What is Business model innovation ?
I felt the need to shed some light on business model innovation. Why do we need business model innovation? The more investigation and study I do on business model innovation, the more I find out how important it is for organizations. There are basically ten innovations pillars to build business model breakthroughs.
Profit Model, Network, Structure, Process, Product Performance, Product System, Service, Channel, Brand and Customer Engagement (Source Ten Types of innovation of Larry Keely).
If you know other innovation pillars please leave a comment and I will update the document.
After reading a lot of papers and further in depth analysis, I have come to the conclusion that Business model innovation is the best way to go and make a difference on your market. Studies show that basic innovation like product or service have a positive effect on profitability only in the short run because in the longer run the competition start copying your product or service.
Why Companies fail at Business Model Innovation?
Organisations fail at business model innovation because people are afraid of change. CEO’s don’t want new models because they are looking, most of the time, for short term profit. Most corporate cultures tend to work against people who innovate. Some leaders focus too much on the products they make and sell, and are unwilling to consider other innovation pillars. Some leaders avoid innovations that might cannibalize their existing business. Some of them are using the wrong metric when assessing innovations. And most companies don’t test their innovation in the real world.
Pricing is a great example of the kind of pillars that are ignored. According to Lean Analytics by Alistair Croll and Ben Yoskovitz:
- 70% of companies have no strategic thinking at all into how they set prices. More than half of the companies surveyed just take prices from their competitors. Some of them use tactic to set prices that cover the cost of production and provide enough profit margin. At least but not last 18% of them guessed.
- If 70% of the companies aren’t thinking about how to innovate their pricing, then how many are thinking about innovating their entire business model? Not a lot! This is a big opportunity and this why business model innovation is so important.
Why, what you have always done isn’t working anymore?
Firms don’t have internal business model innovation department to explore new capacities to deliver value.
You need to analyse your operational model. Define it’s “Key resources” and “key activities,” and establish your “customer segments” showing who pays for your products or services and what kind of value you are creating.
Business Model Canvas inspired by Alexander Osterwalder
Business Model inspired by Ideo
Are you still creating value for your clients?
In some sectors people say that the life of a product or service is just 6 months maximum. By the end of the six months, you should already have two to three new features in your pipeline… Just look at the smartphone industry. It’s always faster, smaller… It’s a never ending process, innovation layer after innovation layer and this is not creating value.
As far as innovation in product performance and processes goes, studies show that this kind of imporvement is even shorter than that of product/service innovation. Have a look at the video game industry. A few years ago there was a huge competition for product performance. It was a real fight for the best graphics, processor speed, and animation… companies where improving product performance at high cost. While most companies where focused on product performance innovation, Nintendo, with the Wii, decided to focus on the customer experience. The result was amazing: a new market segment with non-video games users and smart games that do not need high performance machines. This mean low R & D expenses and higher returns.
Business Model Innovation gives you a real competitive advantage
When I did take a look at business model innovation, I found out that this is one of the best innovation options as it takes you way ahead of the competition. It’s more complicated to copy because it combines different kind of innovations. It takes two to three years for the competition to realize that you have developed a new business model and then it takes them a further two to three years to develop something similar to your model. Add up the years and you can see that it actually gives you an advantage over your competitors and you can gain much more profits out of it. But remember that trying to change a corporation as a whole is meaningless and unhelpful. You always have to focus your energy on one of the innovation type. When it’s done you work on a second and so on. It’s a step by step process… If you want to make a real difference, please don’t focus on the same innovation pillars as the rest of your industry. Try to focus on the pillars where your industry is not investing his resources.
When should Business Model Innovation happen?
Now that I have made a point for the need of business model innovation, I must establish grounds as to when this should happen? It is quite simple and obvious though. When you feel that your competitors keep reaching you no matter how much you innovate, and no matter how much you try to keep them secret, it is time to innovate your business model.
Innovating business models is not an easy task, I can tell you that straight away. It is a tiresome process. You are actually changing everything that you did with something that you never did. You are getting out of your comfort zone, going to uncertainty and ambiguity. Competitive advantages are lost in years if not months but business model innovation gives you an advantage that you can retain for a longer period of time. Take a look at Google, Redhat, Lulu.com, Skype and Innocentive. All of these companies are fast paced, growing and have one thing in common, Business model innovation. I am going to give you brief analysis of their business models.
Here are some business model typologies for taking advantage of this opportunity:
Lulu.com : Long tail
Lulu partners with the authors, who actually are also their suppliers. They have created a new system of publishing. Writers who are not well known and don’t know how to publish their work now have Lulu.com. They provide all sorts of editing and printing services to their customers and suppliers, the writers.
LULU.com offers free publishing and all the services required by the writer. They only charge 20% of the profit margin set by the author of the book. The author keeps 80% of his/her profit share. The books are also made available at amazon.com
Redhat.com : open- innovation
Red Hat has thrown out its old business model of free ware operating system and now has moved from small player to big-time enterprise software competitor. Red Hat had to ditch the freely downloadable Red Hat Linux. Instead, it replaced Red Hat Linux with a more robust enterprise software package that maintained the principles of free (as in freedom) software without actually being free (as in price) to customers.
Skype : Freemium
Skype’s main business model is the peer to peer connection it provides to its users. Businesses can get connected with their partners, customers and employees from everywhere. All this is just for free. If you need more then, you have to buy services. Calling on landlines, mobile phones, Call waiting, Voice mail, and call forwarding are charged extra. Skype shows us how to use freemium model successfully.
Innocentive : Collaborative
Innocentive is like a market place for ideas and seekers. People with ideas solve the problems of people with issues. The problem solution seekers pay a subscription fee and reward to those with the ideas. The person whose idea clicks gets the reward. Innocentive does not have to hire anyone, and they don’t have to pay for any service of consultants.
Google : Freemium
Google is a company which relies mostly on Advertisements. 96% of their revenues are generation from advertising. They generate traffic with Google Search (Free) and they sell ads space to their clients.
- Being conscious about what you do and how you do it is a key step toward mastering innovation as a discipline.
- Trying to asses a corporation as a whole is meaningless and unhelpful. Analyze small, integrated programs.
- Your business model tells the story of how your company creates and delivers value.
- Big companies need business model innovation department to explore how to deliver value.
- Seek out unconventional people who challenge and force you to consider new ideas.
Persistence pays in business model innovation, you need patience to counter the drawbacks in each phase of the innovation process. Avoid committing to a particular model too soon, and make sure your teams feel confident enough to express their ideas.