importance of business model innovation

Business Model Innovation: What It Is And Why It’s Important

Industry Advice Business

Amazon launched in 1995 as the “Earth’s biggest bookstore.” Fast-forward 22 years, and that “bookstore” is now a leader in cloud computing, can deliver groceries to your doorstep, and produces Emmy Award-winning television series. 

The trillion-dollar organization has achieved this growth by being continuously willing to innovate upon its business model in order to address new challenges and pursue new opportunities. 

“Amazon is amazing at new business model development,” says Greg Collier, an academic specialist in   Northeastern’s D’Amore-McKim School of Business and the director of international programs for the Center for Entrepreneurship Education . “They look at themselves from a customer-defined perspective.”

That approach has helped Amazon scale because rather than rely on one revenue stream or customer segment, the company continuously asks “ What’s next?” This has allowed leadership to iterate on its business model accordingly, repeatedly experimenting with a process known as business model innovation .

As Amazon’s success demonstrates, this process can be incredibly exciting and impactful when you’re in control. However, when the need to innovate your business model is thrust upon you by outside forces, it can also feel quite disruptive. 

For instance, today, the novel coronavirus is causing tremendous shifts in both the national and global economy. Many companies are being forced to innovate and adapt their business models in order to meet these challenges, or else risk falling victim to these drastic changes.

Read on to explore what business model innovation is and why it is so important for businesses to be capable of change.

What Is Business Model Innovation?

A business model is a document or strategy which outlines how a business or organization delivers value to its customers. In its simplest form, a business model provides information about an organization’s target market, that market’s need, and the role that the business’s products or services will play in meeting those needs. 

Business model innovation , then, describes the process in which an organization adjusts its business model. Often, this innovation reflects a fundamental change in how a company delivers value to its customers, whether that’s through the development of new revenue streams or distribution channels.

Business Model Innovation Example: The Video Game Industry

Amazon is not the only company known for continuously innovating its business model.

The video game industry, for example, has gone through a number of periods of business model innovation in recent years, Collier says, by envisioning new ways in which to make money from customers.

When video games were first created, the consoles that housed them were expensive and bulky, which put them out of reach of most consumers. This gave rise to arcades, which would charge customers to essentially purchase credits needed to play the games. 

As manufacturing processes and technological advancements made it easier to create smaller, more economical units, however, companies like Atari took advantage of the demand by selling units directly to the customer—a massive departure from what had been the accepted practice.

More recently, game developers have had to undergo rapid business model innovation in order to meet the evolving demands of customers—many of whom want to be able to play their games right on their smartphones. 

Originally, many companies adjusted their practices in order to put their games in this format, charging consumers a subscription fee or making them pay to unlock new levels. Some of those businesses, however, were able to innovate their business models to make gameplay free to the end-user by incorporating in-app advertising or selling merchandise such as T-shirts and plush toys. This practice, they found, was able to dramatically increase their reach, while also bringing in substantial funds from consumers.

As Collier notes, “Competitors can easily change how they price.” That’s why it’s crucial for companies to consider how their products are being delivered.

The Importance of Business Model Innovation 

Business model innovation allows a business to take advantage of changing customer demands and expectations. Were organizations like Amazon and Atari unable to innovate and shift their business models, it is very possible that they could have been displaced by newcomers who were better able to meet the customer need.

Business Model Innovation Example: Blockbuster vs. Netflix

Take Blockbuster, for example. The video rental chain faced a series of challenges, particularly when DVDs started out selling VHS tapes. DVDs took up less shelf space, had higher quality video and audio, and were also durable and thin enough to ship in the mail—which is where Netflix founders Reed Hastings and Marc Randolph spotted an opportunity.

The pair launched Netflix in 1997 as a DVD-by-mail business, enabling customers to rent movies without needing to leave their house. The added bonus was that Netflix could stock its product in distribution centers; it didn’t need to maintain inventory for more than 9,000 stores and pay the same operating costs Blockbuster did.

It took seven years for Blockbuster to start its own DVD-by-mail service. By that point, Netflix had a competitive advantage and its sights set on launching a streaming service, forcing Blockbuster to play a game of constant catch-up. In early 2014, all remaining Blockbuster stores shut down .

“Blockbuster’s problem was really distribution,” Collier says. “DVDs inspired Netflix, and the technology change then drove a change in the business model. And those changes are a lot harder to copy. You’re eliminating key pieces in the way a business operates.”

For this reason, it’s often harder for legacy brands to innovate. Those companies are already delivering a product or service that their customers expect, making it more difficult for teams to strategize around what’s next or think through how the industry could be disrupted.

“Disruption is usually then done by new entrants,” Collier says. “Established organizations are already making money.”

Business Model Innovation Example: Kodak

By focusing solely on existing revenue streams, however, organizations could face a fate similar to Kodak. The company once accounted for 90 percent of film and 85 percent of camera sales . Although impressive, that was just the problem: Kodak viewed itself as a film and chemical business, so when the company’s own engineer, Steven Sasson, created the first digital camera, Kodak ignored the business opportunity. Executives were nervous the shift toward digital would make Kodak’s existing products irrelevant, and impact its main revenue stream. The company lost its first-mover advantage and, in turn, was later forced to file for bankruptcy.

Business Model Innovation Example: Mars

Mars started as a candy business, bringing popular brands like Milky Way, M&M’s, and Snickers to market. Over time, however, Mars started expanding into pet food and, eventually, began acquiring pet hospitals. In early 2017, Mars purchased VCA —a company that owns roughly 800 animal hospitals—for $7.7 billion. further solidifying its hold on the pet market.

“Mars looked at its core capabilities, which is what corporate entrepreneurship is all about,” Collier says. “It’s about looking at your products and services in new ways. Leverage something you’re really good at and apply it in new ways to new products.”

The Role of Lean Innovation

Implementing lean innovation is advantageous. Lean innovation enables teams to develop, prototype, and validate new business models faster and with fewer resources by capturing customer feedback early and often.

Collier recommends companies start with a hypothesis: “I have this new customer and here’s the problem I’m solving for him or her,” for example. From there, employees can start to test those key assumptions using different ideation and marketing techniques to gather customer insights, such as surveying. That customer feedback can then be leveraged to develop a pilot or prototype that can be used to measure the team’s assumptions. If the first idea doesn’t work, companies can more easily pivot and test a new hypothesis.

“This is a big part people forget to do,” Collier says. “Lean design allows us to rapidly test and experiment perpetually until we come to a model that works.”

Pursuing Innovation in Business

In addition to business model innovation, companies could also pursue other types of innovation , including:

• Product Innovation : This describes the development of a new product, as well as an improvement in the performance or features of an existing product. Apple’s continued iteration of its iPhone is an example of this.
• Process Innovation : Process innovation is the implementation of new or improved production and delivery methods in an effort to increase a company’s production levels and reduce costs. One of the most notable examples of this is when Ford Motor Company introduced the first moving assembly line, which brought the assembly time for a single vehicle down from 12 hours to roughly 90 minutes .

The choice to pursue product, process, or business model innovation will largely depend on the company’s customer and industry. Executives running a product firm, for example, need to constantly think about how they plan to innovate their product.

“When the innovation starts to slow down, that’s when firms should be thinking of and looking at next-generation capabilities,” Collier suggests.

If a company is trying to choose where to focus its efforts, however, the business model is a recommended place to start.

“Business model innovation is often more impactful on a business than product innovations,” Collier says. “It’s Amazon’s business model that’s disrupting the market.”

Innovation Doesn’t Always Come Easy

While the examples above demonstrate that innovation is an important part of running a business, it’s also clear that it doesn’t always come easy. Corporate history is littered with examples of companies that were unable to innovate when they needed to the most.

Luckily, there are steps that business owners, entrepreneurs, and professionals can take to become better suited to pursuing innovation when an opportunity appears. 

Learning the fundamentals of how businesses and industries change will prove to be instrumental in enabling you to carry out your own initiatives. Assess and dissect the successes and failures of businesses in the past, and learn how to apply these valuable lessons to your own challenges. 

This article was originally published in December 2017. It has since been updated for accuracy and relevance.

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Innovation in Business: What It Is & Why It’s Important

• 08 Mar 2022

Today’s competitive landscape heavily relies on innovation. Business leaders must constantly look for new ways to innovate because you can't solve many problems with old solutions.

Innovation is critical across all industries; however, it's important to avoid using it as a buzzword and instead take time to thoroughly understand the innovation process.

Here's an overview of innovation in business, why it's important, and how you can encourage it in the workplace.

What Is Innovation?

Innovation and creativity are often used synonymously. While similar, they're not the same. Using creativity in business is important because it fosters unique ideas . This novelty is a key component of innovation.

For an idea to be innovative, it must also be useful. Creative ideas don't always lead to innovations because they don't necessarily produce viable solutions to problems.

Simply put: Innovation is a product, service, business model, or strategy that's both novel and useful. Innovations don't have to be major breakthroughs in technology or new business models; they can be as simple as upgrades to a company's customer service or features added to an existing product.

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Types of Innovation

Innovation in business can be grouped into two categories : sustaining and disruptive.

• Sustaining innovation: Sustaining innovation enhances an organization's processes and technologies to improve its product line for an existing customer base. It's typically pursued by incumbent businesses that want to stay atop their market.
• Disruptive innovation: Disruptive innovation occurs when smaller companies challenge larger businesses. It can be classified into groups depending on the markets those businesses compete in. Low-end disruption refers to companies entering and claiming a segment at the bottom of an existing market, while new-market disruption denotes companies creating an additional market segment to serve a customer base the existing market doesn't reach.

The most successful companies incorporate both types of innovation into their business strategies. While maintaining an existing position in the market is important, pursuing growth is essential to being competitive. It also helps protect a business against other companies affecting its standing.

Learn about the differences between sustaining and disruptive innovation in the video below, and subscribe to our YouTube channel for more explainer content!

The Importance of Innovation

Unforeseen challenges are inevitable in business. Innovation can help you stay ahead of the curve and grow your company in the process. Here are three reasons innovation is crucial for your business:

• It allows adaptability: The recent COVID-19 pandemic disrupted business on a monumental scale. Routine operations were rendered obsolete over the course of a few months. Many businesses still sustain negative results from this world shift because they’ve stuck to the status quo. Innovation is often necessary for companies to adapt and overcome the challenges of change.
• It fosters growth: Stagnation can be extremely detrimental to your business. Achieving organizational and economic growth through innovation is key to staying afloat in today’s highly competitive world.
• It separates businesses from their competition: Most industries are populated with multiple competitors offering similar products or services. Innovation can distinguish your business from others.

Innovation & Design Thinking

Several tools encourage innovation in the workplace. For example, when a problem’s cause is difficult to pinpoint, you can turn to approaches like creative problem-solving . One of the best approaches to innovation is adopting a design thinking mentality.

Design thinking is a solutions-based, human-centric mindset. It's a practical way to strategize and design using insights from observations and research.

Four Phases of Innovation

Innovation's requirements for novelty and usefulness call for navigating between concrete and abstract thinking. Introducing structure to innovation can guide this process.

In the online course Design Thinking and Innovation , Harvard Business School Dean Srikant Datar teaches design thinking principles using a four-phase innovation framework : clarify, ideate, develop, and implement.

• Clarify: The first stage of the process is clarifying a problem. This involves conducting research to empathize with your target audience. The goal is to identify their key pain points and frame the problem in a way that allows you to solve it.
• Ideate: The ideation stage involves generating ideas to solve the problem identified during research. Ideation challenges assumptions and overcomes biases to produce innovative ideas.
• Develop: The development stage involves exploring solutions generated during ideation. It emphasizes rapid prototyping to answer questions about a solution's practicality and effectiveness.
• Implement: The final stage of the process is implementation. This stage involves communicating your developed idea to stakeholders to encourage its adoption.

Human-Centered Design

Innovation requires considering user needs. Design thinking promotes empathy by fostering human-centered design , which addresses explicit pain points and latent needs identified during innovation’s clarification stage.

There are three characteristics of human-centered design:

• Desirability: For a product or service to succeed, people must want it. Prosperous innovations are attractive to consumers and meet their needs.
• Feasibility: Innovative ideas won't go anywhere unless you have the resources to pursue them. You must consider whether ideas are possible given technological, economic, or regulatory barriers.
• Viability: Even if a design is desirable and feasible, it also needs to be sustainable. You must consistently produce or deliver designs over extended periods for them to be viable.

Consider these characteristics when problem-solving, as each is necessary for successful innovation.

The Operational and Innovative Worlds

Creativity and idea generation are vital to innovation, but you may encounter situations in which pursuing an idea isn't feasible. Such scenarios represent a conflict between the innovative and operational worlds.

The Operational World

The operational world reflects an organization's routine processes and procedures. Metrics and results are prioritized, and creativity isn't encouraged to the extent required for innovation. Endeavors that disrupt routine—such as risk-taking—are typically discouraged.

The Innovative World

The innovative world encourages creativity and experimentation. This side of business allows for open-endedly exploring ideas but tends to neglect the functional side.

Both worlds are necessary for innovation, as creativity must be grounded in reality. You should strive to balance them to produce human-centered solutions. Design thinking strikes this balance by guiding you between the concrete and abstract.

Learning the Ropes of Innovation

Innovation is easier said than done. It often requires you to collaborate with others, overcome resistance from stakeholders, and invest valuable time and resources into generating solutions. It can also be highly discouraging because many ideas generated during ideation may not go anywhere. But the end result can make the difference between your organization's success or failure.

The good news is that innovation can be learned. If you're interested in more effectively innovating, consider taking an online innovation course. Receiving practical guidance can increase your skills and teach you how to approach problem-solving with a human-centered mentality.

Eager to learn more about innovation? Explore Design Thinking and Innovation ,one of our online entrepreneurship and innovation courses. If you're not sure which course is the right fit, download our free course flowchart to determine which best aligns with your goals.

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Business Model Innovation – The What, Why, and How

In the last couple of decades, we’ve seen a dramatic increase in the popularity of business model innovation – and for good reason.

Technology has made it easier than ever to adopt a wide variety of novel business models effectively. At the same time, increased pace of innovation and global competition has made differentiation more important than ever .

In addition, with the havoc caused by COVID-19, we're already seeing that even though many businesses are battling for survival, there are also winners. Those winners usually possess very robust business models, which further outlines the importance of business model innovation in times like this.

In this article, we’ll look into what exactly it is, why it is so important, as well as how one can make it happen with the help of quite a few examples.

Table of contents

• What is business model innovation?
• Why is it important?
• Examples of innovative business models
• How to create business model innovation

The Definition of Business Model Innovation

One of the common mistakes people make when it comes to business models is that they simply look at them very narrowly as just the pricing model for their products and services.

While it certainly is a key part of the business model, the term is actually defined as the way an “organization creates, delivers and captures value”.

Business model is the way an organization creates, delivers and captures value.

Successful business models thus take a very holistic approach by integrating these different aspects of the business into a well-organized and thought out system.

Business model innovation, then is simply a novel way to put these pieces together to hopefully create a system that produces more value for both customers and the organization itself.

Why Is Business Model Innovation So Important?

Without realizing it, a business that doesn’t explicitly focus on their business model as a whole often ends up compromising their initial strengths.

For example, many businesses start to gradually drift apart from the true needs of their customers unless they specifically focus on avoiding that. Some might focus too heavily on just optimizing the delivery of their products and sacrifice their ability to create value.

There are many reasons for these phenomena. Perhaps management focuses too heavily on what the competition is doing, or perhaps there’s pressure from shareholders to optimize for short-term profit.

Regardless, there are countless industries where the true interests of the customers and those of the service providers have become opposite.

The healthcare sector is a prime example of this: a private hospital has strong incentives for wanting you to be chronically sick so that you’d keep coming back regularly and they could charge you for each visit. You naturally want the hospital to take good care of you, but ideally, you’d just want to stay healthy and not have to go to the doctors’ in the first place.

Business model innovation is simply put probably the most important tool for building a business that creates maximal value for all stakeholders: customers, shareholders, employees, and the society at large.

This obviously leads to a wide variety of benefits :

• Increased value creation will lead to increased growth , even for otherwise stagnant businesses
• As business model innovation often requires new operating models and is thus often very difficult for established competitors to copy
• …which can lead to an extend period of competitive advantage
• The right kind of business model also helps overcome objections to sales and create positive brand recognition
• As mentioned, some business models can make the business much more robust towards market cycles and unexpected “black swan” events, such as the recent COVID-19 crisis

To conclude, business model innovation is a flexible tool for building a great business irrespective of the industry. That’s why you’ll see most of the fastest growing and most disruptive businesses including business model innovation as a key part of their “innovation mix” .

Examples of Business Model Innovation

Before we get into the part where we look at how to actually do business model innovation, let’s first take a look at a few examples of business model innovation to get a better picture of what it can look like in practice.

Subscription models

Subscription models are a powerful way to turn one-off purchases to a more predictable, and over time larger, stream of revenue while ensuring that the customer keeps getting value and is also able to better afford higher-end services due to the purchase occurring over time.

Subscription models are equally applicable for both B2B and B2C businesses.

On the B2B side, Software as a Service (SaaS) products like Microsoft Office 365 and Infrastructure as a Service (IaaS) offerings like Amazon Web Services are great examples of this approach.

Subscription businesses tend to have quite distinct, straightforward value chains but do require some capabilities that many product businesses might not be very strong at, such as delivery and customer support.  

Freemium is a portmanteau of the words free and premium. It refers to business models where a company offers a free version of their product, typically with certain limitations, in order to attract users and eventually upgrade them to paying “premium customers”.

For businesses with a good product, high gross margins and high customer acquisition costs, such as most content and software businesses, this can be a very powerful model, especially in crowded markets.

The Freemium model is quite common for B2B software products that tend to have bottom-up adoption like Slack and Zoom , but also for many B2C services, such as Spotify and Apple iCloud .

The downside is that without strong value creation, freemium models might make it difficult for the business to capture enough value.

In essence, platforms are places that aggregate and/or facilitate supply and demand meeting. Platforms are characterized by their distributed approach to creating value.

In practice that means that they’re basically either matchmakers or marketplaces, but still come in many shapes and forms. They typically earn money by either taking a commission of the transactions, or by charging the supply side for the value-added services they provide.

These days you mostly hear the term being used for digital platforms, but the business model far predates online services. Shopping malls and classified ads in newspapers are just a couple of examples of traditional platform business models.

The challenge with platform business models is that it's often really hard to get platforms off the ground and achieve a critical mass where they become self-sustaining.

Direct-to-Consumer (D2C)

Both consumer and industrial goods manufacturers have traditionally relied on a, often complicated, supply chain of wholesalers and retailers to sell their goods.

Before the Internet, that allowed them to have a much larger geographical reach and thus benefit from economies of scale.

However, with the rise of e-commerce, we’ve seen a rapid rise in the popularity of the Direct-to-Consumer business model in many categories of consumer goods.

This approach provides the manufacturer with higher margins as the middlemen are removed, gives them much more control over the brand, customer experience and relationship, and provides them with more data, that is also of higher quality, on demand and customer preferences.

Ads, affiliates & sponsorships

For as long as there have been content and communication channels, there’s been advertising in one form or the other, and that hasn’t changed recently.

With the rise of the Internet, smartphones, and the democratization of content creation, we’ve seen a dramatic increase in content, which has made the traditional business model of monetizing content with advertising and sponsorships harder since there’s so much more competition for people’s attention.

For the right kind of audiences, typically in very specific niches, it can still be a viable business model in itself and for other businesses with a sizeable following, it can become an additional secondary source of income.

For example, while Spotify generates the vast majority of its revenue and profits from its subscribers, advertising revenue does provide the company with a solid secondary revenue stream that can be used for investing in growth.

Loss leaders & add-on services

While there’s nothing new in selling professional services, we’ve seen many interesting novel business models built around them.

A great example of this is the business model of open source software companies like WordPress, Red Hat and Elastic . These companies have built very popular open source software products that they let other companies use completely for free.

When you give away great software for free, it tends to become extremely widely adopted, as has certainly been the case for the aforementioned three products. Without the open source model, these companies would never have been able to reach the kind of market share they’ve actually managed to get to.

Once their products have been adopted at scale, the open source companies are obviously well positioned to either sell professional services or offer hosting services for this large base of users.

The same basic logic of giving something away for free, or at a loss, and then sell additional products or services to that wider customer base is also known as a loss leader strategy. It has been widely adopted across many industries, such as retail where stores might offer a real bargain for certain attractive products to lure in more foot traffic.

In general, selling maintenance contracts and other add-on services has become a ubiquitous business model especially in B2B, but also for more expensive B2C products, such as cars.

Razor & blades

Interestingly, just like with so many other stories of innovation , the story of the business model being invented by Gillette when he first created disposable razor blades isn’t true . In reality, it was invented by the competitors that entered the market once Gillette’s patents expired.

Since then, the model has been adopted by many companies selling goods like film cameras, printers and Nespresso capsules .

While the aforementioned examples cover some of the innovative business model patterns that we’ve seen gain popularity in the recent years, there are many others as well: franchising, auctions, micropayments, pay-what-you-want , the list goes on.

The Business Model Navigator is a very convenient and easy-to-use tool for browsing these patterns.

There are literally countless ways you can combine the different business models together with different product and service offerings to try to maximize the value created by your products and services.

Another example of this is Peloton . They sell high-end exercise equipment like bikes and treadmills for home use, and couple that with a subscription service that provides exercise programs, virtual classes and many other engaging features to accompany the bike. According to the company, even though their devices are quite expensive, they aim to sell them at break-even and then make money with the subscriptions.

This obviously means that to make a profit, they need to ensure that their customers stay motivated and keep exercising, which is what ultimately keeps them fit and creates value for everyone involved.

The leadership of the company may not have managed the business optimally, which has led to severe financial challenges after the lockdowns ended but that doesn't take anything away from the fundamental strength of the business model. Still, this is a great reminder that while a strong business model is a great foundation, there's more to running a successful business than that.

How Do You Create Business Model Innovation?

The examples above have hopefully provided you with some inspiration on what kind of new business models might be possible.

However, if you’re looking to create a business model innovation for your business, here are a few tips that can help you find the right model for you.

1. Start with customer value

The first step, as with every innovation, is to start with customer value.

• What is “the job” that the customer wants done?
• What are the obstacles that currently prevent them from getting the job done?
• What are your customers now using to get the same job done, or why are they putting off doing it?
• How do they know if the job is done or not?

Once you have a clear answer to these questions, you’ll already be well on your way.

2. What are your strengths?

Every business should obviously build their business models to benefit from and take advantage of their own strengths and unique capabilities.

For example, if you have plenty of data and when and how your products break, you’re obviously the party that’s best positioned to provide novel maintenance services, or maybe even insurance for these products.

3. What are your objectives for the business?

Some businesses want to focus on profitability, others want to grow as much as possible, and some simply want to do as good of a job as possible for their customers.

These goals ultimately matter a lot when you’re trying to design the perfect business model as different business models are better suited for different kinds of goals.

Some companies might simply want to find ways to expand their current business with minor tweaks to their model where others might be looking for bigger, more transformative kind of changes.

For example, if you’re looking to maximize growth, you should choose a business model where the customer gets almost all of the value and keep costs down to maximize adoption.

In the short term, you will take a financial hit compared to some of the other models, but this can make the business unattractive for competitors, thus providing you with a big competitive advantage in the long run. The Freemium and open source models are obvious examples of this approach.

4. Look for patterns by benchmarking leading innovators

As mentioned, the best business models are tailored to the needs of your customers, the characteristics of your industry, as well as your business objectives.

Thus, whenever you’re looking to design a new business model, it’s usually a good idea to benchmark what the most innovative companies in the world are currently doing.

You should obviously know where your competition is but remember that the point of business model innovation is to find a way that allows you to provide much more value than they do, either at a lower price or with better margins, maybe even both, so don’t just copy them!

Thus, the best benchmarks are often from very different industries.

As mentioned, the Business Model Navigator is a great resource for this benchmarking process. It’s a website that features 55 different business model patterns that you can try to apply for your own business, including most of the examples we presented above.

5. Put it all together to identify the right model

The next step is to combine your findings from steps 1, 2, 3 and 4. Find ways where you can create as much value for your customers as possible, that uses your strengths, and allows you to capture a fair share of that revenue as determined by your business objectives.

This is obviously the creative part, so it might take some time and effort to get this right, but remember that you can always look at the examples we’ve mentioned above.

On the other hand, if you are selling products, you probably want to turn one off sales into a more predictable stream of revenue, as well as grow the amount of business you get from each customer. In this case, the solution is to either sell add-on services that help your customers make the most out of your products, or to look for ways that you could use to turn those one-off product sales into subscriptions with some service components.  

6. Validate and iterate

As with any other kind of innovation, you typically don’t get business model innovation right the first time around either.

In the end, the only way to know if it works is by testing the business model in practice.

The challenging part with many business model innovations are that they often require drastic changes to your current operating model, which you obviously shouldn’t do unless you have strong evidence for the transition being worth it.

Thus, it’s crucially important that you validate the assumptions that you’ve done in the steps leading to this point, starting from your most critical assumption , and pilot that with a small subset of your customers.

Validating the business model at smaller scale obviously saves costs and resources, but has another key advantage: speed. Learning and moving fast is essential for innovation success.

Learning and moving fast is essential for innovation success.

It can sometimes take quite a few of those tweaks to figure out the right business model, even if your products are brilliant, which is why you need to learn, iterate, and move fast when your window of opportunity is still open.

To conclude, business model innovation is a powerful, yet still very underappreciated tool.

It’s one of those topics that is quite straightforward to get the hang of, and can thus help make a difference quite soon.

If you’re not seeing the business results you think you should be getting with your products and services, or you’re looking to take significant market share from entrenched competitors, give business model innovation a try.

If you want a powerful tool to get started with your innovation process, you might want to try Viima ! It takes just minutes and is completely free.

And, consider joining the thousands of innovators already following our latest articles!

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Knowledge at Wharton Podcast

Business model innovation matters more than ever, february 15, 2021 • 33 min listen.

A new book by Wharton’s Raphael (“Raffi”) Amit and Christoph Zott from IESE Business School guides business leaders on how to craft a winning business model innovation strategy for the long game of disruption.

Wharton’s Raphael Amit and Christoph Zott from IESE Business School discuss their new book, Business Model Innovation Strategy.

The coronavirus pandemic has been a roller coaster for business managers. Some are cresting high, others are in freefall, and many more are simply trying to hang on until the nightmare ride comes to a stop. Amid the panic, there are valuable lessons for leaders who can take a deep breath and step back. Wharton management professor Raffi Amit and Christoph Zott , an entrepreneurship professor at the University of Navarra’s IESE Business School in Spain, have written a new book to guide businesses through the internal and external shocks caused by the pandemic and other disruptions. Business Model Innovation Strategy: Transformational Concepts and Tools for Entrepreneurial Leaders draws on 20 years of research and practice to help businesses embrace change by building a strategy that will make them more resilient and responsive to the marketplace. Amit and Zott joined Knowledge at Wharton to talk about the book. (Listen to the podcast at the top of this page.)

An edited transcript of the conversation follows.

Knowledge at Wharton: Before we dive into the book, could you give me a little background on your collaboration?

Raffi Amit: We’ve known each other since the mid-1990s, when we met at the University of British Columbia in Vancouver, Canada. Both Chris and I are strategy and entrepreneurship scholars with a very pragmatic orientation and very rich practical experiences. We observed in the mid- and late-1990s that there were all these e-businesses that were formed, and they are enormously valuable. We observed companies like eBay, for example, which was founded in 1995 and went public in 1998. It doesn’t have a product. The cost of goods sold is zero. Yet eBay is worth billions of dollars. Take Netflix, another example of a company that was founded in 1997 and went public in 2002. There’s really nothing new about its product. You could have rented CDs at Blockbuster, yet Netflix innovated in the way you rent a CD. Initially, it was mail order, and now it’s streaming. By innovating the way you rent a CD, it drove Blockbuster out of business.

This allowed Chris and me to realize that there is a new form of innovation that is distinct from product innovation, that is distinct from process innovation, and which does not require mountains of R&D expenses and years of research. This new form of innovation centered on the way companies do business. Namely, their business model. We published over two dozen papers together, and we decided to write a book about business model innovation.

Christoph Zott: The real answer is that because our last names fit so well together — Amit and Zott. We’re the team that looks at something and tries to find the answer from A to Z. If you go even beyond the internet and the focus on business models, what brought us together was our keen interest in entrepreneurship and everything that has to do with value creation. Raffi and I share a passion for that subject. We really want to understand how value is created, how people create something from nothing. This is this magical formula that is typically attributed to entrepreneurs. They’re able to turn ideas into something tangible. [They build] companies that provide employment to people. They create products that customers want to buy.

The relevant issue that we were observing, especially in the second part of the 1990s, was that there were a bunch of companies that were created very fast and made it to IPO really fast. Netscape, Yahoo, eBay. We asked ourselves, “What’s special about these businesses? Is there anything new here?” That led us to the realization that what these companies were doing and were really good at had nothing to do with our preconceived notions of products or services. But it was in how they did business, which we then called the business model.

“Everything that we have learned in business school for the past decades is still true. But the business model offers a new avenue for value creation.” –Christoph Zott

There was something fundamentally new going on, and it didn’t really have to do with the digitization of business. We saw that digitization was an enabler for firms to go about business in a new way, in a different way. This got us off on our work on business models and business model innovation. We wrote our first paper together in 2000, and it was published in the Strategic Management Journal . It’s still considered one of the seminal pieces on business models. It wasn’t that the business model was a brand-new idea for managers. But for academia, it was a new idea. We were interested in developing this idea and exploring it further because we thought it was a very, very rich idea. If you have companies that, within a matter of a few years, become worth billions of dollars, there must be something really to it. We’ve been at it now for a long time, and the book represents a summary of the insights that we and our colleagues have found and researched over the past 20 years.

Knowledge at Wharton: Let’s talk about what business model innovation is. In this book, you help define it by telling us what it is not. You wrote that, “Modifying an activity by making it faster, cheaper, or higher quality is not a business model innovation.” That statement seems to eliminate the traditional avenues of improvement that managers usually take. What should they be doing instead?

Zott: I’d like to address this question in two ways. Yes, we do say in our book what a business model is not. And we do this deliberately, because we think it helps people understand better what a business model is in the first place. In general, there is a lot of confusion about what a business model really is. If one person says A and another person thinks B, it’s very hard to think that they have a real conversation around this topic. So, we thought it would be very important first to define the concept clearly.

The second thing is that we don’t believe that other ways of creating value have become less important and that the business model eliminates these traditional avenues. In contrast, the business model adds to these traditional avenues of improvement for business managers. It complements them. Everything that we have learned in business school for the past decades is still true. But the business model offers a new avenue for value creation.

Knowledge at Wharton: Professor Amit, what is the framework for business model innovation?

Amit: Now we know what the business model is not — it’s not the product, it’s not the firm, it’s not all-encompassing, and it’s not the same thing as a business plan. The way we think about the business model is as a system of interdependent and interconnected activities that are designed to capture market needs, or perceived market needs, and create value for all the stakeholders. It’s a holistic concept that requires the manager to take a step back and apply system-wide or system-level thinking.

There are really four dimensions in a business model. First, what are the activities that need to be carried out as part of this business model? Second, how are these activities sequenced or connected to each other?  Third, who carries out each of the activities? And fourth, why is this business model creating value for all stakeholders, and why does this business model enable the focal firm that innovates the business model to capture some of this value?

The basic idea is, as Chris pointed out, if you just change and make the product a little bit better — you add a feature, for example, or make it work faster — it doesn’t change the system of activities. So, when we talk about business model innovation, it refers to a business model that is new to the industry in which the firm competes. And business model innovation strategy, which is the title of the book, refers to the design of a new activity system, namely, the design of a new business model. It refers to the processes by which that new system of activities is created and the implementation of the system within the context of the firm. And very, very importantly, [it includes] the ongoing adaptation of that business model to a changing ecosystem or environment within which the firm competes.

Zott: I just wanted to repeat this very important observation — that a business model is not all-encompassing. If it were all-encompassing, how would it then be different from a firm or an organization? We’re talking about the business model of a company, of an organization. This is distinct. In terms of the business model, it’s the activity system that we would like to highlight as the crucial underlying conceptual backbone.

We could think of Apple, which is a very well-known example because Apple does both. Apple is brilliant with product innovation and design. They have innovated many gadgets that are household items today, which has made them one of the most valuable companies on the planet. The iPhone is one of the latest examples of that.

“When we talk about business model innovation, it refers to a business model that is new to the industry in which the firm competes.” –Raphael Amit

But they are also a very powerful business model innovator. With the introduction of their app store and iTunes and all of those innovations, what they have done is added a distribution platform to their hardware business, which makes their hardware business more valuable. They benefit from the sale of the gadgets, but they also benefit from the sale of the content that is played on these gadgets, so they benefit twice. There is a mutually reinforcing relationship here between their product innovation and their business model innovation.

Knowledge at Wharton: In the book, you stress the importance of adopting a business model mindset. That usually refers to startups and thinking like an entrepreneur, but it’s a little bit more than that for you. So, what is a business model mindset and why is it important?

Zott: You mentioned entrepreneurial mindset. That is one type of mindset that’s certainly very helpful. But when we talk about business model mindset, we refer to what Raffi has mentioned a little earlier as system-level thinking and holistic thinking. Entrepreneurs also need to think at the system level and holistically because they need to think about the entire business architecture. They need to think about all business functions.

It’s the same thing with the business model [mindset]. In the business model mindset, you need to be able to take a step back, and this sometimes is very difficult for managers because they’re focused. They work in organizations, within certain functions, so they’re good at one thing. They’re good at strategy, they’re good at marketing. They may work in sales, or they may work in finance. But they rarely have this opportunity to take a step back and rethink the entire construction, the entire architecture of the business for which they’re working. How does it all hang together? How are all these activities connected to each other? That is what we believe requires a specific mindset — this ability to see the forest and not just the trees. That’s the first requirement of a business model mindset. To be able to jump the level of analysis from a focus on activities or individual activities or products, to the system level.

Amit: Think about a car manufacturer executive’s reaction to the entry of Tesla into the automotive market. The first thing they are thinking about is, “Well, maybe what we should do is expand our product portfolio and have an electric car or a hybrid car,” because the focus is on the technology of the product.

But Elon Musk — who has a background at Wharton — already adopted a much broader perspective on his firm’s innovation strategy, taking Apple as an inspiration not only for promoting distinctive technology and slick product design, but also imitating and incorporating other key aspects of the Apple business model. For example, they have their own stores rather than having franchises distribute their car. They have total control of the entire process, from the design to manufacturing and the sales. General Motors doesn’t have that. Mercedes Benz doesn’t have that. Chrysler doesn’t have that. Ford doesn’t. They use third-party franchisees that do the sales, so they don’t have total control of the interaction with the end customer. But Tesla does. And that feedback allows Tesla to continuously innovate its offer and be ahead of the competition. It’s not focused just on the car. It’s a much more holistic perspective on doing business.

Knowledge at Wharton: That’s a really great example because we just found out that Elon Musk has topped the list of richest people in the world. Clearly, he’s doing something right. We can take some lessons from his business model mindset.

“You need to be able to take a step back, and this sometimes is very difficult for managers because they’re focused.” –Christoph Zott

Zott: The Tesla example is a brilliant one in order to highlight the two traps into which managers often fall. The first trap is the level of analysis trap, which is when managers continue to focus on what they thought was the important thing to focus on. Like, for example, the product. This is very clear in the car industry. If you look at traditional car firms, and you ask managers in those car firms what’s really important, many of them will continue to talk about the car and the engine and elements of the design of the car, and so on and so forth. They’re completely focused and concentrated on the car as a product. Whereas people like Elon Musk and others in the e-mobility industry know that the car as a product is one vision. The other vision would be the car as a software platform, or even as a service. And that would be a different type of level of analysis. To get from one to the other is extremely, extremely difficult. If you have worked all your life on products, and all of a sudden somebody comes along and says, “It’s not about the product anymore. It’s about how you do business,” that’s a difficult one to grasp.

That ties into the second trap, which is the familiarity trap. You’re used to working within a particular activity system, within a particular company. You’re used to working within a car manufacturer that has things set up in a certain way, that has a production line, but then outsources many things to suppliers and works with dealerships. This is your familiar reference point. To cast that aside and say, “Wow, maybe we should do things very differently. Maybe we should not outsource so many things and should do them internally,” or vice versa — that’s not so easy, either. People are familiar with certain things, and have a hard time grasping the new and the need for a new way of doing things. The need for a new business model. They also are very much focused on a certain level of analysis, especially at the product level, and then have a hard time understanding why they should be talking about activities. “Why should activities matter? Isn’t it the product that’s important here?” We say both are important, but you need to make the move and the jump from one to the other. And that’s, I think, a mindset issue.

Knowledge at Wharton: The coronavirus pandemic has upended business in a very short period of time. But if we go back through history, there are a number of moments that have redefined business. We can think of World War II, the oil crisis in the 1970s, the development of the internet. Is this pandemic any different? Are there new lessons to be learned here?

Zott: I think that the COVID crisis is acting as an accelerator in many respects. Does it highlight very new issues? I’m not so sure. I think it brings to the forefront issues that were already there, but it makes them even more salient. It’s an accelerator in many ways, for example when we talk about education and digital ways of delivering education. In our universities, both at the Wharton School and at IESE Business School, we’ve seen a change that we would not have believed possible a year ago. I think of it more as an accelerator than as something that brings about fundamentally new desires and fundamentally new developments. Although we cannot exclude that.

Knowledge at Wharton: Dr. Amit, would you agree?

Amit: Let’s just put things a little bit in perspective. The COVID-19 pandemic triggered a severe, multifaceted global crisis — both a health crisis and an economic crisis. The shocks to the economy were both on the demand side as well as on the supply side. A catastrophic pandemic such as COVID-19 is very likely to alter the preferences, habits, and risk attitudes of consumers, in part because of the long stays at home and the social distancing measures that were applied. What seems very likely is that many companies — both large and small, both private and public, both for-profit and not-for-profit — will be prompted to reimagine themselves, to reinvent themselves, in order to survive and prosper in the future.

The way they engage with their customers might change dramatically. For the last almost year, we didn’t go to malls. We didn’t go shopping. We did everything online. If you are a mall owner, you will ask yourself, “Will consumers come back to malls? Will they need the mall? Will they need to go when they are so used to shopping online today?”

There are profound behavioral changes that might occur as a result of this pandemic. Companies need to look at themselves and say, “Should we find new ways to interact with our partners, with our customers?” Therefore, “Do we need to design a new business model?” There is no doubt that the pandemic has prompted companies to reimagine and redesign their business models. I think that we don’t really know how the new normal will evolve. That’s work in progress, right? There are so many things that are happening, both politically, socially, and otherwise, and there is a record level of uncertainty as a result. That, for sure, will affect how companies will decide to engage with their stakeholders.

“There is no doubt that the pandemic has prompted companies to reimagine and redesign their business models.” –Raphael Amit

I think that the breadth and depth of the changes that the pandemic has brought about, as well as the speed at which those things have occurred, will result in substantial business model innovation. Our book provides guidance to executives on how to go about doing this, because many are not that familiar with that process and with that type of thinking.

As we work with companies around the world, we see that they’re struggling. If you’re a mall, you’re trying to hold onto the retailers that lease space from you. But maybe they should think totally differently about the usage of the space, not just running after retailers and convincing them to continue to pay the rent. Maybe they should engage in different uses of the space. Maybe do some entertainment, maybe do some other things that would bring people back into malls, not just for shopping but for other activities that complement shopping.

Knowledge at Wharton: If readers take one thing away from your book, what do you want that lesson to be?

Amit: Pay attention to your business model strategy. It has become a strategic imperative and a key strategic choice that managers and entrepreneurs need to make. The business model requires an ongoing, innovative adaptation to the changing external environment. Make sure that your organization accepts change and has a business model innovation mindset to enable it to continue and prosper in the future.

Zott: I think the most important message to entrepreneurs and managers out there — and it’s a positive message — is that business model innovation has become a new form of innovation. It’s best conceived of as how to do business and how to do business in new ways. It’s centered on the firm’s activity system, and it represents a new form of value creation.

Think of it as a new type of innovation. You don’t have to be a rocket scientist. You don’t have to be an engineer. You don’t have to have a Ph.D. in anything in order to come up with a new business model idea. It’s very democratic, and it’s an equalizer. You can come up with new ideas, creative new ways of doing business, and build a fantastic new company around that. But as Raffi pointed out, in order to do this systematically and in a disciplined manner, you have to have a strategy for it, especially if you’re working for a large company. This is not just for start-up entrepreneurs, but it’s particularly important for established companies who need to reinvent themselves. And then COVID-19 presents us with a rationale for why it’s important to think about reinventing ourselves.

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Four Paths to Business Model Innovation

• Karan Girotra
• Serguei Netessine

The secret to success lies in who makes what decisions when and why.

Reprint: R1407H

Drawing on the idea that any business model is essentially a set of key decisions that collectively determine how a business earns its revenue, incurs its costs, and manages its risks, the authors view innovations to the model as changes to those decisions: What mix of products or services should you offer? When should you make your key decisions? Who are your best decision makers? and Why do key decision makers choose as they do? In this article they present a framework to help managers take business model innovation to the level of a reliable and improvable discipline. Companies can use the framework to make their innovation processes more systematic and open so that business model reinvention becomes a continual, inclusive process rather than a series of isolated, internally focused events.

Idea in Brief

The problem.

Business model innovation is typically an ad hoc process, lacking any framework for exploring opportunities. As a result, many companies miss out on inexpensive ways to radically improve their profitability and productivity.

The Solution

Drawing on the idea that a business model reflects a set of decisions, the authors frame innovation in terms of deciding what products or services to offer, when to make decisions, who should make them, and why the decision makers choose as they do.

Traditional call centers hire a staff to supply services as needed from a place of work, incurring significant up-front costs and risks. LiveOps created a new model by revising the order of decisions: It employs agents as calls come in by routing the calls to home-based freelancers who have signaled their availability.

Business model innovation is a wonderful thing. At its simplest, it demands neither new technologies nor the creation of brand-new markets: It’s about delivering existing products that are produced by existing technologies to existing markets. And because it often involves changes invisible to the outside world, it can bring advantages that are hard to copy.

• KG Karan Girotra is the Charles H. Dyson Family Professor of Management at Cornell Tech and the Johnson College of Business at Cornell University, and a coauthor, with Serguei Netessine, of The Risk-Driven Business Model: Four Questions That Will Define Your Company (HBR Press, 2014). Follow him on Twitter: @Girotrak
• Serguei Netessine is the vice dean for global initiatives and the Dhirubhai Ambani Professor of Innovation and Entrepreneurship at the University of Pennsylvania’s Wharton School and a coauthor, with Karan Girotra, of  The Risk-Driven Business Model: Four Questions That Will Define Your Company   (HBR Press, 2014). Follow him on Twitter: @snetesin

Partner Center

• November 7, 2023
• Digital Experience , Digital Strategy , Digital Transformation

What is Business Model Innovation?

Business Model Innovation (BMI) is more than just a set of incremental changes; it represents a holistic and radical transformation of how a company creates and delivers value to its customers. Most importantly, from the shareholder’s view, BMI represents how it generates revenue or profits through the value proposition.

While some may be well-versed in Business Model Innovation, others may wonder, “What exactly is Business Model Innovation?” In this guide, we define the concept, explain its importance, provide examples, discuss strategies and challenges, and look to the future of Business Model Innovation. 

Business Model Innovation Defined

Business Model Innovation is a comprehensive approach that determines the core components of a company’s strategy, including its target audience, value proposition, revenue streams, and cost structure. 

Business Model Innovation involves:

• Rethinking an organization’s existing business models.
• Challenging conventional wisdom.
• Exploring novel approaches to problem-solving. 

A core component of Business Model Innovation that most organizations overlook is the Operating Model. The Operating Model is an expansion on Michael Porter’s Value Chain first described in his book Competitive Advantage: Creating and Sustaining Superior Performance . In simple terms, a value chain is a series of steps or systems a business uses to create value for its customers. The Operating Model builds upon the concept of the value chain to include all of the capabilities that support the value chain (illustrated as chevrons – see below). Capabilities are visual constructs that describe the people who perform business processes supported by various technologies within an organization. The Operating Model makes the activities and processes that an organization conducts explicit, and in doing so, allows the organization to easily identify, evaluate, and correct inefficient, ineffective, or missing capabilities that are crucial in executing the organization’s strategy. 

Using the Operating Model for BMI focuses on the business processes within the organization that produce customer value. Broadly, these processes fall into three or four Process Families:

• Service Development
• Prospect Awareness and Acquisition
• Service Delivery ( Customer Experience )
• Customer Retention and Community Development 

Importance of Business Model Innovation

To stay relevant, businesses always need to evolve, but they can choose to do so proactively and lead the way or reactively and struggle to keep up. For companies that want to remain relevant , Business Model Innovation allows them to leverage changing customer demands and expectations to drive business growth. Far too many have failed to heed market dynamics at their peril ( for example did you know that Eastman Kodak, a pioneer in the photography industry, played a vital role in the development of digital imaging technology and yet was unable to capitalize on its investment).. 

Examples of Business Model Innovation

Many things we enjoy and rely upon exist due to Business Model Innovation. Just take Netflix, for example. The company began as a DVD rental service, transformed into a cutting-edge subscription-based streaming platform that completely disrupted the industry, and is now creating a buzz by randomly giving away DVDs to customers. Another example is Airbnb. It disrupted the hotel industry with innovative peer-to-peer accommodation arrangements and tourism experiences. These companies boldly shook up the status quo and became staples in our lives. 

Strategies in Business Model Innovation

The fastest way to build new business models, innovate, and transform culture along the way is with a Strategy-to-Execution process that includes the following tenets from the Transformation Manifesto :

• A complete and total leadership focus on running, improving, and transforming the business simultaneously is required. 
• A strategy-to-execution process is cultivated and includes many contributors. Without this, running and improving the business will fail, and transformation will be impossible. 
• The strategy-to-execution process must be driven by vision and inspiration. The best type of transformation is driven by value and is not a response to market forces.
• A fundamental rethinking of the business operating model must be embraced. Forget hierarchy; it’s all about capability development and deployment.
• There must be a deliberate shift away from command and control models to new networked models of work.
• Adoption of new capability-based behaviors, metrics, and responsibilities must be widespread.
• Transformation requires new techniques – capability modeling, business value analysis, heat mapping, investment road mapping, and enterprise architecture.
• Higher velocity must be created by using the agile or scrum approach for business and IT.
• Inspired stumbling forward must be encouraged and rewarded.
• Transformation must start with CEO and C-suite leadership and center on Talent Management. Leadership must demand more from HR and IT to leverage talent for better collaboration and to create the conditions for innovation and growth.

Challenges in Business Model Innovation

Despite their best efforts, many organizations seem to be incapable of Business Model Innovation. The most common root cause of this struggle is that businesses make the mistake of confusing the Org-chart, which describes what employees do for the organization, with the Operating Model, which describes what an organization does to deliver its value proposition to its customers. 

While it can be helpful to direct attention to employee contributions, doing so in this context distracts from what is at the core of business transformation. Viewing business model transformation through the lens of the Org-chart encourages parochial thinking and reinforces departmental silos. Org-chart thinking typically results in a retrospective inward gaze rather than a forward-looking outward scan to discover new market opportunities, enhance customer experiences, and improve operational efficiencies. 

Using the Operating Model for BMI focuses on the customer-value-producing business processes within the organization. Viewing the organization through this lens not only positions the organization for Business Model Innovation but more importantly, it often reveals gaping competitive holes, leaving the organization highly susceptible to digital disruptors – new or existing competitors who have leveraged new/emerging technology to leapfrog existing incumbents.

Future of Business Model Innovation

The Future of Business Model Innovation is for you to define. What will your business innovate? 

In his book, The Fourth Industrial Revolution , Klaus Schwab stated, “The question for all industries and companies, without exception, is no longer am I going to be disrupted but when is disruption coming, what form will it take, and how will it affect me and my organization?” At Accelare, we’ve created a quick, 4-minute assessment that helps organizations evaluate their operating model to determine their digital disruption exposure.  

This assessment looks at four specific domains that are critical to BMI:

• Value Innovation/Customer Experience – The organization’s ability to design and deliver a meaningful customer experience at a lower cost. 
• Operational Innovation/Agility – The organization’s ability to re-align human capital, business processes, and current technology to anticipate and capitalize on market shifts.  
• Organizational Engagement – The organization’s ability to promote employee experiences and build alignment through communication and active participation.
• Financial Health – The organization’s ability to allocate capital to create value for stakeholders.

Upon completion, we will send out a free, personalized report that compares your organization against a baseline and offers advice on improving your digital disruption resilience and BMI efforts.

To jumpstart your Business Model Innovation journey, take our Digital Disruption Assessment . 

More Insights

Key Factors in Digital Disruption: People and Technology

Digital disruption is transforming industries at an unprecedented pace, influencing not just market dynamics but also the internal operations of organizations. While technology undoubtedly plays

5 Recent Examples of Digital Disruption and Their Impact

In recent years, digital disruption has become a central theme in the evolving business landscape. This phenomenon occurs when emerging technologies and new business models

What is an Operating Model in Business?

In the complex and ever-evolving business landscape, understanding the intricacies of an operating model is crucial for any organization aiming to achieve strategic goals and

Is your organization at risk of digital disruption?

Take our 4-minute, 12 question disruption assessment

Business Model Innovation

• First Online: 01 October 2020

Cite this chapter

• Bernd W. Wirtz 2  

Part of the book series: Springer Texts in Business and Economics ((STBE))

8454 Accesses

1 Citations

• The original version of this chapter was revised. A correction to this chapter can be found at https://doi.org/10.1007/978-3-030-48017-2_22

Business model innovation has received more attention in recent years than nearly all of the other subareas of business model management. In this respect, there is a great interest in literature and practice regarding the conditions, structure and implementation of innovations on the business model level. Since business model innovation is rather abstract compared to product or process innovation, knowledge of the business model concept as well as classic innovation management is necessary in order to better understand it.

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The eight essentials of innovation

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January 4, 2024

In the time since this article was first published, McKinsey has continued to explore the topics it covers. Read on for a summary of our latest insights.

Innovation may sound like a creative art: hard to quantify, dependent on lightning-bolt inspiration, subject to the availability of magic dust and luck. It’s true that innovation relies, to an extent, on the vagaries of ingenuity. But according to McKinsey research, innovation—and, crucially, the type of outperformance that innovation can spark in organizations—is much more likely to happen when there is a rigorous process  in place to bring ideas to fruition.

The simple fact is that innovation translates to growth : innovation leaders generate almost twice as much revenue growth from innovation as their competitors. Our research in the years since the COVID-19 pandemic has found that these organizations, which we call “innovative growers,” do this by cultivating four best practices :

• Link innovation to growth aspirations and reinforce its importance in strategic and financial discussions.
• Pursue multiple pathways to growth, both in core businesses and when entering adjacent customer segments, industries, or geographies. Innovative growers also only enter markets where there are clear opportunities to create value.
• Invest productively in all innovation capabilities, including research and development, resourcing, and operational agility.
• Cultivate strong M&A capabilities, particularly programmatic dealmaking.

Innovation can be especially rewarding when deployed as a crisis-management measure . During periods of uncertainty, organizations that invest in innovation—contrary, perhaps, to the impulse to batten down the hatches—are also more likely to emerge ahead of competitors. More specifically, innovative organizations are more likely to find emerging pockets of growth  in times of uncertainty.

Looking ahead, we expect innovative organizations to keep outpacing their peers. Our 2023 McKinsey Global Survey  reveals a striking connection  between organizations’ innovation capabilities and their abilities to increase value through the newest digital technologies, including generative AI. Everyone is talking about gen AI, but organizations with strong innovative cultures are walking the walk, too: thirty percent of top innovators we surveyed said they are already deploying gen AI at scale in their innovation and R&D functions, more than six times the rate of companies that are lagging on innovation. Top innovators are also already reaping significantly better business outcomes from their AI investments than slower-moving competitors.

Articles referenced:

• “ Companies with innovative cultures have a big edge with generative AI ,” August 2023
• “ Innovation: Your solution for weathering uncertainty ,” January 2023
• “ Committed innovators: How masters of essentials outperform ,” June 2022
• “ Innovation in a crisis: Why it is more critical than ever ,” June 2020

It’s no secret: innovation is difficult for well-established companies. By and large, they are better executors than innovators, and most succeed less through game-changing creativity than by optimizing their existing businesses.

Yet hard as it is for such organizations to innovate, large ones as diverse as Alcoa, the Discovery Group, and NASA’s Ames Research Center are actually doing so. What can other companies learn from their approaches and attributes? That question formed the core of a multiyear study comprising in-depth interviews, workshops, and surveys of more than 2,500 executives in over 300 companies, including both performance leaders and laggards, in a broad set of industries and countries (Exhibit 1). What we found were a set of eight essential attributes that are present, either in part or in full, at every big company that’s a high performer in product, process, or business-model innovation.

Since innovation is a complex, company-wide endeavor , it requires a set of crosscutting practices and processes to structure, organize, and encourage it. Taken together, the essentials described in this article constitute just such an operating system, as seen in Exhibit 2. These often overlapping, iterative, and nonsequential practices resist systematic categorization but can nonetheless be thought of in two groups. The first four, which are strategic and creative in nature, help set and prioritize the terms and conditions under which innovation is more likely to thrive. The next four essentials deal with how to deliver and organize for innovation repeatedly over time and with enough value to contribute meaningfully to overall performance.

To be sure, there’s no proven formula for success, particularly when it comes to innovation. While our years of client-service experience provide strong indicators for the existence of a causal relationship between the attributes that survey respondents reported and the innovations of the companies we studied, the statistics described here can only prove correlation. Yet we firmly believe that if companies assimilate and apply these essentials—in their own way, in accordance with their particular context, capabilities, organizational culture, and appetite for risk—they will improve the likelihood that they, too, can rekindle the lost spark of innovation. In the digital age, the pace of change has gone into hyperspeed, so companies must get these strategic, creative, executional, and organizational factors right to innovate successfully.

President John F. Kennedy’s bold aspiration, in 1962, to “go to the moon in this decade” motivated a nation to unprecedented levels of innovation. A far-reaching vision can be a compelling catalyst, provided it’s realistic enough to stimulate action today.

But in a corporate setting, as many CEOs have discovered, even the most inspiring words often are insufficient, no matter how many times they are repeated. It helps to combine high-level aspirations with estimates of the value that innovation should generate to meet financial-growth objectives. Quantifying an “innovation target for growth,” and making it an explicit part of future strategic plans, helps solidify the importance of and accountability for innovation. The target itself must be large enough to force managers to include innovation investments in their business plans. If they can make their numbers using other, less risky tactics, our experience suggests that they (quite rationally) will.

Establishing a quantitative innovation aspiration is not enough, however. The target value needs to be apportioned to relevant business “owners” and cascaded down to their organizations in the form of performance targets and timelines. Anything less risks encouraging inaction or the belief that innovation is someone else’s job.

For example, Lantmännen, a big Nordic agricultural cooperative, was challenged by flat organic growth and directionless innovation. Top executives created an aspirational vision and strategic plan linked to financial targets: 6 percent growth in the core business and 2 percent growth in new organic ventures. To encourage innovation projects, these quantitative targets were cascaded down to business units and, ultimately, to product groups. During the development of each innovation project, it had to show how it was helping to achieve the growth targets for its category and markets. As a result, Lantmännen went from 4 percent to 13 percent annual growth, underpinned by the successful launch of several new brands. Indeed, it became the market leader in premade food only four years after entry and created a new premium segment in this market.

Such performance parameters can seem painful to managers more accustomed to the traditional approach. In our experience, though, CEOs are likely just going through the motions if they don’t use evaluations and remuneration to assess and recognize the contribution that all top managers make to innovation.

Fresh, creative insights are invaluable, but in our experience many companies run into difficulty less from a scarcity of new ideas than from the struggle to determine which ideas to support and scale. At bigger companies, this can be particularly problematic during market discontinuities, when supporting the next wave of growth may seem too risky, at least until competitive dynamics force painful changes.

Innovation is inherently risky, to be sure, and getting the most from a portfolio of innovation initiatives is more about managing risk than eliminating it. Since no one knows exactly where valuable innovations will emerge, and searching everywhere is impractical, executives must create some boundary conditions for the opportunity spaces they want to explore. The process of identifying and bounding these spaces can run the gamut from intuitive visions of the future to carefully scrutinized strategic analyses. Thoughtfully prioritizing these spaces also allows companies to assess whether they have enough investment behind their most valuable opportunities.

During this process, companies should set in motion more projects than they will ultimately be able to finance, which makes it easier to kill those that prove less promising. RELX Group, for example, runs 10 to 15 experiments per major customer segment, each funded with a preliminary budget of around $200,000, through its innovation pipeline every year, choosing subsequently to invest more significant funds in one or two of them, and dropping the rest. “One of the hardest things to figure out is when to kill something,” says Kumsal Bayazit, RELX Group’s chief strategy officer. “It’s a heck of a lot easier if you have a portfolio of ideas.”

Once the opportunities are defined, companies need transparency into what people are working on and a governance process that constantly assesses not only the expected value, timing, and risk of the initiatives in the portfolio but also its overall composition. There’s no single mix that’s universally right. Most established companies err on the side of overloading their innovation pipelines with relatively safe, short-term, and incremental projects that have little chance of realizing their growth targets or staying within their risk parameters. Some spread themselves thinly across too many projects instead of focusing on those with the highest potential for success and resourcing them to win.

These tendencies get reinforced by a sluggish resource-reallocation process. Our research shows that a company typically reallocates only a tiny fraction of its resources from year to year, thereby sentencing innovation to a stagnating march of incrementalism. 1 1. See Stephen Hall, Dan Lovallo, and Reinier Musters, “ How to put your money where your strategy is ,” McKinsey Quarterly , March 2012; and Vanessa Chan, Marc de Jong, and Vidyadhar Ranade, “ Finding the sweet spot for allocating innovation resources ,” McKinsey Quarterly , May 2014.

Innovation also requires actionable and differentiated insights—the kind that excite customers and bring new categories and markets into being. How do companies develop them? Genius is always an appealing approach, if you have or can get it. Fortunately, innovation yields to other approaches besides exceptional creativity.

The rest of us can look for insights by methodically and systematically scrutinizing three areas: a valuable problem to solve, a technology that enables a solution, and a business model that generates money from it. You could argue that nearly every successful innovation occurs at the intersection of these three elements. Companies that effectively collect, synthesize, and “collide” them stand the highest probability of success. “If you get the sweet spot of what the customer is struggling with, and at the same time get a deeper knowledge of the new technologies coming along and find a mechanism for how these two things can come together, then you are going to get good returns,” says Alcoa chairman and chief executive Klaus Kleinfeld.

The insight-discovery process, which extends beyond a company’s boundaries to include insight-generating partnerships, is the lifeblood of innovation. We won’t belabor the matter here, though, because it’s already the subject of countless articles and books. 2 2. See, for example, Marla M. Capozzi, Reneé Dye, and Amy Howe, “ Sparking creativity in teams: An executive’s guide ,” McKinsey Quarterly , April 2011; and Marla M. Capozzi, John Horn, and Ari Kellen, “ Battle-test your innovation strategy ,” McKinsey Quarterly , December 2012. One thing we can add is that discovery is iterative, and the active use of prototypes can help companies continue to learn as they develop, test, validate, and refine their innovations. Moreover, we firmly believe that without a fully developed innovation system encompassing the other elements described in this article, large organizations probably won’t innovate successfully, no matter how effective their insight-generation process is. 

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Business-model innovations—which change the economics of the value chain, diversify profit streams, and/or modify delivery models—have always been a vital part of a strong innovation portfolio. As smartphones and mobile apps threaten to upend oldline industries, business-model innovation has become all the more urgent: established companies must reinvent their businesses before technology-driven upstarts do. Why, then, do most innovation systems so squarely emphasize new products? The reason, of course, is that most big companies are reluctant to risk tampering with their core business model until it’s visibly under threat. At that point, they can only hope it’s not too late.

Leading companies combat this troubling tendency in a number of ways. They up their game in market intelligence, the better to separate signal from noise. They establish funding vehicles for new businesses that don’t fit into the current structure. They constantly reevaluate their position in the value chain, carefully considering business models that might deliver value to priority groups of new customers. They sponsor pilot projects and experiments away from the core business to help combat narrow conceptions of what they are and do. And they stress-test newly emerging value propositions and operating models against countermoves by competitors.

Amazon does a particularly strong job extending itself into new business models by addressing the emerging needs of its customers and suppliers. In fact, it has included many of its suppliers in its customer base by offering them an increasingly wide range of services, from hosted computing to warehouse management. Another strong performer, the Financial Times , was already experimenting with its business model in response to the increasing digitalization of media when, in 2007, it launched an innovative subscription model, upending its relationship with advertisers and readers. “We went against the received wisdom of popular strategies at the time,” says Caspar de Bono, FT board member and managing director of B2B. “We were very deliberate in getting ahead of the emerging structural change, and the decisions turned out to be very successful.” In print’s heyday, 80 percent of the FT ’s revenue came from print advertising. Now, more than half of it comes from content, and two-thirds of circulation comes from digital subscriptions.

Virulent antibodies undermine innovation at many large companies. Cautious governance processes make it easy for stifling bureaucracies in marketing, legal, IT, and other functions to find reasons to halt or slow approvals. Too often, companies simply get in the way of their own attempts to innovate. A surprising number of impressive innovations from companies were actually the fruit of their mavericks, who succeeded in bypassing their early-approval processes. Clearly, there’s a balance to be maintained: bureaucracy must be held in check, yet the rush to market should not undermine the cross-functional collaboration, continuous learning cycles, and clear decision pathways that help enable innovation. Are managers with the right knowledge, skills, and experience making the crucial decisions in a timely manner, so that innovation continually moves through an organization in a way that creates and maintains competitive advantage, without exposing a company to unnecessary risk?

Companies also thrive by testing their promising ideas with customers early in the process, before internal forces impose modifications that blur the original value proposition. To end up with the innovation initially envisioned, it’s necessary to knock down the barriers  that stand between a great idea and the end user. Companies need a well-connected manager to take charge of a project and be responsible for the budget, time to market, and key specifications—a person who can say yes rather than no. In addition, the project team needs to be cross-functional in reality, not just on paper. This means locating its members in a single place and ensuring that they give the project a significant amount of their time (at least half) to support a culture that puts the innovation project’s success above the success of each function.

Cross-functional collaboration can help ensure end-user involvement throughout the development process. At many companies, marketing’s role is to champion the interests of end users as development teams evolve products and to help ensure that the final result is what everyone first envisioned. But this responsibility is honored more often in the breach than in the observance. Other companies, meanwhile, rationalize that consumers don’t necessarily know what they want until it becomes available. This may be true, but customers can certainly say what they don’t like. And the more quickly and frequently a project team gets—and uses—feedback, the more quickly it gets a great end result.

Some ideas, such as luxury goods and many smartphone apps, are destined for niche markets. Others, like social networks, work at global scale. Explicitly considering the appropriate magnitude and reach of a given idea is important to ensuring that the right resources and risks are involved in pursuing it. The seemingly safer option of scaling up over time can be a death sentence. Resources and capabilities must be marshaled to make sure a new product or service can be delivered quickly at the desired volume and quality. Manufacturing facilities, suppliers, distributors, and others must be prepared to execute a rapid and full rollout.

For example, when TomTom launched its first touch-screen navigational device, in 2004, the product flew off the shelves. By 2006, TomTom’s line of portable navigation devices reached sales of about 5 million units a year, and by 2008, yearly volume had jumped to more than 12 million. “That’s faster market penetration than mobile phones” had, says Harold Goddijn, TomTom’s CEO and cofounder. While TomTom’s initial accomplishment lay in combining a well-defined consumer problem with widely available technology components, rapid scaling was vital to the product’s continuing success. “We doubled down on managing our cash, our operations, maintaining quality, all the parts of the iceberg no one sees,” Goddijn adds. “We were hugely well organized.”

In the space of only a few years, companies in nearly every sector have conceded that innovation requires external collaborators. Flows of talent and knowledge increasingly transcend company and geographic boundaries. Successful innovators achieve significant multiples for every dollar invested in innovation by accessing the skills and talents of others. In this way, they speed up innovation and uncover new ways to create value for their customers and ecosystem partners.

Smart collaboration with external partners, though, goes beyond merely sourcing new ideas and insights; it can involve sharing costs and finding faster routes to market. Famously, the components of Apple’s first iPod were developed almost entirely outside the company; by efficiently managing these external partnerships, Apple was able to move from initial concept to marketable product in only nine months. NASA’s Ames Research Center teams up not just with international partners—launching joint satellites with nations as diverse as Lithuania, Saudi Arabia, and Sweden—but also with emerging companies, such as SpaceX.

High-performing innovators work hard to develop the ecosystems that help deliver these benefits. Indeed, they strive to become partners of choice, increasing the likelihood that the best ideas and people will come their way. That requires a systematic approach. First, these companies find out which partners they are already working with; surprisingly few companies know this. Then they decide which networks—say, four or five of them—they ideally need to support their innovation strategies. This step helps them to narrow and focus their collaboration efforts and to manage the flow of possibilities from outside the company. Strong innovators also regularly review their networks, extending and pruning them as appropriate and using sophisticated incentives and contractual structures to motivate high-performing business partners. Becoming a true partner of choice is, among other things, about clarifying what a partnership can offer the junior member: brand, reach, or access, perhaps. It is also about behavior. Partners of choice are fair and transparent in their dealings.

Moreover, companies that make the most of external networks have a good idea of what’s most useful at which stages of the innovation process. In general, they cast a relatively wide net in the early going. But as they come closer to commercializing a new product or service, they become narrower and more specific in their sourcing, since by then the new offering’s design is relatively set.

How do leading companies stimulate, encourage, support, and reward innovative behavior and thinking among the right groups of people? The best companies find ways to embed innovation into the fibers of their culture, from the core to the periphery.

They start back where we began: with aspirations that forge tight connections among innovation, strategy, and performance. When a company sets financial targets for innovation and defines market spaces, minds become far more focused. As those aspirations come to life through individual projects across the company, innovation leaders clarify responsibilities using the appropriate incentives and rewards.

The Discovery Group, for example, is upending the medical and life-insurance industries in its native South Africa and also has operations in the United Kingdom, the United States, and China, among other locations. Innovation is a standard measure in the company’s semiannual divisional scorecards—a process that helps mobilize the organization and affects roughly 1,000 of the company’s business leaders. “They are all required to innovate every year,” Discovery founder and CEO Adrian Gore says of the company’s business leaders. “They have no choice.”

Organizational changes may be necessary, not because structural silver bullets exist—we’ve looked hard for them and don’t think they do—but rather to promote collaboration, learning, and experimentation. Companies must help people to share ideas and knowledge freely, perhaps by locating teams working on different types of innovation in the same place, reviewing the structure of project teams to make sure they always have new blood, ensuring that lessons learned from success and failure are captured and assimilated, and recognizing innovation efforts even when they fall short of success.

Internal collaboration and experimentation can take years to establish, particularly in large, mature companies with strong cultures and ways of working that, in other respects, may have served them well. Some companies set up “innovation garages” where small groups can work on important projects unconstrained by the normal working environment while building new ways of working that can be scaled up and absorbed into the larger organization. NASA, for example, has ten field centers. But the space agency relies on the Ames Research Center, in Silicon Valley, to maintain what its former director, Dr. Pete Worden, calls “the character of rebels” to function as “a laboratory that’s part of a much larger organization.”

Big companies do not easily reinvent themselves as leading innovators. Too many fixed routines and cultural factors can get in the way. For those that do make the attempt, innovation excellence is often built in a multiyear effort that touches most, if not all, parts of the organization. Our experience and research suggest that any company looking to make this journey will maximize its probability of success by closely studying and appropriately assimilating the leading practices of high-performing innovators. Taken together, these form an essential operating system for innovation within a company’s organizational structure and culture.

Marc de Jong is a principal in McKinsey’s Amsterdam office, Nathan Marston is a principal in the London office, and Erik Roth is a principal in the Shanghai office.

The authors wish to thank Jill Hellman and McKinsey’s Peet van Biljon for their contributions to this article.

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Business model innovation: a review and research agenda

New England Journal of Entrepreneurship

ISSN : 2574-8904

Article publication date: 16 October 2019

Issue publication date: 13 November 2019

The aim of this paper is to review and synthesise the recent advancements in the business model literature and explore how firms approach business model innovation.

Design/methodology/approach

A systematic review of business model innovation literature was carried out by analysing 219 papers published between 2010 and 2016.

Evidence reviewed suggests that rather than taking either an evolutionary process of continuous revision, adaptation and fine-tuning of the existing business model or a revolutionary process of replacing the existing business model, firms can explore alternative business models through experimentation, open and disruptive innovations. It was also found that changing business models encompasses modifying a single element, altering multiple elements simultaneously and/or changing the interactions between elements in four areas of innovation: value proposition, operational value, human capital and financial value.

Research limitations/implications

Although this review highlights the different avenues to business model innovation, the mechanisms by which firms can change their business models and the external factors associated with such change remain unexplored.

Practical implications

The business model innovation framework can be used by practitioners as a “navigation map” to determine where and how to change their existing business models.

Originality/value

Because conflicting approaches exist in the literature on how firms change their business models, the review synthesises these approaches and provides a clear guidance as to the ways through which business model innovation can be undertaken.

• Business model
• Value proposition
• Value creation
• Value capture

Ramdani, B. , Binsaif, A. and Boukrami, E. (2019), "Business model innovation: a review and research agenda", New England Journal of Entrepreneurship , Vol. 22 No. 2, pp. 89-108. https://doi.org/10.1108/NEJE-06-2019-0030

Emerald Publishing Limited

Copyright © 2019, Boumediene Ramdani, Ahmed Binsaif and Elias Boukrami

Published in New England Journal of Entrepreneurship . Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

1. Introduction

Firms pursue business model innovation by exploring new ways to define value proposition, create and capture value for customers, suppliers and partners ( Gambardella and McGahan, 2010 ; Teece, 2010 ; Bock et al. , 2012 ; Casadesus-Masanell and Zhu, 2013 ). An extensive body of the literature asserts that innovation in business models is of vital importance to firm survival, business performance and as a source of competitive advantage ( Demil and Lecocq, 2010 ; Chesbrough, 2010 ; Amit and Zott, 2012 ; Baden-Fuller and Haefliger, 2013 ; Casadesus-Masanell and Zhu, 2013 ). It is starting to attract a growing attention, given the increasing opportunities for new business models enabled by changing customer expectations, technological advances and deregulation ( Casadesus-Masanell and Llanes, 2011 ; Casadesus-Masanell and Zhu, 2013 ). This is evident from the recent scholarly outputs ( Figure 1 ). Thus, it is essential to comprehend this literature and uncover where alternative business models can be explored.

Conflicting approaches exist in the literature on how firms change their business models. One approach suggests that alternative business models can be explored through an evolutionary process of incremental changes to business model elements (e.g. Demil and Lecocq, 2010 ; Dunford et al. , 2010 ; Amit and Zott, 2012 ; Landau et al. , 2016 ; Velu, 2016 ). The other approach, mainly practice-oriented, advocates that innovative business models can be developed through a revolutionary process by replacing existing business models (e.g. Bock et al. , 2012 ; Iansiti and Lakhani, 2014 ). The fragmentation of prior research is due to the variety of disciplinary and theoretical foundations through which business model innovation is examined. Scholars have drawn on perspectives from entrepreneurship (e.g. George and Bock, 2011 ), information systems (e.g. Al-debei and Avison, 2010 ), innovation management (e.g. Dmitriev et al. , 2014 ), marketing (e.g. Sorescu et al. , 2011 ) and strategy (e.g. Demil and Lecocq, 2010 ). Also, this fragmentation is deepened by focusing on different types of business models in different industries. Studies have explored different types of business models such as digital business models (e.g. Weill and Woerner, 2013 ), service business models (e.g. Kastalli et al. , 2013 ), social business models (e.g. Hlady-Rispal and Servantie, 2016 ) and sustainability-driven business models ( Esslinger, 2011 ). Besides, studies have examined different industries such as airline ( Lange et al. , 2015 ), manufacturing ( Landau et al. , 2016 ), newspaper ( Karimi and Walter, 2016 ), retail ( Brea-Solís et al. , 2015 ) and telemedicine ( Peters et al. , 2015 ).

Since the first comprehensive review of business model literature was carried out by Zott et al. (2011) , several reviews were published recently (as highlighted in Table I ). Our review builds on and extends the extant literature in at least three ways. First, unlike previous reviews that mainly focused on the general construct of “Business Model” ( George and Bock, 2011 ; Zott et al. , 2011 ; Wirtz et al. , 2016 ), our review focuses on uncovering how firms change their existing business model(s) by including terms that reflect business model innovation, namely, value proposition, value creation and value capture. Second, previous reviews do not provide a clear answer as to how firms change their business models. Our review aims to provide a clear guidance on how firms carry out business model innovation by synthesising the different perspectives existing in the literature. Third, compared to recent reviews on business model innovation ( Schneider and Spieth, 2013 ; Spieth et al. , 2014 ), which have touched lightly on some innovation aspects such as streams and motivations of business model innovation research, our review will uncover the innovation areas where alternative business models can be explored. Taking Teece’s (2010) suggestion, “A helpful analytic approach for management is likely to involve systematic deconstruction/unpacking of existing business models, and an evaluation of each element with an idea toward refinement or replacement” (p. 188), this paper aims to develop a theoretical framework of business model innovation.

Our review first explains the scope and the process of the literature review. This is followed by a synthesis of the findings of the review into a theoretical framework of business model innovation. Finally, avenues for future research will be discussed in relation to the approaches, degree and mechanisms of business model innovation.

2. Scope and method of the literature review

Given the diverse body of business models literature, a systematic literature review was carried out to minimise research bias ( Transfield et al. , 2003 ). Compared to the previous business model literature, our review criteria are summarised in Table I . The journal papers considered were published between January 2010 and December 2016. As highlighted in Figure 1 , most contributions in this field have been issued within this period since previous developments in the literature were comprehensively reviewed up to the end of 2009 ( Zott et al. , 2011 ). Using four databases (EBSCO Business Complete, ABI/INFORM, JSTOR and ScienceDirect), we searched peer-reviewed papers with terms such as business model(s), innovation value proposition, value creation and value capture appearing in the title, abstract or subject terms. As a result, 8,642 peer-reviewed papers were obtained.

Studies were included in our review if they specifically address business models and were top-rated according to The UK Association of Business Schools list ( ABS, 2010 ). This rating has been used not only because it takes into account the journal “Impact Factor” as a measure for journal quality, but also uses in conjunction other measures making it one of the most comprehensive journal ratings. By applying these criteria, 1,682 entries were retrieved from 122 journals. By excluding duplications, 831 papers were identified. As Harvard Business Review is not listed among the peer-reviewed journals in any of the chosen databases and was included in the ABS list, we used the earlier criteria and found 112 additional entries. The reviewed papers and their subject fields are highlighted in Table II . Since the focus of this paper is on business model innovation, we selected studies that discuss value proposition, value creation and value capture as sub-themes. This is not only because the definition of business model innovation mentioned earlier spans all three sub-themes, but also because all three sub-themes have been included in recent studies (e.g. Landau et al. , 2016 ; Velu and Jacob, 2014 ). To confirm whether the papers addressed business model innovation, we examined the main body of the papers to ensure they were properly coded and classified. At the end of the process, 219 papers were included in this review. Table III lists the source of our sample.

The authors reviewed the 219 papers using a protocol that included areas of innovation (i.e. components, elements, and activities), theoretical perspectives and key findings. In order to identify the main themes of business model innovation research, all papers were coded in relation to our research focus as to where alternative business models can be explored (i.e. value proposition, value creation and value capture). Coding was cross checked among the authors on a random sample suggesting high accuracy between them. Having compared and discussed the results, the authors were able to identify the main themes.

3. Prior conceptualisations of business model innovation

Some scholars have articulated the need to build the business model innovation on a more solid theoretical ground ( Sosna et al. , 2010 ; George and Bock, 2011 ). Although many studies are not explicitly theory-based, some studies partially used well-established theories such as the resource-based view (e.g. Al-Debei and Avison, 2010 ) and transaction cost economics (e.g. DaSilva and Trkman, 2014 ) to conceptualise business model innovation. Other theories such as activity systems perspective, dynamic capabilities and practice theory have been used to help answer the question of how firms change their existing business models.

Using the activity systems perspective, Zott and Amit (2010) demonstrated how innovative business models can be developed through the design themes that describe the source of value creation (novelty, lock-in, complementarities and efficiency) and design elements that describe the architecture (content, structure and governance). This work, however, overlooks value capture which limits the explanation of the advocated system’s view (holistic). Moreover, Chatterjee (2013) used this perspective to reveal that firms can design innovative business models that translate value capture logic to core objectives, which can be delivered through the activity system.

Dynamic capability perspective frames business model innovation as an initial experiment followed by continuous revision, adaptation and fine-tuning based on trial-and-error learning ( Sosna et al. , 2010 ). Using this perspective, Demil and Lecocq (2010) showed that “dynamic consistency” is a capability that allows firms to sustain their performance while innovating their business models through voluntary and emergent changes. Also, Mezger (2014) conceptualised business model innovation as a distinct dynamic capability. He argued that this capability is the firm’s capacity to sense opportunities, seize them through the development of valuable and unique business models, and accordingly reconfigure the firms’ competences and resources. Using aspects of practice theory, Mason and Spring (2011) looked at business model innovation in the recorded sound industry and found that it can be achieved through various combinations of managerial practices.

Static and transformational approaches have been used to depict business models ( Demil and Lecocq, 2010 ). The former refers to viewing business models as constituting core elements that influence business performance at a particular point in time. This approach offers a snapshot of the business model elements and how they are assembled, which can help in understanding and communicating a business model (e.g. Eyring et al. , 2011 ; Mason and Spring, 2011 ; Yunus et al. , 2010). The latter, however, focuses on innovation and how to address the changes in business models over time (e.g. Sinfield et al. , 2012 ; Girotra and Netessine, 2014 ; Landau et al. , 2016 ). Some researchers have identified the core elements of business models ex ante (e.g. Demil and Lecocq, 2010 ; Wu et al. , 2010 ; Huarng, 2013 ; Dmitriev et al. , 2014 ), while others argued that considering a priori elements can be restrictive (e.g. Casadesus-Masanell and Ricart, 2010 ). Unsurprisingly, some researchers found a middle ground where elements are loosely defined allowing flexibility in depicting business models (e.g. Zott and Amit, 2010 ; Sinfield et al. , 2012 ; Kiron et al. , 2013 ).

Prior to 2010, conceptual frameworks focused on the business model concept in general (e.g. Chesbrough and Rosenbloom, 2002 ; Osterwalder et al. , 2005 ; Shafer et al. , 2005 ) apart from Johnson et al. ’s (2008 ), which is one of the early contributions to business model innovation. To determine whether a change in existing business model is necessary, Johnson et al. (2008) suggested three steps: “Identify an important unmet job a target customer needs done; blueprint a model that can accomplish that job profitably for a price the customer is willing to pay; and carefully implement and evolve the model by testing essential assumptions and adjusting as you learn” ( Eyring et al. , 2011 , p. 90). Although several frameworks have been developed since then, our understanding of business model innovation is still limited due to the static nature of the majority of these frameworks. Some representations ignore the elements and/or activities where alternative business models can be explored (e.g. Sinfield et al. , 2012 ; Chatterjee, 2013 ; Huarng, 2013 ; Morris et al. , 2013 ; Dmitriev et al. , 2014 ; Girotra and Netessine, 2014 ). Other frameworks ignore value proposition (e.g. Zott and Amit, 2010 ), ignore value creation (e.g. Dmitriev et al. , 2014 ; Michel, 2014 ) and/or ignore value capture (e.g. Mason and Spring, 2011 ; Sorescu et al. , 2011 ; Storbacka, 2011 ). Some conceptualisations do not identify who is responsible for the innovation (e.g. Casadesus-Masanell and Ricart, 2010 ; Sinfield et al. , 2012 ; Chatterjee, 2013 ; Kiron et al. , 2013 ). Synthesising the different contributions into a theoretical framework of business model innovation will enable a better understanding of how firms undertake business model innovation.

4. Business model innovation framework

Our framework ( Figure 2 ) integrates all the elements where alternative business models can be explored. This framework does not claim that the listed elements are definitive for high-performing business models, but is an attempt to outline the elements associated with business model innovation. This framework builds on the previous work of Johnson et al. (2008) and Zott and Amit (2010) by signifying the elements associated with business model innovation. Unlike previous frameworks that mainly consider the constituting elements of business models, this framework focuses on areas of innovation where alternative business models can be explored. Moreover, this is not a static view of the constituting elements of a business model, but rather a view enabling firms to explore alternative business models by continually refining these elements. Arrows in the framework indicate the continuous interaction of business model elements. This framework consists of 4 areas of innovation and 16 elements (more details are shown in Table IV ). Each will be discussed below.

4.1 Value proposition

The first area of innovation refers to elements associated with answering the “Why” questions. While most of the previously established models in the literature include at least one of the value proposition elements (e.g. Brea-Solís et al. , 2015 ; Christensen et al. , 2016 ), other frameworks included two elements (e.g. Dahan et al. , 2010 ; Cortimiglia et al. , 2016 ) and three elements (e.g. Eyring et al. , 2011 ; Sinfield et al. , 2012 ). These elements include rethinking what a company sells, exploring new customer needs, acquiring target customers and determining whether the benefits offered are perceived by customers. Modern organisations are highly concerned with innovation relating to value proposition in order to attract and retain a large portion of their customer base ( Al-Debei and Avison, 2010 ). Developing new business models usually starts with articulating a new customer value proposition ( Eyring et al. , 2011 ). According to Sinfield et al. (2012) , firms are encouraged to explore various alternatives of core offering in more depth by examining type of offering (product or service), its features (custom or off-the-shelf), offered benefits (tangible or intangible), brand (generic or branded) and lifetime of the offering (consumable or durable).

In order to exploit the “middle market” in emerging economies, Eyring et al. (2011) suggested that companies need to design new business models that aim to meet unsatisfied needs and evolve these models by continually testing assumptions and making adjustments. To uncover unmet needs, Eyring et al. (2011) suggested answering four questions: what are customers doing with the offering? What alternative offerings consumers buy? What jobs consumers are satisfying poorly? and what consumers are trying to accomplish with existing offerings? Furthermore, Baden-Fuller and Haefliger (2013) made a distinction between customers and users in two-sided platforms, where users search for products online, and customers (firms) place ads to attract users. They also made a distinction between “pre-designed (scale) based offerings” and “project based offerings”. While the former focuses on “one-size-fits-all”, the latter focuses on specific client solving specific problem.

Established firms entering emerging markets should identify unmet needs “the job to be done” rather than extending their geographical base for existing offerings ( Eyring et al. , 2011 ). Because customers in these markets cannot afford the cheapest of the high-end offerings, firms with innovative business models that meet these customers’ needs affordably will have opportunities for growth ( Eyring et al. , 2011 ). Moreover, secondary business model innovation has been advocated by Wu et al. (2010) as a way for latecomer firms to create and capture value from disruptive technologies in emerging markets. This can be achieved through tailoring the original business model to fit price-sensitive mass customers by articulating a value proposition that is attractive for local customers.

4.2 Operational value

The second area of innovation focuses on elements associated with answering the “What” questions. Many of the established frameworks included either one element (e.g. Sinfield et al. , 2012 ; Taran et al. , 2015 ), two elements (e.g. Mason and Spring, 2011 ; Dmitriev et al. , 2014 ). However, very few included three or more elements (e.g. Mehrizi and Lashkarbolouki, 2016 ; Cortimiglia et al. , 2016 ). These elements include configuring key assets and sequencing activities to deliver the value proposition, exposing the various means by which a company reaches out to customers, and establishing links with key partners and suppliers. Focusing on value creation, Zott and Amit (2010) argued that business model innovation can be achieved through reorganising activities to reduce transaction costs. However, Al-Debei and Avison (2010) argued that innovation relating to this dimension can be achieved through resource configuration, which demonstrates a firm’s ability to integrate various assets in a way that delivers its value proposition. Cavalcante et al. (2011) proposed four ways to change business models: business model creation, extension, revision and termination by creating or adding new processes, and changing or terminating existing processes.

Western firms have had difficulty competing in emerging markets due to importing their existing business models with unchanged operating model ( Eyring et al. , 2011 ). Alternative business models can be uncovered when firms explore the different roles they might play in the industry value chain ( Sinfield et al. , 2012 ). Al-Debei and Avison (2010) suggested achieving this through answering questions such as: what is the position of our firm in the value system? and what mode of collaboration (open or close) would we choose to reach out in a business network? Dahan et al. (2010) found cross-sector partnerships as a way to co-create new multi-organisational business models. They argued that multinational enterprises (MNEs) can collaborate with nongovernmental organisations (NGOs) to create products/or services that neither can create on their own. Collaboration allows access to resources that firms would otherwise need to solely develop or purchase ( Yunus et al. , 2010 ). According to Wu et al. (2010) , secondary business model innovation can be achieved when latecomer firms fully utilise strategic partners’ complementary assets to overcome their latecomer disadvantages and build a unique value network specific to emerging economies context.

4.3 Human capital

The third area of innovation refers to elements associated with answering the “Who” questions. Most of the established frameworks in this field tend to focus less on human capital and include one element at most (e.g. Wu et al. , 2010 ; Kohler, 2015 ). However, our framework highlights four elements, which include experimenting with new ways of doing business, tapping into the skills and competencies needed for the new business model through motivating and involving individuals in the innovation process. According to Belenzon and Schankerman (2015) , “the ability to tap into a pool of talent is strongly related to the specific business model chosen by managers” (p. 795). They claimed that managers can strategically influence individuals’ contributions and their impact on project performance.

Organisational learning can be maximised though continuous experimentation and making changes when actions result in failure ( Yunus et al. , 2010 ). Challenging and questioning the existing rules and assumptions and imagining new ways of doing business will help develop new business models. Another essential element of business model design is governance, which refers to who performs the activities ( Zott and Amit, 2010 ). According to Sorescu et al. (2011) , innovation in retail business models can occur as a result of changes in the level of participation by actors engaged in performing the activities. An essential element of retailing governance is the incentive structure or the mechanisms that motivate those involved in carrying out their roles to meet customer demands ( Sorescu et al. , 2011 ). For example, discount retailers tend to establish different compensation and incentive policies ( Brea-Solís et al. , 2015 ). Revising the incentive system can have a major impact on new ventures’ performance by aligning organisational goals at each stage of growth ( Roberge, 2015 ). Zott and Amit (2010) argued that alternative business models can be explored through adopting innovative governance or changing one or more parties that perform any activities. Sinfield et al. (2012) suggested that business model innovation only requires time from a small team over a short period of time to move a company beyond incremental improvements and generate new opportunities for growth. This is supported by Michel’s (2014) finding that cross-functional teams were able to quickly achieve business model innovation in workshops through deriving new ways to capture value.

4.4 Financial value

The final area of innovation focuses on elements associated with answering the “How” questions. Previously developed frameworks tend to prioritise this area of innovation by three elements (e.g. Eyring et al. , 2011 ; Huang et al. , 2013 ), and in one instance four elements (e.g. Yunus et al. , 2010 ). These elements include activities linked with how to capture value through revenue streams, changing the price-setting mechanisms, and assessing the financial viability and profitability of a business. According to Demil and Lecocq (2010) , changes in cost and/or revenue structures are the consequences of both continuous and radical changes. They also argued that costs relate to different activities run by organisations to acquire, integrate, combine or develop resources. Michel (2014) suggested that alternative business models can be explored through: changing the price-setting mechanism, changing the payer, and changing the price carrier. Different innovation forms are associated with each of these categories.

Business model innovation can be achieved through exploring new ways to generate cash flows ( Sorescu et al. , 2011 ), where the organisation has to consider (and potentially change) when the money is collected: prior to the sale, at the point of sale, or after the sale ( Baden-Fuller and Haefliger, 2013 ). Furthermore, Demil and Lecocq (2010) suggested that changes in business models affect margins. This is apparent in the retail business models, which generate more profit through business model innovation compared to other types of innovation ( Sorescu et al. , 2011 ).

5. Ways to change business models

From reviewing the recent developments in the business model literature, alternative business models can be explored through modifying a single business model element, altering multiple elements simultaneously and/or changing the interactions between elements of a business model.

Changing one of the business model elements (i.e. content, structure or governance) is enough to achieve business model innovation ( Amit and Zott, 2012 ). This means that firms can have a new activity system by performing only one new activity. However, Amit and Zott (2012) clearly outlined a systemic view of business models which entails a holistic change. This is evident from Demil and Lecocq’s (2010) work suggesting that the study of business model innovation should not focus on isolated activities since changing a core element will not only impact other elements but also the interactions between these elements.

Another way to change business models is through altering multiple business model elements simultaneously. Kiron et al. (2013) found that companies combining target customers with value chain innovations and changing one or two other elements of their business models tend to profit from their sustainability activities. They also found that firms changing three to four elements of their business models tend to profit more from their sustainability activities compared to those changing only one element. Moreover, Dahan et al. (2010) found that a new business model was developed as a result of MNEs and NGOs collaboration by redefining value proposition, target customers, governance of activities and distribution channels. Companies can explore multiple combinations by listing different business model options they could undertake (desirable, discussable and unthinkable) and evaluate new combinations that would not have been considered otherwise ( Sinfield et al. , 2012 ).

Changing business models is argued to be demanding as it requires a systemic and holistic view ( Amit and Zott, 2012 ) by considering the relationships between core business model elements ( Demil and Lecocq, 2010 ). As mentioned earlier, changing one element will not only impact other elements but also the interactions between these elements. A firm’s resources and competencies, value proposition and organisational system are continuously interacting and this will in turn impact business performance either positively or negatively ( Demil and Lecocq, 2010 ). According to Zott and Amit (2010) , innovative business models can be developed through linking activities in a novel way that generates more value. They argued that alternative business models can be explored by configuring business model design elements (e.g. governance) and connecting them to distinct themes (e.g. novelty). Supporting this, Eyring et al. (2011) suggested that core business model elements need to be integrated in order to create and capture value ( Eyring et al. , 2011 ).

6. Discussion and future research directions

From the above synthesis of the recent development in the literature, several gaps remain unfilled. To advance the literature, possible future research directions will be discussed in relation to approaches, degrees and mechanisms of business model innovation.

6.1 Approaches of business model innovation

Experimentation, open innovation and disruption have been advocated as approaches to business model innovation. Experimentation has been emphasised as a way to exploit opportunities and develop alternative business models before committing additional investments ( McGrath, 2010 ). Several approaches have been developed to assist in business model experimentation including mapping approach, discovery-driven planning and trail-and-error learning ( Chesbrough, 2010 ; McGrath, 2010 ; Sosna et al. , 2010 ; Andries and Debackere, 2013 ). Little is known about the effectiveness of these approaches. It will be worth investigating which elements of the business model innovation framework are more susceptible to experimentation and which elements should be held unchanged. Although business model innovation tends to be characterised with failure ( Christensen et al. , 2016 ), not much has been established on failing business models. It is interesting to explore how firms determine a failing business model and what organisational processes exist (if any) to evaluate and discard these failed business models. Empirical studies could examine which elements of business model innovation framework are associated with failing business models.

Another way to develop alternative business models is through open innovation. Although different categories of open business models have been identified by researchers (e.g. Frankenberger et al. , 2014 ; Taran et al. , 2015 ; Kortmann and Piller, 2016 ), their effectiveness is yet to be established. Further research is needed to examine when can a firm open and/or close element(s) of the business model innovation framework. Future studies could also examine the characteristics of open and/or close business models.

In responding to disruptive business models, how companies extend their existing business model, introduce additional business model(s) and/or replace their existing business model altogether remains underexplored. Future research is needed to unravel the strategies deployed by firms to extend their existing business models as a response to disruptive business models. In introducing additional business models, Markides (2013) suggested that a company will be presented with several options to manage the two businesses at the same time: create a completely separate business unit, integrate the two business models from the beginning or integrate the second business model after a certain period of time. Finding the balance between separation and integration is of vital importance. Further research could identify which of these choices are most common among successful firms introducing additional business models, how is the balance between integration and separation achieved, and which choice(s) prove more profitable. Moreover, very little is known on how firms replace their existing business model. Longitudinal studies could provide insights into how a firm adopts an alternative model and discard the old business model over time. It may also be worth examining the factors associated with the adoption of business model innovation as a response to disruptive business models. Moreover, new developments in digital technologies such as blockchain, Internet of Things and artificial intelligence are disrupting existing business models and providing firms with alternative avenues to create new business models. Thus far, very little is known on digital business models, the nature of their disruption, and how firms create digital business models and make them disruptive. Future research is needed to fill these important gaps in our knowledge.

6.2 Degrees of business model innovation

Business models can be developed through varying degrees of innovation from an evolutionary process of continuous fine-tuning to a revolutionary process of replacing existing business models. Recent research shows that survival of firms is dependent on the degree of their business model innovation ( Velu, 2015, 2016 ). This review classifies these degrees of innovation into modifying a single element, altering multiple elements simultaneously and/or changing the interactions between elements of the business model innovation framework.

In changing a single element, further research is needed to examine which business model element(s) is (are) associated with business model innovation. It is not clear whether firms intentionally make changes to a single element when carrying out business model innovation or stumble at it when experimenting with new ways of doing things. It may also be worth investigating the entry (or starting) points in the innovation process. There is no consensus in the literature on which element do companies start with when carrying out their business model innovation. While some studies suggest starting with the value proposition ( Eyring et al. , 2011 ; Landau et al. , 2016 ), others suggest starting the innovation process with identifying risks in the value chain ( Girotra and Netessine, 2011 ). Dmitriev et al. (2014) suggested two entry points, namely, value proposition and target customers. In commercialising innovations, the former refers to technology-push innovation while the latter refers to market-pull innovation. Also, it is not clear whether the entry point is the same as the single element associated with changing the business model. Further research can explore the different paths to business model innovation by identifying the entry point and subsequent changes needed to achieve business model innovation.

There is little guidance in the literature on how firms change multiple business model elements simultaneously. Landau et al. (2016) claimed that firms entering emerging markets tend to focus on adjusting specific business model components. It is unclear which elements need configuring, combining and/or integrating to achieve a company’s value proposition. Furthermore, the question of which elements can be “bought” on the market or internally “implemented” and their interplay remains unanswered ( DaSilva and Trkman, 2014 ). Casadesus-Masanell and Ricart (2010) argued that “[…] there is (as yet) no agreement as to the distinctive features of superior business models” (p. 196). Further research is needed to explore these distinctive elements of high-performing business models.

In changing the interactions between business model elements, further research is needed to explore how these elements are linked and what interactions’ changes are necessary to achieve business model innovation. Moreover, the question of how firms sequence these elements remains poorly understood. Future research can explore the synergies created over time between these elements. According to Dmitriev et al. (2014) , we need to improve our understanding of the connective mechanisms and dynamics involved in business model development. More work is needed to explore the different modalities of interdependencies among these elements and empirically testing such interdependencies and their effect on business performance ( Sorescu et al. , 2011 ).

It is surprising that the link between business model innovation and organisational performance has rarely been examined. Changing business models has been found to negatively influence business performance even if it is temporary ( McNamara et al. , 2013 ; Visnjic et al. , 2016 ). Contrary to this, evidence show that modifying business models is positively associated with organisational performance ( Cucculelli and Bettinelli, 2015 ). Empirical research is needed to operationalise the various degrees of innovation in business models and examine their link to organisational performance. Longitudinal studies can also be used to explore this association since it may be the case that business model innovation has a negative influence on performance in the short run and that may change subsequently. Moreover, it is not clear whether high-performing firms change their business models or innovation in business models is a result from superior performance ( Sorescu et al. , 2011 ). Further studies are needed to determine the direction of causality. Another link that is worth exploring is business model innovation and social value, which has only been explored in a few studies looking at social business models (e.g. Yunus et al. , 2010 ; Wilson and Post, 2013 ). Further research is needed to examine this link and possibly examine both financial and non-financial business performance.

6.3 Mechanisms of business model innovation

Although we know more about how firms define value proposition, create and capture value ( Landau et al. , 2016 ; Velu and Jacob, 2014 ), what remains as a blind spot is the mechanism of business model innovation. This is due to the fact that much of the literature seems to focus on value creation. To better understand the various mechanisms of business model innovation, future studies must integrate value proposition, value creation and value capture elements. Empirical studies could use the business model innovation framework to examine the various mechanisms of business model innovation. Also, the literature lacks the integration of internal and external perspectives of business model innovation. Very few studies look at the external drivers of business model innovation and the associated internal changes. The external drivers are referred to as “emerging changes”, which are usually beyond manager’s control ( Demil and Lecocq, 2010 ). Inconclusive findings exist as to how firms develop innovative business models in response to changes in the external environment. Future studies could examine the external factors associated with the changes in the business model innovation framework. Active and reactive responses need to be explored not only to understand the external influences, but also what business model changes are necessary for such responses. A better understanding of the mechanisms of business model innovation can be achieved by not only exploring the external drivers, but also linking them to specific internal changes. Although earlier contributions linking studies to established theories such as the resource-based view, transaction cost economics, activity systems perspective, dynamic capabilities and practice theory have proven to be vital in advancing the literature, developing a theory that elaborates on the antecedents, consequences and different facets of business model innovation is still needed ( Sorescu et al. , 2011 ). Theory can be advanced by depicting the mechanisms of business model innovation through the integration of both internal and external perspectives. Also, we call for more empirical work to uncover these mechanisms and provide managers with the necessary insights to carry out business model innovation.

7. Conclusions

The aim of this review was to explore how firms approach business model innovation. The current literature suggests that business model innovation approaches can either be evolutionary or revolutionary. However, the evidence reviewed points to a more complex picture beyond the simple binary approach, in that, firms can explore alternative business models through experimentation, open and disruptive innovations. Moreover, the evidence highlights further complexity to these approaches as we find that they are in fact a spectrum of various degrees of innovation ranging from modifying a single element, altering multiple elements simultaneously, to changing the interactions between elements of the business model innovation framework. This framework was developed as a navigation map for managers and researchers interested in how to change existing business models. It highlights the key areas of innovation, namely, value proposition, operational value, human capital and financial value. Researchers interested in this area can explore and examine the different paths firms can undertake to change their business models. Although this review pinpoints the different avenues for firm to undertake business model innovation, the mechanisms by which firms can change their business models and the external factors associated with such change remain underexplored.

The evolution of business model literature (pre-2000 to 2016)

Business model innovation framework

Previous reviews of business model literature

Reviewed papers and their subject fields

Source of our sample

Business model innovation areas and elements

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Further reading

Weill , P. , Malone , T.W. and Apel , T.G. ( 2011 ), “ The business models investors prefer ”, MIT Sloan Management Review , Vol. 52 No. 4 , pp. 17 - 19 .

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Business model innovation: What it is and why it matters

Imagine navigating rough seas, where every wave is a disruptive market force, and your boat—a traditional business model—can hardly catch the wind.  Business model innovation  stands as the lighthouse, guiding ventures towards uncharted, lucrative waters. We live in an era where adapting and reinventing one’s business framework is not a luxury—it’s survival.

Here, creativity intersects with strategic tact. Exploring  value proposition design  and leveraging  digital transformation  has become the cornerstone for contemporary success.

This article unravels the intricate tapestry woven by inventive  revenue streams optimization  and  scalable business models ; it’s an artifact replete with knowledge for those embarked on the voyage of  entrepreneurial strategy .

By the final punctuation mark, anticipate enlightenment on aligning your enterprise with the  lean startup methodology  and  innovative pricing strategies —insights potent enough to thrust your venture into future relevancy.

From  blue ocean strategy  to  sustainable business practices , each section is crafted to arm you with the prowess to not just exist but excel in today’s tumultuous business epoch.

What is Business Model Innovation?

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21 Business Model Innovation

Lorenzo Massa, Researcher, University of Bologna and Vienna University of Economics and Business.

Christopher L. Tucci is Associate Professor of Management of Technology at the École Polytechnique Fédérale de Lausanne (EPFL), where he holds the Chair in Corporate Strategy & Innovation. Prior to joining EPFL, he was on the faculty of the NYU Stern School of Business. He is interested in technological change and how waves of technological changes affect incumbent firms. For example, he is studying how the technological changes brought about by the popularization of the Internet affect firms in different industries. He has published articles in Management Science, Strategic Management Journal, Research Policy, IEEE Transactions on Engineering Management, Journal of Engineering and Technology Management, and Journal of Product Innovation Management. In 2003, he was elected to the leadership track for the Technology & Innovation Management Division of the Academy of Management.

• Published: 01 October 2013
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This chapter offers a broad review of the literature at the nexus between Business Models and innovation studies and examines the notion of Business Model Innovation in three different situations: Business Model Design in newly formed organizations, Business Model Reconfiguration in incumbent firms, and Business Model Innovation in the broad context of sustainability. Tools and perspectives to make sense of Business Models and support managers and entrepreneurs in dealing with Business Model Innovation are reviewed and organized around a synthesizing meta-framework. The framework elucidates the nature of the complementarities across various perspectives. Finally, the use of business model-related ideas in practice is discussed, and critical managerial challenges as they relate to Business Model Innovation and managing business models are identified and examined.

Introduction

In the past fifteen years, the business model (BM) has become an increasingly important unit of analysis in innovation studies. Within this field, a consensus is emerging that the role of the BM in fostering innovation is twofold. First, by allowing managers and entrepreneurs to connect innovative products and technologies to a realized output in a market, the BM represents an important vehicle for innovation. Second, the BM may be also a source of innovation in and of itself . It represents a new dimension of innovation, distinct, albeit complementary, to traditional dimensions of innovation, such as product, process or organizational.

This chapter serves to introduce the notion of Business Model Innovation (BMI) and has four main objectives, to: (1) clarify the origins and notion of the BM; (2) organize the literature on BMI around emerging literature streams; (3) offer an overview of the various tools that have been proposed in supporting managers and entrepreneurs in dealing with BMI; and (4) offer a discussion of the principal managerial challenges related to managing BMs and BMI.

As a starting point, we seek to introduce and clarify the notion of the BM. We review the received literature, highlight the origins of the BM and clarify the nature of the construct. Next, we introduce the notion of BMI and define it as the activity of designing—that is, creating, implementing and validating—a new BM and suggest that the process of BMI differs if an existing BM is already in place vis-à-vis when it is not. Accordingly, for analytical purposes, we distinguish between BM design in newly formed organizations, and BM reconfiguration in incumbent firms. We note that these literatures tend to focus on the antecedents and mechanisms at the background of BMI. We suggest that a new literature is emerging focusing on the consequences of BMI, and pointing to the role of BMI in unlocking the private sector potential to contribute to solving environmental and social issues. We offer a review. Finally, we analyse various tools and perspectives that seek to make sense of the BM and support BMI and business modelling (the set of activities supporting BM representation, sense-making and strategic planning for BMI). We highlight the complementary nature of different perspectives and organize them in a conceptual meta-framework. In doing so, we also provide evidence of the current use of BM-related ideas in practice. We conclude with a discussion of some of most salient managerial challenges related to managing BMs and BMI.

What is a Business Model? Definition and Emergence of the Concept

In the past several years, interest in the concept of BMs has virtually exploded, attracting the attention of managers and academics alike. Zott and colleagues ( Zott, Amit, and Massa, 2011 ) searched for the use of the term business model in general management articles and noted a dramatic increase in the incidence of the term in the fifteen-year period between 1995 and 2010, in parallel with the popularization and broad diffusion of the Internet.

Teece (2010) notes that BMs have been an integral part of economic behaviour since pre-classical times. Indeed, firms have always operated according to a business model but, until the mid 1990s, firms traditionally operated following similar logics, typical of the industrial firm, in which a product/service—typically produced by the firm (and its suppliers)—is delivered to a customer from which revenues are collected. Even if instances of firms and organizations adopting innovative BMs have been recognized in business history (cf. Osterwalder and Pigneur, 2010 ), it is only recently that the scale and speed at which innovative BMs are transforming industries and, indirectly, civil society, has attracted the attention of scholars and practitioners. Thus, BMs seek to make sense of these novel forms of ‘doing business’. According to Magretta (2002) , the BM is a story that answers Peter Drucker’s age old questions: (1) who is the customer, (2) what does the customer value, (3) how do we make money in this business, (4) and what is the economic logic that explains how we can deliver value to customers at an appropriate cost? The emergence of novel logics employed by firms in doing business as they go to market has increasingly popularized the notion of BM.

Several scholars agree that the Internet, together with related advances in information and communication technologies (ICTs), acted as catalysis for BM experimentation and innovation (e.g, Timmers, 1998;   Amit and Zott, 2001 ; Afuah and Tucci, 2001 ), opening up new opportunities for organizing business activities. Entire industrial sectors have evolved along radically new trajectories of innovation and offered new logics of value creation not seen in recent business history.

Casadesus-Masanell and Ricart (2010) have observed that two other phenomena have been accompanied by considerable innovation in the way firms ‘do business’. These are: (1) the advent of post-industrial technologies ( Perkmann and Spicer, 2010 ), and (2) efforts by the corporate sector to enter new markets in developing or underdeveloped countries and reach customers at the Bottom of the Pyramid 1 (BoP) ( Prahalad and Hart, 2002 ; Prahalad, 2005 ). A third one, related to BoP, is represented by ‘sustainability’. Let us discuss each of these in turn.

Scientific and technological advances in so-called post-industrial technologies (e.g., software or biotechnology) have been accompanied by a surge of organizational architectures and governance structures which radically differ from those observed in traditional manufacturing organizations (e.g., Bonaccorsi, Giannangeli, and Rossi, 2006 ). Firms, for example, have emerged that host and maintain IT applications across the Internet, offering software as a service (rather than a product: Susarla, Barua, and Whinston, 2009 ). The Open Source software movement has been accompanied by the emergence of new governance structures ( Bonaccorsi et al., 2006 ) and novel forms of collaborative entrepreneurship ( Miles, Miles, and Snow, 2006 ). Similarly, the biotechnology sector has been the locus of considerable BMI (e.g., Pisano, 2006 ), with firms emerging that focus on specific tasks and relative services along the product development value chain ( Konde, 2009 ). Innovative BMs are observed in other sectors as well. Firms such as ARM (semiconductors), Dolby (sound systems), CDT (electronic displays) or Plastic Logic (plastic materials) all have specialized in the management of intellectual property and operate in the ‘market for ideas’ (see chapter 12 by Gambardella, Giuri, and Torrisi) by licensing the rights of their innovative technologies and solutions rather than commercializing the products themselves. Whether post-industrial technologies can be properly considered an antecedent of BM innovation vis-à-vis other explanations such as the intellectual property revolution ( Pisano, 2006 ), the disintegration of the value chain observed in many industries, or the institutionalization of Open Innovation as a way to organize innovation activities outside the traditional boundaries of the firm (see chapter 22 by Alexy and Dahlander), remains an unexplored research question. Certainly, however, post-industrial technologies have been accompanied by the emergence of novel ways to conduct business.

Opportunities to address economic needs at the BoP in emerging markets ( Ricart, Enright, Ghemawat, Hart, and Khanna, 2004 ) have also pointed researchers and practitioners towards the systematic study of BMs. The core argument in the BoP literature is that the vast, untapped market of the world’s poor represents a large opportunity for companies to both serve customers and make a profit. However, business opportunities at the BoP challenge conventional ways of doing business. Due to the fundamentally different social, economic, and cultural environments that characterize emerging markets, companies are urged to rethink every step in their supply chain and develop novel BMs ( Prahalad and Hart, 2002 ). In addition, existing models may have limited applicability and need to be adapted ( Seelos and Mair, 2007 ). Chesbrough, Ahern, Finn, and Guerraz (2006) , studying product deployment in the developing world, highlight that while the ‘right’ product design is a necessary condition for penetrating low income markets, those companies that ultimately succeed in generating commercially sustainable operations are those that put in place the right BM. These BMs play a crucial role in creating key elements, such as distribution channels, supplies and sales channels necessary for the successful execution of business transactions. Thus, enterprises that aim at reaching the BoP constitute an important source of BM innovation ( Prahalad, 2005 ).

While the study of BMs has traditionally focused on business activities, the emergence of new organizational architectures designed for purposes other than economic profits, such as solving social problems and sustainability issues, has started to attract the attention of scholars studying BMs ( Seelos and Mair, 2007 ; Yunus, Moingeon and Lehmann-Ortega, 2010 ). For example, Nobel laureate Mohamed Yunus has been pioneering the concept of microfinance and designed a novel organization, the Grameen Bank, whose main purpose is the eradication of poverty (cf. Yunus et al., 2010 ), a critical issue in the discussion on sustainability (cf. WCED, 1987 ). Scholars increasingly employ the term BM in referring to the way such organizations operate and in capturing instances of value creation whose nature is not necessarily economic (see chapter 16 by Lawrence et al.).

To conclude this section, the BM is an elusive concept allowing for considerable interpretative flexibility ( Bijker, Hughes, and Pinch, 1987 ). Zott et al. (2011) have recently reviewed the most recent literature on the topic and noted that various conceptualizations of the BM exist that often serve the scope of the particular phenomenon of interest to the researcher. There are, however, some emerging common themes that act as a common denominator among the various conceptualizations of the BM that have been provided. In particular scholars seem to recognize—explicitly or implicitly—that the BM is a ‘system level concept, centered on activities and focusing on value’ (2011: 1037). It emphasizes a systemic and holistic understanding of how an organization orchestrates its system of activities for value creation. In addition, they noted that the phenomenon of value creation as depicted by the BM typically occurs in a value network (cf. Normann and Ramirez, 1993 ; Parolini, 1999 ), which can include suppliers, partners, distribution channels, and coalitions that extend the company’s resources. Therefore they suggest that the BM also introduces a new unit of analysis in addition to the product, firm, industry, or network levels. Such a new unit of analysis is nested between the firm and its network of exchange partners.

These considerations suggest that, at first glance, the BM may be conceptualized as depicting the rationale of how an organization (a firm or other type of organization) creates, delivers, and captures value (economic, social, or other forms of value) in relationship with a network of exchange partners ( Afuah and Tucci, 2001 ; Osterwalder, Pigneur, and Tucci, 2005 ; Zott et al., 2011 ). This broad definition is elastic with respect to the nature of the value created, and serves the scope of introducing the topic of BMI.

Business Models and Innovation

The literature at the intersection of the BM concept and the domain of innovation has advanced two complementary roles for the BM in fostering innovation. First, BMs allow innovative companies to commercialize new ideas and technologies. Second, firms can also view the BM as a source of innovation in and of itself, and as a source of competitive advantage.

The first view is mainly rooted in the literature on technology management and entrepreneurship. It is recognized that innovative technologies or ideas per se have no economic value. It is through the design of appropriate BMs that managers and entrepreneurs may be able to unlock the output from investments in R&D and connect it to a market. By allowing the commercialization of novel technologies and ideas, the BM becomes a vehicle for innovation. Xerox invented the first photocopy machine, but the technology was too expensive and could not be sold. Managers at Xerox solved the problem by leasing the machine, inventing a new BM for doing so. In this view, the BM is a manipulable device that mediates between technology and economic value creation ( Chesbrough and Rosenbloom, 2002 ).

The second view is that the BM represents a new dimension of innovation itself, which spans the traditional modes of process, product, and organizational innovation. This new dimension of innovation may be source of superior performance, even in mature industries ( Zott and Amit, 2007 ). Dell in the computer industry, Southwest in the airline industry, or Apple with iPod and iTunes in the music industry, just to mention a few known cases, secured impressive growth rates and outperformed the competition by establishing innovative BMs.

This suggests that firms can compete through their BMs ( Casadesus-Masanell and Ricart, 2007 ). Novel BMs may be a source of disruption ( Christensen, 1997 ), changing the logic of entire industries and replacing the old way of doing things to become the standard for the next generation of entrepreneurs to beat ( Magretta, 2002 ). According to Chesbrough, BMI may have more important strategic implications than other forms of innovation, in that ‘a better BM will beat a better idea or technology’ (2007: 12).

Building on the literature at the nexus between BMs and innovation, we propose that BMI may refer to (1) the design of novel BMs for newly formed organizations, or (2) the reconfiguration of existing BMs. We refer to the first phenomena by employing the term business model design (BMD) , which refers to the entrepreneurial activity of creating, implementing and validating a BM for a newly formed organization. We use the term business model reconfiguration (BMR) to capture the phenomenon by which managers reconfigure organizational resources (and acquire new ones) to change an existing BM. Thus, the process of reconfiguration requires shifting, with different degrees of radicalism, from an existing model to a new one. We contend that both phenomena are change phenomena and could lead to BMI. Xerox’s design of a leasing model to market the Xerox 914 in the late 1950s or Gillette’s design of the ‘Razor and Razor Blade’ model can be considered innovative designs. Indeed, they led to the emergence of new BMs not seen before. Not all design or reconfiguration efforts will necessarily lead to BMI, however. To be a source of BMI, the output of design or reconfiguration activities should be characterized by some degree of novelty or uniqueness. In other words, while in principle BMI may result as the product of design and/or reconfiguration of new and existing BMs, respectively, it constitutes a subset of the larger set comprising the whole product of BM design and reconfiguration activities (see Figure 21.1 ).

Business model innovation as a subset of business model design and reconfiguration

While sharing the potential for the same outcome (namely BMI), reconfiguration and design are two distinct activities that imply important differences. For example, because reconfiguration assumes the existence of a BM, it involves facing challenges that are idiosyncratic to existing organizations, such as organizational inertia, management processes, modes of organizational learning, modes of change, and path dependent constraints in general, which may not be an issue in new firms. On the other hand, newly formed organizations may face other issues such as considerable technological uncertainty, lack of legitimacy, lack of resources and, in general, liability of newness, which do influence the design and validation of new BMs (cf. Aldrich and Auster, 1986 ; Bruderl and Schussler, 1990 ). Because of these differences and for analytical purposes, we treat the above phenomena separately in the next two sections. 2

Business Model Design

As mentioned above, BMD refers to the very first instance of a new BM and is usually associated with entrepreneurial activity. The process of BMD could be considered a process of entrepreneurial venture creation involving the design of the content, structure, and governance of the transactions that a firm performs in cooperation with a network of exchange partners so as to create and capture value ( Amit and Zott, 2001 ). It involves traditional entrepreneurial activities such as internally and externally stimulated opportunity recognition, organization creation, linking with market ( Bhave, 1994 ), and also the design of boundary spanning organizational arrangements ( Zott and Amit, 2007 ). According to Zott and Amit (2007) , the latter is a critical feature of BMD in that ‘a BM elucidates how an organization is linked to external stakeholders, and how it engages in economic exchanges with them to create value for all exchange partners’ (2007: 181). Thus, BMD is concerned with traditional entrepreneurial choices (product/market mix, organizational design, control systems, etc.) as well as the design of a boundary spanning activity system, so as to link an offering (technology or service) to a realized output market. In a nutshell, BMD includes designs that take place across as well as within firms ( McGrath, 2010 ).

Uncertainty associated with the viability of new BMs may be considerable. Uncertainty arises not only because of entrepreneurs’ inability to predict customers’ response to their offering, future market conditions and dynamics, but also because of the computational and dynamic complexity associated with BM planning and design. Computational complexity arises because of the large number of logically possible combinations between BM components ( Afuah and Tucci, 2001 ), activities ( Zott and Amit, 2010 ) and/or choices ( Casadesus-Masanell and Ricart, 2010 ). Dynamic complexity arises because of the non-linear interdependencies—including delays and feedback loops—between BM components, activities, and/or choices. Both computational as well as dynamic complexity increase uncertainty surrounding BMD. Even if it were possible to detect future trends and changes, uncertainty would not be entirely eliminated, only reduced.

Uncertainty affects modes of BMD and associated entrepreneurial tasks. According to McGrath (2010) , unlike traditional concepts in entrepreneurship, such as business planning and business plan design, ‘strategies that aim to discover and exploit new models must engage in significant experimentation and learning’ (2010: 247). BMs cannot be fully planned ex ante . Rather, they take shape through a discovery-driven process; this process places a significant premium on experimentation and prototyping ( Sosna, Trevinyo-Rodríguez, and Velamuri, 2010 ; McGrath, 2010 ). Hayashi (2009) noted that many companies have had original BMs that did not work. This does not necessarily imply failure if companies are able to shift to Plan B . Hayashi proposes that in order to shift to plan B and ‘find’ the right business model, managers and entrepreneurs should engage in experimentation and challenge their initial assumptions. Investigating numerous ‘what if’ questions may be a useful strategy. The discovery-driven nature of BMs also affects the effectiveness of different design and planning approaches. Financial tools that make sense in an experimental world (e.g. real-options reasoning) may be more appropriate than more deterministic ones (e.g. projected economic value added and net present value) in supporting BMD ( McGrath, 2010 ).

While many new BMs may fail before a viable model is ‘found’, these (new BMs) may be a source of abnormal returns. As Ireland, Hitt, Camp, and Sexton (2001) note, entrepreneurs are often interested in finding fundamentally new ways of doing business and work on new models that have the potential to disrupt an industry’s competitive rules. According to McGrath (2010) , BM disruption may occur following Christensen’s model of disruptive innovation. At the beginning, these new models are more like experiments than proven business ideas and may not attract the scrutiny of incumbent firms. Newly formed ventures employing novel BMs often operate in market niches, serve customers that incumbents do not serve, and at price points they would consider unattractive, and rely on novel resources that are not necessarily under the control of incumbents. The latter may ignore the threats coming from innovative BMs. 3 And entrants could progressively experiment with their businesses and find disruptive channels.

Business Model Reconfiguration

The increasing consensus that BMI is key to firm performance (e.g. Ireland et al., 2001 ; Chesbrough, 2007 ; Johnson, Christensen, and Kagermann, 2008 ) has brought scholars working on the BM to focus on issues related to BM renewal and innovation in incumbent firms.

Considerations of issues related to BMI in incumbent firms were already present in Chesbrough and Rosenbloom’s study (2002) of the Xerox Corporation and its research center at Palo Alto (PARC). According to the authors, the BM as an heuristic logic might act as a mental map, which mediates the way business ideas are perceived by filtering information as valuable or not. This filtering process within a successful established firm is likely to preclude the identification of models that differ substantially from the firm’s current BM. In its cognitive dimension, the BM concept is similar to Prahalad and Bettis’ (1986) notion of a dominant logic . The dominant logic represents prevailing wisdom about how the world works and how the firm competes in the world. It can act as a filter of information, preventing managers from seeing opportunities and removing certain possibilities from serious consideration, when they fall outside of the prevailing logic and driving firms into a dominant logic trap ( Chesbrough, 2003 ).

Bouchikhi and Kimberly (2003) have referred to a similar phenomenon as the identity trap . In their view, an organization’s identity can become a trap when it so constrains strategic options that the organization cannot cope effectively with a changing environment. Attempts to change that are in conflict with this core identity are often doomed to failure. Chesbrough (2010) suggests two types of barriers to BMI in existing firms. The first type of barrier is structural. Barriers exist in terms of conflicts with existing assets and BMs (i.e. inertia emerges because of the complexity required for the reconfiguration of assets and operational processes). The second type of barrier is cognitive. It is manifested by the inability of managers who have been operating within the confines of a certain BM to understand the value potential in technologies and ideas that do not fit with the current BM.

Three tools are suggested that could help to overcome these barriers ( Chesbrough, 2010 ). The first consists of constructing maps of BMs to clarify the processes underlying them which then become a source of experiments to consider alternative combinations of the processes. The second involves conferring authority for experimentation within the organizational hierarchy. The third is experimentation itself. Experimentation is conceptualized as a process of discovery aimed at gaining cumulative learning from (perhaps) a series of failures before discovering a viable alternative to the BM. Sosna et al. (2010) have analysed the case of a Spanish family-owned dietary products business facing a threat to their BM of obsolescence from unforeseen external changes. The company was able to successfully reconfigure its BM thanks to experimentation, evaluation and adaptation—a trial and error learning approach—involving all echelons of the firm.

Giesen, Berman, Bell, and Blitz (2007) have proposed that BMI in incumbent firms can be classified into three groups: (1) industry model innovation, which consists of innovating the industry value chain by moving into new industries, redefining existing industries, or creating entirely new ones; (2) revenue model innovation, which represents innovation in the way revenues are generated, for example through reconfiguration of the product-service value mix or new pricing models; and (3) enterprise model innovation, changing the role a firm plays in the value chain, which can involve changes in the extended enterprise and networks with employees, suppliers, customers, and others, including capability/asset configurations. They analyse each type of innovation with respect to firm performance, and report two key findings: (1) each type of BMI can generate success, and (2) innovation in enterprise models focusing on external collaboration and partnerships is particularly effective in older companies relative to younger ones. Zott and Amit (2010) , who view the BM as a system of boundary spanning interdependent activities, have built on their decade-long research program on the BM and recently proposed that managers can fundamentally innovate a BM in three ways: by (1) adding new activities, (2) linking activities in novel ways, or (3) changing which parties perform an activity ( Amit and Zott, 2012 ). In other words, from a managerial standpoint, BMI consists of innovating the content (i.e. the nature of the activities), the structure (i.e. linkages and sequencing of activities) or the governance (the control/responsibility over an activity) of the activity system between a firm and its network ( Zott and Amit, 2010 ).

To become BM innovators, companies need to create processes for making innovation and improvements ( Mitchell and Coles, 2003 ). Doz and Kosonen (2010) have proposed a leadership agenda for accelerating BM renewal. To overcome the rigidity that accompanies established BMs, companies should be made more agile, which can be achieved by developing three meta-capabilities: strategic sensitivity, leadership unity, and resource flexibility. Doz and Kosonen point to the importance of the top management team to achieve collective commitment for taking the risks necessary to venture into new BMs and abandon old ones. Santos, Spector, and Van der Heyden (2009) have proposed a theory of BMI within incumbent firms in which they emphasize the importance of the behavioural aspects involved through mutual engagement and organizational justice. BMI, they argue, should not only consider the structural aspects of the formal organization (typically activity sets), but should also focus on informal organizational dynamics.

More recently, Bock, Opsahl, and George (2010) have linked the research on the BM with the notion of strategic flexibility ( Shimizu and Hitt, 2004 ) and proposed that firms engage in BMI to gain strategic flexibility by enhancing capabilities to respond to environmental complexity while decreasing formal design complexity.

The fragmented and young literature on BMR in incumbent firms implicitly offers a snapshot of the theoretical richness and challenges associated with studying the phenomenon as well as with carrying out the managerial tasks associated with the process of reconfiguration. Johnson et al. (2008) , perhaps not surprisingly, have noted that during the past decade of the major innovations within existing corporations ‘only a precious few have been business model related’ (2008: 52). BMR may well represent an extension of what Henderson and Clark (1990) initially conceived as ‘architectural’ innovation, that is, complex innovations that require a systemic reconfiguration of existing organizational and technological capabilities. Indeed, BMR is a complex art. As Teece (2007) notes, it requires ‘creativity, insight and a good deal of customer-competitor and supplier information and intelligence’ (2007: 1330). Additional complexity is added in incumbent firms by the existing repertoire of capabilities that constrain managers’ ability to innovate the BM, either blinding it ‘from seeing novel opportunities to innovate or acting upon those opportunities when they see them’ ( Pisano, 2006 : 1126).

Business Models and Sustainability

While studies of the BM have traditionally emphasized its importance for firms’ success, a new literature is emerging that studies the role of BMI in promoting sustainability (cf. WCED, 1987 ), analysing BMI from the point of view of its consequences in terms of either corporate social and environmental impact or as a strategic implication for sustainability (i.e. a way to align firms’ search for profits with innovations that would ultimately benefit society and help solve sustainability issues—see chapter 15 by Berkhout).

Firms could create value for sustainability in two ways: (1) by adopting more sustainable practices and processes that would reduce (or prevent the occurrence of) ‘end-of-pipe’ negative impacts (for example, reducing energy, water consumption and material intensity or social problems such as work place stress); or (2) by engineering and marketing new technologies that would help solve sustainability problems (for example, renewable energies, electrical vehicles [EVs], or green materials). In other words, value for sustainability may exist in a firm’s practice(s) or in a firm’s product(s), or both.

While there are different strategic alternatives along the product-practice mix to develop solutions for sustainability issues and improve corporate sustainability performances, market externalities of various forms could prevent profit-seeking firms from fully embracing sustainability and dilute the effectiveness of their initiatives. Activities that have an adverse environmental impact (such as pollution) or a negative social impact (such as exploitation of labour in marginalized and disadvantaged groups) are not fully internalized in the costs of enterprises’ products/services ( Cairncross, 1993 ). Accordingly, firms wanting to improve their environmental and social performance face a structural constraint (i.e. the risk associated with the implementation of sustainability when the market does not reward sustainability initiatives). Similarly, in the absence of appropriate government incentives or market regulation, green technologies may be more expensive than traditional ones—for decades an impediment to the market diffusion of certain technologies related to renewable energies.

Another problem is related to a different type of network externality in complex technological systems. Many technologies provide no value for customers unless necessary complements are also available and this problem applies to traditional and sustainable technologies alike. EVs are of no value if there is no necessary complementary technology (e.g. batteries) or infrastructure such as battery charging stations. The same two- (or three-) sided market argument can be reversed. For example, developing an infrastructure for EVs makes no economic sense if there is no available technology for producing reliable and cost-efficient EVs. The market diffusion of greener technologies may be hampered because firms may not control the full technological architecture necessary to realize the value of a technology.

Some authors have suggested that by innovating their BM, firms could overcome these barriers and make profits while benefiting the environment. For example, service-based BMs (selling a service rather than a product) could contribute to aligning firms’ search for profitability with innovating for sustainability. For example, when the carpet company Interface shifted from selling carpets to a ‘floor covering service’ ( Lovins, Lovins, and Hawken, 1999 ), it started to research, design, and manufacture more recyclable carpets. Under the new BM, when the carpets become worn, Interface replaces them and re-introduces the old ones back into the supply chain; if carpets are highly recyclable, the firm profits from this operation while benefiting the environment. The carpets themselves are eventually designed as tiles so that only consumed parts need to be replaced. The recyclable, modular carpets significantly reduce material and energy consumption, allowing Interface to deliver a better service that costs far less to create and capture the value arising from the new operations ( Lovins et al., 1999 ). Offering services rather than products, and working innovative pricing strategies and novel revenue streams, would also help firms marketing more expensive green technologies and spread their market adoption. As Wüstenhagen and Boehnke (2006) have noted, ‘Given the capital intensity of sustainable energy technologies…reducing the upfront cost for consumers is one of the key concerns in marketing innovation in this sector’ (2006: 256). BMs based on leasing or contracting, or a mix of products/services may represent a solution to the problem ( Wüstenhagen and Boehnke, 2006 ). Finally, new BMs could also help overcome issues of strategic complementarities and solve coordination issues. Better Place, the global provider of EV networks and services, worked to accelerate the transition to sustainable transportation by facilitating the market diffusion of EVs. The company’s BM was not based on EV manufacturing; rather, it was based on alliances with EV manufacturers, utility companies, governments, battery manufacturers, and others to produce a market-based transportation infrastructure that would support EV diffusion. By positioning itself upstream in the value system, and by orchestrating the network with a unique BM, the company attempted to solve two-sided market issues in sustainable transportation. However, Better Place’s bankruptcy in May 2013 demonstrates some of the complexity associated with developing new BMs for sustainability.

Business Model-related Ideas: The Theory and Practice of BMI

The BM is a systemic and conceptually rich construct, involving multiple components, several actors (boundary spanning) and complex interdependencies and dynamics. Because of that, the managerial cognitive effort required to visualize and explore possibilities for BMI as well as the effort for orchestrating (implementing and managing) the architecture of innovative BMs may be considerable.

Awareness of the complexities associated with BM cognition—description of existing BMs or design of new ones—coupled with the increasing relevance of BMs and business modelling for practice (cf. Zott et al., 2011 ), have led academics and practitioners to propose several avenues and tactics in support of BMI. Different tools such as perspectives, frameworks, and ontologies have been proposed that employ a mix of informal textual, verbal, and ad hoc graphical representations. These tools ascribe, with varying degrees, to three core functions at the nexus between the theory 4 and practice of BMI. First, they offer a ‘ reference language’ that fosters dialogue, promotes common understanding, and supports collective sense-making (cf. Amit and Zott, 2012 ). Second, by offering scaled-down simplified representations of BMs, they allow for graphical representations that simplify cognition and offer the possibility of virtually experimenting with BMI (for example, by supporting the formulation and elaboration of important ‘what if’ questions and the evaluation of strategic alternatives: Osterwalder and Pigneur, 2010 ). Third, they offer representations—both graphical as well as verbal—that allow managers and entrepreneurs to articulate and instantiate the value of their venture and to support the engagement of external audiences so as to gain legitimacy, activate resources, and foster action. We note that different tools and perspectives tend to emphasize certain functions while overlooking others. For example, the strength of certain perspectives resides in their simplicity and parsimony. As such, these perspectives are particularly effective in supporting collective sense-making around a BM. Other perspectives are more articulated; their development may be slightly more arduous but allow for a better appreciation of the dynamics occurring between the various components of a BM (cf. Casadesus-Masanell and Ricart, 2007 , 2010 ).

More broadly, we note and illustrate in Figure 21.2 that tools supporting BMI could be structured into several levels of decomposition with varying depth and complexity depending on the degree to which they abstract from the reality they aim to describe. 5

At the highest level of abstraction is a view of the BM as a narrative ( Perkmann and Spicer, 2010 ). According to Magretta (2002) , the BM is a story, a verbal description of how an enterprise works. It should be noted that BM narratives not only entail a descriptive function, but also a normative one. According to Brown (2000) , narratives represent an important way in which people seek to infuse ambiguous situations with meaning and persuade sceptical audiences that their account of reality is believable. Perkmann and Spicer (2010) have suggested that because of their forward-looking character, BM narratives play an important role in inducing expectations among interested constituents about how a business’s future might play out. Narratives of the BM can be constructed by managers and entrepreneurs and used not only to simplify cognition, but also as a communicative device that could allow achieving various goals, such as persuading external audiences, creating a sense of legitimacy around the venture (for example, by drawing analogies between a venture’s BM and the BM of a successful firm) or guiding social action (for example, by focusing attention on what to consider in decision-making and instructing how to operate).

The recognition of patterns in the structure of BMs has led to the introduction of typologies and BM archetypes . An archetype can be understood as an ideal example of a type, in this case a BM. A well-known example is the Freemium BM, adopted by firms such as Acrobat: its core logic lies in delivering a basic version of the product for free and charging for a premium version. Gillette popularized what today is known as the Razor and Razor Blade BM, which rests on ‘selling cheap razors to make customers buy its rather expensive blades’ ( Zott and Amit, 2010 : 218). This model is now popular in other industries where products such as printers (and cartridges) or game consoles (and software games) are brought to market relying on a similar logic. Archetypes are often presented with an identifying label (a ‘title’ that identifies the BM type) followed by a short description of the core essence of the BM. Archetypes perform several functions, including offering descriptions of ‘role models’, that is, models to be followed and imitated ( Baden-Fuller and Morgan, 2010 ).

While narratives and archetypes may serve several important purposes, they tend to be difficult to manipulate and manoeuvre (e.g. it is difficult to evaluate the likely consequences of changes in one part of the BM on the entire system on the basis of a narrative or an archetype). Higher descriptive accuracy, and perhaps a more rigorous approach to structuring and organizing plans for BMI, are offered by graphical frameworks of the BM, which are conceptualization and formalization of the BM obtained by enumerating, clarifying and representing its essential components (see Figure 21.2 ). A popular example among managers and practitioners is represented by the Business Model Canvas 6 (Osterwalder and Pigneur, 2002). The Business Model Canvas offers a scaled-down representation of the generic BM that is obtained by enumerating and visualizing what the authors consider to be the nine critical components of a BM. Similarly, Johnson and colleagues ( Johnson, Christensen, and Kagermann, 2008 ; Johnson, 2010 ) have proposed a simple framework comprising four interdependent elements; customer value proposition, profit formula, key resources and key processes. By focusing on these elements the framework offers a synthetic ‘representation of how a business creates and delivers value, for both the customer and the company’ ( Johnson, 2010 : 22).

Business models at different levels of abstraction from ‘reality’

We contend that the power of frameworks and archetypes, and perhaps the explanation of their popularity among practitioners, stands in their simplicity and parsimony, which, however, come at the expense of descriptive depth. In particular, frameworks and archetypes have shortcomings in their inability to offer a full account of the dynamic aspects associated with a particular BM. Meta-models 7 of the BM may help to overcome this limitation. Casadesus-Masanell and Ricart (2010) have built on system dynamics ( Sterman, 2000 ) and offered a way to conceptualize and represent BMs based on choices and consequences, and on an evaluation of the degree to which consequences are flexible vs. rigid (an important aspect to consider in dealing with BM reconfiguration). Causal loops (both damping and self-reinforcing) support understanding of how the architecture of choices drives the overall behaviour of a BM and leads to a configuration of consequences. This perspective allows for a more fine-grained description of existing BMs supporting the use of ‘theories’ to describe and understand the link between choices and likely consequences.

Gordijn and Akkermans (2001) have proposed a conceptual modelling approach that they call the ‘e3-value ontology’, designed to help define how economic value is created and exchanged within a network of actors. This modelling technique takes a value viewpoint, unlike other traditional modelling tools that take either a business process viewpoint (typical of operations management) or a system architecture viewpoint (typical of the information systems literature). The proposed meta-model borrows concepts from the business literature such as actors, value exchanges, value activities, and value objects, and uses these notions to model networked constellations of enterprises and end-consumers who create, distribute, and consume things of economic value.

In a similar vein, Zott and Amit (2010) have proposed an activity system perspective for supporting the design of new BMs. This perspective relies on an understanding of the BM as a system of interdependent activities (rather than choices and consequences) centered on a focal firm and including those conducted by the focal firm, its partners, vendors or customers, and so on. As such, it allows describing and conceptualizing BMs with considerable depth and accuracy. According to the authors, ‘an activity in a focal firm’s BM can be viewed as the engagement of human, physical and/or capital resources of any party to the BM (the focal firm, end customers, vendors, etc.) to serve a specific purpose toward the fulfillment of the overall objective’ (2010: 217). To better understand the BM as a set of interdependent activities, Zott and Amit differentiate between design elements (i.e. content, structure, and governance) and design themes (efficiency, novelty, complementarities, and lock-in). Design elements comprise the selection of activities (content), the sequencing between them (structure) and choices concerning who performs them (governance) within the network. Taken together, design elements comprise the infrastructural logic of a BM’s architecture. In addition, managers could structure the activity system around different design themes . For example, ‘efficiency-centred’ design (with efficiency being a design theme) refers to how firms use their activity system design to aim at achieving overall greater efficiency through reducing transaction costs. Other design themes are ‘novelty’ (innovation in the content, structure, or governance of the activity system), ‘lock-in’ (BM whose central feature is the ability to keep third parties attracted as a BM participant) or ‘complementarities’ (bundling activities within a system so as to produce more value than running activities separately).

Managing Business Models

Challenges associated with managing BMI go beyond the complexities related to managerial cognition and sense-making. While BMI has the potential for transformative growth and exponential returns for the innovator, it is a highly risky move that may involve changing the entire architectural configuration of a business. Accordingly, a critical challenge for managers is understanding when new BMs are needed ( Johnson, 2010 ). Once opportunities have been identified whose exploitation requires the development of new BMs, managers in incumbent firms may be confronted with problems related to simultaneously managing multiple BMs ( Markides and Charitou, 2004 ). Firms entering the BOP, or addressing new needs or new customer segments, are challenged by the potential conflicts between dual BMs (cf. Markides and Charitou, 2004 ). In this section we describe some of the key findings and insights from research in this important area of organization studies.

BMI can support companies in exploiting new opportunities (seizing ‘white space’) in three different ways ( Johnson, 2010 ): (1) by supporting the development of new value propositions that would address an unsatisfied ‘job-to-be-done’ for existing customers; (2) by tackling new customer segments that have traditionally been overlooked by existing value propositions; or (3) by entering entirely new industries or a ‘new terrain’. These instances present different managerial challenges and opportunities related to BMI.

First, the extent to which the development of new value propositions for an existing customer base requires BMI is a function of the shifts in the basis of competition (cf. Moore, 2004 ). At different stages in market development companies compete and innovate on different dimensions as illustrated in Figure 21.3 .

At early stages, customers’ unsatisfied needs mostly relate to product features and functions. Companies compete accordingly on functionality and focus on product innovation. When functionality-related needs are mostly fulfilled, the basis of competition shifts as customers require higher quality and reliability. In these cases, innovation is mostly process-oriented. When quality and reliability have improved sufficiently, customer value is provided by convenience, customization, and finally, when the market starts becoming commoditized, by lower costs. According to Johnson, managers should focus on BMI at these stages in market evolution, in that innovative BMs may allow developing new customer value propositions in response to commoditization in a way that product and process innovation would not. Innovative BMs may allow developing entirely new value propositions tailored to the customers’ individual needs, or may be able to lower costs significantly. 8

Second, innovative BMs may unlock opportunities to serve entirely new customer segments. These instances correspond to a process of democratization (cf. Osterwalder and Pigneur, 2010 ) in that they allow extending products and services to potential customers who are non-consumers, for instance because existing offerings are too expensive (with respect to potential customers’ wealth), complicated (with respect to potential customers’ skills) or because potential customers lack access (both geographical distances, lack of information and/or time) to them. Attempts to reach customers at the BOP, as previously discussed, fall into this category.

While serving existing customers in innovative ways or reaching new potential customers may require developing new BMs in response to identifiable and somehow predictable market-driven circumstances, a third category of opportunities is offered by less predictable tectonic industry changes, resulting, for example, from technological discontinuities or dramatic shifts in government policy and regulation. BMI can support companies creating new business platforms uniquely suited to the radically altered terrain, such as the innovative BM developed by Better Place, which attempted (unsuccessfully, in hindsight) to exploit opportunities arising from a complex plethora of forces increasingly supporting demand for sustainable greener transportation.

Market development and BMI

Kaplan (2012) proposes that BMI should in fact be treated with equal importance to product innovation and provides a practical guide for incumbents, starting with fifteen principles for BMI divided into three major categories: connect, inspire, and transform. Connect concerns the ‘team sport’ nature of BMI and how to nurture it, for example enabling chance meetings between innovators outside of normal ‘silos’, putting into place structures enabling flexible collaborative networks from across the company, and emphasizing collaborative design thinking. Inspire refers to injecting a sense of meaning into developing new ideas, encouraging systems-level thinking, challenging current assumptions, and experimenting rapidly. Transform is about encouraging large-scale rather than incremental changes, constantly trying new things, and building urgency to innovate. Kaplan also tackles the important problem of how to conduct R&D for BMI, returning to the theme of experimentation and proposing a ‘BMI factory’ that is a ‘connected adjacency’ with the current one (rather than trying to destroy the current one), championed by top management, explicitly desired, staffed with innovators taking on diverse roles (such as idea generators, ethnographers, and BM designers) and maintained as a separate activity from product innovation that supports the current BM.

A critical managerial challenge related to the management of BMs is represented by the conflicts arising from multiple BMs ( Markides and Oyon, 2010 ). Seizing new opportunities by developing new BMs may involve, for existing firms, operating (or considering) two BMs at the same time ( Markides and Oyon, 2010 ). For example, to tap potential customers in India, Hindustan Unilever (the Indian subsidiary of Unilever) operates with a BM that is different from the parent’s BM. ING Group started the highly successful ING Direct to tap into not only Internet financial services users, but the different ways those users utilize such services. Singapore Airlines has launched SilkAir to appeal to customers in the low-cost segment of the market in addition to its traditional operations.

According to Markides and colleagues, there are serious tradeoffs involved in competing with dual BMs, as a new BM risks cannibalizing existing sales and customer bases, destroying or undermining the existing distributor network, compromising the quality of services offered to customers, or simply defocusing the organization by trying to do everything for everybody ( Markides and Charitou, 2004 ). To manage these tradeoffs, strategy experts have traditionally proposed keeping the two BMs separated in two different units (cf. Christensen, 1997 ). Instead, Markides and Charitou (2004) propose a contingency approach, according to which the quest for the best strategy is understood as fundamentally depending on (1) the degree to which the two BMs are in conflict, and (2) the degree to which the two markets related to the BMs are perceived to be strategically similar. Reducing these two dimensions to dichotomous situations (serious vs. minor conflicts and high vs. low strategic relatedness) leads to four logically possible situations with four different strategies. The latter includes both pure strategies (i.e. separate vs. integrate) as well as hybrid ones (e.g. start with integrated BMs while preparing the conditions for future ‘divorce’ or start separate preparing conditions for future ‘marriage’). Hybrid strategies require the organization to become more ambidextrous. Operational tactics for managing dual BMs include conferring operational and financial autonomy to separate units, allowing units to develop their own culture and budgetary system and to have their own CEOs, while, at the same time, encouraging cooperation by means of a common incentive and reward system and by transferring the CEO from inside the organization rather than appointing one from outside.

In this chapter, we have reviewed the small but rapidly growing literature on BMs and BMI. In the course of most industrial sectors and humanitarian undertakings, there will come a time when the traditional way of creating, delivering, and capturing value is no longer valid, efficient, useful, or profitable. In such moments (or perhaps just before!), organizations that embrace BMI will embrace the possibility to reshape industries and possibly change the world. As this exciting field is expanding every day with increasing scholarly and managerial interest, we hope this chapter helps establish a better and more uniform understanding of BMI, and helps bridge the gap between theory and practice.

In economics and business management the Bottom of the Pyramid (or ‘Base of the Pyramid’ or simply ‘BoP’) is the term used to refer to the largest but poorest socio-economic group. The expression is used in particular by people developing new models of doing business that deliberately target that demographic, often using new technology.

As previously noted, the process of reconfiguration also comprises creating, implementing, and validating a BM. In this sense the set comprising reconfiguration activities could be considered a superset of design activities.

However, note the caveats to this aspect of the theory developed in, among others, King and Tucci (2002) .

The term ‘theory’ as related to business model and BMI is used here quite deliberately as resembling van Aken’s notion of Mode 2 knowledge production as the product of a Design Science Research approach ( van Aken, 2005 ) or as comprising an articulated body of knowledge in the form of what Simon (1969) understood as criteria for the design of man-made social artifacts (in this case organizations).

Common across these tools is an (often implicit) understanding of the business model as a model ( Baden-Fuller and Morgan, 2010 ), i.e., a simplified representation of a reality that exists at the level of the firm and its network of exchange partners.

Initially known as the ‘Business Model Ontology’, the framework developed by Osterwalder and Pigneur has become increasingly popular with managers under the label ‘Business Model Canvas’.

We borrow the term meta-model from the literature on systems engineering. In systems engineering, meta-modelling is generally understood as the analysis, construction, and development of the frames, rules, constraints, models, and theories applicable and useful for modelling a pre-defined class of problems.

Johnson (2010) provides several real examples of companies competing through their BM. Zipcar offers car sharing services and competes with traditional car rental companies on convenience. IKEA mixed some degree of convenience and customization with radically lower costs for home furniture.

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BCG Henderson Institute Newsletter: Insights that are shaping business thinking.

Social Impact

/ article, four steps to sustainable business model innovation.

By  David Young and  Marine Gerard

This article is part of an ongoing series that describes the concept of “Sustainable Business Model Innovation” (SBM-I) and how companies are putting it to use.

You may have noticed that every day there’s another announcement about companies making new climate commitments, asset managers outlining their plans for ESG integration, or regulators proposing new disclosures or extending producers’ responsibilities. Corporate coalitions like the World Economic Forum International Business Council and the US Business Roundtable endorse a more stakeholder-inclusive corporate capitalism while industry coalitions work to solve their members’ shared sustainability challenges. And employees and consumers call on employers and brands to take environmental and social challenges seriously. All of this makes clear that we have entered a new era for business, one in which sustaining competitive advantage requires companies to transform their business models for sustainability.

Company leaders need a broader, more systemic understanding of these dynamic sustainability challenges and the ways that their companies can play a part in addressing them. Fortunately, as some farsighted businesses are discovering, the most powerful opportunities for profitable innovation are embedded in these same challenges. Let’s consider three examples.

The first is Telenor, the leading Norwegian mobile operator. In 2008, having entered Pakistan three years earlier, it joined forces with the microfinance bank Tameer. With support from the Bill and Melinda Gates Foundation, the International Finance Corporation (IFC), and the Consultative Group to Assist the Poor (CGAP), they launched a new service called Easypaisa, providing mobile-based financial services to the unbanked and underbanked. By the end of 2019, Telenor Microfinance Bank (the result of Telenor’s acquisition of Tameer) boasted the largest branchless banking service in Pakistan, growing its Easypaisa mobile wallet user base to 6.4 million, its depositor base to 17 million, and the transactions volume through its agent network to about PKR 1 trillion (approximately $6 billion). This service has significantly advanced financial inclusion in Pakistan and established Telenor as a major telecom enterprise there.

Or consider Ajinomoto, a global food and biotech company based in Japan. It produces seasonings, sweeteners, and pharmaceuticals. As part of its 2030 vision and growth strategy to “help one billion people worldwide lead a healthier life,” Ajinomoto is exploring a new "personalized nutrition for health" business. Combining its core nutrition expertise and new technology, the company aims to provide customers with digitally enabled diagnostics, analytics, and product recommendations. These would guide people toward the kind of well-balanced amino acid intake that boosts cognitive and physiological functions and helps prevent aging-related diseases like dementia—a prominent societal issue in Japan.

Another example is Indigo Ag, a US-based agricultural technology startup that was valued at $1.4 billion in 2017. In 2019, the company launched a service called Indigo Carbon to help incentivize farmers to remove carbon from the atmosphere and sequester it in their soil. The service provides technologies and recommendations for regenerative agriculture practices. The ultimate goal is to pay farmers for each ton of carbon captured and then sell certifications to companies looking to offset their carbon footprints. By supporting a transparent carbon credit marketplace, Indigo Carbon creates benefits for all participants: the farmers, the companies buying the offsets, the planet, and its own business.

What do these three companies have in common? Regardless of industry, geography, or size, they (and dozens of others like them) are innovating business models—building on and expanding beyond their core assets and capabilities—to address significant environmental and societal challenges in their local contexts. In this way, they create new sources of value and competitive advantage for their business.

The Four-Step Innovation Cycle

In our research, we have studied more than 100 cases of companies that are practicing what we call “Sustainable Business Model Innovation” (SBM-I). We have found that the most advanced of these companies, the “front-runners,” combine environmental, societal, and financial priorities to re-imagine their core business models and even shift the boundaries of competition.

One might expect the front-runners to consist mainly of smaller enterprises, branded through their visible social or environmental missions. But most of them are actually global corporations that have gradually developed new business models that create both sustainability and long-term competitive advantage.

The core practice for SBM-I is an iterative innovation cycle, shown in Exhibit 1. With each round, the company gains scale, experience, and market presence for its initiative; these reinforce both the business advantage and the environmental and societal benefits generated.

1. Expand the Business Canvas

So how can you bring this cycle to life in your company? The first step is to develop a rich understanding of the broader stakeholder ecosystem in which the company operates and of the environmental and societal issues and trends that might affect this ecosystem. As part of this diagnosis, you explore the potential impacts of ecosystem dynamics and issues on your business model. This will allow you to identify a range of business vulnerabilities and opportunities tied to environmental and societal issues. Some of these are good starting points for focused SBM-I.

More specifically, we recommend the following:

• Expand the business canvas by mapping the wider ecosystem of stakeholders and societal issues in which the business operates. Ask yourself: Who are the key stakeholders in the system? What are the material environmental and societal issues and trends? How do stakeholders and environmental and societal issues directly or indirectly impact all the different parts of the business model?
• Stress-test the business model (current or potential) within this broader map. How do stakeholder dynamics and environmental and societal issues constrain or hold back your business model? Where do limitations in the system create vulnerabilities for the business model? 
• Extrapolate trends and build materiality scenarios. Look at today’s environmental and societal trends and think about how they might evolve over time. In addition, build scenarios to envision completely different, more extreme versions of the future (as opposed to linearly projecting trends) to stretch your thinking. And then, under these scenarios, ask yourself: How might environmental and societal issues change over time? How might stakeholders’ perceptions of and attitudes toward those issues shift? What would be the effects on the system map and the business model?
• Explore scaling up the business. Imagine the business model at different scales of activity. Suppose your business grew three- or five-fold over the next few years. Where might breaking points or opportunities arise? What happens to the externalities the business creates? How do risks and opportunities change?
• Identify innovation opportunity spaces or “strategic intervention points” (SIPs). These are points at which targeted action or innovation could alter stakeholder dynamics, positively impact the environmental or societal issues, reduce the vulnerabilities of the business model, or even create new business value opportunities.

Look for difficulties, gaps, and risks to arise from the analysis. For example, your company’s own lines of business might contribute to the environmental or societal issue and impact the growth of the business today. Also, don’t just rely on your own thinking. Cultivate outsiders who can provide complementary and thought-provoking perspectives.

In a recent interview , Christine Rodwell, former vice president of business development cities at Veolia, explained that “to walk the talk on sustainability, companies need to listen to their external stakeholders. They should create a committee of critical friends (across public, social, and academic sectors) who will challenge them and advise them to develop business solutions that create meaningful environmental and societal benefits.”

To understand what expanding a business canvas looks like in practice, consider the hypothetical example of a consumer packaged goods (CPG) manufacturing company engaged in a real-world dilemma: the toxic effect of plastic packaging on natural habitats, particularly in the world’s oceans. About 18 billion pounds of plastic waste enter the world’s oceans each year. This is equivalent to five grocery bags of trash on every foot of coastline. Plastic pollution causes extensive damage to life on land and at sea, including toxic contamination, strangulation, blockage of digestive passages, and endocrine-related reproductive problems for people as well as animals. Concerns about this problem reached a tipping point in the mid-2010s, as studies confirmed the damage.

As industrial leaders in this field know all too well, the complexities of gathering, cleaning, sorting, recycling, and reusing plastics have made it costly and difficult to address this issue. Companies that step forward with effective and financially viable solutions will not only gain enormous goodwill but are also likely to build high-growth businesses.

But where do you start? And where do you focus innovation efforts and investments to tackle such a complex, multifaceted environmental issue? Reflecting the SBM-I cycle approach, Exhibit 2 shows what a stakeholder-centric systems map for the plastics issue could look like from the point of view of a CPG company. This map uses basic systems dynamics principles to capture the most significant interrelationships among the CPG company, the environmental issue at stake, and key stakeholders (consumers, policymakers, civil society, waste collectors and recyclers, and plastics manufacturers). The arrows show patterns of cause and effect. For example, when urbanization increases, so does the cost of landfilling.

The power of this diagram (versus more traditional, linear depictions) comes in part from its ability to reveal where delays, rebound effects, or tipping points might be active in the system. For instance, the node labeled “environmental and recycling awareness” will influence changes in several consumer habits—but only after a delay. Such awareness cannot be seen as a quick-fix solution, but over time it will help change the dynamics of the entire system.

The boxes in the exhibit represent the opportunity spaces or strategic intervention points (SIPs) that become evident during this step. In this example, a few of the SIPs for our CPG company are as follows: shifting to new packaging formats; setting up plastic collection initiatives; lobbying for government programs like deposit return systems; joining precompetitive coalitions that invest in recycling infrastructure and new recycling technology; and educating and nudging consumers to consume and dispose of packaging in more sustainable ways.

2. Innovate for a Resilient Business Model

The first step in the cycle will have led you to identify the opportunity spaces that hold potential for both financial returns and societal value. You must then transform your business model, or imagine an entirely new one, so that you can seize these opportunities. In this second step, you innovate and develop new aspects of that new business model. You are seeking to bypass current constraints, break tradeoffs, deploy technological advances, and perhaps integrate activities that were previously kept separate. You should ideate a new business model to integrate and reinforce both business advantage and environmental and societal benefits.

In related research , we introduced and defined seven archetypal business models that optimize for both societal and business value. Here we illustrate how they might apply to the plastics waste challenge.

• Own the origins. Change production inputs to generate societal and environmental benefits. For instance, HP is working with waste collectors in a partnership with the First Mile Coalition in Haiti. HP has invested $2 million in a local facility to produce clean, high-quality recycled plastics that can then be used as input in an array of HP personal computer products and ink cartridges, reducing the environmental footprint of those products. Four years after its launch in 2016, the program had already diverted approximately 1.7 million pounds (771 metric tons) of plastic materials (equivalent to more than 60 million plastic bottles) from waterways and oceans and created income opportunities for 1,100 Haitians (with 1,000 more expected in coming years). Thanks to this and other efforts, HP boasted the world’s most sustainable PC portfolio in May 2020. This included, for example, the HP Elite Dragonfly, the first PC manufactured with ocean-bound plastic.
• Own the whole cycle. Create environmental and societal impact by influencing the product usage cycle from cradle to grave. Since the 1990s, Grupo AlEn, a leader in home cleaning products based in Monterrey, has invested and scaled up its in-house plastic recycling operations to become one of the largest plastic recyclers in Mexico. AlEn now operates 30 routes and 6,200 collection points in the Monterrey area, recycling more than 50,000 tons of PET and HDPE per year. This business expansion has given AlEn an exclusive supply of recycled plastics, enabling it to create distinctive, greener packaging at a relatively stable cost.
• Expand societal value. Expand the environmental and societal value of products and services, and capture value in pricing, market share, and loyalty. In 2018, PepsiCo acquired Sodastream, the world’s leading at-home sparkling water maker. Building on this technology, PepsiCo has begun to bring packaging-free, customizable beverages to workplaces, college campuses, and airports. This new business positions PepsiCo to win in the increasingly personalized beverage market and to save an estimated 67 billion single-use plastic bottles by 2025.
• Expand the value chains. Innovate by layering onto the business ecosystems of customers or of partners in other industries. In Chile, Algramo’s innovative bulk distribution system replaces single-use plastic with RFID-equipped reusable containers. Since 2013, the startup has scaled up its business by partnering with more than 2,000 family-owned stores across Santiago. They dispense affordable food and staple products “al gramo” (Spanish for “by the gram”) and reward customers for reusing containers. Algramo’s model not only helps the environment but also benefits the urban poor, who previously had to pay high prices for small quantities of products, in wasteful, individually wrapped packets.
• Re-localize and regionalize. Shorten and reconfigure global value chains to bring societal benefits closer to home. In Brazil, BASF has developed a solution to a local issue: waste certificate fraud. Some collectors and recyclers claim credits for recycled materials that they didn’t actually process or that aren’t actually recycled. Partnering with Kryha, a digital blockchain studio, and Recicleiros, an NGO that supports waste collectors and their cooperatives, BASF developed an online platform called ReciChain. This platform enables accurate and secured data tracking throughout the recycling value chain, to improve the quality of operations and guarantee the validity of manufacturers’ certificates and claims.
• Energize the brand. Encode, promote, and monetize the full environmental and societal value of products and services, and use that leverage to engage customers in novel ways. The innovative manufacturing company 3M released the latest version of its Thinsulate insulation product in 2019. This is “100% recycled featherless insulation” made from recycled plastic bottles. Building on this accomplishment, 3M worked with the high-end apparel brand Askov Finlayson to create “the world’s first climate-positive parka,” producing 3,000 parkas in 2019 as an inspiring demonstration project.
• Build across sectors. Create new business models in collaboration with government and nonprofit organizations, particularly in rapidly developing economies, to improve the business ecosystem and societal proposition. Together, SC Johnson and the social enterprise Plastic Bank have opened nine recycling centers in Indonesia to collect and recycle plastic before it reaches the ocean. This partnership also plays an important societal role, helping families in impoverished areas who collect plastic waste by buying it at a premium from them. In 2019, the partnership announced a ground-breaking, three-year deal to create 509 plastic collection points, including locations in Thailand, the Philippines, Vietnam, and Brazil. In aggregate, these points are expected to collect 30,000 metric tons of plastic over three years—the equivalent of stopping 1.5 billion plastic bottles from entering waterways and the ocean. On the business side, among other benefits, this collaboration will secure a steady supply of high-quality recycled plastics and help SC Johnson meet its 2025 packaging goals.

These seven archetypes can be starting points for developing your own business model innovation. Adapt them, and combine several together to develop a more comprehensive solution to environmental and societal issues relevant to your enterprise. Interestingly, among the 102 in-depth SBM-I cases that we explored in our research, 75% of the SBM-I leaders (the “front-runners”) combine three or more archetypes. This contrasts with less than 30% in the two other groups: the “ecosystem leaders” and the “initiative leaders,” whose efforts tend to be more narrowly focused.

In addition to exploring the possibilities inherent in these seven archetypes, take inspiration in the lessons learned from SBM-I front-runners. Front-runners see sustainability as a source of competitive advantage. In line with their long-term strategies, they continuously iterate and fine-tune their business models, always seeking to deepen their beneficial impact. They explicitly seek to understand and fix the root causes of environmental and societal challenges—as some of our plastics recyclers did, addressing not just the environmental concerns but also the social aspects of the issue. These companies also use digital technologies wherever possible, to break economic constraints and unlock new solutions. They practice an intensive form of stakeholder engagement: partnering with nonprofits and governments, operating across organizational boundaries, and pooling resources with other enterprises, even competitors. Last but not least, they experiment with new forms of value capture, such as blended financing sources, to de-risk and amplify their own investments. After all, notwithstanding their environmental and social track records, the front-runners are still in business to show a profit and return investment to shareholders.

3. Link to Drivers of Value and Competitive Advantage

In the third stage of the cycle, test, iterate, and refine your business model ideas or concepts (from the second step) to ensure that they will yield the environmental and societal benefits intended, and that the benefits will translate into value and advantage for the company. A business with weak profit margins cannot invest in innovation to amplify and scale environmental and societal benefits.

The objective of this step is to keep assessing and reengineering the business model, so that it continually improves the resilience of the business and the benefits to society. The following questions, based on our research into the characteristics of robust, resilient business models , can help you navigate this part of the process:

• Can the business model scale effectively? Can it be replicated across all your business units or the markets you serve, without diminishing returns?
• Will the business model differentiate your brand or product and make it more competitive in the marketplace?
• Will it reduce the risk of commoditization, by being hard for others to imitate? Will its distinctiveness help you retain some control over pricing?
• Can it leverage network effects? For example, can it attract the kinds of customers and suppliers that make other customers feel compelled to join?
• Does the business model harness business ecosystems—including the larger industry, the value chain, and everyone who interacts with your products, services, and practices—for advantage and sustainability?
• Does the business model naturally create meaningful environmental and societal benefits?
• Will the environmental and societal benefits remain durable against changing trends over time, even as the business model scales up?
• Does the business model increase returns to shareholders as well? Are the financial benefits linked to the environmental and societal benefits in some significant way?
• Finally, does the model animate your company’s purpose? Does it boost engagement and loyalty between the company and its employees, customers, investors, and other stakeholders?

Exhibit 3 shows how a company might assess its business model against these nine questions. The resulting footprint reveals how robust and resilient the business model is and identifies where it could be improved to unlock further advantage and value for the company.

The fuller the footprint, the better. Among the front-runners in our sample, 90% score “high” on at least five of the nine attributes, as opposed to only 30% in the other groups. The front-runners also show superior average scores on every single dimension.

4. Scale the Initiative

The full potential value of sustainable business model innovation is achieved only when the new business model is brought to scale: engaging people in the company, across the supply chain, in the company’s networks, and in its ecosystems to expand impact and advantage.

To accomplish this, companies can leverage three enablers. First, partnerships with other organizations, within or across industries or sectors, can help a company pool resources, fill capability gaps, and unlock new markets. Almost 90% of the front-runners have broadened their efforts this way. Second, digital technology (leveraged by 80% of the front-runners) can help create new distribution channels that reach previously unserved or underserved populations at a fraction of the cost of their predecessors. Third, companies that adopt SBM-I tend to develop cultures and leadership values that attract and engage people inside and outside their boundaries. Indeed, all of the front-runners explicitly mention the environmental and societal impact they seek to deliver in their vision, purpose, or mission statements.

Consider the example of BIMA, a mission-driven provider of mobile-delivered health and insurance services that started operations in Ghana in 2010. Its innovative digital technology platform and its partnership model (which comprises telecom providers, mobile money providers, and insurance underwriters) have enabled it to rapidly scale its innovative business model. BIMA now provides affordable, easy-to-manage life and health insurance to more than 35 million low-income customers across ten emerging economies. BIMA’s customers have access to its services through their mobile phones. Many of them are lower income families who earn less than $10 a day. About 75% of them are obtaining insurance for the first time in their lives. These societal benefits are at the core of BIMA’s strategy and mission; the company’s website says explicitly that its “purpose is to protect the future of every family.”

The four-step innovation cycle we propose in this article offers companies a way to systematically integrate and solve for social and business value in one business model. Most of the companies that begin this journey are already skilled at optimizing for business advantage. They may already recognize the importance of taking into account their environmental and societal impacts. With this approach, they are now ready to take on innovation for a business that optimizes for both business and social value.

The BCG Henderson Institute is Boston Consulting Group’s strategy think tank, dedicated to exploring and developing valuable new insights from business, technology, and science by embracing the powerful technology of ideas. The Institute engages leaders in provocative discussion and experimentation to expand the boundaries of business theory and practice and to translate innovative ideas from within and beyond business. For more ideas and inspiration from the Institute, please visit our website and follow us on LinkedIn and X (formerly Twitter) .

Managing Director & Senior Partner, BCG Henderson Institute Fellow

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The Hard Truth About Business Model Innovation

Many attempts at business model innovation fail. To change that, executives need to understand how business models develop through predictable stages over time — and then apply that understanding to key decisions about new business models.

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Surveying the landscape of recent attempts at business model innovation, one could be forgiven for believing that success is essentially random. For example, conventional wisdom would suggest that Google Inc., with its Midas touch for innovation, might be more likely to succeed in its business model innovation efforts than a traditional, older, industrial company like the automaker Daimler AG. But that’s not always the case. Google+, which Google launched in 2011, has failed to gain traction as a social network, while at this writing Daimler is building a promising new venture, car2go, which has become one of the world’s leading car-sharing businesses. Are those surprising outcomes simply anomalies, or could they have been predicted?

To our eyes, the landscape of failed attempts at business model innovation is crowded — and becoming more so — as management teams at established companies mount both offensive and defensive initiatives involving new business models. A venture capitalist who advises large financial services companies on strategy shared his observation about the anxiety his investors feel about the changes underway in their industry: “They look at the fintech [financial technology] startups and see their business models being unbundled and attacked at every point in the value chain.” And financial services companies are not alone. A PwC survey published in 2015 revealed that 54% of CEOs worldwide were concerned about new competitors entering their market, and an equal percentage said they had either begun to compete in nontraditional markets themselves or considered doing so. 1 For its part, the Boston Consulting Group reports that in a 2014 survey of 1,500 senior executives, 94% stated that their companies had attempted some degree of business model innovation. 2

We’ve decided to wade in at this juncture because business model innovation is too important to be left to random chance and guesswork. Executed correctly, it has the ability to make companies resilient in the face of change and to create growth unbounded by the limits of existing businesses. Further, we have seen businesses overcome other management problems that resulted in high failure rates. For example, if you bought a car in the United States in the 1970s, there was a very real possibility that you would get a “lemon.” Some cars were inexplicably afflicted by problem after problem, to the point that it was accepted that such lemons were a natural consequence of inherent randomness in manufacturing. But management expert W. Edwards Deming demonstrated that manufacturing doesn’t have to be random, and, having incorporated his insights in the 1980s, the major automotive companies have made lemons a memory of a bygone era. To our eyes, there are currently a lot of lemons being produced by the business model innovation process — but it doesn’t have to be that way.

In our experience, when the business world encounters an intractable management problem, it’s a sign that business executives and scholars are getting something wrong — that there isn’t yet a satisfactory theory for what’s causing the problem, and under what circumstances it can be overcome. This is what has resulted in so much wasted time and effort in attempts at corporate renewal. And this confusion has spawned a welter of well-meaning but ultimately misguided advice, ranging from prescriptions to innovate only close to the core business to assertions about the type of leader who is able to pull off business model transformations, or the capabilities a business requires to achieve successful business model innovation.

The hard truth about business model innovation is that it is not the attributes of the innovator that principally drive success or failure, but rather the nature of the innovation being attempted. Business models develop through predictable stages over time — and executives need to understand the priorities associated with each business model stage. Business leaders then need to evaluate whether or not a business model innovation they are considering is consistent with the current priorities of their existing business model. This analysis matters greatly, as it drives a whole host of decisions about where the new initiative should be housed, how its performance should be measured, and how the resources and processes at work in the company will either support it or extinguish it.

This truth has revealed itself to us gradually over time, but our thinking has crystallized over the past two years in an intensive study effort we have led at the Harvard Business School. As part of that research effort, we have analyzed 26 cases of both successful and failed business model innovation; in addition, we have selected a set of nine industry-leading companies whose senior leaders are currently struggling with the issue of conceiving and sustaining success in business model innovation. (See “About the Research.”) We have profiled these nine companies’ efforts extensively, documented their successes and failures, and convened their executives on campus periodically to enable them to share insights and frustrations with each other. Stepping back, we’ve made a number of observations that we hope will prove generally helpful, and we also have a sense of the work that remains to be done.

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There are a number of lessons that managers can learn from past successes and failures, but all depend on understanding the rules that govern business model formation and development — how new models are created and how they evolve across time, the kinds of changes that are possible to those models at various stages of development, and what that means for organizational renewal and growth.

The Business Model’s Journey

The confusion surrounding business model innovation begins, appropriately enough, with confusion about the term “business model.” In our course at the Harvard Business School, we teach students to use a four-box business model framework that we developed with colleagues from the consulting firm Innosight LLC. This framework consists of the value proposition for customers (which we will refer to as the “job to be done”); the organization’s resources , such as people, cash, and technology; the processes 3 that it uses to convert inputs to finished products or services; and the profit formula that dictates the margins, asset velocity, and scale required to achieve an attractive return. 4 (See “The Elements of a Business Model.”) Collectively, the organization’s resources and processes define its capabilities — how it does things — while its customer value proposition and profit formula characterize its priorities — what it does, and why. 5

This way of viewing business models is useful for two reasons. First, it supplies a common language and framework to understand the capabilities of a business. Second, it highlights the interdependencies among elements and illuminates what a business is in capable of doing. Interdependencies describe the integration required between individual elements of the business model — each component of the model must be congruent with the others. They explain why, for example, Rolls-Royce Motor Cars Ltd. is unable to sell cheap bespoke cars and why Wal-Mart Stores Inc. is unable to combine low prices with fancy stores.

Understanding the interdependencies in a business model is important because those interdependencies grow and harden across time, creating another fundamental truth that is critical for leaders to understand: Business models by their very nature are designed not to change, and they become less flexible and more resistant to change as they develop over time. Leaders of the world’s best businesses should take special note, because the better your business model performs at its assigned task, the more interdependent and less capable of change it likely is. The strengthening of these interdependencies is not an intentional act by managers; rather, it comes from the emergence of processes that arise as the natural, collective response to recurrent activities. The longer a business unit exists, the more often it will confront similar problems and the more ingrained its approaches to solving those problems will become. We often refer to these ingrained approaches as a business’s “culture.” 6

In fact, this pattern is so consistent and important that we’ve begun to think of the development of a business model across time as resembling a journey whose progress and route are predictable — although the time that it takes a business model to follow this journey will differ by industry and circumstance. (See “The Three Stages of a Business Model’s Journey.”) As the diagram depicts, a business model, which in an established company is typically embodied in a business unit, 7 travels a one-way journey, beginning with the creation of the new business unit and its business model, then shifting to sustaining and growing the business unit, and ultimately moving to wringing efficiency from it. Each stage of the journey supports a specific type of innovation, builds a particular set of interdependencies into the model, and is responsive to a particular set of performance metrics. This is the arc of the journey of virtually every business model — if it is lucky and successful enough to travel the entire length of the route. Unsuccessful business units will falter before concluding the journey and be absorbed or shuttered. Now, let’s explore each of the three stages and how the business model evolves through them.

1. Creation

Peter Drucker once said that the purpose of a business is to create a customer. 8 That goal characterizes the first stage of the journey, when the business searches for a meaningful value proposition, which it can design initial product and service offerings to fulfill. This is the stage at which a relatively small band of resources (a founding team armed with an idea, some funding and ambition, and sometimes a technology) is entirely focused on developing a compelling value proposition — fulfilling a significant unmet need, or “job.” 9 It’s useful to think of the members of the founding team as completely immersed in this search. The information swirling around them at this point in the journey — the information they pay the most attention to — consists of insights they are able to glean into the unfulfilled jobs of prospective customers.

We emphasize the primacy of the job at this point of the journey because it is very difficult for a business to remain focused on a customer’s job as the operation scales. Understanding the progress a customer is trying to make — and providing the experiences in purchase and use that will fulfill that job perfectly — requires patient, bottom-up inquiry. The language that is characteristic of this stage is the language of questions, not of answers. The link between value proposition and resources is already forming, but the rest of the model is still unformed: The new organization has yet to face the types of recurrent tasks that create processes, and its profit formula is nascent and exploratory. This gives the business an incredible flexibility that will disappear as it evolves along the journey and its language shifts from questions to answers.

2. Sustaining Innovation

Business units lucky and skilled enough to discover an unfulfilled job and develop a product or service that addresses it enter the sustaining innovation phase of the business model journey. At this stage, customer demand reaches the point where the greatest challenge the business faces is no longer determining whether the product fulfills a job, but rather scaling operations to meet growing demand. Whereas in the creation phase the business unit created customers, in the sustaining innovation phase it is building these customers into a reliable, loyal base and building the organization into a well-oiled machine that delivers the product or service flawlessly and repeatedly. The innovations characteristic of this phase of the business model journey are what we call sustaining innovations — in other words, better products that can be sold for higher prices to the current target market.

A curious change sets in at this stage of the journey, however: As the business unit racks up sales, the voice of the customer gets louder, drowning out to some extent the voice of the job. Why does this happen? It’s not that managers intend to lose touch with the job, but while the voice of the job is faint and requires interrogation to hear, the voice of the customer is transmitted into the business with each sale and gets louder with every additional transaction. The voice of the job emerges only in one-to-one, in-depth conversations that reveal the job’s context in a customer’s life, but listening to the voice of the customer allows the business to scale its understanding. Customers can be surveyed and polled to learn their preferences, and those preferences are then channeled into efforts to improve existing products.

The business unit is now no longer in the business of identifying new unmet needs but rather in the business of building processes — locking down the current model. The data that surrounds managers is now about revenues, products, customers, and competition. While in the creation phase, the founding team had to dig to discover data, data now floods the business’s offices, with more arriving with each new transaction. Data begs to be analyzed — it is the way the game is scored — so the influx of data precipitates the adoption of metrics to evaluate the business’s performance and direct future activity to improving the metrics. The performance metrics in this phase focus on the income statement, leading managers to direct investments toward growing the top line and maximizing the bottom line.

3. Efficiency

At some point, however, these investments in product performance no longer generate adequate additional profitability. At this point, the business unit begins to prioritize the activities of efficiency innovation, which reduce cost by eliminating labor or by redesigning products to eliminate components or replace them with cheaper alternatives. (There is, however, always some amount of both types of innovation — sustaining and efficiency — occurring at any point of a business’s evolution.) Broadly, the activities of efficiency innovation include outsourcing, adding financial leverage, optimizing processes, and consolidating industries to gain economies of scale. While many factors can cause businesses to transition into the efficiency innovation phase of their evolution, one we have often observed is the result of performance “overshoot,” in which the business delivers more performance than the market can utilize and consumers become unwilling to pay for additional performance improvement or to upgrade to improved versions. Managers should not bemoan the shift to efficiency innovation. It needs to happen; over time, business units must become more efficient to remain competitive, and the shift to efficiency innovations as the predominant form of innovation activity is a natural outcome of that process.

To managers, the efficiency innovation phase marks the point where the voice of the shareholders drowns out the voice of the customer. Gleaning new understanding of that initial job to be done is now the long-lost ambition of a bygone era, and managers become inundated with data about costs and efficiency. The business unit frequently achieves efficiency by shifting to a modular structure, standardizing the interdependencies between each of the components of its business model so that they may be outsourced to third parties. In hardening these interdependencies, the business unit reaps the efficiency rewards of modularization but leaves flexibility behind, firmly cementing the structure of its business model in place. Deviations from the existing structure undermine the modularity of the components and reduce efficiency, so when evaluating such changes, the business will often choose to forsake them in pursuit of greater efficiency.

Now, when the business unit generates increasing amounts of free cash flow from its efficiency innovations, it is likely to sideline the capital, to diversify the company, or to invest it in industry consolidation. This is one of the major drivers of merger and acquisition (M&A) activity. Whereas the sustaining innovation phase was exciting to managers, customers, and shareholders, the efficiency innovation phase reduces degrees of managerial freedom. Efficiency innovations lure managers with their promises of low risk, high returns, and quick paybacks from cost reduction, but the end result is often a race to the bottom that sees the business’s ability to serve the job and customers atrophy as it improves its service to shareholders.

The natural evolution of business units occurs all around us. Consider the case of The Boeing Co. and its wildly successful 737 business unit. The 737 business was announced in 1965 and launched its first version, the 737-100, in 1967, with Lufthansa as its first customer. With orders from several additional major airlines, the new business unit demonstrated that its medium-haul plane fulfilled an important job to be done. Before even delivering the first -100, Boeing began improving the 737 and launched a stretched version, the -200, with a longer fuselage to meet demands from airlines requiring greater seating capacity. Boeing entered the sustaining innovation phase and continued to improve its product by developing several generations of new 737s, stretching the fuselage like an accordion while nearly doubling the plane’s range and more than doubling its revenue per available seat mile. The business continued to improve how it served customers with the Next Generation series in the 1990s, which offered even bigger aircraft and better avionics systems.

Facing increased competition and demands for improved financial performance, the 737 business shifted its focus to efficiency innovation in the early 2000s. To free resources and liberate capital, Boeing began to outsource aspects of 737 production. Most notably, Boeing sold a facility in Wichita, Kansas, that manufactured the main fuselage platform for the 737 to the Toronto-based investment company Onex Corp. in 2005. Outsourcing subsystem production allowed the business to improve its capital efficiency and deliver improved returns on capital. 10

Given that road map, what is the hope for companies that seek to develop new business models or to create new businesses? Thus far in this article we’ve explored the journey that business units take over time. And while we’re not sure that a business unit can break off from this race, we know that its parent companies can — by developing new businesses. Although the processes of an individual business unit’s business model propel it along this journey, the opportunity exists to develop a process of business creation at the corporate level. But doing so successfully requires paying careful attention to the implications of the business model road map.

Implications For Business Model Innovation

It’s worth internalizing the road map view of business model evolution because it helps explain why most attempts to alter the course of existing business units fail. Unaware of the interdependencies and rigidities that constrain business units to pursuing their existing journey, managers attempt to compel existing business units to pursue new priorities or attempt to create a new business inside an existing unit. Using the road map as a guiding principle allows leaders to correctly categorize the innovation opportunities that appear before them in terms of their fit with their existing business model’s priorities. Several recommendations for managers emerge from this insight.

Determine how consistent the opportunity is with the priorities of the existing business model. The only types of innovation you can perform naturally within an existing business model are those that build on and improve the existing model and accelerate its progress along the journey — in other words, those innovations that are consistent with its current priorities — by sharpening its focus on fulfilling the existing job or improving its financial performance. Therefore, a crucial question for leaders to ask when evaluating an innovation opportunity is: To what degree does it align with the existing priorities of the business model?

Many failed business model innovations involve the pursuit of opportunities that appear to be consistent with a unit’s current business model but that in fact are likely to be rejected by the existing business or its customers. (See “Evaluating the Fit Between an Opportunity and an Existing Business.”) To determine how consistent an opportunity is with the priorities of the existing business model, leaders should ask: Is the new job to be done for the customer similar to the existing job? (The greater the similarity, the more appropriate it is for the existing business to pursue the opportunity.) How does pursuit of the opportunity affect the existing profit formula? Are the margins better, transaction sizes larger, and addressable markets bigger? If so, it is likely to fit well with the existing profit formula. If not, managers should tread with caution in asking an existing business to take it on — and should instead consider creating a separate unit to pursue the new business model.

This distinction helps explain the performance of the two innovations with which we opened this article. Google saw Google+ as an extension of its search business and chose to integrate Google+ into its existing products and business. Google+ accounts were integrated into other Google products, and the business saw the incorporation of information from users’ social networks as a way to generate improved, tailored search results. Viewed through the lens of Google’s business model, a social network allowed the business to generate greater revenue and profitability by better targeting advertisements and delivering more advertisements through increased usage of its product platform. However, consumers apparently didn’t see the value from combining search and social networking; to the consumer, the jobs are very different and arise in different circumstances in their lives. So while Google maintains its exceptional search business, its social network failed to gain momentum.

Contrast Google’s experience to that of Daimler, which recognized that car2go was a very different business and established it far afield from the home office and existing business. Daimler started car2go as an experiment tested by its employees working in Ulm, Germany. It housed the business in a corporate incubator that does not report to the existing consumer automotive businesses and designed it from the outset to fulfill Daimler’s core job of providing mobility, but without the need to convince consumers to purchase vehicles. Recognizing that the priorities of a business that rents cars by the minute are very different from those involved in selling luxury vehicles, Daimler has kept car2go separate and allowed it to develop a unique business model capable of fulfilling its job profitably. However, car2go benefits from Daimler’s ownership by using corporate resources where appropriate — for example, car2go rents only vehicles in the Daimler portfolio, principally the Smart Fortwo.

To achieve successful business model innovation, focus on creating new business models, rather than changing existing ones. As business model interdependencies arise, the ability to create new businesses within existing business units is lost. The resources and processes that work so perfectly in their original business model do so because they have been honed and optimized for delivering on the priorities of that model. The classic example of this was the movie rental company Blockbuster, which attempted to develop a new DVD-by-mail business in response to the rise of Netflix Inc. by integrating that offering with its existing store network. This “bricks-and-clicks” combination made perfect sense to Blockbuster’s managers, but what became obvious only in hindsight was that the two models would be at war with each other — the asset velocity required to maintain a profitable store network was incompatible with the DVD-by-mail offering. The paradox that managers must confront is that the specialized capabilities that are highly valuable to their current business model will tend to be unsuitable for, or even run counter to, the new business model.

Building a Business Creation Engine

For some time, we’ve argued that companies should build a business creation engine, capable of turning out a steady stream of innovative new business models, but to date no company we know of has built an enduring capability like that. We think that such an engine of sustained growth would quickly prove to be a company’s most valuable asset, providing growth and creating new markets. But unleashing this growth potential requires very different behaviors than those required to successfully exploit existing markets.

The challenge, as the journey metaphor we’ve developed here should make clear, is that what is necessary is to turn an event — the act of creating a new business and a new business model — into a repeatable process at the corporate level. It must be a process because events are discrete activities with definitive start and end points, whereas processes are continuous and dynamic. Learnings from a previous event do not naturally or easily flow to subsequent events, causing the same mistakes to be repeated over and over. In contrast, processes by their nature can be learning opportunities that incorporate in future attempts what was discovered in previous iterations. Enacted as a process, the act of creation will improve over time and refine its ability to discover unfulfilled customer jobs and create new markets; the success rate will improve alongside the process, creating a virtuous cycle of growth.

While we have not discovered a perfect exemplar of this discipline, we have been tracking the efforts of some leading companies that are intent on building such a capability. While it is too early to hold any of them up as success stories, we can nonetheless discern five approaches that we believe have the potential to lead to success. Let’s look at each of these approaches in turn.

Spot future growth gaps by understanding where each of your business units is on the journey. In our course at Harvard Business School, we teach students to use a tool called the aggregate project plan to allocate funding to different types of innovation. 11 Such a plan categorizes innovations by their distance from existing products and markets and specifies a desired allocation of funding to each bucket. We see application for this tool here as well.

The innovation team at Carolinas HealthCare System, a not-for-profit health care organization based in Charlotte, North Carolina, performed this type of analysis and identified a need to field additional innovation efforts that reflected the organization’s belief that hospitals will be less central in the health care system of the future. Armed with this view, Carolinas HealthCare System has been able to plan innovation activity by type, ensuring that the organization invests appropriately across all three categories of the business model journey. As Dr. Jean Wright, chief innovation officer at Carolinas HealthCare System, said, “The strength of the journey framework is that it allowed us to see that our investments in business creation are very different from our investments in our existing businesses. More importantly, it has helped us see that both types are important.”

Run with potential disruptors of your business. Another approach is to create incentives and channels for entrepreneurs to bring new and, in some cases, potentially disruptive business models to you, either as potential customers or as ecosystem partners. ARM Holdings plc, a developer and licenser of system-on-chip semiconductors, headquartered in Cambridge, U.K., has had success viewing itself as the central, coordinating node of a symbiotic ecosystem of independent semiconductor manufacturers and consumer products companies, rather than as a traditional semiconductor company that develops and manufactures proprietary, standard products. Today, nearly every smartphone and mobile device includes at least one ARM design. The company achieved this ubiquity by inviting customers and consumers into its development process so that it will be the first company called by customers seeking to design a new chip. It does this in two ways: first, by incorporating knowledge across its entire ecosystem that allows it to develop optimized end-to-end solutions for customers, and second, by employing a royalty-based revenue model that ensures ARM’s incentives are aligned with those of its customers.

Start new businesses by exploring the job to be done. When identifying new market opportunities, it’s critical that you begin with a focus on the customer’s job to be done, rather than on your company’s capabilities. It’s tempting to look at your capabilities as the starting point for any expansion, but capabilities are of no use without a job for them. For incumbents, this requires staying focused on the job rather than the market or capability. One example of this discipline is Corning Inc., the manufacturer of specialty glass and ceramic materials based in Corning, New York. When it becomes apparent that a Corning business can no longer generate a premium price from its technical superiority — when it reaches the efficiency innovation stage, in our framework — the company divests that business and uses the proceeds to expand businesses in the sustaining stage and to create new ones. For example, when Corning realized that liquid crystal display (LCD) would eventually replace cathode ray tube (CRT) technology to become the future of display, the company focused on the job to be done — display — rather than just on the CRT market, which at the time was important to the company. Corning began inventing products to enable the growth of the LCD industry and eventually decided to exit the CRT market. 12 To Corning, businesses serve needs, not markets, and as technological or market shifts occur, the company continues to grow by remaining focused on the need, which we call the job.

Resist the urge to force new businesses to find homes in existing units. When executives start new businesses, they often look at them and wonder, “Where do I stick this in my organization?” They feel pressure to combine new businesses with existing structures to maximize efficiency and spread overhead costs over the widest base, but this can spell doom for the new business. When a new business is housed within an existing unit, it must adopt the priorities of the existing business to secure funding; in doing so, the new business often survives in name but disappears in effect.

Once a new business is launched, it must remain independent throughout the duration of its journey, but maintaining autonomy requires ongoing leadership attention. The forces of efficiency operate 24/7 inside an organization, rooting out any cost perceived to be superfluous; standing against these forces requires the constant application of a counterforce that only the company’s most senior leaders can provide. In the quest for efficiency, what has been somehow forgotten is the vital leadership role that corporate executives can play in fostering organizational innovation by countenancing the creation of multiple profit formulas and housing these different businesses in a portfolio of business models.

Use M&A to create internal business model disruption and renewal. Lastly, while we’ve focused most of our attention on organic activities, there’s a very valuable role for M&A in a business growth engine. 13 Although at the extreme, this approach can result in a quasi-conglomerate structure that history has proved to be ineffective, there are exceptions. EMC Corp., based in Hopkinton, Massachusetts, adopted this approach with the creation of its federation structure when it floated VMware Inc., a company it had acquired three years earlier, as a publicly traded subsidiary in 2007. Much M&A activity designed to change an existing business model fails because it’s done for the wrong reasons and managed in the wrong way, often resulting in the integration of units that should remain autonomous. In contrast, EMC’s federation structure allows each business to pursue its individual objectives while coordinating the company’s activity as a whole. This embedded capability for exploiting existing markets while identifying and investing in new markets allowed EMC to expand out of its traditional memory business into machine virtualization, agile development, and information security.

The Greatest Innovation Risk

Executives sometimes prefer to invest in their existing businesses because those investments seem less risky than trying to create entirely new businesses. But our understanding of the business model journey allows us to see that, over the long term, the greatest innovation risk a company can take is to decide not to create new businesses that decouple the company’s future from that of its current business units.

We take great hope from the insights about business model innovation and corporate renewal that we have explored in this article — not because we believe that business units can evade or escape the journey that we have described, but because we believe that the corporations that house these units can. There remains much to be learned about corporate renewal and the business model journey, but we hope that insights from the business model road map can help companies learn how to create robust corporate-level business creation engines that will renew their organizations and power growth. The challenge is great — but so are the potential rewards.

About the Authors

Clayton M. Christensen is the Kim B. Clark Professor of Business Administration at Harvard Business School in Boston, Massachusetts. Thomas Bartman is a former senior researcher at the Forum for Growth and Innovation at Harvard Business School. Derek van Bever is a senior lecturer of business administration at Harvard Business School, as well as director of the Forum for Growth and Innovation.

1. PwC, “2015 US CEO Survey: Top Findings — Grow and Create Competitive Advantage,” n.d., www.pwc.com.

2. Z. Lindgardt and M. Ayers, “Driving Growth with Business Model Innovation,” October 8, 2014, www.bcg.perspectives.com.

3. See D.A. Garvin, “The Processes of Organization and Management,” Sloan Management Review 39, no. 4 (summer 1998): 33-50. In discussing processes, we refer to all of the processes that Garvin identified in that article.

4. This business model framework was developed in 2008; see M.W. Johnson, C.M. Christensen, and H. Kagermann, “Reinventing Your Business Model,” Harvard Business Review 86, no. 12 (December 2008): 50-59.

5. For more information about organizational capabilities, see C.M. Christensen and S.P. Kaufman, “Assessing Your Organization’s Capabilities: Resources, Processes, and Priorities,” module note 9-607-014, Harvard Business School, Boston, Massachusetts, August 21, 2008, http://hbr.org.

6. See E.H. Schein, “Organizational Culture and Leadership” (San Francisco, California: Jossey-Bass, 1985).

7. It’s worth noting that startups typically begin with one business unit, which is the company. Then as the organization grows, companies typically create corporate offices and business units that separate responsibility for the administration of the organization from the specific business. Today, managers tend to operate lean corporate offices that often function as thin veneers between the business and investors, but we believe that there is a vital role for the corporate office in leading business creation and developing innovation.

8. P.F. Drucker, “The Practice of Management” (New York: Harper & Row, 1954).

9. For a more complete treatment of jobs to be done, see C.M. Christensen, T. Hall, K. Dillon, and D.S. Duncan, “Competing Against Luck: The Story of Innovation and Customer Choice” (New York: HarperCollins, in press).

10. W. Shih and M. Pierson, “Boeing 737 Industrial Footprint: The Wichita Decision,” Harvard Business School case no. 612-036 (Boston, Massachusetts: Harvard Business School Publishing, 2011, revised 2012).

11. S.C. Wheelwright and K.B. Clark, “Creating Project Plans to Focus Product Development,” Harvard Business Review 70, no. 2 (March-April 1992): 70-82.

12. Authors’ teleconference with David L. Morse, executive vice president and chief technology officer, Corning Inc., March 8, 2016.

13. J. Gans, “The Disruption Dilemma” (Cambridge, Massachusetts: MIT Press, 2016).

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Arief gunawan, parag deshpande, kheepe moremi, brucestarcher, curtis laird, colin disley, pete randall, jean létourneau, michal kusak, mikko ruohonen, syukri lukman, giovanni bastidas.

Why is a business model important?

Learning & Academics

A business model may seem like a straightforward concept. But the term has shifted and changed over time. Today, if a company is incapable of creating an innovative and flexible business model, that could be its downfall.

Today, technology and innovation are the main players in how successful businesses are run and reinvented. With an explosive amount of information available through big data and the resources provided by digital tech, companies can more easily create and continue to capture value for stakeholders.

Businesses that want to start and stay at the cutting edge use design thinking, strategy, and continuous, fearless change in their business models. Some of the most successful businesses today are those that have reinvented the model, disrupting the industry that was and creating the kind of value customers are looking for in the digital era .

What is a business model?

Does a business model have a simple definition? Yes and no. Business models are the logic behind a company, but the concept can be framed in many different ways. And today, the way the idea has been reframed is inspiring the business owners and CEOs of companies from startups to well-established multinationals.

In his book The New, New Thing , Michael Lewis explains that the business model has been thought of as simply the way a business plans to make money. Expanding upon this idea, Peter Drucker talks about the business concept in terms of flexible assumptions about what a company will and will not do: what they get paid for; markets, customers, and competitors; values and behaviors; technology; and a company’s strengths and weaknesses. Joan Magretta adds that a business model is basically a story about how the company will operate, including the activities involved in making and selling a product or service.

Alex Osterwalder offers a simplified format for thinking about these hypotheses adopted by startups and established businesses alike, called the busi n ess model canvas. This business map is a one-page template that includes space for designing, discussing, and reinventing business models. The nine building blocks included are customer segments, value propositions, channels for delivering value, customer relationships, revenue streams, key resources, activities and partners, and cost structure. The idea of having everything mapped out on one page enables forward-thinking leaders to keep things light and flexible in order to invent or innovatively reiterate their business models as situations change and evolve.

Types of business models and tech

Business models have been transformed by technology . Interconnectivity , globalization , and a digital, tech-driven world have all allowed innovative thinkers to rethink traditional models in sectors from travel to retail.

One example of an age-old business model that has been transformed by tech is the platform business model. In the simplest terms, this model brings buyers and sellers together in one space. An in-person marketplace, auction house, or shopping mall are examples of this model that have been around for decades or even centuries. But digital tech has meant these platforms are no longer confined by time and space. Technology has allowed innovative business owners to use this type of model to create enormous digital networks enabling participation and collaboration across the globe. Some of the most successful companies today, including Airbnb , WhatsApp , Facebook , Google , and Alibaba , are examples of reinvented platform business models that use tech to their advantage.

The global business model is another example of one which has been inspired by technology. These models focus on producing and selling globally in a short period of time, relying on the fast pace of globalization and interconnectivity to thrive. The clothing brands Mango and Desigual are good examples of successful models based on selling to small target segments globally in order to achieve economy of scale, in a way that is only possible in a globalized world.

Interconnectivity and the digital world has also led to the availability of big data, allowing businesses to make sure they are offering the goods and services customers are actually looking for. The “seeking-excellence” business model depends on creating innovative products or services that consumers didn’t even know they wanted. The most disruptive thinkers today can use big data to analyze trends and find new value propositions that reinvent the business model—like Apple did with the iPod and iTunes store in the early 2000s.

Inspiring business models that have broken the status quo

Airbnb is one of the most disruptive businesses of the digital era. Founded by a couple of young startupers in 2008, it is the result of a recognized opportunity (when no hotel rooms were available in San Francisco during a conference held in the city), and the technology capable of connecting hosts and renters from around the globe.

As they put it on their About Us page, “ Airbnb uniquely leverages technology to economically empower millions of people around the world to unlock and monetize their spaces, passions, and talents to become hospitality entrepreneurs. ” It is a sharing-economy-based business , eliminating the overhead of owning the rooms that are rented out, like traditional hotels do. And its platform business model—which uses advances in digital tech to create networks that continuously improve—has allowed the business to boom around the world.

Uber is at the top of the list as another example of a business that has taken an existing business model and reinvented the wheel. By looking at how a current business model—taxis—could be improved, Uber was able to take a share of a preexisting market using a disruptive, tech-based model for grabbing a ride.

Now they have expanded and continue to grow through reiterations of their model, including Uber Eats for food delivery; Uber Freight offering shipping services; Uber Health providing rides for patients and healthcare providers; and even technology groups working towards self-driving vehicles and shared air transportation.

In the fast-paced digital world, innovation is a key element of any business model. Executives and CEOs are not responsible for maintaining the status quo defined in one iteration of the business model, but rather for experimenting, learning, and continuously improving to stay ahead of the competition.

Author: IE University

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UNE launches three new majors to drive business innovation

Less than one year since its formation, the College of Business at the University of New England is once again expanding to offer several new programs consistent with shifting workforce needs. 

Starting this fall, the college will begin offering interdisciplinary degree programs in Accounting , Finance , and Marketing to meet the need for in-demand careers in Maine and the nation’s growing business sector. 

Using a cross-disciplinary, entrepreneurial approach, the College of Business fosters the skills and knowledge of future business leaders through innovative programs, experiential learning opportunities, internships, and a strong network of industry partnerships. As such, the new degree programs have been crafted to equip students with the necessary skills and expertise required for success in today's competitive business landscape. 

UNE’s B.S. in Accounting ensures students are equipped with modern techniques and technologies essential for success, while the B.S. in Finance prepares students for leadership roles in financial management, wealth management, and investments using new financial technologies while emphasizing social responsibility. 

The B.S. in Marketing will prepare students for dynamic careers at the intersection of culture and business, training them to adapt to new consumer behaviors through strategic planning and technology integration.

Through courses in design-thinking, data analytics, innovation technology, and international finance, business graduates will be poised to drive growth in their fields, said Gwendolyn Mahon, UNE provost and senior vice president for Academic Affairs.

“These new academic programs reflect the University’s commitment to meeting evolving industry standards and workforce needs while preparing students for the dynamic challenges and opportunities they will encounter in these fields,” Mahon said. “We are confident that our accounting, finance, and marketing graduates will be well-equipped to make a positive impact in businesses of all kinds across Maine and the nation.”

The College of Business also houses majors in Business Administration , Marine Entrepreneurship , Sustainability and Business , Sport Leadership and Management , and, as of November, a pioneering major in Outdoor Business and Innovation that will prepare students for dynamic careers in Maine’s $3 billion outdoor recreation sector.

Students enrolled in the latter program will leave UNE with industry experience through paid   internships and project-based learning provided in collaboration with Maine Outdoor Brands. The Maine Office of Outdoor is serving an advisory role in curriculum development for the program, which is the sole academic program in New England designed to address the growing need for skilled workers in this field. 

UNE’s College of Business , established in June 2023, supports experiential learning opportunities in preparing students for enriching careers and leadership positions with some of Maine’s and the nation’s most important employers. The University recently announced it has hired Norm O’Reilly, Ph.D., a leading business scholar with two decades of leadership experience in higher education , as the college’s inaugural dean. 

 Norm O'Reilly, Ph.D., inaugural dean of the College of Business

About the University of New England

The University of New England is Maine’s largest private university , with two beautiful coastal campuses in Maine, a one-of-a-kind study abroad campus in Tangier, Morocco, and an array of flexible, accredited online degrees . In an uncommonly welcoming and supportive community, we offer hands-on learning, empowering students to make a positive impact in a world full of challenges. The state’s top provider of health professionals, we are home to Maine’s only medical college , Maine’s only dental college , a variety of other interprofessionally aligned health care degree programs , as well as nationally recognized programs for marine science degrees , natural and social sciences degrees , arts and humanities degrees , and business degrees .

Title: Investigating the role of diffusion of innovation theory, environmental pressure, and organisational capabilities towards adoption of digital technologies

Authors : Bader A. Alyoubi; Mohammad Ali Yousef Yamin

Addresses : Department of Management Information Systems, College of Business, University of Jeddah, Jeddah, Saudi Arabia ' Department of Human Resources Management, College of Business, University of Jeddah, Jeddah, Saudi Arabia

Abstract : The rapid change in global environment, digital transformation and customer preference had built unprecedented pressure for organisations to adopt digital technology. In this essence, the current research investigates factors which influence employee behaviour to adopt digital technology. Data were analysed with structural equation modelling (SEM). Findings indicate that the integrated research model has substantial variance R 2 80.1% in determining employee behaviour towards adoption of digital technology. The effect size analysis ( f 2 ) reveals that compatibility has the highest impact in measuring employee adoption behaviour towards digital technology. Importance performance matrix analysis suggest that organisation performance constructs like employee behaviour to adopt digital technology, compatibility, mimetic pressure and management support are core constructs for managerial consideration. This research has several contributions to theory and practice. This study is unique as it develops and integrated model that underpins technological organisational an environmental factors to investigate employee behaviour towards adoption of digital technology.

Keywords : innovativeness; compatibility; strategic road-mapping; knowledge competency; behavioural intention to adopt digital technology; IT infrastructure; structural equation modelling.

DOI : 10.1504/IJBIS.2024.138555

International Journal of Business Information Systems, 2024 Vol.46 No.1, pp.32 - 55

Received: 13 Jan 2021 Accepted: 08 Mar 2021 Published online: 12 May 2024 *

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