Understanding Business Model Innovation: What it is and why it is Essential for Firms

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Friday, August 06, 2021 / 1:54 PM / By Oreoluwa Ilori, Senior Analyst, Phillips Consulting / Header Image: Philips Consulting

 

About 23 years ago, Amazon came into existence selling books online. Today many years after, it is now a leader in cloud computing, can deliver groceries to your doorstep and produces Emmy Award-winning television series.

 

Nokia one of the leading mobile manufacturers in 2007; it sold phones in the hundreds of millions, controlled supply chains and had a good relationship with carriers. One vital asset Nokia had was its watertight hardware interface and strong battery. However, things started to take a different turn for this giant mobile manufacturer when new competitors like Android and Apple- iOS came into the market. Their model was completely different and unique. Apple launched an App Store that began to take off, attracting tens of thousands of developers and customers. Within two years of new changes in the market, Nokia was already in crisis. In 2007, Nokia had a market capitalisation of 110 billion Euros; by May 2012, this had fallen to 14.8 billion Euros.  In no time, Nokia got wiped off the scene; Android and Apple-iOS dominated the smartphone industry.

 

What lessons can we learn about the case study, and What is Business Model Innovation?  

By studying the case of Nokia, we discovered that they ignored threats from competitors.  Also, it seemed they lacked the skills needed to disrupt their business model; they made the wrong OS choices and platform selections. One can also deduce that their team lacked the expertise required to scale up operations and the technical training critical for the next stage. Although this is a perception, maybe they attempted, but the underlying assumption is they lacked a robust strategy.

 

We often see well-known brands struggle to sustain first-mover advantage and new entrants springing forth and leading the market. However, it is important to note that for organisations to stay ahead of the curve, they need to learn and innovate continually.



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Innovation is not a new concept; we more than often speak of it. Over time scholars and business people have come to realise that the idea of innovation takes several shapes. There are various types of innovation and understanding them is critical for continuous progression.  Although innovation is often associated with technology, and it is a fact that technological innovation has been and will continue to be the most noticeable form of innovation, but other innovations are worth telling.

 

Sometimes innovation is small, a gradual improvement on existing products, processes, and services, while other innovations can be those ground-breaking technological inventions or business models that transform industries.

 

According to statistics, 84% of global business executives believe that innovation is paramount to their growth strategy.

 

There are different types of innovation, and organisations need to know which they would like to implement. There is incremental innovation, business model innovation, architectural innovation, social innovation, and so many others.

 

Innovation is needed to offer the correct value to your customers because, in reality, businesses are competing for value creation to the customers. Innovation is the secret ingredient required to set you apart from your business rivals and make you the customers' preferred choice.

 

How do you improve value creation as an organisation? One type of innovation supporting firms to strengthen their unique selling point and enhance their value creation is business model innovation. Before I dive into explaining it, I will define the term Business model. A business model is a representation of how a business brings value. It is how a company intends to deliver its value proposition to customers and other stakeholders.  It is about seeing things from a customer-defined perspective.


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Diagram derived from tms-outsource

 

On the other hand, business model innovation is how an organisation improves its existing value proposition to stakeholders. According to an article by BCG,  business model innovation is the process of enhancing advantage and value creation by making simultaneous-and mutually supportive-changes both to an organisation's value proposition to customers and its underlying operating model. These changes address the choice of the target segment, product or service offering, and revenue model at the value proposition level. The focus is on driving profitability, competitive advantage, and value creation at the operational model level.

 

Business model innovation is a rapid process where the main goal is continued learning. The simplest way to start is to analyse your customer's point of view. This helps you understand what is important to them and how you can improve your business. However, having just an idea is not sufficient. You will also need to understand consumer behaviours, test prototypes, and revise your concept.

 

In the last year, we have witnessed changes in the world of work and how people interact. We have seen the upsurge of digital technologies in almost every organisation. Video communications and home office applications have become the norm in today's world; the business case for IT infrastructure is evident.

 

Nevertheless, aside from these technical technologies, changes in business operations are also crucial. Today, the novel coronavirus is causing a massive shift in both the national and global economy. Many companies are forced to innovate and adapt their business models to meet these challenges or risk falling victim to these drastic alterations. Few organisations are barely scratching the surface to survive, and some have lost it altogether. However, some firms have been able to adapt to the crisis and have come out winning.

What made the distinction?  Is their success attributed to their business model?



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Digitalisation and its Influence on Business Model Innovation

Digitalisation has changed everything around us; it has influenced the way businesses operate today and human interaction. Thanks to digitalisation, companies in many sectors can access and evaluate their production processes across different countries and at the same time have access to customers across the globe. We have witnessed multiple businesses operate without any significant physical presence; all they have is an e-commerce website and a warehouse.

 

Many businesses have had to make changes to their business model to meet the current market's demands. The potential of digitalisation and novel applications, as well as an integrated view of the product life cycle, are changing the way value is generated and the development of innovative BMs.

 

Due to technological changes and shifting consumer preferences happening around us, we see companies making giant strides and adjusting their business models.

 

Why is Business Model innovation important for Firms

Business model innovation has become so valuable for firms because it usually has a more significant impact on profit margins and can disrupt established industries.  Every organisation intends to survive and grow in the long term. Understanding business model innovation can help managers analyse their current model and test its capabilities with the industry trends. They can know if they need to adjust it or create a new model to complement the previous.

 

Today, business model innovation has become critical for organisations. However, companies are unwilling to update or replace old business models due to fear and lack of knowledge.  Business model innovation should not be used as a defensive tool to protect dying businesses, but it can proactively explore new growth opportunities.

 

It is easy to explain the concept of business model innovation but challenging to execute and implement. Business model innovation requires strategic thinking, creativity and hard work to attain a suitable business model. Sometimes an expert is needed to access the current business model of an organisation. In this case, it is advisable to speak to a trusted advisor who is an all-rounder and an authority in strategy development, validation and execution.

 

Another reason business model innovation is essential for firms is that it helps them differentiate their services from competitors. If you look at some industries, most players have the same or related business models; the only disparity is in the products, services, and positioning.  However, companies that innovate their business models can generate a peculiarity and competitive advantage. Brands like Ryanair, Apple, Nespresso have successfully demonstrated this.

 

Notably, business model innovation is slowly gaining momentum. Nevertheless, research is still limited in this area, especially its relationship with a competitive advantage. Many successful companies we know – Apple, Amazon, Airbnb, Samsung, Tesla, IKEA, and so many others have implemented and made significant changes to their business models. Business model innovation has assisted these companies in rendering more sales, higher profit margins and more cash flows than their rivals.



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2.      Building Sustainable Institutions through Diversity Management

3.      Driving Cost Optimization and Employee Engagement Through Competence

4.      Effectively Assessing the Skills of Your People

5.      Digital Transformation: The Medium Is Not the Message

6.      Workforce Planning in the New Normal

7.      Succession Planning - A Focus on Microfinance Banks in Nigeria

8.     Boarder-less Workplaces: A Review of the Concept and Benefits

9.      Three New Rules of Talent Development

10.  Your People, Your Biggest Brand

11.   Dynamic Working and the New People Policies

12.  What to Look Out for in the World of Learning in 2021

13.  Effective Performance Management Practices in the New Normal 

14.  Cost Optimization Through Organizational Effectiveness 

15.  Cybersecurity Checklists for Remote Working

16.  Improving Business Efficiency Through Analytics

17.   Turbocharging the Year with the Right Competencies


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