Build Back Better
01Build Back Better
How business model innovation can help your firm out of the crisis
In mid-May 2020, with COVID-19 lockdowns in full force, Boston-based Neuroelectrics received uplifting news. The U.S. Food and Drug Administration had greenlighted its request for clinical trials to test a novel brain-stimulation therapy as an at-home treatment for depression. The approval had come back fast: less than a month after filing.
At a time when anxiety was running high and good news was scarce, this potential win for the telemedicine venture was especially welcome. Neuroelectrics was progressing in its mission to “reinvent brain health” while helping vulnerable patients (namely the elderly) at a crucial juncture, precisely because they could be treated remotely while the threat of COVID-19 loomed. “Out of every challenge comes an opportunity,” says Ana Maiques (AMP ’15), the company’s CEO. “In this pandemic, we’ve accelerated about five years ahead in our timeline.”
Striking a similar note, Microsoft CEO Satya Nadella told investors in spring 2020: “We’ve seen two years’ worth of digital transformation in two months.” The company has moved decisively in uncertain times: Between March and June 2020 alone, it made five acquisitions to expand its cloud computing empire.
Amid all the doom and gloom provoked by COVID-19, there are silvery glints in the clouds. With supply chains interrupted, travel restricted, mass gatherings banned and social distancing required, there is no business as usual. Yet, the restrictions in place to protect public health need not limit business leaders’ imaginations. This is a prime time for business model innovation (BMI), changing how value is created.
Amid all the doom and gloom of COVID-19, this is a prime time for business model innovation
So, should some supply chains be shorter? Can education, training and meetings happen via videoconferencing to a greater degree than before? Will older customers embrace online banking and other essential services as fully as their millennial counterparts? The short answer seems to be yes, implying far-reaching ramifications for current business models and the assumptions that underpin them.
Business Model Innovation Strategy: Transformational Concepts and Tools for Entrepreneurial Leaders (Wiley, 2020) is the title of a new book by IESE’s Christoph Zott and Raphael Amit of the Wharton School, which arrives for just such a time as this. Here, we share some of the practical insights contained in the book, as we learn from entrepreneurs how to innovate and change the way a business works.
What a business model is – and isn’t
First, what is a business model? In a nutshell, it’s how a firm should do business.
The business model is one of the fundamental strategic issues a firm faces. During the dot-com boom, internet entrepreneurs were rewarded for their BMI – but that might as well have stood for “business model imaginations,” as too many of their wild ideas never turned profitable, leading to a dot-com bust. They had plenty of strategies, but they lacked viable business models. Making “radical changes in some parts of a firm’s business model can have tremendous performance implications,” asserts Joan E. Ricart, holder of IESE’s Carl Schroeder Chair of Strategic Management.
Indeed, in a recent study of 917 retail companies, IESE’s Govert Vroom found that the business model has a significant effect on company success, accounting for 5.1% of a firm’s ROA, after controlling for other factors. He and his co-authors call this “the business model effect.”
To better understand the mechanics of the business model, here’s the technical definition provided by professors Zott and Amit in their book: “A business model is a boundary-spanning system of interdependent activities that centers on a focal firm, yet may encompass activities performed by its partners, suppliers and customers in the pursuit of value creation and capture.”
Embedded in that definition are some key features like “boundary-spanning” and “partnerships,” which we’ll discuss later. To ground this definition, here are four deceptively simple elements of every business model, and four related questions to ask yourself about your own:
- What: Its content. What are the activities that encompass my business model?
- How: Its structure. How are these activities linked, both the sequencing of the activities and the exchange mechanisms among the activities?
- Who: Its governance. Who performs the activities, i.e., which activities are performed by my firm versus those performed by our partners, suppliers or customers?
- Why: Its value logic. Why does my business model create value, and why does it enhance value appropriation?
These four elements are often highly interdependent. And making innovative changes in any one of them is when things start to get interesting.
If a business model is essentially “how to do business,” BMI can be defined as “how to do business in new ways.” That sounds simpler than it really is. Test yourself: Which of the following real innovations is most likely to result in BMI?
A. Robot laborers. As the Financial Times reported in summer 2020, automated labor for doing everything from picking strawberries to sorting packages to recycling waste is increasingly being deployed, so humans can keep socially distant and avoid contagion.
B. Plant-based meat substitutes. With the coronavirus originating in animals and the initial outbreak traced to animal markets, a plant-based burger captures rising consumer demand for healthy, vegan alternatives and the growing trend for socially conscious, environmentally friendly food products.
C. An online platform like Apple’s. In addition to offering innovative hardware, an online platform can attract a loyal base of developers and end-users whose value grows the more the network interacts and expands.
If you answered A, sorry: Although a robotic workforce may bring major gains in efficiency, it doesn’t fundamentally change how the business of picking, mailing or sorting gets done. If you answered B, sorry again: Even if it’s better for the planet, product innovation, no matter how commercially successful, is not BMI if the company follows a traditional path of, say, selling vegan burgers in supermarkets. If you answered C, you are correct: Developing a platform that benefits from “network effects” will fundamentally change a firm’s value logic (its why) as well as who is doing what. In other words, many elements of the business model design change when a company like Apple moves from being purely a product innovator to becoming a digital platform provider.
Digitalization enables low-cost experiments and innovations in business models
The lesson: BMI is not simply operating more efficiently or offering new products or services, however innovative they may be in their own right. According to two decades of research by Zott and Amit, the four main advantages of BMI (as opposed to just having a good business model) are:
BMI complements other forms of innovation. When done well, BMI can create positive synergistic effects alongside product innovation. So, you may first become an Apple customer because of innovations in the latest iPhone, but you may stay loyal to the platform because of the app store, music downloads or Apple TV.
BMI does not usually require large upfront investment. It can be cost effective. Notably, digitalization enables frequent low-cost experiments and innovations in business models. (You don’t need to build hotels to make money if you rent rooms to travelers like Airbnb.)
BMI can serve as an effective barrier to imitation. When service or product innovations are embedded in a novel business model, competition will have a harder time playing copycat.
BMI can be a disruptive force in an industry. “Disruptive innovation,” popularized by the late Clayton Christensen, creates brand new markets and/or uncovers new opportunities in established ones.
Of course, BMI carries risks, too. They include:
- Insufficient customer adoption or market size.
- Costs of organizational change and other implementation risks.
- Imitation by competitors.
- Legitimacy risk: New business models need high legitimacy, which may be harder for new ventures to achieve.
- Increased complexity may lead to increased risks to viability.
BMI in times of crisis
If all that sounds daunting, remember that stasis is not an option. Consider the case of Tickets.ie, Ireland’s leading independent ticketing retailer for large events. “Our business was gone overnight,” says founder and CEO John O’Neill. “On March 13, the day after Ireland’s schools announced they would close, we sold 25 tickets – compared with 6,600 the same day a year ago.” To add insult to injury, those 25 ticketholders might seek refunds.
A similar thing happened to Ivan Rodriguez and Luis Paris (MBAs 2011), founders of Parclick, which offers reservations for parking lots. With nobody paying for parking, the founders admit they were cursing the virus before regaining their composure.
To understand a business model, tell its story, and tell it simply
Especially in relatively young ventures, the potential for pivots, or BMI, are more than compelling. They may even be necessary to stave off a liquidity crisis.
To help make sure innovations in your business model promote positive changes, Zott and Amit present several analytic tools to help you evaluate your current model, before embarking on designing a new one.
Getting your story straight
To understand a business model, tell its story, and tell it simply. Try this exercise: Write a one-paragraph tale about how your firm’s business model works. In addition to what (activities), who (carries them out) and how (in what order they’re carried out), remember to briefly explain why, i.e., explain the model logic and the main source of value creation. Does the story come to a neat conclusion? If the answer is no, consider it a red flag.
Once completed, the one-paragraph exercise can make great copy for your company’s website, introducing your story to potential customers, for all to see and understand.
Another useful tool is the business model activity map or flow chart, used frequently in business practice and in academic research. Start by drawing boxes for what, arrows between boxes to depict how, different colors for the boxes to show who and additional text, as necessary, to describe why. IESE’s Ricart suggests connecting each of the main elements to their relevant performance indicators, to depict value loops, virtuous circles and other value-creation dynamics. Such visuals will help give you a bird’s eye view of the business model and the underlying dynamics at play.
Designing a new model
Understanding a business model is one thing, but designing one from scratch? Again, there are tools available to help with that, some of which borrow from or dovetail with design thinking.
Find the problem. For starters, think of your prospective customers’ goals and needs. Write out a problem that these prospective customers have, and then aim to solve it. Formulating a problem statement forces you to put yourself in the shoes of your customers, and to put your customers at the forefront of your business model redesign effort.
Probe stakeholders. Once you have a problem statement (formulated from the customer’s point of view, not your own), don’t assume you know how to address it. Stay open to suggestions. Formulate a questionnaire for your stakeholders, including not only prospective customers but also employees and suppliers for more valuable input. The goal here is to understand the problem better, not to find a solution (yet).
Look to the successful business models that abound to learn from them
Borrow templates. Getting closer to solutions, look to the successful business models that abound to learn from them. Examine how incumbent business models work in your field – and look farther afield, to very different industries, to learn from new (to you) business model templates. (This would be the industry- or boundary-spanning component referred to earlier.)
For example, when Ana Maiques’ firm figured out they wanted to be in the business of providing non-intrusive, electrical stimulation to treat brain disorders, they saw many options in front of them. They could be a hardware company, selling the devices that look like (and essentially are) wired helmets that deliver the neural stimulation. Or they could provide a platform for monitoring and delivering stimulation treatments. They chose to work with the latter option, delivering treatments, not unlike the pharmaceutical models for selling pills, once they had studied and understood the nitty-gritty of the business models out there.
Look around. Strategy professors will always tell you to make sure you understand the external environment, and even more so in times of change. IESE’s Miquel Llado recommends frequent scanning of the Political, Economic, Social and Technological (PEST) factors as we wade through the pandemic.
Remember Tickets.ie’s dramatic drop in sales? O’Neill explains how his company – which makes most of its money via sales – also has a revenue stream from licensing its software. If put to new uses, this could potentially attract new business customers. O’Neill took a step back and thought about the new landscape: No events meant no charity events. The dinners, dances, races and even charity shops were no longer possible. As Tickets.ie was already in talks with Ireland’s postal service as a potential ticketing-software subscriber, O’Neill pitched the idea of post offices accepting monetary donations over their counters, to be sent efficiently to charities via Tickets.ie’s e-commerce platform. Things moved quickly from there: The postal service signed on, and O’Neill expects the deal to be cashflow positive in the second half of 2020.
This goes to show that looking around can help identify new potential customers. It can also lead you to identify new partners whose capabilities can help your firm fill any gaps. Call it “resource and capability scanning.” It’s extremely useful to a young company that may want, or need, to quickly pivot to stay above water in a crisis.
Experiments are key to overcoming innovation inertia
Redeploy resources and capabilities. Returning to O’Neill, his team is now working to offer time-based queueing systems to retailers who want to win back in-store customers in a safe, well-managed way. He describes the entry into queue-management as a pretty radical pivot, “almost transposing one axis to another in a graph” – from selling a large number of tickets, to offering a limited number of tickets via QR codes to many, many “events,” which are basically the various sections of a store that’s open all day.
Seek out valuable partnerships. But how do you monetize a well-managed queue? That’s where a business partner may come in, one already working on tracking customers’ journeys through retail. Such a partner could offer O’Neill’s company either commissions or subscription fees in exchange for the customer data it received.
Experiment. Once a new, radically revised or transposed way of doing business has been sketched out, it should be possible to engage in some low-cost experimentation. Experiments not only help test your hypotheses, they can also be key to overcoming innovation inertia if you are in a well-established firm.
This is borne out in a case study by IESE’s Marc Sosna et al. He examined trial-and-error learning in a Spanish dietary products business called Naturhouse, a mature company that was facing a recession and new competitive threats. While simultaneously maintaining revenues and profits, Naturhouse experimented and learned from the process over the course of two years, which then enabled it to internationalize successfully.
Test assumptions. If your business model is complex, as many are, breaking down the critical assumptions that underpin it is a fruitful exercise. There are many questions to ask: Is there demand? Will your third-party suppliers find value in working with you? Is the environment changing in a way that’s compatible with your medium-term plans? Here is where the test assumption matrix (TAM) can come in handy. It will help prioritize experimentation.
6 questions to BMI
1. What perceived customer needs can be satisfied through the new business model design?
2. What novel activities are needed to satisfy these perceived needs?
3. How could the required activities be linked to each other in novel ways?
4. Who should perform each of the activities that are part of the business model (e.g., the focal firm or a partner) and what novel governance arrangements could enable this structure?
5. How can value be created in novel ways through the business model for each of the participants?
6. What novel revenue model fits with the firm’s business model to appropriate part of the total value it helps create?
In a TAM table, each row highlights critical assumptions of the business model, while each column contains milestones, using low-cost experiments. Make it dynamic: Changing the order of the rows can highlight your changing priorities, based on the results recorded in your columns. Empirical evidence from your tests can validate your model and mitigate risk, tackling the business model one piece at time.
For example, in the latest Business Model Challenge elective course that IESE runs every year in its MBA program, students came up with a novel idea for Dr. Oetker, a 100-year-old family business best known for its frozen pizzas. What if Dr. Oetker leveraged its brand name and reach to provide a platform for bakers and customers to connect – a sort of Airbnb for baking? As the lockdown brought baking at home to new prominence, the students’ idea resonated with the external environment. But how might a company test the students’ assumptions without risking too much? A simple online mockup could be a start, with split-testing or other digital experiments. A pie-in-the-sky idea could, one day, get to the board table with some data and targeted experiments. (At press time, this was still in the “ideation” phase.)
Adopting a BMI mindset for change
According to the McKinsey Global Innovation Survey, 80% of executives surveyed think their current business models are at risk of disruption. A more recent survey of IESE Alumni amid the COVID-19 crisis echoed this: A principal preoccupation of executives surveyed in April 2020 was the pandemic’s impact on their business model. So what is getting in the way of change?
The pandemic adds urgency to the question. “Now more than ever, we need leaders to focus on entrepreneurial agility,” says IESE Dean Franz Heukamp. “The economic and societal impact of this crisis is huge. As such, we need agile business leaders who are able to spot opportunities and innovate quickly in light of a new playing field in terms of both supply and demand.”
Research indicates that instilling a BMI mindset can help overcome resistance to change. But note that structural measures can help, too. Hiring outsiders and creating separate business units can also help overcome inertia. So, too, can corporate venturing mechanisms, as IESE’s M. Julia Prats explains in a later column. In any case, it’s imperative that top management be highly involved in the BMI process.
Leaders need to see BMI clearly. “Without a business model perspective, a firm is a mere participant in a dizzying array of networks and passive entanglements,” write Zott and Amit in their book. Analyzing the business model “encourages systemic and holistic thinking when considering innovation instead of concentrating on isolated, individual choices.” Their overarching message to managers: “When you innovate, look at the forest, not the trees.” And when it comes to your team, look to hiring strategically, mentoring with purpose, and being a role model. (See the infographic in this report.)
The optimist finds opportunities for creative partnerships
Relentless optimism is another key feature of the success-prone entrepreneur – and the entrepreneurial executive. In the midst of the crisis, with liquidity concerns, the optimist finds opportunities for creative partnerships or even mergers. If all events are on hold, there’s an opportunity to make big, disruptive infrastructure changes or implement new technologies.
As Parclick’s founders told Zott recently, as soon as they stopped cursing COVID-19 and accepted it, they saw weakened competitors, M&A opportunities, reduced costs, more time to find and eliminate inefficiencies, a job market in which to score rock-star hires – that’s the glass half full!
Crisis-sparked change is opening up even the most traditional of industries to new ideas. And ever advancing technologies continue to make change nimbler. As Maiques points out: “I think that the pandemic has forced us all to rethink the way we have been providing healthcare. There is a lot of inefficiency today, and as patients telework, they may also see that you don’t always need to go physically to the doctor.” The relentlessly optimistic entrepreneur sees challenges and opportunities as two sides of the same coin.
Meanwhile, the United Nations is calling upon governments to “Build Back Better” with renewed urgency for a post-pandemic reordering. For its part, the World Economic Forum has launched “The Great Reset” to encourage vital improvements via public-private partnerships. Both campaigns share a wider view regarding the chance we have now to speed up innovation for sustainability and the common good.
Now seems like a tipping point. Business model innovation can help usher in a post-COVID-19 era that works for all.
Learning from entrepreneurs
Watch as IESE professor Christoph Zott discusses what leaders and managers in established firms can learn from entrepreneurs, as they consider new strategies and actions to take during this uncertain time. (34 minutes)
Wanted: Your business model challenges
Does your firm have its own business model challenge? Every year IESE runs a Business Model Challenge elective during which teams of second-year MBA students collaborate with real companies to provide fresh, unbiased, outside perspectives on their current business model, and then present them with a well-crafted proposal for a potential business model innovation (BMI).
Interested in submitting a challenge? Email firstname.lastname@example.org for details on how to apply. Certain conditions apply.
Deadline for submissions: Nov. 30, 2020
Company reps are invited to collaborate closely with MBA teams and to visit the IESE campus in Barcelona (conditions permitting) sometime between January and April 2021 for discussions and final presentations.
Take advantage of this opportunity!
New Executive Education course on business model innovation strategy
IESE’s Christoph Zott and Marc Sosna are developing a new online course on business model innovation strategy. Watch for details at executiveeducation.iese.edu.
Bruno Lea: “I’m asking you for your ideas”
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Bruno Lea is president of Performer CNC, the southern France-based distributor of Haas Automation machine tools.
As an ambitious entrepreneur looking to acquire an established company via a search fund, Bruno Lea explored dozens of possibilities with an open mind. He finally set his sights on Performer CNC, the southern France-based distributor of Haas Automation machine tools. With the backing of Finaves, IESE’s seed capital fund, Lea took the top management seat in 2019. Just a few months later, in early 2020, he gathered employees from across France, Morocco, Algeria and Tunisia to share a new vision. “We’re not a distributor of machine tools,” he said. “We’re in the business of helping clients be more productive.” Eyebrows were raised, especially from the sales veterans who had been distributing machine tools for more than 30 years and knew this business inside-out.
Around the same time, Lea (MBA ’14) had been invited to take part in IESE professor Christoph Zott’s class on business model innovation (BMI). He thought it would be fun to return to his alma mater. “At first I was just curious,” he recalls, “but soon I realized how critical it was for the long-term future of my business to foster this BMI mindset.”
Shortly thereafter, the COVID crisis hit, and BMI became not just a nice-to-have but an absolute necessity, as sales of the expensive machines plummeted. “You can’t afford not to foster BMI within your company and your employees,” says Lea. Here, he explains how he did it.
You took over a machine tool distributor when you knew nothing about the specialized industry. How did being an outsider help?
The fact that I wasn’t from the industry is, I believe, an advantage, because I’m not coming with preconceived ideas and losing time having to unlearn things. I’m coming with fresh ideas and a different way of seeing and doing things. This helps with BMI.
I look for this in employees, too. Because we’re a technical business, it’s tempting to just recruit technical experience. But finding people with the right attitude and mindset – people who challenge the status quo, who question why and how we do things, who are constantly trying to learn and progress – that’s what makes the difference.
We recently hired four new salespeople who didn’t come from the sector – one came from a law background, another was a high-school teacher. But, vitally, they have the right attitude. Yes, they must believe in the product, but they don’t just focus on the product; they focus on client needs. That’s a big shift. I’m very aware that new hires are key to fostering BMI and so I hire purposefully.
And with existing employees who may have gotten stuck?
It starts by setting the right tone. But it’s not always easy. I can think of one guy who wasn’t so keen at first, but as he tried new things, he began to come around. People have remarked how they can see a real change in him. He seems happier now than he was before, being alone in his convictions that there was only ever one way to do things. Indeed, he’s happy to be nicely challenged. That’s the key: being nice and respecting that this guy has 35 years in this sector and, rather than giving up on him, showing him the worth of exploring other ways of doing things.
This was essentially what I was doing when I told all employees in early 2020: “What you think we’re doing is not what we’re actually doing. Here’s the vision: I will not tell you what we should do. I’m asking you for your ideas.”
So what did they come up with?
Once I said, “We’re in the business of helping,” the next question becomes, “What does it mean to help?” Selling machine tools is one way, but what about renting them? Especially for many SMEs, buying a big, expensive machine may be beyond their means, especially during a recession when many companies are facing liquidity challenges. So, this led us into renting machines, something not common in this sector.
Then we started thinking, instead of just offering a product (whether selling or renting), why not offer clients solutions to help them finance the product? Suddenly, the picture changed dramatically. That guy I just told you about, I remember him saying, “Renting is stupid. It won’t work. Nobody is doing it in our industry.” Now, he’s one of the biggest promoters of renting machines.
We’re already seeing positive results. Whereas the rest of the industry is down 50%, we’re outperforming our peers in Europe, and U.S.-based Haas has named us “best in class” for our region. I don’t believe that was beginner’s luck. It’s because of BMI.
If no one else in your industry is doing it, how can you check your ideas to see if they might work?
You have to search outside your industry, which forces you to imagine things that nobody else has implemented in your sector.
“You have to imagine things that nobody else has implemented before”
You can’t imagine how many different places we looked. In some ways our model is similar to Software as a Service (SaaS) and I remember talking to one guy from that sector who told me, “The answer to your question is in your name: Haas.” I didn’t see it at first, but the name of our company also happens to stand for Hardware as a Service (HaaS), which is a model more common in computing companies. That led me to study models like Xerox’s: They go beyond renting copiers and printers to adding maintenance, training, data management, and more.
One of our guys got an idea from 3-D printing farms of us creating a warehouse where clients could come to rent our machines by the hour, day, week, etc.
I even learned from street sellers in Madagascar. Those guys are ingenious the way they keep selling with very limited, scarce resources. When 90% of our sales orders dropped at the beginning of the coronavirus lockdowns, I reminded myself of those guys in Madagascar who keep smiling against the odds. All this adds to BMI thinking.
Another part of BMI thinking is reframing problems as opportunities. How did that help you deal with the challenges of COVID-19?
In the months prior to the pandemic, I hadn’t been meeting with all the teams, and I had only met with the branch manager in Paris. Now, I’m doing Zoom calls with groups of people, seeing many more people every month.
The same with the salespeople. Before, they felt that, in order to sell a machine, you had to take the car and go have lunch with the prospective client. But, even before the coronavirus, I had been thinking that, in 2020, the new generation of SME owners behave differently: They don’t need lunch to sign; they want information. I had been thinking we needed to use more digital tools for prospects.
And then, with COVID, suddenly we had no choice. Initially, some people thought, “Well, if we can’t take the car to do sales calls, we might as well furlough all our workers until this is over.” But I said no, it’s also an opportunity to accelerate what I was already thinking.
We trained our people on Zoom and they enjoyed it. They thanked me and said otherwise they would have gone crazy for months at home. Now, they can give the specifications to the client via Zoom. They don’t need to drive four hours to do that. I think a hybrid system – some physical, with online follow-up – can be effective. For me, COVID-19 was definitely an opportunity for innovation.
In what other ways did reframing help?
Take the rental model: It takes almost five years of renting a machine before those monthly payments add up to what you’d earn from selling the machine. The board saw that as riskier than selling. But I reframed it as an opportunity.
“The board saw that as riskier but I reframed it as an opportunity”
We’re in a crisis. The main thing is to survive, and for many companies the first thing they’ll try to save is cash. They won’t spend $100k to buy a machine, but they might spend $2k a month to rent the machine because they perceive that as less risky.
I said to the board, “If we want to prepare for the future, we have to propose renting to clients now, not next year, but now when they need the machines.” In framing it that way, I encountered less resistance and more buy-in for the idea from my stakeholders: not just my shareholders but also my employees, especially my salespeople, and the clients themselves. We had to show them the advantages on the balance sheet: renting shows up in a different place, not as debt as it would with buying a machine, but as a business expense, which is better for your debt ratio.
One of the biggest barriers to BMI is not being able to see the possibilities. How do you overcome your own blind spots?
The first blind spot is not being aware that you have any blind spots. Before doing my MBA at IESE, I wasn’t aware of how conditioned I was by my French culture until I was surrounded by non-French people. That’s why I always try to surround myself with diverse thinkers, to help make me aware of the ways I may be behaving without thinking.
Another blind spot is that I tend to trust my own instincts when maybe I should be soliciting feedback. Rationally, we all know the value of feedback, yet in real life we seldom actively seek it out. Being afraid to ask for help is a common blind spot. So, as much as I can, I make a conscious effort to go and get feedback.
We all need a blind-spot buddy. I have a mentor, a high-level executive who has known me for years, whom I have lunch with a few times a year. He acts like a mirror to me. It’s essential to know how others perceive you or your business idea, which may be totally different from the image that you thought you were projecting. It’s not easy. It requires that you dedicate time and energy to doing it consistently. But for BMI, the results are worth it.
Developing a BMI mindset
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Business model innovation (BMI) is a key task for managers – yet they often can’t do it because they lack the requisite mindset. The BMI mindset is one that is able to conceive of the entire activity system of a firm in terms of problem-solving or business opportunities. By thinking proactively and holistically about how you do business, you can better prepare for changes in your industry or business environment. Granted, such thinking isn’t easy and may not come naturally. But the good news is, it can be taught and learned. Here’s how to develop it, in yourself and in others.
Actions to foster BMI in yourself
Never be complacent about your current position. Just because the future is unknown doesn’t mean you can’t try to imagine future scenarios, especially ones in which your competitive position isn’t the same forever. Use strategic foresight tools to help you think about future possibilities.
Don’t get so mired in the day to day that you lose sight of the bigger picture. Step away to get an outsider’s view of your firm, either through a strategy workshop, or by leveraging the views of external hires, advisers and periphery employees who may have a very different take.
Think about your business model in generalizable, conceptual terms, which helps in identifying elements of your existing model that could be applied to a new domain, or vice versa. Just be careful not to oversimplify or ignore crucial elements on which your current model depends.
Make sure you have strong communication processes and that there is sufficient appetite for flexibility and change within the organization before presenting business model alternatives. How receptive is your organization to diverse perspectives? Does it take a crisis before change is considered?
When presenting BMI internally, be conscious of how you do it. When framed as a threat, people tend to get more rigid, which restricts information, narrows attention and reduces channels, resulting in inertia. When framed as an opportunity, people react more positively under the expectation of gain, which motivates change and promotes innovation. Opportunity and threat perceptions act as important cognitive antecedents to business model change and innovation.
Actions to foster BMI in your teams
5. Employee selection
Hiring criteria should include openness to learning. Probe job candidates about their recent learning experiences, not just their industry expertise. An individual with less firm-specific experience but a more open mind or broader background may prove more valuable longer term.
6. Memorable mentoring
Send strong messages from the top that BMI is important. This can happen through formal training and workshops on the topic, but also through informal means. Make sure your meetings are future-oriented, where everyone is encouraged to share examples from other industries to solve problems. Invite employees to travel outside their usual domain to compare how things are done elsewhere.
7. Role modeling
Unlike mentoring, role modeling is neither necessarily based on direct interaction nor does it necessarily have a teaching purpose. By deliberately displaying your own interest in BMI and always being open to new learning experiences, employees may seek to emulate the same attitudes and behaviors if they are so inspired.
Avoid these traps
Not seeing the forest for the trees
Paying too much attention to individual components (e.g., the product or technology) rather than seeing how the whole system works.
Accepting your model as a given
Path dependencies (e.g., standard procedures, ongoing contracts, stable relationships, established routines) discourage the search for anything new.
Following a dominant template
Benchmarking and copying elements from other business models similar to your own, forgetting that things can and often should be redesigned with novel features.
More info: Business Model Innovation Strategy: Transformational Concepts and Tools for Entrepreneurial Leaders by C. Zott and R. Amit (Wiley, 2020).
Philipp Schulte: “The crisis may have created a greater willingness to change”
04Build Back Better
Dr. Philipp Schulte is Group Vice President and Head of Corporate Development & Strategy at Giesecke+Devrient in Munich. A computer science communications engineer by training, he previously worked for McKinsey, which he says gave him the outside perspective to see things analytically and holistically, which helps for business model innovation.
In July 2020, 10 members of Giesecke+Devrient’s top management team, including the group CEO, the CFO and the CEOs of key business units, gathered for a three-day strategic workshop as they do every year – only this was no ordinary year. “When we grasped the magnitude of the COVID-19 challenge, we immediately pulled together a broad taskforce and set up a new program called Planning.Ahead,” says Philipp Schulte, who organizes the strategy process. Their goal: “To identify topics that we have to start doing, or that we would like to keep doing, through and beyond the crisis.”
Giesecke+Devrient (G+D) is a market leader in security solutions for payments, connectivity, identities and digital infrastructures. It belongs to that fabled group of German companies known as “hidden champions” – relatively small but wildly successful companies that excel in niche markets. The business literally prints money: It was founded in 1852 to print banknotes, which continues to be a major pillar of its business today, though they’ve moved way past paper to counterfeit-proof, machine-readable banknotes featuring foil strips, holographs and micromirrors. Their portfolio also increasingly includes other high-security products such as contactless payment cards, biometric passports as well as national IDs and driver’s licenses.
With COVID-19 making digital healthcare, eGov services and e-payments more important than ever, this year’s G+D workshop felt more urgent: “If we don’t constantly question what we’re doing and how we’re doing it, then we run the risk of falling behind. Engaging in business model innovation (BMI) thinking and activities helps to decrease that risk.”
Schulte, who participated in IESE’s Business Model Challenge MBA elective offered by professor Christoph Zott right before COVID-19 hit Europe, offers a glimpse of what any company can do.
Why hold a strategic workshop?
Everybody knows the struggle between the important and the urgent. We tend to focus on the urgent at the expense of the highly important. A workshop forces you to make time for what’s really important for your business. It’s deliberately intense, with lots of topics covered during those three days, and invited experts coming in to speak on certain specialized topics. But it’s a perfect opportunity, because you have all those key people together locked in a room – they cannot escape [laughs] – and you get a grip on where all the business units stand, what the strategic plan is, the resource allocation, improvement programs, competitor moves, and so on.
How can companies do this during a pandemic?
We would normally hold our workshop at a hotel on Lake Tegernsee in Bavaria, but because of the coronavirus situation, we had to hold it on our company site. Still, we tried to create an off-site feeling to get people in the right mindset, so they didn’t just run out during breaks to check emails on their phone or have quick meetings and catch up on other work (the urgent again). That was completely forbidden.
Another difference was that people went home at the end of each day, unlike in a hotel, where your conversations may continue into the night at the hotel bar – which are very special moments when interesting ideas emerge spontaneously. So, you have to think creatively about how to re-create those special moments on-site. We still had lunch and dinner together, and we took advantage of our headquarters’ rooftop terrace to celebrate the milestones achieved.
“We have to be at the forefront of new developments in digital cash”
Apart from those practical considerations, there is definitely a greater feeling of uncertainty, things are less predictable right now, so we found ourselves spending a lot more time discussing different scenarios, what additional portfolios and business model innovations we might want to develop, and the respective resource allocation. You need to plan more time to focus on those things.
What is the attitude toward resource allocation in this time of crisis?
Interestingly, after spending time discussing all the different strategies, we asked people to say how they personally would choose to allocate investment. On average, people felt we needed to be even more aggressive with resource allocation, funneling more money to new businesses with innovative business models. That was something new this year. As long as the value proposition was clear and understood, we saw that people were more willing to support it and create funding for it. The crisis may have created a greater willingness to change.
What new business areas are people more willing to invest in?
Largely digital equivalents of an existing physical business. So, for us, we are working on a central bank digital currency. While we don’t foresee a cashless society anytime soon (believe it or not, 80% of all global payment transactions are still done in cash), we definitely see a change in consumer behavior in many countries when it comes to payment. And since payment solutions are such an important part of our business, we have to closely observe and review all developments there, and be at the forefront of new developments in digital cash.
This would imply new business models…
Yes, because it’s not just about creating one digital solution but actually creating an entirely new ecosystem involving the central bank, the commercial banks, the merchants, the citizens and everything in between. How do you equip all those stakeholders while also guaranteeing the very highest levels of security against hacking and so on? This is very different from anything in the physical world.
Will this require new skill sets?
Part of it will require hiring new people but we are also reallocating internal resources, particularly R&D people from cryptography, secure algorithms and embedded operating systems.
We’re also evaluating partnerships with external companies. In an ecosystem, there’s not a single company – not even the mighty Big Tech companies – that is able or even wants to do everything. It’s okay to say: We want to have a role in this market, but it may be even more beneficial if other companies have a role in this as well.
What are you doing differently this year, prompted by the crisis?
One thing we did in our workshop for the first time was that we got our top management to think about big, disruptive trends. For this, we invited groups from within the organization to present on different topics, to stimulate their thinking in the moment, without them coming pre-prepared with lots of papers, as they normally would. We deliberately started with that exercise. Then, we posted all the open questions they had come up with for each trend on the wall, to keep triggering our thought processes throughout those three days. That helped to focus minds.
A major part of our conversation was also around how to sustain the business and allocate the resources accordingly, which is not about meeting a financial growth target. Not every business can grow 10%. The market isn’t like that now anyway. It’s ultimately about the plans you envision for the future, and deciding how your business model will fit with those future objectives you set.
How will you keep the momentum going?
After our workshop, the CEO proposed that we shoot a video out of the session on long-term trends, which we will share with all employees via our intranet. We also plan to do some deep dives into the trends involving smaller working groups, or think tanks, to come up with some recommendations. It’s important to move from communication to execution.
Getting a mandate to push in a given direction can help to overcome organizational inertia. That comes from the top but you also have to motivate yourself and have enough passion to overcome your own inertia. As a consultant, I had to get accustomed to many different topics quite rapidly, and this is a useful skill to develop. You have to like to learn, to see every day as something new to explore, to have curiosity. That can create momentum. And once you have momentum, you have to use it or lose it.
05Build Back Better
Corporate venturing enablers can help established firms and startups to innovate and grow at a higher speed and lower cost.
New technologies and excess liquidity accrued over recent years have together fueled startups, many of which are offering better solutions to old problems or brand-new value propositions.
As market volatility has increased dramatically amid the COVID-19 crisis, established firms are looking to adapt or even transform themselves to achieve profitable growth in uncertain times. Many firms are looking at corporate venturing, bringing together startups and established firms, to explore the future.
First, let’s clear up a myth: Corporate venturing is not just for the incumbent giants, although many large multinationals are making good use of it. In a series of studies of corporate venturing, my colleague Josemaria Siota and I have seen many small and medium-sized enterprises (SMEs) successfully deploy these mechanisms. Remember, corporate venturing is an umbrella term that encompasses many initiatives with startups, including corporate accelerators, incubators, strategic partnerships, venture builders, venture clients, scouting missions, hackathons, challenge prizes and the more common startup acquisitions, and corporate venture capital (CVC). Each of these involves very different levels of investment in terms of time and money, potentially serving a wide variety of budgets and requirements.
In the latest study that Siota and I published in July 2020, we found that the Chief Innovation Officers we interviewed are engaging with increasingly complex corporate venturing ecosystems. These ecosystems feature established firms, startups and a growing number of participants that we call “enablers” working with both groups. As our research on these ecosystems continues, we are exploring when it’s better for firms and startups to engage directly and when it’s more opportune to go through an enabler – and how working with enablers can be configured.
Business model innovation can be the result of industry-spanning collaborations like these
Enablers include private accelerators and incubators, research centers, universities, venture capital firms, business angel investors, private equity firms, consulting firms, governments, embassies, chambers of commerce and think tanks. Although very different in nature and purpose, their common function is to improve deal flow between established firms and startups, not only in terms of quantity but also quality, so that the fruits of collaboration are borne faster. Enablers can also reduce innovation costs by sharing their expenses with other enablers and thus strengthening the value proposition offered because of the group’s aggregated value.
Let’s look at one example. The car manufacturer, Volvo, joined forces with other corporations in its same value chain, including CEVT (China Euro Vehicle Technology) and the auto tech provider Veoneer, together with the communications company Ericsson – all hosted in Sweden’s Lindholmen Science Park. The joint initiative, dubbed MobilityXlab, offers startups the opportunity to accelerate through mentorships, access to professional networks, industry insights and workspaces provided by these more established corporations working on the future of mobility.
For corporations, this lets them get a view of the future and, not rarely, business model innovation (BMI) can be the result of industry-spanning collaborations like these. And it is through business model innovation that the search for new sources of growth may become reality.
As the business world catches on to the value of corporate venturing collaborations, navigating such ecosystems can be more complex but also more fruitful, with new ways to mitigate risk and share resources via corporate venturing enablers.
Complex times may call for complex – and bolder – solutions. Time for your firm to consider an enabler?
M. Julia Prats is holder of the Bertrán Foundation Chair of Entrepreneurship, head of the Entrepreneurship Department, and Academic Director of IESE. She’s also a member of CNBC’s Disruptor 50 Advisory Council, a group of 55 leading thinkers in the field of innovation and entrepreneurship from around the world.
More info: “Open innovation: Improving your capability, deal flow, cost and speed with a corporate venturing ecosystem” by Josemaria Siota and M. Julia Prats, in collaboration with Gellify’s Diego Fernandez and Acciona’s Telmo Perez (IESE, 2020) can be downloaded from ieseinsight.com or visit iese.edu/entrepreneurship to find out about all the other entrepreneurship activities and resources available through IESE.
This Report forms part of the magazine IESE Business School Insight #156. See the full Table of Contents.