Many entrepreneurs today are perhaps too young to remember that Amazon started as a bookseller. Today, it has a stake in everything from cloud computing to groceries. That is business model innovation in a nutshell.
But because we are going to talk about the benefit of business model innovation, let’s see what the lack of it does. We don’t have to go far. Just look at Netflix, Amazon’s competitor in the streaming world. When Amazon was launched as a DVD mail-in service, its competitor was Blockbuster, a company that had thousands of physical stores across the US. A much older player, it took six to seven years to catch up with Netflix’s disruptive DVD mail-in service. It kept playing catch up and finally shut shop in 2014.
As is clear from these examples, business model innovation can give your business a new lease of life, and the lack of it can bring it down.
Here are some ways business model innovation helps:
1. It can help generate higher returns.
A 2006 study conducted by IBM recently concluded that a positive correlation exists between the growth in operating margin and attempts to innovate the business model. The study showed that the companies which have above-average success invest around 30 per cent of their innovation resources in business model innovation. This is at least twice as much as in the group of companies with below-average performance. Another study conducted by the Boston Consulting Group has concluded that business model innovations are 6 percentage points more profitable over a term of five years than product and process innovations.
2. It is needed when you are introducing new tech or products.
When a company introduces a new technology or builds a new product to enhance its revenues, business model innovation can help grow it further. Scholars argue that a mediocre product combined with an excellent business module will yield better results than an advanced product with an inefficient business model. New technologies and/or products bring new possibilities and the option of creating additional revenue streams. These opportunities can be utilized with the help of business model innovation. In other words, business model innovation allows you to use the new technology/product to derive the maximum benefit out of it.
3. It allows you to respond to new market trends.
When you’re pulling off a business model innovation, you can also align your products and services to the new trends emerging in the market. For example, during Covid-19, a lot of cab aggregation firms, including Uber, also started food delivery services. They realized that the demand for cab services was going to go down for some time as people started working from home and the need to order food from outside would grow in turn. As they were updating their models to respond to the Covid-19 pandemic, cab aggregators also managed to incorporate these trends and offer a new product in terms of food delivery.
Beth Comstock, the former vice-chair of General Electric who ran GE’s Business Innovations wing, captures this well in the following quote: “Business model innovation is constant in this economy. You start with a vision of a platform. For a while, you think there’s a line of sight, and then it’s gone. There’s suddenly a new angle.”
4. It helps create additional revenue streams.
With business model innovation, you can also create new revenue streams apart from sprucing up the main source of your revenue. You can use your existing customer base to produce extra revenue by providing additional offerings during business model innovation. You can introduce a new product which complements an existing successful one. The market for the successful product will lap up the new offering in no time. See, for example, how iPad users responded to the introduction of digital pen and keyboard.
5. It saves you from stagnating or becoming obsolete.
To survive in a highly competitive market, you need to innovate constantly. Many take this advice only for their products or services but forget about the entire business model. As a result, your competitor, over a period of time, will find ways to outsmart your business model. But with regular Innovation, you can keep competitors on their toes.
When competitors’ strategies have converged, and sustained advantage becomes elusive, you can turn to business model innovation. It’ll give your business a fresh breath of air and ensure that you get the opportunity to change how things have been running to save the brand and come up with a new sustainable model that has space for new products and technologies. With business model innovation, you can help address bug disruptions in your market and make new regulatory or technological changes.
As I end the blog, I’m reminded of these lines from Amazon founder Jeff Bezos, which are meant for those who are reluctant to invest in business model innovation: “Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on research and development. It’s not about money. It’s about the people you have, how you’re led, and how much you get.”
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