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.
A business model is nothing more than a model, holistic description of the logical contexts how a company generates value for its customers and itself. The detailed illustration of this logic makes the business model visible, assessable and subsequently changeable. 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:
- What cost model is needed to ensure attractive returns.
- Where to play along the value chain.
- What organizational structure and capabilities are essential to success.
The digital age has become an impetus for business model innovation, as technology has dramatically changed how companies operate and deliver services to customers. This digital disruption has shortened business model lifecycles and made innovation key to financial success. The global marketplace has further driven the need for business model innovations, as companies must react to stiffer international competition and the increased potential for systemic risk. These factors are forcing companies to turn to business model innovation to stay competitive and foster growth in the competitive global marketplace.
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.
Business Model Canvas
The “Business Model Canvas” by Alexander Osterwalder and Yves Pigneur. It is somewhat more comprehensive than the before mentioned 4-dimension concept and therefore also allows a higher degree of complexity with regard to the description of the functioning of a company.
The canvas concept is based on nine basic building blocks that cover the four most important areas of the company (customer, offer, infrastructure, finance):
People or organizations to be reached.
products and services that solve a problem for a customer segment or meet a need and thus value.
sales channels through which the company reaches and responds to its customers to convey the values offered.
The company’s different relationships with its customers (customer acquisition, customer care, sales promotion, personal or automated)
Sources of income: Income from a company from the various customer segments.
Basic resources needed to operate the business model (physical, intellectual, human, financial).
The key business model processes that provide the key resources described above.
The main partners of the business model (suppliers, strategic alliances and partnerships, joint ventures)
The most important of the costs incurred in the business model.
Four Approaches to Business Model Innovation:
- 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.
- 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 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 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.