Sensing – identifying opportunities

Mezger (2014, p. 438–439) emphasized the importance of recognizing different kinds of oppor-tunities at the first stage of BMI. Firms can generate capabilities to identify changes in technology, markets or business models which may start the ideation. Resource- or market-based practices are common elements to analyse, but business models do not usually receive such analysis in BMI research. Companies which specifically analyse the successful business models of competitors and across industry boundaries have an excellent ability to sense potential opportunities. Analysis can focus on a broader set of companies than just the main competitors. It may also centre on only a few components of a business model, such as revenue models or value propositions.

‘Sensing’ means activities to observe new opportunities by scanning, learning and analysing, thereby enabling the generation of new business model ideas. Companies should invest in this activity if they want to make this a continuous and effective process. Identifying and shaping new possibilities require the constant exploring of different markets and technologies. New commer-cialization opportunities might arise from technological aspects or learning about customer needs.

A profound sensing capability also involves understanding latent demand and structural changes in the ecosystem. (Teece 2007, p. 1322) To sense various opportunities and threats regarding the business model, organizations should recognize change in their internal and external environ-ments (Mezger 2014, p. 438).

Business model sensing requires individual as well as organizational capabilities to recognize opportunities. Relevant knowledge and learning capacities may enable efficient sensing by the organization; the sensing responsibility should never be left to only a few people. Individual cog-nitive and creative competencies are important, but organizations should have systematic sensing processes to scan, and interpretative and creative processes to prevent it from becoming vulnera-ble. These processes may help an organization to collect and create new technical information, monitor customer needs, analyse competitor activities and seek new opportunities using exoge-nous science. Internal hypothesis tests and identification processes are required to notice new opportunities in terms of technology or markets. (Teece 2007, p. 1323) Osterwalder and Pigneur (2010) consider getting the right people and information as the most important factors at this early stage. It is vital to get proper expertise to ensure a successful process. With entrepreneurial firms, inherited knowledge is the main capability which helps to understand the market environment and other factors which make it possible to succeed. (Sosna et al. 2010)

Osterwalder and Pigneur (2010, p. 252) have recommended ‘deep understanding of potential tar-get markets and looking beyond the traditional boundaries defining tartar-get markets’ as critical success factors in this phase. It is also important not to overestimate possible ideas at this early stage. Viable business models are usually much more difficult to design and implement than they

are believed to be. Sometimes even great business models fail and, by comparison, fragile busi-ness models thrive, depending on how these are implemented and managed. (Osterwalder et al.

2005, p. 13) It can be impossible to tell which design experiments will work. The BMI process is highly path dependent, and experiments influence both internal processes and processes across firms. (McGrath 2010, p. 254)

Business model innovation is always about the development of a new business model, or changing a current one or some of its elements. Hence, it is essential to recognize the change drivers, such as shifts in regulations, technology, the competition or the markets, which have the ability to change the entire ecosystem. (Frankenberger et al. 2013). It can be challenging to understand the profound role of the ecosystem, for example, how its participants interact, depend on each other and create value. Analysing the external business ecosystem is not the first step of a linear inno-vation process. Instead, a real understanding of the ecosystem usually comes from continuous tests and improvements. Established companies typically start to develop new business model experiments when they encounter difficulties, which is usually due to too slow practices in a rapidly changing environment. (Sosna et al. 2010, p. 391)

Traditional R&D activities are mostly focused on a ‘local’ search and internal processes. These are essential but too narrow in terms of business ecosystems. Sensing processes should gather information from the ecosystem in order to stay up to date. Collaboration with active members can benefit everyone’s innovative practices. BMI usually consists of combinations of comple-mentary innovations and for that reason external collaboration is a prerequisite and necessary to build or reconfigure the entire business model. (Teece 2007, p. 1324) It is important to communi-cate with and collect feedback from stakeholders to identify different kinds of benefits. During the continuous innovation process, firms should explore the potential of hopeful visions by putting these ideas to the test. Only then it will be possible to see reactions to changes. (Coles & Coles 2004) These experiments should not require too much in terms of resources from the organization or its stakeholders, compared to the size of the ongoing business (Sosna et al. 2010, p. 391).

Stakeholders may react to efficiency or the way the new model is delivered, which should be examined. New business model changes should not be introduced before earlier modifications start bringing regular improvements. (Coles & Coles 2004)

A lack of communication and testing can lead to many traps at this early stage. Osterwalder and Pigneur (2010, p. 252) have proposed over-researching and biased research as key dangers in analysing the business environment, potential customers and other elements in terms of a business model. The preliminary design process can start from market research, interviews, studying cus-tomers’ preferences and analysing competitors. This mapping may lead to overblown research, where customers and other stakeholders do not give real feedback. Excessive research may not

serve the objectives and purpose of understanding key business model elements. Also, collecting information from only one source or with a narrow approach may lead to biased research.

Business leaders should have a profound understanding of how the ecosystem operates and how their business model fits into the external environment. The main challenges are related to identify the needs of the actors in the ecosystem and the change drivers. The needs of different players, and especially the needs of customers, can be the starting point for business model development.

Customers can be very useful in the innovation process by providing an external perspective for ideation and giving instant feedback. Also, other key stakeholders may guide the process. For example, the reaction of competitors, suppliers and investors after implementation can offer ad-vice for the future. (Frankenberger et al. 2013)

New innovations are rarely successful if they do not properly meet customer requirements. De-velopers must understand customer needs in order to successfully commercialize innovations.

User-led innovations, typically with digital products, are an efficient way to keep customer needs in the development process. Active customers may offer insights about product specifications and provide suggestions for further adjustments. (Teece 2007, p. 1324) There should be clarity about value creation as foreknowledge to the BMI process. Successful business models are created to fulfil accurate customer needs. The focus should be more on exploring new solutions to customer problems than on intrinsically searching for potential innovations. As the innovation process evolves, the focus shifts to value capturing. Clarity can be achieved by discovering customer needs and by suggesting new value propositions. (Euchner & Ganguly 2014)

Dunford et al. (2010) have described the initial design process as clarifying the objective, to have a clear picture of the core business model elements, for example by offering simplicity or low cost. It can be appropriate to start from core principles which set the criteria for the entire business model. The authors noticed that the design of the business model and its applications evolve to-gether, clarifying the main elements. Companies should follow an ongoing process where they design and test potential improvements. At first, they should understand their current business model, to maximize the benefits for all stakeholders in the business ecosystem (Coles & Coles 2004; Pynnönen et al. 2012; Cavalcante 2014). Focusing on customer value and the current busi-ness model should be the number one priority for a dynamic BMI process and therefore it should be the ‘first stage’. Customer preferences might change quickly and there should be a simple way to monitor these changes. Agile methods may help to understand customer value elements and changes in these. (Pynnönen et al. 2012)

Suppliers may also support the innovation process by providing technology and other resources which enable companies to stay ahead of the competition. Innovation capabilities can cascade from suppliers to companies upstream. It is therefore possible to benefit from integration with

downstream players. Companies should have processes in place to stay connected with their sup-pliers. ‘Continuous and rapid design around new technology/components developed elsewhere can itself be a source of durable competitive advantage.’ In addition to customers and suppliers, the entire business ecosystem, including complementary institutions, companies and individuals, should be taken into account when analysing external stakeholders. It can be a total waste of time to search for and review external collaboration with every possible interest group, and whenever potential and interesting options emerge. Managers should concentrate scarce resources and fol-low a strategy without excessive diversification in research. (Teece 2007, p. 1324–1326)