Business model innovation is the re-organization of a business model. But why do well-established businesses make changes to their business model.
What comes to your mind when you hear "Business model innovation?" Anyone who hears this for the first time must think it means innovating your business model or something. Well, that's what it actually means.
Innovation is essential for businesses to survive. This is why every company allocates a significant portion of its budget to R&D.
Just like businesses need to innovate their products to compete in the market, many businesses also need to innovate their business model to gain a competitive advantage.
Several brands started off as average brands. However, later, they innovated their business models and became giants in their respective industries. One of the famous examples of business model innovation in recent times can be found if we study the business model of Netflix in detail.
Netflix is one of the most famous online streaming platforms that we all know about. It became famous recently when every household began to purchase its subscription. However, you'll be surprised to hear that Netflix's original business model had nothing to do with developing an online streaming platform; it just happened with time.
Netflix has been in the market for decades. It started its operations in 1997. At that time, Netflix entered the market as an online DVD rental store. Netflix's initial business model focused on providing consumers with DVDs through email.
This business model didn't seem very successful, which is when Netflix innovated and took the market by storm in 2007. This time Netflix entered the market as an online streaming platform.
By doing so, Netflix emerged as one of the giant online streaming platforms. In addition, the business model innovation provided the brand with a competitive advantage. Today, Netflix is earning $24.9 billion by having 222 million subscribers across the globe.
Now that you know why business model innovation is essential for businesses to grow let's proceed further and look at what business model innovation is in detail.
What Is Business Model Innovation?
To understand business model innovation, it is very important to break the phrase "Business Model Innovation" into two parts. So let me explain to you what a business model is. Then we will discuss business model innovation as a whole.
A business model is a strategy or document containing complete information about how a business plans to enter the market. It highlights the ideology of the business and what product that business aims to market.
Moreover, a business model also identifies the targeted audience buying these products. A business model provides a complete roadmap for a business to function.
Although every business makes a business model before starting its operations, at times, these models require some changes so that a business can turn out to be more beneficial.
The process in which a business makes adjustments to its business model is described as business model innovation. The changes resulting from business model innovation cause fundamental changes in products/services offered, distribution channels, and targeted audience.
Different scenarios lead to business model innovation. For example, if a business suffers losses, it might innovate its business model. Besides that, a fall in demand for the goods or services offered by a business might force it to innovate its current business model to achieve growth.
A car dealership named David Dodge recently worked to achieve business model innovation when its sales dropped due to COVID-19. David Dodge had the conventional business model for attracting customers and selling their cars.
However, when its sales dropped, the car dealership innovated its business model and opted for different ways to market its cars. David Dodge knew people were reluctant to leave their houses during COVID-19, so they used phones, emails, and Zoom to communicate with their customers.
By doing so, the brand achieved the highest sales in July 2020. In addition, doing business model innovation helped David Dodge increase its sales during COVID-19.
What Are The Four Epicenters of Business Model Innovation?
Business model innovation is very important for every business that wants to grow. Every famous and successful business has innovated its business model multiple times. The ever-changing dynamics of the market force businesses to innovate their business models.
As we discussed above, business model innovation is the re-organization of a business model. However, you must be thinking, why do well-established businesses make changes to their business model?
To answer this question, you must know about the four epicenters that ignite the process of innovation in business models.
The four epicenters of business model innovation are resource-driven, offer-driven, customer-driven, and finance-driven. Let's look into these epicenters and see how they impact the operations of any business.
1. Resource-Driven
Businesses highly value resources because they are always needed to carry out all business operations. Similarly, business model innovation can never be experienced without ample resources.
Businesses can revisit their current business models and adjust them because they have high resources in the form of land, labor, capital, and entrepreneurship.
2. Offer-Driven
You must have heard the famous dialogue, "I'll make him an offer he can't refuse." This dialogue is also applicable in business. At times, businesses offer such different and innovative products that customers can't say no to them.
Offering different products than your competitors often leads to business model innovation because businesses innovate and adjust their existing business models to provide different products in the market.
3. Customer-Driven
Customers are the most integral part of any business since they are responsible for making a business successful. Hence, businesses have to follow the demands of the customers.
For example, suppose customers start demanding a new type of innovative product. In that case, businesses will have to meet the demand of their customers. However, they'll have to go through business model innovation first to meet the demand. In this way, business model innovation is customer-driven at times.
4. Finance-Driven
Businesses often make adjustments to their business model to attain financial gains. Changing business models can help businesses in increasing their revenue. For example, if a company starts operating in another industry, it will increase its revenue.
Moreover, if a business decides to lower its costs and expenditure, it might change its business model. Such changes made in the business model would also be finance-driven.
Why Is Business Model Innovation Important?
One of the main objectives of any business is to maximize its profits. To do that, businesses keep altering their original business model to keep up with the market.
Every business makes a business model before entering the market. That business model highlights the products it will offer, how the operations will be carried out, and the targeted audience.
However, since the market is very dynamic, it is possible that what might be in demand today will be out of demand tomorrow. Furthermore, the targeted audience might change with time.
In such cases, businesses must make changes in their business models to keep themselves relevant and their sales up. Moreover, business model innovation provides a competitive advantage to businesses.
Many businesses can rearrange their operations and gain a competitive advantage over the other firms in the market.
Why Business Model Innovation Is The New Competitive Advantage?
It is often said that business model innovation provides a competitive advantage to a business. To understand the logic behind this, you'll have to imagine yourself as a CEO of a big company.
Imagine you've been running a company for the last ten years. At this point, all your competitors have adopted your business style and are offering products similar to yours. Whereas you are currently doing nothing different.
What if you make changes in your business model? You adopt business model innovation, which makes you change your products, targeted audience, and way of operations. Wouldn't all that put you in front of your competitors? Of course, it will.
Changing business models always provides a competitive advantage to businesses and helps them get ahead of their competitors. This leads to an increase in their market share and customer base.
What Is The Relationship Between Business Model Innovation And Industry Selection?
Businesses are highly affected by the industry environment where they operate. Innovation in the business model is affected by the ever-changing environment; both external factors exist in the industry as well as internal dynamics of the business.
Besides many factors that affect business model innovation, environmental factors largely impact the decision of businesses to innovate their business models. For example, increasing emissions of greenhouse gases force businesses to innovate and indulge in environmentally friendly practices.
To do that, businesses must change their business models and prioritize clean energy practices. Moreover, the increasing awareness about waste disposal will pressure businesses to innovate their business models and make their business plastic-free by using substitute materials.
More specifically, the increasing number of competitors due to low barriers to entry in the industry pushes businesses to make changes in their business models to have a competitive advantage over the new entrants.
In addition, an industry with high buyer power also influences the businesses in the industry to adopt business model innovation so that they can provide innovative products at lower prices than other businesses. This will prevent the buyers from switching to other alternatives.
Besides all these factors, another factor that motivates businesses to innovate their business models is the stage of the industry life-cycle at which the industry is.
Suppose an industry is at the shakeout stage. The businesses need to gain a competitive advantage and innovate, or they'll be pushed out of the industry. Hence, to do that, businesses adjust their business models accordingly.
As we discussed above, many factors in an industry affect business model innovation. Therefore, we can discuss the relationship between industry and business model innovation in detail with the help of an industry-based view which is one of the three components of the Strategy Tripod.
The industry-based view discusses how factors in the environment of industry play a significant role in influencing businesses to adopt innovation and make changes in their business models. It focuses on the external factors in the market that push businesses to gain a competitive advantage.
How Does A Business Model Enable Innovation?
A business model holds great significance for every business since it provides a complete business plan for generating revenue. After operating with the original business model for a while, businesses opt for innovation in the business model.
Several factors, as discussed earlier, make businesses think they need to be on their tiptoes and be flexible enough to adjust according to the changing industry dynamics and make adjustments in their existing business models.
Firstly, successful business owners always tend to have an upper hand or simply to have a competitive advantage in the industry. This competitive mindset enables them to "innovate" or simply to come up with new and exciting ideas. Either in terms of value-proposition to their customers or adjustments in their internal business practices.
Besides that, at times, businesses are forced to make adjustments in their business plan to cope with the changing trends in the market; otherwise, they can be thrown out of the market.
Many businesses innovate their models to survive the cut-throat competition in the industry. To do that, businesses have to think out of the box. Doing something different to survive and do well in the market leads to innovation.
Business Model Innovation: Final Word
Business model innovation is the process of changing the existing business model. A business model is a plan that every business possesses. It tells them what products to offer, how to carry out the operations, and what ideology they should have in detail.
However, when the businesses proceed further in the market, they feel like changing the existing business model. There are four epicenters that ignite the business model innovation.
Business model innovation is very important for businesses since it helps them keep up with the market. Due to this, businesses keep making profits by fulfilling the demand for ever-changing trends.
Changes in the business model also provide a competitive advantage to businesses since it makes the business change its operations entirely. Other than that, many factors in the industry's environment influence businesses to opt for business model innovation, such as environmental, social, financial, etc. We hope this article has made you understand what business model innovation is and the significance of adopting business model innovation for businesses.
