Industry

Enterprise innovation: Business model innovation

Cliff Notes

  • To drive meaningful impact, BMI ideas must take root within the organisation, receive sufficient funding and be given the runway needed to achieve scale.
  • Implementation challenges are often the largest obstacle many companies face when innovating their business models.
By Henry Smith
May 2018

Innovation is becoming an increasingly popular term in the business world.

 

It’s used in relation to many different aspects of business, including product/service innovation, process innovation (developing new delivery methods at radically better cost or experience, or both) and finally business model innovation (making your money from a different source within the value chain). Business model innovation (BMI) is about delivering existing products that are produced by existing technologies to existing markets.

 

Drawing on the idea that any business model is essentially a set of key decisions that collectively determine how a business earns its revenue, incurs its costs and manages its risks, innovations to the model ought to be viewed as changes to those decisions: what your offerings will be, when decisions are made, who makes them and why. Without a framework for identifying opportunities it is hard to be systematic about the process, which explains why it is generally done on an ad hoc basis. However, focussed business models are most effective when they appeal to distinct market segments with clearly differentiated needs.

 

So, why would an organisation undertake a BMI process? There’s a multitude of reasons, including industry disruption, reduced returns on products or services and ineffective decision-making strategies. The traditional tools for dealing with these, including product innovation and pricing strategy, typically involves changes to one or two dimensions of a business. By contrast, BMI involves changes to a much broader set of dimensions. The ability to change multiple elements simultaneously – an in a coordinated manner – is what allows BMI to do the work of traditional growth levers but avoid the pitfalls. The key advantage of BMI over traditional growth levels is that it affords businesses greater degrees of freedom. It can create more value because an orchestrated set of changes across the value proposition and business model can create a new basis of advantage that is harder for rivals to match.

 

 

The first step of changing multiple dimensions of a business is to begin by establishing exactly what components need to be changed. A company could examine the nature of their revenue stream and change it to align with the interests of stakeholders. This works best when performance can be fully and unambiguously defined. For example, Hilti, a tool manufacturing business, shifted from selling tools to selling a tool management service aimed at alleviating the burden on contractors so they could focus on getting the job done. Its service is accompanied by a new revenue and operating model. Many contractors who, in the past had purchased a small share of their tools from each competitor, dramatically increased their share of business with Hilti in order to obtain the full benefits of the company’s tool management service. Hilti’s success depended on possessing a deep understanding of how the customer uses tools and what causes them frustration. Based on this understanding, the company expanded its views of the role it could play in delivering value to customers.

 

Another component of a business that its leaders might want to look at is the decision-making strategies that are currently being implemented and how these can be changed. There’re several methods to doing this, such as changing the order in which decisions are made, splitting up the key decisions or passing the decision risk to the party that can best manage the consequences. In many business models’ key decisions are made by those with less to gain than others in the chain. A company’s customers, for example, often feel that they gain less when they buy a company’s product than the company does. That was a problem facing Netafim, the Israeli market leader in drip-irrigation technology.

 

Despite demonstrating increased crop yields by 3-500% the technology was an initially hard sell. Customers did not trust the company and felt that they were shouldering a lot of risk in adopting its approach. Netafim solved the problem by offering a free integrated package that included system design & installation, all required hardware and periodic maintenance. They went so far as to change its mission statement from “making the best drip-irrigation equipment for customers” to “helping the world grow more with less”, an objective far more aligned with the objectives of its customers, the farmers. Payback came from a share of each farmer’s increased crop yields. Thus Netafim bore all the risk of the decision. They could do this because they realised they had the most to gain from the adoption of its technology. As farmers achieved greater success, word would spread; Netafim would increase its sales and realise economies of scale. A company can safely take on more risk only if the relevant technology is very reliable.

 

 

A final example to be studied here, although there are many more components to a business model that could be well served by innovation, is the emergence of industry disruptions. When airline Qantas were faced with the challenge created by low-cost carriers (LCC), it realised that making incremental changes in cost structure would be insufficient. It had to launch its own LCC with competitively superior economics. In 2004, Qantas introduced its LCC, Jetstar Airways, with an entirely new cost and operating model. Qantas recognised the importance of creating a new model that was not burdened by old ways of operating. Many companies may be tempted to adjust their existing cost models when faced with fierce competition. But when the model is challenged by a truly disruptive change, what is often required is an entirely new approach. Annual revenues now exceed $3bn and Jetstar earns higher margins than does its more premium-focussed patent airline.

 

Companies can use these frameworks to make their innovation processes more systematic and open, with business model reinvention becoming a continued, inclusive process rather than a series of isolated, internally focussed events. When they do, they find that the resulting capabilities offer a sustainable competitive advantage. Of course, failures can happen for all sorts of reasons and they often occur even when the idea is sound. This is especially true for BMI – when they new idea is not a product, service or technology but a different way of engaging with the customers and earning revenues from them. BMI is a powerful driver of value and a surer way to succeed than technology, product/service or process innovation. Large companies failure rate is unacceptably high because so far too many have not shown enough commitment and flexibility in the way they develop and roll them out.

 

So how does an organisation prepare itself for BMI failings and how can it combat this? There could be a problem of a lack of top management support and attention. As we have seen, BMI requires changes that affect multiple parts of an organisation. As such, when rolling out a BMI, it requires direct support from the top management. So before undertaking a BMI, there needs to assurance from top management that there will be both the necessary patience and resources provided. Tied in with this problem, an organisation could display a reluctance to experiment. It’s important to remember that BMI is just an idea. It relies on a lot of assumptions and judgements and, in the absence of a crystal ball, the best tool we have is experimentation. This is why top management need to display patience and provide resources to enable effective BMI.

 

Another potential downfall could be a failure to pivot on BMI. Even when the company experiments with a new business model, it often fails to interpret the result of the test correctly and adjust an implementation plan accordingly. What may seem like a failed experiment might carry the message that an adjustment in the planned rollout of business model innovation is needed. Furthermore, what could appear to be a successful test might not be really testing the most critical aspect of the business model.

 

When an organisation has had a series of failed innovations, the problem may not be with the innovations themselves. The real issue may be that the company has gone out on a limb and introduced the innovations without the operations elements required to support them. Changing the operating model – along with the value proposition – is an imperative because it creates the appropriate support system to enable breakthrough value creation. In many ways, the operating model is the foundation of the business and it needs to reinforce the new insight that is driving the entire BMI. The operating model can change in many ways, but shifts tend to involve building new capabilities, leveraging external partners and redefining interactions with customers.

 

To drive meaningful impact, BMI ideas must take root within the organisation, receive sufficient funding and be given the runway needed to achieve scale. BMI can take years to fully show results. It entails greater risks as well as longer-term payback than more incremental moves and there is often organisational resistance to change. Indeed, implementation challenges are often the largest obstacle many companies face when innovating their business models.

 

For those about to begin the BMI journey, there are four important questions that leaders should take to their organisation:

 

  1. What is the growth ambition for the core business?
  2. Are traditional approaches still sufficient and will they remain so?
  3. What business model solutions from outside the industry could deliver superior return on investment?
  4. How could these solutions be put to work in the organisation?

 

Bolder BMI solutions can be the key to driving growth in the core business and maintaining sustained outperformance. Along the way, leaders must watch their business cycle, their competitors, their customers and especially the potential pitfalls.

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