IBM Global Business Services

Business Model Innovation

Paths to Success: Three Ways to Innovate Your
Business Model
March 2009
Richard Gleed, Associate Partner, IBM
Global Business Services deeper
richard.henry.gleed@uk.ibm.com

© Copyright IBM Corporation 2007

 IBM Global Business Services

Agenda

 Changing Business Environment

 Summary Findings from Business Model Innovation Study

 Business Model Innovation Framework and Best Practices

 Getting Started

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Will UK companies meet the criteria of “The Enterprise of the

Future”?

 Based on the 1,130 CEO interviews, IBM’s Global CEO Survey highlights five
key traits of the “Enterprise of the Future”

Core Traits of the Enterprise of the Future

1 2 3 4 5
Hungry Innovative Globally Disruptive Genuine,
for beyond integrated by nature not just
change customer generous
imaginatio
n

 The 61 interviews carried out in the UK¹ provide an opportunity to contrast the
views of UK respondents with global views
¹The geographic area analysed here is in fact UKISA: 55 interviews were carried out in the UK, and 6 in South Africa; see Appendix for further details

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The Enterprise of the Future is Hungry for Change

More CEOs than ever before – 2006 2008

8 22
8 in 10 – anticipate turbulent % %
CHANGE CHANGE

change, and plan bold moves GAP* GAP*

in response 13% 12% 6%

11%
19%

22% 31%
83% 20%

 In two years the gap between the

65%
ability to manage change and the 57%
61%

challenge ahead has tripled

 The number of companies

reporting limited or no success has
surged 60%
 Outperforming organizations are Expected Past Change Expected Past Change
significantly better than their peers Change Success Change Success

at successfully navigating change Expected Change Past Change Success

No/limited Change No/limited Success
Moderate Change Moderate Success
* Difference or ‘gap’ between expected level of change needed and past success in managing change
Substantial Change Successful
Source: IBM Global CEO Study 2008; n (2006) = 709, n (2008) = 1104

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The Enterprise of the Future is Disruptive by Nature

More than two-thirds of CEOs Focus on Business Model

strongly focused on the most Innovation by Type
sustainable form of innovation –
business model transformation
Established Economy
Emerging Economy*
UK
 More than 2 in 5 pursue business models
that are more externally collaborative 50%

 More than 1 in 5 pursue an even more 37%

32%
disruptive path: redefining their markets, 25% 24% 24%
moving into or creating wholly new 20% 20% 19% 20%
13% 13%
industries
 More outperformers (28%) choose the
Enterprise Revenue Industry Model Multiple Types
most difficult transformation - disrupting Model Model Innovation
industries - and more (49%) choose Innovation Innovation
collaborative business models

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Agenda

 Changing Business Environment

 Summary Findings from Business Model Innovation Study

 Business Model Innovation Framework and Best Practices

 Getting Started

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Top-line findings from Business Model Innovation study

1 Business Model Innovation

improves margins

There are three distinct paths for

2 business model innovation

Each of these paths (or combination)

3 can lead to financial success; the right
strategy and execution are key

Enterprise model innovation through

4 collaborative innovation is the most
prominent model

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Business Model Innovation improves margins

Operating Margin Growth in Excess

of Peers
(Compound annual growth rate over 5 years)

6%

5%

4%

3%

2%

1%

0%

-1% Products/ Operations Business

Services/Markets Innovators Model
Innovators Innovators

Source: The Global CEO Study 2006: Expanding the Innovation Horizon

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There are three distinct paths for Business Model Innovation

Based on literature research and 35 best practice cases (*), we define business model
innovation along three dimensions
What business am I in?
making fundamental choices
Business
Model Innovation

Industry model (IM) Revenue Model (RM) Enterprise model (EM)

Innovation Innovation Innovation

Innovating the industry Innovating how Innovating value chain

value chain by: revenue is generated roles by:
 moving into new through:  changing the extended
industries  new value enterprise to be more
 redefining existing propositions integrated or
ones  pricing models specialized
 or creating entirely  transforming networks
new value chains with employees,
suppliers, customers,
and others
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Within each path, organizations adopt a set of levers to innovate
their business model
Industry model
Innovation
INDUSTRY TRANSFORMATION
• 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
HORIZONTAL MOVES
• Moving from one value chain to
another, leveraging its brand
across industries including airline,
media and telecoms
10
Business
Model Innovation
Revenue model
Innovation
PRICING / REVENUE
MODEL • 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
VALUE PROPOSITION
• Cirque du Soleil
reconfigured offering and
value elements to transform
the circus experience
What business am I in?
‘making fundamental choices’
Enterprise model
Innovation
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
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Two key findings of the Business Model Innovation research

on 35 best practice cases
What business am I in?
‘making fundamental choices’
Business
Model Innovation

Industry model Revenue model Enterprise model

Innovation Innovation Innovation

• INDUSTRY TRANSFORMATION • PRICING / REVENUE MODEL • INTEGRATION/SPECIALIZATION

• HORIZONTAL MOVES • VALUE PROPOSITION • EXTERNAL COLLABORATION

Each of these paths (or combination) can

1 lead to financial success; the right strategy
and execution are key
Enterprise model innovation through
2 collaborative innovation is the most
prominent model

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Agenda

 Changing Business Environment

 Summary Findings from Business Model Innovation Study

 Business Model Innovation Framework and Best Practices

 Getting Started

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 IBM Global Business Services

Industry Model Innovation – Industry Transformation

New models are transforming traditional industry value chains

Value Chain Transformation

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

1.Direct path to the customer

2.Single point of accountability

3.Build-to-Order

4.Low cost leadership

5.Standards-based technology

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Industry Model Innovation – Horizontal moves

Companies leverage assets through horizontal moves

Horizontal Moves
Companies are exporting differentiating expertise / experience / assets to a
comparable part of another industry value chain
Most prominent examples are leveraging brand assets to move
aggressively from one value chain to another.

Example: Virgin horizontal moves

Record
Music Artist Retailer Consumer
Company

Music industry

Manufacturer Agent Airline Consumer

Airline industry

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Revenue Model Innovation – Pricing/Revenue Models

Driving shifts in underlying pricing and revenue models
Revenue / Pricing Model Innovation

Companies are transforming the “rules of the game” in their industry by driving
fundamental shifts in the underlying pricing and revenue models
In several industries (e.g. Media and entertainment) digitization of content has created
entirely new models, such as charging for different ring tones
Examples: Distinct Pricing and Revenue Model Innovations
• Replacing traditional pay per individual product models with selling
Subscription periodic use or access to products and services
Model • Example: Newspapers & Magazines, movie rental subscription, mobile
phones, pay TV channels
• 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
Razor & Blade making profit on high margin consumables that are essential
Model • Examples: Gillette razor/blades, Computer printer/cartridge, mobile
phone/air time
• Many industries see a transition from a traditional product focus to
service focus, often changing the traditional dichotomy of products vs
Product to service to a continuum and alignment
Services Model • Examples: Electronics industry, e.g. IBMs replacing traditional product
focus through service led “business solutions”

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Revenue Model Innovation – Value Proposition

Innovating the value proposition through reconfiguration
Value Innovation. Creating Value while Reducing Costs
Value Innovators open new, uncontested spaces, and generate a leap in customer value
They reconfigure factors of competition and the value they bring to the customer
Unprecedented value propositions and therefore create completely new markets
Example: Southwest
Value Curve Airlines
of Southwest Airlines
High
4
Southwest
Create

3
Raise
Average Airlines

Reduce Eliminate Car Transport

Low
0
Price Meals Lounges Seating Class Hub Connectivity Friendly Service Speed Frequent Point-to-
Choices Point Departures

16 Source. Mauborgne, Kim: “Blue Ocean Strategy”, 2004 © Copyright IBM Corporation 2007
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Enterprise Model Innovation – integration / specialization

Innovating along the integration / specialization continuum
Integration and Specialization
Integrators play in and execute their business component map completely
Specialized players concentrate on a limited number of differentiating ‘business
components’ and partner on selected non-differentiating ‘business components’

Examples: Zara (Integration) and Bharti (Specialization)

Zara is owning/driving/executing and therefore Telco players like Bharti are specializing on
integrating all components out of the Fashion differentiating components (like marketing, sales,
component map distribution)
Develop New Markets Acquire and Manage Develop and Provide Manage
Marketing & Production / Logistics & Business
Product Stores & Channels and Products Customers Network Services Enterprise
Customers Manufacturing Distribution Administration
Customer Network
Corporate Strategy and New Product Billing and Provisioning Service Business
Brand / Business Practice Marketing Sales Management Resource
CRM strategy Channel strategy Delocalization Supply Chain strategy planning Development Collections & Fulfillment Assurance Management
Strategy and Care Development

Store architecture & SRM with Façonners WIP & raw materials

Directing
Direct Marketing strategy Assortment planning
layout and third parties planning
Corporate Governance Market Product & Offer Sales Channel Customer Service Strategy
Technology Strategic Enterprise Planning
and Brand Portfolio Planning Strategy 2.1 Management Fulfillment and and Readiness and Resource 3.1-1
Strategy 2.1 Strategy
and resource Planning and Capacity
Customers’ behavior Network & Asset Market Strategy Care Strategy Planning 2. 2-2-1,
Merchandise planning Channel design Production planning Alliance Management & Policy 3.1 Alliance Strategy Planning
definition optimization 2.2-1 2.2-2 Supply Chain/Value
2.4 2.3-1, 2.3-2
Net Strategy 2.4-1
Market & competitors
Profitability analysis on Façonners / supplier Business Performance Brand Billing &
analysis Collection Supplier scoring Collections
channel / store sourcing and anal. Management Management Service
3.2-1 Sales, Channel, Management Management Network
and Alliance 1.1-8 Resource

Technology Management (IT, R&D, Disaster Recovery) 3.4,3.8, 3..3

Segmentation Product CRM Support and
Store Operations

Controlling
Price and promotion External Market Analysis Management Readiness Performance
Management Inbound Logistics Development Support and
optimization management Façonners / supplier 2.4-8 Device 1-2-1 Management
and Retirement
Readiness 2.3-3, 1. 3-1

Stakeholder and External Relations Management 3.6

sourcing 2.1-7 and
Matching Supply and Organization and Process (Control) Supplier
Control Demand Sales analysis Intra-company & Design Marketing 1.1-1 Order
New in-season products Outbound Logistics Communications, Management
Account Planning Customer
Legal, Tax and Regulatory Advertising and 2.1-8 Supplier/ Partner
Sourcing Promotion 1.1-9, SLA / QoS
Marketing campaign Compliance Management Performance

Procurement 1.4-3, 1.4-4

Transportation / Fleet 3.2
OTB execution Management

HR Management 3.7
Sourcing Management 1-1-7
1.4-1 Finan
Loyalty and Retention 1.1-9
Treasury & Risk Mgmt cial
Loyalty and
Seasonal forecast Agents management Production traceability Warehouse Management Asset
Financial Accounting & Marketing Customer Interface Management 1.1-2 Resource Mana
Reporting Research and Order provisioning geme
Analysis 1.1-9 Handling 1-5 Supplier/Partner (Eng & Const) nt 3.5
Customer Service 1.3-2
Replenishmet Problem Rep &
Distribution Center Customer Contact Operations
Indirect Procurement Service Mgt
Executing

Operations Sales Problem B&C

Development
Services Delivery Samples / collection and Service Service Testing
In-Store mktg execution Customer
Samples management manufacturing Stock transfer amoong Retirement Configuration, and performance
Facilities & Equip Mgmt Analytics Rating &
DOS 2.2-4 Activation, management
Price changing prod match Customer Billing
Disconnects 2-2 1.3-2-31.3-4
Communication and Adv Problem 1.2-5
execution Handling and Service
Execute Stock and sales analysis Time & Attendance Plant Inventory Returns & Reclamation Resource Development Sales 1.1-4 Resolution Problem
on size / color Management Execute Resource
1.1-6 Supplier/ Partner Management Inventory
OOS by size / colour Campaigns and
Settlement and Provisioning 2-3 Management
After Sales management market fulfillment
Product Track & Trace HR Administration Billing 4.7 3-2 1-3-1-5l
Technical product data 1-1-5
management POS / Cash management Manufacturing
procurement Transportation / Fleet /

Telco component map

Cust. Infos managment IT Systems & Operations
Multi-channel Call Center Yard Operations

Fashion component map

Bharti Focus
Zara Focus

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Enterprise Model Innovation – Collaboration & Partnering

Companies are redefining the “extended enterprise”
Collaboration and Partnering
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
Mergers and
acquisitions
Financial participation

Coffee maker
Joint ventures manufacturers
maker

Equity Design IP
maker
Cafes
participation Illy training

Franchises Raw beans Served cup

Roast beans Of coffee
Roast beans

Joint distribution Design Consumer

Co-creation Partnerships Coffee Growers

marketing

Joint R&D Network role of

cups
offering output
Supply relationships Cup manufacturers
Brand

Arm’s-length Asset
contract
Service
Integration of business processes
Network

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Agenda

 Changing Business Environment

 Summary Findings from Business Model Innovation Study

 Business Model Innovation Framework and Best Practices

 Getting Started

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Understand the constraints

Age of Company
Industry
IBM Global Business Services

Timeline – Age of Companies

Industrial Age
1830s
Information
Age
1970s
Digital
Age
1990s
IBM Global Business Services
Financial Performance
SURVIVORS EVOLVERS ENTREPRENEURS

Wal-Mart [45] Infosys [26] Goldcorp [13]

Consumer Packaged Goods IBM Global Business Services
Nokia [142]
Southwest [40] Amazon [13]
Disney [82] Cirque du Soleil [23] Key Issues Globalization
Lilly [131] Ebay [12]
POSCO [39] •Higher raw materials and energy costs have affected both •Manufacturers preferring aggregated
Dell [23] household and personal case industries
Netflix [9] buying and global sourcing to be able to cut
Coca Cola [121] Illy [74]
Virgin [37] Bharti [22] Adsoncars.com [9]
•Lifestyle shifts causing trouble to Carbonated soft drinks
(CSDs) manufacturers
wholesale prices
•Companies expanding internationally
Average Revenue/FTE
IBM [119] Google [9] •Increasing competition esp. from private label
Drivers through joint ventures
Progressive [70]
Starbucks [36] Capital One [19]
Gillette [106] Napster [8] •Emerging markets such as China,
P&G [170] India, and Latin America spell new Consolidation
Flexcar [8] (K)
RM/EM/IM RM / EM EM / IM IM / RM RM EM IM
Target [105] Ikea [64] Microsoft [32] ING Direct (16) opportunity for manufacturers •Food & Beverage companies doing select
Chongqing
facing saturated growth in North M&A to add product lines 1000
Zara [32] America and Europe •Manufacturers collaborating with
Li & Fung [101] •Convenience & on-the-go critical 900
competitors for strategic and financial
for food and groceries stores
Apple [31] benefits 800
•CPG manufacturers making

Rev/FTE Average (01-05)

consumer-driven product innovation
Technology 700
150 50 20 a key initiative
1910 1960 1990 2010 •Consumers are increasingly •Companies are integrating RFID into their 600
turning towards health food supply chains to eliminate invoice 500
Age of companies discrepancies
•Increasing use of enterprise software such 400
21 IBM Confidential | 10-Feb-07 © Copyright IBM Corporation 2006 as SAP
•Colgate Palmolive reduced its global 300
advertising expenditure by 40% with
Top three global leaders the implementation of SAP 200
In Million USD Revenue CAGR Gross margin Operating margin 100
2004 2005 2006 (04-06) 2004 2005 2006 2004 2005 2006
0
• Depending on age and organizational P&G
Unilever
Kraft Foods Inc.
51,407 56,741 68,222
48030 47765 --
32,168 34,113 --
--
--
15% 51.1% 50.9% 51.4% 18.3% 18.5% 19.4%
48.5% 14.7% --
37.0% 36.1% --
11.0% 13.2% --
14.9% 14.5% --

legacy, companies are pursuing 53

Source: Standard & Poor’s Industry Survey; Forrester, Datamonitor
IBM Confidential | 10-Feb-07 © Copyright IBM Corporation 2006

different business model innovation

• Nature of business model innovation Note: Includes only public listed companies; CAGR calculated for the past 5 years; Datat for GoldCorp, Bharti and©Gillette areIBM
for Corporation 2006

paths
67 IBM Confidential | 10-Feb-07 Copyright
2 and 4 years respectively; Data of Inditex used for Zara

opportunities vary by industry, • Benchmarking performance against

• Understanding implications will set the depending on unique characteristics industry peers, especially financial
framework for taking decisions on and maturity in each industry opportunities created through
both type and degree of business
• Understanding the nature of business model innovation
model innovation
opportunities within – and across –
industries allows identification of
incremental or radical innovations

Leveraging the results of IBM’s research on 35 best practice BMI cases

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What kind of innovation best addresses these constraints?

Current Position & Path Selection
Revenue Model
• How can you leverage new /
emerging business models in your
industries? From other industries?
• How does new/emerging
technology change the parameters?
• Are you a leader of follower when it
comes to industry change?
Current Position
• Are there ways to reconfigure / re-
allocated sources of revenue in your
business?
• How can you sell elements of your
services / offerings differently?
High • How can you reconfigure value
elements in your business?
• How can you select and leverage
unique assets & capabilities in your
business that provide competitive
differentiation?
Low • What should you do vs where
should you partner for optimal
value?

Industry Model Enterprise Model

Degree of Innovation
• How does the degree of innovation relate
to your industry? How will it change in the
future?
• Do you have the right balance?
Timing of Innovation
• Do you drive change in the industry, or is
it imposed on you? Lead vs follow?
• What are the disruptive technologies or
models emerging today?
BMI Path
• Which business model innovation paths
are we / should you explore?
• Which ones are most aligned with our
industry, capabilities, vision?

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Enterprise ModelBusiness
Introduction to Component Innovation: a component-based approach
Modeling (CBM)

Columns are Business Competencies,

An Accountability Level characterises defined as large business areas with
the scope and intent of activity and characteristic skills and capabilities,
decision-making. The three levels for example card management or
used are Direct, Control and Execute. payment transaction processing.

A Business Component
Business Financial
supplies a capability to
Business New Business Relationship Servicing & Product
Competencies Administration Development Management Sales Fulfilment
Control and
Accounting
an enterprise: it carries
Direct
Business
Planning
Sector Planning Account Planning Sales Planning
Fulfilment
Planning
Portfolio Planning out activities, using
Sector Relationship
resources, applications
Business Unit Compliance

Control
Tracking Management Management
Sales Fulfilment and infrastructure to do
e
Management Planning
Accountability Staff Appraisals
Product Credit tiv Reconciliation so. Each capability
Management Assessment
Level
should be unique and
ra
st

Product Directory Product

Staff Sales
Fulfillment Customer
only appear once (or on
Illu

Administration Accounts

Execute
Credit
Administration Customer
Dialogue
occasions twice) on the
Marketing
Production
Administration
Campaigns
Document
Management General
Ledger
map
Contact Routing

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Enterprise Model Innovation – high level design

3 weeks 4 weeks 7 weeks 2 weeks

Confirm strategic Baseline Develop target Create Change

direction current model model Roadmap

Strategic Direction Current Operating An integrated Target Outline change case and
Statement Model Assessment Design to deliver BMI roadmap

Total = 16 weeks

Ways of working: ongoing interactions with senior management team

through: 1 to 1 interviews, establishment of “war room” to show gallery of
deliverables, workshops to challenge hypotheses and agree priorities

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Summary

 The drastically changing industry landscape is driving the emergence of new

business models

 Our Business Model Innovation Research shows that:

- Business Model Innovation improves margins

- Different paths of business model innovation can lead to success – the right strategy
and execution are key

- Enterprise model innovation through collaborative innovation is the most prominent

model

 Companies should get started by understanding their current position, the

industry and competition, and by defining and selecting future opportunities

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Business Model Innovation

Paths to Success: Three Ways to Innovate Your
Business Model
March 2009
Richard Gleed, Associate Partner, IBM
Global Business Services deeper
richard.henry.gleed@uk.ibm.com

© Copyright IBM Corporation 2007