Innovate your business model
Business-model innovation is critical to success in today's increasingly complex and fast-changing environment. So, corporate leaders need to understand when to adapt the business model and how to execute the change.
IBM's Global CEO Study 2008 identified a set of characteristics that strong business-model innovators demonstrate consistently - a set of characteristics, which the IBM researchers call the “Three A's”. These are critical to the successful design and execution of business-model innovation.
Here, we answer two questions that can help companies develop their innovation strategy and transformation approach for the new economic environment:
- Under what conditions should companies adapt their business model?; and
- What capabilities and characteristics support the design and execution of successful business-model innovation?
The answers define an organization's strategic agenda for business-model innovation.
When to rethink the business model
Business model innovation can provide significant opportunities both during periods of rapid economic growth and at times of turmoil. What is critical is to select the right type of business model given the economic environment and emerging market opportunities, and to address the set of internal factors that influence the organization's ability to pursue the required change.
Revisit the enterprise model during economic turmoil. Enterprise model innovation often occurs during economic downturn as companies seek new ways to gain cost and flexibility advantages. By adopting new partnering models such as new service models or even outsourcing, organizations are able to more effectively scale down operations during a downturn, but also create the additional access to resources to quickly scale up as new opportunities arise.
Exploit ongoing industry transformation. Those companies that entered the downturn with significant financial means and leveraged their resources to drive industry-model innovation realized the strongest margin performance. During periods of extensive industry change, companies can choose to shake up their industries by harnessing disruptive technologies, going after new customer segments or dislodging competitors. Companies that don't respond quickly will likely become uncompetitive in short order.
Develop new value propositions and pricing models to fit customer preferences. Revenue-model innovation may not deliver an advantage that is as sustainable as industry- or enterprise-model innovation. But during times of economic turmoil, new customer preferences and spending patterns are a significant impetus to changing the pricing model and value proposition.
Internal factors drive business model innovation. Internally driven changes – such as product or service innovations – also create a need for a new business models.
To take this type of product to market, an organization has to address a number of key questions:
- How much does the new product or service change the business model in general and, in particular, the customer-value proposition?
- Does the existing pricing model need to be adjusted?
- What new technology, skills and resources need to be acquired?
- How will the overall operating model change?
Is it time to innovate your business model?
Every organization needs to review carefully whether the time is right to revisit its business model, either to pursue new opportunities in its industry or to respond to competitive or technology threats posed to its existing model. We have developed a structured set of questions to help organizations understand the conditions that determine when they should explore business-model innovation.
The “three A’s” of how to innovate your business model
Our research shows that new and innovative business models can succeed irrespective of a company's age, industry, or geography. And in addition to the 28 cases of successful innovators, we analysed select organizations that either tried to develop innovative business models and failed, or simply missed the window of opportunity. We identified a set of characteristics that strong business-model innovators demonstrate consistently.
These characteristics – the “Three As” – are critical to the successful design and execution of business-model innovation:
- Aligned – Leverage core capabilities and design consistency across all dimensions of the business model, both internally and externally, that build customer value.
- Analytical – Use information strategically to create foresight, and prioritize actions while measuring and tracking for rapid course correction.
- Adaptable – Link innovative leadership to enhance the ability to effect change and institutionalize operational flexibility.
Aligned: creating internal and external consistency
The set of internal factors that influence an organization's ability to shape business-model innovation have to be fully aligned. Internally, this requires organizations to start with the customer-value proposition and align the ways in which revenue is generated and value is delivered. Externally, organizations need to orchestrate customers, partners, and suppliers through open collaboration and partnership models. Finally, many successful business-model innovators leverage existing assets and capabilities in new and unique ways.
Align internally to provide customer value
Understanding how the elements of business-model innovation relate and how they create value are critical as an organization adapts or changes its business model. We especially saw the importance of alignment when comparing successful business-model innovations against those that failed.
Align externally with partners through “open” business models
External alignment with partners, suppliers, and customers is an important characteristic of an effective, collaborative business model. The Global CEO 2008 study found that seven out of 10 CEOs focus on collaboration and partnerships in their pursuit of business-model innovation. A number of open business models are largely built on broad collaboration and partnering. However, our research shows that virtually every successful business model demonstrates external alignment and the ability to work with a large number of collaboration partners.
Use existing assets and capabilities
Successful business-model innovation takes advantage of existing high-value assets and capabilities within the organization, such as unique skills, talent, processes, or technology.
“Successful business-model innovators can and are willing to pursue new opportunities and models while maintaining a ruthless focus on sustaining current business.”
Analytical: leveraging business intelligence for greater insight
Successful business-model innovators demonstrate a particularly acute understanding of their customers and the value that their company can deliver to a new segment, through a new delivery mechanism, or a new product or service. Increasingly, understanding customers, markets, channels and competitors is based on sophisticated analytics that provide better information needed to create advantage in new and unique ways.
Successful innovators use analytics to sift data from inside and outside the enterprise to:
- Create the strategic foresight needed to design the business models of the future.
- Understand their potential economic impact.
- Continuously measure and enhance performance.
Foresight is critical for organizations to understand new opportunities and the potential impact of new technologies, emerging customer segments, or a new set of product or service capabilities.
The ability to better understand potential future scenarios and how the organization can benefit through new models is now more important than ever as organizations have to operate – and make decisions – in a more complex and fast changing environment.
Financial business modelling
Financial business-modelling provides the ability to simulate the interaction (and therefore financial impact) among different kinds of external scenarios and internal changes based on the specific business-model innovation.
Well designed measurements provide timely insight about what is and is not working, better enabling an organization to adapt quickly to new and changing business realities. The ability to sense and respond to change – both internally and externally – is critical. Internally, this requires organizations to integrate fragmented data and perform faster, better extraction and analysis to support business decisions. Externally, it means that organizations have to be able to integrate data across a partners, suppliers, and customers to make quick business decisions.
Adaptable: building flexibility into the business model
Business-model adaptability is becoming more important for organizations that need to manage uncertainty in the current economic environment. Successful business-model innovators can mimic the speed, flexibility, and mindset of start-up companies, which describe some of the most radical business-model innovations, while exploiting the advantage of existing capabilities, resources, and assets. When reviewing both start-ups and established companies, we found that business-model adaptability was based on the effective combination of leadership and change capabilities throughout the organization, as well as an operating model that enables dynamic course correction and rapid execution.
Leadership and change
Successful business-model innovators can and are willing to pursue new opportunities and models while maintaining a ruthless focus on sustaining current business. Successful business-model innovators are able to explore, experiment, and pilot new models without putting the performance of existing models at risk.
For some new business models, this may require separate organizational structures. For others, it requires that existing models support and reinforce each other. Leaders will need to exhibit the following characteristics:
- Innovative leadership
- Effective decisions to enable breakthrough innovation
- Dynamic course correction
This requires flexibility to respond quickly to signals from the external environment, economic results, and partnership alignment. It involves constantly reviewing what is working and what is not, and adapting key aspects of the model accordingly, especially in fast-moving industries like the media industry.
Operating model flexibility
A flexible operating model entails four elements:
- Lean and transparent processes
- Flexible and scalable technology
- Globally optimized operations
- Asset and cost flexibility
In an increasingly complex and fast-changing business environment, organizations have to rethink and revisit their business model more frequently than in the past. They need to continually tweak and enhance their models, especially during periods of economic turmoil and increased industry transformation. But designing the right business model is only the first step. To increase execution success, organizations need to ensure their business models are aligned with customer value (and continually updated), are analytical (they gain insight from differentiated intelligence), and are adaptable (they are enabled by a flexible operating model).
This is a shortened version of “When and how to innovate your business model” which originally appeared in Strategy & Leadership, Volume 38, Number 4, 2010.
The authors are Edward Giesen, Eric Riddleberger, Richard Christner, and Ragna Bell.