Business model innovation

Business Model Innovation refers to the search for the new ways to create and capture value for its customers and stakeholders by creating a new market or exploiting new opportunities in existing markets. Changes to business model design can be also subtle - even without the power to revolutionize the industry, they can still yield important long-term benefits to the innovator. MBI focuses primarily on finding new ways to generate and define value propositions for customers, suppliers, and partners (Casadesus-Masanell, Zhu , 2013). The activities that involve the changes of the architectures of a business activity can occur in three areas:

1. the content ("what") by adding novel activities;
2. the governance ("who") by changing one or more parties that perform any of the activities;
3. the structure ("how") by linking actives in novel ways (Zott & Amit 2010).

BMI is crucial to employees of all levels for several reasons. First, it represents an underutilised source of future value. Second, competitors are less likely to imitate or replicate an entire novel activity system as it is relatively more difficult to achieve in comparison to replicating a single novel product or process. Since it is relatively much easier to erode profits of product and process innovation, BMI can guarantee sustainable performance advantage. Last but not least, because BMI can be such a potentially powerful competitive tool, competitive threats can come outside their traditional industry boundaries. Overall, the need to react on constant requests and changes in dynamic business ecosystem enforces the need for innovation in one of the most fundamental strategic choice - the business model.

What is Business Model Innovation

In order to understand Business Model Innovation it is crucial to get accustomed to the two essential elements of a business model: the value proposition ("what are we offering and to whom?") and the operating model ("How do we deliver the offering in a profitable way?"). The value proposition manifests explicit changes in following dimensions:

• target segments - which customers do we chose to serve and which of their needs do we want to address?
• product or service offering - what do we offer customers to satisfy their needs?
• revenue model - how are we compensated for our offering?

The operating model captures business's choices in the following areas: cost model, organization and value chain.

BMI is challenging to execute and laborious to imitate mainly because it involves changes on a multidimensional level that deliver value in a new way. It is crucial to distinguish BMI from product, service, or technology innovation. First, modifying the activity without modifying the activity system is not BMI but a general innovation. Any activity that does not involve changes in terms of content, structure, or governance does not constitute BMI. Second, any exchange in a link between activities that results in better performance without affecting the overall business model structure cannot be qualified as BMI, but commonly as technology innovation. Last but not least, service innovations, such as better training of employees, or diverse incentives system fall under service innovation. An innovative business model is distinct from products and services innovation, distribution and marketing , by which new markets are not created and/or exploited.

Constant Business Mendel Innovation is considered crucial in response to exogenous change and a highly competitive environment. In order to keep a company's Business Model viable, the companies engage in a ongoing process of experimentation, since only experimentation can create data needed to justify a new BM (Chesbrough, 2010). In order to do that, the managers engage in the ongoing process of reconfiguring the creation value and the value-capturing activities. BMI may also include attention to identification of efficient cycles in the company's business model as well as identification and correction of any vicious cycles generated by company's business model.

4 Major Value Drivers for Business Model Innovation

BMI can proof to be risky, time-consuming, costly, reputation threatening and can even lead up to a business liquidation. In order to increase the odds of developing the right business model for a company-specific situation it is pivotal to identify major interlinked value drivers for business models.

1. Novelty - represents the degree of BMI incorporated in independent organizational activates;
2. Lock-in - relates to business model activities that encourage business model participants to transact within the activity system by creating switching costs or enhanced incentives.
3. Complementarities - refer to the value-enhancing effect of the interdependent companies among activity systems. In situation of two companies collaborating, one can have a value-enhancing effect on other company's activity system.
4. Efficiency - refers to cost savings gained by interdependencies of the activity system.

Relevance of Business Model Innovation

Competitive environment requires from companies constant re-evaluation of methods of capturing customer value and addressing customer needs more precisely. In such times of instability, BMI can provide stability by providing long-term sustainable solutions to break out of intense competition. Because multidimensional changes provided by BMI are more difficult to copy by competitors and the value of one-dimensional innovations (such as product, process, or technological innovations) are easier to diminish by competitors, constant innovation of business model is inevitable to keep the company's strategy viable. By shifting the focus from single-function strategies innovation to more complex BMI, it becomes easier to address disruptions in the system that often demand new competitive approaches.

BMI can also help make risky decisions that in the face of crisis situations can appear counter-productive; companies increasingly leverage the crisis to reinvent themselves. This approach can result in facility of a company in gaining control around the bold moves by, for example, lowering prices or reducing the risks of ownership for customers. Last but not least, despite being more challenging than product or process innovation, statistically BMI delivers superior results. This tactical approach is already proven to ensure longevity of a business competitiveness on the market.

Establishing a Capability for Business Model Innovation

Developing competitive capability for BMI can prove to as challenging as implementing the innovation. Nevertheless, becoming good at BMI is an inevitable learning process that covers multiple activates worth exploring. Within those, however, three activities are particularly important.

Uncovering Opportunities. Before starting exploring new opportunities, it is useful to diagnose and thoroughly examine current model limitations. Scrutinizing each element of the business model in terms of industry trends, evolving preferences of customers and placement among competitors leads to better positioning to brainstorm new opportunities. Implementing the New Model. BMI does not necessary mean that the new models have to be implemented; ofttimes, developing already-existing ideas can be more beneficial. Therefore, scaling up can be the most important step while establishing a capability for BMI. What is more, some companies should consider prior to selecting whether to embed a new business model in the core business or establish it as an independent organization. Lastly, the most complex situation can occur when organization reaches the point where their successful business model is obsolete yet almost impossible to replace. Building the Platform and Skills. Building the platform for consistently managing the BMI process as well as ensuring continuous strive for developing needed skills is crucial to overcome an organization's short-term focus and sustain long-term advantage on the market.

Threats of Business Model Innovation

Innovating across several elements of the business can prove either fruitful or devastating. Notwithstanding the enormous risks, BMI is evident to be the only inevitable approach of an organization to stay relevant . There is plenty of risks of BMI, however, managers can avoid common perils.

• failure to scale up - one the major project has been conducted, lack of attention and/or resources can keep it from scaling up.
• Fixation on Idealisation - some organization are resistant to scale-up thus being reluctant to realise the main idea behind BMI.
• Internal Focus - short-sighted and internal focus of an organization can result in failure of capturing the opportunity in terms of ever-changing and ever-evolving customer needs.
• Historical Bias - disruptive ideas, courageous and visible leadership is required to overcome this powerful tendency. Historical bias in business model is doomed for a failure in the future.
• Pet Ideas - So-called "zombie ideas", projects that are never improved but refuse to die, need to be put away, so that more hopeful ideas can get traction.
• Isolated Efforts - isolating BMI efforts form mainstream business for the sake of separate team or department makes it too distant to leverage an innovation.
• Portfolio Bloat - the situation when the company has too many starting projects, which results in underfunding and lack of support of senior management for any of those.

Examples of Business model innovation

• Digitization: This is the process of transforming analog products, services, and processes into digital ones. This can include digitizing physical products, such as books, music, and video, or creating digital services, such as online banking, streaming media, and cloud computing. Digitization allows for more efficient, cost-effective, and customer-friendly services.
• Platform Business Models: Platform business models enable companies to create an open ecosystem for customers, partners, and suppliers to interact and create value. This type of business model allows companies to leverage their existing resources to create new streams of revenue and to better serve customers. Examples include Apple's App Store, Airbnb, and Uber, which facilitate transactions between customers and service providers.
• Network Effects: Network effects occur when a product or service becomes more valuable as more people use it. This type of business model can create powerful competitive advantages and help companies better understand their customers. Examples include YouTube, Facebook, and LinkedIn, which become more valuable as more people join the network.
• Business Model Bundling: Business model bundling is the process of combining multiple business models to create a single offering. This allows companies to create more value for customers and to better monetize their offerings. Examples include Amazon, which offers a mix of e-commerce, subscription services, and digital content, and Apple, which bundles hardware, software, and services into a single offering.

Advantages of Business model innovation

• Business Model Innovation can help organizations to gain competitive advantage by providing better customer experience, improved efficiency, and diversified revenue streams.
• It allows companies to shift from a product-centric to a customer-centric approach, thus improving customer service and experiences.
• It can help companies to create new markets by using new technologies and leveraging existing resources.
• It enables firms to explore new sources of revenue through innovative pricing models and services.
• It can help organizations to reduce costs by leveraging existing resources and capabilities.
• It can provide an opportunity to develop new product and service offerings that can differentiate a company from its competitors.
• It can help organizations to become more agile and responsive to market trends and customer needs.
• It can enable companies to create new collaborations and partnerships that can foster innovation.

Limitations of Business model innovation

• One limitation of business model innovation is the difficulty in transitioning from an existing model to a new one. This requires considerable resources, time, and effort to develop the new model, and there may be significant risks associated with the transition.
• Another limitation is the difficulty in assessing the potential of a new business model. It is difficult to predict how successful the model will be and its potential for long-term growth.
• A third limitation is the potential for imitation. Once a successful business model has been developed, other companies may attempt to imitate it, resulting in a competitive environment with less potential for profits.
• Finally, there is the potential for disruption in the market. New business models can create unexpected changes in the market and lead to unexpected consequences. This can create uncertainty and risk, making it difficult to plan and implement a successful model.

Other approaches related to Business model innovation

• Platform-based Business Model Innovation: Platform-based business models involve creating a platform or ecosystem that encourages customers to interact with each other, as well as the company itself. It involves creating a platform that allows for the creation of customized products and services that are tailored to customer needs.
• Open Business Model Innovation: Open business models involve sharing and co-creating with customers and partners. It is often focused on leveraging open source and other collaborative tools to create a collaborative environment.
• Service-Based Business Model Innovation: Service-based business models involve creating a service that can be used by customers to fulfill their needs. This includes service-oriented architectures, such as cloud computing, as well as more traditional services, such as consulting and training.
• Digital Business Model Innovation: Digital business models involve leveraging digital technologies to create new products and services. This includes leveraging digital platforms, such as mobile devices, to create new products and services.

In conclusion, Business Model Innovation involves the design and implementation of new business models that can create and capture value in a different way. This includes platform-based business models, open business models, service-based business models, and digital business models. Each of these approaches can be used to create a business model that is tailored to customer needs and provides the company with a competitive advantage.

Business model innovation — recommended articles

Radical innovation — Distinctive competencies — Total Innovation Management — Market development — Benefits of innovation — Related diversification — Value innovation — Knowledge gap strategy — Innovation management

References

• Lindgardt, Z., Reeves, M., Stalk, G. and Deimler, M. (2009). Business Model Innovation. When the game gets tough,change the game. [ebook] Boston: The Boston Consulting Group, pp.1-9.
• Amit, R. and Zott, C. (2020). Creating Value Through Business Model Innovation. MIT SLOAN MANAGEMENT REVIEW, pp.36-42.
• Nunes, M. (2020). Internationalization and the Need of Business Model Innovation - A Theoretical Approach. 1st ed. Universidade FEEVALE, Novo Hamburgo, RS, Brazil: Brazilian Business Review, pp.1-6.
• Pucihar, A., Lenart, G., Borštnar, M., Vidmar, D. and Marolt, M. (2019). Drivers and Outcomes of Business Model Innovation—Micro, Small and Medium-Sized Enterprises Perspective. 1st ed. University of Maribor, 4000 Kranj, Slovenia: MDPI, pp.3-5.
• Zhou, J., Shalley, C. and Hitt, M. (2015). The Oxford Handbook of Creativity, Innovation, and Entrepreneurship. 1st ed. New York, The USA: Oxford University Press, pp.396-399.

Author: Ewa Jackowska