According to a study conducted by IBM in 2012, companies that perform well tend to innovate their business models quite frequently, compared to underperformers. Innovation is essential to remaining competitive if a business is to stay afloat and remain relevant. History provides examples of companies that have lost out by missing out on opportunities to innovate – Think Motorola, Nokia, Lehman Brothers, Kodak, American Airlines – the list goes on. Failing to adjust one’s business model to suit the ever-dynamic business environment can threaten and diminish the longevity of any business. On the other hand, companies that dare to break the moulds of traditional business practices via innovative business models continue to enjoy significant benefits today. Here are some examples:
Amazon is the largest bookseller in the world today without a brick and mortar store;
Apple is the largest music retailer that distributes music without the need for CDs
Netflix reinvented the video rental industry by renting out DVDs via email and eventually providing an online streaming service
Zopa became the first social lending platform
It pays to learn from history – the losses and successes of other business.
So, what exactly is a business model and what should you know about innovating your business model?
According to the book, The Business Model Navigator: 55 Models That Will Revolutionise Your Business, there are four dimensions every business model should have:
Customer (Who) – Your business model should clearly identify who your customers are and which customers you won’t focus on as part of running your business. Customers lie at the heart of every business model and you should be clear on who your business is delivering value to.
Value Proposition (What) – This refers to the offerings (product and services) you provide and how they are relevant to meeting the needs of your target customers.
Value Chain (How) – This refers to the combination of processes, activities, resources and capabilities that are needed to deliver value to your customers.
Profit Mechanism (Why) – This defines why your business generates profit and what makes your business idea viable.
In summary, a business model defines who your customers are, what you offer them, how you offer your products or services as well as what makes your business profitable. The business model canvas is a technique for describing how a business creates and delivers value to its customers. According to the BABOk Guide, it comprises the following building bocks:
Cost Structure and
Why is defining your business model important?
It serves as a blueprint for implementing business strategy
It can be used as a lens for viewing and understanding the current state of your business
It can be used for mapping programs, projects and initiatives to the direction of your business
Here are some tips for defining a business model that works:
Dare to be different – Doing exactly what your competitors are doing is not enough to differentiate your business. For example, Car2Go revolutionised the car rental industry through its innovative car sharing concept. Successful companies like Apple and Google have succeeded by breaking through the dominant industry logic. Think beyond the current logic of your industry - Embrace new ideas by avoiding orthodoxies. Humans tend to get stuck in existing patterns of thought and this can block new ideas and our ability to embrace them.
Apply technology wisely. Technology on its own, is not what leads to innovation but its skilful and creative application to one’s business model.
Learn from others- Great ideas are not always novel – Significant innovation efforts have been achieved by applying ideas or practices that already exist.
Develop a culture and processes that support innovation - Business model innovation tends to be incremental, requiring persistence, and happening over the course of time. For example, Netflix started off by mailing DVDs to customers and then steadily evolved into an online movie streaming service.
Embrace new ideas - Innovation is not limited to creative geniuses or individual geniuses; teams can come together to form innovative products. The need for change can also come from anywhere in the organization and this is not limited to large R&D firms or departments.