Streamline Training & Documentation: Business Model Innovation

Friday, February 09, 2007

Business Model Innovation

A while back I received a report on "Expanding the Innovation Horizon" put together by IBM. The report describes what executives in both the private and public sectors had to say when queried about the scope for business innovation in today's world.

Three types of innovation were considered:

Innovation in products, services, and go-to-market activities — The type of change that comes most quickly to mind when innovation is under discussion.

Operational innovation — Improvements in the effectiveness and efficiency of core processes and functions.

Business model innovation — Changes in the structure and/or financial model of the business.

In my experience, it's business model innovation — e.g., Kodak shifting from a business based on film and film-related sales to a business based on digital products and services — that is least understood conceptually.

IBM found that

Companies that have grown their operating margins faster than their competitors were putting twice as much emphasis on business model innovation as underperformers. (emphasis in original)

Specifically, the outperforming companies devote about 30% of their innovation efforts to business model innovation vs. about 15% for underperforming companies.

The need for business model innovation grows out of the need to establish new competitive differentiators. As one CEO said, "We must innovate in areas where our competition does not act — by developing new competencies and alliances." In this regard, the report notes that

Global connectivity (created through telecommunications, IT infrastructure and open standards) makes new skills and partners accessible and practical to employ and enables entirely new forms of collaboration, and, thus, new business models. Of course, the same global connectivity also exposes firms to new competitors with very different business models and cost bases, which, in turn, can force business model innovation.

Actions companies are taking that involve adjustments to their business models include:

Changes in organizational structure — For example, changes that establish collaboration across functions, across geographical locations, and/or across business units.

Strategic partnerships — As one CEO said, such partnerships can create value "not just for our company, but also for the industry as a whole. We cannot do everything in this era of specialization."

Shared services — to take advantage of dispersed expertise and scale economies.

Alternative financing and investment vehicles — Venture capital comes most immediately to mind.

Divestitures and spin-offs — To tighten focus on core activities.

Use of a third-party operating utility — E.g., an industry-wide utility to process and service life insurance policies at lower cost than when these functions are handled by individual companies.

The goal of reworking a business, using one or more of the above approaches, is "assembling a business model fashioned from groups of specialized capabilities — combining internal expertise and scale through shared services centers with the capabilities of specialized partners to create truly differentiating business designs."

Toward the end of its report, IBM recommends that an organization's strategists ask themselves these questions:

Has your innovation agenda expanded beyond products/services/markets innovation and operational improvement to encompass your business model — the emerging basis for competition?

How vulnerable is your business model? Are you playing in the right place in your networked industry value chain?

How would your business model be different if you started with a clean sheet of paper? What would you do if you were getting into your current business as a start-up located in Malaysia?

What capabilities do you have that might fundamentally change the value chain in another industry?

In sum: The organization should decide what elements or components of their business set them apart, and then acquire other needed capabilities from other organizations.

It is not enough to think in terms of basic shared services centers, outsourcing, and insourcing. As examples of more expansive exploration of business model innovation, IBM suggests "partnering with a competitor to gain a mutual advantage over the rest of the industry or participating in a common, industrywide utility that lowers everyone's costs."

The key is to "[l]ook for ways to transform your core value proposition. Pay particular attention to ignored areas of the value chain where no one is actively innovating. Search out third parties that could add value or technology that could introduce entirely new ways of doing business."

In other words, "Choose business model innovations that make you deeply different."

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Labels: Innovation

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