The constant tension between profiting from operational excellence and searching for new ways to deliver value need not be an unresolved dissonance for enterprise executives. Creative harmony between the two types of activities begins with an understanding of how to design a solid foundation for an operating model and knowledge of platform capabilities that serve to support the underlying enterprise architecture. Using a design thinking approach, it is possible to holistically map out the various facets of a business model into the components of an enterprise architecture which can then be implemented with capabilities offered by ubiquitous and cloud computing, collaboration platforms, as well as intelligent systems.
This five part series will describe an approach to perform the mapping from the business model to an enterprise architecture which is manifested in a platform ecosystem.
- This Series Introduction serves to provide an executive overview and imperative for understanding the critical importance of business model innovation. The design process and innovation team composition are introduced.
- In Part 2, the Business Model Canvas will provide a visual representation of the key components of the business model and serve to anchor the innovation team’s design on how an enterprise creates, delivers and captures value. Design thinking will inform and guide the creative storming to develop breakthrough innovative concepts.
- Part 3 covers the next step in the process to identify an Operating Model that is well-suited for the business model characteristics. Several types of Operating Models are presented as strategic options in the mapping process.
- Once the Operating Model is selected, Part 4 describes how a Core Diagram (see below) is produced to illustrate the platform ecosystem which delivers the capabilities needed to support the enterprise architecture. The focus of this part of the series will be to provide a clear vision of how these platform capabilities come together in the ecosystem to implement a particular class of Operating Model.
- In Part 5, the series will conclude by discussing how the business model performance can be evaluated by verifying the model hypothesis, tracking metrics, implementing feedback loops, and tapping into insights generated by business value analytics. Adapting business model design based on these insights will be covered to illustrate a continuous innovation strategy.
It is the objective of this innovation series to highlight platform capabilities that enable an unprecedented level of business agility which allows an enterprise to maintain core operations for profitability while experimenting on the edges of its Operating Model to seek out new value streams. This dynamic nature of the enterprise architecture will then be shown to empower executives with significant degrees of business creativity in adapting the business model in an iterative fashion to respond to market feedback and opportunities to maximize value creation.
Succeeding in the Global Connected Economy
Achieving success in the new global market environment requires modern enterprises to consider powerful trends and dynamics in order to be able to adapt and respond at velocities much more rapid than ever before in history. These market events and forces are having an effect of tearing apart the traditional enterprise that does not have the architecture to withstand the constant flux of change, competition, and customer demands. Disruption can happen at any time, in any industry, in any market and can threaten market leaders to such a degree that they can be replaced in a few years’ time. In his book, The Business Model Innovation Factory: How to Stay Relevant When the World is Changing, Saul Kaplan uses the disruption Blockbuster experienced due to Netflix’s business model innovation to coin a term to describe the phenomena: Blockbuster was “netflixed”1. Kaplan offers other examples of entire industries being netflixed by companies with innovative business models such as Apple, Google, and Amazon.
In this environment, there is increasing pressure for enterprise executives to develop dual strategies to preserve the profitable core business while innovating with new products and services on price, capabilities, and value for customers. The two types of strategic development require distinct set of lenses with which to identify the set of challenges and opportunities that must be addressed. One the one hand, robust analytical thinking is essential for optimizing the core but on the other, bold creativity is needed to generate additional market value to facilitate the reinvention and evolution of the next generation enterprise.
Personalization for Mobile, Empowered Consumer
The exponential proliferation of mobile devices and adoption by consumers has led to a phenomenal surge in the levels of interactivity on the Web. The interactivity enables new forms of value creation and social connectivity but also changes the expectations for how enterprise platforms need to be designed to support these emergent behaviors. More than ever, consumers gravitate to content and services that are especially suited to their needs in the context they desire. Preferences and recommendations are common place but consumers’ demands for more social intelligence in service offerings drive the level of analytical sophistication required in enterprise capabilities even higher. Consumers are expecting service providers to not only understand their individual identity but also their social graph and the open world around them. In the open world of consumers, time is also of the essence for delivery of those insights and capabilities to help manage uncertainty and maximize outcomes. Personalized content, capability, and context are all important to deliver if an enterprise seeks to gain competitive advantage in the consumer market.
Long Tail on the Demand Side
The long tail on the demand side illustrates the need for even further personalization in not only the product delivery but also marketing. Consumer segments must be targeted with specialized messaging to drive demand for niche products and services to capitalize on additional opportunities. However, the challenge for developing marketing campaigns for these segments is centered on cost. Enterprises need to build out analytical capabilities to execute these highly tailored marketing initiatives for each consumer segment in an efficient manner. The days of broadcast advertising to the mass market are history and new marketing models based on participatory engagement and social advocacy must be identified in order to enhance innovation possibilities in the long tail. Businesses also need to understand how to cultivate niche markets to gain greater traction in segments that are adjacent or lagging to the target. Transitioning across this chasm is key for enterprises that want to achieve significantly greater market share for their products and services.
Collaborative Real-Time Context for Distributed Enterprise
The massive influence the consumer feedback loop is having on enterprise information technology is evident in the increasing velocities with which data insights need to be delivered. In the digital supply chain, events processed from the consumers’ open world must be handled collaboratively across departments, business units, and even partners at a speed approaching real-time. The collaborative group must observe the context and data associated with the event, become oriented to the situation, decide upon a course of action, and then execute the response. The collaborative entities may consist of knowledge workers, information systems, or a combination of both – and in some scenarios, ubiquitous smart devices. To enable this type of high-speed collaboration and event processing, enterprises need to consider business process standardization and integration in their operating model. The degree of standardization and integration depends on the architecture that best aligns with the business model. The path to this desired state involves an evolutionary process that builds out an ecosystem which satisfies key architectural principles to realize the necessary characteristics and capabilities to enable the collaborative, event-driven, real-time distributed enterprise.
Disruptive Economics on the Supply Side
Another major force that every enterprise must contend with is disruptive innovation within their market segments. Using open source technologies and platforms, smaller and, often stealth, startups achieve significant efficiencies and time-to-market acceleration to deliver their innovative products and services that are faster, cheaper, or better than those produced by the market leader. The important economic factor with open innovation is the fact that those technologies can be acquired and integrated at no cost to the startup or enterprise. These disruptive economics lead to the reality that enterprises must be able to adapt their supply chain to counter threats presented by more agile and fast-moving competitors. The most immediate capability that can be leveraged to respond to these potential disruptors is cloud computing. Cloud computing enables the supply chain to integrate external capabilities into the enterprise core to achieve increased agility, velocity, and efficiencies with reduced capital expenditures typically associated with such initiatives.
Sustainability is the corporate responsibility of every modern enterprise to seek ways to minimize the environmental footprint and cost of doing business. Regulations related to sustainability impact the decision-making enterprise executives must undertake on a global basis and often lead to necessary changes in the business model as well. Executives may initially consider these changes as overhead but when viewed with opportunistic lenses the business model can be adapted so that overall energy costs are reduced thus contributing to longer-term profitability. Business model innovation to achieve greater sustainability provides the enterprise with many benefits including enhanced consumer perception, more efficient supply chain, and more valuable products and services. Consumers are very informed about sustainability when making buying decisions so enterprises’ top line are improved with greener products and services.
Innovation Process and Design Thinking
The process and organization needed to take on a business model innovation initiative must be considered on a holistic, strategic level. Ad-hoc exercises do not yield the potentially transformative results that are achievable using a design thinking approach. Design thinking leverages a set of design practices within an informing over-arching framework that considers the linkages and interactions of the various components of the organizational and information technology structures.
Design thinking is especially suited to address the context-driven, user-centric nature of the challenges posed to succeed in the connected global economy. These skillsets are critical to developing a robust foundational operating enterprise core that can be extended or specialized at the edges to support iterative innovation cycles with accelerated cadences. Design thinking can also empower creativity at the edges of the operating model as well as provide a mechanism to validate hypothesis to ensure the new business model design is achieving the desired outcomes.
Execution versus Search Paradigms
Business model innovation should follow a search paradigm that creatively experiments and tests hypothesis in the elements of the new design to determine whether a new product or service is commercially viable. The search paradigm is inherently riskier and more feedback-oriented compared to the execution mindset necessary when optimizing an established business model. Modern enterprises need to excel at not only improving existing elements of its current business model but inventing entirely new business models whose exact structure and dynamics are emergent.
The business model innovation initiatives may be organized as a set of ventures that operate outside of existing business units but leverage their resources. The management of shared resources across the portfolio introduces new requirements in the organizational and information technology architecture. The successful new business ventures may eventually become integrated into the core operating model so that they can be scaled and optimized to maximize value generation.
Enterprise executives must consider that the management philosophy necessary to run these ventures is considerably different than what is expected for existing business units. Instead of applying a discipline for optimizing execution of operations, the team running a business model innovation venture is highly entrepreneurial, comfortable with risk, challenges the established modus operandi, and creatively pivots based on findings from market feedback. These intrapreneurs are essentially leading startups on the edges of the enterprise to find new market opportunities for value creation. Intrapreneurs apply design thinking to realize innovation for customers.
The team setting out to develop the new enterprise architecture consists of individuals knowledgeable with a systems thinking approach for design. Enterprise architects apply design thinking to deliver transformational capabilities to executive management. The team establishes a clear vision that enterprise architecture is the organizing logic for business processes and IT infrastructure reflecting the standardization and integration requirements of the core operating model as well as the new venture entities. The designers must work closely with both management teams in the established business and new ventures to identify the architecture elements that can be shared and extended to support innovation beyond the operating core. The enterprise architecture team excels at creating the standardization and integration necessary to exploit resources to provide management with the capabilities for optimally running their business unit or venture while supporting innovation processes. The design team must also be able to communicate the benefits of enterprise architecture which include:
- reduced IT costs
- increased IT responsiveness
- improved risk management
- increased management satisfaction, and
- enhanced strategic outcomes.
In the next part of the series, the business model design process will be described using the innovation team organization covered in this introduction.
- The Business Model Innovation Factory: How to Stay Relevant When the World is Changing, Saul Kaplan, Wiley Press, 2012
- Alexander Osterwalder (2004). The Business Model Ontology – A Proposition In A Design Science Approach. PhD thesis University of Lausanne.
- Business Model Generation, Alexander Osterwalder, Yves Pigneur, Wiley Press, 2010.
- Enterprise Architecture as Strategy: Creating a Foundation for Business Execution, J. Ross, P. Weill, D. Robertson, Harvard Business School Press, 2006.
- USAF Colonel John Boyd, briefings on military strategy. (http://en.wikipedia.org/wiki/OODA_loop)
- Reinventing Your Business Model, Clayton M. Christensen, Mark W. Johnson, Henning Kagermann, Harvard Business Review, December 2008.
- Creating Value Through Business Model Innovation, Raphael Amit, Christoph Zott, MIT Sloan Management Review, Spring 2012 Vol. 53 No. 3.
- 2012 IBM CEO Study, Leading Through Connections, IBM Corporation.
- Change by Design: How Design Thinking Transforms Organizations and Inspires Innovation, Tim Brown (IDEO CEO), HarperBusiness, 2009.
- The Storm of Creativity, Kyna Leski, MIT Press, 2015