Business Models: Innovating through a change of perspective

Rethinking business models: Innovating with Suitable Tools

There are three approaches to innovation among which business model innovation seems to be the easiest. However, it is important to systematically explore the mechanics of one’s business model by using the right tools.

 

Three Dimensions of Innovation: Technology, Business, and the Human Context

Innovation has three core dimensions: technology, business, and people.

For companies this means that there are also three fundamental ways to innovate. They differ primarily in terms of the dimension from which the innovation impulse originates. Traditionally, in our technology-driven country of Germany, most impulses are explored coming from the technical side of things. However, this proves very challenging time and time again. Every technical invention must overcome two hurdles on the road to innovation: it must be relevant to the users and relevant in a business context. How many technological developments haven’t found people who were interested in them? How often were they considered interesting, but there was not enough willingness to pay for their use? It is no longer enough simply to “start the marketing machine.” Innovations have to be better validated.

One way to approach this challenge is customer centricity. This means developing an invention taking the context of its potential users into account. It first and foremost considers the users’ relevant problems and ask how we can solve them. Or it asks how a range of services can be created that add value that does not yet exist. The methodical starting point of this approach is to develop a convincing value proposition. It focuses on the so-called “pains and gains”: an idea must deliver a relevant improvement (then we call it an incremental innovation), or even something fundamentally new (then it is a disruptive innovation). With this as a basis, the technical feasibility and economic potential are examined afterwards. Advantage: The first important hurdle has been overcome. After all, we now know that the invention is actually needed by the users! This approach promises success, because the aspect on which a company has the least influence is considered with priority (i.e. the customer). According to the old rule from the startup world, the most difficult problem is solved first. However, this approach is also very complex and most companies need the know-how of third parties to innovate in this way.

We now briefly looked at two ways of approaching innovation, one focused on technology and one focused on the user. However, the meat of this article will be our discussion of the third (and often most promising) way: business model innovation. This path is interesting because it has lower hurdles than the other two. This does not mean, however, that the other two are completely ignored. It’s just the approach that is different. It means thinking about existing things in a new way. I will show what this means later, using an example.

Today, the term “business model” is practically a buzzword. It is often used without a clear awareness of what it entails.
Michael Geiss

Business Model Innovation in Theorie und Praxis

Worüber reden wir eigentlich bei “Geschäftmodellinnovation”?

Today, the term “business model” is practically a buzzword. It is often used without a clear awareness of what it entails. This can lead to vague discussions, which of course do not produce the desired results.

There are various ways to approach the term “business model”. A business model is first of all the general way in which a company creates value: value for its customers and value for itself. In order to describe business models more precisely, a “shared language” has emerged, which has the goal of high general comprehensibility and which goes back to Alexander Osterwalder: the Business Model Canvas. We already talked about it on our blog, and we like working with this model. Its advantage is that it is widespread and plausible, which enables even heterogenous teams to hold quick and useful discussions, even if some of their members don’t have a business background.

 

From the business model canvas we can derive that a business model consists of three dimensions, each of which can be broken down further:

Desirability

What good is it to the customer?

Feasibility

How can we produce this?

Sustainability

Are the revenues higher than the costs?

Picture: Business Model Canvas
The Business Model Canvas helps analyze the mechanics of a business model.

The focus is on a value proposition for a precisely described customer segment. We then look at how this value proposition can be used to generate returns and then square these considerations with its technical and financial feasibility.

However, this is only the outer framework. The process becomes interesting afterwards, when we start taking a detailed look at a business model’s mechanics. The business model patterns from the St. Gallen management theory provide information on this. At the University of St. Gallen, recurring patterns were examined according to which the various elements of business models interact. When a company now renews crucial aspects of these patterns, and therefore its business model’s mechanics, we can speak of business model innovation. A new value proposition for new customer segments; new ways of providing services; redesigning customer relationships; new ways of generating revenue streams; these are elements of this approach, and in these pattern changes lies the great potential of business model innovation.

Successful business models haven’t been monopolized by the likes of Google or Netflix

Selling holes instead of drilling machines, availability instead of property: Hilti as an example of business model innovation

One of my favourite examples of successful business model innovation is not found at one of the large technology companies, but at the tool manufacturer Hilti. The company from Liechtenstein is known for high-quality professional tools, including electro-pneumatic hammer drills. For a long time, the company’s business model was the sale of these devices through support dealers as well as maintenance and repair. The primary customer segment consisted of site managers who equipped their teams with the best tools. Good quality and, if required, rapid repair were the Value Propositions that justified a high equipment price. Unfortunately, Hilti was soon in fierce competition with a number of other quality suppliers.

But then, Hilti significantly changed the focus of attention: instead of looking at the foremen as customers, they now looked at the management. Management is a customer segment with completely different pain points, such as high contractual penalties for delays on the construction site (which affect profit). It was therefore much more important for the management that every tool needed was reliably available at the right time. These pain points lead the company to a new value proposition – and the idea for Hilti fleet management originated from it. Using this service, customers would no longer have to buy equipment. Instead, they would pay Hilti a monthly fee for a guarantee that they will receive the right tools at the right time at their construction sites. The tools remain the property of the manufacturer, who also takes over their maintenance and thus relieves his customers of additional work.

Introduction video to the Hilti fleet management

 

Getting started with business model innovation

The example of Hilti shows us why business model innovation has so much potential: The company opened up a new revenue generating mechanic without any technological innovations, without having to introduce new products and without having to look for new customers. It was enough to think about people and their needs anew to come up with a business model that is very successful today.

The best way to successfully innovate the existing business model is to proceed systematically. When we support customers in this, for example, we have established a method of visualizing it with informal and easily approachable methods. This enables us to get to the core of a business model’s functional logic and to consider exactly where there is potential for innovation.

The St. Gallen Business Model Navigator forms the basis for this. It systematically identifies patterns that appear in most successful business models of our time. For example, Hilti fleet management follows patterns such as the subscription model, the Rent instead of Buy model and the flat rate model. Of course these can also be transferred to other companies or industries. In consultation with our clients, we use the patterns as inspiration and starting points for developing new business model approaches. From the multitude of possibilities we filter a pre-selection that is suitable for the respective company and analyse the potential for its implementation.