Business model innovation is the deliberate process of changing your business model to deliver more customer value and disrupting markets to reduce competition.
There are a lot of definitions of business model innovation in the commercial and academic literature. It’s worth having a look at them as they will provide a wider context.
How to Increase Customer Value 50X
The goal of business model innovation is to create a business model that generates more than 50 times the value to customers than your existing business model does.
This forces you to consider very different ways of creating customer value. It means that you cannot improve a small part of the business, cut costs in another and improve the marketing somewhere else.
If you take that approach the evidence is that you can deliver consistent improvements in sales and profits over a significant period. However doing so means that you will be treading the same path as your competitors.
In the words of the Red Queen in Alice’s Adventures in Wonderland
You are running as fast as you can just to stay still
Business Model Innovation aims to change this. The goal is for you to transform your business model (or business models as a business model is not the same thing as a company) and end up in a very different competitive environment.
Radical Change
There are two goals of business model innovation.
The first is the radical increase in customer value that we described above. Take for example Google – how much more accessible is knowledge today as a result of it’s search facility. Amazon – how quickly can we find, buy and use products compared to before Amazon. Or Wikipedia – is it 250 times better than the Encyclopaedia Britannica?
We are trying to achieve this huge increase. This can not be done by doing more of the same. In many cases it’s impossible to make the product that much better. Are the articles in Wikipedia better than Britannica? Maybe, but not that much better.
The way that this is achieved is to restructure the business model to maximise the value that the product or service creates for the customer.
Product + Business Model = 50X Increase in Customer Value
When we look at business model design in this way we see that the purpose of business model innovation is to create a system that maximises value creation. it is not a system that creates a product or system. There are lots of ways to do that, and like any normal distribution there are a lot of bad ones.
In most markets the business models of players will be clustered around the mean. There will normally be some companies with outdated business models that are being outcompeted (for that or other reasons). There will also be some strong ones.
The goal of business model innovation is to shift your business to the right. And implicitly keep shifting it to the right as the market tries to catch up
The second goal of business model innovation is to disrupt the market. This does not mean dropping a bomb on it or engaging in illegal activity. It means designing your business model so that incumbents are forced to make a choice
- Do we keep going and hope that the market disruption resets without hurting us too much
- Do we change our business model and hope that we can transform our company so that we do well in the new conditions
For a mature company, both of those options are bad.
The reason is that they disrupt the smooth cashflows that investors prize. The smooth cashflows also drive down the cost of capital for the business. When they are disrupted the company finds it harder to get approval for change and to finance the changes that it needs to make.
At the same time the company is also losing sales and revenue to the disruption. nasty choice.
Forcing this choice multiple times on incumbents in an industry – whether it is concentrated or fragmented – breaks it apart. For the last seven to ten decades companies have tried to do this through product and service innovation.
A great example of this is the engine innovation war that Ford and Chevrolet fought in the 1920’s and 1930s. If you read the article what is total clear is that for every innovation that the respective companies brought out it had less than 5 years of dominance before the other manufacturer caught it.
With change moving even quicker now many products or services can have identical competitors on the market within weeks, massively reducing the time that a product or service can achieve premium pricing.
Other Approaches to Business Model Innovation
Other approaches to business model innovation have value but without this focus on customer value acceleration and market disruption, they leave a lot of value on the table. Referring back to the graph above – they don’t shift you far enough to the right.
