Business model innovation is a wonderful thing. At its simplest, it demands neither new technologies nor the creation of brand-new markets: It’s about delivering existing products that are produced by existing technologies to existing markets. And because it often involves changes invisible to the outside world, it can bring advantages that are hard to copy.

The challenge is defining what business model innovation actually entails. Without a framework for identifying opportunities, it is hard to be systematic about the process, which explains why it is generally done on an ad hoc basis. As a result, many companies miss out on inexpensive ways to improve their profitability and productivity.

In the following pages we present a framework to help managers take business model innovation to the level of a reliable and improvable discipline. Drawing on the idea that any business model is essentially a set of key decisions that collectively determine how a business earns its revenue, incurs its costs, and manages its risks, we view innovations to the model as changes to those decisions: what your offerings will be, when decisions are made, who makes them, and why. Successful changes along these dimensions improve the company’s combination of revenue, costs, and risks.

The world’s biggest online shopping platform, Amazon, started off in 1995 with the identity of the “world’s biggest bookstore.” Today, Amazon leads the pack among online marketplaces, creates amazing television shows and movies while continuing to deliver groceries to your doorstep. So, what exactly supported the growth of Amazon to the trillion-dollar organization it is today? The only answer to this question points out the continuous efforts of Amazon to innovate its business model efficiently. 

Now, leaders all over the world are eager to discover more about business model innovation steps. Business model innovation is not a simple approach like making few tweaks in the business model to cope with new changes. The following discussion helps you find a detailed guide on how to develop business model innovation in your concerned sector. 

Many startups in the past developed solely on the foundation of the introduction of new technology. Such types of new ventures focused profoundly on offering solutions to problems that were beyond any solution previously. For example, the problem of creating and editing documents led to the introduction of word processing triggered by the easier availability of low-cost personal computers. However, startups in the present times focus more on business model innovation rather than relying on technology innovation. 

Various successful business model innovation examples provide the ideal foundation for new startups and existing enterprises to follow suit. The examples of business model innovation also offer insights on the best practices to follow for ensuring successful adaptability.

How Should You Approach Business Model Innovation?

Business model innovation points out the reconfiguration of a business as it continues delivering similar products to similar markets. However, business model innovation involves a different and unique approach for enhancing the value creation and competitive advantage of organizations. At the same time, business model innovation also brings promisingly supportive modifications in its operating model and the value it offers to customers. 

Furthermore, it is also essential to note that the modifications in business model innovation examples are generally invisible to competitors. Therefore, it is quite impossible to copy the approaches followed by organizations for innovation in their business models. So, you should look for some of the famous business model innovation case studies to identify how the organizations adapted their business models to changing circumstances. 

Importance of Business Model Innovation

Before diving into an outline of the different steps involved in business model innovation, let us understand business model innovation. It is a unique approach focused on the delivery of existing products manufactured through existing technologies to the existing target markets. Generally, business model innovation includes changes that are not visible to the external world and could introduce prolific advantages. 

However, the most prominent challenge emerges in context of defining the actual implications pertaining to business model innovation. The lack of a specific framework for identification of opportunities can create setbacks when you attempt to develop business model innovation.

Steps in Business Model Innovation

Managers need to discover business model innovation as a trustworthy and continuously improvable discipline. It is important to note that a business model basically involves a set of crucial decisions focused on collectively determining the ways in which businesses earn their revenue, incur costs, and manage their risks. Therefore, successful business model innovation paths would focus on changes to the decisions. The four distinct paths for business model innovation emphasize,

• Decisions on offerings of the business
• Time of making decisions
• Authorities for making the decisions
• Reasons for the decisions

The successful implementation of changes in these aspects could play a crucial role in enhancing the company’s bottom-line pertaining to risks, revenue, and costs. Let us dive into an in-depth explanation of the four distinct paths to develop business model innovation with productive results. 

Step 1: Decisions on Product or Service Offerings

One of the foremost aspects in answers for “How do you innovate a business model?” focuses on the product or services that you will offer in the new business model. Almost all types of businesses encounter the challenges of uncertainty in demand, which is also one of the major sources of risk. The most probable approach for reducing the risk of uncertainty points to modifications in your existing assortment of products and services. Businesses seeking innovation in their business model could follow three distinct alternatives for recalibration of their product or service mix.    

• Focus Narrowly

Focused business models are one of the promising options you can try out for defining the way you develop business model innovation in your product/service mix. With a focused business model, you need to look for specific target market segments with clearly outlined requirements. 

Therefore, if a business currently addresses the needs of multiple segments, it needs to divide the segments. Then, the organization could work on each segment as a focused unit for applying one model. However, the focused model restricts a business to a specific product/service or customer segment while omitting key customer requirements. 

• Product Commonalities

Commonalities aren’t just shared components among different products. They may also be the capabilities needed to serve various product, customer, and market segments. Consequently, companies can add to their mix products or services that reflect new applications of their capabilities. This allowed the company to cover the risk of failing to acquire enough share in any one of these categories with a potentially superior share in another.

Commonality can, however, carry significant costs if components must be engineered for a wide range of makes and models. What’s more, the strategy requires that the component-sharing products not all experience their demand highs and lows simultaneously.

In addition, companies could also add products or services which showcase how the business has implemented new capabilities. On the other hand, commonality could lead to high costs when components have to be tailored for a varying range of models and makes. 

• Create a Hedged Portfolio

Just as financial institutions try to create portfolios of investments that will hedge one another’s risks, companies can select an assortment of products or markets to reduce the overall riskiness of the business model. Chile’s LAN Airlines takes such an approach: Unlike most major U.S. carriers, which derive less than 5% of their revenue from cargo, LAN uses the same wide body planes, flying international routes, to transport both passengers and cargo.

The hedged portfolio approach is similar to the ones followed by financial organizations for creating investment portfolios with investments mutually hedging their risks.

Clearly, the approach works mainly for product and market combinations in which demand fluctuations are negatively correlated.

Step 2: Time of Making Decisions

Decisions must often be made before you have enough information to make them with confidence. We have identified three strategies that, depending on the circumstances, can improve a business model by changing the timing of decisions.

The strategies can help in enhancing business models by modifying the timing of decisions according to the circumstances. Let us take a look at how you can define the timing of a decision in an innovative business model. 

• Postponing the Decision

In many industries companies make firm decisions about prices well before they actually sell anything. This, of course, often exposes them to risk. It’s risky to price airplane seats early, for instance, because demand on any given route is highly contingent on economic and other conditions and can vary by the time of day, the day of the week, or the week of the month.

Why? The demand for any specific route depends considerably on economic factors and other aspects, which can differ according to time. 

The ability to price dynamically changed the airline industry forever. On any given flight, the price that passengers have actually paid to fly— even within the same seating class—can vary tremendously.

• Change the Order of  Your Decisions

Some companies don’t have the option of changing the time frame within which they operate, but they can shuffle the order in which decisions are made in order to delay investment commitments until pertinent information is known.

You must have noticed that product development generally starts with a proposal of a technology or solution for customer needs. Companies work on initial investments in the solution and return back to ground zero if the solution fails. The plausible strategy for business model innovation here would refer to the prioritization of performance over investments. 

• Split up the Significant Decisions

The concept of lean innovation has been one of the formidable aspects in defining new business model innovation paths. Lean innovation focuses on novel approaches for entrepreneurs responsible for making decisions regarding their business. The conventional approach for developing a new business venture was considered risky and focused on introducing a comprehensive business plan. At the same time, entrepreneurs would also have to work on all key decisions pertaining to the plan for ensuring its execution. 

With the lean-startup approach, you can divide the significant decisions. The new venture would begin with considerably inaccurate and restricted assumptions regarding the possibilities of an opportunity. Subsequently, the approach focuses on data collection alongside pivoting to ensure that the model reaches a final, verified version. On the other hand, the effectiveness of splitting up key decisions depends on identifying the decisions which you can split. 

Step 3: Authorities for Decision Making

The answers for “How do you innovate a business model?” also draw attention towards the selection of authorities for making decisions. Many businesses have discovered radical improvements in decision-making in their value chains by simply changing the people responsible for making decisions. If you want to innovate your business model, then you can use the following approaches to select authorities for decision making.

• Appoint a Better-informed Decision Makers

Allocation of decision rights to individuals or organizations with better knowledge and skills regarding the industry is beneficial. In addition, it is also important to note that the best-informed individuals are generally not found within the organization. External observers and, most recently, algorithms have been emerging as one of the prolific choices for making decisions. While you can notice prolific advantages in making decisions by leveraging better information, there are some hidden risks. You could encounter costs of empowering employees, customers, or suppliers alongside the collection of extensive data with more difficulties. 

• Select Decision Makers with the Best Possibility for Gains

In many business models, key decisions are made by those with less to gain than others in the chain. A company’s customers, for example, often feel that they gain less when they buy a company’s products than the company does.

Therefore, assigning decision-makers with the most to gain from the new business model could lead to better optimization. 

• Select Decision Makers Capable of Managing Consequences

The effectiveness of business model innovation steps in defining the authority for decision making could also improve by selecting decision-makers who can manage the consequences of change. If you shift the decision risk to parties capable of managing it effectively, then you have a productive strategy. However, it is also important to ensure that the incentives for the replacement decision-maker must align effectively with yours.    

Step 4: Reasons for Decisions

The final addition in business model innovation paths reflects on the possible reasons for which decision-makers take certain decisions. The collaboration of decision-makers for creating value should also involve a focus on how they work towards their private objectives. At the same time, the decision-makers must also safeguard the integrity of the value chain. Business model innovation, in most cases, focuses on the adjustment of motivations of decision-makers. You can follow three distinct alternatives for defining the motivation for decision-makers. 

• Integration of Incentives

Businesses looking to develop business model innovation without any trusted intermediary could work for the development of contractual agreements and management systems. These initiatives could direct independent agents towards maximizing a commonly agreed outcome. However, contractual arrangements could be highly complicated, thereby leading to better prospects for simpler integration of operations. 

On the contrary, it is difficult to achieve complete integration with many organizations refraining from directly working on activities beyond their core competencies. Businesses could leverage the integration framework to ensure that the innovation processes are transparent and systematic.

Achieving full integration is not trivial; many organizations rightly hesitate to take on directly performing activities that are outside their core competencies. Thus we tend to regard it as a last resort, to be applied only when other approaches won’t suffice. Using a framework like ours, any experienced manager can find ways to create a better business model. Companies can also use the framework to make their innovation processes more systematic and open, with business model reinvention becoming a continual, inclusive process rather than a series of isolated, internally focused events. When they do, they find that the resulting capabilities offer a sustainable competitive advantage.

• Modification of Revenue Stream

Traditionally, when the U.S. Department of Defense bought aircraft, it would agree to a time-and-materials contract, under which suppliers charged for labor and materials consumed (on a cost-plus basis) in the course of each maintenance event—just as a mechanic does for car repairs. Unfortunately, this model doesn’t provide suppliers with customer-friendly incentives; from their point of view, the more problems the client has, the better. It has been estimated that for every dollar the government spent to buy a new airplane, it spent seven more over the plane’s life.

Until, that is, the DoD gave suppliers a reason to care about engine reliability. In 2003, facing pressure to cut costs and improve performance, the department adopted what’s called performance based contracting, which changed the revenue model for contractors. They would be paid for the amount of time the aircraft was actually in service, with the DoD specifying, for example, 95% availability as its threshold. As a result, the longer a jet performed without needing to be taken out of service for maintenance or repair, the more the contractor earned.

• Synchronization of Time Horizons

Traditionally, sourcing relied on competitive-bidding rituals that ensured low prices and moderate but acceptable quality. The chosen provider won the business for a relatively short period of time, after which the bidding process was repeated.

But as overseas sourcing increased, this model developed flaws. Faraway suppliers cut corners on quality control and materials reliability. Worse, revelations of abusive labor practices, product diversion, and the counterfeiting of goods emerged. And because most sourcing transactions were one-off deals, shoddy providers faced few consequences—until, of course, multinationals felt the corrosive impact of repeated performance problems on their brands.

This is where you need to develop business model innovation by blending the confidence with long-term relationships alongside flexibility available with competitive sourcing. For example, you can work on selection, verification, and approval for suppliers alongside the allocation of business operations among manufacturing clients. In addition, you should also work on managing the relationship of each client with each supplier. Suppliers must get incentives for investing in materials, facilities, and people. 

Conclusion

Business model innovation helps a business adapt effectively to new changes in customer expectations and demands. With many notable examples of companies working through the business model innovation paths effectively, you could also do it. However, it is important to identify the suitable strategies within each path for business model innovation. 

The shift in the business model requires changes in decisions on how businesses capture and create value. If you can define the decisions for changing products or services or the authorities for decision making, you are starting off in the right direction. Business model innovation also emphasizes the timing of decisions and motivations of the selected decision-makers. Leave your business model innovation to VIM IEMC and discover new avenues for competitive advantage right now!  HERE, SECONEDS MAKE THE DECISION!