12 Strategic innovation – the context of business models and business development
(Written by Anders Drejer, Professor, Ph.D.)
[Please quote this chapter as: Drejer, A. (2012), Strategic innovation – the context of business models and business development, in Nielsen, C. & M. Lund (Eds.) Business Models: Networking, Innovating and Globalizing, Vol. 1, No. 2. Copenhagen: BookBoon.com/Ventus Publishing Aps]
12.1 Introduction: a new competitive landscape
The concept of strategic innovation has risen to fame among management and academia – and it is still rising. And for plenty of good reasons too. The conditions for businesses worldwide are about to change for good.
Many different authors seem to agree that the external dynamics of industrial firms has increased over the last decade or so. Some speak of increased competition and the need for more market-focused organisations, whereas others discuss technological pressures on firms. Regarding the former idea, it seems to have become an accepted idea that whereas firms in the 1960s and prior could rely on stable (expanding) market conditions and customer-emphasis on price alone, today markets are less than stable and emphasis is on price, quality, delivery, innovation, and so on, (Womack et al, 1990), (Ansoff & McDonel , 1990). Ansoff writes: “… From the mid-1950s accelerating and cumulating events began to change the boundaries, the structure, and the dynamics of the business environment. Firms were increasingly confronted with novel and unexpected chal enges which were so far reaching that Peter Drucker cal ed the new era an ‘age of discontinuity’…”, (Ansoff & McDonel , 1990, p. 5). Hammer and Champy, in the 1993 book on BPR, writes of a crisis that will not go away: “… In short, in place of the expanding mass markets of the 1950s, 1960s, and 1970s, companies today has customers…who know what they want, what they want to pay for, and how to get it on the terms they demand…”, (Hammer & Champy, 1993, p. 21). Furthermore, others place emphasis on the increased global competition from first Japanese firms, later Korean and other so-called Tiger economies, and their possible replacements in China and the old eastern Europe, (Quinn, 1992), (Kiernan, 1995).
In general, there seems to be agreement that an entirely new competitive situation has arisen. This is nicely summarised by D’Aveni under the concept of “hyper-competition”, (D’Aveni, 1994). Hyper-competition, according to D’Aveni, is a competitive situation where the key competitive success factor is the ability to constantly develop new products, processes or services providing the customer with increased functionality and performance, (D’Aveni, 1994). In a hypercompetitive environment, firms cannot count on a sustainable competitive advantage, but must continuously develop itself in new directions.
Furthermore, there are also increased technological pressures to firms. It has become accepted that technological life cycles in some industries seem to be decreasing compared to earlier, (Foster, 1986), thereby putting pressure on firms to constantly innovate, (Kiernan, 1995). Much of this thinking stems from the electronics industry – for instance, the new generation of SEGA video games that your six-year– old plays with contains as much computing power as the Cray supercomputers of the mid-70s, (Kiernan, 1995). Even though this situation does not have to be equal y dynamic in other industries – and, indeed, some questions have been raised concerning that issue, (Bayus, 1994) – it seems as if the belief in the technology dynamics creed is so strong that firms simply will follow that creed and, thereby, inflect the dynamics on themselves un-necessarily, (Nori, 1991). Either way, many authors agree on the need for firms to move technology up on the corporate agenda, (Clarke, 1985), and make it a strategic issue, (Bhal a, 1987), (Betz, 1989), (Jones, 1997), (Drejer, 1996). Further on the technological side, new technologies seem to arise that make entirely new ways of working and organising possible. For instance, Savage speaks of the possibility of “Fifth Generation Organisation”, (Savage, 95), based on ideas of networking, virtuality, and so on. Using the same ideas, Martin discusses the notion of “cybercorp”, (Martin, 1996), as an entirely new way of managing and organising firms.
The trends discussed above, of course, cannot be kept separate. New technologies have a strong competitive impact in general, (Tushman & Anderson, 1986), and hence the technological dynamics will also influence the competitive dynamics of firms. Bettis and Hitt writes on this issue that: “… technology is rapidly altering the nature of competition in the late twentieth century…”, (Bettis & Hitt, 1995) and, in fact, guest-edit an issue of the Strategic Management Journal entirely devoted to discussing how technology will change the nature of competition and strategy in the years to come. Bettis & Hitt refers to the situation as “the new competitive landscape”, (Bettis & Hitt, 1995), and it is this new competitive landscape that is creating a trend in management theory that creates the need for theory-building on the selection and evaluation of sub-suppliers, and the establishment of proper integrative measures to work with suppliers along a firm’s value chain.
12.2 Strategic innovation: the background
Evidently, organisations need to be more innovative and think proactively in their strategic management. At least, this has rapidly become the mantra of the new decade both among managers and in academia. The well-known work on innovation management and technology management has gained newfound – or perhaps re-found – respectability and has begun to influence the way we think about strategic management as a discipline (Drejer, 2002).
On top of that a new set of publications have begun to emerge. These publications take their starting-point in the strategic realm rather than the innovation realm and, hence, focus on strategy and innovation or strategic innovation. A recent example of such a fashionable publication is Robert E. Johnston and J. Douglas Bate ‘s recent “The power of strategy and innovation” (Johnston & Bate, 2003).
This and other similar books – and the thinking behind strategic innovation as a concept – is based on three pil ars (Drejer & Printz, 2004). First is the recognition by many that strategic managers need to consider both strategy for tomorrow and strategy for today in order to stay successful over time. This is now state-of-the-art knowledge within the field of strategic management – following the work of people such as Hamel & Prahalad (1994) and the 1996 acknowledgement by Michael E. Porter that strategy needs to consider both operational effectiveness and differentiation (Porter, 1996). Of course, Jim March told us about management as both exploitation and exploration in 1991, but let us not get into petty details about that. Secondly, the thinking is based on the well-known theory that innovation and effectiveness need to different kinds of organisation to succeed – from Burns & Stalker and onwards, we have come to accept this – and that this is because creative thinking per se is different from conventional analytical thinking as De Bono and many others have taught us. Final y, the thinking is based on the latest recognition that competition these days is less on product-markets or even on technology than on concepts and business models that change the rules of the competitive game, as, e.g., Gary Hamel observed at the threshold of the new millennium (Hamel, 1999).
In short, companies need to be able to manage their current set of businesses effectively while at the same time finding and developing new business ideas and models – this is defined as Strategic Innovation. Based on this foundation, Johnston & Bate (2003) assert that what is needed is a process to supplement the conventional strategic planning process – a supplement that they choose to call a Discovery process. The discovery process is creative and divergent and proceed the analytical and convergent strategic planning process in the understanding of the authors.
In short, we have a new concept that both encompass a desirable result to deal with the new competitive landscape – proactive repositioning of the organisation and development of new businesses – as well as the process by which the result is reached – a managerial process that is an alternative to the traditional, analytical process of strategic planning.
12.3 Defining strategic innovation
Early on Peter Drucker – and probably even someone before him – distinguished between doing the right things and doing things right (Drucker, 1958). When it comes to strategic management, we can reformulate this distinction to, on the one hand, market the right products/services on the right markets and, on the other hand, develop, produce, and distribute the products/services in the right way. It is intuitively clear that a company needs to focus on both issues in the long run while at the same time maintaining a dual focus on business development and operational effectiveness. The foundation for our work on strategic innovation, is that we think of strategy as:
• Change of the position of the company in the market place at the same time as exploiting the current position.
• The environment consists of both present and potential customers as well as a large number of different players, i.e. it is the entire environment of the company that needs to be taken into account in strategic management.
• The company itself should be seen as a holistic entity consisting of business and resources. This means that the strengths and weaknesses of the company should be described in the language of “bundles of resources” or competencies rather than departments or functional units.
In consequence, the potential of the existing resources to create value end different market places than the current one (while still creating value in the current situation!) becomes an important consideration in strategic management. One may speak of a competence readiness that the company possess and is able to apply by reorienting its business foundation towards new market places, i.e. strategic innovation.
As argued before, e.g. by Theodore Levitt in his seminal paper “Marketing Myopia” (Levitt, 1960), companies should define their business in a much broader sense than by simply looking at current products. Any business fulfils a number of needs and wants of its customers and can act strategical y with much more than its current products. Hence, we may define a business as the combination of a business idea, a business concept, and a business system. An operational business idea is expressed in one or more products/services that are able to fulfil the needs and wants of a group of customers. The business concept is expressed in the value creation process – or competencies – that are the foundation for how the products/services are designed, developed, produced, distributed and marketed. The business system is expressed as the basic principles and procedures by which the persons and/or functions involved in value creation actual y work.
This is a much broader perception of a business than the traditional SBU definition that is used in traditional portfolio management, mainly in the sense that a business here is able to respond strategical y on its own.
We can now define strategic innovation as: “Strategic innovation is the ability to create and revitalise the business idea and concept of the company by changing both the market of the company and the competencies and business system of the company. In this way, strategic innovation is concerned with developing the entire company”.
12.4 Defining business concepts
The idea of a business concept can be presented through Peter Drucker’s (1993) “Theory of the business” model as a way of formulating the important issue of what kind of organization we have. This may be labelled a business concept and is a necessary starting-point for the strategic manager who wants to change his business concept.
Further, as argued before, e.g. by Theodore Levitt (1960) in his seminal paper “Marketing Myopia”, companies should define their business in a much broader sense than by simply looking at current products. Any business fulfils a number of needs and wants of its customers and can act strategical y with much more than its current products. This has been detailed further by such authors as Abell (1993, 1999), Markides (2000), and Drejer (2007), who have suggested a number of key concepts related to strategic innovation and business development. For instance, we find it important to distinguish between business concept and business model, which we shall see below.
12.4.1 What is a business concept?
Based on prior work (Drejer, 2005; Drejer & Printz, 2004), we can define the components of a business concept. As we saw in section 11.1.3 in this chapter, a business concept expresses the value creation processes, which are the foundation for how products/services are designed, developed, produced, distributed and marketed. The business concept is a somewhat super conceptualization, or meta-view, which permeate how inspiration is sought outside the current core organization and its businesses.
The purpose of strategic innovation is to develop new business concepts. Business concepts, in turn, may be formulated by answering a few basic questions:
1. Who? The first part of the business idea of a business concept is choosing who the business wants as its customers and, therefore, also who the major shareholders of the business are.
2. What? This is the second part of the business idea and involves answering what products and services the business will offer, and what customer demands and wishes the products are designed to cater for. Final y, the what part of a business idea will increasingly come to deal with determining how customers and other stakeholders are going to pay for the services/ products of the business.
3. How? This is the next basic question and involves formulating a business organisation, i.e. a choice of the competencies that the business is based on and a business model that determines the business’ location in the value chain.
4. Why? Final y, there is the question of the strategic assumptions of the business. Is the business based mainly on a group of customers, on certain services or even on certain competencies and why? This determines a lot of things about the business besides the other issues of the business concept.
Note that what is outlined above is a much broader perception of a business than the traditional SBU definition that is used in traditional portfolio management, mainly in the sense that a business here is able to respond strategical y on its own.
12.4.2 What are the characteristics of successful business concepts?
So far, we may summarize three things about a successful business concept.
First, a business concept implies a coherent and logical flow of answers to the basic questions of the concept that lead to a competitive strategic position for the organization in question. Second, involving customers directly is notoriously difficult in strategic innovation. Customers very rarely know what their present needs are, so how should they know what their future needs are? This is the very key argument behind concepts such as “lead users” and “user-oriented innovation”, where customer needs are understood indirectly (often through anthropological methods) rather than analyzed by traditional means. It has been attempted to analyze what readers want from newspapers many times and the result is usual y the same – we long for the kind of newspaper that we have always had, but we do not want to pay for it, perhaps because we do not have the time to actual y read it? So perhaps what MetroXpress and other free newspapers offer us as readers is the chance to feel up to date in current affairs – even if we are not real y so? Third, and final y, we may stress the importance of a unique and often groundbreaking business model in the success of new business concepts.
12.4.3 State of the art examples of modern business concepts
The next logical issue of strategic innovation or business development is to seek inspiration outside of the current business concept and organization. In order to inspire the reader on this issue, let is consider a few more examples of successful innovative business concepts and their corresponding business models, and mobile organizations.
The purpose of this exercise is, of course, to induce some knowledge from a number of new yet both well known and well researched business concepts and business models and may be compared to desk research as opposed to the detailed case study of the telecommunications industry which appears later in this paper.
12.4.4 Business concepts based on a new value proposition
In the newspaper and/or media industry, it is natural consider the Danish media company, Nordjyske Medier. Nordjyske Medier has sought genuine innovation in an industry where few others have dared to challenge the existing mental models. We have documented this case elsewhere in great detail (Drejer & Printz, 2004) and will summarize it quickly within this context. Nordjyske Medier has transformed itself from a local – and admittedly low quality – newspaper to a media corporation, with radio, telecommunications, the internet, a free newspaper a la MetroXpress (named “10Minutes”, of course), as well as an old-fashioned newspaper. The key behind this transformation has been a rethinking of Nordjyske Medier’s value proposition that led to the realization that customers are less interested in a newspaper as a product than in the information that is in the newspaper. So instead of seeing itself as a part of the newspaper industry, Nordjyske Medier has defined itself as part of an industry that brings stories to its customers.
In order to do that, Nordjyske Medier has had to redefine its business model and organization to have many more channels of distribution to its customers than just the newspaper. This has also implied developing new competencies in radio, television and internet distribution, as well as how to coordinate how stories are distributed across media channels. On the other hand, the basic competence of journalism has remained virtual y unchanged by the transformation.
Nordjyske Medier has but one challenge. The corporation is still highly local and may lack economics of scale to create any real value in the business concept.
Example 1: Business concepts based on changing business in the value chain
Is it possible to do something similar to Nordjyske Medier but without the limitations of existing competencies and geography? By all means. Googlezon – the amalgamation of Google and Amazon in our opening scenario in this chapter – could combine Amazon’s competencies in customer relationships via IT with Google’s competencies in information search by offering customers exactly whatever content is wanted, when and where it is required. In order to achieve this end, it will be impossible to maintain the same location in the value chain as a traditional newspaper or even modern media corporation. Obviously, Googlezon cannot generate content enough to cover all the desires of everyone on the planet. It seems as if the more the emphasis on the customer, the higher the complexity of generating content for individual customers. For instance, Nordjyske Medier, which is among the smallest players in the Danish newspaper industry, still has to have a staff of journalists etc. in order to generate enough content. One can only imagine the kind of organization needed for a truly global media corporation catering for the needs of everyone…
Instead of attempting that, Googlezon will relocate in the value chain compared to media corporations today. The key to doing that is to let others generate content and focus on serving customers only. In order to do that, once again, the value proposition of the business concept needs to be redefined. How will Googlezon make money and distribute income down into the value chain? Will we pay per click? Per time spent on Googlezon’s website? How does Googlezon pay for access from telecommunications companies and others providing the infrastructure? And how is content being paid for? Not to mention the largest stumbling block – money from advertisements, the big source of income in media today.
In other words, it is not trivial to change position in the value chain. It becomes necessary to define new organizational roles for the players in the value chain and make sure that everyone gets their fair share of income. Also the overall economy of the value chain may change dramatical y. Consider what Dell did when reconfiguring the value chain of computers by “cutting out the middle man” and pioneering their direct selling model. All of a sudden the overall economy of the value chain changed.
Example 2: Business concept based on lead users implementing new technology
Getting new technology into the market place is notoriously difficult. Often technology push fails to deliver on its promise, whereas market pull is too slow and inefficient. But there is hope if one focuses on the right kind of customers. One way is to focus on the lead users that will pull the rest of the market along (Moore, 1999). The recent example of Skype show how extremely profitable such an approach may be. Skype was sold to Ebay for an estimated €4 billion in 2006 making it an interesting case of a successful business concept.
And what did the people behind Skype do? They did not, for one thing, invent new technology. IP technology had been around for some time and achieved little success, which was probably due to its low quality of telephone transmissions compared to conventional technology. So how did Skype commercialized the technology successful y? The answer is that the Skype people identified the right group of lead users for whom an internet-based telephone service was cheap and extremely welcome. This group of customers is business travellers on long distance flights. Skype jumped on the bandwagon, when airlines started to offer Internet access on transcontinental flights and so offered its services on the same flights. The quality was low here, but remember that the alternative for the business traveller was no phone cal s for many hours (and being forced to watch the latest blockbuster film instead of working). So who cared that quality was low, the alternative was nil communication.
So business travellers jumped at the opportunity to answer e-mails and use a phone, i.e. work, while travelling. Furthermore, at the end of the journey they took the idea with them to their hotel (hotels are also offering cheap internet access these days) and the market has started to evolve. Upon returning home, the business travellers told their friends, fellow travellers and even started implementing the new service in their organizations worldwide. A worldwide success had started to evolve on its own – all because Skype had identified the right lead users.
It was, however, probably a good thing for Skype that Ebay came along with some money, as the continuous implementation of IP services will require an enormous amount of resources in order to succeed. So, €4 billion was probably a very nice way of unloading Skype to the next part of the “food-chain”.
Example 3: Business concept based on Blue Oceans
These days we also find a number of business concepts based on the notion of “blue oceans” (Kim & Mauborgne, 2005), so let us offer an example of this interesting way of thinking. Car rental is a big business and one would think that the biggest names in car rentals – Hertz, Avis, Budget and the likes – would be making the biggest money. Not so. These companies compete for the same customers in similar ways, i.e. price, in a so-called “red ocean” (Kim & Mauborgne, 2007). Think about it. We only see these names in airports, admittedly all over the world, but still limited. The car rental company that makes the most money is not found among the well-known names and sizable organisations mentioned. It is a major surprise. Even though it is not (yet) Rent a Wreck, we are getting there. It is Enterprise from the US. And what have they done? We think that the founders of Enterprise might well have looked at the industry and its big players and asked themselves the question – do we want to be in the line of car rental companies in airports? And probably answered – NO! If we do that, we can only compete on equal or lower prices than the big names.
Should we manage to do that we would still have to accept higher costs due to lack of scale or, worse, from having to lure employees from the competition to join us if demand rises. In other words, we will enter competition in a red ocean with the inherent disadvantages of lower prices and higher costs than the competition – and who wants to do that.
So, maybe the founders of Enterprise went looking for something completely different, a blue ocean. Maybe they found this by looking at the customers of rented cars. Sure many customers, perhaps even the greatest proportion, are travellers to be found in airports. But what about the customers who are not travelling but are at home? Enterprise is based on these customers. This customer segment is located in the big US cities and they have a number of needs for car rental, where price is not terribly important. When your car breaks down and has to be replaced, you need an in-between car in order to go to work and so on. The cost might be covered by the insurance company or is just not very important. And so on. Enterprise has managed to identity a number of customer needs and requirements from a customer segment that no-one was interested in and based its business concept on these customers. As for a business model, this is also quite different from the models of the competition. Enterprise needs to be located in the big cities, where office space – and often even wages – are lower than in airports, and needs to master a set of competencies slightly different from the competition.
This business model has yet to be copied by others, so for now Enterprise competes in a nice peaceful blue ocean. And should anyone try to copy the business concept, then they would fall into the same trap that Enterprise has avoided falling into – the Red Ocean of car rental, the one with cut-throat competition, higher costs, and lower prices.
Example 4: Business concepts based on value-added services
Let us revisit Apple as a case. Whether this example is, in fact, also an example of finding a ‘blue ocean’ may be debated. No matter what, it is an interesting example of a business concept and business model, based on the Apple iPod. Apple enters a market that has stabilized in a fierce red ocean competition on cheap and very similar products and managed to take control of the market with a much more expensive and functional product. Not to mention a user friendly and cool product, but these things, we will argue, are of less importance to the business concept than the idea of value-added services. Of course designers seem to take credit for the success of the iPod, as do engineering people, marketing people, and so on. Everyone loves a success. We believe that the success of the iPod is a combination of an intelligent business concept that manages to combine the creation of a blue ocean position in the market with the opportunities for continuous innovation (as a means to protect that position).
If we attempt to formulate the business concept in words, we may end up with something along the following lines.
1. Who? Users of MP3 sound, who are ready to let the iPod play an important role in their lives and, hence, are ready to pay a premium price for the core product itself as well as apply to the value added services of the iPod business concept.
2. What? The iPod is a well conceived, well designed, user friendly product with a large memory and a number of other features, but it is also iTunes (buying music in the proper format on the internet) and access to the large community of iPod users who exchange Podcasts, music, movies, ideas and trivia through the net.
3. How? This is a complicated matter because there are property rights involved. As such, a truly digital business model – and iPod is based on such a model – is usual y relatively easy to conceive and very complicated to execute. It is obvious that Apple have had to acquire a lot of competencies in IPR in order to get to a point where they can actual y sell music digital y. Furthermore, a number of competencies in marketing via the net have had to be developed.
4. Why? As always this is a complicated matter to answer from the outside. However, we believe that the iPod is based on a strategic core ideology that is very aggressive and aimed at expanding the value added services of iTunes from music to, say movies. This will enable Apple to make a lot of money out of value added services, which is very nice, but might also just enable Apple to, final y, place an Apple computer in every home to deal with music and movies.
12.4.4 What can we learn from the four examples above?
If we are to infer something from these examples, there are three main conclusions. First, the concepts are all based on an outside-in perspective. Customer needs have to be the starting-point of business concepts and strategy these days. Often it is the future needs and wants of customers that enable the formulation of innovative business concepts. It is one of the main developments of modern strategy thinking that we have managed to get the customer as the starting point for strategic management again. Second, at the same time, however, it is crucial to rethink the aspect of the business model in contemporary business concepts. As much as we argue that the customer should be important to strategy, it seems clear from the examples above that contemporary business concepts are to some extent all deeply dependent on new competencies, new organizational fo