Business Model Alchemist

While moving homes has dark sides it also has bright sides: In a huge pile of unread and half-read magazines (who doesn’t know that phenomena I stumbled across the September issue of Wired. The cover story was about the “rebirth of music” and triggered a lot of ideas in my mind.

First of all, I realized at what point the music industry is currently a huge business model design laboratory. It’s not new that old and new business models are clashing in this domain, but the richness of all these new business models is astonishing. I believe it might be the industry with the most different types of business models competing against each other these days.

Sedondly, while reading I understood that other industries MUST follow the evolution of business models in the music industry if they want to be prepared for business model innovation in their own industry. I’m not only talking about intellectual property rights (IPRs), peer-to-peer (P2P) music sharing platforms and lessons for the film industry. I’m talking about genuine insights into business model innovation.

Finally, The music industry transformation is giving us lessons about business model innovation in many different building blocks, such as distribution channels (mobile phones, P2P, USB-sticks, TV series, MySpace, game consoles, …), service & product innovation (free remixing platforms, ringtones, communities of interest, recommendation engines & music DNA…), revenue streams (various forms of advertising, live-streamed concerts, …) and so on.

One of my favorite business model innovations picked from the several Wired stories is the one where movie theaters offer live streaming of sold-out concerts on their big screens (Big-Screen Bands).

With help from National CineMedia, your local cineplex can show live footage from a sold-out concert in New York City. Sure, you may not get away with smoking a joint and sipping a flask, but for $15, you’ll get comfy stadium seating and a view of every wrinkle on the aging rocker’s face.

WOW – this simple innovation involves new value added services, new distribution channels, reducing fixed costs, partnerships and new revenue streams. My advice: go out and learn about the business model innovations taking place in the laboratory of the music industry today – then apply the lessons to your own field.

Merry Christmas, Alex

I found reading this short interview on business model innovation with Clayton Christensen, the renowned Harvard professor and author, quite worthwhile. He offers some trenchant advice on business model innovation. Even more important: It shows how hot the topic currently is. I saw Christensen speak at a conference a few years ago and he certainly isn’t a person who jumps on a topic just because of the buzz.

The most interesting part is Christensen’s answer to the question if the creation of new business models are substantially different from the innovation of new products or services. His answer:

Yes. Most new products and technologies can be sold through the existing business models. In fact, the corporation will reject process or resource allocations that don’t fit its business model.

A powerful reason why companies aren’t good at business-model innovation is because the kind of products that are required to be the seed of a new model can’t get through the resource allocation process.

This is food for thought, particularly for successfull companies…

I’m now at over 100 blogposts, which means that many hours went into this blog about business model design and innovation. While I started this blog more as an experiment and as a thinking & knowledge base for myself more and more readers and visitors joined the journey.

Now I even feel the pressure of writing something useful for “my public”. However, since I have to earn a living (and want to spend time with my family: 2 kids!) I allow myself a maximum of 1-3 hours per post – even if it is at the expense of quality.

To get things more focused and offer you real value I would be interested in your feedback about this blog. I already receive a lot of emails regarding the business model concept and some compliments for the blog, but I still get very little feedback helping me improve my blog.

Let me ask you some questions:

• Which parts of my blog do you most enjoy or hate?
• Are the templates I make available useful?
• Do you like the webcasts?
• Do you enjoy the less conceptual postings – e.g. news style?
• What would you want to see more on my blog?
• Can you apply the things I write about in your daily work?
• Did you ever use the search function on my blog?
• Anything else on your mind (related to this blog

Please take a short break to respond to some of the above questions. It would help me improve this blog and increase the value of the time I spend writing (-> Return on Time Investment – RoTI)

Today I did a webcast with Etienne Eichenberger, co-founder of WISE (and formerly at the World Economic Forum WEF), to talk about his fascinating start-up.

WISE stands for “Wealthy Individuals and Social Entrepreneurs” and has a really interesting business model. As the name indicates the organization connects wealthy individuals that want to “invest” in a social cause with social entrepreneurs that manage interesting projects. What I find fascinating about WISE is that it is a commercial organization with a social goal, which seems to leverage the best of the private and the development sector (e.g. due dilligence, key performance indicators, etc.).

Personally I am fascinated by Etienne’s organization because it combines the sector I have worked in (health & development) and the sector I am working in now (wealth management). His company seems to satisfy the rising demand for venture philantropy, which is rapidly becoming an indispensable part of the offer of private banks and wealth managers.

I wish Etienne and his team good luck with his venture. I am convinced he will make a difference in the health & development sector and at the same time satisfy the social needs of wealthy individuals. Quite impressive!

Yesterday I was interviewed by Richard Hunter and Bob Akerley of Gartner in the context of a project on “communicating the business value of IT”. They were interested in how Chief Information Officers (CIOs) can effectively communicate the nature of a business model because their research led them to the conclusion that:

Executives who do not understand the strengths and weaknesses of their business model have poor appreciation for the value of information technology. Because they don’t understand the business model, they don’t understand how technology (or almost anything else) can be used to improve it.

Quite an interesting departure on a topic that Their first question was whether a business model should be perceived and documented in terms of processes because many CIOs think in terms of processes—inputs, outputs, and transformations.

My opinion:

• NO
• To me there is a clear distinction between a business model and a business process model. The latter is mainly a consequence of the former. A business models is about business logic (what do we do, with whom, how do we make money), while a process model is about business execution (how do I implement something best). As such it should be built on the basis of the business model
• Both models aim at different goals. Business process models are a very good tool to improve efficiency, while business models are a very good tool to improve efficacy and competitive positioning.
• In the 90s business process re-engineering BPR and TQM were a big topic. Today innovation is the big topic. The last IBM Global CEO Study, for example, highlights the importance of business model innovation as a strategic differentiator. Sometimes I call this business mode re-engineering BMR.
• The CIO’s can contribute to both BPR and BMR. However, to communicate with senior executives about technology-based business model innovation business processes are the wrong language.

Richard and Bob also asked me how a CIO and his team can understand and document the business model of a company? Of course I’m biased and recommend using our simple business model template with 9 building blocks to describe the business. Then the question of how to best gather the relevant information about the business model remains. To me there are basically two approaches (of which I prefer the second):

1. The interview approach: A team of the CIO’s office tries to describe the business model by interviewing the relevant people (e.g. for distribution channel design, value proposition, revenue streams, etc.)
2. The workshop approach: The CIO gets the relevant people together in one or several workshops to describe the company’s business model or aspects of it. For example: he assembles a group that can elaborate the company’s different value propositions (e.g. with a group method like the strategy canvas – by using our template – from Kim & Mauborgne’s book blue ocean strategy).

Once the business model has been sketched out it’s much easier for a CIO to analyze and describe how IT contributes to a company’s business. The visualized business model will allow him to outline which applications and what IT infrastructure the business model builds on. At this point he as a perfect tool in his hands to communicate with CxOs about the business value of IT because he has made it explicit.

Finally, the visual model will allow a CIO and his department to analyze how they can improve the business model through IT. Experimentally we do this at arvetica and in our research by describing for each business model building block which application portfolio and which IT infrastructure services make a contribution. But that’s enough material for another blogpost.

I’m a little bit obsessed with the question of who could become the next Skype of private banking since I started doing research in this area. I’m wondering if the private banking and wealth management sector could be just as vulnerable to disruption as any other “ordinary” industry (e.g. Skype in the Telecom market, EasyJet in air transport, …).

As a reminder a short quote summarising the concept of disruptive innovations which was introduced by Harvard Professor Clayton Christensen:

A “Disruptive Innovation” is a successfully exploited product, service or business model that significantly transforms the demands and needs of a mainstream market and disrupts its former key players.

There are some arguments speaking in favor of a possible disruption of private banking and wealth management incumbents, such as UBS, Credit Suisse, Pictet, HSBC and there are arguments speaking against it. Two reasons why disruption could happen:

1. The sector is very lucrative with high margins and growth rates – this naturally attracts potential insurgents. I remember Niklas Zennström from Skype telling me in an interview: “We deliberately chose to disrupt the Telecom sector with our technology because it looked very attractive”.
2. The big actors in this sector admit competition, but they don’t seem overly concerned by it. Why should they? Their returns are still stellar and the market is growing. However, this has led to a certain sluggishness that makes them vulnerable to potential insurgents coming from outside of their radar screen.

Two arguments speaking against a potential disruption:

1. Brand names reflecting stability and security are still of enormous importance in private banking and wealth management. This constitutes an important barrier to entry for new and upcoming actors (more in some regions like Europe than in others like Asia).
2. Over time switching costs increase in this sector. Once a private banking relationship has been established for over 2 years the probability of a client defecting decreases substantially. This can be explained by the personal relationships and the knowledge in terms of wealth management that a bank builds over time for each of their clients.

Obviously, we can’t know how private banking and wealth management will look tomorrow, since we don’t know the future. However, we can launch a search for potential insurgents or at least promising new players. To search, find and analyze these potential insurgents we can start by asking ourselves a number of questions based on the characteristics of disruptive innovations and study if they could apply to private banking:

• Disruptive innovators begin their success by meeting the unfulfilled needs of an emerging or niche market.
  Private Banking: What are the unfulfilled needs and niche markets?
• Disruptive innovations are characterized by innovative performance attributes that are not initially appreciated by mainstream markets, though they are highly rated by niche market customers (e.g. Skype). Mainstream market customers as well as competitors value different performance attribute sets and therefore view the innovation as substandard.
  Private Banking: Which innovations (products & services, business models, technology, processes) are perceived as substandard?
• Niche market adoption of disruptive innovations enable investment in the product, service or business model to increase its performance. They can then create or enter new niche markets and expand customer numbers.
  Private Banking: Which disruptive innovations have already conquered a niche market and are expanding customer numbers?
• As awareness of the product, service or business model increases, they change the mainstream market’s perception of what it values.
  Private Banking: Is any disruptive innovation already changing the incumbents’ market?

In conclusion, even if private banking and wealth management proves resistant to disruption each player has to ask himself how the playing field might look tomorrow. In that light questioning the state of private banking and wealth management is definetly not a waste of energy…