22nd October 2018
In those cases where a new business model has been successfully developed, companies gain on average, a 6% increase in return on investment, compared to other forms of innovation, such in product or process innovation (BCG 2008). Therefore, the innovation of the business model plays a key role in the current and future success of companies.
That is why many managers think that to achieve competitive advantages, business model innovation is more important than other types of innovation. More than 90% of the CEOs surveyed in a study conducted by IBM (2012) stated that they planned to innovate the business model over the next three years. However, good intentions are not enough.
When it comes to moving to action, problems surface. Few managers can explain their company’s business model off the top of their head and, even less so, define what a business model really is. It is still very rare to find companies with teams dedicated to innovating the business model, or to have established processes for that purpose. Given the relevance of this issue, the lack of institutionalization is surprising, although if you consider the complexity and confusion surrounding the issue, it is understandable.
Essentially, we can say that a business model is the way in which companies create, deliver and capture value. Hence, this is the business logic, and it is always the result of a series of strategic reflections and decisions.
To describe a business model, we can use conceptualization based on five components: customer segments, value proposition, value configuration, value network and value capture.
- Customer segments: together with the customer segments a company targets alongside these customers’ needs, this includes the interactions and relationships established with these customer segments.
- Value proposal: to do with the products and / or services that a company offers. It also describes the benefits that the company brings to its customers or users (for example, design, trust, user-friendliness, performance, durability, etc.)
- Value configuration: refers to the set of resources, capacities, processes and activities that are required to next create and deliver the value proposal to the customer segment.
- Value network: identifies the network of collaborators that cooperate with a company with the aim of achieving a goal (for example, economies of scale, contribute resources or knowledge, reduce risk, etc.)
- Value capture: describes how, and in what way, customers pay for the products and / or services offered, as well as the quantity of value a company captures, bearing in mind the costs incurred to create and deliver the value proposal.
Transforming the business model
In recent times, especially over the last decade, changes in the environment have accelerated dramatically. Some of the drivers of these changes are factors, such as digitization, changes in customer preferences, regulatory changes, the entry of new competitors, or globalization.
All this has generated a transformation in the way many companies or their business models compete. Therefore, the transformation, or innovation, of established business models is becoming a fundamental aspect to guarantee the competitiveness of companies.
However, companies portray different attitudes towards this phenomenon. There are various approaches on how an established company initiates an innovation process of its current business model:
- Reactive: undergo a crisis that the current business model cannot respond to
- Adaptive: adjust, improve, or defend the current business model
- Expansive: launch a new technology, product or service
- Proactive: prepare for the future.
It is important to highlight that when we talk about creating new business models, we must differentiate between two different situations: 1) designing a business model from scratch, 2) transforming an existing business model.
These two situations entail considerable differences. For example, for transformation, it is assumed that previous business model exists, so the challenges that arise are for existing organizations, such as organizational inertia, resistance to change, internal vision, fear of cannibalization, or aversion to risk; whereas such challenges are not relevant for start-ups. This means that many transformation attempts do not achieve the expected objectives.
These challenges arise throughout the innovation process of the business model, either in the design stage or in the implementation stage. Taking them into account and responding to them is vital for a successful initiative.
- Internal vision: the company must be able to understand the needs of the most relevant actors for a successful initiative and identify the factors of change that can have a greater impact on the current business model (digital transformation, globalization, circular economy …) For this, it is essential for the organization to look beyond its walls.
- Organizational inertia: the difficulty of overcoming the prevailing logic of the company limits the ability to generate ideas, which questions the conventions on which the current business model is based. To overcome this challenge, critical questioning and using analogies are key.
- Product-focused vision: companies tend to have a very product-oriented approach, which makes it difficult to think in terms of the business model. Introducing the notion that the company is a system, that the product is a key part of this system, but not the only one, may contribute towards a more systemic vision of the company.
- Fear of cannibalization: sometimes the new business model requires dropping some current source of income to replace it with another. This spurs misgivings and delays decision-making. A clear example is Kodak, the company that postponed its transition to digital photography, as a large part of its income came from photography reels, while other companies seized the opportunity. The outcome led to Kodak losing its leadership position. It’s worth remembering that when the moment comes, if you don’t cannibalize yourself, someone else will do it for you.
- Resistance to change: any transformation of the current business model implies, to a greater or lesser extent, changes. There are many reasons why people in the organization may be reluctant to change and may even have incentives to boycott the new initiative. This is one of the aspects that can cause the implementation of the new business model to fail. Transparency, empathy, communication and personalized responses are essential to overcome this scenario.
- Risk aversion: during the implementation phase, one of the greatest challenges is to launch the new business model in phases to avoid damaging the company’s image, in case something does not go according to plan. Care must be taken to meticulously plan in which customer segments or geographical territories to start the implementation.