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The Future of Innovation: Business Model Innovation!?

Thursday, July 20, 2017 - 17:07
Publication
Observador

Innovation is more important than ever for firms to be competitive. However, while in the past product and process innovations were seen as key ingredients, nowadays business model innovation is considered to be crucial as well. Research from IBM shows for example that firms investing in business model innovation have significantly higher growth in their operating margin than firms focusing on process or product innovation. While the importance of business model innovation is widely acknowledged and not new per se, it is not yet clear why this form of innovation seems to drive competiveness so much. Leading management scholars have argued that one of the main reasons for business model innovation’s strong competitive impact is that it centres on the links a firm creates between what technologies can deliver and how customers use them. If a firm manages to build unique links between key technologies and the way customers see these technologies creating value for them, the more the firm will thrive in the market. But how do firms create such links?

The key element of a business model that builds this link between technologies and customers is the value proposition: a firm’s promise or offering to the customer. The value proposition forms the linking pin between what a firm can offer technologically and what a customer is looking to get done. But innovating a value proposition is not easy because customers tend to have clear expectations of what the firms that they like so much should offer. Customers don’t necessarily like surprises. What if a well-respected firm is changing course because it wants to launch a new and potentially disruptive technology. Will customers accept this? Making a disruptive technology’s value proposition attractive for mainstream customers is very challenging.

My colleague Jonatan Pinkse from Alliance Manchester Business School and myself set out to study how firms innovate value propositions for disruptive technologies and how successful they are in doing so. We chose car firms that were offering the disruptive technology of electric vehicles in the US and the Netherlands as a context to study value proposition innovation. Customers are typically very conservative in their choice for cars, so making electric vehicles attractive has proven to be very difficult indeed. Our results, which will be published in the upcoming issue of California Management Review, were revealing.

We found three different tactics car firms use to innovate their value proposition to make disruptive technologies attractive to mainstream customers. Firms either enhance a technology’s unique advantages, they try to compensate for the technology’s disadvantages, or they ‘couple’ the technology with previously unconnected markets to tap into new sources of value. Our findings suggest that many firms only focused on trying to overcome a disruptive technology’s disadvantages by compensating for these by offering additional services. It was quite surprising that most firms rather relied on compensating disadvantages than on stressing or enhancing the novel aspects of a technology. This was especially the case for traditional car firms such as General Motors and Volkswagen who not yet seemed to fully grasp the full value that electric vehicles could offer to customers. However, those firms focussing on enhancing the technology’s unique advantages were more successful in the commercialization of their product than firms that were only compensating. Only Tesla and BMW really focused on the novel aspects of electric vehicles and had much more successful value propositions as a result. Only very few firms tried to couple their technology to new markets but this might be due to the early stages of that electric vehicle industry finds itself in.

Based on our findings we developed a value proposition reconfiguration framework (see Figure below) allowing managers to increase the attractiveness of disruptive technologies in a cost-efficient way and to increase sales. Firms can use the framework to change their value propositions so that disruptive technologies become more attractive. The method helps managers to disentangle all the different features of a technology to see how they should repackage each feature in a novel value proposition by using a combination of compensating, enhancing and coupling tactics.

Because innovation is key for Portuguese firms to stay competitive we are now co-hosting the Best Performer Innovation Award with the Portuguese German chamber of commerce. On our website www.smartcityinnovationlab.com all firms that have business activities with Germany are eligible to participate. The winners will win a ‘Digital Innovation’ workshop jointly provided the Smart City Innovation Lab at Catolica-Lisbon and Roland Berger and will be celebrated at a ceremonial event with an attendance of the president of the Portuguese Republic.

Note: Special thanks to Jonatan Pinkse for his useful comments and suggestions.

René Bohnsack, Assistant Professor

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