Business Model Innovation Basics Series - Part 2: Why Business Model Innovation Matters

July 28, 2022 Michael Gnos

Learnings from sports competitions

Competition in business is similar to sports competitions – there are winners and losers. But what is the “secret sauce” of winning athletes and companies? Is it just pure talent, work ethic, sponsoring, vision and training?

This for sure plays an important role but should be mandatory for professionals and probably aren’t major differentiators at the top. Let’s take a look at how the British cycling team went from zero Tour de France victories and ninety-five years without any Olympic medal by 2003 to sixty-six Olympic or Paralympic gold medals and five Tour de France victories between 2007 and 2017 (Clear, 2018).

An uncontested crucial impact had the new philosophy and approach of the new coach, Dave Brailsford. His approach which he called the “aggregation of marginal gains,” was to look for minor improvements in every dimension of the sport – eventually, together these marginal gains compound into an overwhelming improvement and success. His continuous improvements were mainly creative re-combinations of previously existing concepts far away from cycling sport. They tested different fabrics of their racing suits in wind tunnels, painted the interior of the trucks white to better identify equipment harmful particles and much more (Clear, 2018).

Let’s transfer these findings into the business world, what are our takeaways? Even in unfavorable situations overwhelming success and sustainable competitive advantage can be created by many small improvements, innovations and changes of the holistic approach with which a company aspires to reach its vision. The holistic approach of how a company is implementing a strategy and works its way towards its vision is described by the logic of all dimensions of its business model – the WHO, WHAT, HOW and VALUE.

You don’t need to “reinvent the wheel” for small but innovative changes in your business model, instead get inspired by existing concepts in other industries and apply them to your business model. Together the changes in different dimensions of a company’s business model can add up to massive improvements. However, a business model shouldn’t be innovated or improved ad-hoc in a “one-and-done” fashion – instead due to its importance and the dynamic changing market conditions it should be updated and checked continuously on a regular basis. This can be summarized with these three conclusions:

Competitive advantage and success is largely created by the holistic approach of how a company is implementing a strategy – that’s the company’s business model
Get inspired by existing concepts in other industries and apply them to your business model
Continuously look for improvements of the existing business model

Therefore, it is not a coincidence that many of the major success stories in recent years – such as Nestlé's Nespresso, Rolls Royce's aircraft turbine business, Apple's iTunes, or Amazon's online bookstore, were based on successful business model innovations.

It also explains why prominent firms, which have been known for their innovative products for years, suddenly lose their competitive advantage? Strong players such as AEG, Grundig, Nixdorf Computers, Triumph, Brockhaus, Agfa, Kodak, Quelle, and Schlecker are vanishing from the business landscape one after the other. They have lost their capabilities of marketing their former innovative strengths and have failed to adapt their business models to the changing environment.

Business Model Innovation is a core prerequisite of competitive advantage

Nowadays, the ability to develop innovative business models is a core prerequisite for sustainable competitiveness and long-term growth of companies (Casdesus-Masanell & Ricart, 2011; Gassmann et al, 2020). Competitive advantage is increasingly generated by the business model of companies, the exclusive focus on product- and process innovations is no longer sufficient – this is especially true for matured market.

This figure shows how competitive advantage is generated over a market lifecycle. In the early stages the main differentiators among companies are the quality and features of products. As the market matures the products and qualities of the market participants align and commoditize.

At this stage competitive advantage is mainly generated by efficient processes and process innovations. However, also a lead in process efficiency can be caught up and vanish with time. Hence, in matured markets competition increasingly takes place between the business models of companies. Successful business model innovations can generate more sustainable competitive advantages and represent a major differentiator.

This is demonstrated by the various success stories in the B2C and B2B market (beyond the above mentioned success stories click here to view more case studies about successful business model innovations). In addition to sustainable competitiveness, business model innovations offer high growth opportunities. According to a study conducted by the Boston Consulting Group, business model innovations were approximately six percent more profitable than pure product and process innovations over a five-year period (Gassmann et al, 2020).

“Expiration Date” of Business Models

However, just like any other product- or process innovation also all business models have a certain lifespan (Osterwalder et al., 2011). But when is the expiration date reached? The spectrum of triggers for changes in the current business model is broad.

The main reason is the constantly changing ecosystem conditions – companies need to respond to the dynamics and uncertainties created by new technologies, fierce competition, increasing inter-industry competition, shorter product lifecycles, commoditization, and regulatory changes (Cliffe, 2011; Gassmann et al, 2020).

Thus it may be that a company is forced to act reactively or wants to act proactively to the major changes in the ecosystem by adapting its business model. Furthermore, companies can find themselves in limited growth areas due to market saturation and are therefore forced to leave their core business with a new business model. An indicator of the need for a fundamental change of the current business model is that incremental innovations of the existing offering show even smaller improvements.

Another frequent sign is that the number of ideas for further improvements is decreasing, and existing customers are increasingly turning to alternative products (Ovans, 2015).

Why Business Model Innovations can fail

What distinguishes a successful business model innovation from a worse or even failed business model innovation? In practice, the majority of business model innovations fail (Christensen et al., 2016). A crucial reason for this sobering finding is that many attempts happen ad-hoc and by chance – without a systematic well-founded approach. According to Magretta and Casadesus-Masanell, another important reason why business model innovations fail is that the terms “business model” and “strategy” are misunderstood as synonyms. A business model refers exclusively to the inner logic of a company - how it works, creates benefit and generates revenue from it. In opposition a strategy is a plan to achieve a unique, differentiated positioning over the competition. The strategy of an organization therefore helps for orientation and the creation of a business model.

Furthermore, business models are often innovated in silos. The inclusion of the external consistency, interaction and competitiveness compared to established business models of other market participants is essential to assess the actual benefit and feasibility of the innovated business model (Casadesus-Masanell & Ricart, 2011).

Therefore, we believe successful business models are created systematically – our Business Model Navigator is one method to analytically build and re-work corporate business models. Together with the Business Model Innovation Pattern Cards it is a powerful approach for executives and strategic innovators. Take a look at our resources section for more information or get in touch with us!

References:

Casadesus-Masanell, R., & Ricart, J. E. (2011). How to design a winning business model. Harvard Business Review. https://hbr.org/2011/01/how-to-design-a-winning-business model

Clear, J. (2018). Atomic habits: An easy and proven way to build good habits and break bad ones. Random House Business Books.

Christensen, C. M., Bartman, T., & van Bever, D. (2016). The hard truth about business model innovation. MIT Sloan Management Review. https://sloanreview.mit.edu/article/the-hard-truth-about-business-model-innovation/

Cliffe, S. (2011). When your business model is in trouble. Harvard Business Review. https://hbr.org/2011/01/when-your-business-model-is-in-trouble

Gassmann, O., Frankenberger, K., & Choudury, M. (2020). Geschäftsmodelle entwickeln: 55 Innovative Konzepte mit dem St. Galler Business Model Navigator. Carl Hanser Verlag GmbH & Co. KG

Magretta, J. (2002). Why business models matter. Harvard Business Review, 80(5), 86–92, 133. https://hbr.org/2002/05/why-business-models-matter

Osterwalder, A., & Pigneur, Y. (2010). Business model generation: A handbook for visionaries, game changers, and challengers. John Wiley & Sons

Ovans, A. (2015). What is a business model? Harvard Business Review. https://hbr.org/2015/01/what-is-a-business-model

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