Business model innovation: What it is and why it matters
28 October 2019
As we become more and more involved in the changing world, businesses need to adapt to new demands and trends. Any profitable business needs to be innovative in order to survive. In many industries, new products or services are essential.
A useful trick to use when thinking of becoming an entrepreneur is the business model innovation. It helps you understand what the core of your business, and its strengths, are. By using it, you will be able to structure better everything you need to do.
Keep reading more about this topic in this article created by our team at TMS, and let’s discover more about it, and the details that make it special.
What is Business Model Innovation?
In order to understand business model innovation, we first need to understand what a business model is. To put it simply, a business model is a representation of how a business brings value. It shows the entire process from start to finish.
A business model is used in order to show how a firm transforms resources in the form of technology and converts them through customers and markets. The idea behind it is to connect resources that can bring the potential realization of economic value.
What it also includes is the customer segments that are being handled. This relates to how the company uses its resources and how it sells its offerings by creating value to the end consumer.
Consider the business model innovation as a kind of story that explains how an entire organization is functioning. The most common models usually go for topics like understanding the end customer, what does the customer prefer, how to generate money, and many more. Basically, it is the underlying economic logic that explains how value is being generated for a certain cost.
As you can see, there are different ways to define a business model. There are some well-known principles that go behind each one, but most of the time they will include:
- Answers to strategy questions
- Defining the target market and how is the business going to reach them
- What is the company mission
- The values that are being promoted and the benefits added
- What makes the company different from the competition
The beginning of business model innovation
Over the last five decades, the lifespan of a business model has gone from 14 years to five. This is why business model innovation is essential to organize the details around your idea.
The business model innovation shows how a company is delivering value to its customers. It does not matter if we are talking about the development of a new revenue stream or another distribution channel.
Business model innovation is a fast process where the main goal is continued learning. The easiest way to start is by analyzing your customer’s point of view. This will help you understand what is important to them and how you can improve what the business is doing. However, simply having an idea is not enough. You will also need to understand consumer behaviors, test prototypes, and update the entire concept.
So, why should you consider an innovative business model? Well, at the core of it, the main idea is to bring a change. A change that cannot be seen so fast. Most companies that go for business model innovation reach success, only after this change gets detected. This is why it is very hard to copy it.
In order to understand how innovative business models work, just think about how the value chain can be redesigned. The insight is to focus on what can help you scale your business. Here are some tips to consider:
- Solutions in order to design a better value chain
- Improving the existing cost structure
- Distribution channel that can accelerate growth
- Structure of the company and how is it this helping the growth
Technological Innovation vs Business Model innovation
When you are at the start of a new business, there are a few ways to ensure that it will be sustainable. Discovering differences between business and technological innovations can help you get a clearer vision for your start-up. This will help you be more efficient, and in the end, it will lead to better decisions that are being taken in the long-term.
Compared with other types of innovation, the changes that are done to the business model need to be clear. We want them to be aligned with how the business functions. So, business model innovation is going to be seen as radical a lot of the time.
When we speak about innovations, they usually are incremental. However, technological innovations are different from business innovations. This is because they happen in special centers that do not limit just to a business context.
An example of companies that did great due to technological innovation is IBM, which was the first company to produce computers for consumers and businesses. While they are not a leader in the computer market, they still have some other dominant positions in different markets.
Lotus 1-2-3 was the company that created the first spreadsheet program. They did lose to Microsoft Excel, but oddly enough, it was not because it was a better choice. The reason behind their loss was because Microsoft offered a greater value through innovation and had Microsoft Excel preloaded on all the PCs that were sold.
The importance of business model innovation
Business model innovation has become very important to many firms because it has the capacity of having a strong impact. We are talking about the profit margins and the service innovations that can disrupt established industries.
By having the business model innovation definition, we can now also see why companies should consider it, and why all companies should check the business model they have. Understanding what business model innovation can mean is also important. Making sure that a company can survive and grow in the long-term is what any business owner wants.
It requires a lot of hard work and creativity to reach the right business model innovation. Implementing old strategies is not going to be that efficient, and the desired results will not happen. Just remember, business model innovation is usually one of the best ways to innovate your business.
If you enjoyed reading this article on business model innovation, you should check out this one about Steve Jobs leadership style.
We also wrote about a few related subjects like business model vs business plan, accelerator vs incubator, startup funding stages, how to value a startup, IPO process, IPO lockup period, risk assessment matrix and business process modelling.