Why business model innovation rocks

Can you name management trends that most business executives appreciate but few ever implement? Business model innovation (BMI) sure is one of them.

Companies that successfully reinvent their business models may become more profitable and more sustainable. This post will discuss 4 reasons that business model innovation is so essential, and why the opportunity is big now.

 1) Business models are crucial

The business model describes the way a firm provides value to its customers while generating profits. With a robust business model, companies may win competitors over and dominate a market; without one, firms (and even entire industries) may go out of business.

Business model innovation

The newspaper industry is an excellent example. It used to be the main supplier of news and commentary, enjoying multiple revenue streams: customer subscriptions, retail sales, advertizing and sponsorships. However, the Internet, blogs and social media have changed the game; newspaper readership declined, and many newspapers closed their covers forever.

As a response, some players (including Newsweek to college newspapers) abandoned their print editions, reducing paper, operations, distribution and HR costs.

Other newspapers seek the right balance between free and paid content: The New York Times adopted a paywall, as did UK’s Daily Telegraph and Germany’s Bild.

Clearly, the industry’s leaders are looking for profitable and innovative business models.

 2) Innovation creates value

Research studies, such as GE’s 2013 Innovation barometer, emphasize the importance of innovation: 91% of senior executives worldwide considered innovation “a strategic priority.”

It is true that some corporations sustain long-term success without innovation. However, these often enjoy unique circumstances, such as high barriers to entry (e.g., regulated monopolies like utilities) or traditional and conservative industries (such as private banking and legal services).

However, the majority of firms operate in competitive environments that reward progress, and for them, innovation is essential to sustainable growth. Consumer electronic firms must innovate in order to persuade consumers to replace their “antique” smartphones (which may be only 1-2 years old).

For most firms, innovation is not a choice. It’s a must.

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3) Business model innovation is rewarding

‘The future of management’ by Gary Hamel presents a hierarchy of innovation types. Business model/strategy innovation is superior, in terms of long-term market domination and immunity to competition, to product innovation. As Henry Chesbrough claimed, “A mediocre technology pursued within a great business model could be more valuable than a great technology exploited within a mediocre business model.”

The superiority of business model innovation over product innovation is well demonstrated by Apple’s iPhone. When launched in 2008, the iPhone was so innovative that Apple became the undisputed smartphone market leader. But it didn’t last long: today Android smartphones such as Samsung’s Galaxy are on par with, and some even claim better than iPhone; accordingly, Android smartphones dominate global market shares.

However, in terms of the business model, it’s a totally different story: Apple’s App Store earned 2.6 times more revenues than Google Play last quarter.

Similarly, Apple still benefits from the 10-year-old combination of iPod and iTunes, a business model that turned Apple into the world’s largest music retailer (and a classic case study of Business model innovation).

4) Opportunity to re-define your core

Business model innovation enables businesses to expand and experiment with their core. Some players, such as today’s newspapers, have no choice, but others do so voluntarily.

For example, IKEA executives in Russia noticed the dramatic appreciation in real estate value near IKEA stores. So, as the BCG study revealed, IKEA formed ‘Mega Mall,’ a new business unit aimed to realize this appreciation and engage in mall development.

Another example: Chile’s LAN Airlines successfully operates multiple business models at once: it is a full-service international passenger business, a major cargo business, and a low-cost domestic business. LAN’s ability to exploit synergies between 3 business models distinguishes it from the many airlines that have tried – and failed – to do so.

Musicians, too, experiment with business models: Radiohead’s 2007 album, ‘In Rainbow,’ was initially offered via download and enabled fans to decide how much to pay. Later on, it was successfully sold on CDs. J Viewz is an innovator, too: his album ‘Rivers and Homes’ was financed in 2010 by fans’ pre-purchases, and each track was submitted when recorded. J Viewz also invested in a beautiful album cover design (nominated for a Grammy Award) and involved fans in the creative process.

Not everyone is up to it

Business model innovation is not an easy task. No wonder: it may involve simultaneous changes in many of the building blocks (e.g., distribution channels, revenue streams, value proposition and key partnerships) described by Alex Osterwalder’s canvas in Business Model Generation. Furthermore, BMI may negatively impact managers and employees and slow internal processes. This often causes serious organizational challenges.

No wonder so few executives innovate their firms’ business models. A few years ago Clayton Christensen and Mark Johnson revealed that although many executives hailed BMI, only 10% of innovation investments were business model-related.

Clearly, business model innovation is not for everyone. However, firms looking to distinguish themselves from the rest should definitely consider this challenge.

Just do it!

Those who successfully innovate business models – from Nestle’s Nespresso to Inditex’s Zara – may enjoy great rewards.

So, what are you waiting for?

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