Responding to Threats and Opportunities with Business Model Innovation
No company today can afford to rest on its laurels. Most industries are very competitive, and if you are one of the few in an industry without much competition you are likely to be disrupted by someone entering your market at a lower price point or with an equally damaging competitive stance.
If you offer a high-end product or service that not many people can afford, when (not if) low-end disruptors enter the market and start taking your customers, business model innovation may be the only way to compete. Airlines, for example, used to be a mode of transportation reserved for the rich – everybody else took the train, or drove, or stayed home. Then a few airlines like Southwest, Air Arabia and Ryanair disrupted the market by capitalizing on operational efficiency and eliminating the “luxury” aspects of air travel. Eventually the whole industry was forced to change its business model in terms of who its customers were and how it served them.
Companies in commoditized industries, such as telecom, have been also been forced to innovate their business models because they can no longer compete on price. Telecoms that once offered simple voice and Internet access services are now offering online games, Internet television, videoconferencing and other value-added services that aim to distinguish them from the competition.
In addition to these and other possible threats to your business model, you may find that examining your business model brings to light new opportunities. FedEx, for instance, recognized a business model opportunity in the form of guaranteed overnight package delivery. It was the first delivery company to offer this service, and as such it was able to go beyond price competition and provide a solution for a “job to be done.” People needed quick, guaranteed shipments (the “job”) and the FedEx business model provided the answer – and shaped an entire industry in the process.
Or you may find an opportunity to serve a large market that is unable to access existing solutions due to price or other constraints. One example is the so-called “$100 laptop,” a computer designed for children in developing countries. The manufacturer uses existing technology in an innovative configuration to make the computer affordable but also durable. In this case, a new company was founded on the business model innovation of making reliable computers inexpensive enough that the poorest countries could afford them for their children.
The Tata Nano is another example, only this is an existing company reinventing its business model to provide inexpensive cars to the masses in India. Business model innovations such as this enable established organizations to open up new markets by appealing to the “base of the pyramid” (the poorest socio-economic group) with value propositions that are new to this segment of the market. (Existing offering + new market still = business model innovation.)
Perhaps the greatest opportunity that argues for business model innovation is return on investment. Statistics show that business model innovators see operational margin growth of more than five times that of competitors who only practice product or service innovation. If your company’s revenues are down or stagnant, innovating your business model could bring significant ROI and put you back on the path to profitability.
A recent PricewaterhouseCoopers survey of CEOs worldwide reported that the majority of companies are shifting their growth strategies away from existing markets and are instead focusing on creating new products and services aimed at different markets. These companies are looking for ways to diversify their offerings and appeal to new markets because they know there is too much competition to simply rely on price changes, deals or feature-focused incremental innovations. To appeal to new markets they need to innovate their business model.
You can think of business model innovation as “the search for newness.” Many past business model innovations leveraged new technologies. But today the rapid pace of technology has made it possible for companies to be innovative without waiting for a new technology to arrive – they simply find new ways to use existing technology to deliver a better value proposition.
Of course, there is inherent risk associated with business model innovation (as with any significant strategic change). But along with great risk comes great rewards – and you can minimize the risk using tools for business model design and innovation.
The first step is to fully understand your current business model, using a proven framework for analyzing your entire value chain. Although a business model is meant to have more longevity than a strategic plan, that doesn’t mean it will remain relevant and optimized forever. Companies should ask questions such as “Who are our customers? What value do we offer to them? How do we do this?” If the answers are different than before it may be time for business model innovation.
You must also spend time analyzing your market, your competitors, potential competitors (which may come from outside your industry), and your customers’ (or potential customers’) needs (e.g., jobs to be done). With this in mind, you can revisit your business model and consider the changes you might make to better serve your customers or expand into a new market.
There are many companies who have breathed new life into their offerings, their revenue streams and their organizations using business model innovation. Let us learn from these examples and apply the tools of business model innovation to leverage new technology, enter new markets and create new value propositions.
Kamal Hassan is President and CEO of Innovation 360 Institute, an innovation management and operation advisory group based in Dubai. Mr. Hassan works with both public and private organizations on business model innovation, innovation strategy, innovation project execution and organizational change. In July and August, Mr. Hassan will be leading workshops on Business Model Innovation and Design in Istanbul, Turkey and Denver, CO (USA). For more information, visit www.i360institute.com.