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Business Model Innovation and Its Importance
The recent upsurge in demand for business model innovation has been dramatic and exceptionally beneficial for various reasons. Technology has been one of the foremost drivers of innovation in business models. In addition, the increasing levels of global competition among businesses have also spurred the demand for innovation to differentiate a business from another. Furthermore, a global pandemic has changed the way businesses operate, with many struggling to build or sustain their competitive advantage.
However, the businesses which have successfully navigated their way through the challenges of the pandemic have strong business models backing them up. This is where you would find the significance of business model innovation in entrepreneurship and business in general. The following discussion offers you an in-depth overview of the definition and importance of innovation in business models with examples.
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Defining Business Model Innovation
The foremost mistake people make in understanding business models is the assumption of business models as just the pricing model for products and services of a business. Well, pricing is obviously one of the significant aspects of the business model. However, the business model is basically an approach of the organization for creating, delivering, and capturing value for its customers.
Therefore, successful business models focus on a holistic approach through the integration of different components of a business into well-organized systems. So, business model innovation can be defined as the new approach for organizing all the essential components of a business together in a well-organized and articulated system.
So, what is the best description of business model innovation? It is clearly evident that a business model is a strategy or a document that shows how an organization delivers value for its customers. It offers a detailed overview of the existing target market of the organization, its needs, and the ways in which the products or services of the business help in addressing the needs of the target market.
Innovation in business models basically refers to adjusting the business model in accordance with emerging trends. Generally, innovation in business models focuses on introducing fundamental changes in the way a company delivers value for its customers. Businesses could work on developing new distribution channels or new revenue streams as part of their plans for innovation in their business model.
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Also Read: 4 Steps to Business Model Innovation
Characteristics of Business Model Innovation
The characteristics of business model innovation are also important elements you need to understand the significance of innovation in business models. Innovation in the business model focuses on introducing simultaneous and mutually supportive changes to the value proposition for customers.
The important characteristics of business model innovation dictate the changes at the value proposition level. You can understand the characteristics of innovation in business models by taking a look at the components. The important components for innovative business models refer to the selection of target segment, revenue model, and product or service offerings.
The characteristics of business models also draw attention towards the operating model level. Innovation in business models should also focus on the implications for the business itself. Therefore, you can find the important traits for driving profitability, value creation, and competitive advantage with business model innovation in entrepreneurship .
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Importance of Business Model Innovation
The next important question pertaining to business model innovation theory points out its importance. You need to realize that a business that does not focus on its business model as an overall entity could compromise some of its initial strengths. For instance, some businesses could start to deviate from the actual needs of customers.
Some businesses look for optimization of product delivery while trading off the ability to create value. You could come across a wide variety of reasons for which such things happen. For example, the management could have a strong emphasis on the strategies and actions of competitors. On the other hand, pressure from shareholders for ensuring short-term profits could also be one of the notable causes for trading off the interests of customers.
So, it is clearly evident that many industries face the need for innovation in business models . They are experiencing troubles in aligning the true interest of customers and the service providers. The Healthcare sector is one of the prominent examples which can show the significance of different characteristics of this innovation . Private hospitals have a lot to gain when a patient keeps coming back regularly. On the other hand, the patient wants to stay healthy and never visit the doctor in the first place.
On the other side of the spectrum, you can look at flexible subscription services in business models as a vital indicator of the significance of innovation. Subscription services have to create value for the customers constantly so that the customer keeps the subscription. The longer the businesses hold on to customers, the more likely they are to earn higher profits. As a result, you can notice how innovation can empower strong alignment between shareholder and customer value.
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Example of Business Model Innovation
The next aspect in understanding innovation in business models would refer to its examples . Examples offer a practical overview of the ways in which brands are capable of transforming the way they operate. In addition, you can also decipher how brands are successful in offering improved value to their consumers with innovation. The most promising example of business model innovation is that of renowned automobile manufacturer Rolls-Royce.
Rolls-Royce is also a reputed aircraft turbine manufacturer known for its ‘power-by-the-hour business model. Prior to the innovation in its business model, Rolls-Royce operated exclusively as a product business. According to the previous business model, the engine would become a property of aircraft manufacturers for a large one-off sum. However, the new business model of the company does not focus on selling engines.
On the contrary, the new innovative business model of Rolls-Royce imposes hours on the airlines. How? Airlines have to pay only for the operating time of the engine without any obligation for purchasing the turbine engines. The engine would remain as a property of Rolls-Royce. The company also takes responsibility for engine maintenance and repairs. Such type of business model clearly resembles a performance-based contracting approach. As a result, Rolls-Royce was able to create advantages for its customers and the brand itself.
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Types of Business Model Innovation
Business model innovation, in theory, sound quite appealing, especially considering the fact that it helps in adapting to new changes. However, it is also important to note that innovation is never single-dimensional. You can attempt innovation in business models from various perspectives. Here are some of the notable types of this innovation , which can help you understand the concept better.
In the case of regular approaches for innovation in business models, new firms use exiting capabilities. Such type of business model ensures that existing markets can retain their competitiveness. In addition, the products from the old firm or model could have substantial command over market share for maintaining competitiveness.
Another addition among the types of business model innovation would also refer to the position-building business model. The approach focuses on products and services in the new model overpowering the products and services in the old business model. In this case, the old business model becomes non-competitive, albeit with the same capabilities of both business models.
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Dynamic and Application
Classification of business model innovation also brings the dynamic and application approach for innovation. The different classifications for approaches in innovation for business models follow one common assumption classifying the business model as static. Dynamic and application approach in innovation negates this assumption. Business models could start as regular models and then shift to different variants according to the requirements.
The use of capabilities building innovation also reflects on another prominent approach in business model innovation . As the name implies, capabilities for the new business model are considerably different from those in the old business model. However, the old model also maintains competitiveness like the new one. In such cases, the capabilities for the new business model must be developed from scratch or obtained in any manner.
Also Check: The Opportunities and Barriers of Business Model Innovation
Another prominent addition among the different types of business model innovation refers to the revolutionary approach. The core capabilities underpinning the new and old business models bear stark differences to one another. Interestingly, the new business model could not leverage the capabilities of the old business model. A revolutionary business model presents new definitions for creating and capturing value by reversing the previous approaches for performing value chain activities.
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The role of business model innovation for transforming businesses for the modern landscape is undeniable. It helps businesses understand the areas they need to improve for delivering value to their customers. At the same time, innovation also focuses on enabling businesses to empower their profits and long-term growth. The notable examples of this innovation show how efficient it can be for modern businesses.
With adaptability being the key requirement for businesses in today’s competitive landscape, it is difficult to ignore innovation in business models. At the same time, it is important to note that innovation of business model is not a cakewalk. You need to understand the basics of the ways in which businesses and industries change. Learn more about the stories of success and failures of innovation approaches followed by businesses in the past. Build your own innovative business model and soar towards success!
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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 – The What, Why, and How
In the last couple of decades, we’ve seen a dramatic increase in the popularity of business model innovation – and for good reason.
Technology has made it easier than ever to adopt a wide variety of novel business models effectively. At the same time, increased pace of innovation and global competition has made differentiation more important than ever .
In addition, with the havoc caused by COVID-19, we're already seeing that even though many businesses are battling for survival, there are also winners. Those winners usually possess very robust business models, which further outlines the importance of business model innovation in times like this.
In this article, we’ll look into what exactly it is, why it is so important, as well as how one can make it happen with the help of quite a few examples.
Table of contents
- What is business model innovation?
- Why is it important?
- Examples of innovative business models
- How to create business model innovation
The Definition of Business Model Innovation
One of the common mistakes people make when it comes to business models is that they simply look at them very narrowly as just the pricing model for their products and services.
While it certainly is a key part of the business model, the term is actually defined as the way an “organization creates, delivers and captures value”.
Business model is the way an organization creates, delivers and captures value.
Successful business models thus take a very holistic approach by integrating these different aspects of the business into a well-organized and thought out system.
Business model innovation, then is simply a novel way to put these pieces together to hopefully create a system that produces more value for both customers and the organization itself.
Why Is Business Model Innovation So Important?
Without realizing it, a business that doesn’t explicitly focus on their business model as a whole often ends up compromising their initial strengths.
For example, many businesses start to gradually drift apart from the true needs of their customers unless they specifically focus on avoiding that. Some might focus too heavily on just optimizing the delivery of their products and sacrifice their ability to create value.
There are many reasons for these phenomena. Perhaps management focuses too heavily on what the competition is doing, or perhaps there’s pressure from shareholders to optimize for short-term profit.
Regardless, there are countless industries where the true interests of the customers and those of the service providers have become opposite.
The healthcare sector is a prime example of this: a private hospital has strong incentives for wanting you to be chronically sick so that you’d keep coming back regularly and they could charge you for each visit. You naturally want the hospital to take good care of you, but ideally, you’d just want to stay healthy and not have to go to the doctors’ in the first place.
Business model innovation is simply put probably the most important tool for building a business that creates maximal value for all stakeholders: customers, shareholders, employees, and the society at large.
This obviously leads to a wide variety of benefits :
- Increased value creation will lead to increased growth , even for otherwise stagnant businesses
- As business model innovation often requires new operating models and is thus often very difficult for established competitors to copy
- …which can lead to an extend period of competitive advantage
- The right kind of business model also helps overcome objections to sales and create positive brand recognition
- As mentioned, some business models can make the business much more robust towards market cycles and unexpected “black swan” events, such as the recent COVID-19 crisis
To conclude, business model innovation is a flexible tool for building a great business irrespective of the industry. That’s why you’ll see most of the fastest growing and most disruptive businesses including business model innovation as a key part of their “innovation mix” .
Examples of Business Model Innovation
Before we get into the part where we look at how to actually do business model innovation, let’s first take a look at a few examples of business model innovation to get a better picture of what it can look like in practice.
Subscription models are a powerful way to turn one-off purchases to a more predictable, and over time larger, stream of revenue while ensuring that the customer keeps getting value and is also able to better afford higher-end services due to the purchase occurring over time.
Subscription models are equally applicable for both B2B and B2C businesses.
On the B2B side, Software as a Service (SaaS) products like Microsoft Office 365 and Infrastructure as a Service (IaaS) offerings like Amazon Web Services are great examples of this approach.
Subscription businesses tend to have quite distinct, straightforward value chains but do require some capabilities that many product businesses might not be very strong at, such as delivery and customer support.
Freemium is a portmanteau of the words free and premium. It refers to business models where a company offers a free version of their product, typically with certain limitations, in order to attract users and eventually upgrade them to paying “premium customers”.
For businesses with a good product, high gross margins and high customer acquisition costs, such as most content and software businesses, this can be a very powerful model, especially in crowded markets.
The Freemium model is quite common for B2B software products that tend to have bottom-up adoption like Slack and Zoom , but also for many B2C services, such as Spotify and Apple iCloud .
The downside is that without strong value creation, freemium models might make it difficult for the business to capture enough value.
In essence, platforms are places that aggregate and/or facilitate supply and demand meeting. Platforms are characterized by their distributed approach to creating value.
In practice that means that they’re basically either matchmakers or marketplaces, but still come in many shapes and forms. They typically earn money by either taking a commission of the transactions, or by charging the supply side for the value-added services they provide.
These days you mostly hear the term being used for digital platforms, but the business model far predates online services. Shopping malls and classified ads in newspapers are just a couple of examples of traditional platform business models.
The challenge with platform business models is that it's often really hard to get platforms off the ground and achieve a critical mass where they become self-sustaining.
Both consumer and industrial goods manufacturers have traditionally relied on a, often complicated, supply chain of wholesalers and retailers to sell their goods.
Before the Internet, that allowed them to have a much larger geographical reach and thus benefit from economies of scale.
However, with the rise of e-commerce, we’ve seen a rapid rise in the popularity of the Direct-to-Consumer business model in many categories of consumer goods.
This approach provides the manufacturer with higher margins as the middlemen are removed, gives them much more control over the brand, customer experience and relationship, and provides them with more data, that is also of higher quality, on demand and customer preferences.
Ads, affiliates & sponsorships
For as long as there have been content and communication channels, there’s been advertising in one form or the other, and that hasn’t changed recently.
With the rise of the Internet, smartphones, and the democratization of content creation, we’ve seen a dramatic increase in content, which has made the traditional business model of monetizing content with advertising and sponsorships harder since there’s so much more competition for people’s attention.
For the right kind of audiences, typically in very specific niches, it can still be a viable business model in itself and for other businesses with a sizeable following, it can become an additional secondary source of income.
For example, while Spotify generates the vast majority of its revenue and profits from its subscribers, advertising revenue does provide the company with a solid secondary revenue stream that can be used for investing in growth.
Loss leaders & add-on services
While there’s nothing new in selling professional services, we’ve seen many interesting novel business models built around them.
A great example of this is the business model of open source software companies like WordPress, Red Hat and Elastic . These companies have built very popular open source software products that they let other companies use completely for free.
When you give away great software for free, it tends to become extremely widely adopted, as has certainly been the case for the aforementioned three products. Without the open source model, these companies would never have been able to reach the kind of market share they’ve actually managed to get to.
Once their products have been adopted at scale, the open source companies are obviously well positioned to either sell professional services or offer hosting services for this large base of users.
The same basic logic of giving something away for free, or at a loss, and then sell additional products or services to that wider customer base is also known as a loss leader strategy. It has been widely adopted across many industries, such as retail where stores might offer a real bargain for certain attractive products to lure in more foot traffic.
In general, selling maintenance contracts and other add-on services has become a ubiquitous business model especially in B2B, but also for more expensive B2C products, such as cars.
Razor & blades
The idea is that you provide a product, like the razor, at a very affordable price – typically at a loss – and then make the profits by continuously selling complementary, consumable items for it, just like the blades for the razor.
Interestingly, just like with so many other stories of innovation , the story of the business model being invented by Gillette when he first created disposable razor blades isn’t true . In reality, it was invented by the competitors that entered the market once Gillette’s patents expired.
Since then, the model has been adopted by many companies selling goods like film cameras, printers and Nespresso capsules .
While the aforementioned examples cover some of the innovative business model patterns that we’ve seen gain popularity in the recent years, there are many others as well: franchising, auctions, micropayments, pay-what-you-want , the list goes on.
The Business Model Navigator is a very convenient and easy-to-use tool for browsing these patterns.
There are literally countless ways you can combine the different business models together with different product and service offerings to try to maximize the value created by your products and services.
Another example of this is Peloton . They sell high-end exercise equipment like bikes and treadmills for home use, and couple that with a subscription service that provides exercise programs, virtual classes and many other engaging features to accompany the bike. According to the company, even though their devices are quite expensive, they aim to sell them at break-even and then make money with the subscriptions.
This obviously means that to make a profit, they need to ensure that their customers stay motivated and keep exercising, which is what ultimately keeps them fit and creates value for everyone involved.
The leadership of the company may not have managed the business optimally, which has led to severe financial challenges after the lockdowns ended but that doesn't take anything away from the fundamental strength of the business model. Still, this is a great reminder that while a strong business model is a great foundation, there's more to running a successful business than that.
How Do You Create Business Model Innovation?
The examples above have hopefully provided you with some inspiration on what kind of new business models might be possible.
However, if you’re looking to create a business model innovation for your business, here are a few tips that can help you find the right model for you.
1. Start with customer value
The first step, as with every innovation, is to start with customer value.
- What is “the job” that the customer wants done?
- What are the obstacles that currently prevent them from getting the job done?
- What are your customers now using to get the same job done, or why are they putting off doing it?
- How do they know if the job is done or not?
Once you have a clear answer to these questions, you’ll already be well on your way.
2. What are your strengths?
Every business should obviously build their business models to benefit from and take advantage of their own strengths and unique capabilities.
For example, if you have plenty of data and when and how your products break, you’re obviously the party that’s best positioned to provide novel maintenance services, or maybe even insurance for these products.
3. What are your objectives for the business?
Some businesses want to focus on profitability, others want to grow as much as possible, and some simply want to do as good of a job as possible for their customers.
These goals ultimately matter a lot when you’re trying to design the perfect business model as different business models are better suited for different kinds of goals.
Some companies might simply want to find ways to expand their current business with minor tweaks to their model where others might be looking for bigger, more transformative kind of changes.
For example, if you’re looking to maximize growth, you should choose a business model where the customer gets almost all of the value and keep costs down to maximize adoption.
In the short term, you will take a financial hit compared to some of the other models, but this can make the business unattractive for competitors, thus providing you with a big competitive advantage in the long run. The Freemium and open source models are obvious examples of this approach.
4. Look for patterns by benchmarking leading innovators
As mentioned, the best business models are tailored to the needs of your customers, the characteristics of your industry, as well as your business objectives.
Thus, whenever you’re looking to design a new business model, it’s usually a good idea to benchmark what the most innovative companies in the world are currently doing.
You should obviously know where your competition is but remember that the point of business model innovation is to find a way that allows you to provide much more value than they do, either at a lower price or with better margins, maybe even both, so don’t just copy them!
Thus, the best benchmarks are often from very different industries.
As mentioned, the Business Model Navigator is a great resource for this benchmarking process. It’s a website that features 55 different business model patterns that you can try to apply for your own business, including most of the examples we presented above.
5. Put it all together to identify the right model
The next step is to combine your findings from steps 1, 2, 3 and 4. Find ways where you can create as much value for your customers as possible, that uses your strengths, and allows you to capture a fair share of that revenue as determined by your business objectives.
This is obviously the creative part, so it might take some time and effort to get this right, but remember that you can always look at the examples we’ve mentioned above.
On the other hand, if you are selling products, you probably want to turn one off sales into a more predictable stream of revenue, as well as grow the amount of business you get from each customer. In this case, the solution is to either sell add-on services that help your customers make the most out of your products, or to look for ways that you could use to turn those one-off product sales into subscriptions with some service components.
6. Validate and iterate
As with any other kind of innovation, you typically don’t get business model innovation right the first time around either.
In the end, the only way to know if it works is by testing the business model in practice.
The challenging part with many business model innovations are that they often require drastic changes to your current operating model, which you obviously shouldn’t do unless you have strong evidence for the transition being worth it.
Thus, it’s crucially important that you validate the assumptions that you’ve done in the steps leading to this point, starting from your most critical assumption , and pilot that with a small subset of your customers.
Validating the business model at smaller scale obviously saves costs and resources, but has another key advantage: speed. Learning and moving fast is essential for innovation success.
Learning and moving fast is essential for innovation success.
It can sometimes take quite a few of those tweaks to figure out the right business model, even if your products are brilliant, which is why you need to learn, iterate, and move fast when your window of opportunity is still open.
To conclude, business model innovation is a powerful, yet still very underappreciated tool.
It’s one of those topics that is quite straightforward to get the hang of, and can thus help make a difference quite soon.
If you’re not seeing the business results you think you should be getting with your products and services, or you’re looking to take significant market share from entrenched competitors, give business model innovation a try.
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Business Model Innovations: Components and Types with Examples
When reading the success story of any business, the core is the business model. Let us break the term and understand, business model and innovation. A business model is a framework for making money, creating, and capturing value. Innovation is performing tasks differently from the norms. Combined together, a business model innovation is a framework to capture or create value by doing something differently.
Business model innovation does not mean the business has to leapfrog the competition by the product characteristics compared to competitors. A winner in business model innovation is the firm that moved first to change the rules of the game or the firm that came later and pursued a better business model.
To understand business model innovation, it is important to understand the five building blocks of any business model and the type of business model innovation. For better understanding, we have supported each point with relevant examples.
Components of Business Model
Entrepreneurs are well-rehearsed with the components of the business model but do not understand the relevance of the business model analysis . Before we explore each of these components, let us first understand the rationale of each component and the linkage between each of them. To drive customers to the firm, they must provide something worthy to their customer or address the pain points of the customer. The business must provide the customer with a unique value proposition to earn revenue. However, the right value proposition to the wrong customer will not be beneficial, which is why the market segment should be clear.
A revenue model is a structured way to monetize the value proposition. So for the firm to earn high revenue the firm needs to provide the right value proposition to the right market segment. This will intimate the competitors, to prevail during this stage, the firm needs a growth model. The growth model outnumbers competitors and grows profitability. Finally, to deliver the right value proposition, a firm requires the right capabilities i.e. resources, assets, property, human resources, etc.
Customer Value Proposition
A firm’s customer value proposition is the value it can provide the customer through the product/service. It also depends on which aspect solves a problem and/or satisfies the needs of the customer better than the competitors. A value proposition must answer the most asked questions of the target customers: What is so compelling, engaging, rewarding or delightful in a product which will make customers shift from the competitors?
Customers do not always know what they need in a product/service.
For example – customers didn’t know they needed a touch screen and internet connectivity in their mobile phones until the iPhone was launched. The value proposition will also introduce customers to their own latent needs from the product/ service.
The value proposition depends on the reputation, image, assets the firm control, and the relationship with customers.
For Example – A car enthusiast would buy a car not only because of its features and engine capacity but also because it is a BMW or a Ferrari. A brand-focused customer may buy a product because it is sold in a particular store rather than any other store.
The primary source of revenue is through customers and the firm needs to know their customers properly to be able to serve them. Some details which are needed of the customers are:
- What does our primary target audience need?
- What is the market size of our audience?
- Are they willing to pay for your product?
- Will your product be profitable to these target audiences?
The market segment is the section of people to whom the value proposition is being offered or will be offered. The market segment of a business model is about the quality and quantity of the competitors i.e. suppliers, competitors, customers, complementors and others who have to cooperate to create or capture value.
Segmentation can be the type of customers and their preferences, types of products being offered, willingness to pay, demography, geography, distribution channel, types of relationships with customers. Segmentation creates market segments such as a niche market, mass-market, and multi-sided market.
The multi-sided market is when two or more types of market segments are interrelated and the firm makes money by facilitating the interaction.
For example – a credit card market is a multi-sided market as cardholders are on one side and the merchants on the other. The more the cardholder owns a particular card, the better off will be the merchants who accept that particular card and better off will be the credit card company.
The revenue model component is to get the maximum number of market segment who like the value proposition to pay for the product as close to their reservation price without driving them away. A customer’s reservation price is the highest price a customer is ready to pay for the product. These are some of the types of revenue model:
- Asset sales
- And many more
For example – traditionally Kodak used this technique to sell its film-based camera. They kept the camera cost low whereas the cost of each film was high. This made Kodak popular and they reached record-breaking profits. However, the firm failed miserably when it applied the same model in digital photography.
The price is such an important factor for the revenue model, the entrepreneurs must keep in mind to set the price right. Too high a price will drive the customers away to the competitors or too low a price (without any strategic motive) will lave unnecessary money on the table.
The growth component of a business model is to analyze the following questions and plan them to create the best strategy to grow profitably:
- What a firm has to do to increase the number of customers?
- Strategies to increase the willingness to pay?
- How to keep the price close to the reservation price while keeping it low?
As the firms start providing value for money and making revenue, the competitors increase the prices. The supplier will charge extra money for the commodity or the delivery logistics will increase the charges. This forces the firms to decrease the quality of the product to increase the number of delivery.
Even the competitors will want to go ahead of the firm by imitating or will leapfrog the firm for their benefits, forcing the firm to lower the price or raise its costs.
For example, The internet disrupted the business model of many newspapers and other traditional media, killing their revenue model. Similarly, in today’s world, several unique online business ideas are disrupting the offline business models. An important part of the growth model is to find new UVP and revenue models to relative competitors.
Capabilities are the central point for any business model analysis. The biggest entrepreneurial challenge is to build the capability to take advantage of any opportunity by offering the maximum value proposition. Find the market segment whose needs it can satisfy, increase the number of high-willingness to pay customers in the already existing market or move to the new market. Looking for a better revenue model or improve the existing, work on better pricing model or work towards profitable growth.
Capabilities in a business model consist of resources and activities. Resources are the assets that a firm owns or has access to, whereas activities are what it does. Activities transform resources into values created and/or captured. The quality of the resource determines the amount of value created and/or captured.
For example: At the core of Google’s business model are search capabilities that enable it to deliver searches that are perceived as very dependable by many customers, software that enables it to serve the needs of the long tail searches, tools that it offers to app developers, and so on and so forth.
Conceptualize or Evaluate Your Business Model Framework
Business model innovation and its types .
In a regular business model innovation, the new firms use the same/existing capabilities i.e. value chain activities and underpinning resources. The business model is such that the existing firms in the market still remain competitive. Products of the old firm still take up enough market share to be competitive enough.
Example: The strategy pursued by Dell in the 90s when it introduced the built-to-order direct model. Rather than passing their product through distributors, Dell directly sold their products to the customers. The customers could order from Dell, informing them about their specification needed by them. Dell brought something new in the market but the capabilities that it used for this strategy was not radically different from the ones existing in the market. The business model was such that the other computer makers like HP, Compaq who sold through distributors were still in the market and earned profitability.
In capabilities building innovation, the capabilities needed in the new business model is radically different from the old business model. The old business is still competitive along with the new one. The capability needed in the new business model has to be created from scratch or acquired in some other way.
Example: A firm that produces renewable resources is an example of capability building innovation. The capabilities of this firm will be highly different from the petroleum-based business model. Creating ethanol from sugar cane, sugar beet, corn and sweet potato which is completely from drills, pump out, refine petrol. Both the fuels co-exist in the market.
The popular example of capabilities building is of brick and mortar vs online store. The capabilities needed for both are completely different yet they co-exist in the market share.
In Position building business model, the product/service rooted in the new business model overpowers the product/service in the old business model leaving the latter non-competitive. However, the capabilities of both business models are the same.
Example: When Walmart came to a small town in the US, it was a position building business model. The capabilities of Walmart were almost the same as retailers’ business models. Walmart rendered many small businesses out of competition as the old business model could not offer the customer the cost-saving offered by Walmart.
In the revolutionary business model, the core capabilities that underpin the new and old businesses are completely different. The capabilities used by the old business model is completely useless for the new business. The revolutionary business model redefines the creation and capturing of value by overturning the way value chain activities were performed earlier. The rule of the game is changed both market-wise and capability-wise.
Example: eBay was launched on a revolutionary business model. The online auction required radically different capabilities as compared to an offline auction. For many products, the offline business model is not competitive.
Dynamic and Application
While dividing the business model into different types, we have assumed that the business model is static- that is when a business model is regular it will remain regular always. Nullifying the assumption, many business models may start off as regular but as time goes by many change into position building, capability-building, revolutionary, etc.
Example: Usually, disruptive technologies start off as regular and move on to become revolutionary or position building. Google was neither the first to introduce a search engine nor the first to launch sponsored ads. However, due to its business model innovation, it became revolutionary and monetized more by being a search engine.
To what extent is the game changed by business model innovation? This one question’s answer must be clear in the mind of entrepreneurs after this post. Understand the two variables in the two by two matrix figure(1.1), after deep analysis of your business and the market in which you are entering. Devising a business model must be done after close consideration of all the points mentioned above. Have other queries related to business model Analysis? Talk to our experts.
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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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The Hard Truth About Business Model Innovation
Many attempts at business model innovation fail. To change that, executives need to understand how business models develop through predictable stages over time — and then apply that understanding to key decisions about new business models.
- Business Models
- Developing Strategy
- Executing Strategy
- Skills & Learning
Surveying the landscape of recent attempts at business model innovation, one could be forgiven for believing that success is essentially random. For example, conventional wisdom would suggest that Google Inc., with its Midas touch for innovation, might be more likely to succeed in its business model innovation efforts than a traditional, older, industrial company like the automaker Daimler AG. But that’s not always the case. Google+, which Google launched in 2011, has failed to gain traction as a social network, while at this writing Daimler is building a promising new venture, car2go, which has become one of the world’s leading car-sharing businesses. Are those surprising outcomes simply anomalies, or could they have been predicted?
To our eyes, the landscape of failed attempts at business model innovation is crowded — and becoming more so — as management teams at established companies mount both offensive and defensive initiatives involving new business models. A venture capitalist who advises large financial services companies on strategy shared his observation about the anxiety his investors feel about the changes underway in their industry: “They look at the fintech [financial technology] startups and see their business models being unbundled and attacked at every point in the value chain.” And financial services companies are not alone. A PwC survey published in 2015 revealed that 54% of CEOs worldwide were concerned about new competitors entering their market, and an equal percentage said they had either begun to compete in nontraditional markets themselves or considered doing so. 1 For its part, the Boston Consulting Group reports that in a 2014 survey of 1,500 senior executives, 94% stated that their companies had attempted some degree of business model innovation. 2
We’ve decided to wade in at this juncture because business model innovation is too important to be left to random chance and guesswork. Executed correctly, it has the ability to make companies resilient in the face of change and to create growth unbounded by the limits of existing businesses. Further, we have seen businesses overcome other management problems that resulted in high failure rates. For example, if you bought a car in the United States in the 1970s, there was a very real possibility that you would get a “lemon.” Some cars were inexplicably afflicted by problem after problem, to the point that it was accepted that such lemons were a natural consequence of inherent randomness in manufacturing. But management expert W. Edwards Deming demonstrated that manufacturing doesn’t have to be random, and, having incorporated his insights in the 1980s, the major automotive companies have made lemons a memory of a bygone era. To our eyes, there are currently a lot of lemons being produced by the business model innovation process — but it doesn’t have to be that way.
In our experience, when the business world encounters an intractable management problem, it’s a sign that business executives and scholars are getting something wrong — that there isn’t yet a satisfactory theory for what’s causing the problem, and under what circumstances it can be overcome. This is what has resulted in so much wasted time and effort in attempts at corporate renewal. And this confusion has spawned a welter of well-meaning but ultimately misguided advice, ranging from prescriptions to innovate only close to the core business to assertions about the type of leader who is able to pull off business model transformations, or the capabilities a business requires to achieve successful business model innovation.
The hard truth about business model innovation is that it is not the attributes of the innovator that principally drive success or failure, but rather the nature of the innovation being attempted. Business models develop through predictable stages over time — and executives need to understand the priorities associated with each business model stage. Business leaders then need to evaluate whether or not a business model innovation they are considering is consistent with the current priorities of their existing business model. This analysis matters greatly, as it drives a whole host of decisions about where the new initiative should be housed, how its performance should be measured, and how the resources and processes at work in the company will either support it or extinguish it.
This truth has revealed itself to us gradually over time, but our thinking has crystallized over the past two years in an intensive study effort we have led at the Harvard Business School. As part of that research effort, we have analyzed 26 cases of both successful and failed business model innovation; in addition, we have selected a set of nine industry-leading companies whose senior leaders are currently struggling with the issue of conceiving and sustaining success in business model innovation. (See “About the Research.”) We have profiled these nine companies’ efforts extensively, documented their successes and failures, and convened their executives on campus periodically to enable them to share insights and frustrations with each other. Stepping back, we’ve made a number of observations that we hope will prove generally helpful, and we also have a sense of the work that remains to be done.
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There are a number of lessons that managers can learn from past successes and failures, but all depend on understanding the rules that govern business model formation and development — how new models are created and how they evolve across time, the kinds of changes that are possible to those models at various stages of development, and what that means for organizational renewal and growth.
The Business Model’s Journey
The confusion surrounding business model innovation begins, appropriately enough, with confusion about the term “business model.” In our course at the Harvard Business School, we teach students to use a four-box business model framework that we developed with colleagues from the consulting firm Innosight LLC. This framework consists of the value proposition for customers (which we will refer to as the “job to be done”); the organization’s resources , such as people, cash, and technology; the processes 3 that it uses to convert inputs to finished products or services; and the profit formula that dictates the margins, asset velocity, and scale required to achieve an attractive return. 4 (See “The Elements of a Business Model.”) Collectively, the organization’s resources and processes define its capabilities — how it does things — while its customer value proposition and profit formula characterize its priorities — what it does, and why. 5
This way of viewing business models is useful for two reasons. First, it supplies a common language and framework to understand the capabilities of a business. Second, it highlights the interdependencies among elements and illuminates what a business is in capable of doing. Interdependencies describe the integration required between individual elements of the business model — each component of the model must be congruent with the others. They explain why, for example, Rolls-Royce Motor Cars Ltd. is unable to sell cheap bespoke cars and why Wal-Mart Stores Inc. is unable to combine low prices with fancy stores.
Understanding the interdependencies in a business model is important because those interdependencies grow and harden across time, creating another fundamental truth that is critical for leaders to understand: Business models by their very nature are designed not to change, and they become less flexible and more resistant to change as they develop over time. Leaders of the world’s best businesses should take special note, because the better your business model performs at its assigned task, the more interdependent and less capable of change it likely is. The strengthening of these interdependencies is not an intentional act by managers; rather, it comes from the emergence of processes that arise as the natural, collective response to recurrent activities. The longer a business unit exists, the more often it will confront similar problems and the more ingrained its approaches to solving those problems will become. We often refer to these ingrained approaches as a business’s “culture.” 6
In fact, this pattern is so consistent and important that we’ve begun to think of the development of a business model across time as resembling a journey whose progress and route are predictable — although the time that it takes a business model to follow this journey will differ by industry and circumstance. (See “The Three Stages of a Business Model’s Journey.”) As the diagram depicts, a business model, which in an established company is typically embodied in a business unit, 7 travels a one-way journey, beginning with the creation of the new business unit and its business model, then shifting to sustaining and growing the business unit, and ultimately moving to wringing efficiency from it. Each stage of the journey supports a specific type of innovation, builds a particular set of interdependencies into the model, and is responsive to a particular set of performance metrics. This is the arc of the journey of virtually every business model — if it is lucky and successful enough to travel the entire length of the route. Unsuccessful business units will falter before concluding the journey and be absorbed or shuttered. Now, let’s explore each of the three stages and how the business model evolves through them.
Peter Drucker once said that the purpose of a business is to create a customer. 8 That goal characterizes the first stage of the journey, when the business searches for a meaningful value proposition, which it can design initial product and service offerings to fulfill. This is the stage at which a relatively small band of resources (a founding team armed with an idea, some funding and ambition, and sometimes a technology) is entirely focused on developing a compelling value proposition — fulfilling a significant unmet need, or “job.” 9 It’s useful to think of the members of the founding team as completely immersed in this search. The information swirling around them at this point in the journey — the information they pay the most attention to — consists of insights they are able to glean into the unfulfilled jobs of prospective customers.
We emphasize the primacy of the job at this point of the journey because it is very difficult for a business to remain focused on a customer’s job as the operation scales. Understanding the progress a customer is trying to make — and providing the experiences in purchase and use that will fulfill that job perfectly — requires patient, bottom-up inquiry. The language that is characteristic of this stage is the language of questions, not of answers. The link between value proposition and resources is already forming, but the rest of the model is still unformed: The new organization has yet to face the types of recurrent tasks that create processes, and its profit formula is nascent and exploratory. This gives the business an incredible flexibility that will disappear as it evolves along the journey and its language shifts from questions to answers.
2. Sustaining Innovation
Business units lucky and skilled enough to discover an unfulfilled job and develop a product or service that addresses it enter the sustaining innovation phase of the business model journey. At this stage, customer demand reaches the point where the greatest challenge the business faces is no longer determining whether the product fulfills a job, but rather scaling operations to meet growing demand. Whereas in the creation phase the business unit created customers, in the sustaining innovation phase it is building these customers into a reliable, loyal base and building the organization into a well-oiled machine that delivers the product or service flawlessly and repeatedly. The innovations characteristic of this phase of the business model journey are what we call sustaining innovations — in other words, better products that can be sold for higher prices to the current target market.
A curious change sets in at this stage of the journey, however: As the business unit racks up sales, the voice of the customer gets louder, drowning out to some extent the voice of the job. Why does this happen? It’s not that managers intend to lose touch with the job, but while the voice of the job is faint and requires interrogation to hear, the voice of the customer is transmitted into the business with each sale and gets louder with every additional transaction. The voice of the job emerges only in one-to-one, in-depth conversations that reveal the job’s context in a customer’s life, but listening to the voice of the customer allows the business to scale its understanding. Customers can be surveyed and polled to learn their preferences, and those preferences are then channeled into efforts to improve existing products.
The business unit is now no longer in the business of identifying new unmet needs but rather in the business of building processes — locking down the current model. The data that surrounds managers is now about revenues, products, customers, and competition. While in the creation phase, the founding team had to dig to discover data, data now floods the business’s offices, with more arriving with each new transaction. Data begs to be analyzed — it is the way the game is scored — so the influx of data precipitates the adoption of metrics to evaluate the business’s performance and direct future activity to improving the metrics. The performance metrics in this phase focus on the income statement, leading managers to direct investments toward growing the top line and maximizing the bottom line.
At some point, however, these investments in product performance no longer generate adequate additional profitability. At this point, the business unit begins to prioritize the activities of efficiency innovation, which reduce cost by eliminating labor or by redesigning products to eliminate components or replace them with cheaper alternatives. (There is, however, always some amount of both types of innovation — sustaining and efficiency — occurring at any point of a business’s evolution.) Broadly, the activities of efficiency innovation include outsourcing, adding financial leverage, optimizing processes, and consolidating industries to gain economies of scale. While many factors can cause businesses to transition into the efficiency innovation phase of their evolution, one we have often observed is the result of performance “overshoot,” in which the business delivers more performance than the market can utilize and consumers become unwilling to pay for additional performance improvement or to upgrade to improved versions. Managers should not bemoan the shift to efficiency innovation. It needs to happen; over time, business units must become more efficient to remain competitive, and the shift to efficiency innovations as the predominant form of innovation activity is a natural outcome of that process.
To managers, the efficiency innovation phase marks the point where the voice of the shareholders drowns out the voice of the customer. Gleaning new understanding of that initial job to be done is now the long-lost ambition of a bygone era, and managers become inundated with data about costs and efficiency. The business unit frequently achieves efficiency by shifting to a modular structure, standardizing the interdependencies between each of the components of its business model so that they may be outsourced to third parties. In hardening these interdependencies, the business unit reaps the efficiency rewards of modularization but leaves flexibility behind, firmly cementing the structure of its business model in place. Deviations from the existing structure undermine the modularity of the components and reduce efficiency, so when evaluating such changes, the business will often choose to forsake them in pursuit of greater efficiency.
Now, when the business unit generates increasing amounts of free cash flow from its efficiency innovations, it is likely to sideline the capital, to diversify the company, or to invest it in industry consolidation. This is one of the major drivers of merger and acquisition (M&A) activity. Whereas the sustaining innovation phase was exciting to managers, customers, and shareholders, the efficiency innovation phase reduces degrees of managerial freedom. Efficiency innovations lure managers with their promises of low risk, high returns, and quick paybacks from cost reduction, but the end result is often a race to the bottom that sees the business’s ability to serve the job and customers atrophy as it improves its service to shareholders.
The natural evolution of business units occurs all around us. Consider the case of The Boeing Co. and its wildly successful 737 business unit. The 737 business was announced in 1965 and launched its first version, the 737-100, in 1967, with Lufthansa as its first customer. With orders from several additional major airlines, the new business unit demonstrated that its medium-haul plane fulfilled an important job to be done. Before even delivering the first -100, Boeing began improving the 737 and launched a stretched version, the -200, with a longer fuselage to meet demands from airlines requiring greater seating capacity. Boeing entered the sustaining innovation phase and continued to improve its product by developing several generations of new 737s, stretching the fuselage like an accordion while nearly doubling the plane’s range and more than doubling its revenue per available seat mile. The business continued to improve how it served customers with the Next Generation series in the 1990s, which offered even bigger aircraft and better avionics systems.
Facing increased competition and demands for improved financial performance, the 737 business shifted its focus to efficiency innovation in the early 2000s. To free resources and liberate capital, Boeing began to outsource aspects of 737 production. Most notably, Boeing sold a facility in Wichita, Kansas, that manufactured the main fuselage platform for the 737 to the Toronto-based investment company Onex Corp. in 2005. Outsourcing subsystem production allowed the business to improve its capital efficiency and deliver improved returns on capital. 10
Given that road map, what is the hope for companies that seek to develop new business models or to create new businesses? Thus far in this article we’ve explored the journey that business units take over time. And while we’re not sure that a business unit can break off from this race, we know that its parent companies can — by developing new businesses. Although the processes of an individual business unit’s business model propel it along this journey, the opportunity exists to develop a process of business creation at the corporate level. But doing so successfully requires paying careful attention to the implications of the business model road map.
Implications For Business Model Innovation
It’s worth internalizing the road map view of business model evolution because it helps explain why most attempts to alter the course of existing business units fail. Unaware of the interdependencies and rigidities that constrain business units to pursuing their existing journey, managers attempt to compel existing business units to pursue new priorities or attempt to create a new business inside an existing unit. Using the road map as a guiding principle allows leaders to correctly categorize the innovation opportunities that appear before them in terms of their fit with their existing business model’s priorities. Several recommendations for managers emerge from this insight.
Determine how consistent the opportunity is with the priorities of the existing business model. The only types of innovation you can perform naturally within an existing business model are those that build on and improve the existing model and accelerate its progress along the journey — in other words, those innovations that are consistent with its current priorities — by sharpening its focus on fulfilling the existing job or improving its financial performance. Therefore, a crucial question for leaders to ask when evaluating an innovation opportunity is: To what degree does it align with the existing priorities of the business model?
Many failed business model innovations involve the pursuit of opportunities that appear to be consistent with a unit’s current business model but that in fact are likely to be rejected by the existing business or its customers. (See “Evaluating the Fit Between an Opportunity and an Existing Business.”) To determine how consistent an opportunity is with the priorities of the existing business model, leaders should ask: Is the new job to be done for the customer similar to the existing job? (The greater the similarity, the more appropriate it is for the existing business to pursue the opportunity.) How does pursuit of the opportunity affect the existing profit formula? Are the margins better, transaction sizes larger, and addressable markets bigger? If so, it is likely to fit well with the existing profit formula. If not, managers should tread with caution in asking an existing business to take it on — and should instead consider creating a separate unit to pursue the new business model.
This distinction helps explain the performance of the two innovations with which we opened this article. Google saw Google+ as an extension of its search business and chose to integrate Google+ into its existing products and business. Google+ accounts were integrated into other Google products, and the business saw the incorporation of information from users’ social networks as a way to generate improved, tailored search results. Viewed through the lens of Google’s business model, a social network allowed the business to generate greater revenue and profitability by better targeting advertisements and delivering more advertisements through increased usage of its product platform. However, consumers apparently didn’t see the value from combining search and social networking; to the consumer, the jobs are very different and arise in different circumstances in their lives. So while Google maintains its exceptional search business, its social network failed to gain momentum.
Contrast Google’s experience to that of Daimler, which recognized that car2go was a very different business and established it far afield from the home office and existing business. Daimler started car2go as an experiment tested by its employees working in Ulm, Germany. It housed the business in a corporate incubator that does not report to the existing consumer automotive businesses and designed it from the outset to fulfill Daimler’s core job of providing mobility, but without the need to convince consumers to purchase vehicles. Recognizing that the priorities of a business that rents cars by the minute are very different from those involved in selling luxury vehicles, Daimler has kept car2go separate and allowed it to develop a unique business model capable of fulfilling its job profitably. However, car2go benefits from Daimler’s ownership by using corporate resources where appropriate — for example, car2go rents only vehicles in the Daimler portfolio, principally the Smart Fortwo.
To achieve successful business model innovation, focus on creating new business models, rather than changing existing ones. As business model interdependencies arise, the ability to create new businesses within existing business units is lost. The resources and processes that work so perfectly in their original business model do so because they have been honed and optimized for delivering on the priorities of that model. The classic example of this was the movie rental company Blockbuster, which attempted to develop a new DVD-by-mail business in response to the rise of Netflix Inc. by integrating that offering with its existing store network. This “bricks-and-clicks” combination made perfect sense to Blockbuster’s managers, but what became obvious only in hindsight was that the two models would be at war with each other — the asset velocity required to maintain a profitable store network was incompatible with the DVD-by-mail offering. The paradox that managers must confront is that the specialized capabilities that are highly valuable to their current business model will tend to be unsuitable for, or even run counter to, the new business model.
Building a Business Creation Engine
For some time, we’ve argued that companies should build a business creation engine, capable of turning out a steady stream of innovative new business models, but to date no company we know of has built an enduring capability like that. We think that such an engine of sustained growth would quickly prove to be a company’s most valuable asset, providing growth and creating new markets. But unleashing this growth potential requires very different behaviors than those required to successfully exploit existing markets.
The challenge, as the journey metaphor we’ve developed here should make clear, is that what is necessary is to turn an event — the act of creating a new business and a new business model — into a repeatable process at the corporate level. It must be a process because events are discrete activities with definitive start and end points, whereas processes are continuous and dynamic. Learnings from a previous event do not naturally or easily flow to subsequent events, causing the same mistakes to be repeated over and over. In contrast, processes by their nature can be learning opportunities that incorporate in future attempts what was discovered in previous iterations. Enacted as a process, the act of creation will improve over time and refine its ability to discover unfulfilled customer jobs and create new markets; the success rate will improve alongside the process, creating a virtuous cycle of growth.
While we have not discovered a perfect exemplar of this discipline, we have been tracking the efforts of some leading companies that are intent on building such a capability. While it is too early to hold any of them up as success stories, we can nonetheless discern five approaches that we believe have the potential to lead to success. Let’s look at each of these approaches in turn.
Spot future growth gaps by understanding where each of your business units is on the journey. In our course at Harvard Business School, we teach students to use a tool called the aggregate project plan to allocate funding to different types of innovation. 11 Such a plan categorizes innovations by their distance from existing products and markets and specifies a desired allocation of funding to each bucket. We see application for this tool here as well.
The innovation team at Carolinas HealthCare System, a not-for-profit health care organization based in Charlotte, North Carolina, performed this type of analysis and identified a need to field additional innovation efforts that reflected the organization’s belief that hospitals will be less central in the health care system of the future. Armed with this view, Carolinas HealthCare System has been able to plan innovation activity by type, ensuring that the organization invests appropriately across all three categories of the business model journey. As Dr. Jean Wright, chief innovation officer at Carolinas HealthCare System, said, “The strength of the journey framework is that it allowed us to see that our investments in business creation are very different from our investments in our existing businesses. More importantly, it has helped us see that both types are important.”
Run with potential disruptors of your business. Another approach is to create incentives and channels for entrepreneurs to bring new and, in some cases, potentially disruptive business models to you, either as potential customers or as ecosystem partners. ARM Holdings plc, a developer and licenser of system-on-chip semiconductors, headquartered in Cambridge, U.K., has had success viewing itself as the central, coordinating node of a symbiotic ecosystem of independent semiconductor manufacturers and consumer products companies, rather than as a traditional semiconductor company that develops and manufactures proprietary, standard products. Today, nearly every smartphone and mobile device includes at least one ARM design. The company achieved this ubiquity by inviting customers and consumers into its development process so that it will be the first company called by customers seeking to design a new chip. It does this in two ways: first, by incorporating knowledge across its entire ecosystem that allows it to develop optimized end-to-end solutions for customers, and second, by employing a royalty-based revenue model that ensures ARM’s incentives are aligned with those of its customers.
Start new businesses by exploring the job to be done. When identifying new market opportunities, it’s critical that you begin with a focus on the customer’s job to be done, rather than on your company’s capabilities. It’s tempting to look at your capabilities as the starting point for any expansion, but capabilities are of no use without a job for them. For incumbents, this requires staying focused on the job rather than the market or capability. One example of this discipline is Corning Inc., the manufacturer of specialty glass and ceramic materials based in Corning, New York. When it becomes apparent that a Corning business can no longer generate a premium price from its technical superiority — when it reaches the efficiency innovation stage, in our framework — the company divests that business and uses the proceeds to expand businesses in the sustaining stage and to create new ones. For example, when Corning realized that liquid crystal display (LCD) would eventually replace cathode ray tube (CRT) technology to become the future of display, the company focused on the job to be done — display — rather than just on the CRT market, which at the time was important to the company. Corning began inventing products to enable the growth of the LCD industry and eventually decided to exit the CRT market. 12 To Corning, businesses serve needs, not markets, and as technological or market shifts occur, the company continues to grow by remaining focused on the need, which we call the job.
Resist the urge to force new businesses to find homes in existing units. When executives start new businesses, they often look at them and wonder, “Where do I stick this in my organization?” They feel pressure to combine new businesses with existing structures to maximize efficiency and spread overhead costs over the widest base, but this can spell doom for the new business. When a new business is housed within an existing unit, it must adopt the priorities of the existing business to secure funding; in doing so, the new business often survives in name but disappears in effect.
Once a new business is launched, it must remain independent throughout the duration of its journey, but maintaining autonomy requires ongoing leadership attention. The forces of efficiency operate 24/7 inside an organization, rooting out any cost perceived to be superfluous; standing against these forces requires the constant application of a counterforce that only the company’s most senior leaders can provide. In the quest for efficiency, what has been somehow forgotten is the vital leadership role that corporate executives can play in fostering organizational innovation by countenancing the creation of multiple profit formulas and housing these different businesses in a portfolio of business models.
Use M&A to create internal business model disruption and renewal. Lastly, while we’ve focused most of our attention on organic activities, there’s a very valuable role for M&A in a business growth engine. 13 Although at the extreme, this approach can result in a quasi-conglomerate structure that history has proved to be ineffective, there are exceptions. EMC Corp., based in Hopkinton, Massachusetts, adopted this approach with the creation of its federation structure when it floated VMware Inc., a company it had acquired three years earlier, as a publicly traded subsidiary in 2007. Much M&A activity designed to change an existing business model fails because it’s done for the wrong reasons and managed in the wrong way, often resulting in the integration of units that should remain autonomous. In contrast, EMC’s federation structure allows each business to pursue its individual objectives while coordinating the company’s activity as a whole. This embedded capability for exploiting existing markets while identifying and investing in new markets allowed EMC to expand out of its traditional memory business into machine virtualization, agile development, and information security.
The Greatest Innovation Risk
Executives sometimes prefer to invest in their existing businesses because those investments seem less risky than trying to create entirely new businesses. But our understanding of the business model journey allows us to see that, over the long term, the greatest innovation risk a company can take is to decide not to create new businesses that decouple the company’s future from that of its current business units.
We take great hope from the insights about business model innovation and corporate renewal that we have explored in this article — not because we believe that business units can evade or escape the journey that we have described, but because we believe that the corporations that house these units can. There remains much to be learned about corporate renewal and the business model journey, but we hope that insights from the business model road map can help companies learn how to create robust corporate-level business creation engines that will renew their organizations and power growth. The challenge is great — but so are the potential rewards.
About the Authors
Clayton M. Christensen is the Kim B. Clark Professor of Business Administration at Harvard Business School in Boston, Massachusetts. Thomas Bartman is a former senior researcher at the Forum for Growth and Innovation at Harvard Business School. Derek van Bever is a senior lecturer of business administration at Harvard Business School, as well as director of the Forum for Growth and Innovation.
1. PwC, “2015 US CEO Survey: Top Findings — Grow and Create Competitive Advantage,” n.d., www.pwc.com.
2. Z. Lindgardt and M. Ayers, “Driving Growth with Business Model Innovation,” October 8, 2014, www.bcg.perspectives.com.
3. See D.A. Garvin, “The Processes of Organization and Management,” Sloan Management Review 39, no. 4 (summer 1998): 33-50. In discussing processes, we refer to all of the processes that Garvin identified in that article.
4. This business model framework was developed in 2008; see M.W. Johnson, C.M. Christensen, and H. Kagermann, “Reinventing Your Business Model,” Harvard Business Review 86, no. 12 (December 2008): 50-59.
5. For more information about organizational capabilities, see C.M. Christensen and S.P. Kaufman, “Assessing Your Organization’s Capabilities: Resources, Processes, and Priorities,” module note 9-607-014, Harvard Business School, Boston, Massachusetts, August 21, 2008, http://hbr.org.
6. See E.H. Schein, “Organizational Culture and Leadership” (San Francisco, California: Jossey-Bass, 1985).
7. It’s worth noting that startups typically begin with one business unit, which is the company. Then as the organization grows, companies typically create corporate offices and business units that separate responsibility for the administration of the organization from the specific business. Today, managers tend to operate lean corporate offices that often function as thin veneers between the business and investors, but we believe that there is a vital role for the corporate office in leading business creation and developing innovation.
8. P.F. Drucker, “The Practice of Management” (New York: Harper & Row, 1954).
9. For a more complete treatment of jobs to be done, see C.M. Christensen, T. Hall, K. Dillon, and D.S. Duncan, “Competing Against Luck: The Story of Innovation and Customer Choice” (New York: HarperCollins, in press).
10. W. Shih and M. Pierson, “Boeing 737 Industrial Footprint: The Wichita Decision,” Harvard Business School case no. 612-036 (Boston, Massachusetts: Harvard Business School Publishing, 2011, revised 2012).
11. S.C. Wheelwright and K.B. Clark, “Creating Project Plans to Focus Product Development,” Harvard Business Review 70, no. 2 (March-April 1992): 70-82.
12. Authors’ teleconference with David L. Morse, executive vice president and chief technology officer, Corning Inc., March 8, 2016.
13. J. Gans, “The Disruption Dilemma” (Cambridge, Massachusetts: MIT Press, 2016).
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How to Design a Winning Business Model
- Ramon Casadesus-Masanell
- Joan E. Ricart
Smart companies’ business models generate cycles that, over time, make them operate more effectively.
Most executives believe that competing through business models is critical for success, but few have come to grips with how best to do so. One common mistake, the authors’ studies show, is enterprises’ unwavering focus on creating innovative models and evaluating their efficacy in standalone fashion—just as engineers test new technologies or products. However, the success or failure of a company’s business model depends largely on how it interacts with those of the other players in the industry. (Almost any business model will perform brilliantly if a company is lucky enough to be the only one in a market.) Because companies build them without thinking about the competition, companies routinely deploy doomed business models.
Moreover, many companies ignore the dynamic elements of business models and fail to realize that they can design business models to generate winner-take-all effects similar to the network externalities that high-tech companies such as Microsoft, eBay, and Facebook often create. A good business model creates virtuous cycles that, over time, result in competitive advantage.
Smart companies know how to strengthen their virtuous cycles, undermine those of rivals, and even use them to turn competitors’ strengths into weaknesses.
The Idea in Brief
There has never been as much interest in business models as there is today; seven out of 10 companies are trying to create innovative business models, and 98% are modifying existing ones, according to a recent survey.
However, most companies still create and evaluate business models in isolation, without considering the implications of how they will interact with rivals’ business models. This narrow view dooms many to failure.
Moreover, companies often don’t realize that business models can be designed so that they generate virtuous cycles—similar to the powerful effects high-tech firms such as Facebook, eBay, and Microsoft enjoy. These cycles, when aligned with company goals, reinforce competitive advantage.
By making the right choices, companies can strengthen their business models’ virtuous cycles, weaken those of rivals, and even use the cycles to turn competitors into complementary players.
This is neither strategy nor tactics; it’s using business models to gain competitive advantage. Indeed, companies fare poorly partly because they don’t recognize the differences between strategy, tactics, and business models.
Strategy has been the primary building block of competitiveness over the past three decades, but in the future, the quest for sustainable advantage may well begin with the business model. While the convergence of information and communication technologies in the 1990s resulted in a short-lived fascination with business models, forces such as deregulation, technological change, globalization, and sustainability have rekindled interest in the concept today. Since 2006, the IBM Institute for Business Value’s biannual Global CEO Study has reported that senior executives across industries regard developing innovative business models as a major priority. A 2009 follow-up study reveals that seven out of 10 companies are engaging in business-model innovation, and an incredible 98% are modifying their business models to some extent. Business model innovation is undoubtedly here to stay.
That isn’t surprising. The pressure to crack open markets in developing countries, particularly those at the middle and bottom of the pyramid, is driving a surge in business-model innovation. The economic slowdown in the developed world is forcing companies to modify their business models or create new ones. In addition, the rise of new technology-based and low-cost rivals is threatening incumbents, reshaping industries, and redistributing profits. Indeed, the ways by which companies create and capture value through their business models is undergoing a radical transformation worldwide.
Yet most enterprises haven’t fully come to grips with how to compete through business models. Our studies over the past seven years show that much of the problem lies in companies’ unwavering focus on creating innovative models and evaluating their efficacy in isolation—just as engineers test new technologies or products. However, the success or failure of a company’s business model depends largely on how it interacts with models of other players in the industry. (Almost any business model will perform brilliantly if a company is lucky enough to be the only one in a market.) Because companies build them without thinking about the competition, they routinely deploy doomed business models.
A business model comprises choices and consequences.
Our research also shows that when enterprises compete using business models that differ from one another, the outcomes are difficult to predict. One business model may appear superior to others when analyzed in isolation but create less value than the others when interactions are considered. Or rivals may end up becoming partners in value creation. Appraising models in a stand-alone fashion leads to faulty assessments of their strengths and weaknesses and bad decision making. This is a big reason why so many new business models fail.
Moreover, the propensity to ignore the dynamic elements of business models results in many companies failing to use them to their full potential. Few executives realize that they can design business models to generate winner-take-all effects that resemble the network externalities that high-tech companies such as Microsoft, eBay, and Facebook have created. Whereas network effects are an exogenous feature of technologies, winner-take-all effects can be triggered by companies if they make the right choices in developing their business models. Good business models create virtuous cycles that, over time, result in competitive advantage. Smart companies know how to strengthen their virtuous cycles, weaken those of rivals, and even use their virtuous cycles to turn competitors’ strengths into weaknesses.
“Isn’t that strategy?” we’re often asked. It isn’t—and unless managers learn to understand the distinct realms of business models, strategy, and tactics, while taking into account how they interact, they will never find the most effective ways to compete.
What Is a Business Model, Really?
Everyone agrees that executives must know how business models work if their organizations are to thrive, yet there continues to be little agreement on an operating definition. Management writer Joan Magretta defined a business model as “the story that explains how an enterprise works,” harking back to Peter Drucker, who described it as the answer to the questions: Who is your customer, what does the customer value, and how do you deliver value at an appropriate cost?
Other experts define a business model by specifying the main characteristics of a good one. For example, Harvard Business School’s Clay Christensen suggests that a business model should consist of four elements: a customer value proposition, a profit formula, key resources, and key processes. Such descriptions undoubtedly help executives evaluate business models, but they impose preconceptions about what they should look like and may constrain the development of radically different ones.
Our studies suggest that one component of a business model must be the choices that executives make about how the organization should operate—choices such as compensation practices, procurement contracts, location of facilities, extent of vertical integration, sales and marketing initiatives, and so on. Managerial choices, of course, have consequences. For instance, pricing (a choice) affects sales volume, which, in turn, shapes the company’s scale economies and bargaining power (both consequences). These consequences influence the company’s logic of value creation and value capture, so they too must have a place in the definition. In its simplest conceptualization, therefore, a business model consists of a set of managerial choices and the consequences of those choices.
Companies make three types of choices when creating business models. Policy choices determine the actions an organization takes across all its operations (such as using nonunion workers, locating plants in rural areas, or encouraging employees to fly coach class). Asset choices pertain to the tangible resources a company deploys (manufacturing facilities or satellite communication systems, for instance). And governance choices refer to how a company arranges decision-making rights over the other two (should we own or lease machinery?). Seemingly innocuous differences in the governance of policies and assets influence their effectiveness a great deal.
Consequences can be either flexible or rigid. A flexible consequence is one that responds quickly when the underlying choice changes. For example, choosing to increase prices will immediately result in lower volumes. By contrast, a company’s culture of frugality—built over time through policies that oblige employees to fly economy class, share hotel rooms, and work out of Spartan offices—is unlikely to disappear immediately even when those choices change, making it a rigid consequence. These distinctions are important because they affect competitiveness. Unlike flexible consequences, rigid ones are difficult to imitate because companies need time to build them.
Take, for instance, Ryanair, which switched in the early 1990s from a traditional business model to a low-cost one. The Irish airline eliminated all frills, cut costs, and slashed prices to unheard-of levels. The choices the company made included offering low fares, flying out of only secondary airports, catering to only one class of passenger, charging for all additional services, serving no meals, making only short-haul flights, and utilizing a standardized fleet of Boeing 737s. It also chose to use a nonunionized workforce, offer high-powered incentives to employees, operate out of a lean headquarters, and so on. The consequences of those choices were high volumes, low variable and fixed costs, a reputation for reasonable fares, and an aggressive management team, to name a few. (See “Ryanair’s Business Model Then and Now.”) The result is a business model that enables Ryanair to offer a decent level of service at a low cost without radically lowering customers’ willingness to pay for its tickets.
Ryanair’s Business Model Then and Now
This depiction of Ryanair’s business model in the 1980s highlights the airline’s major choices at the time: offering excellent service and operating with a standardized fleet. The airline was forced to redesign its business model in the face of stiff competition.
Ryanair’s current business model rests on the key choices of offering customers low fares and providing nothing free. The rigid consequences include a reputation for fair fares and low fixed costs. Ryanair’s choices are aligned with its goals, generate cycles that reinforce the business model, and are robust given that it has been operating as a low-cost airline for 20 years.
Click here for a larger image of the graphic.
How Business Models Generate Virtuous Cycles
Not all business models work equally well, of course. Good ones share certain characteristics: They align with the company’s goals, are self-reinforcing, and are robust. (See the sidebar “Three Characteristics of a Good Business Model.”) Above all, successful business models generate virtuous cycles, or feedback loops, that are self-reinforcing. This is the most powerful and neglected aspect of business models.
Three Characteristics of a Good Business Model
How can you tell if a business model will be effective? A good one will meet three criteria.
1. Is it aligned with company goals?
The choices made while designing a business model should deliver consequences that enable an organization to achieve its goals. This may seem obvious until you consider a counterexample. In the 1970s, Xerox set up Xerox PARC, which spawned technological innovations such as laser printing, Ethernet, the graphical user interface, and very large scale integration for semiconductors. However, Xerox PARC was notoriously unable to spawn new businesses or capture value from its innovations for the parent due to a distressing lack of alignment with Xerox’s goals.
2. Is it self-reinforcing?
The choices that executives make while creating a business model should complement one another; there must be internal consistency. If, ceteris paribus, a low-cost airline were to decide to provide a level of comfort comparable to that offered by a full-fare carrier such as British Airways, the change would require reducing the number of seats on each plane and offering food and coffee. These choices would undermine the airline’s low-cost structure and wreck its profits. When there’s a lack of reinforcement, it’s possible to refine the business model by abandoning some choices and making new ones.
3. Is it robust?
A good business model should be able to sustain its effectiveness over time by fending off four threats, identified by Pankaj Ghemawat. They are imitation (can competitors replicate your business model?); holdup (can customers, suppliers, or other players capture the value you create by flexing their bargaining power?); slack (organizational complacency); and substitution (can new products decrease the value customers perceive in your products or services?). Although the period of effectiveness may be shorter nowadays than it once was, robustness is still a critical parameter.
Our studies show that the competitive advantage of high-tech companies such as Apple, Microsoft, and Intel stems largely from their accumulated assets—an installed base of iPods, Xboxes, or PCs, for instance. The leaders gathered those assets not by buying them but by making smart choices about pricing, royalties, product range, and so on. In other words, they’re consequences of business model choices. Any enterprise can make choices that allow it to build assets or resources—be they project management skills, production experience, reputation, asset utilization, trust, or bargaining power—that make a difference in its sector.
The consequences enable further choices, and so on. This process generates virtuous cycles that continuously strengthen the business model, creating a dynamic that’s similar to that of network effects. As the cycles spin, stocks of the company’s key assets (or resources) grow, enhancing the enterprise’s competitive advantage. Smart companies design business models to trigger virtuous cycles that, over time, expand both value creation and capture.
For example, Ryanair’s business model creates several virtuous cycles that maximize its profits through increasingly low costs and prices. (See the exhibit “Ryanair’s Key Virtuous Cycles.”) All of the cycles result in reduced costs, which allow for lower prices that grow sales and ultimately lead to increased profits. Its competitive advantage keeps growing as long as the virtuous cycles generated by its business model spin. Just as a fast-moving body is hard to stop because of kinetic energy, it’s tough to halt well-functioning virtuous cycles.
Ryanair’s Key Virtuous Cycles
Cycle 1: Low fares >> High volumes >> Greater bargaining power with suppliers >> Lower fixed costs >> Even lower fares
Cycle 2: Low fares >> High volumes >> High aircraft utilization >> Low fixed cost per passenger >> Even lower fares
Cycle 3: Low fares >> Expectations of low-quality service >> No meals offered >> Low variable costs >> Even lower fares
However, they don’t go on forever. They usually reach a limit and trigger counterbalancing cycles, or they slow down because of their interactions with other business models. In fact, when interrupted, the synergies work in the opposite direction and erode competitive advantage. For example, one of Ryanair’s cycles could become vicious if its employees unionized and demanded higher wages, and the airline could no longer offer the lowest fares. It would then lose volume, and aircraft utilization would fall. Since Ryanair’s investment in its fleet assumes a very high rate of utilization, this change would have a magnified effect on profitability.
It’s easy to see that virtuous cycles can be created by a low-cost, no-frills player, but a differentiator may also create virtuous cycles. Take the case of Irizar, a Spanish manufacturer of bodies for luxury motor coaches, which posted large losses after a series of ill-conceived moves in the 1980s. Irizar’s leadership changed twice in 1990 and morale hit an all-time low, prompting the new head of the company’s steering team, Koldo Saratxaga, to make major changes. He transformed the organization’s business model by making choices that yielded three rigid consequences: employees’ tremendous sense of ownership, feelings of accomplishment, and trust. The choices included eliminating hierarchy, decentralizing decision making, focusing on teams to get work done, and having workers own the assets. (See the exhibit “Irizar’s Novel Business Model.”)
Irizar’s Novel Business Model
When Irizar—a Spanish cooperative that manufactures luxury motor coach bodies—created a radically different business model, it made several innovative choices.
- Workers own assets and contribute financially to join Irizar
- Teams set their own goals and choose leaders
- No bosses, only coordinators
- Flat hierarchy, with only three levels
- No overtime pay
- Decentralized decision making
- Shared information and transparency about performance
- No walls inside plants or offices; no assigned parking spaces
- Tenure after three years of probation; no evaluation or firings thereafter
- No clocking in and out
- Only one product for all markets
- Most repetitive tasks outsourced
- Relatively high product prices
- Pay scale ratio of just 3:1
- Some profit (or loss) sharing every year
These choices have led to innovation, high quality, and excellent service, generating high sales volume as well as customer loyalty.
Irizar’s main objective, as a cooperative, is to increase the number of well-paying jobs in the Basque Country, so the company developed a business model that generates a great deal of customer value. Its key virtuous cycle connects customers’ willingness to pay with relatively low cost, generating high profits that feed innovation, service, and high quality. In fact, quality is the cornerstone of Irizar’s culture. Focusing on customer loyalty and an empowered workforce, the company enjoyed a 23.9% compound annual growth rate over the 14 years that Saratxaga was CEO. Producing 4,000 coaches in 2010 and generating revenues of about €400 million, Irizar is an example of a radically different business model that generates virtuous cycles.
Competing with Business Models
It’s easy to infuse virtuousness in cycles when there are no competitors, but few business models operate in vacuums—at least, not for long. To compete with rivals that have similar business models, companies must quickly build rigid consequences so that they can create and capture more value than rivals do. It’s a different story when enterprises compete against dissimilar business models; the results are often unpredictable, and it’s tough to know which business model will perform well.
Take, for instance, the battle between two of Finland’s dominant retailers: S Group, a consumers’ cooperative, and Kesko, which uses entrepreneur-retailers to own and operate its stores. We’ve tracked the firms for over a decade, and Kesko’s business model appears to be superior: The incentives it offers franchisees should result in rapid growth and high profits. However, it turns out that the S Group’s business model hurts Kesko more than Kesko’s affects the S Group. Since customers own the S Group, the retailer often reduces prices and increases customer bonuses, which allows it to gain market share from Kesko. That forces Kesko to lower its prices and its profits fall, demotivating its entrepreneur-retailers. As a result, Kesko underperforms the S Group. Over time, the S Group’s opaque corporate governance system allows slack to creep into the system, and it is forced to hike prices. This allows Kesko to also increase prices and improve profitability, drive its entrepreneur-retailers, and win back more customers through its superior shopping experience. That sparks another cycle of rivalry.
Companies can compete through business models in three ways: They can strengthen their own virtuous cycles, block or destroy the cycles of rivals, or build complementarities with rivals’ cycles, which results in substitutes mutating into complements.
Strengthen your virtuous cycle.
Companies can modify their business models to generate new virtuous cycles that enable them to compete more effectively with rivals. These cycles often have consequences that strengthen cycles elsewhere in the business model. Until recently, Boeing and Airbus competed using essentially the same virtuous cycles. Airbus matched Boeing’s offerings in every segment, the exception being the very large commercial transport segment where Boeing had launched the 747 in 1969. Given the lumpiness of demand for aircraft, their big-ticket nature, and cyclicality, price competition has been intense.
How Airbus Bolstered Its Business Model
Companies can often strengthen their business models to take on competitors more effectively. Airbus’s business model initially fell short because Boeing could reinvest profits from its 747, which enjoyed a monopoly in the very large commercial transport segment. In 2007, Airbus launched the 380 to compete in that segment—strengthening its virtuous cycle relative to Boeing’s.
Historically, Boeing held the upper hand because its 747 enjoyed a monopoly, and it could reinvest those profits to strengthen its position in other segments. Analysts estimate that the 747 contributed 70 cents to every dollar of Boeing’s profits by the early 1990s. Since R&D investment is the most important driver of customers’ willingness to pay, Airbus was at a disadvantage. It stayed afloat by obtaining low-interest loans from European governments. Without the subsidies, Airbus’s cycle would have become vicious.
With the subsidies likely to dry up, Airbus modified its business model by developing a very large commercial transport, the 380. To dissuade Airbus, Boeing announced a stretch version of the 747. However, that aircraft would cut into the 747’s profits, so it seems unlikely that Boeing will ever launch it. Not only does the 380 help maintain the virtuousness of Airbus’s cycle in small and midsize planes, but also it helps decelerate the virtuousness of Boeing’s cycle. The increase in rivalry suggests that the 747 will become less of a money-spinner for Boeing. That’s why it is trying to strengthen its position in midsize aircraft, where competition is likely to become even tougher when sales of the 380 take off, by developing the 787.
Weaken competitors’ cycles.
Some companies get ahead by using the rigid consequences of their choices to weaken new entrants’ virtuous cycles. Whether a new technology disrupts an industry or not depends not only on the intrinsic benefits of that technology but also on interactions with other players. Consider, for instance, the battle between Microsoft and Linux, which feeds its virtuous cycle by being free of charge and allowing users to contribute code improvements. Unlike Airbus, Microsoft has focused on weakening its competitor’s virtuous cycle. It uses its relationship with OEMs to have Windows preinstalled on PCs and laptops so that it can prevent Linux from growing its customer base. It discourages people from taking advantage of Linux’s free operating system and applications by spreading fear, uncertainty, and doubt about the products.
In the future, Microsoft could raise Windows’ value by learning more from users and offering special prices to increase sales in the education sector, or decrease Linux’s value by undercutting purchases by strategic buyers and preventing Windows applications from running on Linux. Linux’s value creation potential may theoretically be greater than that of Windows, but its installed base will never eclipse that of Microsoft as long as the software giant succeeds in disrupting its key virtuous cycles.
Turn competitors into complements.
Rivals with different business models can also become partners in value creation. In 1999, Betfair, an online betting exchange, took on British bookmakers such as Ladbrokes and William Hill by enabling people to anonymously place bets against one another. Unlike traditional bookmakers who only offer odds, Betfair is a two-sided internet-based platform that allows customers to both place bets and offer odds to others. One-sided and two-sided businesses have different virtuous cycles: While bookmakers create value by managing risk and capture it through the odds they offer, betting exchanges themselves bear no risk. They create value by matching the two sides of the market and capture it by taking a cut of the net winnings.
Over the past decade, Ladbrokes’ and William Hill’s gross winnings have declined, so Betfair has hurt them, but not as much as expected. Because Betfair has improved odds in general, gamblers lose less money. They then place more wagers, and when bookies pay out, bettors gamble again, feeding a virtuous cycle. This has expanded the British gambling market by a larger proportion than just the improvement of odds might suggest. The better odds Betfair offers also help traditional bookmakers gauge market sentiment more accurately and hedge their exposures at a lower cost. When a new business model creates complementarities between competitors, it is less likely that incumbents will respond aggressively. The initial reaction from bookmakers to Betfair was hostile, but they have become more accommodating of its presence ever since.
Business Models vs. Strategy vs. Tactics
No three concepts are of as much use to managers or as misunderstood as strategy, business models, and tactics. Many use the terms synonymously, which can lead to poor decision making.
To be sure, the three are interrelated. Whereas business models refer to the logic of the company—how it operates and creates and captures value for stakeholders in a competitive marketplace—strategy is the plan to create a unique and valuable position involving a distinctive set of activities. That definition implies that the enterprise has made a choice about how it wishes to compete in the marketplace. The system of choices and consequences is a reflection of the strategy, but it isn’t the strategy; it’s the business model. Strategy refers to the contingent plan about which business model to use. The key word is contingent; strategies contain provisions against a range of contingencies (such as competitors’ moves or environmental shocks), whether or not they take place. While every organization has a business model, not every organization has a strategy—a plan of action for contingencies that may arise.
Consider Ryanair. The airline was on the brink of bankruptcy in the 1990s, and the strategy it chose to reinvent itself was to become the Southwest Airlines of Europe. The new logic of the organization—its way of creating and capturing value for stakeholders—was Ryanair’s new business model.
Changing strategic choices can be expensive, but enterprises still have a range of options to compete that are comparatively easy and inexpensive to deploy. These are tactics—the residual choices open to a company by virtue of the business model that it employs. Business models determine the tactics available to compete in the marketplace. For instance, Metro, the world’s largest newspaper, has created an ad-sponsored business model that dictates that the product must be free. That precludes Metro from using price as a tactic.
Think of a business model as if it were an automobile. Different car designs function differently—conventional engines operate quite differently from hybrids, and standard transmissions from automatics—and create different value for drivers. The way the automobile is built places constraints on what the driver can do; it determines which tactics the driver can use. A low-powered compact would create more value for the driver who wants to maneuver through the narrow streets of Barcelona’s Gothic Quarter than would a large SUV, in which the task would be impossible. Imagine that the driver could modify the features of the car: shape, power, fuel consumption, seats. Such modifications would not be tactical; they would constitute strategies because they would entail changing the machine (the “business model”) itself. In sum, strategy is designing and building the car, the business model is the car, and tactics are how you drive the car.
Strategy focuses on building competitive advantage by defending a unique position or exploiting a valuable and idiosyncratic set of resources. Those positions and resources are created by virtuous cycles, so executives should develop business models that activate those cycles. That’s tough, especially because of their interactions with those of other players such as competitors, complementors, customers, and suppliers that are all fighting to create and capture value too. That’s the essence of competitiveness—and developing strategy, tactics, or innovative business models has never been easy.
- RC Ramon Casadesus-Masanell is a professor at Harvard Business School and the author, with Joan E. Ricart, of “How to Design a Winning Business Model” (HBR January–February 2011).
- JR Joan E. Ricart ( [email protected] ) is the Carl Schroder Professor of Strategic Management and Economics at IESE Business School in Barcelona.
Comprehensive Guide to Business Model Innovation Strategy
What is business model innovation strategy.
If you’re trying to get ahead in the business world, it’s crucial to know how to improve your business model and innovate new business strategies that will keep you one step ahead of your competition.
But, what exactly does Business Model Innovation Strategy mean? What are some ways that businesses have innovated their business models successfully in the past?
This comprehensive guide to Business Model Innovation Strategy will give you insight into this growing trend and help you start to formulate new ideas of your own.
What is Business model innovation?
Business model innovation is a set of activities and interventions focused on challenging and redefining existing business models. It can bring about radical changes in how companies operate, compete, and deliver value.
Organizations that perform well under one business model may struggle in another market environment or see their own success challenged by new players. Responding effectively to such challenges requires creative thinking—and that’s where business model innovation comes in.
Business Model Innovation Examples
As more businesses try their hand at rethinking business models, we’re seeing a wealth of innovation taking place. While many are working with existing products and services, some are exploring brand new areas, finding new markets, and developing entirely new products. In all cases, these innovators share one thing in common: they have taken an innovative approach to their business model.
While we may not be able to see what they’ve done with our own eyes—and can only experience them via a digital interface—it is possible for us to conceptualize how changes in business models affect both customers and producers. At its heart, that’s what business model innovation is all about: improving an existing business model by making some kind of change.
Today, there are two ways to innovate your business model: one way involves imagining new business opportunities (such as Airbnb did), while another way involves changing an existing market or industry (for example, like how Walmart did). Sometimes it makes sense to focus on creating something completely new; other times, you might want to work on improving upon something that already exists.
How Business Model Innovation Works
Before diving into how business model innovation actually works, it’s important to make a distinction between two kinds of innovation: incremental and radical. Incremental innovation is what most people think of when they hear innovation—to improve on something that already exists.
In business terms, incremental innovation means improving on an existing business model by making small changes in order to produce better products or services at a lower cost; for example, an automobile manufacturer might cut costs by reducing supply chain expense and outsourcing certain components.
But there is another kind of innovation—something we call radical or disruptive innovations, which radically change how we do things instead of just making minor improvements to existing processes.
Steps for Developing an Effective Business Model Innovation Strategy
Business model innovation is a major challenge in most organizations and has become even more important due to increasing pressures on profit margins and uncertainty surrounding how business will evolve. This, in turn, makes it very difficult for companies—or any other entity pursuing long-term survival or success—to invest in an innovative business model without risking significant consequences if their efforts fail.
There are no hard and fast rules for developing an effective business model innovation strategy. But there are some broad guidelines that companies can use as they consider what changes might be necessary, when it makes sense to initiate those changes, and how a company might best navigate such a process.
Here we will explore 5 steps in detail.
1. Determine objectives and strategic approach to innovation
Before you start planning how to innovate, you first need to understand your business’s objectives. For example, is your company seeking growth or profitability? Do you want clients’ purchasing behavior patterns altered?
Once you answer these questions, it will be easier for you and your business team to determine a strategic approach that works best for your organization.
2. Know Your Market: Customers and Competitors
Start with your market. Who will be using your product or service? Are you creating something that is needed? Who are you trying to attract as customers, and what do they want?
Researching your market is an important first step in a business model innovation strategy. It ensures that you’re actually meeting a need for a group of customers and not just adding another product into an already saturated industry.
3. Define Your Value Proposition
Before embarking on a new venture, entrepreneurs need to figure out what problem they’re solving, who they’re solving it for, and how their product will address that concern. These factors—what we call your value proposition—define your business model. Consider them carefully before you get too far into development; changes are much easier to make early in your business plan than later.
Take the time now to examine each part of your proposed solution. For example, are you targeting enterprise or customer users? Who is most likely to use your service or product? How do you position yourself against competitors? Be honest in answering these questions, as they’ll ultimately help define who buys from you and why.
4. Assess and Develop Your Core Capabilities
Every company has a core competency that is crucial to its success. McDonald’s, for example, is great at marketing burgers and fries. Apple’s got innovation down to a science. To identify your core capabilities, start by surveying customers about what they value most from your brand.
5. Establish Your Innovation Techniques and Systems
Whether you need to scale up an existing innovation process or create a new one from scratch, it’s important to know how each aspect of your innovation system fits together. For example, when taking on new problems and opportunities, you need not only tools that help you shape and define concepts but also ones that help you systematically choose between them.
And while execution tools should make it easier for teams to run their projects day-to-day and keep everything on track and within budget. But none of these systems will work without data: information about what’s working (and what isn’t) throughout your innovation process—which is why we put so much focus on providing insights into project progress and team performance.
The Role of Business Model in Strategic Management
Business model is a term used in business management. It refers to the logic of how an organization creates, delivers, and captures value. This logic describes how an organization will use available resources in order to create products or services that it can offer to its customers.
The business model focuses on the inner functioning of a firm, unlike its competitors, which more directly affect competition with their business strategies (as opposed to their overall business models). For example, Walmart's original business model focused on selling brand-name merchandise at discount prices.
Characteristics of Business Model Innovation
Starting a business involves taking risks, but there are ways to mitigate those risks. One of them is by testing new business models. In fact, a good way to spot opportunities in an industry that may seem stagnant is by looking for trends in business model innovation. It’s an approach that requires careful observation. Adopting or creating a new business model isn’t as simple as it sounds, so make sure you know what you’re getting into before starting down this path. Here’s a primer on how to be innovative with your business model and take advantage of growth opportunities along the way.
If you want to increase revenue without growing your costs, then one viable solution is to get more customers while keeping customer acquisition costs (CAC) low. Testing out different business models based on your value proposition can help lower CAC because it allows you to figure out exactly what makes people buy from you versus your competitors—and if they aren’t aware of these benefits, finding new ways to promote them is a great place to start. Here are few steps you can take when trying to innovate your business model:
Figure Out How You Make Money Today:
To innovate your business model, you first need to understand how your current one works. By writing down all of your expenses and listing all possible revenue streams—including any hidden ones like account receivables or regulatory licenses—you should gain some clarity around where most of your money comes from and why that might be.
This will allow you to evaluate which parts of it are important or not so vital once new options present themselves. For example, if most of our sales come through word-of-mouth advertising rather than direct marketing efforts, then we have room for improvement there since we could attract more potential clients through promotional activities.
Think About What Kind of Value You Deliver:
At its core, every business is just selling something. No matter what industry you're in or what niche you operate within, there's always some tangible product or service being sold. Finding out exactly what people pay for when using your product/service will clarify for you whether your customers care about price or other factors such as quality and timeliness.
Consider Pricing Differently:
A big part of figuring out how to profitably grow your business is by setting the right prices at each step along your supply chain--specifically between yourself and whomever buys directly from you afterward. And even though every business has a different value proposition, there are still some basic pricing principles that apply across almost all industries and use cases.
One of them is value-based pricing (VBP), which aims to create better alignment with your customers around what they think they should be paying for certain products or services. This approach asks two key questions: What am I offering? What do customers in my industry typically pay for it? And then using those answers, it calculates a price that covers costs while also delivering enough value to make people willing to pay up—in other words, it’s based on actual demand rather than guesswork or gut instinct about what people will probably buy. The final calculation takes into account market prices and how much extra people are willing to pay over those standards; using customer surveys can help here if you want more specific data.
The main goal here is to avoid misleading customers who won't be happy once their purchase arrives and makes less of an impact than promised--or worse, disappoints completely. Ultimately, VBP shouldn't just allow you to more accurately calculate costs; by knowing upfront exactly how much money you need from each customer order, it can also help you minimize risks associated with wrong orders and increase focus on profitable orders instead.
What is Business Strategy?
Before we can learn about innovation strategy, it’s important to understand what exactly business strategy is. In short, business strategy is a plan or set of plans designed with one goal in mind: driving growth. That growth could come from increased market share, improved margins, or new products and services—or all of those things—but it all comes back to what’s called competitive advantage. If you want your business to grow over time, you have to be able to outperform your competitors.
Innovation Strategy vs. Evolutionary Strategy
The Difference Between Innovation and Evolutionary Strategies: While many businesses like to think of themselves as innovative, it is important to recognize that some business strategies will be more innovative than others. In order for a strategy to be considered truly innovative, there must be substantial differences between current activities and future activities in one or more of three key areas: business structure; operating model; or culture.
4 Innovation Strategies
The business model innovation strategy is a strategy that encompasses two essential elements – differentiation and integration.
Differentiation refers to providing added value for customers and one’s competitors. This does not necessarily mean coming up with unique products, but introducing new value dimensions in existing offerings as well.
The second element of business model innovation strategy is integration, which means integrating different parts of an organization and combining them together in order to find innovative solutions for customer problems. Both these elements require a strategic approach to innovation.
It’s important that your company has enough flexibility that it can accommodate changes in demand due to new market opportunities or competition from other companies.
Businesses have also found success using incremental improvement as part of their business model innovation strategy as well. This involves improving one’s offering gradually over time by making it more attractive or easier to use based on customers’ feedback.
Innovation strategy is one of the most important things that companies must implement in order to be successful. Through business model innovation strategy, you will be able to create a new and sustainable competitive advantage over other businesses. It takes effort and leadership abilities to be able to execute on innovative strategies. Companies should always be looking for ways they can make themselves stand out from their competitors; through innovation strategy, they can do just that.
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Innovate your business model
IBM's Global CEO Study 2008 identified a set of characteristics that strong business-model innovators demonstrate consistently - a set of characteristics, which the IBM researchers call the “Three A's”. These are critical to the successful design and execution of business-model innovation.
Here, we answer two questions that can help companies develop their innovation strategy and transformation approach for the new economic environment:
- Under what conditions should companies adapt their business model?; and
- What capabilities and characteristics support the design and execution of successful business-model innovation?
The answers define an organization's strategic agenda for business-model innovation.
When to rethink the business model
Business model innovation can provide significant opportunities both during periods of rapid economic growth and at times of turmoil. What is critical is to select the right type of business model given the economic environment and emerging market opportunities, and to address the set of internal factors that influence the organization's ability to pursue the required change.
Revisit the enterprise model during economic turmoil. Enterprise model innovation often occurs during economic downturn as companies seek new ways to gain cost and flexibility advantages. By adopting new partnering models such as new service models or even outsourcing, organizations are able to more effectively scale down operations during a downturn, but also create the additional access to resources to quickly scale up as new opportunities arise.
Exploit ongoing industry transformation. Those companies that entered the downturn with significant financial means and leveraged their resources to drive industry-model innovation realized the strongest margin performance. During periods of extensive industry change, companies can choose to shake up their industries by harnessing disruptive technologies, going after new customer segments or dislodging competitors. Companies that don't respond quickly will likely become uncompetitive in short order.
Develop new value propositions and pricing models to fit customer preferences. Revenue-model innovation may not deliver an advantage that is as sustainable as industry- or enterprise-model innovation. But during times of economic turmoil, new customer preferences and spending patterns are a significant impetus to changing the pricing model and value proposition.
Internal factors drive business model innovation. Internally driven changes – such as product or service innovations – also create a need for a new business models.
To take this type of product to market, an organization has to address a number of key questions:
- How much does the new product or service change the business model in general and, in particular, the customer-value proposition?
- Does the existing pricing model need to be adjusted?
- What new technology, skills and resources need to be acquired?
- How will the overall operating model change?
Is it time to innovate your business model?
Every organization needs to review carefully whether the time is right to revisit its business model, either to pursue new opportunities in its industry or to respond to competitive or technology threats posed to its existing model. We have developed a structured set of questions to help organizations understand the conditions that determine when they should explore business-model innovation.
The “three A’s” of how to innovate your business model
Our research shows that new and innovative business models can succeed irrespective of a company's age, industry, or geography. And in addition to the 28 cases of successful innovators, we analysed select organizations that either tried to develop innovative business models and failed, or simply missed the window of opportunity. We identified a set of characteristics that strong business-model innovators demonstrate consistently.
These characteristics – the “Three As” – are critical to the successful design and execution of business-model innovation:
- Aligned – Leverage core capabilities and design consistency across all dimensions of the business model, both internally and externally, that build customer value.
- Analytical – Use information strategically to create foresight, and prioritize actions while measuring and tracking for rapid course correction.
- Adaptable – Link innovative leadership to enhance the ability to effect change and institutionalize operational flexibility.
Aligned: creating internal and external consistency
The set of internal factors that influence an organization's ability to shape business-model innovation have to be fully aligned. Internally, this requires organizations to start with the customer-value proposition and align the ways in which revenue is generated and value is delivered. Externally, organizations need to orchestrate customers, partners, and suppliers through open collaboration and partnership models. Finally, many successful business-model innovators leverage existing assets and capabilities in new and unique ways.
Align internally to provide customer value
Understanding how the elements of business-model innovation relate and how they create value are critical as an organization adapts or changes its business model. We especially saw the importance of alignment when comparing successful business-model innovations against those that failed.
Align externally with partners through “open” business models
External alignment with partners, suppliers, and customers is an important characteristic of an effective, collaborative business model. The Global CEO 2008 study found that seven out of 10 CEOs focus on collaboration and partnerships in their pursuit of business-model innovation. A number of open business models are largely built on broad collaboration and partnering. However, our research shows that virtually every successful business model demonstrates external alignment and the ability to work with a large number of collaboration partners.
Use existing assets and capabilities
Successful business-model innovation takes advantage of existing high-value assets and capabilities within the organization, such as unique skills, talent, processes, or technology.
“Successful business-model innovators can and are willing to pursue new opportunities and models while maintaining a ruthless focus on sustaining current business.”
Analytical: leveraging business intelligence for greater insight
Successful business-model innovators demonstrate a particularly acute understanding of their customers and the value that their company can deliver to a new segment, through a new delivery mechanism, or a new product or service. Increasingly, understanding customers, markets, channels and competitors is based on sophisticated analytics that provide better information needed to create advantage in new and unique ways.
Successful innovators use analytics to sift data from inside and outside the enterprise to:
- Create the strategic foresight needed to design the business models of the future.
- Understand their potential economic impact.
- Continuously measure and enhance performance.
Foresight is critical for organizations to understand new opportunities and the potential impact of new technologies, emerging customer segments, or a new set of product or service capabilities.
The ability to better understand potential future scenarios and how the organization can benefit through new models is now more important than ever as organizations have to operate – and make decisions – in a more complex and fast changing environment.
Financial business modelling
Financial business-modelling provides the ability to simulate the interaction (and therefore financial impact) among different kinds of external scenarios and internal changes based on the specific business-model innovation.
Well designed measurements provide timely insight about what is and is not working, better enabling an organization to adapt quickly to new and changing business realities. The ability to sense and respond to change – both internally and externally – is critical. Internally, this requires organizations to integrate fragmented data and perform faster, better extraction and analysis to support business decisions. Externally, it means that organizations have to be able to integrate data across a partners, suppliers, and customers to make quick business decisions.
Adaptable: building flexibility into the business model
Business-model adaptability is becoming more important for organizations that need to manage uncertainty in the current economic environment. Successful business-model innovators can mimic the speed, flexibility, and mindset of start-up companies, which describe some of the most radical business-model innovations, while exploiting the advantage of existing capabilities, resources, and assets. When reviewing both start-ups and established companies, we found that business-model adaptability was based on the effective combination of leadership and change capabilities throughout the organization, as well as an operating model that enables dynamic course correction and rapid execution.
Leadership and change
Successful business-model innovators can and are willing to pursue new opportunities and models while maintaining a ruthless focus on sustaining current business. Successful business-model innovators are able to explore, experiment, and pilot new models without putting the performance of existing models at risk.
For some new business models, this may require separate organizational structures. For others, it requires that existing models support and reinforce each other. Leaders will need to exhibit the following characteristics:
- Innovative leadership
- Effective decisions to enable breakthrough innovation
- Dynamic course correction
This requires flexibility to respond quickly to signals from the external environment, economic results, and partnership alignment. It involves constantly reviewing what is working and what is not, and adapting key aspects of the model accordingly, especially in fast-moving industries like the media industry.
Operating model flexibility
A flexible operating model entails four elements:
- Lean and transparent processes
- Flexible and scalable technology
- Globally optimized operations
- Asset and cost flexibility
In an increasingly complex and fast-changing business environment, organizations have to rethink and revisit their business model more frequently than in the past. They need to continually tweak and enhance their models, especially during periods of economic turmoil and increased industry transformation. But designing the right business model is only the first step. To increase execution success, organizations need to ensure their business models are aligned with customer value (and continually updated), are analytical (they gain insight from differentiated intelligence), and are adaptable (they are enabled by a flexible operating model).
June 2011 .
This is a shortened version of “ When and how to innovate your business model ” which originally appeared in Strategy & Leadership , Volume 38, Number 4, 2010.
The authors are Edward Giesen, Eric Riddleberger, Richard Christner, and Ragna Bell.
Generally, innovation in business models focuses on introducing fundamental changes in the way a company delivers value for its customers.
Business model innovation is the art of enhancing advantage and value creation by making simultaneous—and mutually supportive—changes both to an organization's
Why Is Business Model Innovation So Important? · Increased value creation will lead to increased growth, even for otherwise stagnant businesses
In a regular business model innovation, the new firms use the same/existing capabilities i.e. value chain activities and underpinning resources. The business
Business model innovation, then, describes the process in which an organization adjusts its business model. Often, this innovation reflects a
To achieve successful business model innovation, focus on creating new business models, rather than changing existing ones. As business model
Good ones share certain characteristics: They align with the company's goals, are self-reinforcing, and are robust. (See the sidebar “Three Characteristics of a
Business model innovation is a set of activities and interventions focused on challenging and redefining existing business models. It can bring
Successful business-model innovators demonstrate a particularly acute understanding of their customers and the value that their company can deliver to a new
attributes of m-commerce and mobile application service technologies in order to design and implement innovative business models?