Proceedings of the 41st International Conference on Computers & Industrial Engineering

A STRUCTURED APPROACH TO BUSINESS MODELLING FOR STRATEGIC PLANNING OF INNOVATIVE PRODUCT-SERVICE SYSTEM Ji Hwan Lee, Dong Ik Shin and Yoo S. Hong∗ Department of Industrial Engineering Seoul National University Seoul, South Korea +82 (2) 880-9070 {ralbu85, dshin, yhong}@snu.ac.kr

Yong Se Kim Creative Design Institute Sungkyunkwan University Suwon, Republic of Korea +82 (31) 299-6581 [email protected]

Abstract The business model is receiving considerable attention these days as companies achieve great success, or suffer from failure, through changing their ways of doing business. Most of the existing literature on this subject has emphasized the taxonomy, architecture, or constituent elements of business models, with the aim of isolating their key characteristics. However, only a few of them have dealt with supportive methodologies for designing business models. The present study aims to provide a structured methodology for business modeling. At the core of the methodology lies a design template with which a current business model can be analyzed or reinvented in a systematic manner. The template consists of a set of predefined building blocks that describe a business model’s strategic patterns and/or constituent elements, which were verified through an investigation into more than a hundred real-world business model cases. In addition to the design template, a framework for new business model design is also provided. With the help of the representational schemes and procedures defined therein, one can design a business model in a more structured way. Also, in order to make the ideation process of business modeling more efficient, we develop a system that searches the relevant business model cases. Various business-model cases are collected each of which is analyzed through combination of the proposed building blocks and stored into a database. The structure database of business models ever grows as the system gets in use so that it can help users create more relevant new business models. Keywords Business modeling; Architecture; Building blocks; Design template; Design framework; Morphological analysis; case base system; Strategy; Protocol 1. Introduction Market globalization and the rising expectations of customers have drawn companies into fierce competition. Some innovative organizations are meeting this challenge by creating new values from combinations of products and services. Manufacturing industries are delivering their product functions as services, and service industries are packaging their service processes into various product forms in order to make them more easily accessible by more customers [1]. The product-service system (PSS) is a novel concept proposed as a means of delivering better values to customers by way of the integration of products and services [2]. Much interest in the system has been obtained in both academia and industry since it is believed to be able to alter the basis of competition by delivering innovative offerings while reflecting environmental advantages [3]. However the PSS concept itself cannot guarantee a success in the market. To ensure its successful implementation, a supporting business model should be identified as well. A business model is a logical description of how a firm does its business with its product and service. It consists of interrelated plans for capturing the potential values of product or service and converting them into economic values. Therefore, a variety of decisions for realizing a firm’s business, such as the way of getting paid by customer, the way ∗

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Proceedings of the 41st International Conference on Computers & Industrial Engineering

of delivering a firm’s product or services to the customer, or the specific way of producing a firm’s offering, are required to create a business model. Nowadays, business model is recognized as the influential success factors for enterprise. Interviewing hundreds of CEOs of global companies, Pohle and Chapman [4] ascertained that most of them consider business model innovation to be their major priority. One of the reasons for such attention is the fact that many companies succeeded to differentiate them from their competitors by introducing new business models, even in industries with fierce competition on lowering price or speeding up technology development. For instance, in the printing machine business, Xerox achieves a huge success by introducing new business model. They reshaped their business model by changing their ways of getting paid. Instead of selling a large printing machine to customers, they lease printers with small fixed fee with additional payment for various supplies and maintenance services. With the new structure of revenue model, the company was able to generate the sustainable revenue streams from their customers [5]. In an airline service industry, some of the pioneers restructured their business model by eliminating unnecessary service offerings for reduced fares. After introducing the new business model, they could not only succeed in attracting new customers but also make the superior cost structure because of its simplified activity structures [6]. Contrary to the strong need for business model innovation guidelines, one can hardly find any structured methodologies. Whereas the literature on business models attempts to establish the taxonomy [7-8], architecture [9], or constituent elements [10], most studies have focused only on the question “What elements are needed to establish a firm’s business model?” while neglecting the question “How is an innovative business model to be designed?” This study aims to establish a structured methodology for new business model creation. We apply the morphological analysis in structuring and investigating the possible relationships of the business model. It decomposes the business model within a structure of balanced perspectives and then, for each perspective, identifies a set of predefined building blocks which describe the strategic patterns or constituent elements. Those building blocks were obtained by investigating various real business models and relevant literature. As a result of the analysis, we developed a morphological chart entitled ‘business model creation template’ that can represent the possible configurations of the business model. By mixing and matching various building blocks in the template, a business model planner is able to generate a variety of alternatives, which might lead to an innovative business model. In order to facilitate the creation process, we also implemented a system that supports the business model planner by reminding him or her of appropriate business model cases. The system is operated based on a case base that contains hundreds of real business model cases. If the planner specifies an input query reflecting his or her partial ideas about a new business model, then the system retrieves the relevant cases based on a case matching mechanism. 2. Business modeling methodology: A morphological approach It is noteworthy that lots of interesting business models emerge by adapting other company’s business model [11]. For example, business model of many portal websites is similar to that of broadcast industry in respect that they provide the search engine with varied contents for free in exchange of the attention paid to advertisements. Recently this “ad-based” model has been applied to lots of product and service concepts across various industries such as newspaper, car rental, even the paper copy service. In addition to the way of getting paid by customers, a new distribution channel configuration or efficient cost structure of other company also could be considered in creating a new business model. In this study, we propose the structured methodology with which a variety of business model ideas are identified and utilized in creating a new business model. At the core of methodology lies the concept of morphological analysis. The term morphology refers to the study of the shape and arrangement of parts of an object and how these parts conform to create a whole. It has been applied in disciplines where the construction of formal structure is required such as linguistics, geology or astronomy [12]. Proposed by Zwicky [13], the morphological analysis refers to an approach to solving a problem by establishing a morphology of solutions to the problem. It first investigates all the possible solutions and classifies them according to the pre-defined structure of the problem. When a morphology is established, one could find a best solution by exploring all the possible set of solutions defined on the morphological chart. The approach is well-suited to the problem which requires creative thinking since it could help to discover new relationships or configurations of a solution which may not be so evident or might be overlooked by others.

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Proceedings of the 41st International Conference on Computers & Industrial Engineering

Generic morphological analysis framework

Application of morphological analysis business model creation

1. Problem description (Feature identification)

Decompose the business model into eight basic perspectives

2. Possible solution analysis (Attributes listing)

List up possible strategies and protocols for each perspective

3. Morphological matrix construction

Construct the morphological chart for business model creation

Business model creation template

4. Solution selection/evaluation

Create a business model theme by identifying an appropriate combination of strategies/protocols

Business model case retrieval system

5. Applying solution

Implement the real business model based on established theme

Relevant tool

Graphical scheme for strategy and protocol

Business model Implementation framework

Figure 1. Morphological analysis framework for new business model creation

Morphological analysis is usually applied to the complex problems whose structure has both nonquantifiable and multi-dimensional characteristics. Regarding the characteristics of its domain, the business modeling suits the morphological analysis. Creating a new business model is such a complex problem that it is affected by various factors each of which cannot be represented in simple numerical values. When explaining a firm’s business model, factors from various discipline such as operations, marketing or finance should be addressed together [14]. Also, since the business model should describe the firm’s strategic plan at a conceptual level, qualitative assessment is required rather than mathematical model such as financial statement or operations model [15]. In this study, a five-step procedure for creating a new business model is proposed. Based on Zwicky [13]’s generic framework of morphological analysis, we refine each step according to the business model context. Each step with brief description is presented in Figure 1. The remainder of this section describes the steps in more detail. 2.1. Problem description: decomposing the business model into eight perspectives In the first step, the problem is decomposed into a number of parts each of which represents specific features to be explained. For business modeling, we propose eight basic perspectives through which a business model could be viewed. The eight perspectives - revenue model, cost structure, distribution channel, customer relationship, customer segment, activity configuration, resources, partner network – were adopted from Osterwalder [16]’s decomposition1, because his scheme is considered to provide the most balanced viewpoint, among the literature dealing with generic elements of business model, which takes into account the finance, customer, and infrastructure aspects simultaneously. 2.2. Possible solution analysis: identifying strategy and protocols After defining major features comprising the problem, a possible set of attributes for each feature are identified. In this study, an attribute indicates a possible choice for a given perspective in structuring a new business model. Depending on whether it is associated with strategic or tactical level decision, an attribute is classified into two types - strategy and protocol. The distinction between the two types is based on Casadesus-Masanell and Ricart [6]’s definition on strategy and tactics. According to that definition, strategy refers to the choice of the business model itself through which the firm will compete in market place. In this context, a strategy is defined as an attribute which determines the entire structure or configurations of a given perspective. On the other hand, tactics is the residual choice open to a firm by virtue of strategic choice. In this sense, a protocol is defined as a standard element that can be used in implementing a firm’s tactical decision.

1

The value proposition, which is one element of Osterwalder’s scheme, is not included in our perspectives.

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Proceedings of the 41st International Conference on Computers & Industrial Engineering

(a) Graphical schemes of revenue model

(b) Graphical schemes of “Ad-based” revenue model

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Figure 2. Graphical schemes of strategy and protocols of revenue model perspective

The graphical scheme of each perspective serves as a basic grammar for developing a variety of strategy and protocols. The scheme is based on entity-relationship modeling. Appropriate entities and their interrelationships are visualized together in a diagrammatic form. Figure 2 illustrates the graphical scheme of the revenue model. A firm’s revenue model is visualized as entities (firm, customer, money, product/service element) and relationships (flow of money, flow of product/service element). In this way, the diagram visualizes the way of receiving money from customers together with the way of providing a product/service element to customers. A strategy is associated with the structural configuration of the diagram. A new strategy possibly alters the existing structure of the diagram by adding/deleting/modifying entities or relationships. In Figure 2(b), the “ad-based strategy” is chosen as a new strategy for revenue model. This strategy is obtained from the examples of broadcasting industry where the advertisement provider pays to the firms instead of customers in exchange of their advertising activities. In the new diagram, advertisement provider appears as a new entity. Also, the flow of money is altered (advertiser pays to customer) and the flow of advertisement emerges. On the other hands, a protocol is related to each entity-level decision. It is defined as one of the types each entity may have. Figure 2(c), represents the entire collections of protocols for the revenue model. Product/service-related protocols determine the types of asset and right transferred to the customer. Money-related protocols determine the pricing mechanism. As illustrated in Figure 2(d), the product/service and money elements are characterized by the chosen protocols. In this example, the ownership of physical asset is transferred to the customers. Also, the price of the product is determined by the fixed menu prices. 2.3. Morphological chart construction: establishing the business model creation template establishment In this stage, the morphological chart is established by investigating all the possible solutions for each problem dimension. In order to construct morphological chart for business modeling, we investigated a variety of strategies and protocols for each perspective. Through a comprehensive analysis of real business model cases as well as relevant literature, we obtained the total of 69 strategies and 63 protocols across the eight perspectives. Each strategy and protocol has been rigorously defined based on the graphical schemes developed in the previous step. The morphological chart obtained is depicted in Figure 3. We refer to this morphological chart as the business model creation template. Compared to the traditional approach which defines the generic elements of business model in a topdown manner, the proposed method is more practical since each attribute was derived from the real business model cases. Therefore, the proven ideas from one business model are collected and transplanted in to another business model, which is often the case in a real situation. The structure of the template is flexible enough to allow the new strategies and protocols to be continuously added/updated, as new business model cases are accumulated. 2.4. Solution selection: creating the theme of a new business model In the fourth step, a new business model is identified by exploring the morphological chart. Potential solutions for the business model are formed by combining strategies and protocols from each perspective.

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Proceedings of the 41st International Conference on Computers & Industrial Engineering

Barter

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Revenue Model Strategy Protocol

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Humans

Figure 3. Business model creation template

Similar to the concept development of products, more idea would lead to a more thorough exploration of the solution space. Thus, it is recommended to generate as many business model alternatives as possible (a divergent process). After the business model alternatives are generated, a convergent process of narrowing the set of alternatives might be required. Each alternative needs to be evaluated with respect to numerous criteria such as its potential profitability, robustness, or uniqueness [17]. A more structured process of solution generation and evaluation is left as a further research. The existing business model cases could facilitate the selection of strategies or protocols for a new business model. To this end, we developed a case-based system which supports the planner by providing him or her with the appropriate business model cases. The details about the case-based system are presented in the next section. 2.5. Applying solution: implementing the new business model In the last step, selected concept of the new business model is practically applied and implemented. In this step, detailed activities and resources need to be structured with a view to operating a business model concept. Zott and Amit [18] defines the activities of a business model as the engagement of human, physical and capital resources of any party for fulfilling the overall objectives. Since those activities are largely depends on the specific context or environment of the focal firms, the business model implementation requires the planner’s experience or knowledge about the firms. 3. Case based system for business model creation We developed a case-based system which enables a user to search and visualize relevant business model cases. In order to implement the system, a hundreds of real business model cases were collected in the database. Each business model case is classified into specifying strategies and protocols from the eight perspectives. Moreover, various types of textual and graphical information around each business model case was collected as well. Figure 4 depicts the graphical user interface of the system. To search a business model, a user can select various search criteria such as strategy, protocol or any related keywords. In response to a search query, a set of relevant business models appear on the result list. By selecting one on the list, a user can learn more details about the business model. 4. Conclusions Having a good business model is a ‘must’ for survival in the competitive environment. By doing their business differently, a firm can find the new ways of innovating revenue streams and reducing costs. While the term business model is widely used in both academia and practice, one can hardly find the methodology for supporting the business model creation.

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Proceedings of the 41st International Conference on Computers & Industrial Engineering

Figure 4. Screenshot for graphical interface of system

In this study, we developed the structured methodology based on morphological analysis. The methodology aims to construct the morphological chart (business model design template) that could facilitate the ideation process by providing a variety of patterns or features of business model. We also developed a design support system which can search and visualize the relevant business model cases. There are, however, further research issues to explore. First, the inter-perspective relationship between building blocks needs to be identified. The ideas about the fitness between the identified strategies or protocols could facilitate the business model finding process by reducing the solution space. Second, a methodology to evaluate a given business model alternative should be developed. A balanced evaluation scheme of business model is required for this purpose. Based on the scheme developed, an appropriate scoring and screening methods should also be developed. We are currently working on the improvement of methodology for the generation and evaluation of new business models. 5. References [1] R. Wise and P. Baumgartner, "Go downstream: the new imperative in manufacturing," Harvard Business Review, vol. 77, pp. 133-141, 1999. [2] M. j. Goedkoop, et al. (1999, march). Product Service Systems, Ecological and Economic Basics. [3] O. K. Mont, "Clarifying the concept of product-service system," Journal of Cleaner Production, vol. 10, pp. 237245, 2002. [4] G. Pohle and M. Chapman, "IBM's global CEO report 2006: business model innovation matters," Strategy & Leadership, vol. 34, pp. 34-40, 2006. [5] H. Chesbrough and R. Rosenbloom, "The role of the business model in capturing value from innovation: evidence from Xerox Corporation's technology spin-off companies," Industrial and Corporate Change, vol. 11, pp. 529-556, 2002. [6] R. Casadesus-Masanell and J. Ricart, "From strategy to business models and onto tactics," Long Range Planning, vol. 43, pp. 195-215, 2010. [7] M. Rappa, "Business models on the web," North Carolina State University (ecommerce. ncsu. edu), vol. 13, 2000. [8] P. Timmers, "Business models for electronic markets," Electronic Markets, vol. 8, pp. 3-8, 1998. [9] O. Petrovic, et al., "Developing business models for ebusiness," in International Conference on Electronic Commerce 2001, Vienna, Austria, 2001, pp. 17-19. [10] M. Morris, et al., "The entrepreneur's business model: toward a unified perspective," Journal of Business Research, vol. 58, pp. 726-735, 2005. [11] J. Linder and S. Cantrell. (2000, Changing business models: surveying the landscape. Available: See also: http://www.accenture.com [12] T. Ritchey, "General morphological analysis," A general method for non-quantified modeling, 16th EURO, 1998. [13] F. Zwicky, Discovery, invention, research. New York, NY, USA: Macmillan, 1969. [14] D. Teece, "Business models, business strategy and innovation," Long Range Planning, vol. 43, pp. 172-194, 2010. [15] M. Johnson, et al., "Reinventing your business model," Harvard Business Review, vol. 86, pp. 50-59, 2008. [16] A. Osterwalder, "The Business Model Ontology-a proposition in a design science approach," PhD Thesis, Ecole des Hautes Etudes Commerciales, Universite de Lausanne, Lausanne, Switzerland, 2004. [17] G. Hamel and P. Ruben, Leading the revolution vol. 286: Harvard Business School Press Harvard, 2000. [18] C. Zott and R. Amit, "Business Model Design: An Activity System Perspective," Long Range Planning, vol. 43, pp. 216-226, 2010.

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