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Business Model Innovation

The Business Model Innovation Master Plan

Introduction

As a critical source of competitive advantage, innovation certainly deserves the attention it receives.  But innovation is also notoriously difficult to manage.  And while recognized innovators are widely admired for their achievements, every business leader knows that the pursuit of innovation is exceptionally challenging even as it is entirely necessary.

The roots of the problem lie in the fact that innovation takes place at the crossroads of two critical uncertainties:  uncertainty about the future, and uncertainty about what will be best for our organization.

Given these issues, executives face two key questions:

  • First, What innovations should our organization be pursuing?
  • And second, How should we create them?

We respond by nothing that among the four types of innovation that any firm could pursue (this is detailed on the next page), business model innovation should be highly attractive and pursued aggressively.  Why?  Because business model innovators are earning very attractive returns on capital, and finding new market opportunities that others have overlooked.

But business model innovation is also widely misunderstood, and consequently few organizations are reaping the significant benefits that can come from doing it well.

InnovationLabs has developed a unique set of materials to help you understand why business model innovation may be important for your company, and a systematic program to help you develop breakthrough business models of your own.

Four Types of Innovation

Organizations allocate their innovation investments among four types of innovation:  incremental, breakthrough, new venture, and business model.

The purpose of incremental innovation is to maintain market share.  But it’s a maintenance strategy, and rarely confers much of an advantage.  It’s necessary, to be sure, but by no means is it sufficient to support growth.

The search for breakthroughs offers a shot at stardom, but as they are quite rare, pursuing breakthroughs is a properly recognized to be a high risk approach.

Successful new ventures can position a company for the very long term, but they are also high risk, capital intensive, and for good reasons they are rarely attempted.

In today’s business environment, this leaves the fourth option as the most attractive:  business model innovation can be not only the most cost-effective form of innovation, but for most firms it’s also the most promising route to success.

Recent research by IBM has shown that business model innovators are earning the most attractive returns on innovation investment, and also achieving the best rates of growth.

In fact, if you look at the most successful and admired companies of the last twenty years, you see that most of them have focused on developing innovative business models.  What company would not want to be included on this list of business model innovators:  Amazon.com, Apple, Costco, Fedex, Google, Ikea, Southwest Airlines, Starbucks, Wal-Mart, and Zara are 10 of the world’s most successful companies, and business model innovation has been the key to the success of each one.

Defining Business Model Innovation

But what exactly is a business model?

At its simplest, a business model simply describes how a company makes money.  It’s the products and services it offers, the way it delivers them, and through these elements it is the experiences that it creates for customers.

Business model innovators just find ways to create better experiences for their customers, and as a result of doing so the most successful among them earn profits that others did not recognize as even possible.

For example:

  • Google discovered how to sell words at auction, a new business model that transformed the company into the world’s number one advertising agency, and soon thereafter into one of its most admired companies.
  • Amazon.com developed a new business model for selling products online, has radically reshaped the book business, and is now working to extend its model into every market.
  • Apple found a tremendously successful way to sell songs through iTunes, permanently reshaping the music industry.
  • Fedex set up a system that delivers packages for ten to fifty times more than the Postal Service charges.
  • Southwest Airlines sells airplane tickets for less than its competitors, but it has nevertheless been the most consistently profitable US airline for two decades.
  • Wal-Mart, Costco, and Ikea, meanwhile, developed global manufacturing and supply chains that enable them to sell enormous quantities of products at prices once thought unattainably low, undercutting their competitors and redefining the very nature of retail.

To reiterate the point made above, the core of each success is that these companies found new ways to earn profits by providing their customers with new and better experiences.

Further, the experiences provided by their innovative business models have resulted in enduring relationships that transcended traditional boundaries between customers and companies, and as a result each transformed the industry in which it competes, permanently altering the competitive landscape while becoming a renowned leader.

If business model innovation is the goal, and for most companies the evidence strongly suggests that it should be, then we need a way to get there.

InnovationLabs has created a unique and powerful set of analytical tools, exercises, and worksheets that we use to help our clients develop a true master plan for business model innovation.  (Our complete set of innovation worksheets now numbers approximately 100 exercises.  Some of the worksheets are shown below.)

This process enables executives to understand the key drivers of business model innovation, and to apply them to develop business model innovations of their own.

The process consists of these 8 steps:

  1. The Business Model Universe
  2. The External Drivers of Change
  3. The Customer Experience Model
  4. Core and Edge Markets Analysis
  5. Market Leader Analysis
  6. Competitor Analysis:  Jobs to Do
  7. Who Innovates?
  8. Putting it All Together: The Complete Business Model Innovation Package

1.  The Business Model Universe

Perhaps surprisingly, there are only four possible approaches to business model innovation, and they can be mapped very nicely in a single diagram.  We use this diagram to explain the patterns of economic change and the structure of industry competition across a wide cross section of the economy, including air travel, autos, banking, entertainment, fashion, financial services, fmcg, media, retail, technology, and many other B2C and B2B industries.

The model is extremely important when people develop new business model ideas because it gives them a simple way to test the essence of a concept and see if it actually makes sense.

2.  The External Drivers of Change

There are four key economic drivers upon which nearly every business model innovation of the last 30 years has been built:

Digitization, the shift to the digital world for all forms of information and entertainment, as well as for product design, manufacturing, logistics management, communication, and collaboration.

Commoditization, the use of technology to drive prices down across the entire spectrum of economic activity, affecting not only mass market products, but also luxury brands.

Globalization, the sourcing of goods and services from the cheapest possible providers worldwide.

Acceleration, the combination of the 3 previous factors to speed up the economy, and put tremendous pressure on the existing business models of every established firm.

And now over the last five years a fifth new driver has emerged:

Socialization, which has two dimensions.  First is the increasing prevalence of online social networking platforms that influence the needs, desires, attitudes, and choices of millions of people.  Second is the expansion of creative content production to everyone, and its accessibility through platforms such as YouTube.

All successful new business models factor these five drivers into their plans.

3.  The Customer Experience Value Matrix

The design of a successful new business model is always based on one key factor:  the customer experience.

It’s essential that innovators build a clear understanding of the customer experience into their designs, and to help them we have developed a way to visualize the value propositions that are embedded in any business model.

4.  Core and Edge Markets Analysis

Most executives are accustomed to looking for opportunities from the “inside out,” meaning that they come at the question of growth from the perspective of their current core business.  But that is rarely where new opportunities emerge.  Instead, they come from outside, from the edge, where entrepreneurs are experimenting with new ideas, new services, new products, and new kinds of offers.  Executives and innovation teams need to learn to search on the edge for their future business models, because 99 times out of 100, that’s where they’ll emerge first.

Questions like these can stimulate the right kind of thinking:

  • For your business, what’s the core, and what’s the edge?
  • Identify the ten most significant innovations that have come to your industry in the last ten years, and pinpoint the source.  Was it core or edge?

5.  Market Leader Analysis

How did “they” do it?

We have developed a series of worksheets to help executives understand what the market leaders have done to get where they are.  We look at companies such as Southwest Airlines, Apple, Home Depot, and Wal-Mart to learn from their experiences.

6.  Competitor Analysis:  Jobs to Do

Why hasn’t anyone else come up with this business model yet?  Perhaps because they’re busy running their existing business, and they haven’t recognized the threat.  The essence of what they don’t yet understand is that the customer’s definition of the “job to be done” may be changing, or it may be changeable, and this provides the opening that the innovator will exploit to articulate a better value proposition, gain market share, and grow profits.

If the incumbent players in any market have lost sight of the real jobs to be done, and they focus excessively on their own particular solution, this leaves them vulnerable to innovation.

7.  Who Innovates?

Where do the insights come from that make business model innovation possible?  In most cases, it is neither the “insiders” not the “outsiders” who forge the insights that lead to a breakthrough business model.

Instead, it’s the two groups working together.  Sometimes one individual can possess both viewpoints, but more commonly this is done by carefully designed innovation teams of insiders and outsiders who work together to create the innovation culture.

8.  Putting it All Together:  The Complete Business Model Innovation Master Plan

By working carefully through the steps described above, new business model concepts that are ready for presentation and analysis will emerge.

When the concepts are compiled, the resulting Master Plan will address all three critical issues:

The Economic Model will explain why the new business model offers significant advantages over existing ones.  It will show the old and new models in the Business Model Universe, and will address each of the 5 key drivers.

The Operations Model will show how the organization is going to be designed and run to deliver a unique and differentiated experience to customers.

The Brand Identity will convey the distinct advantages of the business model to customers.

What’s the result?  What every senior management team and board of directors is asking for:  excellent investment options sourced from within.

In this case, it’s a robust new business model concept, well thought out, fully articulated, and ready to be added to a vibrant Innovation Portfolio and evaluated as a possibility for investment.

Arriving at this stage means that the organization has indeed executed well on the mandate to create innovations.

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At InnovationLabs, we continue to apply the principles and concepts described here with our clients around the world to help them develop new and innovative business models for their own organizations.

We would be pleased to work with your organization as well.

Please contact Langdon Morris at LMorris at innovationlabs dot com to learn more.

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