Although proven that innovating a company’s business model can significantly increase performance, a majority of companies fail to do so. The authors discuss the various cognitive and organisational barriers that impede managers from successfully initiating, implementing and managing business model innovation in established firms.
What is Business Model Innovation and Why is it Important?
Businesses increasingly seek to innovate their business models, based on the notion that business model innovation can be an important source of competitive advantage and thus have a positive influence on firm value.1 For example, surveys of the world’s leading CEOs show that innovative business models are preferred over new products and services as a source of competitive advantage.2 The reasoning behind these findings is straightforward. With increased globalisation, cross-fertilisation of industries and rapid advancements of mobile and network technologies, it is no longer feasible for many companies to merely compete on basis of prices or technology only. Instead of engaging in “price wars” or incurring high R&D costs to win the technology race, business model innovation allows companies to redesign the way the fundamental ways they do business. Such redesign is often surprising to the competition, complex, and specific to the firm. Hence, it may be difficult to imitate for the competition. Alternatively, the business model innovation may allow the company to “rewrite the rules of the game”, that is, to redefine the industry standards of how business is usually conducted. In both cases, the company stands to benefit.
Managers can innovate an existing business model by changing the (1) value proposition (e.g. the bundle of services, products or experiences offered to the customer), (2) the target customer (e.g. tapping into a new customer segment), (3) value delivery (e.g. use of external partners and resources), (4) value capture (e.g. revenue and cost structures) (see figure 1 below).
For example, while Apple did not “invent” digital music players, it wrapped the technology in a new business model that redefined industry standards. By linking music label owners to the end consumers and hereby easing the access to digital music (iTunes), the company’s business model became an innovation platform for external parties.3 Similarly, Dell did not invent personal computers, but redefined the industry by innovating how value is created and delivered to the customer. Hence, an innovative business model does not necessarily need to discover a novel service or product, but it may however redefine how a service or product is delivered to the customer and how the company profits from this customer offering.4
Managers may change, even innovate, one or more of the four components of business models. Such changes can be more or less radical. Some changes amount to relatively minor changes, for example, in the customer segments the company addresses (this may still matter very significantly to profitability, however). However, even if changes look minor, there may still be many of them, calling for coordination.
About the Authors
Nicolai J Foss is Professor of Organization Theory and Human Resource Management at the Bocconi University, Milano. A prolific contributor to the management research literature, his research focuses on the performance effects of organisational design and HRM, and the drivers and consequences of firm-level entrepreneurship.
Tina Saebi is Associate Professor in International Strategy at the Norwegian School of Economics (NHH) and research director for the theme Business Model Innovation at the Center for Service Innovation (CSI). Her research focusses on business model design for entrepreneurs as well as the drivers, barriers and facilitators of business model innovation in established, international companies.
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