Innovation and business models Group 1 Iiris Eestilä, Stheffany Godoy Garzon, Anastasiia Glebova, Toni Mellin, Müge Tetik

Today’s subject Session Innovation and business models Article Markides, C. (2006). Disruptive innovation: In need of better theory Discussion Discuss the differences between business model innovations and technological innovations, emphasizing the implications for management

Agenda Analysis of the article Disruptive Innovations Business-Model Innovations Technological Innovations Business Model VS Technological Innovations Discussion and conclusion Questions

Analysis of the article What is the purpose of the article? To illustrate that the different kinds of innovations have different competitive effects, produce different kinds of markets, pose radically different challenges for established firms and have radically different implications for managers. How was the topic addressed? Categorizing the concepts and differentiating the notions using previous literature and surveys. What did you find interesting? When to create disruptive business model, how to react to a new innovation with the perspective of competitors with different size and customers. What did you learn? The real life examples and differences between the different type of innovations, challenges and managerial implications.

2. Disruptive innovations Disruptive innovation is innovation in an industry that create new market disrupting existing markets and challenging market leader’s position. Technological (exploiting old technologies in new ways) Business-model (the discovery of a fundamentally different business model in an existing business) Radical product (creating new-to-the world products)

3. Business model innovations Innovations that create a fundamentally different business model in an existing business field. Qualifying as innovation the new business model should either: enlarge the market niche by attracting new customers encourage current customers to consume more should not be mixed up with a new strategy of the firm Business model innovation is not a new product or service, it is rather a redefinition of existing products or services.

Business model innovations Critical performance of the old business models change, which mean different key drivers in operations. Industry Old business model critical performance attribute New business model critical performance attribute Airlines Premium service, meals Price, no frills Computer Speed, memory capacity, power Design and user-friendliness Watches Accuracy and functionality Design Bookstores Chain of stores offering nice environment and service Wide selection, price, convenience Markides, 2006

Business model innovations Management needs to have a full understanding of how their business operates to implement changes that can create extra value Current assets and activities may differ from what is needed for the new business model, which means trade-offs may cause loss of investments cost of gaining new assets and creating new activities Management needs to able to organize and manage a whole new set of situations that they may not have had previous experience of handling. As they are changing the way the firm operates, they also need to educate employees on new processes and operations.

Business model innovations Business model innovations keep growing and achieve market share but they may not replace existing markets. Reason for that may be: new business models attract different customers require different and contradictory value chains by trying to copy the new business model the established firms can lose their current customers. For example low cost flying has been growing since 1995, but it’s market share is no more than 20% of the markets.

Business model innovations New business models may not be superior to the old ones or lead to an optimal strategy for an established company and thus the decision for change should be based on cost-benefit analysis, change in competitive advantage and created shareholder value. Imitation is not the only option, growth can be found in other ways Investing in other markets Differentiation

4. Technological innovations Technological innovations are radical new-to-the-world products such as mobile phones, television or personal computers, which disrupted the existing markets and created a new one New innovations may undermine or make competitors products, complementary competences and assets obsolete, which definitely is disruptive Example: DVD -> VCR Management needs to keep-up with competition and their new technological advancements in order to ensure superiority or parity (depends on strategy) or possibly to change strategic position from mass markets to differentiation New markets still may not lead to extinction of the existing ones, so actions should be considered thoroughly

Technological innovations There are dangers of being the pioneer who invents the technological innovation: Risk of overengineering and spending too much in research and development of the product without gaining value to customer through it, in an attempt to make the product the best possible The competition and late entrants aim to only create a product that just covers customer needs and although isn't the best product it can still be more popular, thus the late entrants may get to the position of generating a mass market and capture market leadership with a lower cost and lower quality product

Technological innovations Big companies should let start-ups and new companies to develop new technologies. Big companies are able to bring these new technologies from niche markets into mass markets due to their greater resources, marketing power and larger distribution networks It should still be noted that this is not in anyway risk-free and easy way to handle disruptive markets This would require for management to keep seeking potential candidates for new implementable technologies and quickly generate required

5. Business model vs technological innovations Business model innovation Technological innovation Definition The discovery of a fundamentally different business model in an existing market Exploiting old technologies in new ways Resources Less expensive to discover -> More common among startups and small companies Needs resource for R&D -> More attractive for big companies Market focus Concentrate on a specific niche Eventually grow to dominate the market Competitive advantage Long term Short period Market share at early stages Little share of the market in the beginning Known brand, attractive for customer in the beginning Imitability Difficult to copy by competitors Easy to copy, buy the patent and use it

Business model vs technological innovations Business model innovation Technological innovation Business focus Focus is on customer Focus is on product Customer value Creates cheaper services for customers Extra functionalities added causing additional increase in the price Business growth Grows—usually quickly—to a certain percent of the market but fails to completely overtake the traditional way of competing Eventually grow to dominate the market until replaced by another technology Competitor response Competitors should find a way to respond it Competitors should accept and exploit it

6. Discussion and conclusion Management implications Management strategies look at different perspectives: For a Business-Model Innovation the strategy efforts are focused on the internal side of the business to provide value to its customers, with lower risk to face competitors or imitators. For Technological Innovations managers develop strategies against competitors since the imitation risk gets high. More direct approach to customers, efforts are focused now more on environment response.

6. Discussion and conclusion Business-Model Innovation: More common between start-ups, due to the less resource consumption for implementation. The growth goes until certain point, since it is not expected to replace traditional methods. Established companies may create a separate unit or work under some exceptions: Entering a new market, current model does not work or scaling a new product. Technological Innovation: Common between well established companies, which possess higher resources and interest on R&D investment. They grow to dominate the market, the strategy to respond is accept and exploit it.

7. Questions