what-is-business-model-innovation

What Is Business Model Innovation And Why It Matters

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.

RelatedWhat Is a Business Model? 30 Successful Types of Business Models You Need to Know

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 in intercepting search intents is the fact that billion people around the world use 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.

Since its scale-up phase, Google aggressively acquired deals that made it the tech giant we know today. However, a few people realize it, and it is easy to think – especially in tech – that the best product wins.

A great product with a lack of distribution strategy won’t go far.

Myth two: technology is what gives a competitive advantage

Peter Thiel, 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 in business jargon, first-mover advantage. Peter Thiel, instead pointed out an important 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 modeling 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 errors to design an innovative business model. In short, Google introduced an auction system for advertising, which aim was 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 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 coming back.

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’re able to deliver to key partners, which are a crucial ingredient of your business success!

Thus, even though business model innovation can be about changing the way 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?

To understand how to innovate a business model you might want to think along the line of how to tweak and redesign your value chain, cost structure, key partners and in general what can help you scale:

  • How can I design a better value chain?
  • Can I improve the existing cost structure?
  • What is the distribution channel that can accelerate growth?
  • 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. At times you can 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 quite interesting for your business.

Engineer an innovative business model from scratch 

As Reid Hoffman points out in his book Blitzscaling business model innovation is a key 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 by Reid Hoffman he 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.

Yet designing a business model isn’t always possible beforehand. In some cases, you need to experiment, reiterate and find it

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 trial and errors figure 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 made already over three billion in revenues, a 155x growth in about four years!

history-of-google

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 do 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 that is 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 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 stop experimenting with business model innovation.

Business units like Uber Eats, Express Pool, Freight are all an attempt to tweak an existing business model until it allows the company to become financially sustainable, also at a massive scale.

Business model innovation examples

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 time 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 a continuous tweaking 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 represent the hottest companies on earth:

fang-companies
FAANG is an acronym that comprises the hottest tech companies’ stocks. Those are Facebook, Amazon, Apple, Netflix and Alphabet’s Google. The term was coined by Jim Cramer, former hedge fund manager and host of CNBC’s Mad Money and founder of the publication TheStreet:

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 has been able for the first time to move the needle of “culture creation” from Hollywood to the Silicon Valley. While today Netflix invests billions in creating original content which is also what makes it so successful today.

Netflix main contribution is in its business model innovation. Where people hated so much Blockbuster’s late fees, Netflix introduced a new way of renting movies. Initially, Netflix had found its 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)

When Amazon started as 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. Thus, the initial value proposition was convenience.

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 Amazon store, and Amazon, in turn, would use all the additional short-term cash to invest in the growth of the organization.

This process performed many times over, 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 from 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)

When Steve Jobs went back to Apple the company needed to be rebuilt from its ashes. Sales were plummeting, 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 a suitable 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!

Google business model innovation (case study)

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)

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.

It then transformed its social network in targeted ads money-making machine. 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 how to monetize the so-called “social currency.” In short, companies and marketers pay Facebook to gain visibility on the platform.

That visibility is sold in the form of impressions, clicks or other actions people can take on a targeted ad! Facebook hidden revenues business model has proved the only worthy competitor to Google advertising business.

Is business model innovation for anyone?

In theory business models innovation is for anyone. 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 do that the small consulting business starts only to charge a small retainer and a success fee. This kind of model might be not 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 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!

Do you have business model innovation examples you want to share with us? Comment below or send us an email at fourweekmba@gmail.com

Other resources for your business:

Learn how tech companies business models work and the lessons you can learn to scale up your own company:

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which he brought to reach about a million business students, professionals, and entrepreneurs in 2019 alone | Gennaro is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

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