Business Model Innovation in Today’s Fast-Changing Business Ecosystem

Elif-Koru---Surfer

Elif Koru
Research Analyst, pmX
M Sc Project and Enterprise Management, University College London (UCL)

The environment in which businesses operate – social, technological, legal and many others – are being hit by the waves of change like never before. Some get buried under the waves, others try to keep up by paddling in wooden boats. Then there’s a third group: the surfers. These businesses harness change, rather than be battered by it. Below is a primer on how business model innovation can be a tool for survival when the waters get rough.

1. Value creation through Business Models

In the last two decades, we saw major disruptions in the business environment that changed the rules of competition. Improvements in technology, although not the sole change factor, seem to have led the way. The dot-com bubble at the turn of the century was only the beginning of a series of rapidly increasing technological advancements that were yet to come. These developments popularized a leveraging tool to cope with change: business model innovation.

The term may need some clarification: ‘business models’ outline the process through which a company captures and delivers value. While value was traditionally derived through supply driven logic, we can see in companies like Apple, Ryanair, or Netflix that new value propositions which provide more customer centric products and services have been on the rise in recent years as a source of competitive advantage. Anything from mobile transactions, to service customisations through big data, or the establishment of platforms to gain customer loyalty are all forms of business model innovation with varying value propositions made possible in recent years. As technology advances, the variety of value propositions that can be offered by companies expands. It is this variety that has enabled innovation in business models to be one of the most popular tools to create competitive advantage in many diverse industries.

2. Stages of a Business Model

Let’s first take a look at the cycle of a business model. Although companies constantly adjust their business models to their environment, there is often a lag between the pace of change and the speed of adjustment. As this gap increases over time, the company enters a misalignment stage in which small adjustments to a business model become unfeasible and large changes become necessary. The business model cycle of incremental innovation, misalignment and transformation or demise is illustrated below.

Business_model_cycles

3. Drafting a new Business Model

Once the misalignment stage is reached, how do you adjust the business model to build a competitive advantage in the midst of turbulence? The traditional process of revising a business model involves a fair amount of tacit knowledge of existing managers and depends on many external factors – such as competitors’ actions, political changes, or social patterns – that are all interdependent and difficult to predict. Thus, finding a rigorous method to draft and rate a successful business model design is challenging. Nevertheless, there are certain criteria that should be taken into account when developing and evaluating new ways of doing business in times of change:

Analyze both the environment and internal capabilities:

  • Value drivers of customers: What do customers really value and need? What does our current service offer?
  • Market conditions: How large is the market? What are alternative offerings? What direction is the industry evolving to?
  • Resources and competences: What is the current company structure, its resources and competences? What new resources are becoming available?

Evaluate new business model ideas:

Based on a sample study of 150 firms, Wharton Professor Raphael Amit and IESE Professor Christoph Zott[1] propose the elements below as key sources for value creation in business models:

  • Novelty: Is the business model innovative? Does it introduce a new product, new market, or a new method of production?
  • Lock-in: Does the business model make it difficult – by switching costs or other design elements – for users to change to other platforms? (Ex: Nespresso’s lock-in technique)
  • Complementarity: Does the combination of activities enhance value? (Ex: eBay acquiring PayPal to add value to its business model by enabling payments without credit cards)
  • Efficiency: Do the interconnections in activities lead to cost savings? (Ex: the use of cross-docking by Wal-Mart)

Although these guidelines will prove useful during the development of a new design, it is important to remember the dynamic nature of business models that requires them to continuously be fine-tuned to adjust to their environment. So, to enjoy a ride on the waves, keep a sharp eye on changes in your surroundings and don’t be afraid to let go of yesterday’s plans!

If your company is in the misalignment stage of this cycle, you can see how your project preparation and planning stacks up against industry competition by taking the pmX Transformational Change Self-Diagnostic test.

www.programexecution.com

[1] Amit, R., & Zott, C. (2012). Creating value through business model innovation. MIT sloan management review, 53(3), 41-50.