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ing resources. However, few organizations have you can’t address with your current business
successfully conceived and executed a business model? The answers to these questions form the es-
model different from their current one, fewer still sence of business model experimentation.
have done it more than once and only a handful
ABOUT THE have put in place a methodical approach to business Starting the Process
RESEARCH model innovation. The first step in the business model exploration pro-
The approach to business
model experimentation pre-
Our goal is to demonstrate how an organization’s cess is to create a template to examine possible
sented in this article stems ability to methodically and routinely examine mul- alternative answers to the questions above. (See “A
from over four years of field tiple business model alternatives — in other words, Business Model Development Template.”) The ques-
work carried out with more by treating the business model as a variable and not a tions that help to shape a business model represent a
than 20 companies — in-
constant — can serve as a critical enabler of growth, series of decisions, each of which has a set of possible
cluding Kennametal,
Infineum, Johnson & allowing executives to anticipate, adjust to and capi- outcomes. Our template lays out various possible
Johnson, P&G and talize on new technologies or customer insights. The outcomes within the business model structure. Se-
Medtronic — in an array of approach we describe is based on research over the lecting one possibility from each category and then
industries, including con-
last two decades into mechanisms of reliable, me- linking them together forms one potential new way
sumer packaged goods,
chemicals, medical devices, thodical business model generation as well as our to proceed. And, of course, selecting different com-
pharmaceuticals and finan- own work helping companies2 build the capability to binations creates other possible outcomes.
cial services. This work create repeatable growth through business model To see how this works, consider how an airline
entailed in-depth, interview- experimentation. (See “About the Research.”) might use the template to generate alternative busi-
based primary market
research with existing and
ness models. Currently, airlines serve a range of
potential customers; exten- What Is a Business Model? customers with the same basic model. For example,
sive working team idea At a conceptual level, a business model includes all as- regardless of whether the customer is going on vaca-
formulation and prioritiza- pects of a company’s approach to developing a tion with her family, traveling on business or
tion activities, and in-market
profitable offering and delivering it to its target cus- responding to an emergency, airlines use the standard
assumption testing and
business piloting. Our pur- tomers. A review of the relevant literature reveals that pay-per-seat model with which we are all familiar.
pose was to understand the more than 40 different components — such as target Minor levels of customization exist — for example,
range of alternatives avail- customer, type of offering and pricing approach — larger seats and priority boarding for those who pay
able for companies to
have been included in various definitions of business for them — but the core model is the same for all.
optimize the value captured
through commercialization
models put forward over the past few decades, with To explore business model innovation, an airline
of their innovative offerings. much of the variation stemming from differences be- could start by picking a specific customer group and
The specific company ex- tween the industries and circumstances in which a then beginning to explore potential options other
amples presented in this definition has been applied.3 than its current model. Answers to the question “How
article highlight two distinct
For our purposes, we will explore the concept of a does the customer gain access to the offering?” (which
approaches to employing
the proposed business business model by addressing several core questions is essentially the same as asking “How will we sell it?”)
model innovation process. that the majority of business model researchers deal could include “Through travel agents” or “Through
These two cases represent within their models: online websites” or “Through self-service kiosks” or
starting points at opposite
•Who is the target customer? “As part of partnerships.” As for where on the value
ends of the value chain —
one driven by an •What need is met for the customer? chain the airline might operate, it could be the service
understanding of unsatis- •What offering will we provide to address that provider, but it might also be a wholesaler selling off
fied customer needs, the need? excess capacity to reduce unprofitable flights. Various
other driven by the pursuit •How does the customer gain access to that offering? profit models would likely start with the traditional
of applications for a set of
technical solutions. This
•What role will our business play in providing the pay-per-seat but might expand to include subscrip-
demonstrates the broad ap- offering? tion models. The offering itself might be a premium
plicability of the approach. •How will our business earn a profit? seat, a low-cost seat or maybe even fractional owner-
In any working business model, the answers to ship of a plane or chartered use of an aircraft. We
these questions are fixed. But what if they weren’t? experimented with “What we sell” for an airline to
What if you considered each of them as a variable? show how changing just one variable can result in a
What new opportunities could you capture that substantially different business. (See “Generating
erately align the exploration of alternative business The company then identified three high-potential
models with wider corporate goals by “locking in” combinations. For example, one was small “job
one or more variables as you go about your experi- shops” that had unmet training needs. The next
mentation. To see how this might work, let’s take a step was to focus on developing the offering and
look at two cases in more depth. In the first, a tool determine how the company would deliver it.
manufacturer explores opportunities to enter new For each possibility, the team methodically re-
lines of business spurred by market trends; in the viewed a list of levers for the remaining business
second, a maker of petroleum additives seeks to model components — for example, “What we sell”
identify new ways to employ its core competencies. and “How we profit” — and articulated multiple op-
tions for each lever. By examining more than 30
Exploring New Customer Needs different levers in multiple combinations, they sys-
Kennametal is a tool manufacturer based in La- tematically generated an expansive list of possible
trobe, Pennsylvania. Faced with an evolving business model options. Conceptualizing the differ-
manufacturing environment, a changing customer ent components of a business model as levers forced
base and increasing global competition, Ken- the team to consider new combinations they likely
n a m e t a l e m b a r ke d o n a b u s i n e s s m o d e l would have otherwise overlooked. For example, Ken-
experimentation initiative to diversify its revenue nametal has traditionally been a product-centered
stream by identifying two to three new businesses company that provides service as part of product
in adjacent markets that would leverage core assets. sales. However, by looking at its service capabilities
A small team kicked off the initiative with a research and examining the options for some “How we profit”
effort focused on developing a more comprehen- levers, the company was able to consider a number of
sive understanding of potential customers’ interesting fee-for-service business models. In doing
frustrations, desires and challenges, in order to so, Kennametal was essentially exploring ways to
populate both the target customer and possible monetize the latent wealth of knowledge contained
needs categories of the business model template. in the organization’s experience, people and knowl-
The research involved a combination of qualitative, edge-management systems.
quantitative and observational activities.5 With more than 30 levers, there were literally
Since the goal was to create diversified revenue thousands of possible permutations and, therefore,
streams, Kennametal chose to prioritize needs the last step in the process was to identify the most
based on the classic measures of their profit poten- attractive ones. The team focused on the possibili-
tial: importance to the customer, the customer’s ties that would generate the greatest customer
level of dissatisfaction with the offerings currently satisfaction, would be the hardest for competitors
on the market and the degree to which the need had to copy and were the most feasible to pilot. This
not already been targeted by other internal efforts. process ensured not only that a wide range of op-
tions were considered but that the opportunities
EXPLORING OFFERING OPTIONS IN MORE DEPTH selected were well matched to customers’ needs,
Rather than just brainstorming various alternatives for the “What we sell” question were competitively robust and leveraged existing
that is part of a business model, a company could more systematically examine its resources appropriately.
options by asking a series of additional questions, such as whether what it sells is a The initiative required a minimal amount of
product or service, whether that product or service is standard or customizable, etc.
time from a small, multifunctional team over an
What We Sell eight-week period — truly a low-risk way to home
in on new growth options. In this way, Kennametal
Type Features Benefit Brand Lifetime
used the business model innovation process to
Product Custom Tangible Generic Consumable move beyond incremental improvements in its
businesses and generate three new opportunities to
pursue in adjacent markets. In particular, two of
these initiatives formed the foundation of new ser-
Service Off-the-Shelf Intangible Branded Durable
vice-based offerings for Kennametal.
ditives are mixed into the fuel after it has left the Colson is a company coach at Open Water Develop-
refinery, typically when it is on board a ship in the ment Ltd. and a former general manager of growth
initiatives at petroleum-additive maker Infineum in
port of delivery. Here, the main emphasis is on high the United Kingdom. Comment on this article at
levels of responsiveness and very short lead times to http://sloanreview.mit.edu/x/53214, or contact the
minimize the turnaround time of vessels in port. authors at smrfeedback@mit.edu.