Business model innovation
Encyclopedia
Business Model Innovation (BMI) refers to the creation, or reinvention, of a business itself. Whereas innovation is more typically seen in the form of a new product or service offering, a business model innovation results in an entirely different type of company that competes not only on the value proposition
of its offerings, but aligns its profit formula, resources and processes to enhance that value proposition, capture new market segments and alienate competitors.
, a consultant and author of several books on economic theory and management has highlighted the importance of adjusting the Business-Design in order to adjust to value migration or drive value value migration
within an industry.
In his Doctoral Thesis, Alexander Osterwalder has explored the ontology of business models and developed the business model canvas business-model-canvas
as a tool to systematically design or re-design business models. By following the principles, Osterwalder and a group of 470 practitioners from around the world developed the self-published book Business Model Generation. Osterwalder considers that successful business-model-designs must consider 9 elements: Customer Segments, Value Propositions, Distribution Channels, Key Relationships, Revenue Streams, Key Resources, Key Activities, Key Partners and Cost Structure. Moreover, the authors present common business model patterns, and techniques to systematically explore and design differentiated business models.
Since Osterwalder's contribution in 2004, several adaptations of the business model canvas as a tool were proposed by renowned innovation thinkers such as IDEO (video: http://vimeo.com/15395662) and Clayton Christensen and Mark Johnson, co-founders of Innosight, a strategy and innovation consulting firm, and from Harvard Business School.
Clayton Christensen
, a Professor at the Harvard Business School
, cites the need for business model
innovation as one of the core elements of a successful market disruption. In his book The Innovator’s Prescription (McGraw Hill 2008) he and his co-authors define the role of BMI by stating that first, a simplifying technology is needed to spark the disruption, a new business model is then needed to maximize the reach of the technology and a comprehensive value network
must finally evolve to support it.
The BMI concept itself was explored in detail by Mark Johnson
of Innosight, Clayton Christensen, and Henning Kagermann of SAP in their McKinsey Award winning feature article
“Reinventing Your Business Model” published in the December 2008 Harvard Business Review. Mark Johnson built on this framework in his book Seizing the White Space: Business Model Innovation for Growth and Renewal (Harvard Business Press 2010) when establishing the 4-box model. According to this model, a business model consists of four interlocking elements that, taken together, create and deliver value. Innovation can occur in one or more of these areas simultaneously:
Customer Value Proposition First and most important, a successful company is one that has found a way to create value for customers — that is, a way to help customers get an important job done. By job we mean a fundamental problem, in a given situation, that needs a solution. The best customer value proposition is an offering that gets that job–and only that job–done perfectly. The lower the price of the offering and the better the match between the offering and the job, the greater the overall value generated for the customer. The more important the job is to the customer, the lower the level of customer satisfaction
with current options, and the better your solution is than your competitors’ at getting the job done, the greater the value for your company.
Profit Formula The profit formula is the blueprint that defines how the company creates value for itself. People often think that profit formulas and business models are interchangeable, but how you make a profit is only one piece of the model. It consists of the following:
Key Resources The key resources (or assets) are the people, technology, products, facilities, equipment and brand required to deliver the value proposition to the targeted customer. The focus here is on the key elements that create value for the customer and company, and the way those elements interact. Every company also has generic resources that do not create competitive differentiation.
Key Processes Successful companies have operational and managerial processes that allow them to deliver value in a way they can successfully repeat and increase in scale. These may include such recurrent tasks as training, development, manufacturing, budgeting, planning, sales and service. Key processes also include a company’s rules, metrics and norms.
, is quoted in Johnson, Christensen and Kagermann’s Harvard Business Review
article as saying, “I think historically where we [venture capitalists] fail is when we back technology. Where we succeed is when we back new business models.”
Business model innovations have reshaped entire industries and redistributed billions of dollars of value. Retail discounters such as Walmart and Target, which entered the market with innovative business models, now account for 75% of the total valuation of the retail sector. Low-cost U.S. airlines grew from a blip on the radar screen to 55% of the market value
of all carriers. Over the past decade (1997-2007), 14 of the 19 entrants into the Fortune 500 owed their success to business model innovations that either transformed existing industries or created new ones.
A 2005 survey by the Economist Intelligence Unit
reported more than 50% of executives believe that between now and 2010, business model innovation will be even more important for success than product or service innovation. A 2008 IBM survey of corporate CEOs echoed these results. Nearly all of the CEOs polled reported the need to adapt their business models; more than two-thirds said that extensive changes were needed.
An analysis of major innovations within existing corporations in the last decade (1998-2008), though, shows that precious few have been business-model related. And a recent American Management Association
study determined that no more than 10% of innovation investment at global companies is focused on developing new business models. The authors therefore highlight five strategic circumstances companies commonly face that often require business model change:
Business Model Innovation is an important tool to both capture, design, innovate and transform the business. However in order to transform ones organization and align them to ones business model, business model innovation can and should not be seen separately, but as Prof. Dr. Mark von Rosing has specified, in connection with:
Such a holistic approach would help clarify both intent and sources of synergy and disconnect between business model innovation, strategy innovation, scorecards e.g. performance innovation, information, innovation, processes innovation and at last but not least IT innovation. This includes business architectural alignment as well as business transformation and value and performance views. Such dialogues allow Executives to apply business model innovation with their business alignment.
Apple–iTunes Store + iPod
WalMart–Discount retailing
Hilti–Power tools leasing/subscription
FedEx–Guaranteed overnight delivery
Southwest–Low-cost regional air travel
Business Model
Business Design/Enterprise Architecture
Value proposition
A value proposition is a promise of value to be delivered and a belief from the customer of value that will be experienced. A value proposition can apply to an entire organization, or parts thereof, or customer accounts, or products or services....
of its offerings, but aligns its profit formula, resources and processes to enhance that value proposition, capture new market segments and alienate competitors.
Evolution and key principles of the theory
Adrian SlywotzkyAdrian Slywotzky
Adrian J. Slywotzky is a consultant and author of several books on economic theory and management. Slywotzky graduated from Harvard College and holds a JD from Harvard Law School and an MBA from Harvard Business School...
, a consultant and author of several books on economic theory and management has highlighted the importance of adjusting the Business-Design in order to adjust to value migration or drive value value migration
Value migration
In marketing, value migration is the shifting of value-creating forces. Value migrates from outmoded business models to business designs that are better able to satisfy customers' priorities....
within an industry.
In his Doctoral Thesis, Alexander Osterwalder has explored the ontology of business models and developed the business model canvas business-model-canvas
Business Model Canvas
The Business Model Canvas is a strategic management template for developing new or documenting existing business models. It is a visual chart with elements describing a firm's value proposition, infrastructure, customers, and finances...
as a tool to systematically design or re-design business models. By following the principles, Osterwalder and a group of 470 practitioners from around the world developed the self-published book Business Model Generation. Osterwalder considers that successful business-model-designs must consider 9 elements: Customer Segments, Value Propositions, Distribution Channels, Key Relationships, Revenue Streams, Key Resources, Key Activities, Key Partners and Cost Structure. Moreover, the authors present common business model patterns, and techniques to systematically explore and design differentiated business models.
Since Osterwalder's contribution in 2004, several adaptations of the business model canvas as a tool were proposed by renowned innovation thinkers such as IDEO (video: http://vimeo.com/15395662) and Clayton Christensen and Mark Johnson, co-founders of Innosight, a strategy and innovation consulting firm, and from Harvard Business School.
Clayton Christensen
Clayton M. Christensen
Clayton M. Christensen is the Robert and Jane Cizik Professor of Business Administration at the Harvard Business School, with a joint appointment in the Technology & Operations Management and General Management faculty groups. He is best known for his study of innovation in commercial enterprises...
, a Professor at the Harvard Business School
Harvard Business School
Harvard Business School is the graduate business school of Harvard University in Boston, Massachusetts, United States and is widely recognized as one of the top business schools in the world. The school offers the world's largest full-time MBA program, doctoral programs, and many executive...
, cites the need for business model
Business model
A business model describes the rationale of how an organization creates, delivers, and captures value...
innovation as one of the core elements of a successful market disruption. In his book The Innovator’s Prescription (McGraw Hill 2008) he and his co-authors define the role of BMI by stating that first, a simplifying technology is needed to spark the disruption, a new business model is then needed to maximize the reach of the technology and a comprehensive value network
Value network
A value network is a business analysis perspective that describes social and technical resources within and between businesses. The nodes in a value network represent people . The nodes are connected by interactions that represent tangible and intangible deliverables. These deliverables take the...
must finally evolve to support it.
The BMI concept itself was explored in detail by Mark Johnson
Mark Johnson
Mark Johnson may refer to:Academics*Mark Johnson , philosophy professor*Mark H. Johnson , developmental neuroscience professorSports*In baseball:**Mark Johnson...
of Innosight, Clayton Christensen, and Henning Kagermann of SAP in their McKinsey Award winning feature article
Feature article
* For general information "articles", see Article * For the term used in specific, see Article * For the concept of "feature stories," made the primary focus of a issue for in-depth investigation, see feature story...
“Reinventing Your Business Model” published in the December 2008 Harvard Business Review. Mark Johnson built on this framework in his book Seizing the White Space: Business Model Innovation for Growth and Renewal (Harvard Business Press 2010) when establishing the 4-box model. According to this model, a business model consists of four interlocking elements that, taken together, create and deliver value. Innovation can occur in one or more of these areas simultaneously:
Customer Value Proposition First and most important, a successful company is one that has found a way to create value for customers — that is, a way to help customers get an important job done. By job we mean a fundamental problem, in a given situation, that needs a solution. The best customer value proposition is an offering that gets that job–and only that job–done perfectly. The lower the price of the offering and the better the match between the offering and the job, the greater the overall value generated for the customer. The more important the job is to the customer, the lower the level of customer satisfaction
Customer satisfaction
Customer satisfaction, a term frequently used in marketing, is a measure of how products and services supplied by a company meet or surpass customer expectation...
with current options, and the better your solution is than your competitors’ at getting the job done, the greater the value for your company.
Profit Formula The profit formula is the blueprint that defines how the company creates value for itself. People often think that profit formulas and business models are interchangeable, but how you make a profit is only one piece of the model. It consists of the following:
Revenue model (price × volume)
Cost structure (assets; direct and indirect costs; and a model of how, and whether, scale affects costs)
Margin model (How much does each transaction need to net to cover the cost structure and deliver target profits?)
Resource velocity (How much revenue do we need to generate per dollar of assets and per dollar of fixed costFixed costIn economics, fixed costs are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs...
s, and how quickly?)
Key Resources The key resources (or assets) are the people, technology, products, facilities, equipment and brand required to deliver the value proposition to the targeted customer. The focus here is on the key elements that create value for the customer and company, and the way those elements interact. Every company also has generic resources that do not create competitive differentiation.
Key Processes Successful companies have operational and managerial processes that allow them to deliver value in a way they can successfully repeat and increase in scale. These may include such recurrent tasks as training, development, manufacturing, budgeting, planning, sales and service. Key processes also include a company’s rules, metrics and norms.
Market context and circumstances fueling BMI
Bob Higgins, founder and managing general partner of Highland Capital PartnersHighland Capital Partners
Highland Capital Partners is a venture capital firm that focuses on investments in seed, early, and growth stage companies in the communications, consumer, digital media, healthcare, and information technology sectors. The firm's partners include: Peter Bell, Sean Dalton, Bob Davis, Richard de...
, is quoted in Johnson, Christensen and Kagermann’s Harvard Business Review
Harvard Business Review
Harvard Business Review is a general management magazine published since 1922 by Harvard Business School Publishing, owned by the Harvard Business School. A monthly research-based magazine written for business practitioners, it claims a high ranking business readership among academics, executives,...
article as saying, “I think historically where we [venture capitalists] fail is when we back technology. Where we succeed is when we back new business models.”
Business model innovations have reshaped entire industries and redistributed billions of dollars of value. Retail discounters such as Walmart and Target, which entered the market with innovative business models, now account for 75% of the total valuation of the retail sector. Low-cost U.S. airlines grew from a blip on the radar screen to 55% of the market value
Market capitalization
Market capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding of a publicly traded company...
of all carriers. Over the past decade (1997-2007), 14 of the 19 entrants into the Fortune 500 owed their success to business model innovations that either transformed existing industries or created new ones.
A 2005 survey by the Economist Intelligence Unit
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
reported more than 50% of executives believe that between now and 2010, business model innovation will be even more important for success than product or service innovation. A 2008 IBM survey of corporate CEOs echoed these results. Nearly all of the CEOs polled reported the need to adapt their business models; more than two-thirds said that extensive changes were needed.
An analysis of major innovations within existing corporations in the last decade (1998-2008), though, shows that precious few have been business-model related. And a recent American Management Association
American Management Association
The American Management Association , based in New York City, is a corporate training and consulting group that provides a variety of educational and management development services to businesses, government agencies and individuals. The non-profit membership organization offers business courses in...
study determined that no more than 10% of innovation investment at global companies is focused on developing new business models. The authors therefore highlight five strategic circumstances companies commonly face that often require business model change:
1. The opportunity to address the needs of large groups of potential customers who are shut out of a market entirely because existing solutions are too expensive or complicated for them. This includes the opportunity to democratize products in emerging marketsEmerging marketsEmerging markets are nations with social or business activity in the process of rapid growth and industrialization. Based on data from 2006, there are around 28 emerging markets in the world . The economies of China and India are considered to be the largest...
(or reach the bottom of the pyramidBottom of the pyramidIn economics, the bottom of the pyramid is the largest, but poorest socio-economic group. In global terms, this is the 2.5 billion people who live on less than $2.50 per day. The phrase “bottom of the pyramid” is used in particular by people developing new models of doing business that deliberately...
).
2. The opportunity to leverage a brand-new technology, wrapping the right business model around it or the opportunity to leverage a tested technology in a whole new market.
3. The opportunity to bring a job-to-be-done focus to a marketing-driven industry. Such industries tend to make offerings into commodities. But a jobs focus allows companies to redefine the industry profit formula.
4. The need to fend off low-end disruptors. If Tata’s 1 Lakh ($2300) Nano is successful, it will threaten other automobile makers.
5. The need to respond to a shifting basis of competition. Inevitably, what defines an acceptable solution in a market will change over time, leading core market segmentMarket segmentMarket segmentation is a concept in economics and marketing. A market segment is a sub-set of a market made up of people or organizations with one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function...
s to commoditize.
Business Model Innovation is an important tool to both capture, design, innovate and transform the business. However in order to transform ones organization and align them to ones business model, business model innovation can and should not be seen separately, but as Prof. Dr. Mark von Rosing has specified, in connection with:
- The main business goals of the organization, e.g. strategic business objectives, critical success factors and key performance indicators, which a holistic business model approach should include.
- The main business Issues/pain points and thereby organizational weakness, which a holistic business model approach should include for they represent the threat to the company’s business model.
- A clear cause and effect linkages between the competencies, desired outcomes and performance measurements e.g scorecards.
- An emphasis on business model management and thereby a continuous improvement and governance approach to the business model.
- The business maturity level, in order to develop the organization representation of core differentiated and core competitive competencies [linked to strategy], which is a basis for building a business model as they the represent some of the most important sources of uniqueness. These are the things that a company can do uniquely well, and that no-one else can copy quickly enough to affect competition.
- Linkages among competences and competency development.
- The possible value creation and realization of the organization.
- The information flow, and thereby information need for effective and efficient decision making.
Such a holistic approach would help clarify both intent and sources of synergy and disconnect between business model innovation, strategy innovation, scorecards e.g. performance innovation, information, innovation, processes innovation and at last but not least IT innovation. This includes business architectural alignment as well as business transformation and value and performance views. Such dialogues allow Executives to apply business model innovation with their business alignment.
Examples of BMI where the business model is the core value proposition
Tata–Tata Nano 1 Lakh ($2300) city carTata Nano
The Tata Nano is an inexpensive, rear-engined, four-passenger city car built by the Indian company Tata Motors and is aimed primarily at the Indian domestic market....
Apple–iTunes Store + iPod
ITunes
iTunes is a media player computer program, used for playing, downloading, and organizing digital music and video files on desktop computers. It can also manage contents on iPod, iPhone, iPod Touch and iPad....
WalMart–Discount retailing
Hilti–Power tools leasing/subscription
FedEx–Guaranteed overnight delivery
FedEx
FedEx Corporation , originally known as FDX Corporation, is a logistics services company, based in the United States with headquarters in Memphis, Tennessee...
Southwest–Low-cost regional air travel
Southwest Airlines
Southwest Airlines Co. is an American low-cost airline based in Dallas, Texas. Southwest is the largest airline in the United States, based upon domestic passengers carried,...
Related concepts
Disruptive Technology/InnovationDisruptive technology
A disruptive technology or disruptive innovation is an innovation that helps create a new market and value network, and eventually goes on to disrupt an existing market and value network , displacing an earlier technology there...
Business Model
Business model
A business model describes the rationale of how an organization creates, delivers, and captures value...
Business Design/Enterprise Architecture