Business Model Innovation: Key To Achieve Breakthrough Performance
An organization that 'embraces innovation' can stand out from the crowd. These clear leaders never shy away from implementing new ideas, creating dynamic products, improving services, exploring new revenue opportunities, or changing their business model entirely.
A business model explains how a business makes money by delivering value to its customers at a reasonable cost that exceeds the manufacturing cost. Globalization, technological advancements, and the biggest yet, the changing consumer preferences serve as the driving force behind the creation of new business models. Many companies have identified the need to adapt and innovate their business models to stay relevant and survive in today's fast-changing marketplace. And to do so, they need to have a proper understanding of their existing business model, its strengths and weaknesses, and the right time and way to embrace a new model.
GoodFirms surveyed 68 management experts worldwide to find out the challenges in transforming the business model and the ways companies can pursue innovation without jeopardizing their core businesses.
What Is Business Model Innovation?
Every company has a business model, though they might not articulate it at times.
Business Model - At its core, a business model is a conceptual structure that performs two essential functions: value creation and value capture.
- First, the model defines a set of activities, from raw material procurement, designing, manufacturing to marketing, transacting a sale, distribution, and satisfying the final customers. The aim here is to create net value, which means providing something valuable to gain something more valuable in return.
- Second, the model captures some of the required value from these activities for the organization's operation and development. After all, generating a reasonable and consistent profit is the ultimate goal of any business.
- It also describes the payment methods, pricing strategy, payment timing, and more.
Technology provides a much faster and efficient way of performing these business operations, allowing organizations to have a competitive advantage through innovation. Still, no matter how transformative new technology is, it alone cannot propel a business into the future. Nor, for that matter, product and service innovation or business strategy is the same as business model innovation.
So what is the business model innovation, after all?
Business Model Innovation is the process of creating conscious and mutually supportive changes to both - an operating model and an organization's value proposition to customers - to enhance value creation. Even the perfectly executed minor changes can be of great benefit to both - customers and businesses.
Neil Kane, President of Illinois Partners, LLC, says a business model innovation "changes the way that products are sold, such as changes in the monetization method, sales model, distribution mechanism, services, etc."
He adds, "Many of the most significant and profitable innovations of the past 20 years have been Business Model innovations. Back in 1999, when people were saying ‘The Internet Changes Everything’, what they meant was that old business model, in fact, all the old business models were about to be disrupted. And they were pretty much right."
"One of the trends we currently see in business innovation is the fail-fast model." says David Adler, Founder and CEO of The Travel Secret, "Here companies are quick to market and quick to solicit feedback with their minimum viable product so that they can tweak their business model and implement solid customer feedback more quickly."
David advises, "Ensure you're innovating to meet demands rather than for the sake of innovation. You have to have your finger on the pulse of your industry and understand what changes that industry, whether it's based on social issues, a changing problem for consumers, or some other external factor."
Why Is Business Model Innovation Important?
In the past 50 years, the average business model lifespan has fallen from about 15 years to less than five. And so it’s been clear that no entrepreneur can pull through years and years merely by holding onto the past glory of their business models. Sooner or later, they need to update their plans based on the anticipated trends and challenges ahead.
The challenge is to find a successful business model, better than the existing ones, by fulfilling client needs at a sustainable cost and competitive price. Only then will it be able to create value for its customers and the organization. A business model itself can never be flawed; the fault lies with its distorted implementation.
As per the executive coach and management consultant, Amie Devero, it's as simple as - 'The only constant in life is 'change'. She expands, "First, a model might need revision because the original strategic theory is simply wrong. You only discover that once you have been operating with that model while the growth and revenue did not come. And, there could be only two causes: Either the strategy (the theory) is wrong, or you're not executing it well."
"Second, it's critical to have the agility to shift models as conditions change over time. What worked on day 1 or year 3 may no longer make sense in a new timeframe. We see that happen all the time as customers. It used to make sense to run to the shop if you needed a few things. But, in a pandemic, that seems less attractive, so you buy online, avoiding in-person retail. Taxi-drivers have felt the brunt of change as ride-sharing has eliminated the need to stand on street corners in the snow and attempt to flag a taxi."
"In today's global economy, business models expire faster than ever before due to the rapid pace of technological change and disruption,” says John Kinloch Anderson, CEO of Kinloch Anderson "To remain competitive and position a business for future success, companies must develop the internal capabilities and possess the foresight to innovate their model or risk getting left behind by their competitors."
John instances, "the Toys "R" US which operated across 37 countries with 1500+ brick and mortar stores (only 12 of which had eCommerce stores). Globally the company's revenues exceed $11.5 Bn, of which approximately $1.5Bn was delivered online.
They were ahead of the curve as one of the first major retailers to adopt eCommerce in 1996. However, their reliance on their $10bn bricks and mortar revenue cost them in the end. Despite the head start, the world's largest toy company soon got left behind by rivals Walmart and Amazon, who prioritized their digital offerings and captured the majority of the market share as consumer buying habits shifted to online shopping."
When the same idea or technology is taken to market through two different business models, there will be two different economic outcomes. So, companies with good business sense always aim to develop the capability to innovate their business models.
The Challenges In Transforming The Model
An enterprise that fails to keep up with the rapid changes in the business aspects is surely a sinking ship. But, the resolution of innovating a business model is not a trivial one either.
The first and foremost problem that the companies encounter while moving to action is the top management's inability to understand their existing model properly. Without the perception of the conflicts with the owned assets and business model, it is a futile exercise to determine how to transform it to achieve breakthrough performance.
There are many more challenges on the way to building the capability to develop, rapidly test, and scale new models.
Avinash Chandra, Founder & CEO of BrandLoom, identifies some of the challenges associated with the process of transforming business models, such as:
- Relying on a product-oriented approach only - Most companies have a product-oriented approach that makes it difficult to comprehend in terms of the business model. (company mainly directs its energy toward offering the highest-quality products)
- Lack of fundings - Sometimes, the new business model may require some amount of capital that may delay the decision-making process.
- Incoherent internal alignment - It is essential to have a clear internal team vision. Your company needs to understand the importance of the most relevant factors for a successful initiative of your business model."
Leadership must have a clear vision and plan of how they are going to stay ahead of their competition. Identifying the same, John Kinloch Anderson lists a few more of the challenges here:
- Investors pressuring CEOs - Most CEOs are under pressure from investors to focus on short term returns (and they are often incentivized by their salaries being directly correlated to the company’s share price), which hinders innovation.
- Balancing improvement and innovation - In most businesses, there are two worlds, one world that focuses on improvement and one that focuses on innovation. Most companies struggle while innovating. Each world requires an entirely different knowledge base and internal capabilities. Companies need dual operating systems - they must continue to focus on delivering shorter-term profits while simultaneously and consciously working on developing what their next innovation leap looks like.
- Falling victim to own success - It’s often hard for businesses to think about the future or feel the need to innovate when they are performing well. Many organizations fall victim to their own success as they don’t feel the need to innovate until they lose market share or something catastrophic happens, and by that stage, it is already too late.
Here’s a case study from Amie Devero to understand the possible challenges in innovating the model. She takes a business model example for an art-gallery in the current time.
Amie explains, "Consider that the owner has based the strategy on attracting customers to their art gallery by holding wine-tastings and social gatherings at openings. Now, in the current conditions, they must change the approach to succeed. Though, it isn't just pandemics that change circumstances and markets.
To succeed with the original model; the art gallery may have -
- a strong list of prospective guests,
- an event planning ability,
- a building that accommodates social events,
- an employee who knows how to organize and plan those events,
- relationships with wine vendors and caterers who are vendors for the events – and much more."
Now when that method of attracting art buyers has disappeared, a gallery owner has to figure out how to change their model.
Speculating the same, Amie furthers, "The following prospective shifts in the model will require different skills, tools, and people for the owner. They may decide to begin hosting online "meet-the-artist" events or offer virtual auctions to drive crowdsourced interest in new artists. The owner may plan to organize in-home exhibitions to high net-worth customers.
Doing in-home exhibits means a need for vehicles, security to ensure art stays safe, the staff to provide the kind of bespoke service that would go along with that –and much more. Online auctioning might require special software, employees who know how to customize and operate it, different contracts with the artists, and more. Making even such a fundamental shift in the model is a big undertaking –and then, it may not work."
How To Pursue A Business Model Innovation?
Any company, small or large, a startup or an established one, can successfully pursue business model innovation with a willingness to change and adapt. And if the opportunity is really good, and entrepreneurs follow proper steps, then the company's industry, age, or geography also do not affect the prospect of success.
Here's what businesses need to know before taking the first step towards creating meaningful change and having a significant impact on the overall performance.
1) Have A Clear & Logical Rationale For The Implementation Strategy
"Innovation for its own sake is inane. Instead, business leaders need to stay attuned to the success of their current strategy and the fluctuations in its effectiveness," says Amie Devero.
She adds, "Every business needs to dig into the articulation of their strategy and the assumptions that underpin it. By having a clear, logical rationale for the strategy, it’s easier to spot alterations in the environment that act as early warning systems for change. Then, when those changes come, you have prepared your team to reassess and create a new model. That new model will only be as successful as the planning to execute it. That will take flexibility in thinking, tools, and in the employees who will have to look at things through the new prism of a transformed model."
As a professional strategy consultant Amie Devero is usually involved when businesses either have transformative goals and need a way to accomplish them -- or when they have diminishing results; both situations demand a revision of the strategy.
She recalls, "At one time, I was the President of a mobile payment company for parking and transit. Before there were smartphones, the company came into existence, so we did payment using phone calls with local telephone numbers and voice recognition to identify customers and payment."
Later as smartphones emerged and apps came into the frame, they needed to alter their whole model. Informing about the changes, Amie says, "It then became possible to provide a payment app on the phone.
- That meant eliminating our entire voice recognition and phone call infrastructure.
- It also meant developing the technical know-how to build and maintain apps, upgrade them regularly, accommodate multiple languages and currencies, and the security for that to work, and have all the in-house talent to deliver that.
It’s fundamental to any business strategy that you must be able and willing to adjust to change. If you can't or won't, eventually, your business will fail."
2) Invest In Innovation Teams Or Tools
"For larger businesses that are serious about sustaining growth, they need to invest in innovation teams or startups while remembering many of their experiments will fail. Amazon is the prime example of this type of innovative culture," says John Kinloch Anderson.
He further adds, "For smaller businesses or one-person bands, there are several notable frameworks they can deploy, i.e., the Business Model Canvas and the Value Proposition Canvas. These are tools that can be used to map out each element of a company's business model and design how they propose to create, deliver and capture value (for both their customers and stakeholders)."
3) Motivate Your Team To Listen To Customers' Needs
Gary Magenta, who's Chief Change Architect at Root Inc., says, "Companies that want to pursue innovation in business models need to listen to their customers' needs first and then create the disruption or innovation with that information in mind."
He then advises, "Remember your frontline employees can be the conduit between you and your customers' wants and needs, listen to what they have to say. You need to be quite focused on what your customers care about, and then you need to motivate your people to execute that change.
To execute your innovation(s), employees need to understand the answers to these three questions clearly:
- Why are we changing?
- What's changing?
- What do I need to do to change?
Leaders must be committed to continual innovation and disruption to keep up with customers' changing needs and wants. Leaders must ask themselves every day, "What is our purpose (i.e., why are we in business?), and what do we need to throw away to remain true to this purpose?" Leaders need to be ready to throw away or challenge long-standing products, services, technology, procedures -- or all of the above -- to remain true to the company's purpose as the marketplace shifts."
Agreeing with Gary, Darren Litt, Co-Founder and Chairman of Hiya Health, says, "The key is to understand your customers. All business decisions should come from your customer's wants and needs. Companies often make the wrong decision of starting with their financials and working backward instead of starting with their customers and innovating from there."
Examples Of Successful Businesses Model Innovations
Given below are the real-world examples to provide the entrepreneurs with pieces of evidence on the importance of innovating business models.
Sale Ordinary Products In Extraordinary Ways
It is always inspiring to know of the examples of business model innovations that took ordinary products and sold them in extraordinary ways. One such phenomenal advancement is the shift in the music industry over the last couple of decades.
Neil Kane, a faculty at Michigan State University, elaborates on Apple's successful idea to provide a virtual store for people to buy and download digital music on-demand.
Speaking about the evolution, he says, "With the rise of online peer-to-peer file-sharing services like Napster, CD sales started to plummet. Napster made $99 million in 2000 by helping 80 million people download and share "stolen" music (in terms of copyright infringement)."
Explaining the consequences, Neil, who's recently written the book, "The Innovator's Secret Formula", says, "The music executives finally had to admit that their industry had been disrupted. The Recording Industry Association of America sued Napster out of existence in 2002, which might have made them feel better. Still, the digital music genie was out of the bottle and was not going back in."
"Enter Steve Jobs. Despite the major music labels' desire to continue to force people to buy entire albums of songs as digital downloads, Jobs crafted a deal that allowed Apple's new iTunes download service to offer any individual song for 99 cents. The iTunes Music Store opened April 28th, 2003, and it was an instant success, starting with the 80 million people who missed Napster."
Neil concludes by saying, "The music industry executives were right, of course. Forcing people to pay more for an entire album full of songs they mostly didn't want ($20), rather than allowing them to only pay for the songs they did want ($1), was a terrific and profitable business model. In fact, it may be one of the few business models where selling a product with low Product-Market Fit is more profitable than selling a product with a high fit."
Laser Focus On Understanding Customer Preferences
Customers are the ultimate determiners of how successful a business becomes. The only way to satisfy their needs is to understand them to the extent that one can anticipate their needs and deliver beyond their expectations.
An admirer of one of the most successful entertainment mass-media-companies of all time, Neil Kane, says, "Netflix is an interesting example because it combines both Technology and Business Model innovation with a laser focus on understanding customer preferences."
"First, it annihilated its primary competitor, Blockbuster, with the mail delivery system for DVDs that it pioneered in the late 1990s. Then it disrupted itself with another Business Model Innovation to become both a video streaming service and an award-winning content creator. Today it has a market capitalization of $238 billion."
Consistently Evolve To Stay Relevant
While talking about the most innovative companies, it would be wrong not to applaud the firms that have been sufficiently resilient and fundamentally strong to be around for more than many decades! These organizations certainly cannot just scrape by without getting reinvented multiple times to stay current and sustain timeless appeal.
"At Kinloch Anderson, we have traded since 1868, and over the course of these 152 years, our business model has inevitably had to change to remain competitive," says John Kinloch Anderson.
He then says, "One of the fundamental changes we’ve made to our model is to develop brand partnerships and license agreements in Asia. Previous CEO Douglas was ahead of his time, and during a previous recession, he noted the success of other licensee partnerships made by top quality international clothing companies."
Talking about how this helped Douglas and the company ultimately, John says, "Seeing local manufacturing costs were rising, he took inspiration from other foreign brands. For example, in the Japanese market, Burberry and Ralph Lauren started to look for partners who would make their products under license in this country for sale in that market. Therefore, the brand’s market cover was increased by extending it into three ranges, each attracting a different age range and type of customer."
Even though many businesses are fighting for survival because of the havoc caused by COVID-19, there are certain clear winners who possess very robust business models. The corporate world has witnessed countless companies fail to innovate when they needed to the most. This outlines the importance of being more vigilant than ever in remaining innovative.
But, no innovation ever comes easily, without any resistance. Changes in business models can be expensive and burn out the employees, mostly when done for the wrong reasons or incorrectly implemented. Fortunately, it is easier now with technology to adopt a wide variety of novel business models effectively. Learn from assessing the successes and failures of other businesses in the past, and learn how to apply those valuable lessons to your own challenges. Carry out your initiatives by learning the basics of how companies and industries change, how your consumers' behavior changes, and how value can be created and captured in the altered circumstances. Rather than going for immediate changes, make the transition as incremental as possible smartly. Change at the speed of the changing marketplace and disrupt your customers' experience before your competition does.
Have clearly defined goals and expectations, a clear & logical rationale for the implementation strategy, and find the most appropriate implementation services from GoodFirms' list to morph your concept into a reality.
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