KEY CONCEPT

Choices organizations make about their business model often go unchallenged for a very long time. This is an underutilized source of future value. As an alternative or complement to product and process innovation – business model innovation can be where the greatest benefits lie. With that in mind, and before launching a new business model, managers should ask themselves the six key questions outlined in this Idea.

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IDEA SUMMARY

Though product/process innovation has become a necessity for many companies, the time and expenses required is now leading hesitant companies to turn towards business model innovation instead. So what do executives need to know about it?

Business model innovation matters to managers, entrepreneurs and academic researchers for several reasons. First, it represents an often underutilized source of future value. Second, competitors might find it more difficult to imitate or replicate an entire novel activity system than a single novel product or process.

A fresh business model can create and exploit opportunities for new revenue and profit streams in ways that counteract an aging model; the latter can tie a company into a cycle of declining revenues and pressures on profit margins.

To illustrate the powers of business model innovation, we can highlight the cases of Apple and HTC. Apple’s radical innovation of its business model when it created the iPod and iTunes (a shift in focus from just hardware, software and PCs) is an example of successful business model innovation, something its revenues, profit and stock price change are evidence to.

In HTC’s case, they have also been very innovative, making the shift from initially manufacturing handsets for Microsoft-powered mobile phones, to selling its own HTC-branded smart phones. However, unlike Apple, it has not been involved in the creation or delivery of mobile content or services, and its devices function on third-party operating systems. As such, HTC generates revenues only from the hardware sales, whereas Apple benefits from its interoperable software base and direct ownership of distribution channels.

Some of the ways business model innovation can occur include the following:

• By adding novel activities (content);
• By linking activities in novel ways (structure); and/or
• By changing one or more parties that perform any of the activities (governance).

Content, structure and governance are the three design elements that characterize a company’s business model… Change one or more of these elements enough and you’ve changed the model.

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BUSINESS APPLICATION

Here are six questions managers should ask themselves before launching a new business model:

1. What perceived needs can be satisfied through the new model design?
2. What novel activities are needed to satisfy these perceived needs? (business model content innovation)
3. How could the required activities be linked to each other in novel ways? (business model structure innovation)
4. Who should perform each of the activities that are part of the business model? Should it be the company? A partner? The customer? What novel governance arrangements could enable this structure? (business model governance innovation)
5. How is value created through the novel business model for each of the participants?
6. What revenue model fits with the company’s business model to appropriate part of the total value it helps create?

For example, we can look at how McGraw-Hill’s book publishing business might consider each question when considering how to meet the growing demand for digital content. For Question 2 on business model content innovation, they may need to perform new activities, such as designing, uploading and maintaining the most complete online catalogue. Similarly, looking at Question 3 on business model structure innovation, they might need to decide how they will interact with multiple digital distribution partners, such as Apple and Amazon, in order to tap into the retail digital book market.

Addressing these six questions can help managers see their companies’ identities more clearly in the context of the networks and ecosystems in which their organizations operate, i.e. provide business model perspective.

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REFERENCES

Creating Value Through Business Model Innovation. Raphael Amit & Christoph Zott. MIT Sloan Management Review (Spring 2012).

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