noise of daily business life, this logic aids the firm in assessing what information is important, and it will seek
information that fits with this logic and eschew that which conflicts with it (chaotic and uncertain environments) –
potential value of technology can be lost
• But it is not clear how the new model will work – Be it confusion or obstruction – experimentation is key. Though
experiments alone are not enough.
 Experimenting and adopting new business
Models
• Mapping of models help with experiments – Osterwalder’s 9-point
decomposition, IBM’s Component Business Model
 Experimentation

• Thomke: Alternate Business Model factors: high fidelity & low cost to gain
cumulative learning from a series of ‘failures’
• McGrath and Macmillan’s concept of discovery-driven planning - model unknown
assumptions (e.g. economic) to be directly tested + clarify the required results of
experiments = economically attractive business model
• Effectuation : Action : without experiment action, no new data will be forthcoming
- reframing the dominant logic of one’s business model
• Leading change in the organization: who will drive this conflicting process? CEOs?
 More Problems

• Need for strategic agility for business model transformation in the pursuit of strategic innovation – requires
leadership meta-skills in perceptions of the environment, in maintaining unity among the leadership team,
and in the ability to reallocate resources to support new models - ‘Organizational ambidexterity’
• Need to continue to perform well in their current business (and business model), while at the same time
undertaking the experiments necessary to nurture a new model.
• Organizational problem: search for a new business model requires a period of co-existence between the
current and new models.
• Knowing when to shift resources from the former to the latter is a delicate balancing act, and rife with
possible career consequences for the managers involved.
• Need for strong organizational culture to navigate through these treacherous shoals, so that the local
objectives of individual middle managers give way to the imperatives of the larger whole.
 Conclusion
• Organizations must address these leadership issues to ensure effective governance of business model experimentation, and that the results
of their experiments lead on to action within the organization.
• Adopt experimental stance toward business model innovation.
• Leaders can authorize the launch of high fidelity, low cost, quick performing and usefully informative experiments.
• These new data will be reflected in new discovery driven models, and leaders must be empowered to take action based on these findings and
overcome the barriers that surround and protect the extant business model.
• The leadership process must address the many affected constituencies within the organization without becoming mired in the infighting
between them. To quote an old aphorism, ‘In God we trust, all others bring data’ and: it is the experimental process that can bring that data
to bear.
• Business model innovation is vitally important – even though the barriers are real
• Tools such as maps are helpful, but not enough. Organizational processes must also change (and these are not mapped by those tools).
• Companies must adopt an effectual attitude toward business model experimentation - failure informs new approaches and understanding
within the constraints of affordable loss, this is to be expected - even encouraged. Effectuation also creates more data.
• With discovery driven planning, companies can model the uncertainties, and update their financial projections as their experiments create
new data.
• Organizations will need to identify internal leaders for business model change, in order to manage the results of these processes and deliver
a new, better business model for the company.
• At the same time, the organization’s culture must find ways to embrace the new model, while maintaining the effectiveness of the current
business model until the new one is ready to take over completely – only then can companies escape the ‘trap’ of their earlier business
models, and renew growth and profits.
Thank You