The lifespan of the average business model has become shorter in recent years, making it more difficult for companies to grow or compete. Companies seeking breakthrough growth, revitalizing a weakening core, or defending against industry disruption must innovate their models using the business model innovation tool.
With COVID-19 wreaking havoc, we’re already witnessing that there are also winners while many businesses are fighting for survival. Those who succeed typically have powerful business models, emphasizing the need for business model innovation in times like these.
In this post, we’ll look at what it is, why it’s essential, and how to make it happen using a variety of instances.
- What is business model innovation?
- The importance of business model innovation
- Four approaches to business model innovation
- Let’s take a peek into a few examples of business model innovation!
What is business model innovation?
A business model is a strategy or blueprint that describes how a company or organization provides value to its clients.
In its most basic form, a business model outlines an organization’s target market, the demands of that market, and the role that the company’s products or services will play in addressing those needs.
The process by which a company updates its business model is called business model innovation. Frequently, this innovation signifies a significant shift in how a firm provides value to its customers, whether through new income sources or distribution methods.
Consequently, successful business models take a holistic approach by integrating these various parts into a well-organized and well-thought-out framework.
Many companies have the same concerns about their core business: what kind of business model innovation will help them achieve breakthrough performance? How do we build the capability to develop, rapidly test, and scale new business models that are inspiring to the entire corporate culture? And how do we avoid putting our organization at risk in the process?
Motivating change within an organization is not a trivial task, but your attention is still required with developments in areas such as the strategic environment.
The importance of business model innovation
Business model innovation enables a company to capitalize on customer demands and expectations changes.
- Customer needs: New companies with superior capacities to address customer wants would likely have displaced Amazon and Atari if they had not innovated and modified their business models.
- The big picture: A company that does not explicitly focus on the big picture of its business model often compromises its original strengths without realizing it.
- Stumbling block: Some companies gradually drift away from their customers’ needs and focus only on optimizing the delivery of their products. Others may sacrifice their ability to create value by not focusing enough on this aspect.
- Factors: There are many reasons for these phenomena. Perhaps management is too focused on what the competition is doing, and there is pressure from shareholders to optimize short-term profit. Nevertheless, in many industries, the interests of customers and service providers have become opposites.
Example: The healthcare sector is a case in point. Private hospitals have incentives to keep you chronically ill so you can come back and they can charge you for every visit.
You want the hospital to take good care of you, of course, but ideally, you just want to stay healthy and not go to the doctor in the first place.
Therefore, even if the individual doctors are doing their best to take care of you and keep you healthy, it is unlikely that the company will invest in keeping you healthy because that would be bad for them.
Therefore, a company needs to always keep innovating their business model as it helps to stay connected to all aspects related to their customers, problems, and opportunities, and look at the bigger picture.
Four approaches to business model innovation
All the companies want growth, but not many understand the scale of the effort or the level of risk that needs to be put in. Furthermore, if it should be a one-time event or an ongoing capability. Hence, companies hope to drive growth through business model innovation.
There are four different approaches to business model innovation. Understanding these differences can help leaders make effective decisions as they develop ways to grow their business.
1. Reinventor Approach
The reinventor approach is used when a company’s business model is slowly deteriorating and growth prospects are uncertain.
In this scenario, the company must find ways to provide new value to its customers while realigning its business operations to deliver these superior offerings profitably.
2. Adapter approach
When a company’s current core business is not up to combating a fundamental disruption, adapters explore adjacent business units or markets.
They may even abandon their current operations altogether! If adapters want to stay in business, they need an innovation engine that constantly drives experimentation until a successful new “core” area with the right business model is found.
3. Maverick approach
The maverick approach uses business model innovation to grow a potentially more successful core business.
Mavericks – either startups or emerging incumbents – use their core advantage to revolutionize their industries and set new standards. This requires the company’s ability to continuously develop its competitive advantage or business advantage to drive growth.
4. Adventurer Approach
The adventurer approach is when a company aggressively expands its footprint by exploring or venturing into new or adjacent areas.
This approach requires an understanding of competitive advantage and a cautious bet on novel applications to succeed in new markets.
Innovation is not a simple process
Innovation is an important part of running a business, and it is not always easy. In business history, there are many examples of companies that we’re unable to innovate when they needed to the most.
Let’s take a peek into a few examples of business model innovation!
Subscription models are a method to convert one-off purchases into a more predictable and recurring, though the smaller, stream of revenue.
It also ensures that the customer keeps getting value from their purchase over time and is able to better afford higher-end services as they grow accustomed to purchasing on an ongoing basis.
Both B2B and B2C businesses can use subscription models. The value chain for a subscription business is quite clear but requires strengths that product businesses might not have which includes delivery and customer support.
Platforms can be characterized by their distributed approach to creating value. They create a place that brings together supply and demand, allowing them to meet in the process.
Typically, digital platforms are like marketplaces and matchmakers. Here revenue is earned by charging the supply side for value-added services like providing a matching algorithm and screening members.
Digital platforms have provided an opportunity to create a global platform that has huge economies of scale and minimal costs for setup.
Freemium is a word that comes from the words free and premium. It refers to business models where companies offer a free version of their products or services with certain limitations, in order to attract users and then upgrade them into paying customers or the premium customers.
Companies with a good product or service, high gross margins, and high customer acquisition costs (content-related and software businesses), this is an excellent choice, especially in highly competitive niches.
Spotify is an excellent example of a Freemium model. However, if the companies lack value proposition and value creation, this might result in huge losses.
The traditional chain of business was manufacturers to wholesalers, wholesalers to retailers, and then finally retailers to customers.
Direct-to-consumer (D2C) businesses have seen a rise in popularity recently as e-commerce becomes more popular.
A (D2C) business model usually has a higher margin for the manufacturer because it eliminates middlemen and gives them more control over their brand, customer experience, and relationship with consumers. Furthermore, it gives data quality on-demand and customer preferences.
Ads, Affiliations & sponsorships
Ads, Affiliations & sponsorships have been a part of advertising from the very beginning which continues to exist even now. The only change is in the scale of operations.
The smartphones and content democratization on social media platforms such as YouTube and Instagram have brought a dramatic increase in content. This has made it harder for traditional businesses who monetize their content only with offline advertising or sponsorships because there are so many competitors fighting for people’s attention online.
It is essential for an organization to tap into the right audiences for advertisements or affiliate with a business with a larger audience.
Learning how companies and industries have changed in the past will be invaluable to your venture. You can evaluate or dissect the successes and failures of these types of companies on a case-by-case basis and then apply those lessons to your own challenges.
Companies should look at business model innovation as a powerful tool for success.
It is one of those topics that is fairly simple to understand and therefore can have a big impact.
If you are not seeing the business results you are hoping for, or if you are looking to take market share from established competitors, you should try a new business model.