Modern companies see innovation as a means of turning ideas into money. They’re looking for non-technological ideas, originating from anywhere within or beyond their organisation, to help them innovate. This means that the R&D function is increasingly competing for its role as the key source of new value within companies.

That’s the rub for R&D, which turns money into ideas. Innovation has moved beyond R&D’s traditional domain of technology, process and product, as companies look for ways to improve service content, and to combine products and services to deliver continuing revenue streams. There are also important innovations in the ways that companies do business, and how they structure and manage their organisations. According to IBM’s 2006 study of CEOs’ concerns, companies that focus on business-model innovation do better than those which focus on product innovation.

Some are quite blunt about this challenge to the R&D function. Prof Bengt Järrehult, director of innovation and knowledge management at paper products company SCA, told an EIRMA meeting on business-model innovation: “R&D has no value as such. What matters is what good it is for the company or for society.”

The question for the R&D function is how to respond to this broadening of the innovation frontier. What are the opportunities, and how can they be addressed?

Some definitions

If the IBM study is correct, then companies should be directing an increasing proportion of their effort towards business-model innovation. To understand how the R&D function can contribute to this form of innovation, it helps to have some basic definitions.

Mike Stoneham of Addept Solutions put it succinctly when he said: “What is a business model? Simply put, it describes the problem a business solves and how it does so profitably.”

Dr Alexander Osterwalder, a partner at consultancy Arvetica, set the idea of a business model in a wider corporate context.

“Where does the business model fit in a business?” he asked. “Usually a business can be seen as layers, with strategy at the top, business models below that, business-process models below that and technology at the bottom of the pile. Companies can also be regarded as a triangular relationship between strategy, organisation and technology, brought together by the business model.”

So what is business-model innovation in this context? It is about understanding how the company’s activities fit together and how they can be combined in new ways to create more sustainable value. There are many examples of this kind of thinking. The US supermarket giant Wal-Mart wanted to strengthen its client relationships and concluded that it should start putting health clinics into its stores. In the 1990s, Southwest Airlines reinvented the airline business model, launching the low-price, point-to-point approach that has now transformed travel. Xerox shifted to a leasing model when its high-quality photocopiers proved too expensive to compete on price with lower quality offerings from competitors.

Successful business-model innovation of this sort cuts across most, if not all, of the functions within a business. So where should the responsibility for it lie? There are as many answers to that question as there are companies of which to ask it. But involving the R&D function in some ways looks more likely to succeed.

For example, at steel company Corus, the R&D function is not involved in forming the company’s strategic plans, according to Johan den Hartog, of the company’s research, development and technology (RDT) group. Instead these plans are drawn up by product marketing, sales and customer services groups, based on the company’s manufacturing configurations, existing markets, macroeconomic forecasts, the competition environment, and decisions about current market positions.

The RDT function includes a new business development group, which mainly handles spin-outs of technology that Corus has developed but does not want to take forward. Corus is also hampered by the fact that as a business-to-business (B2B) organisation, RDT doesn’t have direct contacts with end customers, such as people buying cars made with its steel.

“So how can we improve the position of RDT?” asked den Hartog. “Do we need to know more than science? Do we need more customer input? How can we improve our contribution to the strategic planning process?”

In contrast gases and engineering company Linde, has a dedicated innovation management group thinking up business ideas. These have recently included helping to develop the hydrogen economy, and creating laundry systems that use carbon dioxide. This contrasts with its R&D function, which is seen as developing existing technologies.

“The innovation management people act mainly as a think tank,” said Pierluigi Picciotti, head of knowledge management at Linde. “For the carbon-dioxide cleaning system they took the idea to the board, which decided to create a new company to try it. For the hydrogen economy project, the board preferred to keep the idea within the company.”

Templates and cubes - tools for business-model innovation

The crosscutting nature of business-model innovation makes developing a common understanding of the current structure of the business vital to ensuring that all the functions that might contribute ideas or apply their resources can collaborate successfully.

“The logic of your business and the logic of your operation are different, although they are linked,” said Osterwalder. “Having a common language between the different business areas is a start.”

He argues that many of the techniques currently used to describe businesses fall short.

“Very few companies will look at the full picture at the business-model level when thinking about innovation. From my experience, people want to do everything at once.

“Using just words and numbers is like Napoleon going to war without a map,” he continued. “It fails to create a common language. In business-process modelling there are languages and maps but they are too detailed for a true overview.”

His approach is to map a business’s inputs and outputs onto a simple nine-block template, which makes it easy to represent a business model consistently to people of different backgrounds. It also helps abstract single issues, such as the capabilities of a new technology, from the overall issue of making a business work.

Osterwalder demonstrated the power of the template by applying it to Amazon, which is widely regarded as a successful online retailer.

“If you analyse where Amazon’s highest costs are, they include information technology and marketing. If you look where its core competencies lie, they are in information technology and search,” he said. “That explains why Amazon can offer S3, a simple storage service, through which it rents web-server capacity to companies needing lots of storage, and offers its core A9 product search service to other e-commerce web sites.”

Osterwalder has applied the template to an innovation at Rabobank: offering a new service to entrepreneurs. The bank looked at the 'offer’ and 'client’ segments of the business template and decided it could create a new business by offering entrepreneurs an integrated banking and accounting service. The distribution channel is the web, the revenue is a monthly fee, and the client relationship is automated.

The first step to applying the template in your own organisation is to use it to develop a consistent representation of the existing business model.

“If you ask a chief executive officer, a guy from marketing, one from sales and an R&D leader each to draw their idea of the current business model, they won’t create the same picture,” Osterwalder said.

The second step is to assess the strengths and weaknesses of each element of the current business, as highlighted by the template. The third is to renew the business by brainstorming improvements to the way each element of the template is working now. The final stage is to plan ways to turn a new business model, building on the resources exposed by the current template, into a project roadmap for implementation.

Dr Peter Ramaekers, business manager Europe at consultancy SIRRIS, has his own tool for thinking about business-model innovation, based on a cube. Each of the cube’s six faces is used to represent an element of business-model innovation. The issues that need to be addressed at the interfaces between the various aspects of business-model innovation are represented as the cube’s edges.

“What is the cube model?” asked Ramaekers. “It is a thinking tool for understanding key factors in an innovation and their inherent relationships, as well as a checklist of things to consider when crossing an interface between them.

“The success factors for crossing an interface between two faces of the cube include skills, mindset, communication and marketing, organisation and culture, and technology,” he added. “For example, on the interface between external expertise and strategy, companies should consider organisational issues such as IP management, openness to strategic alliances, their willingness to take on global projects and undertake technology scouting, as well as their attitudes to open innovation.”

For and against

Organisations face various constraints on their ability to develop new business models. Some businesses are highly constrained by their capital intensity. For example, at the Corus plant in Ijmuiden, the Netherlands, adding a new galvanising line for coated steel products will cost € 300m.

Other factors can militate against business-model innovation. B2B organisations rely on their customers’ success for their success, so they’re effectively coupled to a chain of other organisations’ business models that can be hard to re-engineer. They need the whole value chain to become more transparent, which means cultural as well as organisational change.

Conversely, there are factors that can help promote business-model innovation. Business-to-consumer (B2C) businesses may find it easier to develop new business models, because they’re close to their end customers. While capital-intensive industries find it difficult to change, their capital requirements may provide such a high barrier to entry of new competitors that the incumbents have more time to innovate than in industries such as fast-moving consumer goods.

Fast-moving companies have their own advantages when it comes to business-model innovation. They can be bolder, because they can try again quickly if innovations fail. And the industries they service tend to expect innovation, which increases the pressure to innovate as well as the tolerance for failure.

By example

Some companies have already taken business-model innovation to heart. The basic business model of gases company Air Liquide is about as undifferentiated as is possible: it supplies simple molecules, derived from air and fossil fuels. Making a business of this means being a technology provider with an in-depth knowledge of the customer's business, so it can get more of its products into the customer's process.

According to Bernard Jamonet, director of new technology opportunities at Air Liquide, R&D is essential to the evolution of the company’s business model. For example, it is working on developing a role in providing hydrogen for zero-emission transportation, despite the fact that current cylinder technology will only support pressures high enough to give vehicles a 200km range.

“I'm convinced that in 20 years' time your car will not be fuelled by hydrogen,” said Jamonet. The company's response has been to try and find a market to make hydrogen-based power generation work now. In 2000, it supplied a North Pole explorer with a zero-emission hydrogen-powered electricity generator.

“This gave us a proof of principle and some learning,” Jamonet said. “From that we derived emissions-free, silent generators for powering night-time filmmaking in city centres. We’ve also supplied similar power systems for forklift trucks operating underground, as well as providing power for GSM masts in remote areas. We have done all this to solve the chicken and egg problem of the excess cost of fuel-cell membranes, which is caused due to a lack of a large market for fuel-cell membranes.”

Air Liquide has also been driven to change its business model by customer pressure, for example from the semiconductor industry. It started by selling carrier gases and specialty gases for use in wafer fabs. The customers then asked Air Liquide to deliver some of the manufacturing chemicals as well, so it developed the expertise to do this. Then it had to develop gas cabinets for working with its gases, and liquid cabinets for working with its chemicals, as well as inventory management systems, detection systems, and gas distribution, control and exhaust treatment systems.

“Finally we added the people to operate the systems for our electronics customers. We now have 80 people on site around the clock on the STMicroelectronics site at Grenoble, and 250 people on site at the Texas Instruments fab complex in Dallas. We also have 10 people in Grenoble and 20 in Dallas doing R&D.

“In my company, R&D is essential to support and develop the business,” he added. Being close to the customer is vital. “I joined the company 31 years ago on the 15^th of December and visited a customer on the 17^th. Our strategy is to stay market and customer focused, in close collaboration with the business lines. We evaluate each opportunity in terms of the value it can create for our customers and ourselves. And we try and find the shortest way to make it happen.”

Econova is another company that makes R&D a part of its developing business model. The private Swedish company focuses on recycling waste in an environmentally friendly way. It works with biofuel ashes, sludge from pulp mills and water purification plants, sawdust, wood chips and bark.

“There’s nothing so expensive as transferring waste from one place to another,” said Dan Winberg, technical and international market development director for Econova. So the company tries to create eco-cycles which gather and reuse waste within a local community.

“Our target is to find ways in which a customer can avoid disposing of any waste in the local eco-cycle. We use R&D to integrate recycling plants with the customer’s plant, producing waste that has the best properties for further treatment, and finding ways of transforming some of the waste into a product that can be sold on the local market,” he added.

R&D is the key to developing new business models along these lines, applying sound economic principles. For example, in Viana, Portugal, Econova has been involved in capping an 8ha landfill, and ended up asking other local waste providers to offer their waste for use as a capping material. At a mill in Braviken, Sweden, Econova created a business-to-consumer business to sell its output waste as garden compost.

“Econova believes that traditional interfaces between seller and buyer, and options beyond traditional agreements, give great possibilities,” said Winberg. “R&D and sales should work in close cooperation with customer.”

Structuring for business-model innovation

If the R&D function is successfully to address business-model innovation, it needs to understand what it is and how it works. Current understanding of business models varies between companies, industries and levels of seniority. In the pharmaceuticals industry, for example, an R&D director is likely to have a good knowledge of the company’s business model, and project leaders less so. Getting the R&D function involved means educating down through the ranks.

“A lot of it is down to the individual and corporate culture,” said Stoneham at Addept Solutions. “Most R&D people are clued up about business models because they’re such soft targets when times are tough. But do they use this knowledge to make the R&D function more relevant to the company?”

This all assumes that R&D can actively contribute to new business models, rather than simply servicing a need defined elsewhere. There are problems, of course. Sales teams tend to want to sell what’s available now, forcing unrealistic deadlines on to the R&D function. But R&D people are usually deeply engaged with their subjects and often want to see their ideas put into widespread use, so they can be a rich source of business model ideas if ways can be found of unlocking that talent for this purpose.

Järrehult at SCA said: “Our idea collection system has been enlarged to ask about business model ideas, and half of those have come from R&D.”

Maurits Van Camp, team coach for pyrometallurgy at Umicore, says that his company has an ideas development system that gives people 100 days to create a business plan for their ideas. The company has had three prototype ventures since 2003, two of which have become real products and all of which came out of R&D.

At Outotec, a metals processing company, research people are involved throughout the process of developing a new product line, all the way through to plant start-up, according to Dr Kari Knuutila, senior vice president and chief technology officer.

“The motivation of R&D people is linked to involvement in the sales project,” he said.

Osterwalder added: “Knowledge comes out when there’s more cross-fertilisation and cross-disciplinarity.”

Customer facing

Access to customers is an important part of enabling this cross-fertilisation to happen. Some organisations have reservations about letting that happen, because they fear the R&D people will give away secrets or affect sales by promising something that will take years to deliver.

“R&D people are too talkative,” said Järrehult. “The solution is not to keep them away from the customer, but to teach them the business skills to understand what they should and shouldn’t say.”

Anne Goldberg, technology knowledge manager at Solvay worries that customer contact can lead to the wrong sort of pressure: “If R&D people shortcut the usual internal contacts, it can create operational pressure from the customer on them which is incompatible with the objectivity that R&D needs.”

There are ways around these issues. Teambuilding exercises, workshops, career planning and common training can strengthen relationships between sales and R&D and therefore with the customer. R&D people can visit customers with salespeople, so that commercial issues can be better managed. Or companies can work with product development consultancies to access customer insights in a 'safe’ environment.

Culture

Many R&D organisations will need to change their cultures if they are going to take a role in business-model innovation, with its broad reach within and beyond the organisation.

“R&D is often in the back room and if someone needs something they open the door, put the question and then come back later and ask 'do you have an answer?’” said Dr Eric Rudolph, formerly head of knowledge and information management at Corus. “Is business-model innovation an opportunity or a threat to R&D?”

“Knowledge of markets, customers and the value chain has to be combined with internal processes and products,” he added. “Then the question becomes how do managers combine knowledge for best results?”

There are other cultural issues. What role should a chief technology officer play in an organisation seeking business-model innovation? Should a much more broadly drawn role evolve, such as a chief innovation officer? How do you share responsibilities and protect secrets in the more open culture that business-model innovation may demand?

There’s another important factor that needs to be recognised about business-model innovation - it often happens in crisis conditions.

“Today, business-model innovation in big companies often only happens under conditions of urgency, in fire-sale situations,” said Osterwalder.

R&D organisations that want to flourish for the long term need to be prepared to take an active role in helping their companies change the way they do business.

Järrehult put it another way: “The only way to get recognition of the value of R&D is to put it somewhere where the link between R&D success and business success is more obvious.”