Navigating the World of Business Model Innovation: A Guide to Staying Ahead of the Competition
Understanding the different types of business model innovation, the steps for implementing it, and the challenges to consider
Business model innovation refers to the process of creating new ways to generate revenue, deliver value to customers, and operate a business. It is becoming increasingly important for companies to innovate their business models as the pace of technological change and disruption continues to accelerate. Companies that are able to successfully innovate their business models are able to stay ahead of the competition and create new sources of revenue.
At Berylls Digital Ventures we build startups for ourselves and for our clients. Defining the right business model is a pivotal step in our innovation process during the validation phase. The last 15 years of radical digital transformation have shown, that there are a plethora of business models to choose from. In this article we want to introduce you to some of the most relevant business models for innovation.
Types of Business Model Innovation
There are several types of business model innovation that companies can pursue. Business model innovation can be classified into 5 main types:
- Value Proposition Innovation
- Economic Model Innovation
- Delivery Model Innovation
- Production Model Innovation
- Assets and Capabilities Innovation.
Each type of innovation addresses a different aspect of the business, and therefore companies can choose or combine the ones that better adapt to their particular needs and goals.
1. Value Proposition Innovation
Value proposition innovation is where the company changes the way it delivers value to customers. This can include offering new products or services, or changing the way existing products or services are delivered.
One example of value proposition innovation is “Servitization” — the shift from offering a product to offering a bundled service package with it. For instance, a car manufacturer might offer a service package that includes maintenance, roadside assistance, and a concierge service.
Another example is the no-frills product, which involves removing features with low value in order to create a lower cost model. An example of a no-frills product is the budget airline industry, where companies like Ryanair and easyJet have removed amenities such as in-flight meals and entertainment systems to focus on providing a basic flying experience, thus lowering costs and ticket prices. This business model innovation has disrupted the traditional airline industry and made air travel more affordable.
Another example is tailoring and customization which is a powerful tool that leverages the ubiquity of internet access and data to personalize the user experience. A perfect example of this is Netflix, which uses data on viewing habits and preferences to recommend content that aligns with each individual’s tastes. Similarly, Zara, the fashion retailer, uses data on customer preferences and trends to quickly design and produce new clothing styles. This allows them to constantly update their inventory and tailor their offerings to the latest fashion trends, making sure their customers are always satisfied.
2. Economic Model Innovation
Economic model innovation involves changing the way a company generates revenue. This can include new pricing strategies, or creating new revenue streams.
An example of economic model innovation is the flexible consumption model, which creates lower entry barriers by facilitating one-time or low frequent usage on demand. This approach allows customers to use a product or service only when they need it, rather than committing to long-term usage or ownership. An example of this are car-sharing or car-subscription services that allow customers to rent a car for a short period of time, rather than committing to long-term ownership.
A “razor and blades” model, which is when two previously separated products are fused into one, creating a stickier value proposition. Companies such as Nespresso and Gillette have successfully implemented this model by selling the razors or machines at a low price and making profit on the blades or capsules.
Another example is the exchange model, where a company creates a marketplace for the buying and selling of goods or services without being the owner of them. Companies like Amazon and eBay have successfully implemented this model by providing a platform for individuals and businesses to sell their products or services.
3. Delivery Model Innovation
Delivery model innovation involves changing the way a company delivers its products or services to customers.
An example of this is the “go direct” model, where a company bypasses a B2B2C model of resale by setting up a front-line B2C sales channel. Companies like Tesla have successfully implemented this model by setting up their own physical stores and selling directly to customers rather than through third-party dealers.
Another example is changing the interaction model, which eliminates a step in the value chain by either letting the end customer take it on or productizing a high-value service. Companies such as IKEA and Warby Parker have successfully implemented this model by allowing customers to take on certain aspects of the value chain, such as assembly for IKEA or allowing customers to order multiple frames and try them on at home for Warby Parker.
4. Production Model Innovation
Production model innovation involves changing the way a company produces its products or services.
An example of this is the aggregation platform model, where a company becomes the go-to marketplace for a certain type of product or service category. Companies such as Airbnb and Uber have successfully implemented this model by providing a platform for individuals to list their properties or cars for short-term rental.
Another example is the co-creation platform which allows for an open-access community of content creators to collaborate and create new products. This approach has been successfully implemented by companies such as Android and Github. These companies provide a platform for developers to come together and work on new software projects, which allows for a more collaborative and efficient development process. The co-creation platform model is beneficial for both the company and the content creators as it allows for a more creative and productive environment. It also allows the company to tap into the collective knowledge and expertise of a large community of developers, which can lead to the development of more innovative and useful products.
A final example is the radical efficiency model which aims to achieve low-price offerings by eliminating waste and redundancy in the value chain. One notable example of a company that has successfully implemented this model is Aldi. The retailer keeps costs low by providing a no-frills in-store experience, offering a smaller variety of products, and stocking low-cost own-brand items. This approach allows Aldi to reduce costs and pass on the savings to customers in the form of lower prices. Another example of a company that has successfully implemented the radical efficiency model is Amazon. The company has been able to achieve a lower cost structure through its use of technology and automation, which allows them to reduce labor costs and streamline their supply chain.
5. Assets and Capabilities Innovation
Assets and capabilities innovation involves leveraging a company’s existing assets to create new opportunities for growth.
One example of this is opening up captive assets, which involves using the infrastructure that a company uses most to provide a service to its clients. A perfect example of this is Amazon Web Services (AWS), which leverages its vast network of servers and data centers to provide cloud computing services to other businesses. This allows Amazon to generate additional revenue streams by renting out its excess capacity to other companies.
Another example of assets and capabilities innovation is extending the brand, which involves leveraging a company’s loyal followers to create branded experiences or product derivatives outside the traditional core target market/sector. Companies like Lego and Virgin have successfully implemented this strategy by extending their brand to new product lines and experiences. For example, Lego has created Lego theme parks and Virgin has expanded into the hotel industry. This approach allows these companies to diversify their revenue streams and appeal to new customers, while still leveraging their existing brand recognition and loyalty.
Steps for Implementing Business Model Innovation
Implementing business model innovation can be a complex process, but there are several steps that companies can take to make it more manageable.
The first step is to identify potential areas for innovation. This involves looking at current trends and identifying areas where the company can create new value for customers or generate new revenue streams.
The next step is to conduct market research and gather customer feedback. This involves gathering data on customer needs and preferences, as well as understanding how customers currently interact with the company’s products or services.
Once potential areas for innovation have been identified, the next step is to prototype and test new business models. This can involve creating mockups or prototypes of new products or services, or experimenting with different pricing or distribution strategies. The key is to test the new business models with a small group of customers to gather feedback and iterate on the model before fully implementing it.
The final step is to implement and scale successful models. This involves rolling out the new business model across the company and making any necessary changes based on feedback from customers. It also involves making sure that the new business model is aligned with the company’s overall strategy and goals.
Challenges and Considerations
Implementing business model innovation can be challenging for companies for several reasons. One of the main challenges is resistance to change within the company. This can be due to a lack of understanding of the need for innovation, or a fear of disrupting existing business processes. To overcome this, companies need to clearly communicate the need for innovation and involve employees in the process.
Another challenge is aligning the new business model with the company’s overall strategy and goals. This can be difficult because the new business model may require a significant shift in the way the company operates. To overcome this, companies need to make sure that the new business model is aligned with the company’s overall strategy and goals and that it is supported by the right resources and capabilities.
Finally, managing the financial risks associated with innovation can also be challenging. This can include investing in new technology or hiring new staff, which can be costly. To mitigate these risks, companies need to carefully plan and budget for the implementation of new business models.
Conclusion
In conclusion, business model innovation is becoming increasingly important for companies as the pace of technological change and disruption continues to accelerate. Companies that are able to successfully innovate their business models are able to stay ahead of the competition and create new sources of revenue. There are several types of business model innovation that companies can pursue, including value proposition innovation, economic model innovation, delivery model innovation, production model innovation, and assets and capabilities innovation. Implementing business model innovation can be challenging, but by following a structured process and involving employees, companies can successfully innovate their business models.
