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Business Model Innovation: What It Is And Why It’s Important

Industry Advice Business

Amazon launched in 1995 as the “Earth’s biggest bookstore.” Fast-forward 22 years, and that “bookstore” is now a leader in cloud computing, delivers groceries, and produces Emmy Award-winning television series.

“Amazon is amazing at new business model development,” says Greg Collier, an academic specialist in the Master of Science in Innovation program at Northeastern’s D’Amore-McKim School of Business and director of international programs for the Center for Entrepreneurship Education. “They look at themselves from a customer-defined perspective.”

That approach has helped Amazon scale. Rather than rely on one revenue stream or customer segment, the company continues to ask “What’s next?” and iterates on its business model accordingly. Amazon repeatedly experiments with business model innovation.

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What Is Business Model Innovation?

Business model innovation describes a fundamental change in how a company delivers value to its customers, whether that’s through the development of new revenue streams or distribution channels.

“Most people immediately say, ‘Let’s think through a new way to charge the customer,’” Collier explains, using games as an example. Companies typically charged a subscription fee or made users pay to perform certain activities or unlock new levels. Over time, brands switched to charging for in-app advertising or started creating game merchandise, such as T-shirts and plush toys.

As Collier notes, though, “Competitors can easily change how they price.” That’s why it’s crucial for companies to consider how its products are being delivered.

Why Business Model Innovation Is Important

Take Blockbuster, for example. The video rental chain faced a series of challenges, particularly when DVDs started outselling VHS tapes. DVDs took up less shelf space, had higher quality video and audio, and were also durable and thin enough to ship in the mail—which is where Netflix founders Reed Hastings and Marc Randolph spotted an opportunity. The pair launched Netflix in 1997 as a DVD-by-mail business, enabling customers to rent movies without needing to leave their house. The added bonus was that Netflix could stock its product in distribution centers; it didn’t need to maintain inventory for more than 9,000 stores and pay the same operating costs Blockbuster did.

It took seven years for Blockbuster to start its own DVD-by-mail service. By that point, Netflix had the competitive advantage and its sights set on launching a streaming service, forcing Blockbuster to play a game of constant catch-up. In early 2014, all remaining Blockbuster stores shut down.

“Blockbuster’s problem was really distribution,” Collier says. “DVDs inspired Netflix, and the technology change then drove a change in the business model. And those changes are a lot harder to copy. You’re eliminating key pieces in the way a business operates.”

Because of that, it’s often harder for legacy brands to innovate. Those companies are already delivering a product or service that their customers expect, making it more difficult for teams to strategize around what’s next or think through how the industry could be disrupted.

“Disruption is usually then done by new entrants,” Collier says. “Established organizations are already making money.”

By focusing solely on existing revenue streams, however, organizations could face a fate similar to Kodak. The company once accounted for 90 percent of film and 85 percent of camera sales. Although impressive, that was just the problem: Kodak viewed itself as a film and chemical business, so when the company’s own engineer, Steven Sasson, created the first digital camera, Kodak ignored the business opportunity. Executives were nervous the shift toward digital would cannibalize Kodak’s existing product and main revenue stream. The company lost its first-mover advantage and, in turn, was later forced to file for bankruptcy.

Organizations should think more like Mars. The company started as a candy business, bringing popular brands like Milky Way, M&M’s, and Snickers to market. But over time, Mars started expanding into pet food and, eventually, began acquiring pet hospitals. In early 2017, Mars purchased VCA, a company that owns roughly 800 animal hospitals, for $7.7 billion—further solidifying its hold on the pet market.

“Mars looked at its core capabilities, which is what corporate entrepreneurship is all about,” Collier says. “It’s about looking at your products and services in new ways. Leverage something you’re really good at and apply it in new ways to new products.”

The Role of Lean Innovation

Implementing lean innovation is advantageous. Lean innovation enables teams to develop, prototype, and validate new business models faster and with fewer resources by capturing customer feedback early and often.

Collier recommends companies start with a hypothesis: “I have this new customer and here’s the problem I’m solving for him or her,” for example. From there, employees can start to test those key assumptions using different ideation and marketing techniques to gather customer insights, such as surveying. That customer feedback can then be leveraged to develop a pilot or prototype that can be used to measure the team’s assumptions against. If the first idea doesn’t work, companies can more easily pivot and test a new hypothesis.

“This a big part people forget to do,” Collier says. “Lean design allows us to rapidly test and experiment perpetually until we come to a model that works.”

Pursuing Business Model Innovation

Companies could pursue other types of innovation, including:

  • Product Innovation: This describes the development of a new product, as well as an improvement in the performance or features of an existing product. Apple’s continued iteration of its iPhone is an example of this.
  • Process Innovation: Process innovation is the implementation of new or improved production and delivery methods in an effort to increase a company’s production levels and reduce costs. One of the most notable examples of this is when Ford Motor Company introduced the first moving assembly line, which brought the assembly time for a single vehicle down from 12 hours to roughly 90 minutes.

The choice to pursue product, process, or business model innovation will largely depend on the company’s customer and industry. Executives running a product firm, for example, need to constantly think about how they plan to innovate their product.

“When the innovation starts to slow down, that’s when firms should be thinking of and looking at next-generation capabilities,” Collier suggests.

If a company is trying to choose where to focus its efforts, however, the business model is a recommended place to start.

“Business model innovation is often more impactful on a business than product innovations,” Collier says. “It’s Amazon’s business model that’s disrupting the market.”

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