Business model innovation: How exponential technologies can be disruptive in your industry
Every day we open the newspapers and read about exciting new, exponential technologies that have the potential to “disrupt” an industry. Artificial intelligence, 3D printing, “artificial” meat, autonomous cars, robotics, virtual and augmented reality, nanotechnology, and on and on. However, the excitement usually wanes quickly after the huge challenges to adapt those technologies to create real and concrete products and services are exposed. This includes the mammoth task of convincing customers to abandon their traditional solutions, and embrace a new value proposition that can be scaled up and become mainstream. It seems that we are amazed by the technological advancements, but we “cannot get them to work for us yet”. The missing piece in this puzzle is business model innovation. New technologies are a transforming force and a necessary condition to disrupt an industry, but it is business model innovation that is the enabling factor which allows the technological revolution to become the new reality. In this article we provide some insights to the power of business model innovation in an industry, that is always evolving and on the cusp of new scientific discoveries: Healthcare. Our conclusions however are not singularly applicable to healthcare. We believe they could be applied to any industry, and this will be explored in future articles.
First, let’s look beyond the buzz phrase “exponential technology” to understand what the phrase means. Arguably there are two components: on one side, “exponential”, meaning something that is rapidly accelerating, say doubling in size or alternatively halving in costs. Exponential technologies include artificial intelligence (AI), augmented and virtual reality (AR, VR), data science, digital biology and biotechnology, digital medicine, nanotechnology and digital fabrication, networks and computing systems, robotics, and autonomous vehicles. On the other side, it is a technology that is now at the point where its price-performance makes it possible to be incorporated into solving today’s problems in ways that were not previously possible.
Although it is possible, getting the full value of exponential technologies is not yet a reality. The only way of making the application of exponential technologies a reality is by using their main catalyst: new, innovative business models — business models as the rationale of how an organisation creates, delivers, and captures value. Only if exponential technologies are applied in the creation, delivery, or capturing of value, then their incredible benefits and impact come to full fruition. Only if new innovative business models form the means, then exponential technologies can actually disrupt an industry, and eventually help solve humanities’ biggest challenges.
As a way of visualising the power of business model innovation, let’s take Osterwalder and Pigneur’s “business model canvas” framework from their best selling book “Business model generation”, which has become the widely established framework to analyse and describe business models across industries. The graph below highlights the nine different elements of this model.
The nine elements highlight how a business creates (key activities, key resources, key partners), delivers (customers, customer relationships, channels), and captures (value proposition, costs, revenue) value.
If one wants to leverage exponential technologies, the question is clear: in which area of the business model canvas can they be used to enhance, improve, or enable a superior value proposition. There are sectors, where this is more “obvious”, e-commerce or social media being examples. But to show the potential of applying exponential technologies, the authors chose a different industry, where it is less obvious, but equally powerful: Healthcare. Across five of the nine elements of the business model canvas, examples are given on how innovative business models, with the power of exponential technologies, can transform this exemplary industry.
Value Proposition: “Provide patients with what they need. Not what you get paid for.”
Michael E. Porter and Robert S. Kaplan criticized in their HBR article “How to pay for Health Care” that the current “fee-for-service” model for paying for healthcare services rewards quantity but not the quality or efficiency of medical care. They suggest instead a system of “bundled payments” — which is virtually present in all types of non-healthcare related products and services, where customers pay a single price for the whole package. When purchasing a car, customers get the car, not the motor from one, the wheels from another, and the antenna from a third supplier etc. Integration of multidisciplinary care creates accountability for outcomes.
And this philosophy is being implemented, for example, at the Cleveland Clinic, which organizes healthcare around conditions and supports the transparency around outcomes and measurements. Another example is Oak Street Hospital, which focuses exclusively and specializes on one population — “older adults”. With a value based practice (including special focus around illnesses, not fee-for service, and being financially responsible for the entirety of patient care), technology-enabled approach (e.g. data-driven approach to population health focusing on patients with greatest needs), and team-based model (e.g. cross-disciplinary teams with clear roles in patient care), Oak Street Hospital has reduced hospitalizations by more than 40%, a huge cost saving.
Channels: Don’t go to healthcare, let healthcare come to you
Why go to the doctor when you can receive a first diagnosis on your sofa at home? Fancy avoiding commuting and waiting at the doctor? Booking a doctor’s appointment via the app on your smartphone? Providers like https://minxli.com/ in Germany or https://www.kry.se/in Sweden already provide these services and build the connection between you and the doctor’s practice. But not only independent new entrants use “skype-like” technologies, also companies like the Spanish healthcare giant Sanitas which actively uses technology to provide its customers new ways to reach out to their doctors.
But this is “simple” compared to the “Hospital at Home” (HaH) model that the John Hopkins University is developing together with its partners. Sensor technologies, wearables, and faster wireless communication via smartphones enable “mobile health”, where patients are admitted in their own homes rather than in the hospital — and can get access to remote monitoring technology, receive daily visits from a physician and other caregivers (e.g., nurses, respiratory therapists, and physical therapists): Electrocardiograms, x-rays, and ultrasounds can all be performed in the patient’s home with use of portable technologies — patients only go to the hospital if they are “sick enough”. Originally thought for more remote areas, the programs are so successful that they are finding more and more application in urban areas — also because they are proving to save up to 20% of the costs with equal or better outcomes compared to similar traditional inpatients treatment plans.
A similar model, the “USC Virtual Care Clinic” is being used at the Center of Body Computing at the University of Southern California to deliver world-class healthcare without having to physically visit the clinic. Via a simple app “doc on” on any smartphone, the patient can for example consult with an atrial fibrillation expert 24/7 regarding “anything” related to that illness. The app understands human speech, hence provides care and advice “anywhere” and “anytime”.
Customer segments: The spider in the web
Founded in 2006 by Linda Avey and Anne Wojcicki, 23andme is the world’s largest personal genomics company with more than 2 million customers. But that is only giving credit to a part of the business model. The genetic tests are the front end for collecting massive health information. 80% of their customers have consented to sharing their data for researchpurposes. This genetic information is a gold mine for R&D of pharma companies, their second “customer segment”. The different collaborations with Genentech, Pfizer and others indicate the potential of this business. For example, if pharma companies look for specific rare mutations in humans to test therapies through clinical trials, 23andme can consult its database and potentially connect the patient with a clinical trial sponsor, in this way significantly accelerating enrolment for a clinical trial. But 23andme isn’t stopping there. They expect to enter the drug development space: “The scale of the data — millions of customers and growing — and the unique combination of genotypic and phenotypic information provides an unrivalled research platform for insights into human health,” said Sequoia’s Botha, lead investor in 23andme US$250M round last year. In April 2015, 23andme founded the Therapeutics Division — led by Dr Richard Scheller: “It is committed to discovering and developing novel therapies that can offer benefits for patients. This dedicated research and drug development group identifies novel targets using the 23andMe genetic database, generates lead compounds to these targets and performs preclinical research to support future clinical development.”
This model is not unique — Foundation Medicine, acquired by Roche in January 2015, is building a similar model: “Our Precision Enrolment program identifies patients with rare or specific biomarkers and matches them with sponsor trials using the FoundationSmartTrials engine. In addition to efficient patient matching, the Precision Enrolment program raises awareness in the community with respect to clinical trials and evolving science; which further amplifies participation.”
Cost structure: Taking costs out with AI drive process automation
Have you spoken with Molly yet? Probably, if you have been interacting with UCSF or the NHS hospitals in Dudley and West Birmingham recently. Molly is a virtual nurse from award winning startup Sensely that is able to recognize speech, translate spoken words into text and seamlessly integrates member data. It can ask patients questions about their health, assess symptoms, and direct them to the next best doctor. HBR estimates that AI-powered nurse assistants could save US$20.000 billion annually by saving 20% of the time nurses spend on patient maintenance. But there are even more sophisticated applications poweredby AI and destined to take costs out — Optra Health just launched their “Digital Genetic Assistant” to help patients understand their Genetics data. And in another example, Beth Israel Deaconess Medical Center has developed an AI-enabled application for screening patients for cancer, reaching almost (92%) the same accuracy of human pathologists (96%).
Key partners: Together against the most pressing challenges
On one side, the last months have seen a clear consolidation play combining different parts of the healthcare world. CVS Health buying Aetna for US$69.000M — combining the drugstore giant with one of the largest health insurers to form community-based healthcare hubs that could offer blood tests and help manage chronic diseases. With United Healthcare buying the DaVita physician group for US$4.900 billion — combining the existing insurance business with a large for-profit chain of dialysis centers. This is not just “another M&A transaction” — but an insurer actively moving into the direct delivery of healthcare.
On the other side, there are also “less intuitive” alliances emerging: “We want our employees to get better healthcare at lower costs”, said Warren Buffet in May 2018, after founding a venture between Amazon.com, JP Morgan, and Berkshire, and stating that healthcare is a “hungry tapeworm” hurting the competitiveness of US companies. The announcement surprised the health care and the stock market. But it remains to be seen how the combined effort will play out. Jamie Dimon, CEO of JP Morgan, already indicated that big data and virtual technology will be used to tackle costs and focus on value.
To sum it up, business model innovation will be the driving force for change — heavily leaning on exponential technologies as a “means to meet ends”. In a newly published book “What’s Your Digital Business Model?: Six Questions to Help You Build the Next-Generation Enterprise” by Peter Weill and Stephanie Woerner, executives were asked which percentage of revenues they see under threat in the next five years. On average, executives see 28% under threat — but more interesting is the estimate of those companies that have more than US$7 billion in revenues: These CEOs feel that 46%, almost half, of the whole business is in danger.
In fact, all industries will sooner or later apply exponential technologies within or across their business model. Those that do best will see incredible benefits. Every year, The Boston Consulting Group publishes a report on the “most innovative companies of the year”. Eleven of the fifty companies named in BCG’s 2018 ranking of the most innovative companies — including seven of the top ten — are digital natives and thus digital innovators by definition. Most, if not all, of the others on the list have built digital technologies into their innovation programs, write Michael Ringel and Hadi Zablit, and most important, across all elements of the business models and all industries, even the most “conservative” ones. It seems that we are just getting started.
This article was first published by Juan Martinez-Barea and Christian Hense in Spanish on Harvard Deusto.