Strategy & Leadership

Strategy & Leadership Designing innovative business models with a framework that promotes experimentation Cara Wrigley Karla Straker

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Designing innovative business models with a framework that promotes experimentation


Cara Wrigley and Karla Straker

Cara Wrigley is a senior lecturer in the field of design-led innovation at the Queensland University of Technology, Australia ([email protected]). Karla Straker (k.straker@ qut.edu.au) is a researcher in the university’s School of Design and its Information Systems School.

n uncertain, complex and fast-moving environments, the product and process development essential for creating new business models increasingly benefits from a combination of novel insight, rapid experimentation and evolutionary learning. Practitioners need to consider approaches that can create new perspectives by looking beyond known assumptions, barriers and constraints. A key to success is to find tools that enhance and expand the practice of business model experimentation.

I

Emerging research offers new opportunities to explore the importance and relevance of dynamic, design-driven approaches to the creation of innovative business models. As a starting point, “The Business Model Canvas” of Osterwalder and Pigneur[1] was selected to categorize the efforts of innovators in a diverse set of industries. The business models of forty companies were selected for evaluation and comparison. Five archetypal business models were derived from this content analysis. Combined into a five-model framework it synthesizes knowledge gained from real world case studies into a useful and thought provoking methodology for identifying and developing opportunities for business model innovation.

Business models deconstructed The Osterwalder and Pigneur “Business Model Canvas” (Exhibit 1) illustrates a business model visually. Compiled of nine building blocks – Customer Segments, Value Propositions, Channels, Customer Relationships, Revenue Streams, Key Resources, Key Activities, Key Partners and Cost Structure – it shows the constituent elements of a company’s business model and offers more insight into the model’s metrics and management levers. It can help define important opportunities for innovation not usually addressed by product or process development.

Business model innovation Several studies show that business model changes are among the most sustainable forms of innovation. While great business models often appear to have gone straight from drawing board into implementation, thus leading the firm to glory and success, in reality new business models rarely work the first time around. Often decision makers face difficulties at both exploratory and implementation stages.[3] Business model innovation can itself be a pathway to competitive advantage if the model is sufficiently differentiated and hard to replicate for incumbents and new

DOI 10.1108/SL-06-2015-0048

VOL. 44 NO. 1 2016, pp. 11-19, © Emerald Group Publishing Limited, ISSN 1087-8572 STRATEGY & LEADERSHIP

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Exhibit 1 Business Model Canvas (Strategyzer.com after Osterwalder and Pigneur 2010)[2]

entrants alike.[4] Despite extensive research into the necessity and importance of business model innovation, the key drivers of success have not been synthesized into a functional framework.

Business model prototyping and experimentation Business model experimentation and prototyping emphasizes the importance of the iterative learning and problem solving processes for testing different solutions and adapting them based on the results. The business model prototype serves a dual purpose. First, prototyping helps explore various scenarios and then stress test the viability and potential profitability of a venture. As importantly, however, a prototype forces participants to make their assumptions explicit. Protoyping, however, should not merely be a process for testing a pre-defined set of business extensions. The real payoff only occurs when the organization as a whole shifts to a dynamic test-and-learn mind-set,[5] an exploration of a broad range of new business model options.

Results: five design typologies Five business strategies and the models to implement them were derived from the research analysis: 1. Customer Led. 2. Cost Driven. 3. Resource Led. 4. Partnership Led. 5. Price Led. A key finding was the identification of a logical sequence of activity, which explained how each typology would likely have been executed as mapped by the business model

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Research methodology The research followed a content-analysis approach using the Business Model Canvas as the categorization matrix. The nine building blocks of the Business Model Canvas provide a schematic and comprehensive view of a business process, and the canvas approach has been widely recognized by scholars and practitioners and empirically validated.[6] Forty international companies were chosen for the study, representing a cross section of popular and dominant industries and sectors. Though a diverse range of businesses was researched, there was a preference towards businesses with non-traditional business models. All data came from publicly available sources. Details for each company and the main data sources used for each are listed in Exhibit 2.


The first step in analyzing these findings was to isolate the main types of business model innovation exhibited in the forty cases. This was done by evaluating each area of its business model canvas and establishing which segment was the most logical primary driver behind each company’s business model transformation.

The impact these primary business model drivers had on the rest of the company’s strategy was determined to discern how the primary driver affected other facets of the business model makeup. The goal was to identify the most logical concomitant activity of the primary business model driver.

canvas. For each of the models, numbering the components shows the chronological order of the sequence of activity. Not only is this order relevant in understanding each model, it also provides a process map from which new prototypes can be designed. Each of the five typology models is detailed below (Exhibits 3-7), along with examples from the analysis.

How to use the five-model framework A business model is never complete nor static and the process of creating and testing business models should be iterative and ongoing. These five typology models provide a tangible starting point from which a business can begin to explore different perspectives and gain insights into the internal and external capabilities of their company. By producing an array of prototypes, businesses are able to understand the implications of different business models and make clearer, better-informed decisions about where and how they want to compete. The results highlight the efficacy of these models. However, they should not be only measured by the viability of a business proposition that they propose. Their true value to practitioners is the unexpected diversity of the prototypes, in effect the opening of new frontiers. By utilizing these models a business is encouraged to broaden its horizons in search of new and untapped commercial opportunities. This form of experimentation provides internal stakeholders with a framework that can stimulate conversation, exploration and divergence from commonly held assumptions and logics within their respective industry. It is this type of practice that can foster business model evolution, in search of an innovative, reactive and anticipatory response to changing market conditions and environments. These five key foci provide the stakeholder with a viewpoint from which to quickly prototype new and innovative business models. The intent is not to propose one “right” model, but rather generate many different and diverse “possible” models. By following the order of the model and disregarding other constraints within the current business, the designer is able to rapidly prototype models based upon blue sky thinking rather than current restrictions and constraints. These five models facilitate this process, by providing a framework that can be exploited by designers from different backgrounds and expertise levels.

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‘‘Emerging research offers new opportunities to explore the importance and relevance of dynamic, design-driven approaches to the creation of innovative business models.’’

1. Customer led strategy


Many innovative business models are designed to be customer centric, rather than product centric. A Customer Led strategy (Exhibit 3) explores the diverse possibilities that lie within new and untouched customer segments, and how a new business model would look based on this new customer group. By experimenting with new customer segments, the designer is able to break away from the current norm in search of more lucrative and untapped customer demographics. The first starting point is to identify a new customer segment that the model will delineate and target. This can be based upon existing customer insights and market research, however, nontraditional customer segments may also be explored. By changing the customer segment and letting that drive the prototyping activity, the outcome will be a range of business alternatives that create value in a new way, for new markets. Bankwest offers a prime example of how a Customer Led approach can become the key driver of the business model. In the highly competitive world of retail banking, Bankwest focused on creating a better banking experience for a younger customer demographic, a contrast with a number of banks that were aiming their products and services at older, richer customers. This new focus had a significant impact on the rest of Bankwest’s business, as it streamlined its product offerings to suit this demographic, set up branches in high traffic retail locations favored by younger customers, and leveraged resources from its partner institutions. 2. Cost driven strategy Many innovative business models are based on an approach that strives to reduce or manage costs. Cost reduction doesn’t typically promote growth; however, operating in a low cost environment can create unique opportunities for a firm and often leads to the creation of a unique value proposition. A Cost Driven model (Exhibit 4) first looks to reduce expenses in order to find opportunities elsewhere. Surprisingly, this often leads to the creation of a unique product or service offering. It begins by suggesting that the business reduce its cost structure, for example, by outsourcing manufacturing offshore, transferring to a low-cost marketing strategy, or reducing bricks and mortar sale locations in favor of a greater online presence. The designer then begins to build a business model that is driven by this change, and explore the implications and possibilities that arise using a prototype that explores how this new low cost environment can stimulate innovative improvement in other areas of the business. An example is the business model of 99 Designs, an online graphic design platform that revolutionized the marketplace by crowd sourcing graphic designers, and having them compete for projects. 99 Designs dramatically reduced its cost structure, by not employing in-house designers and by moving its model online. This low-cost environment allowed 99 Designs to offer its services at a far lower price point, and also meant that they were able to scale their business far more effectively than a traditional graphic design firm. This cost-based approach is the primary driver behind its innovative business model. 3. Resource led strategy A Resource Led approach (Exhibit 5) starts with a business model design team evaluating the internal resources and capabilities within a business. After identifying the company’s resources and capabilities, the next step is to explore novel ways to restructure or reapplying them. This exercise uncovers new value from existing infrastructure, such as


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Exhibit 3 Customer led business model analysis

Exhibit 4 Cost driven business model analysis

utilizing manufacturing capabilities for complimentary products, leveraging brand equity, or licensing existing patents or trademarks. The fashion brand, Zara offers an example of a company having a Resource Led business model. Though there are many innovative aspects of Zara’s business model, they all stem from the company’s efforts to restructure its resources while also aligning its design, production and commercialization assets and activities. This realignment allowed the company to bring leading trends and designs to the market quicker, thus giving it significant competitive advantage within its marketplace. This innovation within Zara’s supply chain then had significant implications throughout the rest

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Exhibit 5 Resource led business model analysis

of its business model. These included targeting a new customer segment – younger, fashion forward women – which then dictated the lower price point the company’s products are sold at. Operating under lower margins therefore requires a reduced cost structure, which Zara achieved through better integration of its manufacturing and distribution partners. The resulting model lays out a roadmap which is inspired by Zara, and other Resource Led business cases. 4. Partnership led strategy The creation of partnerships can be a powerful driver for a firm’s strategy; it allows a company to utilize external resources and capabilities. Partnerships can allow a firm to co-create value and often lead to exposure to a wider marketplace, reduction of costs, and can also improve future research and development outcomes. For the business model designer, identifying possible partnerships can be a fruitful exploration in order to expand the current possibilities within a business, or to overcome any constraints that may exist. An example of a Partnership Led approach (Exhibit 6) would be a retailer forming a distribution agreement with a foreign brand in order to reach previously unserviced markets. An example of a Partnership Led model is the online product development platform, Quirky. Quirky crowd sources participants from around the world to collectively develop and commercialize new product inventions, a way to co-create value. Contributors also pay a submission fee, making them a lucrative source of revenue. Quirky’s reliance on its global contributors suggests this as the primary driver of their unique business model. The creation of this large partnership network allows Quirky to create new revenue streams, get products to market faster and with less risk, and also scale its business up faster than a traditional product development firm. 5. Price led strategy A Price Led strategy aims to position a firm as the price leader in its marketplace. A Price Led approach (Exhibit 7) aims to holistically reduce cost down across the entire business model in order to provide the same offering at a much cheaper price. It may encourage more cost effective channels, target a different customer segment, or


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Exhibit 6 Partnership led business model analysis

Exhibit 7 Price led business model analysis

propose taking on strategic partners who will aid in achieving this new value proposition. This model helps explore these effects and possible opportunities that exist for a firm that positions itself as a price leader. A business that takes a Price Led approach is Southwest Airlines. In its branding, Southwest Airlines pledged to become the cheapest form of short-haul travel, and not only considered other airlines as competitors, but also other transport services such as buses, and trains. This led Southwest to restructure its costs in order to make its position as price leader viable. Southwest achieved this in numerous ways including; establishing key partnerships with airlines, airports and travel agents, moving its ticket sales and passenger

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management online, and flying a point-to-point service. This position as price leader was the fundamental driver to Southwest’s strategy, and is an example of how this can be a catalyst for exploration in a Price Led business model prototype.

Future outlook for research


In an uncertain and rapidly evolving global economic landscape, it is clear that firms will have to become more adaptive and responsive to changes within their marketplace. In order to do this, businesses will not only need to engage in business model experimentation, but also look to embrace business model innovation as a core competency and a means for sustained competitive advantage. For many companies this will require exploration of dynamic, design-driven approaches to the creation of innovative business models. The five model types identified by this research can be used in a holistic approach to the process of business model experimentation. We assume that further research may lead to a deeper understanding of how design experimentation and prototyping can facilitate business model innovation. In the long run, longitudinal analyses of business model innovation case studies may enhance the understanding of design-led business model innovation and its influence on the successful adoption and growth of new business models.

Exhibit 2 Company overview

Industry

Company (Name)

Size (Employees)

Agriculture

Australian Fresh Leaf Simpson Farms Nespresso Sumo Salad Xpresso Delight Inxpress Southwest Airlines JetStar Revive Clinics Argus Connect Webjet.com.au Quirky Inc. 99Designs KickStarter Zappos.com Sketchchair Lego JRobins Footwear Kimberley Trailers Hilti Kitchener Kitchens Procter & Gamble Black & Decker Tata Motors Nintendo Sony Orica Rabo Direct Bespoke Law Bankwest Commonwealth Bank Beacon Lighting B&R Automation Anytime Fitness Space Furniture Ikea WholeFoods Market Zara Chemists Warehouse Terry White Chemist

!50 51-200 5,001-10,000 5,001-10,000 51-200 501-1000 10,000# 5,001-10,000 51-200 !50 51-200 201-500 51-200 51-200 1,000-5,000 !50 $10,000 51-200 51-200 $10,000 !50 10,000# 10,000# 10,000# 1,000-5,000 10,000# 10,000# 51-200 !50 5,000-10,000 10,000# 201-500 1,001-5,000 51-200 51-200 10,000# 10,000# 10,000# 5,001-10,000 1,000-5,000

Food and Hospitality Freight and Travel Healthcare Internet

Manufacturing and Consumer Products

Mining Professional Services and Banking Retail


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Founded (Year) 2008 1969 1986 2003 2004 1999 1971 2004 2009 2004 1998 2009 2008 2009 1992 2011 1932 1911 1994 1941 2003 1837 1910 1945 1889 1946 1874 2007 2009 1895 1911 1969 1979 2001 1993 1943 1998 1975 1973 1994

Location (Headquarters)

Typology

Australia Australia Switzerland Australia Australia UK USA Australia Australia Australia Australia USA USA USA USA UK Denmark Australia Australia Liechtenstein Australia USA USA India Japan Japan Australia Australia Australia Australia Australia Australia Austria USA Australia Sweden USA Spain Australia Australia

Partnership Led Partnership Led Customer Led Price Led Customer Led Cost Driven Price Led Price Led Cost Driven Partnership Led Price Led Partnership Led Cost Driven Customer Led Cost Driven Cost Driven Customer Led Resource Led Resource Led Customer Led Partnership Led Partnership Led Partnership Led Customer Led Customer Led Resource Led Resource Led Price Led Cost Driven Customer Led Resource Led Price Led Resource Led Cost Driven Partnership Led Customer Led Customer Led Resource Led Price Led Partnership Led

Website & social media " "

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Data source Online trade publications

Annual reports

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Notes 1. Osterwalder, Alexander and Yves Pigneur. 2010, Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. Chichester/GB: John Wiley & Sons Ltd. 2. http://support.strategyzer.com/knowledgebase/articles/506842-business-model-canvas-andvalue-proposition-canvas?_ga%1.147155263.988190666.1400488357 3. Sosna, Marc, Rosa Nelly Trevinyo-Rodríguez and S. Ramakrishna Velamuri. 2010, “Business model innovation through trial-and-error learning,” Long Range Planning 43(2-3):383– 407. Retrieved May 21, 2013 (http://linkinghub.elsevier.com/retrieve/pii/S0024630110000099). 4. Teece, David J. 2010, “Business models, business strategy and innovation,” Long Range Planning 43:172–94. Retrieved (http://dx.doi.org/10.1016/j.lrp.2009.07.003).


5. Davenport, Thomas. February 2009, “Smart business experiments,” Harvard Business Review 68 –76. 6. Boillat, Thomas and Christine Legner. 2013, “From on-premise software to cloud services: the impact of cloud computing on enterprise software vendors= business models,” Journal of Theoretical and Applied Electronic Commerce Research 8(3):39 –58; Osterwalder, Alexander. 2004. “The business model ontology a proposition in a design science approach.” www.hec.unil. ch/aosterwa/PhD/Osterwalder_PhD_BM_Ontology.pdf

Corresponding author Karla Straker can be contacted at: [email protected]

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