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José  SantosProfessor  in  the  Prac/ce  of  Global  Management,  INSEAD

&  Visi/ng  Professor,  MIT

Bert  SpectorAssociate  Professor  of  Interna/onal  Business  and  Strategy,  Northeastern  University

&  Visi/ng  Professor  of  Organiza/onal  Behavior,  INSEAD

Ludo  Van  der  HeydenProfessor  of  Technology  and  Opera/ons  Management

&  Solvay  Chaired  Professor  of  Technological  Innova/on,  INSEAD

Version:  Utah  Winter  Opera/ons  Conference,  Park  City,  Jan  29th  2010

Towards  a  Theory  ofBusiness  Model  Innova>on

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Increasing  AAen>on  to  Concept:  Academia• First  appearances:  

-­‐  in  abstract:  Lang  (1947)

-­‐  in  subject  index:  Mertes  (1949)

-­‐  in  ar/cle  /tle:    Jones  (1960)• Rising  interest  star>ng  with  Internet  boom  (Ghaziani  &  Ventresca,  2005):  

-­‐  166  ar/cles  between  1975  and  1994

-­‐  1,563  between  1995  and  2000

• Deeper  and  wider  occurrences  since  then:

Evans  &  Wurster,  1999;  Timmers,  2000;  Hamel,  2000;  Mahadevan,  2000;  Afuah  &  Tucci,  2001;  Amit  &  Zo`,  2001;  European  Commission,  2002;  Elliot,  2002;  Magre`a,  2002;  Mansfield  &  Fourie,  2004  …

• Special  sessions  and  journal  issues:

-­‐  Session  in  Academy  of  Management  2009

-­‐  Special  Issue  of  Long  Range  Planning  on  Business  Models  (Exp  Feb  2010)

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Increasing  Diffusion  of  the  Concept:Examples  from  Business  &  Society  at  Large

• Widespread  belief  that  BMI  will  be  responsible  for  significantly  largerimpact  on  firm  performance  than  new  products  /  services  (Pohle  &Chapman,  2006)

• President  Obama’s  and  Thomas  Friedman’s  comments  on  the  automobileindustry  needing  to  change  business  models

• Rick  Gurnon,  Head  of  the  MassachuseAs  Mari>me  Academy:    "The  pirateshave  a  great  business  model  that  works  for  them:  See  ships,  take  ransom,make  millions,"  he  told  reporters.

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But

• No  agreement  on  defini>on,  leading  to  increasedconfusion  (incl.  in  academia)  about  the  term

• Focus  on  start-­‐ups  /  new  technologies

• Confusion  between  single  business  and  a  (mul/-­‐business)  corpora>on

• No  men/on  of  people

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Business  Model  ≠  Business  Strategy• Tradi/onal  Business  Strategy:  market  (who)  &product  (what)  &  value  chain  (how)

• Business  Model:  only  the  how!

• BM  is  to  be  dis>nguished  from  the  market  (who?)and  product  strategies  (what?)  -­‐  and  fromtechnology  strategies

• Having  defined  the  3  dimensions  of  the  BusinessStrategy,  one  can  compute  the  profit  func>on  (or  theperformance  model)

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Business  Strategy:  three  “gurus”Porter  (1979,  1996):

-­‐  compe//ve  strategy:  5  forces  (HBR  1979)

-­‐  choice  of  ac>vi>es  (HBR  1996  “What  is  strategy?”)

Prahalad  (and  Hamel)  (1990):

-­‐  core  competences

Kim  &  Mauborgne  (2004):

-­‐  Blue  Ocean  Strategy  :  a  process  for  new  product-­‐market  spaces

Ps:  none  has  a  men>on  to  business  model  the  way  we  define  it  

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Business  Model  ≠  Start-­‐up  issue• In  fact,  business  model  innova/on  has  been  aroundall  the  /me  and  is  hardly  something  new:  SEARS,GM,  Ford,  McDonalds…

• Related  mostly  (exclusively)  with  market  (who?)and  the  product  innova>on  (what?)

• These  are  business  constructs  that  are  related  to“business  models”  -­‐  in  fact  many  of  these  start-­‐updied  b/c  they  had  no  BM

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An  example:  the  downfall  of  GM• 1921:  Sloan  buys  a  chao/c  GM  from  Durant  (who  had  established  it  13  y  earlier)

who  “had  no  concept  of  the  business”  and  establishes  the  Policy  CommiAee  (PC)and  establishes  the  mul>-­‐divisional  corpora>on  (product-­‐process  matrix:  Cadillacon  top,  Chevrolet  at  bo`om,  …)

• 1924:  Puts  division  heads  on  the  PC  (shareholders  like  Dupont  complain)  to  favorcollabora/on  that  was  missing  -­‐  he  separates  PC  into  two:  Administra>on  and(Corporate)  Execu>ve  CommiAees

• 1946:  Drucker  has  full  access  to  GM  and  a`ests  to  the  “linking”  governancevirtues  of  the  two  commi`ees

• 1958:  Donner  dismantles  Sloan’s  “par/cipa/ve  decentraliza/on”  and  removesdivisional  managers  from  the  main  commi`ees  (unfair  process  dis-­‐engagement)

• In  view  of  resistance  from  divisional  managers,  he  takes  further  control  and  makesbusiness  decisions:  removes  Chevrolet  from  low-­‐end  segment  (opening  up  marketfor  smaller  cars),  mandates  increased  shared  parts  …

• 1965:  creates  GMA(ssembly)D  dismantling  the  Bus  Units  :  Vega  disaster  (1970)

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Ques>ons  for  discussion?• Management  maAers:    The  Policy  Commi`ee  was  the  key  linking

mechanism  for  GM  and  ensured  value-­‐adding  by  the  corporate  center  ontop  of  the  value  adding  by  the  BUs  (an  example  of  synergy  in  corporatestrategy  through  management  -­‐  dis/nct  from  pormolio)

• OM  cannot  be  seen  only  as  wri>ng  algorithms  (rou>nes)  for  op>mizingphysical  (or  informa>on)  flows:  let  us  be  careful  to  consider  the  role  ofmanagement  instead  of  trying  to  op/mize  management  away

• Are  we  going  to  leave  that  terrain  to  others?

-­‐  OB  studies  organiza/onal  networks  and  rela/onships  at  will  …  but  noac/vi/es  in  their  models,  only  managers

-­‐  Strategy:  for  them  business  model  is  another  term  for  strategy  …

-­‐  Entrepreneurship:  mostly  concerned  with  start-­‐ups  (cfr.  Strategy)

• What  is  the  opportunity  for  OM?

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Defini>on  #1  :  Business  Model

1)  A  configura>on  of  ac>vi>es

&  their  (material,  informa>onal)  linkages

2)  A  set  of  organiza>onal  units  that  performthose  ac>vi>es

&  their  (managerial)  rela>onships  (including  of  a  governance  type)

In  sum:  supply  chain  with  managerial  rela>ons

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A  Model  for  Business  Models

OrganizationalUnit

OrganizationalUnit

OrganizationalUnit

OrganizationalUnit

OrganizationalUnit

OrganizationalUnit

OrganizationalUnit

OrganizationalUnit

ActivityActivity ActivityActivity ActivityActivity ActivityActivityTransactional Linkage

Transactional Linkage

RelationalLinkage

RelationalLinkage

RelationalLinkage

RelationalLinkage Relational

LinkageRelationalLinkage

TransactionalLinkage

TransactionalLinkage

Transactional Linkage

Transactional Linkage

Value ChainPartner Focal Firm

Value ChainPartner

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BM:  what  it  is  and  what  it  is  not• What  it  is:

-­‐  ac/vi/es  AND-­‐  organiza/onal  units  AND-­‐  their  rela/ons/linkages

• What  it  is  not:-­‐  business  strategy  OR-­‐  product  or  market  characteris/cs  OR-­‐  technology  OR-­‐  ac/vi/es  (by  themselves)  OR-­‐  any  combina/on  of  the  above

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Example  1:    ZARA

Step 2: Simplify« hits » & producelibrary of designs

Step 1: Scanfashionshows

PurchaseRaw Mat

Step 3: FinalDesign ofnext batch

Mfg

Shoppingexperience

Dist

Step 2: Shoppers (and storemgers) « pull » next design

(shape) & designers « adapt »

Step 3: Designers« pull » next RM batch

Observa>on  #1:ZARA  SUPPLY  CHAIN

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Observa>on  #2  :Management  Rela>onships

1) Start-­‐up  of  ZARA  Quick  Response:  CEO  runsthe  La  Coruna  store  and  the  factory

2) “New  Product  CommiAee”:  designer,  supplychain  manager,  commercial  manager  co-­‐govern  opera/ons

3) Store  managers:  fully  engaged  in  opera/ons

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Example  2:    Accor

A  Mul>-­‐business  corpora>on  withcentral  ac>vi>es

(real  estate,  new  format  development,financing,  franchising,  overseeing

business  leaders,  …)

ACCOR

Business

Process

S e r v i c e O f f e r

Flow line:Inflexible

Job shop:Flexible

Luxury Comfort Minimal

Sofitel

Novotel

Ibis

F1

BasicYes No

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Example  3:    Luqhansa  Group

A  Business  Model  Change  that  is  purelya  change  in  managerial  rela>onships

The old Lufthansa:Functional Organization

The new Lufthansa Group:Service Holding

President

VPHR

VPFinance

VPMktg

TechnikPassengerCatering

PassengerCatering

TechnikPassengerCatering

Technik

President

Technik Passenger Catering

HRFinMktg

FinMktg

HRFinMktg

HR

Cargo Cargo Cargo

Cargo

HR

Fin

Mktg

BMC  at  Luqhansa

BMC  at  Nissan:  in  the  other  direc>on

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Defini>on  #3a:Business  Model  Change

A  reconfigura>on  of  ac/vi/es,  organiza/onal  units,their  linkages  and  rela/onships.

In  short:

reac>va>ng,  reposi>oning/reloca>ng,

relinking,  regoverning

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A  Model  for  BMC

Linkages  betweenac>vi>es

Posi>oning  betweenac>vi>es

Setof  ac>vi>es

Loca>on  of  ac>vi>es

Businessmodel

Innova>on

Businessmodel

Innova>on

Remove

Augment

RelinkingInsource

On-­‐shore

Off-­‐shore

OutsourceRegovern

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Defini>on  #3b:Business  Model  Innova>on

The  defini/on  of  a  business  model  that  is  newand  valuable  for  a  given  product-­‐market  (or

business  in  the  SIC  sense).

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Implica>ons  for  Prac>ce  :  BU  Level

• BMI  offers  opportunity  for  lean  value  crea>on

• BMI  does  not  require  breakthrough  technologies  or  heavyinvestment  in  new  product/market/business  development

• People  &  rela>onships  are  as  much  a  part  of  a  businessmodel  as  technology  linkages  &  economic  exchanges

• All  BMI  is  competency  destruc>ve  &  will  requiretransforma/onal  behavioral  change

• It  takes  considerable  >me  (and  much  more  so  than  productor  market  innova/on)  -­‐  which  is  also  why  it  gets  li`le  billing

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Further  argumenta>onon  behalf  of  BM:

corporate  theorizing  that  is  dis/nct  andnew  compared  with  the  typicalpormolio/synergy  dichotomy

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Defini>on  #4:The  BMI-­‐Conducive  Corpora>on

A  corpora(on  that  maximizes  theopportunity  /  likelihood  that  BMI  (or  BMC)will  emerge  from  within  its  business  units

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Implica>ons  for  Prac>ce  :  Corporate  Level• To  create  BMI-­‐Conducive  Corpora>on,  corporateexecu/ves  need  to  engage  in  both  structural  &behavioral  change

• Loose  horizontal  coupling  combined  with  deepsense  of  organiza/onal  jus/ce  &  mutualengagement  (cfr.  Fair  process)  will  maximizeopportuni/es  for  BMI  from  within  BUCs

• Corpora/ons  can  develop  crea>ve  white  space  tomaximize  BMI  exchange  across  BUCs

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Toward  the  BMI-­‐Conducive  Corpora>on

Crea>ve  White  SpaceHigh  autonomy

High  cross-­‐unit  learningLow  Autonomy

High  cross-­‐unit  learning

High  AutonomyLow  cross-­‐unit  learning

Low  AutonomyLow  cross-­‐unit  learning

Horizontal  CouplingHorizontal  Coupling

Low High

High

Low

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Towards  a  Theory  of  BMI:  summary

• A  defini>on  of  Business  Model  (BM)  that  brings  in  ac/vi/es,  theirorganiza/onal  units  (and  hence  people),  and  their  linkages  and  rela/onships

• A  concept  should  be  part  of  OM  and  elevates  OM  into  the  strategy  space  (in  away  that  supply  chain  design  does  not)

• It  re-­‐imports  management  into  OR/OM

• It  provides  a  unique  space,  next  to:

-­‐  finance  (an  input)

-­‐  marke/ng  (product-­‐market  issues)

-­‐  entrepreneurship  (not  only  for  start-­‐ups)

-­‐  strategy  and  OB  (let  us  add  some  ac/vi/es)