Business model innovation is about increasing the success of an organization with existing products and technologies. By crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
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The importance of business model innovation
In the last years, I’ve been dissecting business models of any type, and companies of any size. At the same time, I’ve been talking, interviewing, and discussing business models and business model innovation with dozens of entrepreneurs and practitioners.
I’ve been doing that for several reasons:
To gain a better understanding of businesses around me. As I had the option to gain a Ph.D. on the topic or to create my Ph.D. I went for the latter, and in the process, I thought to document it all on FourWeekMBA. Over time I wanted to create the business school I always dreamed of.
Business models enabled me to gain insights into how companies worked at a holistic level so that I could become a better digital entrepreneur.
Business modeling also helped me test the assumptions around the business I was trying to build, thus reducing the time or potential financial resources spent on a project which was doomed to failure.
In short, I found myself using business modeling for several reasons, and those I believe are all legitimate.
At the same time, while researching the topic with the mindset of an entrepreneur but the depth of reach of a Ph.D. I noticed how the business model and business model innovation had become widely adopted concepts. And also (and probably for that reason) widely misunderstood.
Business model innovation is about increasing the success of an organization with existing products and technologies by creating a compelling value proposition able to allow an organization to scale up customers, with a better operating model.
At its core business model innovation is a subtle change, that as it becomes hard to dissect from the outside world (in many cases business model innovation is detected when an organization has achieved massive success), it is also hard to copy.
Thus, in a world where technology has become, in part a commodity business model innovation can make a huge difference.
Before we move forward toward deciphering and dissecting business model innovation, let’s bust three myths, existing in the entrepreneurship world, especially in the era of digital business models.
Business model innovation enables you to create competitive moats
As technology becomes over time a commodity, creating a lasting advantage requires business model understanding, experimentation, and execution.
That’s because business model innovation shifted the focus from the competition; which is what in the last decades we’ve all been looking at with frameworks like Porter’s Five Forces, to customers.
Without going through all the reasons why that happened today, business model innovation has become more important than technical innovation.
A quick caveat, before we move on.
When I say that the focus has shifted to customers, it doesn’t mean that you don’t need to understand your competition. It just means you need to start from customers and the problems they face. Only after that, you want to move to competition and what existing alternatives exist.
A multi-faceted concept
Although we like to give a single definition to each of the concepts we know, those concepts will adapt based on the context they sit into.
In short, that is fine to have multiple definitions of the concept, based on the objective that each practitioner might have.
Therefore, it’s okay that a concept translated in several fields will have different meanings.
Thus, let’s see some of those meanings.
Analysts use business models to produce financial analyses
Business modeling can be seen as a technique to dissect any organization and business for analysts and business people trying to gain a better understanding of those businesses.
Business and financial analysts use business modeling to have a better understanding of tech companies. They do it to give investment recommendation, financial reviews, and investment advice.
Academics study business models for the sake of classifying things
For academics, a business model might be just a holistic way to describe a business. And the purpose of an academic might seem more rigorous than an entrepreneur. The academic has to prove the business has certain features that make it different or similar to other businesses.
And from those features, the academic will derive classifications, that as they become more and more complex only live in theory land.
The research, therefore, doesn’t necessarily have a practical purpose. But instead the goal of uncovering universal classification systems for things in the real world. As such, they might lose a practical application.
Most people confuse business models for business plans
Among the top results, Google suggests “How to write a business model” when typing “how to … business model. When you click on the result that Google suggested, see what happens.
When you click on the Google suggested result for “How to write a business model,” you get “how to write a business plan.”
For most people (those that didn’t study the topic), business models often resonate with business plans. I noticed it when I started to research the topic.
As Google makes accessible the search data and behaviors of billions of people, it also adapts to those search behaviors.
To my surprise, in the past, I noticed how for the query “how to write a business model,” Google served results around “how to write a business plan.”
I’ve learned to appreciate those “mistakes” as Google is a commercial search engine.
And as such, it follows what most people search for.
If people collectively think a business model is a business plan, Google might enable that to be true.
This means that if you are an entrepreneur searching for valuable resources either you are lucky to find the resource you need or you might end up writing a hundred-page business plan which won’t help much with your business.
If at all will prevent you from starting it.
As you will start making things more complicated than they should be.
Startups confuse business models for monetization strategies
An example of how Airbnb “confused” its business model for its monetization strategy (Slideshare)
How WeWork described its business model in the report before the IPO. You might notice that what they’re talking about is their revenue generation strategy. (WeWork Financials)
And for many startups, the business model resonates with monetization strategies. I’m not saying this is right or wrong; it’s just what it is.
Overall that is fine.
Startup pitches or financial forms are in many cases, also a marketing tools meant to communicate and simplify a concept.
Thus, if most investors want to know about your business model but what they mean is how you make money, that is fine to simplify it.
However, as an entrepreneur, if you do believe that a business model is how you make money that might limit your options, as all day long you’ll think about monetization strategies, rather than having a more holistic and strategic approach.
Business model innovation is an experimentation mindset for entrepreneurs
Business model design is not about sketching a plan on a piece of paper, but rather a mindset of experimentation.
In business modeling, you can manufacture experiments (business models, and business model variations) that enable the entrepreneur to test the assumptions around the business quickly, cheaply, and with minimum effort.
It is important to start testing (as practitioners like Ash Maurya highlighted) from the riskiest assumptions.
Those assumptions for which the business might not become sustainable over time.
Things like monetization strategy or key customer understanding are some of the riskiest assumptions, and they need to be tested, quickly.
An entrepreneur is not a scientist
Where scientists use labs to test their hypotheses through experimentation. Entrepreneurs build business model experiments to test their businesses ideas in the real world.
Anentrepreneur has different goals than a scientist. Where the scientist might try to uncover more universal truths.
The entrepreneur needs business model experimentation to test the assumptions, uncover market opportunities, reduce the time to market, and eventually build a valuable business.
In short, an entrepreneur is a market-driven animal. Rather than starting from theories to find if that is true through experiments.
An entrepreneur starts from a problem, and she or he goes back to theory to understand what are the underlying assumptions which are preventing the business to succeed.
Once those assumptions have been streamlined, they can be tested so that the entrepreneur can move on and make the product or service in target with the market.
Business model innovation is, at the same time, a mindset, a framework, and a set of tools for entrepreneurs
Business model innovation, therefore, can be seen as a mindset, framework, and a set of tools for entrepreneurs to build relevant businesses in today’s marketplace.
Myth one: the best product wins
When you get online, and want to look for something, but you’re not sure what is that chances are you’ll land on a white page with a small search box on it, that is Google search results page.
Why, in the first place, do you get there?
Well, you get there because Google is an incredible product, able to find you anything on the web at a super-fast speed.
Yet, is Google the best product out there? And how do we define best?
Well, Google is a great search engine able to give you relevant results to any question, but it also benefits from network effects.
In short, one of the reasons why Google is good enough at intercepting search intents is the fact that billion of people around the world use it each day.
At the same time, Google is a decent product for what it gives us back (and it is free), but it also has drawbacks.
For instance, in an experiment, an SEO expert tried to rank a Latin Language site (a language used by ancient Romans, no longer in use), and guess what? It did that successfully.
This is not to say that Google is not a good search engine.
Google today is the most widely used search engine on earth, and part of the reason why is thanks to its distribution strategy.
Myth two: technology is what gives a competitive advantage
Peter Thiel, the former CEO of PayPal, has shifted an important business paradigm.
As the common business thinking goes, “be the first, and you’ll probably win over time.”
This is called business jargon, first-mover advantage.
Peter Thiel, instead, pointed out a critical paradigm, especially in the tech industry, which is the last-mover advantage.
In other words, companies that come later, especially in the tech industry, can win over existing organizations, even when those were the first movers.
For instance, Google and Facebook were not the first movers to move in the search and social media space. They dominated it.
What happened there? The answer is business model innovation!
Myth three: business model innovation is just about how you make money
When Google came out of the Stanford dormitory where the two P.h.D. had invented it, it was a great search engine. Many argue it was 10x better than competitors.
Yet it wasn’t financially successful until it managed via a couple of years of trial and error to design an innovative business model.
In short, Google introduced an auction system for advertising, aiming to remove the inefficiencies of how advertising had worked for decades.
That was not the primary innovation. Indeed, another search engine called Overture was already doing it successfully.
Therefore, where Google innovated was the introduction of a few critical parameters to allow advertisers to show on top of Google text-based ads results.
In other words, it wasn’t enough to be offering a higher bidding rate on a keyword.
Google crossed that with a few other parameters, which allowed to show on top of the ads space on Google results, those that were most relevant and had a higher click-through rate.
Even though it might sound trivial now, as the whole web, after Google has been built on the premise of click-through rate, it was not back then.
That business model innovation was critical to Google’s economic hypergrowth, scale, and domination.
Business modeling isn’t a simple concept, and in the mind of most people, that is about how you make money. However, business modeling is way more than that.
It is how you make a great product or service so that your customers keep returning.
It is about how you make that product or service scalable. And how you keep making financial sense of your business over time.
But also the value proposition you can deliver to key partners, which is a crucial ingredient of your business success!
Thus, even though business model innovation can change how you charge your customers and how you make money, it can also be about other critical aspects of the business that will allow you the scale up.
There isn’t a single path to business model innovation, but there are a few critical questions to ask.
What kind of questions do you need to ask with business model innovation?
Why is my company experiencing bottlenecks in certain areas?
Is the organizational structure helping the company to grow as it should?
Paths toward business model innovation
There isn’t a single path toward business model innovation.
You can sometimes design a business model drawing from your previous experiences in that industry.
Other times you’ll have to figure it out along the way. Among the many paths to business model innovation, we’ll see three paths that might be pretty interesting for your business.
Engineer an innovative business model from scratch
A Business Engineer is a hybrid between a business administration and technology expert, a person with the business acumen and engineering abilities to understand a complex organization and devise solutions and work as a liaison between commercial and technical teams.
As Reid Hoffman points out in his book Blitzscalingbusiness model innovation is a crucial ingredient to success, especially in the digital space, where a countless number of companies offer innovative tools and solutions on the market.
That’s why in some cases, business model innovation can be engineered before
This is what happened when I cofounded LinkedIn. The key business model innovations for LinkedIn, including the two-way nature of the relationships and filling professionals’ need for a business-oriented online identity, didn’t just happen organically.
As explained, Reid Hoffman used his understanding of the social networking world (he had founded a social network called SocialNet) to design an innovative business model for LinkedIn, which got acquired in 2016 by Microsoft for an astounding $26.2 billion.
In short, what gives a competitive advantage isn’t any more technology alone but a combination of technology paired with an innovative business model.
In some cases, you need to experiment, reiterate and find it along the way.
Indeed, that is how in most cases, you can engineer a business.
It’s fascinating to read the history of successful businesses and think that they were sketched on a piece of paper.
That only happens in hindsight.
In most cases, what happens is you figure it out along the way.
You know where you want to get, but how you will get there, in the short term will be highly dependent on the context and landscape.
This is what the business engineer does.
With a long-term vision yet a short-term understanding of the landscape, the business engineer tries to build, and scale businesses.
Thus, using both a transitional business model, grounded to the current reality.
A transitional business model is used by companies to enter a market (usually a niche) to gain initial traction and prove the idea is sound. The transitional business model helps the company secure the needed capital while having a reality check. It helps shape the long-term vision and a scalable business model.
That enables a company to validate the market in the short-term, put together a business model that works for the scale in which the business is currently in, all the while it creates option to scale.
Thus, the company has options to get larger, and scale a business model, to test until which extent it will work at current scale, and when new elements are needed to test it at wider scales.
In other words, business engineering requires a combination of understanding for product, distribution and how this is integrated via a technology, at various stages of scale!
Find an innovative business model along the way
When Google was scaling up, it didn’t figure it all out right away.
Although the tech giant has incredible technology and product, it still lacked behind in business model innovation.
When it finally, after a few trials and errors, figured it out (Google was running out of investment money), it was a massive success.
When Google had to show its numbers when it got listed back in 2004, the company already made over three billion in revenues, a 155x growth in about four years!
Google (now Alphabet) primarily makes money through advertising. The Google search engine, while free, is monetized with paid advertising. In 2021 Google’s advertising generated over $209 billion (beyond Google Search, this comprises YouTube Ads and the Network Members Sites) compared to $257 billion in net sales. Advertising represented over 81% of net sales, followed by Google Cloud ($19 billion) and Google’s other revenue streams (Google Play, Pixel phones, and YouTube Premium).
In this scenario, you need to try and test many things before you can say to have a business model that makes you scale up sustainably and that it does make sense financially.
In the end, if you find it, you’ve created a long-lasting competitive advantage!
Use business model innovation as a survival mechanism
Imagine if the next time you reserve an Uber ride, you’ll see coming to a self-driven car.
Now stop imagining. Indeed Uber has been investing in self-driving cars since 2015.
Why would a company dominating an entire space make such a move?
Well, a couple of reasons. First, if self-driving cars become mass-adopted Uber would be out of business.
This implies that if Uber wants to thrive in the next era needs to be on top of this game.
The second aspect is about business model innovation. Among its key partners, Uber has drivers across the world.
Yet those drivers also pose a significant threat to Uber’s success.
Even though Uber might be pulling the plug or spinning off its self-driving cars business, this example is to show how the company never stops experimenting with business model innovation.
Business units like Uber Eats, Express Pool, and Freight are all attempting to tweak an existing business model until it allows the company to become financially sustainable and at a massive scale.
Business Engineering as the engine of Business Model Innovation
In the last decade, I’ve been treating this blog as my real-live Ph.D. in business.
I believe that to become quickly able to drive value in the current business landscape, you should combine a practical understanding of the real world, thourhg a lot of experimentation, and a set of heuristics to help you drive through the ambiguity of that world.
Contrary to the traditional definition of business engineering (primarily about integrating technology in business processes).
Business engineering, as structured on FourWeekMBA, is a holistic discipline to understand the changing business world by applying simple heuristics, on the one hand, and an experimental framework, on the other hand.
To, therefore, make sense of the real world in a way that enables you to build from scratch, grow, maintain and innovate within startups and organizations.
Thus, throughout this blog, you will find all the key concepts around business engineering.
Let me point you toward some of them to get you started:
I will repeat over and over again; a business model isn’t something static. Thus, even if in this article we’ll look at how Google business model looks today, it might be probable that in a few years, the Google business model would have evolved as well.
Indeed, even though a business model does create a long-term competitive advantage, it does also require continuous tweaking to make sure all the pieces of it come well together.
Many argue that business model innovation is what makes a difference in a company’s success. Thus, even though many believe that product or technology is the most critical competitive advantages.
From a business standpoint, business modeling has proved to create a real edge, especially since digital businesses have taken over the business world. This is no exception for Google.
When the company started back in the late 1990s, it wasn’t the first search engine. It was a better product than many others on the market, yet it wasn’t just technological innovation that made Google successful.
It was when Google finally found its business model, that revenues took off. In 2004, Google’s had to reveal its numbers for the first time to the public. As the company was going public, when it opened its financials to the public everyone was astounded.
Google was among the first few companies that proved the internet wasn’t just a cool new thing. But instead what would give rise to new, disruptive business models.
Nonetheless, the dot-com bubble that would wipe out most of the companies that had a “.com” in their company’s name, the few that survived, became also the basis for a technological revolution that would also spur a business revolution and vice-versa.
For instance, the so-called FAANG companies at the time of this writing still represent the hottest companies on earth.
Why is it so? If we look at each of those companies, there are a few things to notice.
Netflix business model innovation (case study)
Netflix is a subscription-based business model making money with three simple plans: basic, standard, and premium, giving access to stream series, movies, and shows. Leveraging on a streaming platform, Netflix generated over $29.6 billion in 2021, with an operating income of over $6 billion and a net income of over $5 billion.
While today Netflix invests billions in creating original content, which is also what makes it so successful today.
Netflix’s main contribution is in its business model innovation.
Where people hated so much Blockbuster’s late fees so Netflix introduced a new way of renting movies.
Initially, Netflix had found the perfect medium of delivery of its new subscription business model via DVDs.
Where Netflix wasn’t able to compete with established Blockbuster, it needed to rethink the way it delivered its service.
Thus, in exchange for a fixed monthly fee, people could rent as many movies as possible with no late fees!
While the new technology of DVD allowed Netflix to deliver a better service, in the end, Netflix had to wait for more than a decade before streaming would pick up.
Therefore, Netflix’s CEO and founder set out to wait for Moore’s law to make streaming possible. Today streaming is the key delivery channel of Netflix service.
Amazon business model innovation (case study)
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services, Amazon AWS, Subscription Services, Advertising revenues and Physical Stores.
When Amazon started as an internet store, its founder Jeff Bezos started from a niche, books.
Rather than trying to sell everything to everyone (that would happen later on), Amazon began to form one relatively smaller market, dominated it, and then moved on.
Once again, while Amazon invested from its early years in infrastructure and technology, it also shifted the conventional business model for publishing upside down.
On Amazon, you could find an extensive collection of books, at a lower price compared to physical bookstores.
Amazon cut off its margins by putting up a cash machine business model, or a model where the company lowers its profitability but generates a lot of short-term cash flows in return.
People could pay for a book right away, Amazon would have delivered, and would pay its vendors later on.
The model worked because people could get any book they wanted at a lower price.
Vendors could have higher exposure and visibility through the Amazon store, and Amazon, in turn, would use all the additional short-term cash to invest in the growth of the organization.
This process has been performed many times over, and for over two decades, Amazon has expanded to sell anything.
It also allowed the company to create a few other businesses (AWS, Prime, and Physical Stores) that run at high profitability compared to the online store!
Once again, it all starts with business model innovation. Technology is an enhancer of this process but not necessarily what makes the real difference in the outcome.
Apple business model innovation (case study)
Apple has a business model that is divided into products and services. Apple generated over $394 billion in revenues in 2022, of which $205.5 came from iPhone sales, $40 billion came from Mac sales, over $41 billion came from accessories and wearables (AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch, and accessories), $29.3 billion came from iPad sales, and $78.13 billion came from services.
Sales were plummeting, and too many unsuccessful products had been introduced.
As soon as Jobs joined Apple again, it made sure to cut and simplify the product offering, but most importantly, it started to create the infrastructures that would make its products successful: iTunes for the iPod and the App Store for the iPhones.
Those devices are great, but without an environment made of developers willing to create interesting applications for the iPhone, or if people had to pay for entire albums to listen to in the iPod.
Apple changed the way music was consumed, and it created a whole new industry with its smartphone.
Also, here, sales didn’t pick off because of great devices powered by software (that, of course, contributed), but the business model crafted by Jobs and his team created commercial viability of those products and a massive amount of traction!
In 2022, most of Apple’s sales (62%) came from indirect channels (comprising third-party cellular networks, wholesalers/retailers, and resellers). These channels are critical for sales amplification, scale, and subsidies (to enable the iPhone to be purchased by many people). In comparison, the direct channel represented 38% of the total revenues. Stores are critical for customer experience, enabling the service business, and branding at scale.
Google business model innovation (case study)
Google is a platform, and a tech media company running an attention-based business model. As of 2021, Alphabet’s Google generated over $257 billion in revenues. Over $209 billion (over 81% of the total revenues) came from Google Advertising products (Google Search, YouTube Ads, and Network Members sites). They were followed by over $28 billion in other revenues (comprising Google Play, Pixel phones, and YouTube Premium), and by Google Cloud, which generated over $19 billion in 2021.
When Google launched its search algorithm proved to be quite good compared to other search engines.
For one thing, Google didn’t look spammy with all the ads other search engines provided, and it was quite fast.
The tool was free, and it made it scale quickly. However, it wasn’t until Google figured out a new business model for advertising that revenues took off.
Indeed, at the time, Google combined its technology with a business model first crafted by a – at the time – Google’s competitor, called Overture.
Overture, for the first time, had introduced a system of auctions for advertising, which had proved quite successful.
Yet Google took that model and improved on it with its seamless advertising machine (Google AdWords, now Google Ads).
When Google introduced a mechanism of ads based on auctions and introduced a quality score.
This is a 1/10 scale rating comprised of components like expected clickthrough rate, ad relevance, and landing page experience.
This means that ads weren’t only judged on the price paid by the business but also if that ad was relevant. In 2017 Google had generated over a hundred billion dollars in revenues from advertising!
Also here, a great technological product without a proper business model would have been doomed.
Facebook business model innovation (case study)
Facebook, the main product of Meta is an attention merchant. As such, its algorithms condense the attention of over 2.91 billion monthly active users as of June 2021. Meta generated $117.9 billion in revenues, in 2021, of which $114.9 billion from advertising (97.4% of the total revenues) and over $2.2 billion from Reality Labs (the augmented and virtual reality products arm).
When Mark Zuckerberg came up with Facebook in its dorm room, it wasn’t the first social media network. Yet it grew exponentially over the years. While Facebook managed to grow very fast thanks to investments and a free model initially.
Facebook, at the time of this writing, is among the most profitable companies in the world and still among the most popular apps.
Other social media applications, like TikTok, are trying to disrupt it. Facebook has managed over the years to build a strong brand, and it figured out how to monetize the so-called “social currency.”
In short, companies and marketers pay Facebook to gain visibility on the platform.
Think of the case of a small consulting business that operates in a traditional industry, where most of the competitors charge by the hour.
Yet instead of keeping to doing that, the small consulting business starts only to charge a small retainer and a success fee.
This kind of model might not be financially viable at the beginning, but it might wipe out competitors over time.
Indeed, with a larger customer base, the retainer becomes an essential base for the company’s revenues.
And the success fees are the scalable part of the business.
In other cases, though, business model innovation might require massive financial resources.
Think of a business that decides to dominate an existing industry, and it does that by introducing an innovative business model that grows at a reckless pace.
That pace might be attractive for investors looking for high returns on their investments, while it might also burn a lot of cash!
Key takeaways
Business model innovation is a popular topic, and as such, there are a lot of misconceptions about it.
In my research on the topic, I’ve figured out the reasons behind those misconceptions and how and why they exist.
We also uncovered how business modeling has a meaning based on the reason why you’re using it.
At the end of it all, business model innovation is a dynamic concept at the apex of its evolution, and as such, it’s interesting to see how it can have different meanings and interpretations.
At the same time, if you’re an entrepreneur, it’s essential to understand what it can do for you, and this article might clear things up.
Key Highlights
Understanding Businesses and Innovation: The author has been deeply involved in dissecting various business models and discussing business model innovation with entrepreneurs and practitioners. This has helped them gain insights into how businesses work and become a better digital entrepreneur.
Holistic Approach to Business: Business model innovation focuses on creating a compelling value proposition to scale up customer base and improve the operating model, rather than just focusing on technical innovation or competition.
Shifting Focus to Customers: Business model innovation shifts the focus from competition to customers. It involves understanding customer problems and needs before considering competition and alternatives.
Misconceptions and Myths: There are misconceptions and myths surrounding business models, including confusing them with business plans or monetization strategies.
Experimentation and Risky Assumptions: Business model innovation is an experimentation mindset that allows entrepreneurs to test the riskiest assumptions around their business quickly and efficiently.
Importance of Business Model Innovation: Business model innovation is crucial for success in the current landscape, where technology becomes commoditized, and it can provide a lasting competitive advantage.
Paths to Innovation: Business model innovation can be engineered from scratch, found along the way as a business grows, or used as a survival mechanism to adapt to changing market conditions.
Google’s Example: Google’s success wasn’t solely due to technology; it innovated its business model by introducing an auction system for advertising, which significantly contributed to its growth.
Uber’s Approach: Uber’s pursuit of self-driving cars and experimentation with different business units like Uber Eats and Express Pool showcase a commitment to ongoing business model innovation.
Business Engineering: The author proposes a concept called “business engineering,” which involves understanding the changing business landscape through heuristics and an experimental framework to build, grow, maintain, and innovate within startups and organizations.
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
A transitional business model is used by companies to enter a market (usually a niche) to gain initial traction and prove the idea is sound. The transitional business model helps the company secure the needed capital while having a reality check. It helps shape the long-term vision and a scalable business model.
The minimum viable audience (MVA) represents the smallest possible audience that can sustain your business as you get it started from a microniche (the smallest subset of a market). The main aspect of the MVA is to zoom into existing markets to find those people which needs are unmet by existing players.
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.
The market expansion consists in providing a product or service to a broader portion of an existing market or perhaps expanding that market. Or yet, market expansions can be about creating a whole new market. At each step, as a result, a company scales together with the market covered.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
In the FourWeekMBA Revenue Streams Matrix, revenue streams are classified according to the kind of interactions the business has with its key customers. The first dimension is the “Frequency” of interaction with the key customer. As the second dimension, there is the “Ownership” of the interaction with the key customer.
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.
A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.
Business model innovation FAQs
What is business model innovation?
Business model innovation is about increasing the success of an organization with existing products and technologies. By crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
Why business model innovation is the new competitive advantage?
In an era where technology becomes over time commoditized. The ability to intersect revenue generation, distribution, and technology help organizations to build a viable business model that has a long-lasting advantage. Thus, business model innovation starts by obsessing over customers to deliver products and services that are 10x more valuable.
How business model innovation differs from technology innovation?
Innovation gains different meanings based on the context of reference. More precisely, in the business world, innovation is not about technical solutions but the ability to master key customers to understand what problems they are facing. In short, innovation in business starts from problems rather than technological solutions.
How does business model innovation impact the market?
Business model innovation can impact the marketplace by reshaping entire industries. It all starts by looking at how current players are solving problems to look at them from a different perspective. Companies like Google, Amazon, and Tesla began to with a new playbook in mind, enhanced by innovative business models.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
