How Do You Innovate Your Business Model?
Business model innovation is essential for the success of every business in today’s fast-changing and complex business environment. Therefore, corporate leaders need to understand when to adopt new business models and execute the change.
Business leaders often define their businesses in terms of the products and services they deliver and focus on these for innovation. However, with technological advancement and digitalization presenting new opportunities, business leaders are now looking to gain a competitive advantage through innovative business models. Indeed, business model innovation has the power to transform businesses and reshape an entire industry.
Growth and innovation go hand in hand. The critical part is how to structure innovation. The UNITE Business Model Innovation Patterns summarize 95% of all business model innovations and give you the necessary tools to systematically innovate your business model.
Elements of a Business Model
The business model is a company’s value proposition and the set of means implemented to generate revenue and profitability. It is the way businesses make money out of their ideas, resources, and technologies. Every company has a business model, whether it is documented or not.
There are nine essential elements of a business model. These include
- Value proposition – describes the bundle of products and services that create value for a specific customer segment.
- Cost structure – describes all costs incurred to operate a business model.
- Revenue streams – represents the cash a business generates from a customer segment.
- Channels – describe how a business communicates with and reaches its customer segments to deliver a value proposition.
- Customer segments – define the different groups or organizations a business aims to reach and serve.
- Key activities – describes the most important things a business must do to make its business model work.
- Key resources – describes the most important assets required to make a business model work.
- Essential partnerships – describes the network of suppliers and partners that make the business model work.
- Customer relationships – describes the types of relationships a business establishes with specific customer segments.
When to Rethink the Business Model?
Business model innovation provides significant opportunities both during times of rapid economic growth and times of turmoil. The most important thing is to select the right type of business model given the economic environment and emerging opportunities. This helps companies address the set of internal factors that influence their ability to pursue the required change.
Here are some tips on when to rethink your business model:
Revisit your business model during economic turmoil
Business model innovation often occurs during economic meltdown as businesses seek new ways to gain flexibility and cost advantages. By adopting new partnering business models such as new service models, organizations can effectively scale down operations during an economic meltdown. In addition, they can also create additional resources to scale up new opportunities quickly.
Revisit your business model to leverage ongoing industry innovation
Businesses that entered the downturn with significant financial means use their resources to drive business model innovation to achieve the highest margin performance. During periods of extensive industry change, companies can choose to shake up their industries by leveraging disruptive technologies or leveraging new opportunities. Conversely, businesses that don’t respond quickly will likely become uncompetitive in a short time.
Revisit the business model when developing new pricing models and value propositions to fit customer preferences
Business model innovation may not deliver an advantage that is as sustainable as industry-model innovation. However, during an economic meltdown, new customer preference is a significant impetus to changing value proposition and pricing model.
Internal factors drive business model innovation. However, internally driven changes such as service or product innovations- also create a need for a new business model.
To make this type of product to market, an organization needs to address some key questions such as:
- Does the existing pricing model need an adjustment?
- How much does the new service or product change the business model in general?
- What new technology, resources, and skills do you need to acquire?
- How will the overall operating business model change?
When is the Right Time to Innovate Your Business Model?
Every organization needs to carefully review when 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.
How to Innovate Your Business Model?
Research shows that new and innovative business models can succeed, irrespective of age, industry, or geography. However, there are a set of characteristics that strong business model innovators need to engage consistently.
These characteristics are critical to the successful design and execution of business model innovation.
- Analytical – Use information strategically to create foresight and prioritize actions while measuring and tracking for rapid course correction.
- Aligned – Leverage core capabilities and design consistency across all business model dimensions, both internally and externally that build customer value.
- Adaptable – Link innovative leadership to enhance the ability to effect change and institutionalize operational flexibility.
Analytical: leveraging business intelligence for greater insight
Successful business model innovators demonstrate an acute understanding of their customers. They also understand the value they can deliver to a new customer segment through a new product/service or delivery mechanism. Increasingly, understanding customers, markets, channels, and competitors are based on sophisticated analytics that provides better information to create advantages in new and unique ways.
Successful innovators use analytics to sift data from inside and outside the enterprise to:
- Continuously measure and enhance performance
- Understand their potential economic impact
- Create strategic foresight needed to design the business models of the future
Foresight is essential for organizations to understand new opportunities and the potential impact of new technologies 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. This is because organizations have to operate and make decisions in a more complex and faster-changing environment.
Financial business modeling
Financial business modeling can simulate the interaction among different kinds of external scenarios and internal changes based on the specific business model innovation.
Well-designed measurements provide timely insights about what is and is not working, 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 an organization to integrate fragmented data and perform faster to support business decisions. Externally, it means the organizations need to integrate data across partners, suppliers, and customers to make quick business decisions.
Aligned: creating internal and external consistency
The factors that influence’s an organization’s ability to create business model innovation need to be fully aligned. Internally, this requires organizations to start with the customer value proposition and align how it generates revenue and delivers value. Externally, organizations need to orchestrate partners, customers, 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 changes its business model. Alignment is especially important when comparing successful business model innovations against those that failed.
Align externally with partners through open business models
External alignment with customers, suppliers, and partners is an important characteristic of an effective collaborative business model. The Global CEO 2008 study found that seven out of ten CEOs focus on partnerships and collaboration to pursue business model innovation. A number of open business models are largely built on broad partnering and collaboration. In addition, further research by business analysts shows that virtually every successful business model demonstrates external alignment and the ability to work with a large number of collaboration partners.
Use existing capabilities and assets
Successful business model innovation takes advantage of existing high-value assets and capabilities, such as technology, processes, talent, and unique skills.
Adaptable: building flexibility into the business model
Business model adaptability is becoming more important, especially for organizations that need to manage uncertainty in the current economic environment. Successful business model innovators can mimic the speed, flexibility, and mindset of lean startup companies.
Consequently, when reviewing both startups and established businesses, you will discover that business model adaptability is based on the effective combination of leadership and change capabilities through the organization and an operating model that enables dynamic, rapid execution, and dynamic course correction.
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 can explore, experiment, and pilot new models without putting the performance of existing models at risk.
For some new digital business models, this may require separate organizational structures. For others, it requires that existing models support and reinforce each other. Business leaders need to exhibit the following characteristics:
- Dynamic course correction
- Effective decisions to enable breakthrough innovation
- Innovative leadership
This requires flexibility to respond quickly to signals from the external environment, partnership alignment, and economic results. 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.
In an increasingly fast-changing and complex business environment, organizations have to frequently rethink and revisit their business models. In addition, they need to continually tweak and enhance their business models, especially in times of increased digital transformation and economic turmoil.
But designing the right business model is only the first step in the equation. To increase execution, organizations need to ensure their business models are aligned with customer value, are analytical (gain insight from differentiated intelligence), and are adaptable (are enabled by a flexible operating model).