Business model innovation is a fundamental restructuring of the beliefs that underlie existing ways that businesses create value.
In other words, business model innovation can be disruptive, toppling long-held beliefs about how customers get what they want.
Back in the era of VHS tapes, nobody even considered mailing people the videos they wanted to rent. Besides, every town had a Blockbuster Video. But then VHS gave way to DVDs, which were small enough that mailing people videos on demand was suddenly feasible.
Had Netflix’s beliefs in how video content was delivered stayed there, however, we wouldn’t have on-demand streaming right in our homes. Unlike many product or process innovations, business model innovation can upend old markets and create new ones.
Why Are Businesses Wary of Business Model Innovation?
Business model innovation can be a disturbing concept for existing, successful businesses to accept. They don’t want to cannibalize existing profit streams (which is why Kodak, whose own engineer invented digital photography, decided to stick with film instead), and sometimes beliefs about value creation are so entrenched that they can’t think of a way to innovate their business model. And what do they do when an outsider disrupts the business model, forcing them to play catch-up?
The good news is, unlike many product or service innovations, business model innovation can translate well from one industry to another. Subscriptions to paper-based publications might go away once media goes online, but what about subscriptions to physical products people consume regularly? Crowdsourcing can work well for huge social or scientific projects, so why not use it for more practical matters, like getting a ride across town (Uber) or having a place to stay on vacation (Airbnb)?
What Is the Process of Business Model Innovation?
McKinsey has broken down business model innovation into a five-step process that is useful in any industry:
- Articulate the dominant business model, as well as long-held supporting beliefs in your industry
- Dissect the most important long-held belief into its component supporting beliefs
- Turn one of those underlying beliefs on its head. Reframe it into a radical new hypothesis that no one is currently working on in the industry.
- Sanity test that reframed belief. It may simply not be doable. But if it is, you may be onto something.
- Translate the reframed belief into a new business model based on the logical implications of the reframed belief
Does it always work? No. But many businesses are too entrenched to even consider possibilities that might work, providing the perfect opening for an outsider to come in, dig up those entrenched beliefs, and disrupt the industry.
What Are Some Popular Approaches to Business Model Innovation?
Boston Consulting Group identifies four approaches to business model innovation, based on impetus and focus.
- Reinventors transform the core of their business while defending against industry decline or disruption. Businesses may do this in the face of a fundamental industry challenge like commoditization.
- Adapters expand into non-core competencies to defend against industry decline or disruption. They explore adjacent businesses or markets and may exit the core business altogether.
- Mavericks transform their core business in a bid for breakout growth. They employ their core advantage to revolutionize the industry and set new standards.
- Adventurers expand into non-core competencies in their aspiration for breakout growth. These companies place careful bets on novel applications of competitive advantage in new markets.
Business model innovation requires embracing change, and that can be a challenge for legacy businesses. Innovation management is the key to embracing change without promoting excess uncertainty. IdeaScale invites you to learn more about disruption and innovation — whatever your industry — by downloading our disruptive innovation infographic.