The constant of change
There are now very few business leaders who would deny that the world around us has changed rapidly over the last three decades. Indeed, the pace of change appears to be increasing rather than slowing down. Social media and powerful search engines have given consumers more access to information and choices than ever before. Any brand should now beware of the power of the crowd!
As these changes have been happening a few business leaders have dismissed their potential impact on their companies and industries. However, most leaders have recognized the importance of the changes taking place and have started developing strategies to respond.
What is often missing in this strategic work is a clear understanding of what the changes that are happening in the world really mean. Some managers view the emerging trends in technology as merely changes in the means of production and marketing channels. Other managers view innovation as simply the creation of new products and services. Both perspectives are incorrect and can lead companies down the wrong path.
Business models matter
What has changed is not just the technology we
use to create products and services or the way we communicate and deliver services to our customers; the great new companies are innovating at the business model level. When Marc Andreessen remarked that software was eating the world, he wasn’t merely referring to the writing of great code. He was referring to the way that software exponentially transforms business models. Google, Amazon, Airbnb and Uber are not simply websites and mobile applications. Their websites and mobile apps are expressions of the innovative business models that underlie these companies.
By focusing exclusively on products and services companies also run the risk of getting trapped in industry thinking. In contrast, business model innovation transcends industries by creating new and interesting combinations of products and services.
In an interview with Insead , Olli-Pekka Kallasvuo, the former CEO of Nokia, remarks how their business was disrupted by companies that were not considered part of the mobile phone industry (i.e. Apple and Google). According to Kallasvuo, it was the unique combination of mobile, computing and internet technologies that created the business models that changed the industry in which Nokia was operating. Here is a scary thought to some of you reading this article: You probably think you are in the pet industry, don’t you?!
There are excellent tools and method for business model innovation that we will share within in this article. However, even with these great tools now widely available a lot of established companies still fail to innovate on their business models.
There are several reasons for this, some of which are outlined in a great post by Saul Kaplan . Kaplan notes that in most companies, product is king and nothing else matters. In fact, information technology is viewed as a tool for optimizing costs. Some CEOs are comfortable with the status quo and are not keen to change their business. This is further exacerbated when the new business model has potential to cannibalize the current one.
Finally, when faced with new business models, established company execs use traditional methods such as ROI to evaluate the model’s potential and are averse to allowing their teams to experiment with the business model in the real world.
These are challenges established companies face. The goal of this article is to illustrate how business model innovation can benefit your company. We will also provide with tips of how you can start doing business model innovation within your organization straight away. But before we get into that, let first answer a simple question: what is a business model anyway?
What is a business model?
According to Osterwalder and colleagues, a business model describes the rationale of how a company creates value, delivers value to customers and captures value back from customers. They describe typical business models as having nine key building blocks (see next page).
Osterwalder and colleagues have combined these nine elements to create the business model canvas. This is a tool that can be used by organizations to generate, map and test business models. This is a great tool that is visual and provides a clear-shared language for any business to use.
How business model innovation can help your company
Business models are a great differentiator. They are sometimes the distance between the failure and success of a product. For example, Nestlé’s Nespresso product was close to failure until they changed the business model. Now it is one of Nestlé’s most successful products.
Business model innovation is also important for ensuring that an organization has a balanced portfolio of business models. If a company has one business model it is much more likely to suffer from shocks in its business environment. Nagji and Tuff distinguish three types of innovation: core, adjacent and transformational. It is important for every company to ensure that it has products and business models that fall into these three categories.
Let’s imagine a wholesale pet food company. Its core business would be the wholesale business through which it supplies pet food to retailers. However, the company could expand its business model portfolio and start supplying retailers with other pet products such as toys and clothing. The margins, suppliers and customers for this would be different, and this would require a slightly different business model. However, the business is still a wholesaler. Another idea might be to open its own retail pet food stores. Again, the business model for this would be very different to wholesaling. However, the company would still be selling pet food. The above two business model changes are examples of adjacent innovation.
The wholesale company can also consider making ‘crazy-plays’ into new markets and new products it has never created before. For example, the company might consider providing consulting service for food manufacturers, transforming its suppliers to customers and changing its business model and revenue model at the same time. It might even consider opening a chain of veterinary clinics or even leveraging its wholesale business into selling non-pet products.
A great example of this is Amazon that created a great cloud-based technology infrastructure to run its own business and then decided to create a new division, Amazon Web Services, through which it
sells cloud-based web services to other companies. This is a totally different business model to its core business, which is e-commerce. The Amazon example illustrates that a business model portfolio can create synergies that allow a company to leverage its various capabilities.
What is interesting about this approach is that a company does not have to abandon its core products – rather it is building a balanced portfolio of business models!
Start tomorrow
Using the business model canvas to start ideating on new business model ideas is quite easy. Your company can start doing this work tomorrow!
- Get a cross-functional team together. Business model design must include people from different functions of the business. This is the best way to break through siloed thinking and create the sparks of serendipity.
- Inform the team of the nature of the task at hand. The challenge is to ideate a variety of new business models, which can become part of your business model portfolio. Define your scope and ambition for the task. Define whether you want review a business model for the whole business or for just a division or product within your business.
- Allow the team time to do as much research as they need to on the topic and on the business environment so you can have an informed business model design session.
- After 1-2 weeks get the team together in a room with a business model canvas and loads of post-it notes. Allow at least four hours for the session.
- During the session, map your current business model using the business model canvas. Do not write on the canvas. Use post-it notes!
- After this, map your business environment in terms of key trends, market forces, industry forces and macro-economic forces (see model on the right).
- Now review your first canvas and ask if your current business model is adaptive to its current environment. The answer will often be ‘No!’
- Start designing more adaptive business models. Imagine as many different business model changes as you can. After each iterative design of the canvas, take a picture of the new business model you have designed and store it somewhere.
- Return to your original business model again. Ask a series of ‘what-if’ questions – crazy scenarios that may or may not happen. For example, imagine a business model where you give you core product away for free. What services could you offer to make money after that? This may not be realistic but the ideation will lead to interesting insights.
- Design as many business models as you can, imagining all sorts of crazy scenarios. But after that you have to identify a few business models that you make a commitment as a business to start testing.
What happens next?
Business model design is not the same as business planning. After you identify the business models you want to test, the plan is not to go into a corner and start writing business plans. Instead, review each of your business models for the untested assumptions that you were making during the design phase.
After identifying your assumptions, review each one and ask yourself one simple question: What can
we do tomorrow to start testing this assumption? Systematically work through each assumption until you have finished validating your business model. If you do this work at regular intervals, in the end you will have a good portfolio of business models.
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