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 an advantage over rivals.
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.
- Low-cost airline Southwest Airlines created an entirely new airline service model that offered cheap fares, fun, and more frequent flights.
- Walmart and Target transformed the retail business model to one that excelled in delivering discounted products.
- Dell Computers revolutionized computer distribution by taking out the middle man and supplying computers directly to the end customer.
- Apple – iTunes with their entirely new way for customers to purchase music.