Making Business Model Innovation a Core Capability
Amid widespread digital disruption, business experts continue to urge executives in every industry to analyze their fundamental business model, and ask whether it needs revamping. This process, known as ’business model innovation,’ is a strategic capability—one that is especially critical today, thanks to the disruptive effects of digital products and services. Organizations without a proficiency in business model innovation are at significant and increasing risk. Yet it is quite easy for executives to get immersed in their current business model and develop tunnel vision, seeking opportunities for growth, efficiency, and improvement only within their tried-and-true business model.
Thus successful, established leaders in a number of industries suddenly find themselves fending off new competitors that rise, seemingly without warning, from the digital sea.
Examples of businesses derailed by business model innovators abound. Blockbuster’s movie rental business was upended by Netflix (movies supplied by mail, and later, streamed over the internet) and Redbox (videos dispensed by vending machines). Borders and other bookstore chains were unsettled by online book sellers like Amazon, and now digital books. Record stores like Sam Goody’s were disrupted by Apple’s internet record store (iTunes) and music streaming services. Coffee machine makers such as Sunbeam Products’ Mr. Coffee were upended by singleserve coffee machines from pioneers like Keurig and Nestle, and coffee consumption habits changed. In 2014, U.S. consumers spent a hefty $3.1 billion on single-serve coffee pods, up from $132 million in 2008, according to Mintel.63
Recent business model innovators include ride-sharing car service Uber, challenging the taxi industry, and electric car maker Tesla, challenging the automotive business with its distribution network (retail stores in shopping malls, not independent dealers) and novel maintenance scheme (updates via software downloads, not trips to a dealer’s mechanic).
In all these cases, part of the failure was organizational tunnel vision caused by the very success of the existing business model. This is not entirely surprising. As the basis of the company’s brand and the source of its revenue, the current model preoccupies executives. Understandably, they pursue growth, efficiency, and improvement around it. But in doing so, they may miss or dismiss transformational ideas, particularly ones that disrupt the current model.
Many organizations are keenly aware of the risk of not focusing on business model innovation. A 2014 survey by Boston Consulting Group (BCG) of 1,500 executives, found 94 percent of their companies ‘had engaged in business model innovation to some degree.’64
While most organizations recognize the imperative of implementing a formal approach to business model innovation and experimentation, they typically struggle with how to do it well.
The same 2014 BCG study found only about a quarter (27 percent) of executives said their companies were ’actively pursuing’ business model innovation.