In the late 1990s and early 2000s, just when everyone thought that Apple’s growth had reached a saturation point, the company made a game-changing move. In 2001, Apple introduced an array of products and services beyond hardware and software. The company’s new offerings, such as the iPod, the iPhone, and the iTunes skyrocketed Apple’s growth all over again, taking it to the zenith of its industry. Every business needs a strategy to respond to the changing world. Although avant-garde cases of business model innovation like Apple are rare, there are many companies that have tested the waters and tasted the success of innovating their business model.
What is business model innovation?
A business model is a well-rounded description or, in simple terms, a model that defines the value proposition of a company, both for itself and its customers. Your business model is, therefore, your company’s nidus for innovation. This means that you can alter parts of the business model and make conscious changes to create a competitive advantage. That’s business model innovation for you. Over the years, the lifespan of business models has fallen from almost 15 years or more to less than 5 years. This implies that business model innovation is no longer a strategy only to gain competitive advantage, but it is an imperative core capability to adapt to the rapidly changing world. Business model innovation whacks traditional, and often stagnant, business models on the head!
Apple proved that business model innovation goes beyond innovation in mere product, service, or technology. As a thought leader, you must ask yourself if your current business model is succeeding. Future success almost always depends on altering the existing model by defining a persuasive customer value proposition and reinforcing it with an efficient and effective operating model. Whether you want to steer breakout growth, revive a trailing core business, tackle industry disruptions, or protect your company against industry decline, business model innovation is the key. Although it has its own caveats (discussed later), it is critical to business transformation in the current strategic environment.
How innovations in the business model create competitive advantage
Business model innovation is more challenging than process or product innovation. However, it also offers dramatically superior returns by opening new windows of opportunity and unlocking growth. Business model innovation doesn’t necessarily mean creating a completely new model for your business. According to the University of St. Gallen’s BMI Lab, 90 percent of all business model innovations are essentially recombinations of business models or ideas that already exist. How the changes to the business model contribute to creating competitive advantage are manifold. For example,
- In times of instability, changing your existing business model can help you relieve the strain of intense competition.
- In case of disruptions in your industry, such as technological or regulatory shifts, business model innovation can help you create fundamentally novel competitive approaches to drive your business without any roadblocks.
- It creates a scope for downturn-specific opportunities and enables you to lower prices or mitigate the costs and risks of ownership for your customers. It allows you to leverage a crisis to reconfigure your business instead of using defensive operational or financial tactics.
How can you strive for business model innovation in your organization?
It’s the age of disruption when business model innovations are putting established business models under attack. Bitcoin bypassing traditional banks with blockchain technology, Uber sidestepping the licensing system of taxicab franchises, and Coursera threatening business schools with online courses are only a few examples of the disruptive power of new entrants in each of their industries.
According to McKinsey, disrupting beliefs is the latest approach to business model innovation. There are five steps to reframe the fundamental beliefs of value creation and find new ways to create value.
Finding the dominant business model in your industry
What are some of the long-standing principles of value creation in your industry? When cloud technology had entered the scene, it was a long-held belief that cloud infrastructure will last a lifetime. But as an organization evolves, so does its cloud requirements. And so came agile cloud solutions. Question the status quo, look for errors in your business model.
Dissecting the most significant long-standing belief into supporting notions
Once you’re aware of a long-held belief or principle, break it down into how it is reinforced by supporting notions, such as notions about technology regulation, customer interaction and needs, business economics, etc.
Reframing an underlying belief into a new hypothesis
Create a new hypothesis that no one in your industry has thought of—not currently at least. Apple hypothesized that customers might want to buy their electronics in stores although Dell educated them about direct buying.
Sanity-testing the reframed beliefs
Reframing concepts that worked in another industry improve your chances of creating one that makes sense for your business. Business model innovations travel well from one industry to the other. A classic example is Airbnb inspiring Uber inspiring Peerby.
Translating the reframed belief into a new business model
Once you have it ready, the new strategy for value creation becomes evident. The only thing left to do now is transitioning from your current business model to the brand new one. It does require the right timing and a lot of nerve!
How Tesla revolutionizes the automotive industry with business model innovation
Source: The New Climate Economy
Tesla challenges dominant industry logic every step of the way to transform the automotive industry while maximizing its profits. Before Tesla came into the picture, electric cars were inferior vehicles that didn’t have many takers. So what did the company do different that transformed the electric car industry? How did Tesla innovate? The generic business model for automotive manufacturing relies on the basics of who, what, how, and why of a business model. Whereas, Tesla goes a step further by altering these four basic premises to its advantage.
|Business Model||Everyone else||Tesla|
|WHO is the customer?||Anyone with transportation needs||Ecologically aware car owners and stakeholders who want to increase their use of renewable energy|
|WHAT is the solution?||Transportation from one point to the other||Clean energy ecosystem, sustainable batteries for businesses, homes, and self-driven cars|
|HOW is value created?||Manufacturing vehicles by collaborating with different partners and distributing the vehicles through third parties||Own branch stores; create a network of well-placed charging stations; and meet specific customer needs|
|WHY is it commercially viable?||Price per vehicle-based on customized add-on features||Sales of units of sustainable energy; decrease battery costs by 30 percent once the Gigafactory is operational|
Pitfalls of business model innovation
Seeing the changing world of business with rose-tinted glasses is only a temporary solution to deal with change. Changing customer behavior, technological innovations, and globalization make business model innovation a necessity. Although it is significantly profitable for most businesses, business model innovation can come with a fair share of problems. These are the common pitfalls that you should lookout for:
Failure to scale
This is often the result of a lack of resources or attention when the novelty of a project dies down. Failing to establish all the right criteria or collect and analyze all the validations can hinder your business model innovation from scaling.
An unbalanced portfolio
When there are too many non-hierarchical or uncoordinated innovations, the result is an unbalanced, overlapping, and bloated portfolio of experiments. These might not even have enough support or resources to win approval from the senior management.
Overvaluing past models
The natural yet powerful tendency of historical bias makes you undervalue disruptive, futuristic ideas.
When you value the internal needs of your organization more than your customers’ evolving and often unmet needs, your business value innovation fails to help you make the best of the opportunity.
Promising ideas often take a back seat if there are pet ideas looming about in your organization. Projects that neither go anywhere nor die are major obstacles for your business model innovation to be effective.
Obsessing on ideation
Churning an endless torrent of ideas isn’t worth anything if those ideas aren’t piloted and scaled up.
Isolating your business model innovation efforts from your mainstream business can drastically reduce your opportunity to leverage and influence the business.
Create a new window of opportunity and reignite growth
An American Systems theorist, author, inventor, and futurist, Buckminster Fuller, (1895–1983) quoted, “You never change something by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” He couldn’t have been more right. Instead of waiting for a crisis to reinvent your business, you can proactively use business model innovation to explore new growth avenues and steer your company to success. So, now is definitely a good time for business model innovation, right?