Strategic Innovation &

Business Model

Dr. Mohammad Hamsal, MBA

 Strategic Innovation
in Airlines & Banking Industries
Strategic Airlines: Airlines: Banking: Banking:
Innovation Dominant New Answer Dominant New Answer
Dimensions Answer Answer
WHAT? ‘Full service’ air Budget air travel High street banking Virtual banks
(Product – Service) travel

WHAT? Differentiation, Low cost, no frills Differentiation, Differentiation, service

(positioning) service levels brand, reliability level, convenience

WHO? All segments Primary target budget All segments Primary target
conscious travelers educated professionals
HOW? Air & ground Air & ground Branches, Internet, Internet, telephone
(channel – delivery) infrastructure infrastructure telephone
HOW? Flag carriers, Budget airlines, focus ‘Full service’ Call centers, Internet
(internal focus on quality - on leanness & infrastructure supported by full
architecture) innovation efficiency infrastructure

Source: Heracleous et al. (2009)

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 Innovation Stack
(Hamel, 2007)

Implementation in FS Industry

Umpqua Bank, ING Group, Bank of America

Management Innovation

Virtual Banking (UK), Mini-Banks (Japan),

Strategic (Business Model) Charles Schwab, Alliances, Niche Players
Innovation

ATM, EFT-POS, PC Banking, Call Center,

Internet Banking, Mobile Banking, Cash
Product/Service Innovation Management, Gifts/Points, ”Undian
Berhadiah”, Bancassurance, Smart Cards

Benchmarking, Prudential Practices, Risk

Mitigation, Efficiency, Zero Error, GCG,
Operational Innovation CRM, Service Quality, Outsourcing &
Offshoring, Restructuring

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 Innovation & Competitive
Advantage

Sir John Bond, former Chairman of HSBC (2000)

“Product innovation gives less than

three months competitive advantage.
Process innovation gives at least 12
months competitive advantage”

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 Donuts Business Models

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 Bread Business Models

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 Oil Retail Business Models

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 Business Model Innovation
• Increasingly important in the study of strategic
management
• Great business models can reshape industries
and drive spectacular growth (Johnson et al.,
2008)
• The future competition will be between different
business models (Hamel, 1994)
• The dot-com era and the growth of electronic
commerce has created new kinds of business
models  Internet Business Models

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 Internet Business Models

Source: Huff et al. (2009)

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 Definition of a Business Model
• Business Model: a method of doing
business by which a firm generates profits
(Afuah, 2004; Johnson et al. 2008)
• Addresses fundamental question of how a
firm makes money and attracts resources
• A business model is the vehicle for
delivering a value proposition (Finkelstein
et al., 2007)

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 Two Aspects of Business Models

• Business Model Evolution:

Awareness of how the prevailing business
model of their industry is changing

• New Business Models:

Unconventional ways to meet customer
needs; can be disruptive

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 Relationship Between
Strategy & Business Model
Strategy . . . Business Model . . .
Deals with a company’s Concerns whether
competitive initiatives revenues and costs
and business flowing from the
approaches strategy demonstrate a
business can be amply
profitable and viable

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 Business Model & Strategy

A Business Model includes:

– the profit-oriented aspects of strategy and
operational effectiveness (Porter, 1991)
– the elements of business strategy and
implementation that are oriented toward
financial performance
– the functional strategies of the firm’s different
functional areas with the associated
operational effectiveness
Business models are about making money;
strategies are about performance

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 Business Model Elements
• It is not the same as the strategy of the firm
• Spells out where the firm is in the value
chain, activities it performs and revenue
sources that will be generated
• Two major elements: value creation
activities and value capture activities

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 Elements of a Business Model

VALUE BUSINESS VALUE

CREATION MODEL CAPTURE

Source: Fitzroy & Hulbert (2005)

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 Value Creation

VALUE
CREATION

Activities in the value chain

What customers and how value
will be created for them
Generic strategies are well known

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 Value Capture

VALUE CAPTURE
How firm gets rewarded for value it creates
Normal model involves product sales and service fees

Gillette: razors not blades

Car firms through after sales service and spare parts
Airlines running reservation systems
PC companies on peripherals

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 Value Chain Analysis: Southwest Airlines
SIMPLIFIED DUE TO
MINIMUM CUSTOMER CONTACT
STANDARDISED SUSTAINED
FLEET OVER 30 YEARS
INTERNET, First Mover Advantage
WWW.SOUTHWEST.COM HUMAN RESOURCES

PROCUREMENT
P
SECONDARY
ACTIVITIES TECHNOLOGY R
CORPORATE FUNCTION O
INBOUND
LOGISTICS
OPERA-
TIONS
OUTBOUND
LOGISTICS
MARKETING
& SALES
SERVICES
F
QUICK, AUTOMATED I
CHECK-IN & BOARDING

QUICK TURNAROUNDS - 20
NO FRILLS, EXCISED WASTAGE, TO 25 MINS POST 9/11 LOYALTY
WEB, EFFECTIVE
REPLACED GALLEY WITH SEATS. PROGRAMS
PUNCHY SIMPLE
MAINTAINED SAFETY STANDARDS FUNFARES
ADVERTISING
WHILE REMAINING LOW COST CARRIER

PRIMARY ACTIVITIES
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 Activities Map: Southwest Airlines

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 Blue Ocean Strategy
Red Ocean Space
• The known market space
• Industry boundaries
defined and accepted
• Competitive rules
understood
• Outperform to get more of
demand
• Space gets crowded;
harder to make profits
and grow
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Blue Ocean Space
• Unknown market space
• Industries not in existence
• Demand is created rather
than fought over
• Opportunity for both profit
and growth
• Two ways to create:
completely new or from
within existing red ocean
Source: Kim and Mauborgne, 2004
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 Examples of Blue Oceans
• Model T Ford
• Apple personal computer
• Dell built-to-order computers
• AMC Movie theatre megaplex
• Cirque du soleil
• Mutual funds
• Cellular phones
• Express packaging
• Home videos

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 What is a Business Model, and How is it Built?

RESOURCES:
THE VALUE PROPOSITION:
People, technology, products,
A product that helps
facilities, equipment, brands,
customers do more effectively,
and cash that are required to
conveniently & affordably a
deliver this value proposition
job they’ve been trying to do
to the targeted customers

PROCESSES:
PROFIT FORMULA:
Ways of working together to
Assets & fixed cost structure, address recurrent tasks in a
and the margins & velocity consistent way: training,
required to cover them development, manufacturing,
budgeting, planning, etc.
Source: Clayton M. Christensen 25
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 Business Model & Value Proposition
Alignment

PRICE FEATURES QUALITY SUPPORT AVAILABILITY REPUTATION

Value Proposition
1. Premium 1. Original 1. Excellent 1. Comprehensive 1. Restricted 1. Prestigious

2. Premium/ 2. Original/ 2. Excellent/ 2. Comprehensive/ 2. Restricted/ 2. Prestigious/

Competitive Customized Average Standard Selective Respected

3. Competitive 3. Customized 3. Average 3. Standard 3. Selective 3. Respected

4. Competitive/ 4. Customized/ 4. Average/ 4. Standard/ 4. Selective/ 4. Respected/

Leader Basic Acceptable Minimal Universal Functional

5. Leader 5. Basic 5. Acceptable 5. Minimal 5. Universal 5. Functional

Business Model
Cost Innovation Reliability Relationships Channels Brand

Vision for the future

Source: Finkelstein et al. (2007), “Breakout Strategy”, p. 223
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 Business Model Needs Analysis
VALUE PROPOSITION BUSINESS MODEL

Element Movement Element Business Imperatives

• Need to become more efficient

Price 1 2 Cost
• Need to improve systems

• Need to encourage innovation

Features 3 2 Innovation
• Need to challenge old convention

• Need to enhance quality

Quality 2 1 Reliability
• Need to increase control mechanisms

• Need to maintain close relationships

Support 3 2 Relationships
• Need to increase responsiveness

• Need to identify opportunities

Availability 2 3 Channels
• Need distribution arrangements

• Need to build image

Reputation 3 2 Brand
• Need to maintain reputation
Source: Finkelstein et al. (2007), “Breakout Strategy”, p. 227

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 Business Model Needs Analysis

VALUE PROPOSITION BUSINESS MODEL

Element Movement Element Business Imperatives

Shifting from low-grade fortified wines to

Price 4 2 Cost
high-end fine wines

Developing new methods for producing

Features 3 1 Innovation
and bottling wine

Producing high-quality, high-technology

Quality 3 2 Reliability
wine company

Providing customers with more information

Support 3 1 Relationships on its production techniques and scientific
investments
Gallo had more than 60 different wine
Availability 3 5 Channels labels and distributed in 90 countries
(2007)
Investing more in advertising to discerning
Reputation 3 1 Brand drinkers who previously would not even try
its wines
Adapted from: Strickland (2008)
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 What are Common Business
Models?

• Business models: summarize how

strategic decisions are expected to
make a profit
• Business plans: a more complete
overview of company activities,
followed by detailed financial analysis

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