Business Model Innovation: Everything you need to know about it
A business model clearly describes the business strategy and logical context of how a company intends to operate to generate value for itself and its customers. The detailed plan and illustration of this logic make the business model assessable and visible. Therefore, the business model of a company is an analytical unit to identify the starting point for innovation systematically. This means companies can change different parts of their business model and create an advantage over their competitors.
A business model innovation is thus the strategic change of an existing business model or creating a new business model that satisfies customers’ needs than the existing business models.
We live in an ever-evolving world, and as things keep changing, businesses need to adapt to new demands and trends. Any valuable business needs to be innovative to survive changes in market trends. A useful trick to help your business stay relevant amidst this transformation is the business model innovation. It helps you understand what to focus on as a business. By understanding business model innovation, you will be able to effectively structure everything you need for your business to thrive.
Keep reading this article to know more about business model innovation.
What is Business Model Innovation?
To fully understand business model innovation, we need to first understand what it is all about. A business model is simply the representation of how a business brings value. It represents the entire business process and innovation strategy from start to finish. The business model refers to a company’s step-by-step plan for making a profit. It identifies the products or services the company plans to sell. It also identifies the target market and other factors necessary for the business’s success. Additionally, it helps new, developing businesses attract profitable investors, recruit talent, and motivate management/staff.
Things to Know about Business model Innovation
Business model innovation is the unique process or strategy a company employs to create value for itself and its customers.
• The business model innovation process does not necessarily involve the development of completely new concepts. Most business model innovations are a combination of parts of the old business models and another model. Therefore, innovation is a combination of already existing ideas.
• Business model innovation does not necessarily have to be in connection with a new product or new technology. Digital business model innovation, however, is necessary for generating value from radical product innovation.
• Every profitable business has a clearly defined business model
• A company’s business model and business strategy need to change from time to time to ensure its survival and ultimate success.
• The business model needs to be seen as a separate unit, on the one hand focusing on value creation for the customers and on the other hand value recording for the company.
• New business models can be strategically generated. Visualization tools such as Business Model Canvas, 4-Dimension Concept, or BMI Pattern Cards support this process.
• New business models are not created on the drawing board; the business model development follows the “Trial and Error Principle.”
• A company can operate different business models at the same time. Several business models can be successfully run in one industry simultaneously.
• Business model innovations can revolutionize an entire industry.
How to create business model innovation for your company
1. Begin with customer value in mind
The first step to creating business value innovation is to start with customer value in mind.
The following questions will help you on your journey to creating customer value.
• What problems are your customers currently facing, and how can you help them solve them?
• What services do they want the most?
• What are the obstacles preventing them from accessing those services?
• Who is currently offering that service to your target market?
• How can you offer the service better than those currently offering it?
Once you can answer these questions, you are already on your way to creating real value for your customers.
2. What are your strengths as a company?
Every business should create their business model innovation taking advantage of their unique capabilities and strengths.
• What is your competitive advantage?
• What stands you out as a business?
• What are your areas of specialization as a business?
3. What are your objectives for the business?
Some businesses want to increase their revenue, others want to grow as much as possible, and some others simply want to improve their products and services to offer more value for their customers. These goals ultimately matter when you’re creating a business model for your company. Your business objectives determine the business models or strategies you will employ.
4. Look for patterns by benchmarking leading innovators
The best business models are tailored to the needs of your customers as well as the business objectives and characteristics of your industry. Therefore, whenever you want to create a business model innovation for your company, it’s important to benchmark what the most innovative companies in the world are currently doing. Understudy the top 5 leading companies in your industry are doing and pattern your innovation after what they’ve done so far. This way, you will develop something more improved that customers will be willing to pay for.
5. Validate and iterate
As with any other form of innovation, you typically may not get business model innovation right the first time you try it. The only way to experientially know which one truly works is by testing the business model in practice repeatedly.
The challenging part with most business model innovations is that they often require drastic changes to your current operating models, which you shouldn’t be in a hurry to do unless you’re fully convinced that it’s worth it. Therefore, it is crucially important to validate the assumptions or models before adopting them. Validating the business model saves cost.
Business Model Innovation Examples
Business model innovation is all about restructuring a business while it delivers the same products to the same target market in different ways. Usually, business model innovations involve changes in the backend of the company. Such innovations are mostly invisible for the competitors and therefore difficult to copy. This is why managers consider business model innovation one of the best strategies to grow their business and gain a competitive advantage.
While there are several business model innovation examples, some companies have become famous for theirs. These companies are reconsidered leading pioneers as they developed new ways to conduct business in their respective industries, and some of them created whole new industries.
Below, we share some famous business model innovation examples the world has seen so far.
1. Xerox: Pay Per Copy
Xerox is a cosmopolitan company that sells digital and print document products and services. The famous business model innovation was introduced 60 years ago, precisely in 1959. It is one of the best business model innovation examples of how simple ideas in the revenue model can increase financial revenue.
The company first developed a copy machine, Model 914, based on a novel and superior technology compared to what existed at that time. The only issue was that the machine was more expensive, thus making it difficult to penetrate the market.
Rather than selling the copy machine, Xerox decided to lease the equipment at $95 per month and charge $0.04 per copy each month after the first 2,000. Xerox took the burden of servicing the machine and every other technical support issue, thus lowering the risk and burden of its customers.
The new pricing model offered by Xerox was attractive and favorable. As such, customers were soon making over 2,000 copies per day, and over the next 12 years, the company recorded a massive increase in revenue.
2. Dell: Made-to-Order
Dell is one of the famous technology companies with an interesting business model innovation example.
The company was founded by Michael Dell in 1984 and generated over $6 million in sales the next year and over $25 billion 15 years later. How did the company achieve this enviable milestone?
Dell first started as a provider of hard-drive upgrades. Years after its founding, the company changed its business model to offer personal computers and laptops directly to end-users without retail intermediaries. The purpose of this direct made-to-order model was to cut the cost associated with middlemen retailers.
This direct business model enabled Dell to sell customized personal computers and laptops at a low cost. Compared to its competitors, Dell was able to focus on configuring its distribution and supply chain to best match the market’s expectations without dealing with middlemen retailers. Moreover, Dell became closer to its customers and collected data to improve its products and services. All these innovations supported by smart technological solutions made Dell one of the biggest players in the PC industry.
3. Rolls-Royce: Power-by-the-Hour
Rolls-Royce was first founded in 1904 when Henry Royce and Charles Rolls established a collaboration to develop the best cars in the world. However, the world wars shifted their focus into manufacturing engines for aircraft. Their famous business innovation model was introduced in 1966.
The company was solely selling the ownership of its engines to aircraft manufacturers. Aircraft engines were purchased by airlines, who then paid Rolls Royce for maintenance and repairs of the engines. This was a risky venture for airlines, especially smaller ones since aircraft engine repair and maintenance could be extremely costly.
Instead of selling engines directly to aircraft manufacturers, Rolls Royce created a business model to deal directly with airlines. This model was more convenient for airlines since it reduced their risk.
In conclusion, business model innovation is a powerful yet underrated business growth strategy. With the right business model innovation strategy, your business can transform like day and night, leading to more revenue and massive growth.
If you’re not experiencing the business growth and results you think you should be commanding with your products and service, it’s time to try business model innovation.