Business Model Business Model Innovation Innovation
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Business Model Business Model InnovationInnovation
What is Business Model :What is Business Model :
A company’s business model is management’s A company’s business model is management’s story line for how the strategy will be a story line for how the strategy will be a moneymaker. moneymaker.
The story line sets forth the key components of The story line sets forth the key components of the enterprise’s business approach, indicates how the enterprise’s business approach, indicates how revenues will be generated, and make a case for revenues will be generated, and make a case for why the strategy can deliver value to customers why the strategy can deliver value to customers in a profitable manner.in a profitable manner.
A company’s business model thus explains why A company’s business model thus explains why its business approach and strategy will generate its business approach and strategy will generate ample revenues to cover costs and capture a ample revenues to cover costs and capture a profit.profit.
Business Model Innovation (BMI) refers to Business Model Innovation (BMI) refers to the creation, or reinvention of a business the creation, or reinvention of a business itself. itself. A business model innovation results in an A business model innovation results in an entirely different type of company that entirely different type of company that competes not only on the value proposition competes not only on the value proposition of its offerings, but aligns its profit formula, of its offerings, but aligns its profit formula, resources and processes to enhance that resources and processes to enhance that value proposition, capture new market value proposition, capture new market segments and alienate competitors.segments and alienate competitors.
By the late 1990’s , Apple’s initial pathway to By the late 1990’s , Apple’s initial pathway to growth was running out of steam. The company’s growth was running out of steam. The company’s proprietary approach to designing both hardware proprietary approach to designing both hardware and software limited it to being a niche player and and software limited it to being a niche player and hampered its ability to compete on price. hampered its ability to compete on price. In 2001, Apple began introducing a series of In 2001, Apple began introducing a series of successful new products and services – the IPOD, successful new products and services – the IPOD, the ITunes online music service, and the I Phone- the ITunes online music service, and the I Phone- that propelled the company to the top of its that propelled the company to the top of its industry. This was followed with the I Pad.industry. This was followed with the I Pad.
But the shift wasn’t only a matter of product But the shift wasn’t only a matter of product innovation. Apple’s success resulted from its ability innovation. Apple’s success resulted from its ability to define a workable business model for to define a workable business model for downloading music - something that had eluded the downloading music - something that had eluded the music industry for years.music industry for years.
Clayton Christensen , a Professor at the Clayton Christensen , a Professor at the Harvard Business School , cites the need for Harvard Business School , cites the need for business model innovation as one of the business model innovation as one of the core elements of a successful market core elements of a successful market disruption. disruption.
A simplifying technology is needed to spark A simplifying technology is needed to spark the disruption , a new business model is the disruption , a new business model is then needed to maximize the recall of the then needed to maximize the recall of the technology and a comprehensive value technology and a comprehensive value network must finally evolve to support it.network must finally evolve to support it.
Value Proposition
Business Model
Operating Model
Target segme
nt
Product or
service offering
Revenue model
Value Chain
Cost Model
Organizatio
n
As Apple has demonstrated, innovation As Apple has demonstrated, innovation in a business model is more than mere in a business model is more than mere product, service, or technological product, service, or technological innovation. Innovation becomes BMI innovation. Innovation becomes BMI when two or more elements of a when two or more elements of a business model are reinvented to business model are reinvented to deliver value in a new way. Because it deliver value in a new way. Because it involves a multidimensional or involves a multidimensional or orchestrated set of activities, BMI is orchestrated set of activities, BMI is both challenging to execute and both challenging to execute and difficult to imitatedifficult to imitate
A business model, from their point of view, A business model, from their point of view, consists of four interlocking elements that consists of four interlocking elements that taken together create and deliver value. taken together create and deliver value. According to their construct, Innovation can According to their construct, Innovation can occur in one or more of these areas occur in one or more of these areas simultaneously.simultaneously.
Customer Value proposition :Customer Value proposition :Profit formula- Revenue model ( price X Profit formula- Revenue model ( price X volume)volume)Key resourcesKey resourcesKey ProcessesKey Processes
( Source- HBR Dec 2008 )( Source- HBR Dec 2008 )
What necessitates a business model change What necessitates a business model change ::
1. The opportunity to address the needs of large groups of 1. The opportunity to address the needs of large groups of potential customers who are shut out of a market entirely potential customers who are shut out of a market entirely because existing solutions are too expensive or complicated because existing solutions are too expensive or complicated for them for them ( e.g. Tata Nano)( e.g. Tata Nano)
2. The opportunity to leverage a brand-new technology, 2. The opportunity to leverage a brand-new technology, wrapping the right business model around it or the wrapping the right business model around it or the opportunity to leverage a tested technology in a whole new opportunity to leverage a tested technology in a whole new market. market. ( South West Airlines leveraging the usage of ( South West Airlines leveraging the usage of internet )internet )
3. The opportunity to bring a job-to –be- done focus to a 3. The opportunity to bring a job-to –be- done focus to a market -driven industry. Such industries tend to make market -driven industry. Such industries tend to make offerings into commodities. But a job focus allows a company offerings into commodities. But a job focus allows a company to redefine the industry profit formula.to redefine the industry profit formula.E.g. L'Oreal , Unilever has brought the concept of a hair E.g. L'Oreal , Unilever has brought the concept of a hair care, skin care therapy centre to focus on its offerings.care, skin care therapy centre to focus on its offerings.
4. The need to fend off low-end disruptors. 4. The need to fend off low-end disruptors.
e.g. If Tata’s one lakh car Nano is e.g. If Tata’s one lakh car Nano is successful it will threaten other successful it will threaten other automobile makers.automobile makers.
5. The need to respond to a shifting basis of 5. The need to respond to a shifting basis of competition. Inevitably, what defines an competition. Inevitably, what defines an acceptable solution in a market will change acceptable solution in a market will change over time , leading core market segments to over time , leading core market segments to commoditize.commoditize.E.g. GE selling off its consumer E.g. GE selling off its consumer electronics business.electronics business.
Examples of BMI where the business model Examples of BMI where the business model is the core value proposition.is the core value proposition.
Tata- Nano 1 lakh carTata- Nano 1 lakh carApple-iTunes + IPodApple-iTunes + IPodWal-Mart Discount retailingWal-Mart Discount retailingFed-Ex- Guaranteed overnight deliveryFed-Ex- Guaranteed overnight deliverySouthwest- Low cost regional air Southwest- Low cost regional air travel .travel .
As CEOs navigate in today's rapidly changing As CEOs navigate in today's rapidly changing global business environment, their ability to global business environment, their ability to introduce business model innovations is proving introduce business model innovations is proving to be a critical success factor. to be a critical success factor.
The IBM 2006 Global CEO Study indicated that The IBM 2006 Global CEO Study indicated that business model innovation had a much stronger business model innovation had a much stronger correlation with operating margin growth than correlation with operating margin growth than other types of innovation. other types of innovation.
Based on IBM’s experience and research, they Based on IBM’s experience and research, they identified three main types of business model identified three main types of business model innovation, which can be used alone or in innovation, which can be used alone or in combination: combination: innovations in industry models, innovations in industry models, innovation in revenue models innovation in revenue models innovations in enterprise modelsinnovations in enterprise models
Anticipating massive change across diverse Anticipating massive change across diverse industries, top-performing CEOs are focusing industries, top-performing CEOs are focusing on business model innovation as a path to on business model innovation as a path to competitive strength. competitive strength.
To accomplish this, business leaders can use To accomplish this, business leaders can use three main types of business model three main types of business model innovation: innovation in industry models, innovation: innovation in industry models, revenue models or enterprise models. These revenue models or enterprise models. These approaches can be used alone or in approaches can be used alone or in combination. combination.
Because of its prevalence as a successful Because of its prevalence as a successful innovation strategy, enterprise model innovation strategy, enterprise model innovation, emphasizing collaboration and innovation, emphasizing collaboration and partnerships, should be a key consideration partnerships, should be a key consideration for executives as they respond to change.for executives as they respond to change.
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