Business model innovation is the creation, reinvention or enhancement of a business model (describes the logic and principles that a firm uses to generate revenue) so that it satisfies customer needs (value proposition) in a new, changed or different way.
Henry Chesbrough and Richard S. Rosenbloom from Havard Business School put forward an excellent definition for a business model...
“The functions of a business model are to:
Articulate the value proposition, that is, the value created for users by the offering based on the technology;
Identify a market segment, that is, the users to whom the technology is useful and for what purpose;
Define the structure of the value chain within the firm required to create and distribute the offering;
Estimate the cost structure and profit potential of producing the offering, given the value proposition and value chain structure chosen;
Describe the position of the firm within the value network linking suppliers and customers, including identification of potential complementors and competitors;
Formulate the competitive strategy by which the innovating firm will gain and hold advantage over rivals.”
(Image Credit: Alex Osterwalder)
Business model innovation is becoming a high priority task in many executive boardrooms as it can be extremely valuable when done right, transforming existing markets or creating entirely new ones that drive competitive advantage and generate billions of dollars of market value.
It can be important to the long term success of a company and therefore often more emphasis is placed upon it than product or service innovation.
However for large incumbent’s this is a difficult task to successfully complete. One of the reasons why this is difficult is because business model innovation often requires a new value network which means new relationships with customers that can potentially disrupt existing relationships.
Another reason is the number of unknowns that innovating the business model creates – such unknowns make it difficult to accurately manage the associated risks.