Comments for Designing competitive business models: Why and what?

BLIN Laurence, DUBUS Sarah, GILLAIN Jérôme, VAN HECKE Julien, VERMEULEN JULIEN

Gans, J., Scott, E. L., & Stern, S. (2018). Strategy for Start-ups. Harvard Business Review, 96(3), 44-51.

In today’s changing world, it seems essential for entrepreneurs to choose a strategy that will prepare them for the entrance of their innovation on the market but that will also help them to face tough market competition. In fact, by considering the possible strategic routes, founders are able to better evaluate the potential of their idea and to confirm its…
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In today’s changing world, it seems essential for entrepreneurs to choose a strategy that will prepare them for the entrance of their innovation on the market but that will also help them to face tough market competition. In fact, by considering the possible strategic routes, founders are able to better evaluate the potential of their idea and to confirm its possible strengths. This analysis can be of value for stakeholders. Thus, to choose a strategy, managers could use the so called “Entrepreneurial Strategy Compass”, a tool that delineates four generic go-to-market strategies and that should help them to move from an idea to the launch stage. Whether a company decides to collaborate or compete and whether it decides to build a moat or storm a hill, will define a unique strategy offering a distinct way to create and capture value.

The first strategy is the “Intellectual Property Strategy”. It lies in the alignment of a start-up innovation with incumbent’s occupation. In this collaboration, the entrepreneur will focus on the idea generation and control to create value to the incumbent’s customer and keep bargaining power.
In contrast to this, the “Disrupting strategy” centers its attention on the commercialization of the innovation and the quick market share growth that will follow. So, the established value chain is completely redesigned and the entrepreneur has no fear to compete against incumbents, even if start-up still have the incentive to develop themselves as quick as possible or to choose a niche segment before the already established companies notice it in order to avoid conflict.
The third strategy is the “Value Chain Strategy” focusing on the existing value chain instead of trying to modify it. It means that companies will try to build a profitable partnership with established ventures of the value chain. In order to do so, they will stay focus on only one layer of the chain so that they are able to create value by developing the greatest expertise and capabilities. Consequently, it will allow all the companies of the chain to benefit from enhanced differentiation or cost advantage.
The last one is the “Architectural Strategy”: by reorganizing an entire value chain and supervising its key bottlenecks, entrepreneurs will bring innovation to a mass market and will gather data on customers.

Nevertheless, those different strategic routes face some limitations. First of all, despite the access to great tools such as the entrepreneurial strategy compass, the uncertainty linked to the creation of a start-up is definitely still present. Actually, the success of a start-up does not lie only in the fact that it chooses the coherent framework but more that it took into account all its environmental factors in order to implement it. One of those factors is time. Timing is crucial and an entrepreneur has to find the right balance between launching its innovation too soon or too late. Indeed, start-ups that spend too much time focusing on strategy can expect some delay as the market entry will be postponed and might therefore lose an opportunity while precipitating into the entrance of the market might be risky. For example, if the chosen route was not the most profitable one or if important aspects have been overlooked. Concerning the architectural strategy, controlling the value chain and taking part in competition is a very risky choice that could quickly lead to failure. In fact, such a strategy could be chosen only by high public profiles that benefit from great funding.

To go even further, the TedxTalk “The single biggest reason why startups succeed” by Bill Gross presents the different factors that could lead a startup to success. Nevertheless, whatever strategy it decides to adopt, if it did not choose the right timing to enter the market, it will certainly end up in a failure.

Also, the book “The Lean Startup” from Eric Ries brings an interesting additional view on the matter of startups willing to launch an innovation. However, the author seems to think that defining a strategy is important but should not delay the commercialization too much and proposes an alternative approach with its Minimum Viable Product.

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Robin Barbiere

(Article) Johnson, M.W., Christensen, C.M., & Kagermann, H. (2008). Reinventing your business model. Harvard Business Review, 86(12), 57-68.

1. Key insights There are two main topics addressed in this article. A. Firstly, the author defines a business model as four interlocking elements that can create value for a business. • Customer value proposition: As a company, you need to find a way to create value for your customers. • Profit formula: It is also important to understand how your business creates value for itself…
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1. Key insights
There are two main topics addressed in this article.
A. Firstly, the author defines a business model as four interlocking elements that can create value for a business.
• Customer value proposition: As a company, you need to find a way to create value for your customers.
• Profit formula: It is also important to understand how your business creates value for itself while creating value for the customers.
• Key resources: Key assets required in order to create value for your customers.
• Key processes: Processes allowing you to keep delivering value in a way that will increase in scale.
B. The second point raised by the author consists in the importance of spotting the need for business model innovation. The author identified four strategic circumstances when such a change is required.
• The opportunity to address a new disruptive product to a large group that cannot afford the basic product.
• The opportunity to capitalize on a new technology by wrapping a new business model around it.
• The opportunity to reach unmet customers’ needs.
• The need to respond to a shifting basis of competition.

2. Implications
A. The theory implies that managers should extensively understand the principles behind the business model definition to know whether the existing model could be useful to fulfil a different customer value proposition and what should be done to construct a new one.
B. However, business models sometimes need changes. As a consequence, it is important to keep a proactive and vigilant behaviour towards opportunities. We propose three behaviours to capture major strategic circumstances. (1) Listen to the current customers and to potential clients, (2) Closely monitor your competitors, (3) Look at the industry trends and insights.
C. Nevertheless, it is possible that reinventing a new business model is not necessary or beneficial as such. Pursuing a business model that is not totally new or game changing to the industry is a waste of time and money.

3. Limitations
When applying the previous concept, managers should pay a particular attention to the following limitations.
A. It is difficult to identify a precise CVP and invest in the real customers need. Companies often confuse accurate innovative investments with R&D defending the historical business.
B. Deep-rooted rules, norms and metrics stand in the way of business model innovation. For instance, firms obviously need to fulfil several financial and operational requirements such as keeping a gross margin of at least X %.

4. Further references
A. Johnson, M. W. (2010). Seizing the white space: Business model innovation for growth and renewal. Harvard Business Press.

B. Pisano, P., Pironti, M., & Rieple, A. (2015). Identify innovative business models: can innovative business models enable players to react to ongoing or unpredictable trends?. Entrepreneurship Research Journal, 5(3), 181-199.

C. Frankenberger, K., & Zott, C. (2018, July). The role of differentiation, integration, and governance in developing innovative business models. In Academy of Management Proceedings (Vol. 2018, No. 1, p. 18658). Briarcliff Manor, NY 10510: Academy of Management.

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Anonymous

Leonard, D., & Rayport, J. (1997). ‘Spark innovation through empathic design

Key points As you’ve probably understood through the video, a set of techniques we call empathic design can help resolve those dilemmas. If we had to define in one sentence what empathic design is, we could say it is the innovation process of producing the same thing as before but in a better way and by putting us into the…
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Key points

As you’ve probably understood through the video, a set of techniques we call empathic design can help resolve those dilemmas. If we had to define in one sentence what empathic design is, we could say it is the innovation process of producing the same thing as before but in a better way and by putting us into the eyes of the customer. As Mr. Wattelet told us this morning, the aim of this process is not to work for the users but to work with the users.

A lot of these infos are developed in the article and we encourage you to read them because it would take too much time to develop each of them. But we think the most important is the fact that empathic design permit us to know what are the triggers of use of our product. Indeed, by observing the customer while he’s using your product you can understand better why and when he uses your product. For instance, the producers of Cheerios found out that their product was not used only for breakfast but also during any moment of the day when users were a little bit hungry.

Managerial implications : Empathic design : the process

Step One: Observation: Unarticulated User Needs. The application of empathic design that holds the greatest potential benefit is the observation of current or possible customers encountering problems with your products or services that they don’t know can be addressed and may not even recognize as
problems.
Step Two: Capturing Data: In addition to the observation of the non-verbal language it is also useful to help yourself with other means like photos or videos.
Step Three: Reflection and Analysis: After gathering data in many forms, the team members return to reflect on what they have observed and to review their visual data with other colleagues.
Step Four: Brainstorming for Solutions: Consultants at the Chicago-based Doblin Group, observed individuals creatively combining beepers and cell phones so they could be just as available as they wished-and no more. These consumers gave special beeper codes to friends and relatives to screen out undesired interruptions. By brainstorming these observations, they suggested to the firm the need for filtering capabilities on cell phones.
Step Five: Developing Prototypes of Possible Solutions: After visiting the homes of Kimberly-Clark customers, consultants at the Palo Alto, California-based design firm GVO recognized the emotional appeal of pull-on diapers to parents and toddlers, who saw them as a step toward “grown- up” dress. Diapers were clothing, the observers realized, and had highly symbolic as well as functional meaning. Huggies Pull-Ups were launched as prototypes and were rapidly rolled out nationally in 1991, and by the time competitors caught on, the company was selling $400 million worth of the product annually.

Limitations

1. Privacy
A) Companies observing in cyberspace face the issue of where to draw the line between what they can see and when it comes to privacy. We cannot observe all the products or services.
B) Moreover, because observation can be perceived as invasive, it could thus lead to biased behavior. Observed individuals might change the way they use to live routine just because of an abusive monitoring.
2. Collecting data : How do we know we have a considerable amount of data to draw conclusion ? How much people do we observe? How long should we monitoring them ? Some problem or new innovation with can arise after a while. Then we could draw conclusion to early or it could be unfeasible to monitor people so long in order to collect the right datas (e.g. wood pallet)
Further references

• Veryzer, R., Borja de Mozota, B., (2005). The Impact of User-Oriented Design on New Product Development: An Examination of Fundamental Relationships, The journal of product innovation management, 2, 128-143.

• Potsma, C., Zwartkruis-Pelgrim, E., Daemen, E., Du, J., (2012). Challenges of Doing Empathic Design: Experiences from Industry, IJDesign, 6.

• Visser, F., van der Lugt, R., Stappers, P. (2007).Sharing user experiences in the Product Innovation Process: Participatory Design Needs participatory Communication, Creativity and innovation management, 16, 35-45.

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Anonymous

Mitchell, D., & Coles, C. (2003). The ultimate competitive advantage of continuing business model innovation

The main idea of the paper is that a continuing business model innovation is source of competitive advantage. A competitive advantage is what allows you to generate higher profit, higher sales and higher cash-flows than a competitor could. A continuous business model innovation is when a company pursues an ongoing process of developing and installing business model improvements, replacements and…
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The main idea of the paper is that a continuing business model innovation is source of competitive advantage. A competitive advantage is what allows you to generate higher profit, higher sales and higher cash-flows than a competitor could.
A continuous business model innovation is when a company pursues an ongoing process of developing and installing business model improvements, replacements and innovations.
Business model replacement entails improving at least 4 of these elements:
1. What
2. Where
3. When
4. Who
5. Why
6. How
Most effective companies do this changes every 2 to 4 years.
The implication is clear, managers should always keep in mind the following question: “How to implement the continuing business model innovation?”. Managers should think over the 7 pillars of their business model. But, the more people think about it, the more likely good ideas and answers can be found. The business model shouldn’t be reserved to members of the board. Employees should be involved. Asking employees, that are closer to the field than top manager, what they think the 7 pillars are and if they have ideas of how they could change would help understand how the business is seen through the eyes of the employees and where the organization wants to go. This could be done on a regular basis.
Nevertheless, in a world where some companies are desperate to know what competitors are doing, involving employees in strategic decisions could be a problem. They could be reached by competitors and leak information about business model changes, diminishing drastically the value of surprise when shifting business model.

Business model improvement can be disabled by cost reduction policies. Companies are looking for efficiency and sometimes they think that the only way to do so is by decreasing costs. Companies leading in operating cost reduction activities were less likely to become continuing business model innovators. Managers can work with that by not focusing only on cost reduction on the existing model, but always pay attention to see if the business model needs any improvement. They also should spend more resources (like time and money) in the business model management and, for example, designate a business model innovation manager per department.

Limitations come with this theory:
First, focusing too much on optimizing one process can create or sustain inefficiencies/weaknesses in other activities and processes. For example, google focus too much on the HR aspect of innovation and actually do not come up with internal innovations.
Secondly, even with better processes, an obsolete business model is usually ineffective against a better one. For example, Kodak which was focused on improving their numeric camera while the digital camera development increased. This lead to Kodaks failure.
Finally, focussing in the wrong way can be a mistake. Most successful business model innovations are in place within a year of beginning the implementation. We can take the example of Bic, they tried to launch a range of perfume but it was a total flop so they stopped.

Annexes: Further references

The literature about this topic is quite recent so there are a lot of articles not yet peer reviewed.

Nevertheless we found some of them:
Mitchell, D. W., & Carol, B. C. (2004). Establishing a continuing business model innovation process. The Journal of Business Strategy, 25(3), 39-49.

It’s in fact the continuation of the article we have discussed, written by the same authors. It explains how to establish the continuing business model in order to gain the competitive advantage that is supposed to come.

Matzler, K., Bailom, F., Stephan Friedrich von, d. E., & Kohler, T. (2013). Business model innovation: Coffee triumphs for nespresso. The Journal of Business Strategy, 34(2), 30-37.
Describe here again the concept of business model innovation, and explain how it can be successful, taking the case of Nespresso which is one of the famous users of it, as an example
Clauss, T. (2017). Measuring business model innovation: Conceptualization, scale development, and proof of performance. R & D Management, 47(3), 385-403.

Quite a few cited despite the date of release. It brings the proof of the performance of business model innovation and define how to measure it
Verhoeven, B., & Johnson, L. W. (2017). Business model innovation portfolio strategy for growth under product-market configurations. Journal of Business Models, 5(1), 35-50
.
This one is recent but it sounds good (2017) à combine the concepts of product market growth strategy, magnitude of innovation and business model innovation to lead to dynamic business model innovatoin strategy, linked to the continuous business model innovation

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Anonymous

Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage.

The authors address the issue of asset stocking in firms. As they point out, a firm’s assets may be (1) tangible, such as equipment, and therefore acquired in product markets, or (2) intangible, such as know-how or reputation, and therefore accumulated in “strategic factor markets” (Barney, 1986). More, the law of diminishing returns creates an obstacle on the efficient management of…
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The authors address the issue of asset stocking in firms. As they point out, a firm’s assets may be (1) tangible, such as equipment, and therefore acquired in product markets, or (2) intangible, such as know-how or reputation, and therefore accumulated in “strategic factor markets” (Barney, 1986).
More, the law of diminishing returns creates an obstacle on the efficient management of assets that require long time-frames to become fully valuable. This creates Time Compression Diseconomies: there is a limit to growth speed; twice as hard does not correlate into twice the benefits (Allegory: 9 women cannot give birth to a baby in 1 month). Due to innovations and the fact that time eventually turns specific know-how less valuable or even obsolete, the level stock of assets changes over time. Hence, firms have to capitalize on the flow of new assets in a stock.
Lastly, due to the untradeable nature of some assets, a crucial point for a firm to capitalize on their competitive advantage is to protect them from imitation. This potential replication is related to key features of asset accumulation: “time compression diseconomies, asset mass efficiencies, inter-connectedness, asset erosion and causal ambiguity” (Dierickx and Cool, 1989).
We found that this article’s findings imply:
1) Time Compression Diseconomies: Managers should exploit on early-mover advantage. Growth efforts can be spread out through a timeline if a manager is prepared in advance. If diseconomies are large, they provide a bulky protection for the first-mover.
 Limitation: If second-movers need fewer break time than pioneers, these diseconomies will be equal to zero. More, some assets may be protected with an expiration date, such as patents. Resources and work put forward by the first-mover may be exploited by follower at little cost. Since the expiration of Nespresso’s capsule patent, other firms from the coffee industry, such as Starbucks, have profited from producing capsules compatible with Nespresso’s machines.
2) Asset Mass Efficiencies: Managers should know it is easier to increase the stock of an already large stock of assets (“success breeds success”). E.g. the vast stock of R&D at Google allows them to take rapid steps on innovation to make larger additions to their stock of know-how.
 Limitation: Pursuing rises to stocks by itself creates no tangible value to a firm unless leveraged with a strong business plan. Tesla and Uber have been able to accumulate tremendous stocks of networks, know-how or brand image, but have yet to realize profits on their investments.
3) Interconnectedness: It may be that scarcity of resources limits the maximization of levels of all stocks at a given time. Managers should prioritize increments on the flow of the most relevant stocks without prejudice to others (Pareto Efficiency: optimal allocation of the flow of stocks).
 Limitation: (1) Even with macro-trend analysis and provisions for long-term industry changes there is always the least of uncertainty in which stocks will best complement each other. (2) Convincing shareholders to allocate resources on raising the flow of a stock without empirical proof of profits’ realization may be hard. (3) Smaller firms (by money, human capital, or global scale) have more barriers to counter the devaluation of existing stocks. Symbian, once the most used mobile OS, suffered from: intense competition of new entrants; not being user-friendly outside Western Europe; constant malware issues. Symbian Ltd. may have been too small to battle all fronts at once. Google optimized the flow of different intertwined stocks to tackle all issues, and turn the Android OS into the dominant design.
watch?v=y0wf7gq76s4
 Gretler, C. and Weiss, R. (2017). Nespresso Is Loosening Its Grip on Coffee Pods. Bloomberg. Available at: https://www.bloomberg.com/news/articles/2017-07-12/nespresso-adds-retail-partners-for-pods-as-knockoffs-encroach
 Kwong, R. (2009). HTC calls for more user-friendly smartphones. Financial Times. Available at: https://www.ft.com/content/bcea82c6-fc51-11dd-aed8-000077b07658
 Starbuckscapsules.co.uk. (2017). Starbucks Espresso Capsules. Available at: http://www.starbuckscapsules.co.uk/
 Statista. (2017). Number Global market share held by smartphone operating systems from 2009 to 2016. Available at: https://www.statista.com/statistics/263453/global-market-share-held-by-smartphone-operating-systems/
 Vermeulen, F. (2008). “Time compression diseconomies” – too much, too fast. [Blog] FREEKY BUSINESS. Available at: http://freekvermeulen.blogspot.be/2008/02/time-compression-diseconomies-too-much.html
 Watkins, M. (2011). Threat of mobile cybercrime on the increase. Financial Times. Available at: https://www.ft.com/content/5a4ed514-32e5-11e0-9a61-00144feabdc0
New sources identified:
 For in depth analysis on the topic of “strategic factor markets” (article that serves as basis for Dierickx and Cool, 1989):
Barney, J. (1986). Strategic Factor Markets: Expectations, Luck, and Business Strategy. Management Sciences, 32(10), 1231-1241.
 For further insights on the resource-based view of competitive advantage, and the proposal of model with four necessary conditions for competitive advantage:
Peteraf, M. (1993). The Cornerstones of Competitive Advantage: A Resource-Based View. Strategic Management Journal, 14(3), 179-191.
 For an expanded study on how market-based assets can be capitalized through customer’s wants and needs or effective managerial coordination of a firm’s units, to achieve competitive advantage:
Srivastava, R. & Fahey, L. & Christensen, H. (2001). The resource-based view and marketing: The role of market-based assets in gaining competitive advantage. Journal of Management, 27(6), 777-802.

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Anonymous

Slater, S. F., & Mohr, J. J. (2006). Successful development and commercialization of technological innovation: insights based on strategy type

Key insights: This paper explains how firms can successfully develop and commercialize technological innovations in order to retain their leadership position and according to it, there are two reasons why firms don’t succeed in commercializing their technological innovation. The first raison is called the innovator’s dilemma. Firms typically become industry leaders by having a broad base of customers in the marketplace and…
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Key insights:
This paper explains how firms can successfully develop and commercialize technological innovations in order to retain their leadership position and according to it, there are two reasons why firms don’t succeed in commercializing their technological innovation.
The first raison is called the innovator’s dilemma. Firms typically become industry leaders by having a broad base of customers in the marketplace and by continually meeting their needs for value over time. These firms develop sustaining innovations based on their customer’s feedbacks with as goal to stay the leader. Paradoxically, they put themselves in danger because the industry newcomers become more innovative.
The second raison is cross the chasm. The success of an innovation depends on different categories of adopters, which have different characteristics and needs. They all belong to one of the market categories: the early market or the mainstream market. According to Moore, the marketer should focus on one group of customers at a time, using each group as a base for marketing to the next group. The most difficult step is making the transition between visionaries (early adopters) and pragmatists (early majority). This is the chasm that he refers to.
Understand the customer needs is the second purpose of this article. Studies has shown that having a proactive market-oriented culture will increase the ability to successfully develop and commercialize technological innovation. That implies to adopt a set of behaviors like discovering, understanding and satisfying the potential needs of customers.
Managerial Implications & limitations:
First implication is that marketers may also need to ignore feedback about what customers say they do not want in order to counter innovator’s dilemma. Indeed, customers are not always able to articulate their needs and are not always aware of them. Based on this belief, useful information can be gleaned through observation of what customers do under normal, natural and conditions.
This one implies if firms always ignore what customers do not want can lead to failure.
Example: In 2011, Netflix effectively increased the price of their products by 40% even if the customer advised not to do it. The result was that 800 000 subscribers cancelled their service and in a survey Netflix was rated as one of the 10 most hated companies in the US.
The second implication is about the overcoming the chasm problem. Firms could be an option to ally with another organization that already possess the capabilities to go deep in the market.
The limitation links with it, some alliance can turn very badly because when you do an alliance, you have different culture of enterprises. That collapse and if it doesn’t fit, the company put themselves in danger.
Example: When Daimler merged with Chrysler in the late 1990s it didn’t go well because of the difference in culture. By 2000, major losses were projected. In 2007, Daimler sold Chrysler to Cerberus Capital Management for $6 billion.
Further references:
1. Helping us to understand the chasm problem:
Bath, W. (s.d). Crossing the Chasm – Disruptive Innovation – Technology Adoption Life Cycle. Retrieved from: https://www.youtube.com/watch?v=Y-97AXOPzJo
2. Corso, M & Pellegrini, L. (2007). Continuous and Discontinuous Innovation: Overcoming the Innovator Dilemma, Volume 16, Issue 4, pp 333–347. Retrieved from: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8691.2007.00459.x/full
3. Bates, D. (2007). Effect of Organizational Cultures on Mergers and Acquisitions: The Case of DaimlerChrysler. International Journal of Management. Vol. 24, Issue 2, pp 303-317. Retrieved from: https://search.proquest.com/openview/0a2f5d0f48a8c4b2a6d1e5696efef9c3/1?pq-origsite=gscholar&cbl=5703

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