Abstract

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Abstract Business model innovation becomes increasingly more important. It is without doubt the most powerful driver for competitive advantage in today’s economy and has started to outshine product innovation. There are many cases in which a changing market environment requires an innovative business model that can sustain market leadership. After several years of business model innovation research and the application thereof, SAP provides a systematic, iterative approach to identify the appropriate business model. The approach is suitable for industries and for businesses of any size. It interrelates with other well-known approaches such as Design Thinking or Lean. Together they offer a meaningful and solid foundation for any business. To better understand the approach, a use case is used to show step by step how it successfully turned a cloud business into a cloud of insights.

360° – the Business Transformation Journal No. 11 | August 2014

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BUSINESS MODEL DEVELOPMENT & INNOVATION A Strategic Approach to Business Transformation

Even the best companies cannot sustain themselves by simply focusing on product innovation. To succeed, companies have to evolve their business model innovation skills. In this article you will learn how business models can be developed and evaluated based on an agile and iterative approach. 7

by Julia Doll and Uli Eisert The increasing difficulty to differentiate based on services and products has led to significantly greater interest for business model innovation in research and practice (Chesbrough, 2007; IBM, 2012). Today, it is well understood that business models are decisive for a company’s long-term success or failure and are probably the most powerful driver for competitive advantage (Johnson et al. 2008). Nevertheless, there is still a striking discrepancy within most companies between the degree of awareness about the importance of Business Model Development and Innovation (BMDI) and its implementation (Bucherer et al. 2012; Chesbrough, 2010). What is needed is a systematic approach to continuously develop and improve the business models of a company and to come up with business model innovations whenever it makes sense. Companies have to maintain and develop their business models with the same professionalism and seriousness as they do for their product and service portfolio. Hence, processes, organizational struc-

tures, and accountability need to ensure that each business unit and, if required, even every single product or service is embedded into an appropriate business model. Appropriate means that under given internal and external conditions the most promising model is chosen and that risks are mitigated by a comprehensive validation of the underlying assumptions. This will ensure that the economic viability of the unit and the entire enterprise is ensured in the best way possible. BMDI: The Silver Bullet for Economic Viability? Most scholars and practitioners today agree that successful innovations should satisfy three perspectives: technical feasibility, human desirability, and economic viability (Brown, 2008; IDEO, 2012). Likewise, products or services already in the marketplace are only successful if their quality lives up to user’s expectations, users want to use them, and buyers are willing to pay for them. While technical feasibility and product quality had been the focus of developers, engineers, and


Business Model Development & Innovation

Design Thinking

(Lean) Engineering

Illustration by Tobias Hildenbrand based on IDEO, 2012

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Fig. 1: BMDI:The missing piece

product managers for quite some time, Design Thinking was a break-through approach to successfully focus on human desirability and to ensure that users are keen to use (and maybe own) a product. However, Design Thinking does not sufficiently focus on the buyers’ perspective. It does not provide the required mindset as well as tools to systematically cover economic viability and to make sure that buyers are willing to pay a given price (this might be more obvious in B2B industries where buyers and users

Box 1: How was BMDI developed? The approach was developed by SAP based on extensive research in collaboration with the University of St. Gallen and practical experience from dozens of internal projects. It takes into account well-known concepts such as the “Business Model Canvas” (Osterwalder, 2005), “Business Model Patterns” (Gassmann, 2013) or “Lean StartUp” (Ries, 2011; Blank, 2013). The approach was standardized and validated by coaching multiple teams at SAP with innovative products facing market entry or established products with insufficient success. After several effective projects, we started to consult SAP customers as well as HANA start-ups and Social Impact start-ups.

Business Model Development & Innovation (BMDI)

are often different people). We believe that Business Models Development and Innovation is the missing piece to cover the economic viability dimension (see figure 1). Business models specify the core logic of a firm because they describe how value is created and delivered to the customers and how the value is captured for the producer or provider (Osterwalder et al. 2005). If used in the right way, business models also capture the competitive advantage of a company. In a very pragmatic way, they combine the marketbased view and the resource-based view of the firm, which makes them a great “unit of analysis” – that is an ideal basis for a systematic development of business activities. Some people might think that business cases and business plans are sufficient to ensure economic viability for a new product, business field or even company. Both are necessary; nevertheless, if done without a systematic development of the appropriate business model beforehand, they will neither ensure that the most promising approach is chosen nor that the underlying assumptions are sufficiently validated. Only a systematic, iterative approach to


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identify the appropriate business model such as the BMDI approach provides a meaningful and solid foundation to calculate business cases and develop business plans (see box 1). In addition, it guides you to a model that allows full exploitation of ideas and capabilities, regardless of whether this model is highly innovative, totally new or “just” the adaption of a proven, existing business model or something in between. Business Model Description Business models can only be leveraged as an appropriate “unit of analysis” if the used description model allows to illustrate and convey the business logic in a highly condensed and easy-to-understand manner. This explains the success of the Business Model Canvas from Alexander Osterwalder as the de-facto standard for business models, at least on the practitioner’s side. It uses nine elements to describe a business model (Strategyzer, 2011). We call the canvas the “enterprise view” of the business model (see figure 3 on the next page)

and complement it with a “network view” that allows it to describe the relevant network and interrelations around the enterprise (see figure 2). This helps significantly to understand dependencies in complex business models and to ensure that competition is always considered when the business model is developed. Without a systematic development of the approriate business model beforehand, business cases and plans are not sufficient to ensure economic viability (Eisert, 2013). What is BMDI in a Nutshell? The art of BMDI is to turn the baseline (see box 2 on the next page) into an appropriate model that is, under given internal and external conditions, the model that ensures economic viability in the best way possible. In order to accomplish that, the team has to go through different activities, such as analysis, design, validation, implementation, execution, and scaling. However, it will never be a sequential, linear process. It must be tailored to the specific challenges of the

Network View Partner Network

My Company

My Customers

Customer Network

My Partners

My Competition


Competition

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Fig. 2: Network view (adapted from SAP SE/CC BY 4.0)


Enterprise View How?

What?

Who?

Value Creation

Competition

Value Capture Why? 10

My Company

My Customers

Fig. 3: Enterprise view (adapted from Business Model Foundry AG/CC BYSA 3.0)

My Partners

My Competition

project and it has to be flexible enough to take into account all the insights that will be gained along the way. That is why BMDI is a highly iterative and agile approach. Its beauty is the combination of simplicity and flexibility with powerful methods. BMDI offers four types of iteration that allow project teams in any given situation to identify and carry out the activities needed to develop their model into the right direction.

Box 2: It All Starts with the Baseline To develop the business model, the first exercise should always be to describe a baseline for the following activities. This is straightforward, when a business model already exists, which is not as successful as expected or under pressure from the competition. In this case the current state of the business model is the baseline. However, even if you are in a very early stage, e.g. for new product ideas or startups, it is important to describe the baseline. In this case all ideas, thoughts, and assumptions, regardless to which extent they are completed or validated, should be taken into account, to reflect the current thinking and create a common ground for the team working on the business model.

The Four Types of Iteration We distinguish four basic ways to systematically develop a business model. All of them follow the diverge/converge principle that has proven to be successful in Design Thinking. First the team creates options, then it synthesizes its insights and chooses the most promising option(s). For each type of iteration we have developed a set of methods while leveraging good industry practices (see figure 4). Analyze & Improve: During this iteration, parts of the business model are analyzed in more detail to improve the business model based on the gained insights. This can be done in various areas, a few examples are: −−Analyze customer needs in detail and improve the value proposition to better address them −−Analyze competitors and improve the value proposition to increase unique aspects −−Analyze partnering options and improve your needed key activities and resources accordingly


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−−Analyze customer experience and improve customer relations accordingly −−Analyze key activities to reduce related costs Challenge & Change: If there are valid triggers (opportunities or threats) to challenge the business model baseline at any point in time, a design challenge is formulated and dedicated ideation methods are used to come up with different alternative business model options. While some methods rather facilitate systematic ideation for incremental improvements, others are more suited for creative ideation that might bring up disruptive, out-of-the-box alternatives. In any case, the team has to cluster ideas and finally has to decide which changes will be used for subsequent processing. Test & Verify: Each business model is based on several assumptions that imply risks if they turn out to be wrong. That is why crucial assumptions should be tested and validated at an early stage with limited effort. Usually assumptions are made regarding customers’ issues, needs, and wants, as well as their willingness to pay. Also, assumptions can be made regarding appropriate chan-

Box 3: The Right Team and Mindset Besides the four types of iteration described in this article, the BMDI approach is also about the right team set-up and mindset. The team has to unite various perspectives; so diversity is important. In addition, there is a need to access experts (e.g. pricing, legal issues), stakeholders for validation (in particular customers), decision makers as well as sponsors. The right mindset is very similar to the one needed in Design Thinking projects (e.g. openness and endurance are key). nels, capabilities of key partners, and the company itself. These assumptions should be derived out of the business model and the risks involved need to be evaluated in order to figure out which assumptions should be tested in which sequence. The “Lean Start Up” literature (Ries, 2011) provides many insights as to how these assumptions can be validated depending on the maturity of the project. Key elements are the “Build-MeasureLearn” cycle, and the “MVP (Minimal Viable Product) concept” to minimize the involved effort, as well as “actionable metrics” that should ensure some objec- Fig. 4: BMDI in a tivity throughout the test. Depending on nutshell

Diverge

Analyze & Improve Partner Network

Customer Network

Converge

Challange & Chance

Competition

Partner Network

Customer Network

Competition

Appropriate, Validated Business Model

Baseline

Test & Verify

Create Choices


Evaluate & Decide

Make Choices

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Box 4: Project Description Helix Nebula In 2012, science organizations such as the European Organization for Nuclear Research (CERN), the European Molecular Biology Laboratory (EMBL), and the European Space Agency (ESA) teamed up with IT service companies, such as Atos, CloudSigma, Interoute, and T-Systems, to establish a federated European cloud known as Helix Nebula (HN). the results of the test, either an assumption is confirmed and the team can move on, or changes are required, sometimes significant ones, so called “pivots”. Evaluate & Decide: To figure out which of the different business model options are most promising, these have to be evaluated both qualitatively and quanti-

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The evaluation criteria and its relative weight have to be projectspecific because stakeholders might look at very different aspects. tatively. For the overall evaluation two dimensions are decisive: impact vs. ease of implementation. Impact summarizes all the relevant criteria that allow assessment of the potential impact (including revenue potential) of the business model. Ease of implementation summarizes all related efforts (including costs) and risks. The evaluation criteria and its relative weight have to be project-specific because stakeholders might look at

A win-win-win situation has to be created because value needs to be created for all customer groups even those that do not pay anything. very different aspects. However, the two dimensions can be depicted in a simple decision matrix to illustrate the consolidated feedback of various stakeholders and experts to simplify decisions. The

quantitative evaluation can be done by deriving a business case out of the respective model. Therefore, all revenue streams related to the addressed customer groups are estimated based on revenue models, price points, and number of customers/deals. In addition, all costs related to value creating and delivering activities, resources, and partnering are estimated and summarized. Furthermore, towards the end of the project the favored business model is evaluated in detail to provide the decision makers with a solid foundation for further planning or investment decisions. Specifics of Complex Business Models In two-sided or multi-sided business models, more than one customer group needs to be convinced because there is a crucial relationship between the customer groups. The best-known examples for these types of models are platformbased business models such as Airbnb or Google Search. For these models you have to create a win-win-win situation because value needs to be created for all customer groups even those that do not pay anything (such as the end user of a search engine). This gets even trickier if the model is subject to so-called network effects. Network effects are present if the value of the model depends on the amount of other customers also using it and can appear within one customer group (direct) or across customer groups (indirect network effects). Network effects are extremely beneficial for the owner of the business model as soon as the required critical mass is reached, i.e. when the adoption of the product or service is self-sustaining (Mahler and Rogers, 1999). However, until critical mass is achieved, the network effects are hindering the adoption and success of the business model. Investments as well as some endurance are needed to be successful in the end. As a consequence, BMDI supports the systematic development of strategies that can be used to accomplish critical mass.


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How BMDI Transformed a Cloud Business into a Cloud of Insights Helix Nebula (HN) cloud suppliers (see box 4) faced several challenges, such as addressing a new market segment called “big science”, pressure on prices due to apparently low-cost in-house solutions, and building up an innovative partner ecosystem with usually competing companies. Major competitors such as Amazon Web Services (AWS) offered cloud services at extremely low prices. The fact that some of the customers already used AWS was reason enough to accelerate market entry. At that point, the major remaining question was if HN could, against all odds, beat AWS based on pricing, or if a value proposition tailored to the needs of science could be found? In “Analyze & Improve”, we started by investigating related industries, existing and potential competitors, as well as partner ecosystems with their drivers and obstacles. Further, we analyzed the customer side, the public sector, and specifically the needs of “big science”. For this, multiple interviews with public institutions and the customers themselves were conducted. We found that science organizations tend to have many publicly funded IT resources, which are maintained by non-profit organizations. If HN could integrate these resources with the commercially-offered solutions, it would offer a previously non-existing flexibility to the market. This value proposition would set HN apart from AWS. However, based on the very restricted budget of science organizations, prices would still have to be very low. Having this in mind, the challenge for the supply side was to create a valuable business out of this ecosystem without just covering its costs. Focusing on this design challenge we conducted several workshops with HN suppliers in “Challenge & Change” to develop multiple potential business models. Since the establishment of a notyet-existing cloud ecosystem required room for innovation, many creative methods were applied to inspire innovative

ideas. A second challenge was to overcome coopetition issues, in order to enable smooth business operations of the proposed ecosystem. For this, multiple broker roles were determined that would enable interaction between suppliers and buyers based on business and technical processes.

Earth observation data from ESA can be very valuable to oil companies in order to predict landslides near pipelines. In “Evaluate & Decide” these business models were evaluated by experts at SAP and HN suppliers. The result was a business model roadmap, with a final business model that goes beyond generic cloud computing by creating value not only for science, but also for business, government, and society based on the analysis and aggregation of Big Data brought to the cloud by science organizations. For example, earth observation data from ESA can be very valuable to oil companies in order to predict landslides near pipelines. This extension allows science organizations to consume cloud services for free by providing valuable Key Learnings ►►

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It is not enough to rely on product innovation. Often products fail, if they address the market with the wrong business model. Business models can be systematically developed and evaluated based on an agile and iterative process that ensures economic viability. Business models are probably the most powerful driver of competitive advantage and should be managed as it is done with product portfolios. Business cases by themselves are insufficient if they do not build on a validated business model. Business model development and innovation combined with Design Thinking and lean offers a meaningful and solid foundation for businesses.


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data to the cloud and to open up a major revenue stream for HN suppliers by giving room for innovative services. Moreover, it could help nations and cities protect their citizens based on early warning systems. The growing ecosystem of research organizations collaborating in the cloud allows for the aggregation of nearly all conceivable scientific knowledge in one cloud. Thus, it enables not-yet-existing insights based on inter-organizational and international research.

Business Model Development and Innovation is relevant across industries and for businesses of any size. 14

To fill the cloud with data, the design of a profitable business model that provides cloud services tailored to the enormous demand of “big science” was required. In this field the major competitor was AWS. We had defined a clear differentiation by integrating non-profit partners offering publicly funded resources to European big science organizations. However, HN still needed to compete on price. Hence, we conducted a business case to compare HN prices to CERN’s in-house costs and AWS prices. The results spoke for themselves. HN’s prices beat AWS’s prices and partly CERN’s in-house costs. Assuming that CERN moves to the cloud gradually while HN reaches economies of scale, this is a perfectly valid starting point. Therefore, we had proven economic viability, not only by offering a unique value proposition but also by providing a financially attractive alternative to inhouse solutions for science organizations. The final challenge to tackle was the

roadmap to critical mass in order to establish the final business model. For this, we worked closely with one of the major flagships, namely ESA, in order to create suitable steps for implementation. We carefully considered a first potential niche to start with, which would make use of the satellite earth observation data already incorporated into the HN cloud. Based on this niche, the market would be expanded into other fields, based on data enrichment in the cloud. The proposed steps, amongst others, were to build up a lively community with the first ecosystem, to facilitate partner co-innovation and complementation in order to enrich the platform along the way, as well as to enable the exchange between partners and customers. Based on the proposed business model roadmap and the roadmap for critical mass, the Helix Nebula Marketplace was rolled out in May 2014. This use case showed us the specific needs of partner ecosystems going through the process of business model innovation. Specific focus must be given to the needs of each partner, providing each of them with a suitable business model underlying the common business model of the ecosystem as a whole. Conclusion Consulting customers and start-ups has proven that the BMDI approach is relevant across industries and can be applied to challenges faced by businesses of any size. In order to succeed, companies will have to realize that BMDI should be granted as much importance as product innovation. The ultimate goal is to establish a standardized BMDI process in each company, in which the business models implemented are managed similarly to the product portfolio of the company.

Learn more about: The approach is integrated into SAP innovation approach. To receive further information on training and consulting services, contact Peter Mittemeyer (peter.mittemeyer[at]sap.com).


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Service AUTHORS Julia Doll is a Project Lead for Business Model Innovation at SAP Switzerland. She has coached several projects regarding analysis, design, and evaluation of business models. During her career at SAP, starting in 2007, she has worked on several projects around the globe. Julia holds a Master of Science from the University of Mannheim, Germany and a Master of Business from the University of Queensland, Australia. ju.doll[at]sap.com Dr. Uli Eisert built up a SAP research lab at the University of St. Gallen and is heading a research & innovation team that is currently focusing on Business Model Development & Innovation (BMDI) as well as new approaches leveraging smart management of intangible assets. He published various journal papers and articles on innovation management and BMDI. Before his current position, he was heading the global PLM solution management at SAP and worked as a consultant and project manager for SAP implementations. He holds degrees in mechanical and industrial engineering as well as a PhD in business administration. uli.eisert[at]sap.com REFERENCES ►► ►► ►►

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Blank, S. (2013). Why the lean start-up changes everything. Harvard Business Review, 91(5), 63 – 72. Brown, T. (2008). Design Thinking. Harvard Business Review, June 2008, 84 – 92. Bucherer, B., Eisert, U. and Grassmann, O. (2012). Towards Systematic Business Model Innovation: Lessons from Product Innovation Management. Creativity and Innovation Management, 21(2), pp.183-198. Chesbrough, H. (2007) Business model innovation: it’s not just about technology anymore. Strategy & Leadership, 35(6), 12 –17. Chesbrough, H. (2010). Business Model Innovation: Opportunities and Barriers. Long Range Planning, 43(2 – 3), 354–363. doi:10.1016/j.lrp.2009.07.010. Eisert, U. (2013). SAP: Bringing Economic Viability to the Front End of Innovation. In O. Gassmann & F. Schweitzer (Eds.), Management of the Fuzzy Front End of Innovation. Berlin: Springer Verlag. Gassmann, O., Frankenberger, K., & Csik, M. (2013). Geschäftsmodelle entwickeln: 55 innovative Konzepte mit dem St. Galler Business Model Navigator. Carl Hanser Verlag GmbH Co KG. IBM. (2012). Leading Through Connections. Highlights of the Global Chief Executive Officer (CEO) Study. Somers, New York. IDEO (2012). Human Centered Design, An Introduction, 2nd Edition. Available from: http://www. ideo.com/images/uploads/hcd_toolkit/HCD_INTRO_PDF_WEB_opt.pdf [Accessed 19.12.2012]. Johnson, M., Christensen, C., and Kagermann, H. “Reinventing your business model.” Harvard business review 86.12 (2008): 57– 68. Mahler, A., & Rogers, E. M. (1999). The diffusion of interactive communication innovations and the critical mass: the adoption of telecommunications services by German banks. Telecommunications policy, 23(10), 719 –740. Osterwalder, A., Pigneur, Y., & Tucci, C. L. (2005). Clarifying Business Models: Origins, Present, And Future of the Concept. Communications of the AIS, 16(1), 1–25. Ries, E. (2011). The Lean Startup. 1st ed. New York: Crown Business. Strategyzer (2011). Business Model Canvas Explained. [video] Youtube.


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