How to Create a Winning Business Model

Innovation is a critical source of competitive advantage and certainly deserves the attention it receives. But innovation is also difficult to manage and something many organizations struggle to repeat (if they were lucky enough to experience it once). Recognized innovators are widely admired for their achievements but as every business leader knows, the pursuit of innovation is exceptionally challenging even as it is entirely necessary.

The roots of the problem lie in the fact that innovation takes place at the crossroads of two critical uncertainties: uncertainty about the future, and uncertainty about what will be best for our organization.

Given these issues, executives face two key questions:

First, What innovations should our organization be pursuing?
And second, How should we create them?
We respond by noting that among the four types of innovation that any firm could pursue, business model innovation should be highly attractive and pursued aggressively. Why? Because these innovators are earning very attractive returns on capital, and finding new market opportunities that others have overlooked. But business model innovation is also widely misunderstood, and consequently few organizations are reaping the significant benefits that can come from doing it well.

Why is business model innovation important for every company? How can organizations develop breakthrough business models of their own?

Four Types of Innovation

Organizations typically must allocate their innovation investments among four types of innovation: incremental, breakthrough, new venture, and business model.

The purpose of incremental innovation is to maintain market share. This is a maintenance strategy and necessary for any organization to ‘stay in the game.’ But incremental innovation rarely confers much of an advantage and is not sufficient to support growth.
The search for breakthroughs offers a shot at stardom, but as they are quite rare, pursuing breakthroughs is recognized to be a high risk approach.
Successful new ventures can position a company for the very long term, but they are also high risk, capital intensive, and for good reasons they are rarely attempted.
In today’s business environment, this leaves the fourth option as the most attractive. Business model innovation can be the most cost-effective form of innovation, and for many companies it can also be the most promising route to success.
Recent research by IBM has shown that business model innovators are earning the most attractive returns on innovation investment, and also achieving the best rates of growth. In fact, if you look at the most successful and admired companies of the last twenty years, you see that most of them have focused on developing innovative business models. What company would not want to be included on this list of business model innovators: Amazon.com, Apple, Costco, FedEx, Google, Ikea, Southwest Airlines, Starbucks, Wal-Mart, and Zara are 10 of the world’s most successful companies, and business model innovation has been the key to the success of each one.

Defining Business Model Innovation

But what exactly is a business model?

At its simplest, a business model simply describes how a company makes money. It’s the products and services it offers, the way it delivers them, and through these elements it is the experiences that it creates for customers.

These innovators just find ways to create better experiences for their customers, and as a result of doing so the most successful among them earn profits that others did not recognize as even possible.

For example:

Google discovered how to sell words at auction, a new model that transformed the company into the world’s number one advertising agency, and soon thereafter into one of its most admired companies.

Amazon.com developed a new model for selling products online, has radically reshaped the book business, and is now working to extend its model into every market.

Apple found a tremendously successful way to sell songs through iTunes, permanently reshaping the music industry.

FedEx set up a system that delivers packages for ten to fifty times more than the Postal Service charges.

Southwest Airlines sells airplane tickets for less than its competitors, but it has nevertheless been the most consistently profitable US airline for two decades.

Wal-Mart, Costco, and Ikea, meanwhile, developed global manufacturing and supply chains that enable them to sell enormous quantities of products at prices once thought unattainably low, undercutting their competitors and redefining the very nature of retail.

To reiterate the point made above, the core of each success is that these companies found new ways to earn profits by providing their customers with new and better experiences. Further, the experiences provided by their innovative models have resulted in enduring relationships that transcended traditional boundaries between customers and companies, and as a result each transformed the industry in which it competes, permanently altering the competitive landscape while becoming a renowned leader.

If business model innovation is the goal, and for most companies the evidence strongly suggests that it should be, then we need a way to get there.

This process of developing a winning business model has 8 steps. These 8 steps enable executives to understand the key drivers of this type of innovation, and to apply them to develop business model innovations of their own.

The Business Model Universe
The External Drivers of Change
The Customer Experience Model
Core and Edge Markets Analysis
Market Leader Analysis
Competitor Analysis: Jobs to Do
Who Innovates?
Putting it All Together: The Complete Business Model Innovation Master Plan
Michael Kaufman is one of the four founders of the global innovation consulting firm – InnovationLabs. We are a full service innovation consulting firm offering a complete suite of innovation consulting services, innovation workshops, and innovation tools. For more information download a free copy of our book Permanent Innovation.

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