Why Business Model Innovation matters for All Organizations
Innovation matters
Audi’s recent admission that they have a 50% chance of survival in the next decade serves as a stark reminder of the importance of staying relevant and competitive in today’s fast-paced business environment. This statement highlights the need for businesses to regularly re-evaluate and evolve their business models in order to adapt to changing customer needs.
Business model innovation is not just for start-ups or disruptors, established companies can also benefit from incorporating it into their strategic planning. From Airbnb’s disruption of the hotel industry to Tesla’s transformation of the automotive market, we have seen numerous examples of companies successfully differentiating themselves through innovative business models.
In this article, we will delve into the different types of innovation and explore the factors that drive business model innovation. We will also provide examples of companies that have successfully implemented it, and offer advice on fostering an innovation culture within your organization. So, join us as we explore the world of business model innovation and discover how it can help your business stay ahead of the curve.
Innovation in business
Innovation comes in many forms, but it is typically classified into three main categories: product innovation, process innovation, and business model innovation.
Product innovation
This type of innovation entails creating and launching new or improved products or services. This can range from minor tweaks to existing offerings to entirely new ones. It’s an important component of a company’s growth strategy because it can help increase revenue, differentiate the company from competitors, and improve customer satisfaction. Companies consistently delivering new products and services are better equipped to maintain customers and benefit from continuous revenue streams.
Apple is known for its ability to constantly introduce new, innovative products and services, which has helped it maintain its position as one of the world’s most valuable companies. Apple’s iPhone development has been a central area of innovation for the company. Apple released the first iPhone in 2007 and has consistently released new models with improved features and capabilities. These continuous upgrades have assisted Apple in maintaining its market share in the smartphone industry and have been a significant driver of revenue growth for the company.
Product (or service) innovation can be an essential driver of business model innovation because new offerings can generate new revenue streams or allow a company to enter new markets. However, product innovation alone cannot generate new, successful business models. To turn their iPhone upgrades into a complete business model innovation, Apple could, for example, offer a subscription-based model in which you’ll always get the latest iPhone.
Process innovation
Process innovation refers to developing and implementing new or improved ways of performing business activities, such as manufacturing, logistics, or supply chain management. It’s how a company produces and delivers its products or services, from the raw materials to the final customer. This includes changes to the production process’s design, organization, management, and operation.
Companies that are looking to create these savings in their underlying operating model involve their frontend and/or customer-facing staff. Those are the ones with their feet in the mud, they talk to customers daily, and they know where improvements can be made. When I was still the innovation manager for Liberty Global, and we ran an efficiency campaign, we received the idea to simplify the self-install from a guy experiencing customer complaints daily. The validated new approach not only simplified installation and improved customer satisfaction but also reduced the costs for materials, packaging, phone, and technical support.
Process innovation can improve a company’s efficiency and effectiveness but happens on the operating model level and does not result in a different business model.
Business Model Innovation
Business model innovation (BMI) is the process of identifying and implementing new ways for a company to create, deliver, and capture value. Changes to how a company produces and sells its products or services and changes to its revenue model, distribution channels, and customer relationships can all fall under this category.
A business model is a blueprint for generating revenue and creating customer value. It’s the key factor in determining a company’s competitive position in the market. The easiest and most accepted way to create this blueprint is using the Business Model Canvas developed by Strategyzer. Business model innovation means to change or create new business models to adapt to market changes and technological advances.
In summary, BMI involves a holistic approach to how an entire business creates, delivers, and captures value. In contrast, product or process innovations focus on specific elements of the business model. All three types of innovation are essential for a company’s success. Still, BMI is the most transformative and impactful in creating a sustainable competitive advantage.
BMI shows a four-fold larger shareholder return premium than product and process innovation and provides more stable returns; BMI outperforms product and process inventors even after ten years. (See survey results by the Boston Consulting Group)
Business Model Innovation
BMI is for anyone wanting to design a new business model or change their existing business model. It can involve introducing new products or services, adopting new technologies, shifting pricing strategies, redefining customer relationships, or improving operational efficiency. BMI is vital for all companies, regardless of size or industry, as it helps them create a viable business with a lasting competitive advantage.
Importance of Business Model Innovation
While BMI is often associated with start-ups and disruptors, established companies should also embrace it as a critical strategy for success. In fact, established companies may have even more to gain from BMI, as they often have existing customer relationships, brand recognition, and resources they can leverage (and should protect).
Implementing BMI at an existing company can be challenging, however, as it may require breaking with established practices and ways of thinking.
One of the most famous examples of a company that failed to innovate its business model is Kodak. Kodak was once a dominant player in the photography industry but failed to adapt to the shift toward digital photography. Even though a Kodak employee invented the digital camera (read the entire story here), Kodak’s management team didn’t dare to change.
This ultimately proved to be a mistake, as Kodak could not compete with the convenience and capabilities of digital cameras and eventually filed for bankruptcy in 2012.
Another example is Hilti. Hilti is a company that has successfully differentiated itself in the highly competitive construction industry through a transformation from one business model to another. Hilti’s business model traditionally involved selling power tools and other equipment to construction firms, focusing on quality and durability.
However, the company recognized that there was an opportunity to offer a more comprehensive solution to its customers. It implemented a new economic model that focused on providing a range of services in addition to equipment.
Under this new pricing model, Hilti began offering equipment rental, repair and maintenance, and training and support services. This allowed the company to provide a complete solution to its customers and capture value beyond the initial equipment sale. Hilti’s focus on services also allowed the company to build stronger relationships with its customers, as they relied on Hilti for ongoing support and assistance.
Changes that call for a new business model
Several factors can drive BMI, including technological changes, customer preferences and behavior, market conditions, and the regulatory environment.
Technology
In the realm of technology, the lightning-fast rate of technical change might present fresh openings for business models that are susceptible to innovation. For instance, the widespread use of the internet and mobile devices has enabled businesses to provide their goods and services via the internet. It has resulted in entirely new business models, such as those based on subscriptions or pay-per-use arrangements.
An excellent illustration of a company that adapts its business model in response to shifts in the technology landscape is Netflix.
The innovation of Netflix’s business model was driven in large part by changes brought about by technological advancements, most notably the widespread use of the internet and streaming technology. However, perhaps most significantly, Netflix has shaken up the traditional media sector by making its movies and television series available through a subscription service.
Blockbuster, a once-dominant player in the video rental industry, clung to its time-honored pay-per-rental business model and was slow to embrace the mail-rental service which Netflix pioneered. These two factors ultimately led to Blockbuster’s decline and eventual demise.
Customer preferences and behavior
As organizations strive to satisfy their target market’s ever-evolving requirements and aspirations, customer preferences and behavior can also be a driving force behind the innovation of new business models. For instance, one of the factors that contributed to the development of the sharing economy was the demand among customers for less restrictive, more adaptable, and less expensive solutions.
Changes in client tastes and behaviors, namely demand for more convenient, flexible, and cost-effective options for travel accommodation, have played a role in the innovation of Airbnb’s business model.
Airbnb’s peer-to-peer infrastructure enables individuals to rent out their houses or apartments to tourists, providing a wider variety of lodging options at a lower cost than traditional hotels. They can achieve this because their fundamental business model does not include costs associated with real estate assets or service staff.
Market conditions
Market conditions, including competition and the state of the economy, can prompt BMI. For instance, businesses might try to innovate their business models to differentiate themselves in a crowded market or to react to shifting economic conditions such as a recession. These are examples of situations in which businesses might need to respond by finding new ways of doing business.
The Dollar Shave Club disrupted the traditional razor market, which offered a subscription-based service for purchasing high-quality razors at significantly lower prices than traditional brands. This enabled the company to generate a more consistent revenue stream while their viral marketing campaign set them apart from its rivals.
The Dollar Shave Club relied heavily on an e-commerce platform to sell its products directly to customers, eliminating the need for a middleman.
Regulatory
Finally, regulation changes can drive BMI, requiring businesses to adapt to new requirements and guidelines. For instance, in response to the growing attention paid to sustainability and environmental responsibility issues, some companies have rethought their business models to bring them closer to these core values.
The electric vehicle manufacturer Tesla had to adjust its business model to comply with international legislation that encourages the use of electric vehicles and seeks to reduce emissions of greenhouse gases. Initially, Tesla sold its expensive automobiles to early adopters of electric vehicles.
Tesla increased the size of its customer base by releasing models with lower starting prices, such as the Model 3, and by modifying its business model to include electricity distribution. Tesla owners can charge their vehicles for free using the company’s Supercharger network, which helps the company comply with regulations, enhances the customer experience, and builds loyalty to the Tesla brand.
Despite evolving regulations and intensifying competition in the market for electric vehicles, Tesla flourished with the new opportunities they found.
Approaches to business model innovation
The previous paragraphs showed how old business ways do not guarantee a strong business model that works in the future. Businesses and industries change. BlackBerry was once a dominant player in the smartphone market, but it failed to adapt to the shift toward touch-screen devices. Despite having a loyal customer base and a strong brand, Pebble could not innovate its (old) business model in response to changing market conditions and customer preferences. And Nespresso was forced to invent new and additional business models when their patent for coffee capsules expired.
Business leaders must understand the value of innovation in business models and take a holistic approach to identify the right business model. Although there are multiple paths to BMI, it is essential to cultivate an atmosphere that supports and encourages innovation. This can be achieved through many strategies, including:
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- Encouraging risk-taking and experimentation: To innovate, companies must be willing to take risks and try new things, even if they may not always succeed. It is essential to create a culture where employees feel comfortable proposing and testing out new ideas and where failure is seen as a learning opportunity rather than a reason for punishment.
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- Embracing open communication and collaboration: Innovation often emerges from exchanging ideas and perspectives, so creating an environment where employees feel comfortable sharing their thoughts and ideas is crucial. This can be achieved through open communication channels and collaboration tools, as well as by encouraging cross-functional teamwork and collaboration.
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- Investing in employee training and development: It is essential to provide employees with the skills and knowledge they need to innovate. This can include training in areas such as design thinking, problem-solving, entrepreneurship, and opportunities for professional development and growth.
By fostering a culture of innovation, companies can create an environment where BMI can thrive and drive long-term success. It is essential for established companies to create a culture that is open to change and experimentation and to allocate resources toward exploring and testing new ideas.
Established companies can approach this through “intrapreneurship,” which refers to the practice of teaching and creating entrepreneurial behavior within your company. This can involve setting up innovation training programs or encouraging employees to pitch and develop new ideas. Watch the videos on this page to see how intrapreneurship was implemented at Virgin Media. By embracing an intrapreneurial mindset, established companies can tap into the creativity and expertise of their people to drive BMI and stay ahead of the curve in the market.
Summary
In today’s rapidly-changing market, BMI has become a critical driver of success for companies of all sizes and industries. From Airbnb’s hotel industry disruption to Tesla’s automotive market transformation, we have seen countless examples of value creation through revolutionary business models.
To effectively implement BMI, companies need to understand the different kinds of innovation and the factors that drive it and cultivate a culture that supports and encourages innovation. By embracing risk-taking and experimentation, embracing open communication and collaboration, and investing in employee training and development, companies can create an environment where BMI can thrive and drive long-term success.
To apply BMI, it’s crucial to consider your current business state and what changes can be made to implement new value propositions and revenue models. It’s also important to look at how competitors are innovating their business models and what trends are emerging in the industry. By carefully considering these factors, it’s possible to develop innovative solutions that will help create lasting value for your customers and the profitability of your business.
So, feel free to think outside the box and experiment with new ways to create value. Business model innovation is a vital element of your innovation strategy.
Business Model Innovation Masterclass & Training
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