Every organization – whether for profit, government, or not-for-profit – needs a viable Business Model. This ensures relevance to the customer, and sustainability as an ongoing enterprise.
Today, it is often imperative to be capable of innovating Business Models – to change and reconfigure value chains. This post provides a framework – far beyond just a product and service innovation – for Business Model Innovation.
What Is a Business Model?
At its core, a business is about creating value.
Boston Consulting Group has identified six components that typically comprise a Business Model, depicted in the chart at right.
There are two sides to a Business Model that creates value – the Value Proposition and the Operating Model.
Value Proposition
- Target Segment(s) – What customers, and which specific needs, can we best serve? Whom do we choose not to serve?
- Product/Service Offering – What specific product or service solution do we offer to fill that need?
- Revenue Model – How do we generate revenue from our offer?
Operating Model
- Value Chain – What value chain activities do we offer in order to deliver enough to satisfy demand?
- Cost Model – How do we configure the organization – assets and costs – to deliver profitably?
- Organization – What kind of organizational configuration will help build and sustain competitive advantage?
For more perspective, see my prior post on strategic business models and project management.
What Is a Business Model Innovation Definition?
Business Model Innovation is parallel to the idea of product and service innovation, especially the process of lean innovation.
Business Model Innovation is more than a value proposition…and it has internal and external components. Let’s distill it down to three:
- Create – What can we offer to solve a problem? This presupposes a clear understanding of the problem, and intimate with evolving changes.
- Deliver – How can we efficiently execute on the solution to that problem? This entails bringing a strong operational solution to produce and deliver effectively.
- Capture – How can we capture value for our investment to solve the problem? The plan must include a way to extract value from the Create and Deliver activities to earn a return for owners and to plow back into further problem solving.
Business Model Innovation is the capability to reconfigure these three elements across the value chain to suit the situation.
I think the following are some key success factors of Business Model Innovation:
- Continuous – Innovation of Business Models is a continual, self-sustaining renewal process.
- Business Model Breadth – Does the organization serve customers with distinctly different needs. These needs might relate to the product or service, but the scope also includes operational aspects of building, delivering, and supporting. Multiple Business Models might be needed.
- Sustainability – Financial viability is required in order to sustain a Business Model. Innovating new Business Models requires strong fiscal underpinnings.
Business Model Innovation is a distinct capability that can be used for strategic advantage. It’s like the capability to innovate – but specifically related to innovating on the overall Business Model.
For more insight, I recommend the video, “Business Model Innovation Basics“, by the ‘Board of Innovation’.
The Process of Innovating Business Models
Boston Consulting Group has outlined four approaches to Business Model Innovation. Those approaches are represented by the four quadrants in the chart at right.
This is a useful Business Model Innovation framework.
Business Models are segmented based on two sets of choices.
- Impetus – Is the Business Model Innovation being driven by a desire to reduce Cost or to achieve Differentiation from competitors?
- Focus – Does the Business Model Innovation expand the scope of operations into Noncore segments? Or does it actually Transform the Core?
The choices will indicate which of the four approaches to Business Model Innovation tends to be dominant.
- Mavericks – Transform the Core to achieve Differentiation.
- Reinventors – Transform the Core in order to be a Cost Leader.
- Adventurers – Expand into Noncore segments to Differentiate.
- Adapters – Expand into Noncore segments to reduce Costs.
The importance here is in the structure. Since Innovating Business Models is a value-adding capability, it is worthwhile to formalize it. Structure provides the ability to grow and mature the capability.
Degrees of Maturity in Business Model Innovation
Business Model Innovation as a capability has some parallels to the Capability Maturity Model (CMMI), such as for project management. It is just more flexibly structured, and thus is more adaptable to change.
Think about Business Model Innovation as a capability to mature in a business. The ability to innovate on Business Model – and not just on products and services – is, by itself, a competitive advantage.
Business Model Framework (BMF) is explored in “Business model innovation: it’s not just about technology anymore“, by Henry Chesbrough, Executive Director, Center for Open Innovation, University of California, Berkeley. Chesbrough outlines six levels of maturity of the capability to Innovate on Business Model:
- Undifferentiated Business Model – This lowest level of maturity indicates that the organization will struggle to compete and make a profit.
- Some Business Model Differentiation – A small but definite improvement makes it possible for the organization to add and extract value.
- Segmented Business Model – Acknowledging the need for different Business Models for different segments represents a step up in maturity.
- Externally Aware Business Model – A company sees itself through a different lens and can expand capabilities geometrically through leveraging partners in new and innovative ways.
- Innovation Process Integrated With Business Model – Suppliers, partners, and other stakeholders expand their relationship from operational to also include Business Model Innovation.
- Business Model Highly Adaptable – With experimentation part of the organizational DNA, there is an ability to adapt the Business Model to the widest range of changing circumstances.
As an organization matures its capability to differentiate and adapt its business model, it increases the value it creates.
Risks of Business Model Innovation
Clearly, Business Model Innovation has its benefits. But what are the risks when a business tries to Innovate its Business Model?
Here is a set of risks, derived in a Boston Consulting Group article in Dec 2009 entitled, “Business Model Innovation: When the Game Gets Tough, Change the Game“.
- Lack of Portfolio Focus – Openness and adaptiveness overreaches, resulting in a lack of focus.
- Scaling Out of Sync – Innovation is not balanced across the spectrum of operations, which cannot support.
- Localize Pet Projects – Politics and personal agendas can creep in, resulting in poor prioritization of efforts.
- Stovepipe Efforts – Lack of coordination across the organization can lead to diseconomies.
- Stuck in the Idea Stage – Action and ideation can get out of balance.
- Focus Not External – An internal focus can lead to blind spots for the best opportunities.
- Eyes in the Rear View Mirror – Attachment to past ways of doing business can thwart innovation success.
There are many traps that can derail Business Model Innovation success. Implementing a disciplined plan with broad buy-in is the best antidote. Periodic audits for risks like the above can help identify early issues and set them straight.
Business Model Innovation and Project Management
Here are five areas where project managers in different settings can add value by thinking strategically with a perspective for Business Model Innovation.
- Identify the underlying Business Model(s) – In order to get to the purpose of the project, you need to understand the business drivers. The Business Model will usually point to the purpose of the project.
- Develop the appropriate success metrics – Success metrics will in large part be driven by Business Model considerations. A propensity to differentiation over cost is driven by the Business Model.
- Identify Business Model drivers in stakeholders – Often the driver behind stakeholder thinking is based o the business model. It can also be a source of conflict if business models are not in sync. The project manager needs to manage the conflict.
- Be aware of Business Model Innovation risks – The risks outlined above give an idea of the range of potential risks. These results from some malfunction in the process of Business Model Innovation and can derail projects.
- Build agility and flexibility into your projects – Be prepared for changes. This is especially true if the industry, market, and customer preferences are changing. Build the capability for morphing into a revised project plan, just as a company builds the ability to Innovate the Business Model.
Business Model Innovation is a key driver in today’s economy and is a useful strategic thinking concept.
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I recommend these PM templates and strategy resources (paid links):
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