Innovate your business model

Leaders frequently define their business in terms of the products and services they deliver and so focus on these for innovation. However, with technological advances and globalisation presenting so many new opportunities - and threats - leaders are now looking to gain a competitive advantage through innovative business models. Business model innovations have the power to transform businesses and reshape entire industries.

Business model innovation is about being different, really different. You can be different in ANY industry.

Business model case study - Apple

When Apple introduced the iPod with the iTunes store it revolutionised portable entertainment, creating a new market and transforming the company.

Apple was not the first company to bring digital music players to market; there were two other players in 1998 and in 2000. Both products worked well, were portable and stylish. The key difference was that Apple did something far smarter than take a good technology and wrap it in a snazzy design. It took a good technology and created a new business model.

This innovative business model combined hardware, software and service, and made downloading digital music easy and convenient. Apple essentially ‘gave away’ the low-margin iTunes music to lock in the purchase of the high-margin iPod. This model defined value in a new way and provided industry-changing convenience to the customer (Johnson et al. 2008).

Business model elements

The business model is the way(s) that businesses make money out of their ideas, resources and technologies. Every business has a business model, whether it is documented or not. Osterwalder and Pigneur in their book Business Model Generation discuss 9 key elements of a business model. They are:

  1. Customer segments - defines the different groups or organisations a business aims to reach and serve.
  2. Value proposition - describes the bundle of products and services that create value for a specific customer segment.
  3. Channels - describe how a business communicates with and reaches its customer segments to deliver a value proposition.
  4. Customer relationships - describes the types of relationships a business establishes with specific customer segments.
  5. Revenue streams - represents the cash a business generates from a customer segment.
  6. Key resources - describes the most important assets required to make a business model work.
  7. Key activities - describes the most important things a business must do to make its business model work.
  8. Key partnerships - describes the network of suppliers and partners that make the business model work.
  9. Cost structure - describes all costs incurred to operate a business model.

Business model tool

Osterwalder and Pigneur have developed a tool that incorporates the 9 elements of a business model. The Business Model Canvas tool allows people to paint a picture of new or existing business models.

To determine whether you should change your business model consider:

  • What makes your existing business model successful? For example, what customer problem does it solve? How does it make money for you?
  • Are there signals that your model needs changing, such as tough new competitors?
  • Is reinventing your business model worth the effort? Will it result in a significant competitive advantage for your business?

There are significant opportunities to transform your business through moving to an open business model, through new revenue streams and a reduction in costs. The most common business model innovations include (Ball 2006):

  • organisation structure changes
  • major strategic partnerships
  • shared services
  • alternative financing/investment vehicles
  • divestitures/spin-offs
  • use of third-party operating utility.

References

Ball, I, 2006, 'Expanding the innovation horizon: the IBM global CEO study 2006 [Paper presented at CEO Industry Forum 2006: Sustaining and growing market share: customers and community.]'. InFinsia 120 (3): 43.

Johnson, MW, Christensen, CM and Kagermann, H, 2008, 'Reinventing your business model'. Harvard Business Review 86 (12).

Osterwalder, A, Pigneur, Y and Clark, T, 2010, Business model generation: a handbook for visionaries, game changers, and challengers. Wiley, Hoboken, NJ.