Chesbrough

BUSINESS MODEL INNOVATION: IT´S NOT JUST ABOUT TECHNOLOGY ANYMORE

Henry Chesbrough

A business model performs two important functions to every company: the value creation and value capture. The value creation defines a series of activities, from procuring raw materials to satisfying the final consumer, which will yield a new product or service in such a way that there is net value created through the various activities. The value capture means the developing and operating of those activities for the firm. Both are critical for a company that can´t earn a profit from some portion of these activities can’t sustain those activities over time.

The functions of a business model are:

1. Articulate the value proposition, that is, the value created for users by the offering.

2. Identify a market segment, that is, the users to whom the offering is useful and for what purpose.

3. Define the structure of the value chain required by the firm to create and distribute the offering, and determine the complementary assets needed to support the firm’s position in this chain. This includes the firm’s suppliers and customers, and should extend from raw materials to the final customer.

4. Specify the revenue generation mechanism(s) for the firm, and estimate the cost structure and profit potential of producing the offering, given the value proposition and value chain structure chosen.

5. Describe the position of the firm within the value network linking suppliers and customers, including identification of potential complements and competitors.

6. Formulate the competitive strategy by which the innovating firm will gain and hold advantage over rivals.

The Business Model Framework

Type 1- Company has an undifferentiated business model. The vast majority of companies that operating today do not articulate a distinct business model, and lack a process for managing it. (Restaurants, barber shops)

Type 2- Company has some differentiation in its business model. The company has created some degree of differentiation in its products or services. This gives rise to the pattern of so-called ‘‘one hit wonders’’, where a company or inventor has a successful first product, but is unable to follow up this success with additional products of similar success. Many technology startup companies fall into this type.

Type 3 – Company develops a segmented business model. The company now can compete in different segments simultaneously. The firm’s business model now is more distinctive and profitable, which supports the firm’s ability to plan for its future via product and technology roadmaps.

Type 4 – Company has an externally aware business model. In this business model, the company has started to open itself to external ideas and technologies in the development and execution of the business. This unlocks a significantly greater set of resources available to such a company.

Type 5 – Company integrates its innovation process with its business model. The company’s business model now plays a key integrative role within the company. Suppliers and customers now enjoy formalized institutional access to the firm’s innovation process, and this access is now reciprocated by the suppliers and customers. Customers and suppliers now share their own roadmaps with the company, giving the company much better visibility into the customers’ future requirements.

Type 6 – Company’s business model is an adaptive platform. Key suppliers and customers become business partners, entering into relationships in which both technical and business risk may be shared. The business models of suppliers are now integrated into the planning processes of the company. The company in turn has integrated its business model into the business model of its key customers. (Intel, Microsoft and Wal-Mart).

One important capability that enables this integration of business models throughout value chain is the ability of the company to establish its technologies as the basis for a platform of innovation for that value chain. In this way, the company can attract other companies to invest their resources, expanding the value of the platform without consuming extra investment by the platform maker.

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