Abstract: Typically, innovation is seen more as an offering in the form of a new product/ service, whereas a Business Model Innovation (BMI) deals with an innovation that provides companies with an advantage to not only compete on the value proposition of its offerings, but also aligns its formula for profits, resources and processes which would be helpful in enhancing the value proposition, capturing of newer market and alienating competitors. The article focuses on BMI as how it can be of help to managers while resolving the trade-off between costs of innovation and benefits by addressing the way they do business.
A company’s business model can be defined as a system of interconnected and interdependent activities that determines the way the company “does business” with its customers, partners and vendors. Alternatively, a business model is an activity system (an array of specific activities) which is based on satisfying the perceived needs of the market, along with the specification about which parties (its partners or a company) will perform what activities, and the linkage between these activities is also defined i.e. how these activities are linked to each other.
Substantial efforts are being made by companies in the field of innovation of their processes and products in order to achieve higher revenue growth and also improve or maintain profit margins. But it has also been observed that innovations are often time-consuming and expensive and requires a considerable amount of investment upfront in everything from research and development to new plants and equipment, specialized resources and sometimes even entire new business units. But future returns on these investments are not always predictable and certain. A large number of companies that hesitate to make such big bets are now turning toward business model innovation as an alternative or complement to product or process innovation.
For a large number of organizations much of the innovations and cost savings that could be achieved in the operation areas have already been achieved. So their greatest focus now is on business model innovation from where they can achieve a competitive advantage over their competitors. In today’s competitive world, it is not enough for companies to make a difference only in terms of product quality or delivery readiness or production scale but it is equally important to innovate in areas where companies competitors does not act.
Competitive pressures have pushed business model innovation much higher than expected by the companies. Organizations today favor new business models over new products and services as a source of future competitive advantage. In the near future not only what organization does will be important but also how organizations does its business will be equally or even more important.
It has been observed that business model choices within organizations often go unchallenged for a long time. So, it is important for an organization to make innovations in their Business Model, as it could be seen that business world is so fast changing that an organization is just one innovation away from getting wiped out by a new competing innovation that eliminates the need for its product. However, a good product that is embedded in an innovative business model is less easily shunted aside from the market. For Example: Suppose tomorrow someone comes up with a better MP3 player than Apple’s, but only few of the hundreds of millions of consumers with iPods and iTunes accounts will be open to switching brands. Thus, Business model innovation can be helpful to companies for staying ahead in the product innovation game.
An innovation in Business Models consists of addition of new activities, linkage of activities in novel ways or changing the parties that perform activities. There are several reasons due to which Business model innovation matters to entrepreneurs, academic researchers and managers. Firstly, it represents an often underutilized source of future value. Secondly, it will be difficult for competitors to imitate or replicate an entire novel activity system than a single novel process or product. Lastly, as business model innovation can be such a potential powerful competitive tool, managers can get accustomed to the possibility of competitors’ efforts in this area.
Organizations do not need to renounce innovation, even under conditions of resource scarcity, as a way of enhancing their performance prospects. Instead management in organizations should consider the opportunities offered by business model innovation to complement, if not substitute for an innovation in products or processes. An organization can resolve the apparent trade-off between innovation costs and benefits by the use of Business model innovation which can address how organization do business and how various activities are linked to each other for an organization.
For the purpose of illustration of the power of business model innovation, consider two cases: Apple and HTC. Firstly Apple, for most of its history – Apple was focused on the production of innovative software and hardware, mostly personal computers but by creating the iPod and the associated iTunes, a legal online music download service, thus Apple introduced a radical innovation of its business model. Apple became the first computer company to include music distribution as an activity and linked it to the development of the iPod software and hardware. With the addition of this new activity to its business model that links end users with the music label owners, Apple brought a revolution in music distribution. Instead of growing by simply introducing innovative new hardware in the market, the company transformed its business model to encompass an ongoing relationship with its customers. This enabled Apple and its partners in the business model, to extract ongoing value from the use of the Apple software and hardware. Through these transformations, Apple expanded the locus of its innovation from the product space to the business model — and its stock price change, profits and revenues change have reflected that successful business model innovation.
Now consider HTC, which has been a very profitable, innovative and growing original equipment manufacturer since its founding in 1997. Initially, HTC used to manufacture handsets for Microsoft-powered mobile phones for companies such as Palm, HP and T-Mobile thus being a contract OEM for these companies.
In 2006, HTC changed its product-market strategy from being a contract Original Equipment Manufacturer to selling its own HTC-branded smart phones to wireless network operators and the general public through various distribution channels. HTC has excelled in many ways, like recording many firsts in the smart phone product market space and winning numerous awards for its numerous technological innovations. Yet HTC’s business model locus has remained centered on hardware design and product innovation and not expanded. Thus, HTC business model allows it to benefit only from the sale of its state-of-the-art, innovative smart phones and tablets, but not from their use. HTC has not been involved in the creation or delivery of mobile content or services, in contrast to Apple, and its devices function on third-party operating systems such as Google’s, thus HTC focuses on generating revenues only from the hardware sales and not properly develop its business model for generation of greater revenues or profits. Considering Apple on other hand, which also benefits from economies of scope due to the interoperability of its software base (like iOS, iTunes, App Store, iCloud) for its various products including its computers (iMacs), tablets (iPads), phones (iPhones) and MP3 players (iPods). In addition to this, Apple also benefits from direct ownership of its distribution channels like brick-and-mortar Apple retail stores and online App Store. Further, it can also be noticed that Apple’s business model has enabled it to derive revenue from App Store sales of third-party applications, from AT&T for the use of its iPhone devices for data and voice and from iTune songs. On comparing the performance of HTC and Apple stock in the past five years, one can notice the fact that in this fast-moving technology market space- product innovation without business model innovation may not always be enough to provide competitive advantage. Such performance can be hard for even some otherwise high-performing companies to match if they rely solely on product innovation.
An innovative Business Model can help a company to either create a new market or help it to create and exploit new opportunities in existing markets. For example: Dell replaced the traditional build-to-stock model of selling computers through retail stores by implementing a build-to-order, customer-driven business model.
However, changes to a business model design can be subtle even when they might not have the potential to disrupt an industry but then to they can still yield important benefits to the innovator. For Example: Consider Taco Bell (the restaurant chain offering Mexican-style fast food) in the late 1980s it decided to turn the restaurant’s kitchens into heating and assembly units. Most of the activities such as chopping, cooking and clean-up were transferred to corporate headquarters of the organization. Precooked food was sent in plastic bags from headquarters to restaurants, where food was later heated and served. Although, when taking into consideration the fast food industry this incremental business model innovation was not game-changer, but it helped Taco Bell to realize economies of scale and improvements in efficiency and quality control, as well as it allowed Taco Bell to increase space for customers within the restaurants.
Although the concepts of business and revenue model are distinct, they may be quite closely related and even inextricably intertwined to each other. Consider the example of: The “razor and blade” model of Gillette i.e. in the product world, Gillette uses its pricing strategy of selling inexpensive razors to make customers buy its more expensive blades.
A business model lays the foundations for a company’s value capture along with the company’s products and services by co-defining the total value that is created, which can be considered as an upper limit to the company’s value capture. A fresh business model can create and exploit opportunities for new revenue and profit streams in ways that counteract an aging model that has tied a company into a cycle of pressures on profit margins and declining revenues.
A company is a mere participant in a bewildering array of networks and passive entanglements without a proper business model perspective. The business model perspective, if adopted can be helpful to executives to purposefully structure the activity systems of their companies. A key task for managers and entrepreneurs is the purposeful designing and structuring of business model which can prove to be an important source of innovation, which can be helpful for the company in looking beyond its traditional sets of partners, competitors and customers. Perhaps, when considering innovation this approach encourages systemic and holistic thinking, instead of isolated and individual choices. In the end, the message intended to be delivered for future managers and leaders is that-
“When you innovate, look at the forest and not the trees — and get the overall design of your activity system right before optimizing the details.”
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