For successful companies, in addition to developing new products, improving processes and opening up new markets, a new type of innovation comes into the limelight: rethinking the fundamental logic of one's own business activity - business model innovation.
What Is Business Model Innovation?
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. 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:
Where to play along the value chain
What cost model is needed to ensure attractive returns
What organizational structure and capabilities are essential to success
Business Model Innovation and Transformation
Business model innovation is critical to transformation. Many organizations share a common set of concerns: What type of business model shift will help us achieve breakout performance? How do we avoid jeopardizing the core business? How do we build the capability to develop, rapidly test, and scale new models? Inspiring an organization to change is not a trivial undertaking, but given the current strategic environment, it’s a critical one.
Four Approaches to Business Model Innovation
Companies hoping to drive growth through business model innovation face a number of critical questions: How broad should the scope of the effort be? What’s the appropriate level of risk to take? Is it a onetime exercise, or does it call for an ongoing capability?
To answer those questions, it’s important to realize that not all business model innovation efforts are alike. Understanding the four distinct approaches to business model innovation can help executives make effective choices in designing the path to growth:
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.
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 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 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 competitive advantage of the company and careful selection of new ways to use it to achieve success in new markets.
How does your company work?
The business model describes how your company creates value, delivers value to customers and earns money itself. In doing so, the product increasingly takes a back seat. What counts is the benefit offered to the customer.
The principle of business model innovation is by no means new. Successful companies have always been characterized by the fact that they adapt to the constantly changing environment and even often actively drive and shape change. With new, often digital business models, start-ups turn established industries upside down. What is new, however, is the understanding that business model innovations can, and must, be systematically developed. Because only those who are able to continuously adapt their business model to changing market conditions, in a user-oriented way, can remain successful.
The business model as a starting point for innovation
A business model is nothing more than a model-like, holistic description of the logical relationships between how a company generates benefit or value for its customers and itself. The detailed mapping of this logic makes the business model visible, assessable and subsequently changeable.
The business model of a company is therefore suitable as an analysis unit to systematically find starting points for innovations, i.e. companies can change parts of their business model and thus create an advantage over their competitors.
A business model innovation is therefore the conscious change of an existing business model or the creation of a new business model that satisfies the needs of customers better than existing business models.
Business model innovation needs a clear concept
A concept that facilitates description and discussion is essential for successful work on the business model. It has the task of capturing and communicating the basic principle according to which a company creates value. Depending on the desired level of detail and abstraction, various concepts are available. Here we briefly present two concepts of different complexity which, however, basically answer the same questions.
3 Reasons in favor of business model innovation
New technologies and products require new business models
The trigger for a new business model is often a new product or a new technology. Above all, digitization brings many potentials for business model innovations. Digitization creates new products, new customer benefits, or new data, as a basis for new business models.
For this reason, every company should start a creative process in parallel with the development of new products or processes, to discover whether this can also be used to develop a business model innovation. In this way, a company can bring much more far-reaching and radical innovations to the market.
Potential for radical and disruptive innovations through new business models
Business model innovations have the potential for radical, completely new and disruptive innovations. Uber and Airbnb have proven it and turned entire industries upside down with their new business models. In just a few years, they have become companies worth billions. Business model innovations have a very high innovative power and offer many opportunities for unique differentiation and unique selling propositions.
In many industries the products are already extremely exhausted and there is little innovation potential. However, through a changed and new business model, one can still reach far up and have many levers for innovation to hand, for example alternative sales opportunities, new value chains, etc.
Differentiation from the competition
If you look at some markets, all players have the same, or a very similar, business model, the difference lies only in the products, services and positioning. But in principle they all tick the same boxes. Business model innovations, however, can generate a true difference and competitive advantage. This can also make it possible to create completely new markets. Ryanair, Apple, Nespresso and Cirque du Soleil have proven this successfully. New business models have the potential to completely revolutionize existing industries, or to create completely new markets.
Visualize and test the business model
With the Business Model Canvas, you can visualize and test your business model. This is an indispensable step, especially if a business model innovation is to be developed. The Business Model Canvas (BMC) allows you to present your business idea clearly on a piece of paper. In this way you can visualize your business model, discover weak points and test whether it can work. The BMC was developed in 2005 by the Swiss economic theorist Alexander Osterwalder and the computer scientist Yves Pigneur. This simple tool, which is also described in this book, has enjoyed increasing popularity ever since.
How does a Business Model Canvas work?
All you need for a BMC are two things. Different colored post-it notes and an empty BMC, which you can download from our download section. Print the template as large as possible so that you have enough space for your ideas. You can also make your BMC digitally. This method is suitable, for example, for teams that work together via the cloud.
The BMC is suitable both for the analysis of your existing business model, and for the design of a new idea.
Now write down the different topics. Start with the value proposition and continue with the customer segments. You can also start with the customer segments and then take the value proposition next. However, you should always fill in these two fields at the beginning. This ensures that you always have the essentials of your business model, and your target group, in view. The different colors of the post-it notes should represent the different customer segments.
The 3 phases of business model innovation.
A business model innovation is the positive change, improvement or renewal of the business model.
Innovation always affects several types of innovation, e.g. product innovation, marketing innovation and process innovation. Business model innovation thus has a broader impact on the company because it works in several dimensions. For example, in contrast to this, with a product innovation one usually "only" has a new product which, however, has no direct and positive change on the type of sale or the revenue logic.
The Business Model Innovation project deals with the future of your core business model.
In 3 phases you will discover the transformation potentials of your business model:
Phase 1: IS Analysis and trend radar
The analysis of the business model, using Business Model Canvas, maps the business model on one page. In this way, strengths and weaknesses can be identified. What has made the company strong in the past? Is the logic of the business model conclusive?
In trend radar, needs and trends in the market, game changers that can shake your business model, are mapped according to influence, strength and probability of occurrence. The internal perspective can be validated by external experts.
Phase 2: Vision
Here the generation of business models is in the foreground. There are 3 stimuli for this:
1. Derivation of improvements of the business model from the analysis of the current business model.
2. Creation of scenarios on the basis of trend radar and derivation of business models based on these scenarios.
3. Application of stimuli from other industries: Which business model types are successful in other industries and how could they be transferred to your own business model?
Phase 3: Testing
The next steps are defined on the basis of the business models generated. The business models are further developed in tailor-made tests, and positively tested business models can be converted into concrete projects.