Business Model Innovation: What it is and why you need it
Business Model Innovations are typically the most lasting and most differentiating forms of innovation. Working hard to improve your Business Model is therefore time well invested. So how do you challenge your Business Model?
To go beyond this question, you can move through increasingly higher-effort/more-expensive types of validations. The logical first step is to speak with customers. They need to buy your product or service. Without that validation, the entire Business Model is quite frankly useless.
Once you’ve done that, another easy approach is to speak with other experienced entrepreneurs and investors and have them challenge your Business Model.
At Digital Leadership, we guide clients in ways to use technology and the Internet to jumpstart business model innovation and revenue stream expansion. In recent years, we’ve seen more and more companies struggle to identify how they can bring improved products and services to their customers. Given the advantages possessed by companies that already use technological development to broaden their reach, this struggle is unnecessary. We believe that, with the right effort and mindset, any company can use business model innovation to build their sales and demand for their services.
Red Ocean vs Blue Ocean: Where do you wanna be?
An entire generation of managers has been trained to use Michael Porter’s Five Forces to identify their competition, analyzing market competition along with four impacting factors. Theoretically, nothing is wrong with this approach, but the problem is that it only works for very large companies in consolidated markets. In an innovation context, it is impossible to account for all the factors that would make Porter’s approach useful.
The entire domain of business administration and management is largely focused on very large enterprises. This ignores that our economies are mostly driven by small and mid-sized companies. Many models of understanding and working simply do not work for smaller organizations. Porter’s Five Forces is just one of many examples here, the BCG matrix being another one. Assessing your competition is tough if you do not have just five other main players in the market (as is the case for example in the auto industry, for example), but are facing hundreds of competitors.
In 2005, INSEAD professors Chan Kim and Renée Mauborgne created their Blue Ocean Strategy, which describes a new approach to breaking free from the competition. Their most important message was that a successful innovation leaves the competition behind (the Red Ocean) by seeking a new and uncontested market space (the Blue Ocean). If you capitalize on otherwise unseen opportunities, you can be far out in the open water, while your competitors are left fighting over their limited market space, bloodying the water red.
Therefore, the only way to create a new Business Model is to stop looking at what your competitors are doing. Corporations are obsessed with competitive analysis, customer acquisition, profit, and importance, but when it comes to innovation, looking at others is like driving while looking in the rearview mirror.
Business Model Innovations Benefits
There is a Boston Consulting Group report entitled
“When the Game gets tough, Change the Game.”BCG Group
This is what BMI can deliver at its best. Technological change has historically enabled product and process innovation but is now playing a more dynamic role in how we satisfy customers’ core needs and Jobs to be Done, and hence has spurred a broader Opportunity Space for Business Model Innovation. At the same time, Business Model Innovation is now the key enabler that allows us to leverage technology beyond what we previously thought possible.
In a time of accelerating change and instability, like ours, Business Model Innovation offers many benefits. It can provide a way to break out of the competition into Blue Oceans. It is a real advantage in a context when product and process innovations are easily copied, competitors’ strategies are converging, and sustained advantage is elusive. It also can help you respond to disruptions – such as regulatory, technological, or competitive shifts, that demand fundamentally new approaches.
BMI also helps address downturn-specific opportunities, enabling companies, for example:
To lower prices or reduce the risks and costs of ownership for customers. In our experience, the companies that flourish in downturns frequently do so by leveraging the crisis to reinvent themselves – rather than by simply deploying defensive financial and operational tactics. Last but not least, Business Model Innovation is often necessary to make the most of technological innovation: a great technology is useless without a Business Model that creates value out of it. As innovation strategist Henry Chesbrough has said,
“A mediocre technology pursued within a great Business Model may be more valuable than a great technology exploited via a mediocre Business Model.”Henry Chesbrough
This makes sense if we think about the companies that have rocketed to prominence without having created radically new products, in fact, sometimes having no real “products” at all. For example, Uber, the world’s largest taxi company, owns no vehicles; Facebook, the world’s most popular media network, creates no content; Alibaba, the world’s most valuable retailer, has no inventory; and Airbnb, the world’s largest provider of accommodation, owns no real estate. The list goes on and on.
Business Model Innovation may be more challenging than product or process innovation, but it also delivers superior returns. The Boston Consulting Group (BCG) conducts an annual survey to identify the most innovative companies. The study differentiates between “Business Model innovators” and “product or process innovators.” While both types of innovators achieve a premium over the average total shareholder return, Business Model innovators earned an average premium that was more than 4-times greater than that enjoyed by product or process innovators. Furthermore, BMI delivers returns that are more sustainable. Even after ten years, Business Model innovators continued to outperform product and process innovators.
Many companies pursue Business Model Innovation as a defensive move to protect a dying core business or defend against aggressive competitors, but we are convinced that BMI can be most powerful when it is approached proactively to explore new avenues of growth.
But have you acted upon this insight? The consequences for companies in the innovation race are dramatic. The old adage of milking your cash cows has become less and less relevant today. Indeed, if you are only focusing on milking your cash cow, you are probably going to fail to notice when someone invents a totally different kind of milk. In order to anticipate and adapt to change, organizations have to become ambidextrous—focusing on advancing their core and innovating at the same time. And the most profitable and sustainable way to innovate is through Business Model Innovation.
How to Apply Business Models Innovation?
Business Model innovation requires attention. It’s like a garden that needs tending, and constant evaluation to ensure it’s getting the resources it needs to flourish. Many business model innovations fail because they are done blindly, often as a knee-jerk reaction to bad news or a collapsing revenue model.
Don’t make the mistake of innovating as a short period of energy. While business model innovation is, in fact, a game of speed, it is also a game of endurance.
Iterate toward a new Business Model
Start by documenting your current Business Model using the Business Model Canvas we introduced. This intentional exercise will help you better understand your own Business Model and identify areas of early opportunity for improvement.
The innovation process is simple at its core: you start with one Business Model component and cover all of its available alternatives. With every iteration of this one component, you reassess whether you have made progress. For example, you could consider using the same Business Model but selling through a different distribution channel,
With every iteration of this one component, you reassess whether you have made progress by testing with external and internal customers and gaining quantitative validation before moving forward. Do not forget to then think about how changing this element of the Business Model Canvas affects the other elements. This will require iterations of those as well. A change in one area can often create a ripple effect on other areas, so consider the effects of changes carefully.
Innovation start-ups have the ability to construct their Business Models from the ground up and may thus be able to come up with more radical Business Models. After all, they don’t have to respect any existing boundaries (apart from their mental barriers – which may of course prove to be the biggest obstacles of all!),
Existing organizations, however, cannot ignore their existing structure and thus have to pay careful attention: changes in one area of the Business Model often affect other areas in more significant ways than initially thought. The changes required for an existing organization to achieve a new value structure are often more significant and potentially riskier. Case in point: the challenge of innovating with legacy technology systems. What is it going to mean if you have to rebuild significant systems from the ground up?
The starting point for Business Model Innovation can be anything from a vague idea, concrete problem, or technological opportunity. Go back to the Value Proposition and consider the customer perspective: what is the job the customer has to do? (The Digital Leadership website discusses the concept of Jobs to Be Done in other articles.) What kinds of Business Models could satisfy those important but underserved customer jobs?
With answers to those questions, innovation requires we rapidly test new services and products that address customer need. We can’t be afraid to fail when we set out to begin creating new business models, but we should be terrified of failing slowly. Focus on value creation, exploiting competitive advantage, and learning valuable lessons through each iteration. Find rewards for being brave enough to return to the drawing board when a new product innovation or service fails to create more value.
Chances are that at the end of the innovation process you will have something quite different than what you started off. This is exactly as it should be: successful Business Model Innovation is frequently counter-intuitive, so expect surprises.
Work with Patterns
Researchers from the University of St. Gallen found out that over 90% of all Business Model Innovations are recombinations of previously existing concepts, ideas, or entire Business Models. This means that most Business Models are not created by business geniuses but are strategically assembled based on existing patterns. These patterns provide the blueprints you need to revolutionize your business and drive powerful change.
Working with Business Models Patterns will allow you to develop new combinations in a structured manner. First, the process will help you to break with your dominant industry logic. Then, you can adapt the pattern to your company’s specific context and so create an innovative variant. Your own ideas and creativity are as essential at this point as challenging your Business Model against other patterns.
Critics of this approach may then ask, but where does the beauty and creativity of innovation then lie? Isn’t this simply producing copies? The innovation lies in the understanding, translation, recombination, and transfer of successful patterns to your own industry and challenges. You may end up with the same result without using a system such as the one we present, but then you are leaving a lot up to luck.
Leading neuroscientists and neuroeconomists, such as Gregory S. Berns, have argued in favor of such a systematic approach. Berns contends that to get a different perspective on an issue, we need to confront ideas that we have never considered before. Pushing our brains to re-categorize information enables us to break free from our habitual patterns of thought and ultimately begin to develop entirely new ideas.
Introducing The UNITE Business Model Innovation Patterns
Business model innovation is the core of Digital Leadership’s mission. Digital platforms help organizations develop a viable business model that takes advantage of new ways to bring value to customers, and Digital Leadership gathers experts from around the world to help you explore these opportunities.
Do you need to read an entire book to get a sense of the types of patterns available to you? Of course not! To assist you in the journey of adapting patterns and creating your own innovative Business Model, we have assembled a framework of the most common patterns used in Business Model Innovation and mapped it to the Business Model Canvas.
We explore business model innovation even more deeply in our book, How to Create Innovation. If you’re looking for more information about business model development, we encourage you to explore the book through our website. In the meantime, we’ll discuss some of the highlights here.
Additionally, in order to create the Business Model Innovation Patterns, we have drawn on work from multiple sources, including most importantly the 10 Types of Innovation framework and The University of St. Gallen’s Business Models. Do also consider the Business Model Gallery, an online database of Business Models, which outlines the Business Models of numerous prominent companies, as well as industries, topics, and design themes.
If you look at Amazon, Netflix, and Apple, you will see that their Business Models utilize many of the patterns in our table. What makes their Business Models unique, innovative and thus defensible, is the number and combination of the patterns used. The more patterns you can get to work together, the more innovative and successful you will be.
As you review each aspect of your Business Model Canvas, think about the patterns and combinations of patterns that can help you gain a competitive advantage and find Blue Oceans. Remember to also experiment with patterns that are not typical in your industry, even if this may be uncomfortable at first. It may seem like you are just jumping into a void, but it will be rewarding once you go through a few iterations and begin to see the potential of the new patterns you are assembling.
Working with the Business Model Innovation Patterns in conjunction with your Business Model Canvas may lead to a very interesting question: Now that we have designed our new Business Model, what if we could scale exponentially?
Not all Business Models can be scaled exponentially, but certainly, almost all Business Models contain factors that will limit or promote the organization’s inherent growth potential. Our focus should be to maximize the growth potential of a Business Model.
All aspects of new business models can contribute to exponential growth. But growing exponentially starts with your very own thinking. Do you want to grow exponentially to start with? Are you ready to turn your organization upside-down? Once your mindset is clearly engaged in the idea and potential of exponential growth, you can move on and consider all the areas of your Business Model. If you have a strong why, you will find a how.
One of the biggest challenges for organizations is deciding where to innovate and where to cut costs. Luckily, there is a guideline to help solve that puzzle.
Most activities within a business, such as accounting, forecasting, marketing, and HR, are not even sector-specific. And while any of these can theoretically add to the differentiation of an organization, most of them do not and are unlikely to do so.
This is an important point: most of what we do (and what any firm does) does not support our differentiation, and may not even be part of our core operations. What does that mean for how we should think about strategy?
The business objective is to meet customer needs in a satisfactory manner, but to not overdo it, since this is likely to have only limited impact on your differentiation. You want to keep up with your competitors in order to defend your core, but streamline where possible. From a business strategy perspective, the objective is to improve (to “keep up” as we said), but also to transform based on your strong core. Consider moving into adjacent areas, leveraging additional hidden capabilities and expanding into untapped segments and markets.
Develop a business model based on developing a value chain. Many organizations seek fundamental change in the face of challenges, while businesses really should seek to expand on their advantage in new ways. Finding insights through analyzing your business objectives leads to Business Model Innovation.
Connecting the Dots: The UNITE Business Model Framework
How to Create Innovation includes a number of canvases that focus on value creation and finding the right business model to meet your customer segment and customer needs. The framework is built to inspire drastic changes that help you find a competitive advantage. Our hope is that your company grows through business model innovation, and so we again encourage you to look deeper into our website and the book.
Here is a summary of the key ingredients of the framework:
The centerpiece is the Business Model Canvas, which covers the six main areas of a Business Model (the Operating, Value, Service, Experience, Cost, and Revenue Models).
A Business Model can be broken out into its numerous aspects. Depending on what challenge you face, you can zoom in on your area of interest using an appropriate tool or canvas:
- Your Business Intention and objectives as well as your Massive Transformative Purpose summarize your drivers and give direction to what you do.
- The Value Proposition Canvas details the central components of your offering (the product or service).
- To dig into your Customer Segments, work with data-driven Personas.
- The JTBD Customer Job Statement and Job Map frames the JTBD of your customers.
- The Business Model Environment puts your Business Model in a market context composed of emerging trends and disruptive forces.
- The Innovation Culture Canvas helps you understand and consciously shape a culture that supports innovation.
- The Innovation team structure enables you to draft a team structure for your innovation initiative.
- Using learning and growth metrics, you can measure progress at the initial stages of development. These metrics help you focus on what really matters instead of creating a detailed business plan will not really help you. Later on, you can expand the financial aspect of the Revenue and Cost Models with a full business case.
- The Operating Model Canvas helps you think through the Operating Model.
Business model innovation needs to be a major point of emphasis if a company hopes to stay competitive. When your organization creates value in a new way, not only do you boost your revenue stream, but you potentially set the stage for an entirely new industry.
Sales, services, higher quality performance: model innovation meets customer needs and helps all businesses grow. Business model innovation must be a part of your overall innovation strategy.