Distinct Approaches to Business Model Innovation

(amended, 2015-05-03)

Business model innovation (BMI) is becoming ever more important as it turns out increasingly difficult for companies to differentiate based on products and services alone. New business models are difficult for competitors to copy, not only because it takes considerable time and effort to build a new business model and simultaneously change several elements of an existing one, respectively. Moreover, a business model has to fit a company’s unique combination of strategy, culture and competencies in order to succeed.

Directions of impact for business model innovation

The Boston Consulting Group (BCG) has recently published an article, outlining different approaches to business model innovation, depending on a company’s particular context. The distinct BMI styles are spanned by two criteria:

Impetus:  Is the company defending against an external threat, such as commoditization, new regulation, or an economic downturn – or is it proactively disrupting the status quo?

Focus: What is the most attractive area of opportunity – does it reside in the core business or in adjacent businesses or market?

According to BCG, each of these four approaches comprises a dedicated set of moves. In the following, the specialities are briefly summarized:

The reinventor approach is deployed in light of a fundamental industry challenge, such as commoditization or new regulation, in which a business model is deteriorating slowly and growth prospects are uncertain. In this situation, the company must reinvent its customer-value proposition and realign its operations to profitably deliver on the new superior offering.

Key issues to be addressed:

• Redefine value for customers. Reinventors do not need to be radical. Rather, they capitalize on their expertise to find ways to reinvent their customer-value proposition to unlock new advantages, such as customer loyalty. Moving from providing commodity products to embedding products in more value-added services is one common pathway.

• Cannibalize proactively. Though the change may not be revolutionary, efforts must be broad-based and fully committed – including a willingness to reinvent every function in the company in order to deliver on a more attractive value proposition to the customer profitably. Reinventors do not deny the decline of the core business. Instead, they figure out how to control and benefit from it – rather than letting rivals set the terms and the pace.

The adapter approach is used when the current core business, even if reinvented, is unlikely to combat fundamental disruption. Adapters explore adjacent businesses or markets, in some cases exiting their core business entirely. Adapters must build an innovation engine to persistently drive experimentation to find a successful “new core” space with the right business model.

Key issues to be addressed:

• Find untapped value in current assets and capabilities. Expanding into new markets inevitably requires operating in unknown areas and experimenting. Adapters minimize additional risk by understanding their strengths and moving decisively to apply them in new – and growing – areas.

• Make adversity an advantage. The most attractive opportunities often exist where market disruption or new regulations expose new customer needs. Adapters tap into these.

The maverick approach deploys business model innovation to scale up a potentially more successful core business. Mavericks – which can be either startups or insurgent established companies – employ their core advantage to revolutionize their industry and set new standards. This requires an ability to continually evolve the competitive edge or advantage of the business to drive growth.

Key issues to be addressed:

• Target the sleeping giant. Mavericks exploit the complacencies of incumbents – a goal that calls for commitment and grit. Such complacency is often evident in low levels of customer satisfaction or the extent to which customer needs go unmet.

• Minimize the barriers that stand between you and the customer. While mavericks may have a superior offering or technology, the key to turning that advantage into value is often to connect with customers in a new way. This new approach must reduce the risk, inconvenience, or complexity of adopting the maverick’s product or service.

The adventurer approach aggressively expands the footprint of a business by exploring or venturing into new or adjacent territories. This approach requires an understanding of the company’s competitive advantage and placing careful bets on novel applications of that advantage in order to succeed in new markets.

Key issues to be addressed:

• Stabilize the core. Adventurers must be vigilant about ensuring the company preserves a solid financial foundation and protects its resources. Many of these companies use outsourcing or partnering as a way to minimize capital investments and risk.

• Establish a permanent, dedicated innovation team to place bets in new spaces. Innovation for these companies is not a onetime effort. They establish a pipeline to generate new initiatives with well-tested managers at the helm of that effort. In this way, innovation efforts are managed separately from the core business.

Organizational implementation

When it comes to implementing new business models, research indicates that there is a general difference between new business models that completely replace the exisiting one and those being implemented in parallel.  For the former case, risk can be mitigated by testing the new business model in dedicated units and target markets for a limited period of time. If it turns out to be unsuccessful, there is still the option of switching back to the old model. If implementation is executed in parallel, e.g. to employ tailored business models for different business units or target markets, a certain kind of independent organization is required in most cases. This can either be an internal (and often newly built) unit, leveraging synergies with other business units, or a completely separate entity, such as a spin-off.

However, other research suggests that it may be benecicial for organizations to just add a novel business model to the existing one if both are based on complementary, rather than conflicting assets. Incumbent performance after new business model addition tends to improve when the incumbent organization aligns complementary assets (tangible or intangible) through earlier addition of the new business model and conflicting assets with an autonomous unit for the new business model.

Organizational implementation is further driven by the right people. In case a company has never undergone a business model innovation, it’s highly recommended to bring specialists on board who have already implemented novel business models successfully before. Quite often, business models from apart industries share similarities and there is one major requirement all BMI projects have in common: dealing with organizational and individual resistance to change. Compared to product and service innovation, top management involvement – first of all CEO engagement – is more essential for organizational anchoring of business model innovation initiatives.

Saul Kaplan summarizes the requirements for implementing business model innovation as follows:

The CEO must directly lead R&D for new business models. Assigning the task to line executives responsible for the performance of the core business model will result only in incremental improvements to the existing business model. Assigning the task to a Chief Innovation Officer accountable to line management will have the same result. Innovation projects that improve the performance of today’s business model will be prioritized, selected, and funded, and projects aimed at developing potential new business model projects will be killed. So, it’s the CEO’s job to make sure that the current business model produces expected results, and also to prepare the organization for the next business model.

Here’s how R&D for new business models works: Create a sandbox – connected to but autonomous from the core – in order to combine and recombine capabilities in new ways that are not constrained by the current business model. From this sandbox, conduct real-world business model experiments. At all times companies should have a portfolio of business model explorations underway, including early stage concepts, in-market prototypes, and later-stage scalable models. 

Takeaway

There is no one-size-fits-all approach to business model innovation. In order to maximize likelihood of success, the company’s individual context, strategy, culture and competencies have to be taken into account. In most cases, development and validation of new business models should be separated organization-wise to avoid interference from existing business models and to reduce risk. In case of parallel business models, the dedicated unit is supposed to scale the novel business model up to a new business segment. Just adding the novel business model to the existing one may be indicated, if deployed assets are complementary, rather than conflicting. As existing organizational and personal capabilities mostly cover product and service innovation, experts with track records in more complex business model innovation need to get hired. Last but not least, direct CEO engagement has turned out to be essential for successful business model innovation.