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- Business Model Innovation
Product and service innovation are essential, but business model innovation can deliver more lasting competitive advantage, particularly in disruptive times.
In the past 50 years, the average business model lifespan has fallen from about 15 years to less than five. As a result, business model innovation is now an essential capability for organizations seeking to drive breakout growth, reinvigorate a lagging core, or defend against industry disruption or decline.
What Is Business Model Innovation?
Business model innovation is the art of enhancing advantage and value creation by making simultaneous—and mutually supportive—changes both to an organization’s value proposition to customers and to its underlying operating model. At the value proposition level, these changes can address the choice of target segment, product or service offering, and revenue model. At the operating model level, the focus is on how to drive profitability, competitive advantage, and value creation through these decisions on how to deliver the value proposition:
- Where to play along the value chain
- What cost model is needed to ensure attractive returns
- What organizational structure and capabilities are essential to success
Business model innovation is also critical to business transformation . Many organizations share a common set of concerns: What type of business model innovation will help us achieve breakout performance? How do we avoid jeopardizing the core business? How do we build the capability to develop, rapidly test, and scale new models? Inspiring an organization to change is not a trivial undertaking, but given the current strategic environment, it’s a critical one.
Four Approaches to Business Model Innovation
Companies hoping to drive growth through business model innovation face a number of critical questions: How broad should the scope of the effort be? What’s the appropriate level of risk to take? Is it a onetime exercise, or does it call for an ongoing capability?
To answer those questions, it’s important to realize that not all business model innovation efforts are alike. Understanding the four distinct approaches to business model innovation can help executives make effective choices in designing the path to growth:
- The reinventor approach is deployed in light of a fundamental industry challenge, such as commoditization or new regulation, in which a business model is deteriorating slowly and growth prospects are uncertain. In this situation, the company must reinvent its customer-value proposition and realign its operations to profitably deliver on the new superior offering.
- The adapter approach is used when the current core business, even if reinvented, is unlikely to combat fundamental disruption. Adapters explore adjacent businesses or markets, in some cases exiting their core business entirely. Adapters must build an innovation engine to persistently drive experimentation to find a successful “new core” space with the right business model.
- The maverick approach deploys business model innovation to scale up a potentially more successful core business. Mavericks—which can be either startups or insurgent established companies—employ their core advantage to revolutionize their industry and set new standards. This requires an ability to continually evolve the competitive edge or advantage of the business to drive growth.
- The adventurer approach aggressively expands the footprint of a business by exploring or venturing into new or adjacent territories. This approach requires an understanding of the company’s competitive advantage and placing careful bets on novel applications of that advantage in order to succeed in new markets.
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Business Model Innovation: What It Is And Why It’s Important
Industry Advice Business
Amazon launched in 1995 as the “Earth’s biggest bookstore.” Fast-forward 22 years, and that “bookstore” is now a leader in cloud computing, can deliver groceries to your doorstep, and produces Emmy Award-winning television series.
The trillion-dollar organization has achieved this growth by being continuously willing to innovate upon its business model in order to address new challenges and pursue new opportunities.
“Amazon is amazing at new business model development,” says Greg Collier, an academic specialist in Northeastern’s D’Amore-McKim School of Business and the director of international programs for the Center for Entrepreneurship Education . “They look at themselves from a customer-defined perspective.”
That approach has helped Amazon scale because rather than rely on one revenue stream or customer segment, the company continuously asks “ What’s next?” This has allowed leadership to iterate on its business model accordingly, repeatedly experimenting with a process known as business model innovation .
As Amazon’s success demonstrates, this process can be incredibly exciting and impactful when you’re in control. However, when the need to innovate your business model is thrust upon you by outside forces, it can also feel quite disruptive.
For instance, today, the novel coronavirus is causing tremendous shifts in both the national and global economy. Many companies are being forced to innovate and adapt their business models in order to meet these challenges, or else risk falling victim to these drastic changes.
Read on to explore what business model innovation is and why it is so important for businesses to be capable of change.
What Is Business Model Innovation?
A business model is a document or strategy which outlines how a business or organization delivers value to its customers. In its simplest form, a business model provides information about an organization’s target market, that market’s need, and the role that the business’s products or services will play in meeting those needs.
Business model innovation , then, describes the process in which an organization adjusts its business model. Often, this innovation reflects a fundamental change in how a company delivers value to its customers, whether that’s through the development of new revenue streams or distribution channels.
Business Model Innovation Example: The Video Game Industry
Amazon is not the only company known for continuously innovating its business model.
The video game industry, for example, has gone through a number of periods of business model innovation in recent years, Collier says, by envisioning new ways in which to make money from customers.
When video games were first created, the consoles that housed them were expensive and bulky, which put them out of reach of most consumers. This gave rise to arcades, which would charge customers to essentially purchase credits needed to play the games.
As manufacturing processes and technological advancements made it easier to create smaller, more economical units, however, companies like Atari took advantage of the demand by selling units directly to the customer—a massive departure from what had been the accepted practice.
More recently, game developers have had to undergo rapid business model innovation in order to meet the evolving demands of customers—many of whom want to be able to play their games right on their smartphones.
Originally, many companies adjusted their practices in order to put their games in this format, charging consumers a subscription fee or making them pay to unlock new levels. Some of those businesses, however, were able to innovate their business models to make gameplay free to the end-user by incorporating in-app advertising or selling merchandise such as T-shirts and plush toys. This practice, they found, was able to dramatically increase their reach, while also bringing in substantial funds from consumers.
As Collier notes, “Competitors can easily change how they price.” That’s why it’s crucial for companies to consider how their products are being delivered.
The Importance of Business Model Innovation
Business model innovation allows a business to take advantage of changing customer demands and expectations. Were organizations like Amazon and Atari unable to innovate and shift their business models, it is very possible that they could have been displaced by newcomers who were better able to meet the customer need.
Business Model Innovation Example: Blockbuster vs. Netflix
Take Blockbuster, for example. The video rental chain faced a series of challenges, particularly when DVDs started out selling VHS tapes. DVDs took up less shelf space, had higher quality video and audio, and were also durable and thin enough to ship in the mail—which is where Netflix founders Reed Hastings and Marc Randolph spotted an opportunity.
The pair launched Netflix in 1997 as a DVD-by-mail business, enabling customers to rent movies without needing to leave their house. The added bonus was that Netflix could stock its product in distribution centers; it didn’t need to maintain inventory for more than 9,000 stores and pay the same operating costs Blockbuster did.
It took seven years for Blockbuster to start its own DVD-by-mail service. By that point, Netflix had a competitive advantage and its sights set on launching a streaming service, forcing Blockbuster to play a game of constant catch-up. In early 2014, all remaining Blockbuster stores shut down .
“Blockbuster’s problem was really distribution,” Collier says. “DVDs inspired Netflix, and the technology change then drove a change in the business model. And those changes are a lot harder to copy. You’re eliminating key pieces in the way a business operates.”
For this reason, it’s often harder for legacy brands to innovate. Those companies are already delivering a product or service that their customers expect, making it more difficult for teams to strategize around what’s next or think through how the industry could be disrupted.
“Disruption is usually then done by new entrants,” Collier says. “Established organizations are already making money.”
Business Model Innovation Example: Kodak
By focusing solely on existing revenue streams, however, organizations could face a fate similar to Kodak. The company once accounted for 90 percent of film and 85 percent of camera sales . Although impressive, that was just the problem: Kodak viewed itself as a film and chemical business, so when the company’s own engineer, Steven Sasson, created the first digital camera, Kodak ignored the business opportunity. Executives were nervous the shift toward digital would make Kodak’s existing products irrelevant, and impact its main revenue stream. The company lost its first-mover advantage and, in turn, was later forced to file for bankruptcy.
Business Model Innovation Example: Mars
Mars started as a candy business, bringing popular brands like Milky Way, M&M’s, and Snickers to market. Over time, however, Mars started expanding into pet food and, eventually, began acquiring pet hospitals. In early 2017, Mars purchased VCA —a company that owns roughly 800 animal hospitals—for $7.7 billion. further solidifying its hold on the pet market.
“Mars looked at its core capabilities, which is what corporate entrepreneurship is all about,” Collier says. “It’s about looking at your products and services in new ways. Leverage something you’re really good at and apply it in new ways to new products.”
The Role of Lean Innovation
Implementing lean innovation is advantageous. Lean innovation enables teams to develop, prototype, and validate new business models faster and with fewer resources by capturing customer feedback early and often.
Collier recommends companies start with a hypothesis: “I have this new customer and here’s the problem I’m solving for him or her,” for example. From there, employees can start to test those key assumptions using different ideation and marketing techniques to gather customer insights, such as surveying. That customer feedback can then be leveraged to develop a pilot or prototype that can be used to measure the team’s assumptions. If the first idea doesn’t work, companies can more easily pivot and test a new hypothesis.
“This is a big part people forget to do,” Collier says. “Lean design allows us to rapidly test and experiment perpetually until we come to a model that works.”
Pursuing Innovation in Business
In addition to business model innovation, companies could also pursue other types of innovation , including:
- Product Innovation : This describes the development of a new product, as well as an improvement in the performance or features of an existing product. Apple’s continued iteration of its iPhone is an example of this.
- Process Innovation : Process innovation is the implementation of new or improved production and delivery methods in an effort to increase a company’s production levels and reduce costs. One of the most notable examples of this is when Ford Motor Company introduced the first moving assembly line, which brought the assembly time for a single vehicle down from 12 hours to roughly 90 minutes .
The choice to pursue product, process, or business model innovation will largely depend on the company’s customer and industry. Executives running a product firm, for example, need to constantly think about how they plan to innovate their product.
“When the innovation starts to slow down, that’s when firms should be thinking of and looking at next-generation capabilities,” Collier suggests.
If a company is trying to choose where to focus its efforts, however, the business model is a recommended place to start.
“Business model innovation is often more impactful on a business than product innovations,” Collier says. “It’s Amazon’s business model that’s disrupting the market.”
Innovation Doesn’t Always Come Easy
While the examples above demonstrate that innovation is an important part of running a business, it’s also clear that it doesn’t always come easy. Corporate history is littered with examples of companies that were unable to innovate when they needed to the most.
Luckily, there are steps that business owners, entrepreneurs, and professionals can take to become better suited to pursuing innovation when an opportunity appears.
Learning the fundamentals of how businesses and industries change will prove to be instrumental in enabling you to carry out your own initiatives. Assess and dissect the successes and failures of businesses in the past, and learn how to apply these valuable lessons to your own challenges.
This article was originally published in December 2017. It has since been updated for accuracy and relevance.
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Business Model Innovation
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About this Course
Innovation goes beyond technology, products and processes. The new competitive landscape requires another, more holistic and strategic perspective, based on the concept of business models.
This course gives you access to the Odyssey 3.14 approach, a pioneering framework that will help you invent or reinvent business models. This highly innovative approach has been developed by Laurence Lehmann-Ortega and Hélène Musikas and has proven to be a very valuable methodology for start-up entrepreneurs, business unit managers and intrapreneurs alike. It offers a practical and highly effective framework and toolbox to create, invent or reinvent business models in a very disciplined way. The approach starts with a deep dive into the 3 pillars of the business model: - The value proposition (who are our customers and what are we offering them?) - The value architecture (how are we organized in order to deliver this value proposition to our customers in due time) - The profit equation (how the alignment between the first 2 pillars generates a profit) 14 directions are then explored in order to invent or reinvent a business model. Examples of the directions include “reducing clients overall costs”, “modifying the revenue stream”, “introducing a third party”, “eliminating a step in the value chain”, and “exploring new resources”. Illustrated by numerous examples, both iconic (Ikea, Tetra Pack, Grameen Bank…) and more recent (Airbnb, Zopa, Drive Now…), these directions stimulate your creativity to rigorously explore all possible innovation paths. Innovation becomes an adventure, an odyssey… hence the name of the approach! Odyssey 3.14 is the result of over 15 years of research, consulting and teaching. Over 150 companies that have successfully invented or reinvented their business model have been thoroughly analyzed and will inspire you to develop your own new, innovative business model. This course is a part of the MSIE program at HEC. If you liked it, do not hesitate to consult the other courses of the program.
Could your company benefit from training employees on in-demand skills?
What you will learn
Define what a business model is and why it enables you to approach innovation and strategy from a completely different angle
Understand the 3 components of the business model and how they are linked
Stimulate your creativity by capitalizing on the 14 directions toolbox
Analyze existing business models, create new ones or adapt existing ones using the Odyssey 3.14 approach
Skills you will gain
- Strategic Management
- Business Model
- Business Modeling
- Business Strategy
Instructors
Laurence Lehmann-Ortega
Hélène Musikas
HEC Paris, founded in 1881 by the Paris Chamber of Commerce and Industry, is one of France’s oldest elite higher education Grandes Ecoles. Throughout its 130-year history, HEC Paris has consistently attracted individuals highly capable and talented, innovative and entrepreneurial, ambitious and open-minded, capable of becoming architects of a responsible world. What makes HEC unique is its conviction shared by the HEC community: knowledge determines the freedom and entrepreneurship required for a better world.
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Syllabus - What you will learn from this course
Module 1: introduction to business model innovation.
Welcome to the business model innovation journey! The aim of this introductory module is to familiarize you with innovation and business models and how they relate to the strategy of your company. We will focus on different business models and business model frameworks. This module will also give you an overview of the course and of your assignments.
MODULE 2: THE 3 COMPONENTS OF A BUSINESS MODEL
In this module, we will dive deeper into the Odyssey 3.14 approach and framework, by exploring in detail the 3 components of the business model. 1) The value proposition, which defines your offer and how it is perceived by customers 2) The value architecture, which defines the way your company is organized to deliver your offer 3) The profit equation, which enables you to measure the efficiency of your business model and the relation between the value proposition and value architecture. Thinking deeply about these 3 components and seeing them through new lenses will help you find innovative solutions to create a more effective business model.
MODULE 3: 7 DIRECTIONS FOR THE VALUE PROPOSITION
This module explores the 7 directions on the value proposition side of the business model. These are the first 7 directions in the Odyssey 3.14 framework. They include: 1) Modifying the revenue stream, that is, how charging a customer can radically change the value proposition, 2) Looking at non-customers, since this group offers many growth opportunities 3) Introducing a third party, which explains the power of platform business models. Each direction will be illustrated by real life examples.
MODULE 4: 7 DIRECTIONS FOR THE VALUE ARCHITECTURE
This module explores the 7 directions on the value architecture side of the business model. These are the last 7 directions in the Odyssey 3.14 framework. They include: 1) Eliminating or adding a step in the value chain, that can for example lead to a circular economy, 2) Finding new resources in the crowd, which explains how to leverage the billion individuals connected to the internet, 3) Leveraging resources and competencies, which demonstrates how an alternative way of looking at existing resources and competencies can radically modify the business model. Each direction will be illustrated by real life examples.
MODULE 5: IT'S YOUR TURN TO APPLY THE ODYSSEY 3.14 APPROACH!
During this module, you will have to imagine a new, innovative business model by applying the Odyssey 3.14 framework. Creativity is key, both in coming up with the new business model and in your presentation to your peer participants!
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Superb course with great structure and well designed modules and videos. You end up with a very practical toolbox to think about business models in a very disciplined way.
This course assisted me greatly innovate an idea in the renewable energy production process, the innovation is currently being tested in Kenya after it was selected for funding.
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It was one of the most interesting courses I have taken in my life! It made me think of changing my career and wanting to work on creating business models for companies. Thank you!
Very good course! the pedagogy is excellent, and the whole way to re-invent a business model is really operational! thanks a lot for the people who prepared this course!
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Business Model Innovation Strategy: Transformational Concepts and Tools for Entrepreneurial Leaders
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Description, digital evaluation copy, about the author, permissions, table of contents.
Raphael Amit , Christoph Zott
ISBN: 978-1-119-68968-3 October 2020 368 Pages
- E-Book Starting at just $17.00
- Print Starting at just $29.00
The most comprehensive, global guide to business model design and innovation for academic and business audiences.
Business Model Innovation Strategy: Transformational Concepts and Tools for Entrepreneurial Leaders is centered on a timely, mission-critical strategic issue that both founders of new firms and senior managers of incumbent firms globally need to address as they reimagine their firms in the post COVID-19 world. The book, which draws on over 20 years of the authors collaborative theoretical and rigorous empirical research, has a pragmatic orientation and is filled with examples and illustrations from around the world.
This action-oriented book provides leaders with a rigorous and detailed guide to the design and implementation of innovative, and scalable business models for their companies. Faculty and students can use Business Model Innovation Strategy as a textbook in undergraduate, MBA, and EMBA degree courses as well as in executive courses of various designs and lengths. The content of the book has been tested in both degree and non-degree courses at some of the world's leading business schools and has helped students and firm leaders to develop ground-breaking business model innovations.
This book will help you:
- Learn the basics of business model innovation¯including the latest developments in the field
- Learn how business model innovation presents new and profitable business opportunities in industries that were considered all but immune to attacks from newcomers
- Learn how to determine the viability of your current business model
- Explore new possibilities for value creation by redesigning your firm's business model
- Receive practical, step-by-step guidance on how to introduce business model innovation in your own company
- Become well-versed in an important area of business strategy and entrepreneurship
Authors Amit and Zott anchored the book on their pioneering research and extensive scholarly and practitioner-oriented publications on the design, implementation, and performance implications of innovative business models. They are the most widely cited researchers in the field of business model innovation, and they teach at the top-ranked Wharton School of the University of Pennsylvania and the prestigious global business school IESE with campuses in Barcelona, Madrid, Munich, New York, and São Paulo.
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Part I Foundation and Mindset for Business Model Innovation 1
Chapter 1 Why Do Business Models Matter? The “What, How, Who, and Why” Framework for Understanding Any Business Model 3
Chapter 2 How Business Models Create Value in New Ways – Case Studies and Theory 27
Chapter 3 Adopting a Business Model Mindset – A Prerequisite for Transformative Innovation 55
Chapter 4 Business Model Innovation – A Fundamentally New Source of Innovation 85
Part II Strategic Design and Evaluation of Business Model Innovation 127
Chapter 5 Strategic Design of Innovative Business Models – How to Bring Design Thinking and Creativity to Your Business Model 129
Chapter 6 How to Design a New Business Model – A Dynamic Design Method 161
Chapter 7 How to Design a New Business Model – Methods Championed by Startup Entrepreneurs 191
Chapter 8 Value Propositions – The NICE Framework for Measuring the Impact of the Business Model 223
Chapter 9 Evaluating Existing Business Models and Designing New Ones – Your Essential Toolkit 249
Part III Making Business Model Innovation Happen 277
Chapter 10 Implementing Business Model Innovation in Established Firms – Organizational Barriers and How to Overcome Them 279
Chapter 11 Implementing Business Model Innovation in New Ventures – Balancing the Prospects of Shooting for the Stars with the Risks That Can Sink the Ship 307
Chapter 12 Business Model Innovation Strategy in the Digital Age – What Does It Mean for You? 339
Acknowledgments 355
About the Authors 357
The Business Model Kit
The business model kit is a tool designed to explore and imagine different business models to support your solution.
The key to a sustainable business model is ensuring that all stakeholders in the ecosystem are delivering and capturing items of value.
Why should you use the business model kit?
Excel is not the most engaging innovation tool, is it? Discussions on business models often end in total confusion. You’re talking about multiple revenue streams, 10+ partners and many transactions going back and forth; it’s hard to keep all the information in your mind, and even harder to communicate your ideas with the team.
That’s why we developed a visual tool that helps you ideate and refine business models, correct existing issues, and communicate the outcome to other teams in a simple way. Perfect for individual and team brainstorms about new business ideas, it creates clarity on value streams and stakeholders.
What’s the difference between the business model kit and the business model canvas?
For those who are familiar with the business model canvas by Alex Osterwalder, our business model kit works in perfect harmony:
The business model kit helps you ideate multiple business model options. In particular, it raises awareness over the value exchange between stakeholders.
The business model canvas is a perfect screenshot of an existing, established business model. We suggest to use it after the business model kit.
Be sure to check out our business model examples and info on how to use the business model kit.
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Long Range Planning
Business models and technological innovation.
Business models are fundamentally linked with technological innovation, yet the business model construct is essentially separable from technology. We define the business model as a system that solves the problem of identifying who is (or are) the customer(s), engaging with their needs, delivering satisfaction, and monetizing the value. The framework depicts the business model system as a model containing cause and effect relationships, and it provides a basis for classification. We formulate the business model relationship with technology in a two-way manner. First, business models mediate the link between technology and firm performance. Secondly, developing the right technology is a matter of a business model decision regarding openness and user engagement. We suggest research questions both for technology management and innovation, as well as strategy.
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Charles Baden-Fuller is Centenary Professor of Strategy, Cass Business School, City U. London, and Senior Fellow, Wharton School, U. Penn. He is also a Fellow of the Strategic Management Society, and winner of the Lord Mayor of London's Chancellor's Prize at City University. He is very widely published and recognised as a thought leader on the topics of rejuvenating mature businesses, cognition and competition, high technology entrepreneurship and business models. He advises senior executives and boards on topics of strategy in private international businesses and not-for profit organisations. He was editor-in-chief of Long Range Planning from 1999 to 2010. Email: [email protected]
Stefan Haefliger is Reader in Innovation at Cass Business School. He has published in Management Science, Research Policy, and MIS Quarterly, on knowledge reuse and private-collective innovation contributing to a deeper understanding of the development strategies and practices of open source software developers as well as the entrepreneurial consequences of user innovation. He is an associate editor for Long Range Planning. Email: [email protected]
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Business model innovation is a tool that help companies to increase their values It basically provides information and describes, to the organization, the target markets, its needs and the role of the business’ product in the market. BMI - Approaches IMPETUS Why is BMI important in product development? Existing consumers The Reinventors The
Business model canvas a tool for innovation common language helps to see the “big picture” grammar that helps people better understand each other Understand Design Blue ocean strategy increase value for customers by creating new benefits and services reduce costs by eliminating less valuable features or services Design
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Business model innovation is a powerful approach to driving growth and to capturing a more durable competitive advantage. Four success stories point the way. Using Business Model Innovation to Reinvent the Core When traditional growth levers—such as product extension and pricing—become less effective, it’s time to embrace business model innovation.
Business model innovation, then, describes the process in which an organization adjusts its business model. Often, this innovation reflects a fundamental change in how a company delivers value to its customers, whether that’s through the development of new revenue streams or distribution channels.
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The most comprehensive, global guide to business model design and innovation for academic and business audiences. Business Model Innovation Strategy: Transformational Concepts and Tools for Entrepreneurial Leaders is centered on a timely, mission-critical strategic issue that both founders of new firms and senior managers of incumbent firms globally need to address as they reimagine their ...
For those who are familiar with the business model canvas by Alex Osterwalder, our business model kit works in perfect harmony: The business model kit helps you ideate multiple business model options. In particular, it raises awareness over the value exchange between stakeholders. The business model canvas is a perfect screenshot of an existing ...
Business model choice determines the nature of complementarity between business models and technology and the paths to monetization. A poor choice can lead to low profits, a good choice to superior profits. Many examples exist of these interdependencies.