How Do You Define Business Model Innovation?

In 2020, all competitive companies are in a state of constant business transformation. That’s just a fact : . And so, mediocre companies update their products and services. Good companies update their processes, too. Great companies, meanwhile, update their business models. those that do not evolve are made redundant by stronger, more agile competitors Over the past decade, entrepreneurs and CEOs alike . They tend to nod knowingly, rarely asking themselves what their business model . They just know they have to change it. This lack of clear definition often leads to the creation of conflicting objectives / actions, as various stakeholders will have different ideas of what the business model of their company is, and what innovation should look like. . have been told over and over that Business Model Innovation (BMI) is key to their companies’ growth is They mean well, they’re just missing the larger picture Below are 7 ways to define a business model. Each definition creates different strategies for companies, as we shall explore. The definitions are lifted both from the fantastic work of Professors Gassmann, Frankenberger and Sauer ( ), and from my own experience as a strategy consultant. Exploring the Field of Business Model Innovation, 2016 1. Activities definition “A business model is a set of interdependant activities spanning firm boundaries” What does that mean? . This obviously attracts the attention to perfoms these activities, hence lending a strong HR and governance vibe to an activity-based strategy. This definition also helps differentiate between core activities and annex activities, so that a company can concentrate on the value it adds best (sub-contracting is often used by companies that abide by this philosophy). The company defines itself as a list of actions taken along the value chain, and how those activities are interlinked who Activities-based business models are dependent on 4 key concepts, which make each company unique: — Activities leading to innovation are key to a company’s financial success Novelty — activities are interlocked in such a way that it would be difficult to uncouple them Lock-In — Not only are activities locked together to create more value, but they complement each other Complementarities — Activities are made to be as efficient as possible to avoid waste along the value chain Efficiency Note that nowhere in this definition are mentioned. Neither are the , the or the general (dynamic) . The list could go on : like every definition, the activity-based view of the business model is an imperfect portrayal. resources customers product economical environment 2. Process definition A business model is a dynamic process of balancing revenue, costs, organization, and value. What does that mean? This vision of the business model is a lot more , and will vary from month to month as a company tries to find the perfect equilibrium between resources and competencies, organisational structure, and value proposition ( ). Changes to the model occur when one of the aspects is changed, or when their relationship is altered. This should keep decision-makers on their feet, as a model can change without any internal actions or decisions being made : a startup might release a new product, making an incumbent's value proposition obsolete. That obsolescence ripples through as resources become scarce, competencies become redundant, and the organisational structure crumbles. . dynamic spoiler alert, such a perfect equilibrium doesn’t exist Fall of the Roman empire, here I come The process definition entails that any business model is a snapshot at a moment in time, and nothing more. This means that companies embracing that philosophy know that they have to change regularly to keep up with internal and external changes. This allows them to plan ahead of time, creating valuable, disruptive projects. . Identifying and eliminating inefficiencies and improving the exploitation of resources thus becomes the name of the game 3. Narrative definition A business model is the narrative of how firms do business What does that mean? ? The past two definitions concentrated on the side of business models. This definition aims to rectify this imbalance by concentrating on the term . Indeed, (Who are our customers, why do we do business, what do we offer, how do we make our products/services…). This simplified, abstract concept can then be studied, improved, copied, imitated, emulated… just like any model. What are businesses if not the sum of the stories we tell ourselves about their offered value business model a narrative entails a history, and a history entails a tangible framework that can be used for simplification’s sake The narrative definition is important for two reasons : It specifies that much like a good recipe, variables of a business model can be more or less changed, but that key components will remain the same ( ). add sugar for extra taste It also shows that innovation comes from a break with history, which needs to be understood for a company to remain competitive. This concept thus has a lot of value for upstarts and underdogs. 4. Sales definition A business model is a way to commercialise a product or service What does that mean? The sales definition of BMI relies on 6 key components, which describe the way a company’s products or services are commercialised. As such, this approach is a lot more specific than that of the Activities, Process or Narrative definitions, yet still allows for an infinity of variable combinations. The 6 components of the sales definition are as follows : : what is the value that the customer will extract from the product or service? Value proposition : which customer should we target, and why? Market segment : what assets do we need to create and distributes our offerings? Value chain : given the defined value chain and value proposition, how will the offer be priced, and what profit can be expected from it? Cost/profit structure : What is our position within Porter’s Five Forces model? Value network : How do we keep an advantage over our competitors? Competitive strategy This definition takes time into account (a sale happens at a moment in time, after all), as well as the imbalance between various aspects of a model (giving managers the tools to quickly adapt to improve their commercialisation efforts). Finally, this definition highlights the key difference between a strategy and a business model : while the latter , the former This means that the rules of engagement are much more restricted when working on BMI, as the company is operating within the rules established by the Sales definition. is dependent on delivering value to customers is a way of delivering financial value to shareholders. 5. Choice definition A Business model is a result of strategic/tactical choices/decisions What does that mean? I mention above that well-defined rules are what separates a business model from a strategy (among other things). Indeed, the rules of the Strategy game are ill-defined, and each decision has hundreds, if not thousands of outcomes (not least because the reaction of competitors is impossible to take into account). It is less so for business model innovation, which only offers a finite amount of possible choices (targeting rich or poor customers, selling online or not…). In this definition, , which is something that had not been mentioned in previous definitions. each choices shuts down a plethora of other potential opportunities The Choices definition also highlight the need to quickly react to changes to the business’ environment. Those that do not do so choose not to act, and may very well be left behind by the economy, by their industry, by competitors or by customers. I already posited that business models can be copied and imitated. This leads to an interesting game theory dilemma when it comes to choices : if a company enters a market, should it copy the main players, or enter using an innovative approach that may in turn be copied by incumbents? If it tries to hide its innovation, how long can it do this for? A question for the ages, which from experience, is seldom asked. 6. Archetype definition A business model is an archetype of patterns for answering the who-what-how-why questions of a business. What does that mean? If you’ve read , you’ll know that this is by far my favorite definition. anything I’ve ever written on Business model innovation Business Model Innovation’s ambitious goals require an intuitive framework. Firstly, it is paramount to precisely understand which a new business model seeks to address. Secondly, we must identify the company’s , be it a product or a service, and how it caters to this specific customer need. Thirdly, the created to deliver a strong value proposition to customers must be mapped out. Finally, managers must identify an effective to ensure the new business will be viable commercially. . In order be truly innovative, a company should seek to differentiate itself using two or more of these levers (anything else would only strengthen the status quo, something that previous definitions forget). customer segment target value proposition value chain profit mechanism Put simply, we are here answering the who, what, how, and why of the soon-to-be-launched business Based on this framework, which actively encourages innovation, a finite amount of models / archetypes / categorisation / morphologies can be identified and reproduced. This was mentioned in previous definitions (Sales, Choices), but did not go far enough, as this finite amount was not quantified. The authors behind ( ) identified 55 business model archetypes, accounting for 90% of businesses. Through my own research, I have identified a few more (83 to be exact, perhaps accounting for the missing 10%), ranging from the model to the model. The Business Model Navigator Gassmann, O., Frankenberger, K., & Csik, M., 2014 A La Carte Variable-based Pricing 7. Imbalance definition A business model coexists with competing business models withing an organization, and requires ambidextrous thinking. What does that mean? Building on everything we’ve just discussed ( ), this definition posits that businesses are able to both exploit and explore business models, simultaneously. This means that businesses are always on the lookout for the next disruption, innovation, transformation… words that sing to the hears of management consultants everywhere. The explorative approach means that businesses have to change their philosophy as it is very different from exploiting an existing model. It demands a strong mental gymnastic, and — not least because employees rebel against constant changes. and there’s a lot to unpack this ambidextrity is not an easy talent to acquire That imbalance is all the more interesting because new is not always better when it comes to BMI : what works well for a small company may not work for a large one and vice-versa. As described above, : whereas a new product is often said to be better than its previous iteration, a new business model is not necessarily better than that of a competitor. It’s just different. we’ve gone way beyond mere product improvement or technology creation It also means that a decision needs to be made with regards to a new model comes about. ? Those are questions which keep CEOs up at night, as things like cannibalisation and synergies must be taken into account when introducing a new model. how Should it be separated, integrated, or a mix of the two as it matures Conclusion This can be confusing, I know. But what isn’t understood cannot be improved. Below are a few conclusion from all the above: How key activities are undertaken make each and every company unique. Activities and resources, both internal and external, have to be constantly balanced to keep up with a dynamic environment, leading to innovation. This dynamism can be used as a story-telling device which can be copied by others. A business model is made up of key components which creates many possible models (but not an infinity) Exploiting one model makes it impossible to exploit another A business model is only innovative if a few key elements are changed simultaneously Innovating one’s business model means both exploiting the existing one while exploring another Good luck out there. This article was also posted on my blog, The Pourquoi Pas . Come say hi!