Innovative technologies are sweeping away everything: organizations, work practices, offerings, hierarchies, and even business models. Those days are long past when business models used to stay static for years to no end. They are now under threat more so than anything else, since any technology-driven entrant can knock an established business model down in no time.
In order to stay in the game, organizations need to evolve their business models tenaciously. Business Model Design is grounded on tacit industry beliefs around Value Creation. These rigid underlying industry beliefs become widespread opinions and are deemed unchallengeable. For instance, in the telecom sector, success relies on customer retention and average revenue per user, whereas views and hits trigger profitability in the media business.
Incumbent companies are able to displace conventional business practices and current approaches of value creation by reassessing and challenging the widespread, hindering beliefs that support them. But such business model innovation is not as simple as it seems.
Approach to Business Model Innovation (BMI)
The approach to displace conventional business practices and methods of value creation commences by ascertaining the most significant beliefs or ideas about value creation in the industry, and clarifying the notions that trigger these beliefs.
The approach to Business Model Innovation (BMI) comprises the following 5 steps:
- Identify Existing Business Model
- Determine Foundational Beliefs
- Challenge Underlying Belief
- Sanity Test Our Reframe
- Formulate New Business Model
Let's take a deeper look at the 5 steps to the BMI Approach.
Identify Existing Business Model
The first step requires delineating the dominant business model in the relevant industry and determining the long-established beliefs regarding their value creation method.
Determine Foundational Beliefs
The next step is to reveal the supporting notions that help establish that belief—i.e., notions about customer needs, technology, laws, costs, and ways of doing business. For instance, financial service providers have a strong belief that customers desire economical, yet scalable automated systems. This assumption is based on the advantages that economy of scale of IT products offers to them.
Challenge Underlying Belief
This step entails challenging the foundational belief and creating a radical new premise that no one currently in the industry wants to believe. For example, challenge the minimum IT systems’ scale requirement belief of the financial service operators, i.e., what if IT could be based almost entirely in the cloud, diminishing the need for minimum economic scale.
Sanity Test Our Reframe
A newly established (reframed) belief or idea may or may not work. It is important to test the reframed belief first. Applying a reframe that is industry proven, even if it is from a different industry, may work. Innovative business models can be utilized in varied industries.
Formulate New Business Model
The last step entails translating the reframed belief into your industry’s new business model. Once companies reach a reframe, they begin to test and adopt new mechanisms for creating value—e.g., new ways to communicate with clients, operating model, or resource allocation.
4 Areas of Business Model Innovation
Implementation of a new business model necessitates analytical evaluation of 4 main areas of the existing business model. There are opportunities for rethinking and innovation present within each of these 4 components, regardless of location:
- Customer Relationships
- Key Activities
- Strategic Resources
- Cost Structures
Digitization is a common factor in these 4 areas, which disrupts customer interactions, business activities, resources deployment, and economic models.
Interested in learning more about these 4 key areas of Business Model Innovation? You can learn more and download an editable PowerPoint about the 4 Areas of Business Model Innovation here on the Flevy documents marketplace.
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