Why Business Model Innovation is Disruptive?
Those who don’t bend, break. An adage that is more relevant today than ever. Change, innovation, agility, and flexibility: these attributes are essential for individuals, as well as for businesses to succeed. But how should a business change, and should it focus on developing innovative products or finding new markets? There isn’t a universal answer to that question, but what a company should focus on before anything else is business model innovation.
What is business model innovation? It’s any change in a business’s existing operation methods that helps it generate more revenue and capture a broader market. The beauty of it is that it rarely requires the development of new products and services, or penetrating a fresh market. Successful business model innovation grants an increase in revenue generation and future growth, using existing products, services, and markets.
Importance of Business Model Innovation
The market is changing more rapidly than ever before. Businesses that can’t keep up with the times don’t stay afloat for long. Innovation in products and finding new markets is important, but that’s a relatively long term game. The optimal strategy for businesses to stay up-to-date and profitable is business model innovation.
Innovating a business model involves working with what you have. It’s about efficiency, agility, fast-learning, and restructure. Embracing the right change at the right time is not just crucial for growth; it’s vital for survival. A great cautionary tale in this regard is Blockbusters, a VHS retail chain of more than 9000 stores that couldn’t change its business model fast enough to incorporate DVD. This was, however, something that the creators of Netflix capitalized on. And by the time Blockbuster caught up, Netflix had already moved to online streaming while Blockbuster closed shops in 2014 – all 9000 of them.
A market giant, with a massive presence and a vast consumer pool, lost to obscurity- just because they couldn’t remodel their business fast enough.
Success Stories of Innovative Business Models
Companies that understand the importance of business model innovation tend to stay ahead of the curve. Amazon and Rolls-Royce are two such businesses.
Amazon is undoubtedly one of the most innovative and change-embracing companies in the world. Their success is evident in the size of the market they have captured. But that doesn’t mean that their ride to success has been all smooth and swift.
Amazon Marketplace, which made up the bulk of Amazon’s sales in 2018 (about 68%), is an example of a successful business model innovation. In 1999, Amazon introduced ‘Amazon Auctions’ to compete with eBay as a new and better e-commerce platform. But it didn’t go as planned. eBay had the market’s trust, and despite being technically better, Amazon Auctions couldn’t capture the market it hoped to.
But instead of scraping the initiative, Amazon remodeled it as ‘Amazon zShops.’ It was integrated with Amazon’s website as a separate tab. Theoretically, it should have converted many of Amazon’s 12 million customers, but it didn’t.
Amazon’s last remodeling effort was Amazon Marketplace. Amazon merged the e-commerce platform with its website. So when a customer searched for a product, Amazon’s own products, as well as retailer’s products, were shown in the results. Customers had many more options to choose from, and Amazon cashed in a nice commission from each sale made through Amazon Marketplace.
This new model has been enormously successful, and Amazon Marketplace is now much bigger than Amazon itself. Using the same product, same customer base, and a different approach, Amazon created a revolutionary business model.
A lot of people know Rolls-Royce as a classy car company that produces luxury vehicles. But a significant portion of the Rolls-Royce’s business is its aero-engines. They make engines for commercial and fighter aircraft. Like the one-of-a-kind vertical propulsion system for fighter jets like F-35B Lightning II.
They introduced a unique business model: “power-by-the-hour.” Instead of selling their engines, they started “lending” them and charging the companies by the hours of flight. Rolls-Royce owns and maintains the engine itself.
This business model is based on performance-related remunerations, which focus on the hours of flight that can be achieved with that engine, operation, and maintenance cost. This model allows for steadier revenue streams and serious cost-cutting. It also helped the company penetrate the low-budget aircrafts market.
Using an existing product, and focusing on the same market, Rolls-Royce made an innovative business model. A model that practically transformed the way the company generated revenue.
The innovation of Your Business Model
Business innovation is a true safeguard against industry decline and disruptions. But innovating your business model isn’t as easy as making a few changes in company policies; it’s making decisions after thoroughly understanding the market and its patterns.
There are a number of systematic approaches and strategies for business model innovations. But there are hardly any one-size-fits-all methods. The reason is that each business is unique. Even the businesses that share a market can be very different in their goals, aims, resources, and market presence. There are a lot of variables to consider while innovating your business model. And preparing the right equation is your way to a successful new business model.
You can choose one of the four common approaches for your business model innovation: The reinventor, adapter, maverick, or adventurer approach. Each has its own merits and is suited for a range of businesses.
Leading Business Model Innovation
A key element in business innovation is uncertainty. When you innovate, you try new things, experiment with different methods, and inevitably make mistakes. This makes it a process riddled with uncertainty. When you lead your business towards remodeling and innovation, dealing with uncertainty will be your primary job.
The level of uncertainty depends upon your approach to innovation. When you are working with the existing market and existing products and services, you will be on the least risky and known grounds. When you experiment with new products and services or find a new market, to augment your innovation, uncertainty will grow. You will have to deal with unknowns like desirability, product feasibility, and growth prospects.
A lot of companies find their business model innovation too important a task to take on with just in-house resources. And it’s seen that outside resources and consultants with more exposure and an eye on the broader market bring more to the table. There is no confusion about the fact that a lean and agile business model is essential to survive the current market. If you think your business model is flexible and adaptable to deal with any significant changes in the market than you are on the right track. If not, then it might be high time for some serious business model innovation.
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