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Managing Growth by Business Model Innovation 1st Session, Dr. oec.

(HSG) Patrick Sthler


March 13, 2009

Agenda

Introduction of the course How do you think about innovation? Homework and survey! The Bosch Case: How to grow in a mature and highly competitive market A bit of theory: What is a business model innovation?
Sustaining vs. disruptive innovations

Dr. Patrick Sthler. Leuphana University Lneburg

And now lets have some fun!


Dr. Patrick Sthler. Leuphana University Lneburg

Lets sneak into your heads Homework and Survey

Dr. Patrick Sthler. Leuphana University Lneburg

What insights did you gain from your homework?


Dr. Patrick Sthler. Leuphana University Lneburg

And the winner are

Dr. Patrick Sthler. Leuphana University Lneburg

IT, internet, consumer electronic product companies are seen as more innovative than service, retail or banking, but..
----+ ++ +++

* *

Apple Amazon Toyota Audi Nokia Smart BMW Mercedes Siemens SONY Ryanair Dell IBM Zara Samsung AirBerlin

* * * * *

Otto Versand Lufthansa Aldi HP EasyJet Lidl Thalia ING-DiBa Dacia Haspa Kaufhof

You think that there are more innovative industries like consumer electronics or IT Zara, Aldi, Dell, ING-DiBa redefined their dull industries through business model innovations even in dull industries business model innovation can change the competitive landscape Apple was a business model innovation for the music industry

Deutsche Bank

0%

20%

40%

60%

80%

100%

Dr. Patrick Sthler. Leuphana University Lneburg

business innovators

Sustaining innovations are rated high

---

--

-+

++

+++

first to market value-add bundle of products new customer brand/image more features self service cheaper
0% 20% 40% 60% 80% 100%
7

sustaining innovations are rated highly disruptive innovations are rated low answers show typical behavior of current customers that have difficulties to see advantage

Dr. Patrick Sthler. Leuphana University Lneburg

The Case

Die Ausgangsituation

At the beginning of the 1990s the world in the power tool industry was in perfect order

Established brands in a growing,European market Competition was well defined and Bosch was the uncontested market leader

Dr. Patrick Sthler. Leuphana University Lneburg

Die Ausgangsituation

And then the Chinese came along..

Over 200 new competitors in a short period of time


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Die Ausgangsituation

and the market stagnated at the same time.

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Die Ausgangsituation

Dire consequences: A steep decline in the average price per sold tool and. 5,9 Sales(Mio. units)

3,8 329 88 Sales (Mio. Euro)

307

78

69

65

price in Euro 64 67 62 58

56

52

93

94

95

96

97

98

99

00

01

02

Source: GfK

Do-it-yourself chains in Germany: 1993 bis 2002


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and declining market share for the established brands and exponential growth for the no-names and trade brands
Market Share Powertools
(Germany)

100%

27

29

33 No Names & Trade Brands

95 73 71 67

Established Brands

0% 1991 2000 2001 2002


Source: GfK, Do-it-yourself shops

Strong increase of market share for no-names and trade brands Bosch Power Tools DIY 2002 with a market share of 33% but loss making
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Simple task from your board: Defend market leadership Improve profitability

Which directions should we take?


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How about this crazy idea?

How about making a power tool which is much weaker than the last generation but we make it also very handy and nicely designed. For that we charge a premium and market it to people who are not really into DIY. Great idea, isnt it?

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The solution: Tools for the IKEA Generation


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Here is the solution for Bosch: the IXO, the first power tool for the IKEA generation
Bosch introduces the IXO to the market Instead of following the traditional mantra of better, stronger, faster Bosch used a new battery technology to make tools smaller and more user friendly Instead of going for the traditional market of MMS (men, muscles and sweat) the IXO addresses the soft DIYs that assembles its IKEA furniture but not more Thereby, it addresses a new, previously unserved market of noncustomers The IXO is a typical value innovation that opened up new, uncontested markets
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Shift from technology to user orientation


prior 2002 since 2002

Technologie orientation Building and repairing reliable, very powerful and long-living products

User and usage orientation Building/repair, planning and home decoration

reliable, easy to use products and services

unemotional technology orientation

inspiring people

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The traditional market: MMS or Men, Muscles and Sweat


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New market: Addressing previously non-customers like soft DIYlers and particularly woman

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Changed consumer behavior The first power tool for the kitchen drawer
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Bosch IXO is the world record holder in units sales

IXO was first power tool with Li-Ionen technology IXO is the best selling power tool in the world
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Growing market share and highly profitable


Market share in power tools
(DIY Shops Germany)

27

29

33

35

34

38

38 No Name / Trade Brands

40

38

34

31

29

26

25

Other Brands

Bosch 33 33 33 34 37 36 37

'00

'01

'02

'03

'04

'05

'06

Source: GfK

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OK, lets do some analytics and theory


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Bosch used the new battery technology for a disruptive value innovation
Sustaining innovation = Serving todays customers Extend performance in direction of what todays customers like Use the Li-Ion technology for stronger and more heavy duty tools

Advantages of Li-Ion can be formed into a variety of shapes and sizes so as to efficiently fill available space in the devices lighter than otheroften much lighter. do not suffer from the memory effect low self-discharge rate of approximately 5% per month, compared with over 30% per month in nickel metal hydride batteries (Source Wikipedia)

Disruptive innovation = Finding new customers with different needs Use for a new market segments that values different performance parameters like usability, handiness than traditional customers Performance of tool will be worse in parameters current customers value

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Technology does not create value per se. A sustainable business model is needed

technology

X
enables creates

value

business model

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Lets take a look at the innovation process at Bosch The idea of the IXO was born in the strategic planning process after the board order a strategic review of the Bosch Power Tool division It was clear for top management that they wanted to break the rules of the industry with a business model innovation The approach to the IXO was very analytical starting with a market analysis that showed that there was a market for smaller, weaker power tools Particularly women expressed their need for smaller power tools since they wanted to do some home decoration Top Management came finally up with the idea to create the IXO to serve the market Market research firms later calculated that Bosch will sell more of IXO than any competitor had done before. And then they lived forever happily.

Dr. Patrick Sthler. Leuphana University Lneburg

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The real story: Driven by chance, luck, professionalism and the right people A young product manager (female) fresh out of university had the idea to make tools for her generation The head of product development (engineer) is open to experiments The development costs for a prototype of a power tool is not very high so that market test could be conducted with real products The president of Bosch Grn has no engineering background but gained his professional experiences in the fast-moving-consumer-goods industry

The crisis and later the success of the IXO change the whole strategy of Bosch Grn towards a user driven company Processes were changed to support the new mantra of consumer-orientation What was once a disruptive move for the company is todays business.

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Creating Business model innovations is a creative and analytical process at the same time. There is a reason why god gave us two brain hemispheres

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The definition of a business model

Value Proposition What value do we create for our customers and for other stakeholders?

Value Architecture How do we create the value?

Revenue Model How do we earn money?

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The business model is the DNA of a company

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A business model is the simplified model of a business you can make it as detailed as needed but dont get lost in details
Business Model

Value Proposition

Value Architecture

Revenue Model

For customers

For other stakeholders and value partnenrs

Product-/ Market Model

Internal Value Arch. resources value chain communication channels coordination mechanisms

External Value Arch. customer interface distribution channels customer information communication channels value partners active (suppliers, customers, competitors) passive (supplier of complementary goods

Mix of sources of revenues

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A business model is no strategy: A deliberate change of or an innovation in a business model can be a strategy
Starting points for innovations

Value Proposition

Most business models are constructs of the past All components of a business model can be the starting points for innovation value innovation architectural innovation revenue model innovation In the end all business model innovation must be a value innovation to guarantee success

Architecture

Revenue Model

Business Model

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The strategy canvas of Bosch IXO: A clear profile of the value innovation 6 5 4 3 2 1 0 -1

Traditional brands

No-Name

Bosch

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Where does the value innovation of Bosch start?

Eliminate Reduce Create Raise Matrix Eliminate technology talk cost reduction Create easy of use fun inspiring people

Reduce performance heavy duty men, muscle & sweat

Raise price home decoration

Differentiation
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Dr. Patrick Sthler. Leuphana University Lneburg

A business model innovation is always about differentiation


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We love clear profiles We have only a limited capacity for each category

amazon is online books IKEA is crazy and modern furniture Otto is the mail order house Apple is the cool computer kid

What do you think as a customer about this idea?

Our service is much worse than your competitors. We need your cooperation for transportation, moving and assembling for our service. But for all your hassle, you really get a great price! Great idea, isnt it?

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Scary to be this nail. Where will the hammer hit next time?

Business model innovation is


about being

DIFFERENT!

NO,

REALLY

DIFFERENT!

And you can be innovative in

ANY INDUSTRY!

Contact

Dr. oec. (HSG) Patrick Sthler Partner & Founder fluidminds GmbH, the business innovators Gemeindestrasse 23 8032 Zrich Switzerland Tel: +41 79 770 27 09 www.fluidminds.ch Blog.business-model-innovation.com

Ackknowledgement Pictures in the presentation taken from Toni_V (flickr), Bosch and others Graphics in part from Marty Neumeier, Neutron LCC 44

Dr. Patrick Sthler. Leuphana University Lneburg

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