Business Model Innovation

Concepts, Analysis, and Cases

Allan Afuah

• Publisher: Routledge
• Year: 2018
• ISBN:
  9780429821837
• Edition: 2
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Rooted in strategic management research, Business Model Innovation explores the concepts, tools, and techniques that enable organizations to gain and/or maintain a competitive advantage in the face of technological innovation, globalization, and an increasingly knowledge-intensive economy.

Updated with all-new cases, this second edition of the must-have for those looking to grasp the fundamentals of business model innovation, explores the novel ways in which an organization can generate, deliver, and monetize benefits to customers.

PART I

INTRODUCTION

1 Introduction to Business Model Innovation

KEY TERMS

•Analytical techniques

•Business model innovation

•Business models

•Core concepts in a digital economy

•Crowdsourcing

•Macro environment

•Monetization

•Multisided platforms

•Network effects

•Strategy

Introduction

On March 12, 2018, the world’s top five most valuable firms by market capitalization were Apple, Alphabet, Amazon, Microsoft, and Facebook, while the world’s top six unicorns— privately-held startups valued at a billion dollars or more—were Uber, Ant Financial, Didi Chuxing, Xiami, Airbnb, and Meituan-Dianping (Tables 1.1 and 1.2). Netflix was the only member of technology’s FAANGs (Facebook, Amazon, Apple, Netflix, and Google) missing from the list. The combined market value of the top five firms exceeded $3.5 trillion, with the most valuable of them, Apple, flirting with the $1 trillion valuation dream. Three of the top five richest people in the world were founders or co-founders of these top firms. Thousands of managers and other employees from these firms had also become billionaires or millionaires. Just as interesting, thousands of individuals who invested in these firms made tons of money. Of course, many startups and established firms did not fare as well as these top performers, and the millions who invested in the losers lost tons of money.

These fascinating facts about these overachievers raise many interesting questions for the entrepreneurs and managers whose overarching responsibility is the performance of their organizations, and for the investors who want to win by investing their money in future winners. What is it about the business models of these winners—about the activities that they perform to build and use resources to generate, deliver, and monetize benefits to customers—that enables them to perform so well? How were the values of these businesses—especially the values of the unicorns that were still losing money—determined? That is, how did “markets” assign monetary amounts to what these organizations are worth? Could these top performers have been overvalued? Why did their competitors not do as well, and could the differences in performances have been predicted years earlier? Is offering excellent products or services enough to guarantee the types of profits that enable firms to command such high market valuations? What can an underperformer do, if anything, to topple these overachievers? Do the phenomenal advances in information technology (IT), social media, communications, globalization, and trade—some of which have inspired or led to the digital/ sharing or social media economy—have anything to do with the superior performance of these firms?

Table 1.1 World’s top five most valuable firms (March 12, 2018)

Firm	Share price (US$)	Market value (Capitalization) (US$)	P/E
Apple	181.72	922.05B	17.78
Alphabet	1,165.93	809.96B	36.32
Amazon	1,598.39	773.79B	349.92
Microsoft	96.77	745.11B	29.64
Facebook	184.76	536.73B	29.99

Source: Daily online stock broadcasts. Retrieved on March 12, 2018.

Table 1.2 World’s top six most valuable unicorns (February 26, 2018)

Unicorn	Valuation in 2017 (US$)	Total equity funding (US$)	Country
Uber	69B	10.7B	USA
Ant Financial	60B	4.5B	China
Didi Chuxing	56B	17.0B	China
Xiaomi	45B	1.1B	China
Airbnb	31B	3.4B	USA
Meituan-Dianping	30B	8.3B	China

Source: Crunchbase Unicorn Leaderboards. Available from https://techcrunch.com/unicorn-leaderboard/. Retrieved on March 10, 2018.

A fruitful exploration of these questions requires a comprehensive and thorough understanding of management in today’s economy. In particular, it requires an in-depth understanding of two management domains. First, it requires comprehension of business model innovation—comprehension of the building and use of resources to generate, deliver, and monetize benefits to customers in novel ways. Business model innovation has always played a critical role in the performance of firms—witness examples from Xerox in its heyday to Apple, Google, and Facebook today—a role whose significance has increased in today’s digital/sharing economies. Second, exploring these questions requires an in-depth understanding of analytical techniques and core concepts to help entrepreneurs, investors, and managers (1) perform the relevant analyses to assist them in taking more informed decisions, (2) explain to stakeholders how and why decisions were reached, (3) lend credibility to decisions and the people behind the decisions, and (4) better explain and make predictions about organizational performance in today’s economies.

This book is about providing an in-depth knowledge of these two domains—the type of proficient knowledge that managers, entrepreneurs, and individual investors utilize to make informed decisions and, importantly, explain to their stakeholders why and how they arrived at the decisions. This book is about the analytical techniques and concepts that can be used, not only to make and defend business model decisions, but also to explain why some business models are more profitable than others, or why one should invest in one firm rather than another. What is business model innovation, and what are these analytical techniques and core concepts that the book is about?

Business Model Innovation

An organization’s business model is the set of activities that it performs to build and use resources to generate, deliver, and monetize benefits (embodied in products and services) to customers.¹

That is, a business model is a set of activities for creating and capturing value. Therefore, a business model innovation is the set of activities for building and using resources to generate, deliver, and monetize benefits to customers in novel ways.²

It is about creating and capturing value in novel ways. Thus, the innovation in a business model can be from the novelty in the generation of benefits, delivery of the benefits to customers, monetization of the benefits and, importantly, in the building and use of the resources to generate, deliver or monetize benefits to customers. How?

Generation of Benefits

Organizations generate customer benefits by transforming inputs (information, materials, components, labor, knowhow, land, equipment, capital, and so on) into products, services or other objects of exchange that embody the benefits.³ The transformation process consists of performing a sequence of interdependent activities selected to add value at each step— additions that cumulatively deliver a final product or service that embodies the benefits that customers demand.⁴ For example, smartphone manufacturers transform inputs such as technological knowhow, microchips, touch screens, batteries, microcode, and other components into smartphones by pursuing the appropriate R&D, software development, product design, purchasing, logistics, manufacturing, marketing, sales, distribution, and other value-adding activities. The cumulative result of the value added by each of these activities to the inputs results in the smartphone and the customer benefits that it embodies.

Innovation in a business model—when generating customer benefits—can be in the novel ways in which one or more of these value-adding activities is performed or in the ways in which the activities interact. For example, one of the innovations in Apple’s iPhone business model was the crowdsourcing of apps development. That is, rather than developing all the apps internally or having designated contractors develop them, Apple outsourced development in the form of an open call to anyone anywhere in the world that wanted to develop apps for the phone, with no ex ante contracts on specific apps. The apps from crowdsourcing significantly increased the value of smartphones to users and the willingness of customers to pay. The crowdsourcing of apps also changed the rules of the game for app development in the industry and the role that apps played in the profitability of a firm and, importantly, the lives of the users of the apps.

Walmart’s rise to become the world’s largest company (by sales revenues) has also been attributed to business model innovation. The company started out in small towns in parts of southwestern United States and then scaled its activities by building stores in contiguous towns without leaving “holes” behind for competitors to move in and occupy. According to former Walmart CEO, David Glass, “We were always pushing from the inside out,” Glass explained. “We never jump and then backfill.”⁵

Delivery of Benefits

Business model innovation can also be in the way benefits are delivered to customers. For example, in the 1990s, Dell very successfully sold its computers directly to end customers online, changing the rules of the game in an industry where PCs had been sold through powerful brick-and-mortar distributors. In 2001, when Apple also bypassed distributors to sell directly to end customers, it changed t...