If you put a new product in the market, sooner or later, somebody is going to clone it. To build sustainable shareholder value, companies have to create innovative business models, not just innovative products and services.
Cycle times have dramatically accelerated in every industry, says Janelle Hill, a research vice president at analyst Gartner: ‘Whether it’s inventory turn-over, the rate at which you have to introduce new products and services or the accounts receivable collection period, everyone is reporting that cycle times are much shorter, no matter how you measure them,’ she says.
In a recent IBM survey, Expanding the Innovation Horizon, The Global CEO Study 2006, some 65 per cent of chief executives and other business leaders said they will have to make fundamental changes in their businesses over the next couple of years.
‘New products and services remain a priority, but they are placing growing emphasis on differentiating themselves with innovation in the basics of business models,’ wrote Sam Palmisano, IBM’s chief executive, in the report’s preface.
Nearly a third of respondents said they would focus innovation efforts on their business models. The survey also found that companies that put an emphasis on business model innovation performed better than those that did not.
Alexander Osterwalder, a partner at Swiss consulting firm Arvetica, says that while it is still important to innovate on products and services, it is more difficult to copy a business model innovation because it is much more complex.
Osterwalder cites the example of Apple and its success with the iPod. ‘The success does not just come from the iPod product, but from a whole bundle of things, including the iTunes software,’ he says.
‘That really is a business model innovation. It is not just a product innova tion of an MP3 player that is powerful and elegantly designed. There are a lot of rival products in the field, but it is much more difficult to recall the products’ names.
‘Despite having quite powerful products, competitors do not have a business model to match that of Apple. Even if they have more powerful products than Apple, Apple won the market through its business model, not the iPod itself.’
But unlike products, business models cannot be protected by patents. Even so, it has been demonstrated in a number of industries that business models, because they knit together so many disparate things, are difficult to imitate.
You cannot copy a business model in a piecemeal fashion, says Henry Chesbrough, author of Open Business Model – How to Thrive in the New Innovation Landscape. You have to copy it whole hog or you do not get the virtues of the business model.
‘Lots of airlines in the US and Europe have tried to imitate the low-cost carriers of Ryanair in Europe or Southwest Airlines in the US, for example. Very few have had any success even though they are using the same aeroplanes, the same fuel and the internet to book tickets.
‘It has proved quite difficult to imitate the business models, not because of intellectual property (IP) protection, but because of the complexity and the interdependency of the different parts of the business model,’ says Chesbrough.
A business model is a story. It is the story of how a firm makes money. The problem with stories is the more they are repeated, the more sacrosanct they become. A company might focus on its core business, but if it does not repeatedly challenge the logic of their business model, their revenue streams will run dry.
Charlie Simpson, a partner in the Strategy Consulting Group at PA Consulting, has encountered the difficulty of shifting mindsets. His client sold large capital equipment – such as graders and diggers – and they believed that that was their key business. But in a strategy review, Simpson saw that the real high-margin opportunities were actually in the rental, leasing and product-support business.
‘The mindset shift was the biggest challenge for this organisation,’ he says. ‘They perceive of themselves as sellers of large bits of metal, yet all of the bottom-line impact came from intangible, services.
‘In that particular organisation, there was the lack of flexibility, which made it difficult to realign their resources and focus on the real business opportunity. A lot of it is about moving away from the tangible to the intangible, which is a big cultural challenge for many companies.’
An even bigger challenge is openness. It is almost counter-intuitive to open the borders of your company. Until recently, companies operated like fiefdoms, battling each other for a share of the market. The modern metaphor that has rapidly taken root, is quite different. Today companies are seen as ecosystems with complex interdependencies. The message now is: you need to be open to survive.
Chesbrough says open innovation and an open business model is the key to corporate survival in the 21st century. Firms should no longer rely on their research and development (R&D) departments to come up with all the ideas, not when there is a network of talented, creative people across the globe – see case study, 43.
‘I am seeing the beginnings of a secondary market for intellectual property,’ says Chesbrough. ‘And that means firms with strong business models will be able to access other external IPs more readily, provided it sits well with their business model. This will keep them going for a longer period.
‘This openness to external influence also provides more outlets for internal ideas that would not be successful internally, but might find traction elsewhere. It really does help to open up the innovation process both for things coming into the company and for things flowing out to the market,’ says Chesbrough.
Firms spend an enormous amount of money on R&D, but only a tiny fraction of patents are ever monetised. That means a lot of wasted money and opportunity.
Unfortunately, many companies still see their intellectual property as a weapon. ‘Many, if not the majority of, patents are taken out to strategically block known competitor activity as they are to protect something you want to do yourself,’ says Ian Rhodes, a partner in the Technology Group at PA Consulting.
Yet even the pharmaceuticals industry – a notoriously secretive cabal – is beginning to experiment with open innovation and open business models.
‘Most biotech firms, for example, do not take their compounds from inception all the way to the market,’ says Chesbrough. ‘Instead, they tend to take the compounds into early human trials, then agree a deal with another company, usually a pharmaceutical firm, to complete the remaining trials and take the drug to market.’
Chesbrough uses the example of Millennium, a biopharmaceuticals company, that licenses IP rights to promising compounds by field of use, so that multiple companies can use the same compound for different indications.
In his latest book, Chesbrough argues the case for extending the value chain outside of the four walls of the company and creating an open business model based on open innovation.
As the pace of change accelerates, firms will increasingly need to be open and experiment with different business models. It is key to be flexible enough to seize opportunities when they arise. Fortune favours the prepared company.
This is an excerpt from the cover story of this month’s Computing
Business, the magazine for IT leaders from the
publishers of Computing.
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