The Bumpy Road to Business Model Innovation: Overcoming Cognitive and Organisational Barriers

By Nicolai Foss & Tina Saebi

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.

For example, world-leading Danish toy maker, Lego has over the last decade been engaged in a long series of business model changes. Thus, Lego has slimmed its product offering, addressed new segments, modified its value chain by concentrating on fewer suppliers, modified the way it digitally engages with users and customers, and so on. Individually, each change may not look revolutionary. However, if taken together, the many interconnected choices jointly represent a massive change of the Lego business model. This is also a change that has required constant and intensive management involvement. In the following, we address some of the challenges managers face when engaging in major business model change and innovation.

The Five Challenges of Business Model Innovation

Although there is strong evidence that innovating a company’s business model can significantly increase company performance, a majority of companies fail to do so.⁵ In our research on business model innovation, we found two main reasons to account for this problem that often reinforce each other. The first group of challenges is of “cognitive” nature and is expressed in an inability to perceive new avenues of doing business. That is, executives are often unaware of their current business model or hesitant to change the status quo, hence foregoing opportunities to improve their current business model. The second type of challenges consists of “organisational” barriers to changing the existing business model. In these cases, executives might be eager to innovate the business model, but lack the required know-how and organisational support to manage the transformation and implementation process. This can result in costly trial-and-error efforts. (see figure 2 below)

Cognitive Barriers to Business Model Innovation

1. Bias of the current business model: An important cognitive barrier to business model innovation lies in the dominant logic or of the company.⁶ A dominant logic, whether installed by a founder or developing over time, manifests itself in the “prevailing wisdom about how the world works and how the firm competes in this world”.⁷ It means that information tends to be interpreted, processed and reacted to in the same way over time. This has the advantage of reducing the costs of handling information and making the company predictable and accountable in the eyes of stakeholders. However, it also means that new information that does not concur with the dominant logic of the firms are often rejected. Thus, falling victim to the “bias of the current business model”,⁸ executives are unable to recognise opportunities outside their logic of doing business. An important skill in this regard is to get comfortable with the idea of “ambidexterity”, that is, finding the right balance between exploiting the current business model and exploring and experimenting with new business model ideas at the same time.

2. Lack of managerial know-how: Another important cognitive barrier to business model innovation is a lack of understanding of the firm’s extant business model and its underlying assumptions. Often, business models are a result from the firm’s activities over time as opposed to being a carefully drawn model.⁹ Thus, lacking the knowledge about how to assess the current business model and to experiment with alternatives, innovative business model ideas cannot be evaluated and implemented effectively. Here, developing appropriate analytical tools and providing managerial training can strengthen the organisation’s capability in successfully initiating, implementing and managing the business model innovation process.

3. Complexity of business models: A third important and related cognitive barrier to business model innovation lies in the inherent complexity and uncertainty of the process of changing the business model. A radical change of the extant business model is a major leap into the unknown. It may be impossible to put probabilities on outcomes, and may even be difficult to construct meaningful scenarios. Additionally, as business models consist of many interrelated elements, assessing existing business models and evaluating new ideas is a difficult task for business leaders. This problem is exacerbated by short time pressures, which inhibit leaders to think beyond profit margins and to over emphasise the current operating model. As a result, managers may pursue an existing business model until the end of its lifecycle without questioning its viability vis-a-vis competition and emerging market trends. For example, underestimating the impact of new technologies and changing customer demands, brick-and-mortar retail companies such as Blockbuster (DVD-rental) and Borders (book selling) held on to their initial business models for too long and eventually lost their market shares to the web-based business models of Netflix and Amazon.

Organisational Barriers to Business Model Innovation

The second type of challenges consists of organisational barriers to changing the existing business model. Here the firm’s existing organisational structures and processes can act as the major barrier to change. Experimentation is key in developing new business model ideas. Thus, rigidity of resources, a lack of incentives and low degree of autonomy can decrease the motivation and willingness to experiment with new business models. Further, when managers are committed to a certain return on investment, they are less willing to experiment with alternative business model configurations.

1. Leadership gap: Another critical obstacle to changing an existing business model that often no single person has the effective authority and the capability to innovate the business model, particularly when the relevant changes are radical and connected. For example, complex business model innovation may involve several functional areas and require substantial integration and alignment. This requires an aligned leadership team or an exceptionally powerful CEO – otherwise, top managers who disagree with may more or less subtly counteract the proposed changes.¹⁰

2. Organisational resistance: Business model innovation may also be counteracted from levels below the top management team. In general, changing the business model, perhaps radically so, threatens established power positions, privileges and perceived endowments. For example, as the pharmaceutical industry moves towards building a bigger service component into offerings, power relations between in-house lawyers change; those specialising in patent law losing power to lawyers specialised in handling the multiple legal intricacies involved when pharma firms approach end users. Roles, functions and processes may have to be altered and redefined. Employee uncertainty emerges. All this can lead to substantial demotivation and even conflict and prolong or in the extreme even hinder the business model innovation. Our research shows that business model innovation thrives when the corporate culture supports experimentation and big leaps.

Conclusion

In sum, while business model innovation is often advocated as a new source of competitive advantage, it is a complex and broad undertaking, requiring organisation-wide support and implementation. The lack of business model know-how is expressed in the inability to grasp the current business model and to perceive the need for change, thus forgoing viable opportunities for growth and competitive advantage. Lacking the appropriate processes and routines to manage the innovation and implementation process leads to an ad-hoc approach to business model innovation, which can pose significant risks and costs to the firm. In our latest book, Business Model Innovation: the Organizational Dimension (published by Oxford University Press), we take a closer look at these challenges and discuss the important roles of corporate strategy, dynamic capabilities, power distribution, and other aspects of organisational structure and control in enabling companies to innovate their business models successfully.

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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