How crucial is Business Model Innovation to the success of an organisation?
Strategic Allies Limited understands the importance of business model innovation for organisations. That’s why, our common project objective is to support clients in the discovery
and implementation of technological innovation, resulting in new or improved processes, products or services. Fundamentally, a ‘need’ is identified, and we find and recommend solutions and partners to address that need. All solutions are thoroughly evaluated technically and commercially, and have been deemed a good fit for our client. However, no matter how good the technology is, sometimes more innovative efforts are needed to ensure success. This is where business model innovation comes into play.
Defining business model innovation
When it comes to innovation, technology is only part of the story. Successful commercialisation of innovation, and the ability to derive value and competitive advantage from new technology, very much depends on the associated business model – the strategy for creating, delivering and capturing value. Business models are multi-faceted and complex, but the model depicted below, termed the St Gallen Magic Triangle (Figure 1) seeks to offer a simple visual representation of the four key dimensions and the interdependencies that make up a business model.
Fig. 1 The St Gallen Magic Triangle for describing business models
The four dimensions consist of ‘who’ (your target segment), ‘what’ (your offering, also termed your customer value proposition), ‘how’ (the processes, activities, resource and capabilities to build and distribute the value proposition), and ‘why’ (why is this model financially viable?).
Business model innovation put into practice
At the 2022 Innovation Roundtable Summit in Copenhagen, we hosted a discussion on Business Model Innovation which focussed on questions that reflected the importance of business model innovation for organisations.
Some of the questions that we delved into were: Have you tried business model innovation? What worked and what didn’t? Where are the best examples? What are the learnings? It was interesting to hear that drivers for business model innovation varied from company to company, but some of the common themes included:
- Deviation from ‘core’ business – organizations developing new products and services that deviate from their core business and require new value propositions and operational models for commercialisation
- Evolving customer expectations – increasing consumer demand for ‘value adds’ to complement existing products or services, for example, technical support, product recommendation services, or after-care
- Sustainability – across all sectors, organisations are under pressure to build sustainability into their business models, for example component suppliers are now being asked about return procedures to support material circularity, or repair services to extend the lifespan of products
The combination of deviation from “core business”, customer satisfaction, and sustainability are the key factors that show why business model innovation is crucial for organisations and their success.
Examples of successful business model innovation
AirBnB disrupted the travel market when it developed a digital platform to offer rooms and manage customer relationships without actually owning any accommodation themselves.
Netflix revolutionised the movie rental market by building an online streaming service with an integrated recommendation algorithm that also informed content production. It remains one of the most successful streaming services available today with over 230 million subscribers worldwide.
Uber, a company providing ‘mobility as a service’, was developed in a coworking space by Kalanick and Camp, who were personally tired of San Francisco’s taxi problems. Their focus on customer convenience boosted the company’s popularity, and last year Uber generated over $8.6 billion in revenue.
Importance of business model innovation for staying relevant as organisation
Notably, all these companies were essentially start-ups when they established these innovative business models. Larger, more established companies have legacy systems and products, as well as existing customers and investments that often reduce agility and ability to innovate. Starting from a more established position can represent a greater challenge. And, whilst these examples highlight the importance of successful business model innovation, market disruption isn’t always the intended outcome.
For many, business model innovation is a way to try and retain market share and remain relevant within operating environments that are constantly in flux. Commercial success relies on companies continually adapting to changing consumer demands, regulations, new market entrants, digitalisation… the list goes on. Consequently, the average business model lifespan has fallen from approximately fifteen years to less than five, and many now see business model innovation as an essential capability. Indeed, many participants in our discussion felt there was a compelling need for business model innovation within their own organisations, however there was overwhelmingly a lack of clarity around how best to achieve this. Several frameworks exist that define the various phases of business model innovation and describe systematically the steps to take.
However, companies must also possess an organisational culture that encourages creativity and innovation across all levels of the business, and this often poses the greatest challenge. One company overcoming this challenge is Bosch. They have developed the Bosch Innovation Framework which enables them to rapidly, and capital-efficiently experiment and evaluate a large number of innovative business models. Their model relies on a fail fast approach to ‘kill off’ models that do not perform against their clearly defined KPIs.
For full-scale adoption, business models must address a ‘must have’ need for a well-defined customer segment, and be built around a convincing value proposition. It must also fit the strategic ambitions of the organisation despite sitting outside Bosch’s core business. To drive cultural change, teams do not pitch their ideas, rather they provide an assessment of them against the pre-defined performance metrics and share lessons learned from experimentation phases. Success rates remain lower than 10 % but by experimenting and validating high numbers of innovations at scale, there is greater confidence that those adopted will ultimately succeed.
We understand the importance of business model innovation for organisations
Whilst SAL have never explicitly offered services around business model innovation, our project outcomes often support companies with this endeavour because we understand how crucial
business model innovation is. We help clients in a number of ways, from identifying key customer needs and ideating around new value propositions and business models, to benchmarking and identifying white space growth opportunities and scouting technologies and partners to support the implementation of novel business models (see below for further details). We also can identify niche organisations that clients can partner with in order to access new markets and / or experiment with new business models before progressing to acquisition of such partners if experimentation is successful.
The 2 case studies below further highlight the support we offer clients (additional examples are available on our website):
- Assessing new market opportunities for biodegradable lubricants – A manufacturer of high performance lubricants, greases and oils was working with SAL to evaluate new market opportunities to underpin their future growth strategy. Phase 1 of the project, concluding with a 1 day interactive workshop, highlighted a potential opportunity for biodegradable gear oils in the wind industry. In phase 2, SAL identified and engaged with approximately 20 relevant experts and Key Opinion Leaders (KOLs) from different types of organisation across the wind industry including turbine OEMs, gearbox manufacturers, service providers, and power operators to provide the client with an overview of trends influencing the gear oil market, a summary of market opportunities and threats, a customer segmentation analysis, and a route to market roadmap
- Step-change ‘product systems’ for construction materials– SAL worked with an international manufacturer of construction chemicals to identify and implement innovative technologies that could become part of a ‘product system’ that would be viewed as a must-have by the end user. This included, for example, systems for early detection of failure (e.g. via indicators) and corrosion inhibition, or sensor technologies that could be embedded / mixed into concrete for in-situ monitoring of curing and quality control. This enabled the client to move from supply only, to supply and services (including quality monitoring and predictive maintenance) which was a completely novel business model, and a new revenue stream for the company.
We know from experience that change can be hard, but by practicing what we preach – by understanding the needs of our customers, thinking innovatively about how to address these needs, and creating connections with individuals and organisations that can help us deliver our value proposition – we know change can also be great.
As an example, we have increased the breadth of our service offerings over time to include more market and product landscaping services in line with client requests for such work.
We have also expanded our network to include more companies in the areas of green chemistry, bio-derived materials and renewable energy to reflect the greater demand from clients for more sustainable solutions and services.
At SAL, we would welcome the opportunity to discuss business model innovation with you. We are keen to hear your objectives, your challenges and your expectations and share our ideas, experience and support services with you. Feel free to reach out to John (email@example.com) for more information.
 The St. Gallen Business Model Navigator – https://exploit-advisory.ch/wp-content/uploads/2019/10/Business-Model-Navigator-Whitepaper_2019.pdf