itsm guide - extract chapter 6 - innovation management

INNOTRAIN IT

IT Service Management

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Chapter 6

2011

IT Service Management

I

Authors

Dr. Mariusz Grabowski, Universität der Wirtschaft Krakau

Dr. Claus Hoffmann, Beatrix Lang GmbH

Philipp Küller, Hochschule Heilbronn

Elena-Teodora Miron, Universität Wien

Dr. Dariusz Put, Universität der Wirtschaft Krakau

Dr. Piotr Soja, Universität der Wirtschaft Krakau

Dr. Janusz Stal, Universität der Wirtschaft Krakau

Marcus Vogt, Hochschule Heilbronn

Dr. Eng. Tadeusz Wilusz, Universität der Wirtschaft Krakau

Dr. Agnieszka Zając, Universität der Wirtschaft Krakau

IT-Service-Management Innovation management

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6 Innovation management The INNOTRAIN IT innovation method not only allows medium-sized enterprises to optimise

business processes, it also creates the basis for new products and services by freeing up company

resources. But how can new business ideas be developed pragmatically and in a targeted way for

SMEs? We already introduced the topic of "IT-based innovation management" in Chapter 3. The

following chapters build on this, showing how freed-up resources can be used and provide the

framework for what is known as the blue ocean strategy, which systematically sketches out the

most important steps of innovation management. As a practical example, let's now leave Charly's

world and devote our attention to Apple‘s iPhone as a real-world instance of one of the best-known

innovations of recent years.

6.1 Blue Ocean Strategy: idea and concept

As mentioned briefly in Chapter 3, the term "innovation" - in contrast to "invention" - means that a

company is capable of implementing its ideas in such a way that they are marketable (e.g. as a

product, service etc.). The success of innovators is based partly on solid partnerships in the area of

technical development, skilful selection of innovative ideas while taking into account the potential

market size and financial opportunities, powerful and routine procedures for time and budget

planning and one-of-a-kind products that stand apart from what the competitors offer.

The INSEAD Business School in Fontainebleau, France came to this realisation when investigating

150 successful companies of the last century. Based on that, INSEAD developed a method of

innovation in which many existing innovation methods were integrated in a novel way. The

objective of this approach consists in distinguishing oneself from the competition with the products

and services offered and thereby finding mass markets that still have not been developed. These

as yet untouched mass markets were called "Blue Oceans," and the associated innovation strategy

was labelled accordingly as the "Blue Ocean Strategy" (BOS, see also

http://www.blueoceanstrategy.com). A large advantage of this approach consists in the use of a

consistent method from the time the technical product development begins until the new ideas are

implemented in the organisation structures of companies. The BOS innovation process consists of

three main steps:


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Figure 26 – BOS innovation process

1. A value curve analysis based on customer opinion of a current, average product concept in

a certain sector compared to a product concept planned for the future

2. A creative method, which is helpful when researching new markets and adapting product

concepts and is called the "Six Paths Framework"

3. A control method, in which the following is checked:

• Customer benefit

• Pricing structure

• Costs

• Implementation effort

In SMEs, upper management usually controls the development of new product/market

combinations. However, IT managers should also be familiar with the bases of innovation

management, since they can make valuable contributions in the innovation process owing to their

knowledge and experience. The following chapters provide a basic introduction to the BOS

method.

6.2 Blue Ocean Strategy: Value curve method

The basic idea of the value curve method within the BOS consists in making the limitations and

opportunities of the existing and future product concepts transparent. In the following, application of

this method is described using the example of the Apple iPhone.


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Figure 27 – Product offer vs. expectations of smart phone users

When Apple entered the market for mobile phones in 2007, the value curve of the sector looked as

it does in Figure 27 – . On the one hand, there were inexpensive telephones which were frequently

sold via discount supermarket chains like Aldi or Lidl. They had only telephone functions and a

simple user interface and were offered at a favourable price to less affluent consumers almost

without any marketing expenses. On the other hand, at that time there were already premium-class

smart phones such as the Nokia Communicator and RIM Blackberry. These slowly began to

replace the still existing PDAs (Personal Digital Assistants), which were used in addition to

conventional mobile phones in order to be able to achieve a minimum of office work while on the

road. Thus there was a separation between the private and business use of the mobile phone. At

the same time this meant that it was not particularly attractive for personal telephone users to

decide on a phone for the business area, and vice versa. For this reason, in addition to using their

phones for business, most business users used MP3 players (usually an iPod) or digital cameras

for personal purposes on their business trips.

From the BOS perspective, Apple's development department considered which functions they

could eliminate, reduce, raise or create (ERRC method): to achieve innovation with the overall

product concept and market (refer to Figure 28). Apple increased the value of a central function:

the user interface of smart phones, which was a weak point at that time. In 2007, most phones

used for business had a mechanical keyboard, which was usually too small for normal-sized

fingers. In those cases where the keyboard was large enough, the size and weight of the phone

increased to such an extent that no one wanted to carry it around for very long. Aside from this, the

mechanical keyboards offered only static functions and thereby limited the use of the mobile

phones.


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Figure 28 – Product offer vs. expectations of smart phone users vs. iPhone offer

With the obvious idea of transferring the software-based user interface of the iPod to the phone,

Apple achieved a genuine breakthrough with the radical reconfiguration of the smart phone world.

In addition to the software-simulated keyboard, Apple also greatly enhanced the phone with an

MP3 player function. The iPod software was transferred to the iPhone for this purpose and enabled

access to the world's largest online music store, iTunes. 70 % of the software that runs on an

iPhone was taken over from the iPod. However, Apple also created completely new value for

customers within the framework of the product concept. This included, for example, applications

(apps) for consumers with which the iPhone—in conjunction with the software-based user

interface—can be used with great flexibility. Together with the App Store, a counterpart to iTunes

for applications, Apple introduced a powerful platform with which the possibilities for using the

iPhone have been continuously expanded. With this system-oriented approach, Apple also

addressed new types of customers, for example programmers of apps and individual

telecommunication companies, which received the exclusive marketing and sales rights for the

iPhone. This also contributed to Apple being able to reduce its own marketing costs, while

nonetheless reaching a large number of end customers.

But how could all of these ideas for creating values (functions highlighted in blue on the x-axis of

the second figure) be implemented? The BOS makes available a method with which such solutions

can be systematically achieved: the "Six Paths Framework."

6.3 Blue Ocean Strategy: Six Paths Framework

What kind of innovations can IT managers provide to change the value curve of a product or

service? New IT services can be developed which significantly reduce the effort and/or expense for


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providing a product with additional value. For example, product marketing can be supported by

hosting a social network, using viral marketing methods instead of traditional channels of

advertising, such as radio or TV commercials. In terms of the product being advertised, this IT

service reduces the costs of the existing advertising function while also making it possible for the

customers to give interactive feedback. A similar effect can be achieved, for example, by devising

new navigation and scheduling systems to reduce the costs for companies with large sales

departments.

The Six Paths Framework can be regarded as a creative way of thinking, which supports the

product developer in drafting innovative product ideas and solutions. Ultimately there are six

questions to ask in order to find the right "paths" in the context of this framework:

Path 1: Can the product concept be placed in another sector?

Taking Apple into consideration, you can see that this company was able to transfer the product

concept of the iPod. This consisted of a software-based user interface and a music store and was

taken over in the smart phone area with a similar user interface and an app store. Even the pricing

model in which the music industry has to pay 30% for each unit sold was transferred into the world

of the application programmers.

Path 2: Are there strategically important user groups in the market that still have not been taken

into account, for example people who do not use the product?

Level 1: Future customers who will soon enter the market.

Business customers who were persuaded by the possibility of being able to use entertainment

functions even on their business trips, and who already used an iPod.

Level 2: Neglected customers who decided not to enter the market. The availability of millions of

applications used to solve everyday problems (navigation in unfamiliar cities, workflow solutions for

standardised business processes in companies, such as travel applications etc.) produces

pressure to use these environments.

Level 3: Inexperienced non-customers who appear as consumers in various markets.

Customers who previously used MP3 players and webcams separately, but were not in a position

to use, or saw no additional benefit to using, a phone designed for the business user. Today they

use the iPhone environment as a kind of integrated platform for personal use and entertainment.

In addition to the consumers, Apple found other customer groups that were ready to pay for the

products. They also contributed to the business success of Apple in this way:

! Application developers have to pay 30% of their revenue in the App Store to Apple. On the

other hand, Apple makes a high-quality development environment available to them. This


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makes it possible to transfer the code very easily to other Apple platforms, such as MacBook

and iPad. In 2011 Apple projected revenues of 15 billion US dollars from programmers of

apps.

! Telecommunication companies: Owing to Apple's strategy of having only a single provider sell

the iPhone in the initial years, telecommunication providers with the exclusive sales rights

have to pay Apple 30% of their earnings from the contracts.

Path 3: Can I change the chain of buyers in order to change my own profit margin?

With the App Store and the strategy of allowing only one provider exclusive rights, Apple was able

to change the profit margin of the chain of buyers and the chain of buyers itself.

Path 4: Can I change my product portfolio by adding product objects from different sectors?

Apple, for example, added access to iTunes to the iPhone. This increased the degree of utility for

consumers in market segments.

Path 5: Can I change the value of a product for the customer by changing the proportion of

functions to emotions?

With the specific Apple design and the typical presentation of the iPhone by Steve Jobs, the iPhone

brought the familiar Apple philosophy to the smart phone sector. Therefore, no other product in this

sector could compete with the emotional factor of the iPhone. The design and philosophy of user-

friendliness that defines the entire product concept could be considered a real unique selling

proposition on the part of Apple.

Path 6: How will the value dimension of the ERRC grids change in future? Can I assess the

change?

Apple determined that along with the increasing success of the iPhone, the significance of the App

Store would also increase, having a lasting impact on the area of commercial applications.

Therefore, Apple began by introducing the applications from ERP systems from SAP or Oracle that

support top management in their work and ultimately, also in purchasing decisions.

What types of innovations can an IT manager provide starting with the Six Paths Framework? If the

value curve analysis focuses on the quality of a product function and the question of whether it is to

be eliminated, increased or reduced, new solutions and strategies can be developed, for example

using IT services. The following examples from traditional companies demonstrate the strengths of

the questions asked by the Six Paths Framework.

Are there strategically important user groups in the market that still have not been taken into

account, for example people who do not use the product? (Path 2)


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A network of tradespeople from different trades could specialise in particular complete services,

such as renovating balconies. Earlier, if a household customer wanted to obtain these services, he

or she had to hire a blacksmith, a bricklayer and a painter and co-ordinate the various providers

himself or herself. However, because it was a small job, the tradespeople did not have any

particularly great interest in it. After weeks of waiting, many customers withdrew their request for

quotation to take over the renovation themselves. The network of tradespeople was conscious of

this situation and developed a standardised service that included their respective individual

abilities, specific products and processes. To publicise and co-ordinate this solution, the network's

IT experts developed a platform that combined an online store, product configurator and CRM

function. This platform not only advertised the service offer under the network's brand name, but

also took care of all project co-ordination between the customer and the various tradespeople

electronically. Moreover, the network developed a number of additional services that were not of

specific benefit for the individual company, but for standardising and professionalizing these

services. In this way, the business model showed excellent growth, with each tradesperson seeing

an annual increase in profit of 30% due to the services provided by the network. With their specific

services, they succeeded in winning over non-customers as new customers who had previously

carried out this work themselves, even if often in poor quality.

Can one change the chain of buyers in order to change one's own profit margin? (Path 3)

A company of the INNOTRAIN IT analysis sold its products via a personnel-intensive direct sales

channel and via middlemen who offered the products to the end customer. After the analysing the

actual situation of the process for transacting orders, the company reached the realisation that the

sales costs were twice as high as production costs of the product. To survive in this market with

truly standardised products, the customer implemented an online store, as a survey of customers

found that they were willing to make use of a substantially more convenient method of ordering

products via the Internet. After implementing the online store, the company because one of the

most profitable companies in this sector, as the middlemen were no longer necessary and a portion

of the sales staff could be moved to other product groups, significantly increasing their productivity

in sales.

Can I change my product portfolio by adding product objects from different sectors? (Path 4)

A good example for a change of this type is the network of tradespeople described above who

combine services from various sectors to offer the customer a new type of service. Another

example is the combination of a machine tool manufacturer's tools with a special software program

that improves the features of the machine or the service quality. Today, many manufacturers offer

IT server and network solutions that link their machines to other ones in process chains. These, in

turn, can be controlled and adapted using the tool manufacturer's software. In addition, the

machines have an internal memory with a telematics function which, if necessary, transmits alarm

messages about required maintenance measures. As soon as an alarm is received, a service

technician can access the machine remotely via the Internet to determine the level of urgency. If


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necessary, he or she can drive the required spare parts directly to the customer's facility to remedy

any imminent problems, even before they occur. This provides the customer with a high degree of

value, as the desired level of availability of his or her production resources is ensured. Thus

information systems, software and consulting services complement each other optimally to provide

customers with a high degree of additional value. This means that the entire hybrid product of the

availability of the network and the server services and a good version management of the control

software.

6.4 Blue Ocean Strategy: Control methods

After the Six Paths Framework has been used for developing new product and market ideas, the

BOS offers a number of control methods to check the customer benefit and advantages for the

company. The methods include four different analysis tools, which are described in the following

chapter.

Figure 29 - Analysis tools of the Blue Ocean Strategy

Analysing the customer benefit

The customer benefit of a product concept can be analysed by looking more closely at the following

criteria.

Product focus: The product provides customer benefit if it is focused. This means that the product

costs should be low and the business plans for the product should be simple.

Product differentiation: A product is one-of-a-kind if:

! Its value curve differs significantly from the average in the respective sector

! The product strategy differs significantly from a "Me too" strategy

! The product concept is positioned outside existing markets


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! It offers exceptional customer benefit

To ensure that exceptional customer benefit is being offered, the "Buyer Utility Map" method can

be used. The idea is to reconcile the criterion of a product's customer benefit with the buyer's

experiences over the entire lifecycle, from the purchase of the product to its disposal.

Figure 30 - Six utility levels

The six utility levels allow you to check your product for the various phases with the following

questions:

! Does my product have the ability to increase buyers' productivity?

! Can my product be used as easily as possible?

! Does my product increase users' comfort?

! Can my product decrease buyers' level of risk?

! Can my product have a positive impact on the buyers' fun and image factor?

! Is my product environmentally friendly enough so that buyers can use it with a good

conscience and no additional costs for disposal are incurred?

How can the IT department assess its contribution to the exceptional customer benefit? This

question, which arises of each of the company's functions, can, of course, also be directed with

regard to their IT service by the IT department. The example described earlier of the company that

uses an online shop for selling its largely standardised product in the cell with number 2. This is

due to the fact that business customers find it more convenient to order to products as needed with

just a few mouse clicks instead of having to wait for the next visit from the salesperson and fill out

order forms.


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Figure 31 - Six utility levels, example

In the cell with number 1, we discover that an online store and simple configurator make it

significantly easier for the customer of the tradesperson network to convey more detailed

information about the renovation work (square metres, colours of the balcony, length of the

baluster, type of damage to the floor covering) and placing the order compared to co-ordinating the

three different companies. In the cell with number 3, the contribution of the IT service which has

been engaged after the sales services and reduces the customer's risk of failure of the production

line. However, the Buyer Utility Map provides a unique contribution when specifying and designing

IT services, which not only have a positive effect on the customer's business, but also ensure

additional benefit for the product shipped by the company.

If we deal with pricing and cost model of a new product concept, IT services can provide a

significant reduction of both factors. Many innovations in the pricing structure can be introduced by

strategic purchasing of IT services. If we return to our example of selling standardised products

using a web shop, this reduces the process costs for the sale of goods dramatically—while

providing complete flexibility with regard to who hosts the application and service. However, if the

company's in-house IT employees are inexperienced or their number is insufficient, outsourcing

may be useful. In this case, the online store service is leased from a strong partner and integrated

into the network of their partners if the company is in a position to control and manage the service.


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Analysing the pricing

Figure 32 – Analysing the pricing

"Blue oceans" have to be capable of winning over mass markets. Therefore, the price should be

affordable for customers on the mass market. Innovations are frequently targeted only to niche

customers, which means a high price for customer in the market niche. In this case, Settlers can

use techniques from the "me too" companies to make investments in the development of pioneers.

Analysing the costs

The cost analysis of the product concepts in BOS is specified first and foremost by the price that

the customer is willing to pay for a revolutionary product. This price can sometimes differ

significantly from prices for comparable products in the entry-level market. The desired profit is

subtracted from this price to determine the target costs. To implement this cost structure, cost

reduction initiatives can be used, for example to make corporate processes less expensive. It is

worth a try to select new materials or service suppliers with whom the price structure can be newly

negotiated.


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Figure 33 - Analysing the costs

Analysing the implementation effort

To implement the changes and turn the development into an innovation, a good method of change

management is required (for more detailed information, refer to Chapter 5).

itsm guide - extract chapter 6 - innovation management

Documents

based innovation management

method of innovation

term innovation

bos innovation process

associated innovation

existing innovation

universitt wien

wirtschaft krakau marcus