Innovating the Business Model

Missing the Window of Opportunity or Seizing the Advantage

by Paul Hobcraft

Business model innovation is shaping up to be one of the most challenging aspects for leadership of existing business or that aspiring leaders need to fully understand. The question today being faced by many is how to transform existing business models so as to avoid that race to commoditization and decreasing shareholder value and so to provide improved value. Equally business model innovation increasingly needs to be able to reduce the threat of new competition that is constantly finding ways to undermine your present business. The Entrepreneur is snapping at your heels like never before.

Leaders need the tools, skills and experience to envision, test and implement new business models more than ever and certainly faster than ever. The worrying aspect today it seems is that many leaders are still not knowing what it is within their existing business model that ‘combines’ to make the existing profit engine of the business, those ‘value points’ that really provide the innovation opportunity to sustain or challenge their existing business models.

So what is Business Model Innovation?

There are numerous definitions of a BMI- let me provide three that I trust build the understanding.

In Alexander Osterwalder’s & Yves Piqneur’s book “Business Model Innovation” they simply explain this as “creating value, for companies, customers and society, replacing outdated models that respond to emerging user needs and pressing environmental concerns. A business model describes the rationale of how an organisation creates, delivers and captures value.” The authors offer nine basic building blocks that build up the complete logic of how a company intends to make money through a new BMI. It basically covers the four main areas of the business: customers, offer, infrastructure and financial viability. They suggest you construct a business model canvas through exploring key partners, key activities, key resources, customer relationships, channels (to market), customer segments and the value proposition with cost structure and revenue streams.

In Mark Johnson’s book “Seizing the White Space”, he firstly starts with White space as defined as “the range of potential activities not defined or addressed by the current business model, beyond its core and adjacencies that require a different business model to exploit.” He sees a BMI to have four parts requiring a clear, strong customer value proposition (CVP), secondly the show me the money part – a profit formula that defines how and where the company will capture value for a given set of customers at a given price. The third and fourth elements of this framework are key resources and key processes as the means by which the company delivers the value to the customer and itself.

Thirdly, Boston Consulting Group argues a business model consists of two essential elements- the value proposition and the operating model. Within the value proposition you need to be explicit on your target segments, product or service offering and revenue model. In the operating part you need to address three critical parts- the value chain, cost model and organization.

So in summary:

Business model innovation is really all about game-changing moves, partly dependent on the industry and the circumstances. BMI should be seen as a proactive need for all to explore new avenues of growth and opportunity before others steal in and take the space from right under you.

Understanding your value-added points is essential

Articulating the (existing) business model as a first step leads to exploring ways to add further value. Customers want to be served in increasingly different, more exciting ways that often need lower cost delivery, greater convenience or improved functionality or are genuinely novel to the world. Knowing these value points is vital.

The role of the business model is capturing that value from new innovative insight. Increasingly this is coming from articulating your purpose more than the product or service and discovering the value promise that will gain customers attention and then delivering on it through your redesigned business model. You need to be really clear on the scope of your business and be ready to outsource the rest to others who specialise in that part more efficiently than you can do. This might be in the area of supply chain, technology platforms, research and development, warehousing and storage, support services etc.

The Catalysts of Change needed for a new Business Model Innovation

The starting point of a new Business Model is to know what the customer is trying to do that they cannot do as effectively as they would wish today. These are regarded as jobs-to-be-done or knowing the unmet needs and often not unarticulated as they have not been recognised or even appreciated as needed when you ask. You can recognise these more often through deeper observation to discover the opportunities that are presently not being served correctly. So the executing of the task or job is becoming increasingly more important to focus upon and today I feel less attention should be given to (existing) known product or services that often over-serve the real need of the customer. The critical aspect here though is that it must be delivering something the consumer wants resolving not what you might just think from your own internal perspective, it needs identifying and then validating. If you can correctly identify these then you have a potential innovation match that might need a new business model to support this.

For me, there are four powerful drivers that can galvanise BMI- increased visibility, reducing complexity, providing a different effect than the present and altering the perception with significant impact on today’s understanding.

The reason for today’s emphasis on Business Model Innovation

The challenge is to unravel the (increasing) complexities of a business. There is a consistent need to beat back intensifying competition, not just coming from the normal competition but from emerging entrants that have spotted these breaking opportunities or seen a unmet job that need to be changed and resolve a customer needs. They can quickly translate this into a viable business alternative and scale rapidly to disrupt the existing business providers. This ‘disruptive process’ is happening across all sectors of the manufacturing industry and service and has given rise in these times of increased uncertainty, accelerating global competition and increasingly more choice for the buyer. As a consequence it is getting harder to not evolve constantly and this is increasingly coming through a closer ongoing review that Business Model Innovation provides.

To summarize why you need a clear understanding of BMI

Business Model Innovation is becoming essential to understand and explore. Luckily there is numerous references available to refer too, to draw down examples and to gain encouragement to experiment. It is not something that I would suggest you push away or delegate to others, BMI offers a powerful concept to change the existing ways and to help you identify the present unknowns that can offer new value and growth paths for you and your future business.

• A business model defines a broad competitive approach to business and you need to articulate this
• A successful business model needs to ‘earn’ some sort of competitive advantage to the extent it changes the existing offerings available in worthwhile ways, for the consumer to ‘do something better’ than what is presently available.
• Having a comprehensive understanding on the focus of competition must also mean a greater focus on innovation, as the relentless changing conditions ensures any business and its model must evolve.

Today you simply cannot afford to stand still, you need to innovate your business model consistently.

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Paul Hobcraft runs Agility Innovation, an advisory business that stimulates sound innovation practice, researches topics that relate to innovation for the future, as well as aligning innovation to organizations core capabilities.