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Business Model Innovation

Product and service innovation are essential, but business model innovation can deliver more lasting competitive advantage, particularly in disruptive times. BCG helps leaders leverage innovative business models to tackle their most pressing challenges and capture their greatest opportunities.

In the past 50 years, the average business model lifespan has fallen from about 15 years to less than five. As a result, business model innovation is now an essential capability for organizations seeking to drive breakout growth, reinvigorate a lagging core, or defend against industry disruption or decline.

What Is Business Model Innovation?

Business model innovation is the art of enhancing advantage and value creation by making simultaneous—and mutually supportive—changes both to an organization’s value proposition to customers and to its underlying operating model. At the value proposition level, these changes can address the choice of target segment, product or service offering, and revenue model. At the operating model level, the focus is on how to drive profitability, competitive advantage, and value creation through these decisions on how to deliver the value proposition:

  • Where to play along the value chain
  • What cost model is needed to ensure attractive returns
  • What organizational structure and capabilities are essential to success

Business model innovation is also critical to business transformation . Many organizations share a common set of concerns: What type of business model innovation will help us achieve breakout performance? How do we avoid jeopardizing the core business? How do we build the capability to develop, rapidly test, and scale new models? Inspiring an organization to change is not a trivial undertaking, but given the current strategic environment, it’s a critical one.

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Our Approach to Business Model Innovation

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Companies hoping to drive growth through business model innovation face a number of critical questions: How broad should the scope of the effort be? What’s the appropriate level of risk to take? Is it a onetime exercise, or does it call for an ongoing capability?

To answer those questions, it’s important to realize that not all business model innovation efforts are alike. Understanding the four distinct approaches to business model innovation can help executives make effective choices in designing the path to growth:

1. The reinventor approach is deployed in light of a fundamental industry challenge, such as commoditization or new regulation, in which a business model is deteriorating slowly and growth prospects are uncertain. In this situation, the company must reinvent its customer-value proposition and realign its operations to profitably deliver on the new superior offering. 

2. The adapter approach is used when the current core business, even if reinvented, is unlikely to combat fundamental disruption. Adapters explore adjacent businesses or markets, in some cases exiting their core business entirely. Adapters must build an  innovation engine  to persistently drive experimentation to find a successful “new core” space with the right business model. 

3. The maverick approach deploys business model innovation to scale up a potentially more successful core business. Mavericks—which can be either startups or insurgent established companies—employ their core advantage to revolutionize their industry and set new standards. This requires an ability to continually evolve the competitive edge or advantage of the business to drive growth. 

4. The adventurer approach aggressively expands the footprint of a business by exploring or venturing into new or adjacent territories. This approach requires an understanding of the company’s competitive advantage and placing careful bets on novel applications of that advantage in order to succeed in new markets. 

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

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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Business Model Innovation – The What, Why, and How

Jesse Nieminen

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.

What is a business model?

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.

The Healthcare industry is in dire need of business model innovation

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.

Slack is an example of a company using a SaaS subscription business model

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.

Viima uses the freemium business model

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.

Digital platforms are one of the most powerful business models today

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.

Warby Parker sells eyeglasses with the direct to customer business model

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

Nespresso uses the razor & blade business model

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.

Spotify uses the freemium business model

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.

How to create business model innovation

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.

Business Model Navigator Patterns

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.

Mapping business model innovation

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.

Time is of the essence in business model innovation

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.

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

Business professionals pursuing innovation in the workplace

  • 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.

Design Thinking and Innovation | Uncover creative solutions to your business problems | Learn More

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.

Four phases of design thinking: 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.

Which HBS Online Entrepreneurship and Innovation Course is Right for You? | Download Your Free Flowchart

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.

innovative business model definition

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What Is a Business Model?

  • Andrea Ovans

innovative business model definition

A history, from Drucker to Christensen.

A look through HBR’s archives shows that business thinkers use the concept of a “business model” in many different ways, potentially skewing the definition. Many people believe Peter Drucker defined the term in a 1994 article as “assumptions about what a company gets paid for,” but that article never mentions the term business model. Instead, Drucker’s theory of the business was a set of assumptions about what a business will and won’t do, closer to Michael Porter’s definition of strategy. Businesses make assumptions about who their customers and competitors are, as well as about technology and their own strengths and weaknesses. Joan Magretta carries the idea of assumptions into her focus on business modeling, which encompasses the activities associated with both making and selling something. Alex Osterwalder also builds on Drucker’s concept of assumptions in his “business model canvas,” a way of organizing assumptions so that you can compare business models. Introducing a better business model into an existing market is the definition of a disruptive innovation, as written about by Clay Christensen. Rita McGrath offers that your business model is failing when innovations yield smaller and smaller improvements. You can innovate a new model by altering the mix of products and services, postponing decisions, changing the people who make the decisions, or changing incentives in the value chain. Finally, Mark Johnson provides a list of 19 types of business models and the organizations that use them.

In The New, New Thing , Michael Lewis refers to the phrase business model as “a term of art.” And like art itself, it’s one of those things many people feel they can recognize when they see it (especially a particularly clever or terrible one) but can’t quite define.

innovative business model definition

  • AO Andrea Ovans is a former senior editor at Harvard Business Review.

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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.

innovative business model definition

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

innovative business model definition

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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The eight essentials of innovation

Updating a classic.

January 4, 2024

In the years 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: What it is and why it matters

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As we become more and more involved in the changing world, businesses need to adapt to new demands and trends. Any profitable business needs to be innovative in order to survive. In many industries, new products or services are essential.

A useful trick to use when thinking of becoming an entrepreneur is the business model innovation. It helps you understand what the core of your business, and its strengths, are. By using it, you will be able to structure better everything you need to do.

Keep reading more about this topic in this article created by our team at TMS , and let’s discover more about it, and the details that make it special.

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 FourWeekMBA

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Innovation In Business: 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.

Table of Contents

Business Model Explorers

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 .

Related : Successful Types of Business Models You Need to Know

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

google-autosuggests-business-model

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.

how-to-write-a-business-plan

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

airbnb-first-pitch-deck

An example of how Airbnb “confused” its business model for its monetization strategy ( Slideshare )

wework-revenue-strategy

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

Business-Model-Experimentation

An entrepreneur 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 .

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, 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?

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.

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 

business-engineer

As Reid Hoffman points out in his book Blitzscaling business 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 .

Yet designing a business model isn’t always possible beforehand.

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. 

transitional-business-models

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!

business-engineering-manifesto

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!

how-does-google-make-money

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. 

For that matter, I’ve built a discipline that I call business engineering . 

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: 

  • Business Engineering.
  • Heuristics. 
  • Bounded Rationality.
  • Business Modeling.
  • Technological Modeling.  
  • Revenue Modeling.
  • Asymmetric Business Models.
  • Asymmetric betting.  
  • Lindy effect.  

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, 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-business-model

Netflix has been able, for the first time to move the needle of “culture creation” from Hollywood to Silicon Valley .

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-business-model

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.

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 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-business-model

When Steve Jobs went back to Apple , the company needed to be rebuilt from its ashes.

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!

apple-distribution-strategy

Google business model innovation (case study)

google-business-model

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-business-model

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 out 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’s 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 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.

Business modeling crash course

Other resources for your business:

  • Successful Types of Business Models You Need to Know
  • The Complete Guide To Business Development
  • Business Strategy: Definition, Examples, And Case Studies
  • What Is a Business Model Canvas? Business Model Canvas Explained
  • Blitzscaling Business Model Innovation Canvas In A Nutshell
  • What Is a Value Proposition? Value Proposition Canvas Explained
  • What Is a Lean Startup Canvas? Lean Startup Canvas Explained
  • What Is Market Segmentation? the Ultimate Guide to Market Segmentation
  • Marketing Strategy: Definition, Types, And Examples
  • Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
  • How To Write A Mission Statement
  • What is Growth Hacking?
  • Growth Hacking Canvas: A Glance At The Tools To Generate Growth Ideas

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

  • How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained
  • How Amazon Makes Money: Amazon Business Model in a Nutshell
  • The Trillion Dollar Company: Apple Business Model In A Nutshell
  • How Does Netflix Make Money? Netflix Business Model Explained
  • How Does Google Make Money? It’s Not Just Advertising!

Read Next: Business Model Innovation , Business Models .

Related Innovation Frameworks

Innovation Theory

innovation-theory

Types of Innovation

types-of-innovation

Continuous Innovation

continuous-innovation

Disruptive Innovation

disruptive-innovation

Business Competition

business-competition

Technological Modeling

technological-modeling

Diffusion of Innovation

diffusion-of-innovation

Frugal Innovation

frugal-innovation

Constructive Disruption

constructive-disruption

Growth Matrix

growth-strategies

Innovation Funnel

innovation-funnel

Idea Generation

idea-generation

Design Thinking

design-thinking

FourWeekMBA Business Toolbox

Business Engineering

business-engineering-manifesto

Tech Business Model Template

business-model-template

Web3 Business Model Template

vbde-framework

Asymmetric Business Models

asymmetric-business-models

Transitional Business Models

transitional-business-models

Minimum Viable Audience

minimum-viable-audience

Business Scaling

business-scaling

Market Expansion Theory

market-expansion

Speed-Reversibility

decision-making-matrix

Asymmetric Betting

asymmetric-bets

Revenue Streams Matrix

revenue-streams-model-matrix

Revenue Modeling

revenue-model-patterns

Pricing Strategies

pricing-strategies

Business model innovation FAQs

What is business model innovation, 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.

More Resources

four-step-innovation-process

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Denis Oakley & Co

Denis Oakley & Co

I HELP BOLD LEADERS TRANSFORM THEIR BUSINESSES AND THE INDUSTRIES THEY COMPETE IN

March 21, 2021 By Denis Oakley

20 Definitions of Business Model Innovation

I’ve collected a number of business model innovation definitions here to help give a sense of what business model innovation is and the different perspectives that organisations, consultants and academics have on it. If you need a business model innovation definition, read on, and hopefully, there will be one that fits your needs or provides the spark of enlightenment.

Consulting and Commercial Definitions of Business Model Innovation

Business model innovation is the art of enhancing advantage and value creation by making simultaneous—and mutually supportive—changes both to an organization’s value proposition to customers and to its underlying operating model. At the value proposition level, these changes can address the choice of target segment, product or service offering, and revenue model. At the operating model level, the focus is on how to drive profitability, competitive advantage, and value creation through these decisions on how to deliver the value proposition BCG
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. North Eastern University
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. Karan Girotra and Serguei Netessine – Harvard Business Review
A  business model innovation  is thus the conscious change of an existing business model or the creation of a new business model that better satisfies the needs of the customer than existing business models. Lead Innovation Management
Business model innovation is the development of new, unique concepts supporting an organization’s financial viability, including its mission, and the processes for bringing those concepts to fruition. The primary goal of  business model  innovation is to realize new revenue sources by improving product value and how products are delivered to customers. Ben Cole @ Tech Target
Business model is [sic] the way an organization creates, delivers and captures value. Successful business models thus take a very holistic approach by integrate [sic] 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. Jesse Nieminen at Viima
Business Model Innovation  is about fundamentally rethinking your business around a clear—though not always obvious – customer need, then realigning your resources, processes and profit formula with this new value proposition. It’s not easy and can take decision makers out of their comfort zones. But the results can be dramatic. C i o Index
When an organisation creates a new business model, the process is called business model innovation . There is a range of reviews on the topic, the latter of which defines business model innovation as  the conceptualisation and implementation of new business models . This can comprise the development of entirely new business models, the diversification into additional business models, the acquisition of new business models, or the transformation from one business model to another (see figure on the right). The transformation can affect the entire business model or individual or a combination of its value proposition, value creation and deliver, and value capture elements, the alignment between the elements.The concept facilitates the analysis and planning of transformations from one business model to another.  Frequent and successful business model innovation can increase an organisation’s resilience to changes in its environment and if an organisation has the capability to do this, it can become a competitive advantage. Wikipedia
Business model innovation is about fundamentally rethinking your business around a clear—though not always obvious—customer need, then realigning your key resources, processes and profit formula with this new value proposition. It’s not [an] easy approach and can take decision makers out of their comfort zones. But the results can be dramatic, providing a real competitive advantage. Innosight
Business model innovation is the process of reinventing how you transform your organisation to more effectively compete. At the centre of business model innovation is the need to create new products, services or organisational models that improve your value proposition Gary Fox
Business model innovation describes the innovative processes and rationale of how an organization creates, delivers and captures value as opposed to how to create a new product or service Dwight Chestnut

Academic Definitions of Business Model Innovation

I’ve linked to the actual papers to make it easy for you to read full text articles and see the business model innovation definitions in their original context. There are undoubtedly some that are behind a paywall. If you can’t get one hit me with the contact form and I will share my copy (licensing restrictions permitting)

By business model innovation , we mean business model replacements that provide product or service offerings to customers and end users that were not previously available. We also refer to the process of developing these novel replacements as business model innovation Mitchell and Coles, 2004
A business model innovation changes one or more dimensions of a business model (which are perceived by the authors as product-market combination, the architecture of the value creation, and the revenue model) so that a novel configuration of the elements is created and implemented. Labbé and Mazet, 2005
Specifying a set of business model elements and building blocks, as well as their relationships to one another […] a business model designer […] can experiment with these blocks and create completely new business models, limited only by imagination and the pieces supplied. Osterwalder and Pigneur, 2005
Business model innovation is to “advance [the] business model […] from very basic (and not very valuable) models to far more advanced (and more valuable) models. Chesbrough, 2007
Innovation becomes BMI [ business model innovation ] when two or more elements of a business model are reinvented to deliver value in a new way. […] BMI can provide companies a way to break out of intense competition, under which product or process innovations are easily imitated. Lindgardt et al., 2009
business models as definers of the value creation priorities in an organisation should be continuously reviewed in response to actual and possible changes in the perceived market conditions and evolve the enterprise strategy as the business environment and customers’ needs change. Romero and Molina, 2009
[Business model innovation] [1] Articulates the value proposition (i.e., the value created for users by an offering based on technology); [2] Identifies a market segment and specify the revenue generation mechanism (i.e., users to whom technology is useful and for what purpose); [3] Defines the structure of the value chain required to create and distribute the offering and complementary assets needed to support position in the chain; [4] Details the revenue mechanism(s) by which the firm will be paid for the offering; [5] Estimates the cost structure and profit potential (given value proposition and value chain structure); [7] Describes the position of the firm within the value network linking suppliers and customers (incl. identifying potential complementors and competitors); and [8] Formulates the competitive strategy by which the innovating firm will gain and hold advantage over rivals. (p. 355, citing Chesbrough and Rosenbloom, 2002) Chesbrough, 2010
[Seizing the white space] calls for the ability to innovate something more core than the core, to innovate the very theory of the business itself. I call that process business model innovation.” (p. 13) “ business model innovation is an iterative journey“ (p. 114) Johnson, 2010
Business model innovation describes either a process of transformation from one business model to another within incumbent companies or after mergers and acquisitions, or the creation of entirely new business models in start-ups. Geissdoerfer et al., 2018
  • The Ultimate Guide to Creating Powerful Business Models
  • Business Model Innovation – Definitions
  • Business Model Innovation Changes Everything
  • How to Find a Competitive Advantage as A Startup

About Denis Oakley

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20 Definitions of Business Model Innovation

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Business model innovativeness: designing a formative measure for business model innovation

  • Original Paper
  • Published: 27 November 2015
  • Volume 86 , pages 671–696, ( 2016 )

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  • Patrick Spieth 1 &
  • Sabrina Schneider 2  

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Business model innovation is attracting increasing attention in corporate practice and academia. Despite strong interest in the phenomenon, no common understanding of the concept’s meaning has yet been established, hindering dialogue and progress in this research field. This study seeks to build a definition of business model innovation, and to provide a measurement index for the extent of innovativeness of a firm’s changed business model. Based on the business model, business model innovation and product innovation literatures, conceptualise business model innovation as a ‘new-to-the firm’ change that affects at least one out of three business model dimensions: value offering, value creation architecture and revenue model logic. Based on a study among 200 German firms, this study further offers an empirically validated measurement model for business model innovativeness comprising three dimensions and nine indicators. We also emphasise the opportunity-centric potentials of business model innovation as well as the potentials of integrating findings from related research streams into business model innovation research.

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Spieth, P., Schneider, S. Business model innovativeness: designing a formative measure for business model innovation. J Bus Econ 86 , 671–696 (2016). https://doi.org/10.1007/s11573-015-0794-0

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What is Innovation Management? Definition, Process and Best Practices

By Nick Jain

Published on: June 26, 2023

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Table of Contents

What is Innovation Management?

Importance of innovation management for organizations, innovation management process: 9 key steps, top 10 innovation management best practices for 2023.

Innovation management is defined as the process of a systematic and strategic approach to generating, developing, and implementing new ideas, products, services, or processes that result in organizational value addition. For businesses, innovation management serves as a key driver of competitive advantage.

It encompasses various activities and stages, including ideation , idea evaluation and selection, development and prototyping, commercialization, and ongoing improvement. It involves creating an environment that encourages and supports innovation, as well as establishing processes and structures to effectively manage and drive innovation initiatives.

Key components of innovation management typically include:

  • Innovation Strategy: Innovation Strategy defines the organization’s innovation goals, objectives, and priorities. This includes determining the focus areas for innovation, such as product innovation , process innovation , or business model innovation .
  • Idea Generation: Encouraging the generation of new ideas from both internal and external sources. This can involve techniques such as brainstorming sessions, employee suggestion programs, customer feedback , market research, and collaboration with partners or experts.
  • Idea Evaluation and Selection: Assessing and selecting the most promising ideas for further development. This involves evaluating the feasibility, market potential, technical requirements, and alignment with strategic goals. Various tools and methods, such as feasibility studies, market research , and business case evaluations, are used to evaluate ideas.
  • Development and Prototyping: Transforming selected ideas into tangible prototypes or minimum viable products (MVPs). This stage involves refining the concept, conducting research and development, testing, and iterating to create a viable solution.
  • Go-to-Market: Bringing the innovative product, service, or process to the market. This includes activities such as marketing, sales, distribution, and launching the innovation . It also involves considering intellectual property protection, regulatory compliance, and potential partnerships or collaborations.
  • Implementation and Adoption: Ensuring successful implementation and adoption of the innovation within the organization. This may involve change management, training, and creating a supportive culture that embraces innovation.

Effective innovation management requires a supportive organizational culture that fosters creativity , risk-taking, and collaboration. It involves engaging employees at all levels, promoting cross-functional teamwork, and providing the necessary resources, tools, and incentives to support innovation initiatives.

Innovation management is crucial for organizations to stay competitive in dynamic and evolving markets. By effectively managing innovation, companies can drive growth, create value, respond to market changes, and meet the evolving needs and expectations of customers.

Importance of Innovation Management for Organizations

Innovation management is of great importance for organizations for several reasons:

1. Competitive Advantage

In today’s rapidly changing business landscape, organizations need to stay ahead of the competition. Innovation management allows companies to develop unique products , services, or processes that differentiate them from competitors. It helps organizations create a sustainable competitive advantage by offering something new and valuable to the market.

2. Growth and Expansion

Innovation is a key driver of growth and expansion. By continually innovating and introducing new products or services, organizations can tap into new markets, attract new customers, and increase their market share. Innovation management enables companies to explore new opportunities, enter new industries, and expand their reach.

3. Adaptation to Change

Innovation management helps organizations adapt to external changes, such as evolving customer preferences, technological advancements, or regulatory shifts. It allows companies to anticipate and respond to market disruptions, industry trends, and emerging challenges. By being proactive and innovative, organizations can navigate uncertainties and stay relevant.

4. Improved Efficiency and Productivity

Innovation management not only focuses on developing new products but also on improving internal processes and operations. It encourages employees to find innovative solutions to streamline workflows, optimize resource allocation, and enhance productivity. Innovation management can lead to cost savings, increased operational efficiency, and improved overall performance.

5. Employee Engagement and Retention

Engaging and retaining talented employees is crucial for organizational success. Innovation management provides employees with opportunities to contribute their ideas, be creative, and make a meaningful impact. It fosters a culture of innovation , continuous learning, and empowerment. Organizations that prioritize innovation management often attract and retain top talent who are motivated by the opportunity to work in a dynamic and innovative environment.

6. Customer Satisfaction

Innovation management helps organizations better understand and address customer needs, preferences, and pain points. By developing innovative solutions, organizations can provide enhanced customer experiences , improved products or services, and increased customer satisfaction. Innovation management enables companies to stay customer-centric and deliver value that meets or exceeds customer expectations.

7. Long-Term Sustainability

Organizations that embrace innovation management are better positioned for long-term sustainability. By continuously innovating and evolving, companies can adapt to changing market dynamics, remain relevant, and avoid stagnation. Innovation management encourages a forward-thinking mindset and a culture of innovation , ensuring that organizations stay resilient and thrive in the long run.

In summary, innovation management is essential for organizations to thrive in a dynamic business environment. It drives growth, fosters competitiveness, enhances efficiency, and enables organizations to meet the evolving needs of customers. By effectively managing innovation , organizations can position themselves for long-term success and create a culture of innovation that permeates throughout the entire organization.

Learn more: What is Business Innovation?

The innovation management process typically involves several steps or stages. While the specific steps may vary depending on the organization and context, here are the common stages involved in the innovation management process:

Step 1. Identify Challenges and Opportunities

The first step is to identify the challenges or opportunities that the organization aims to address through innovation . This could involve analyzing market trends, customer needs, competitive landscape, technological advancements, and internal capabilities. The goal is to gain a clear understanding of the areas where innovation can make a meaningful impact.

Step 2. Idea Generation

In this stage, ideas are generated to address the identified challenges or opportunities. This can be done through brainstorming sessions, idea contests, employee suggestion programs, market research , customer feedback , or collaboration with external partners. The focus is on generating a diverse range of ideas without judgment or evaluation.

Step 3. Idea Screening and Evaluation

Once ideas are generated, they need to be screened and evaluated to identify the most promising ones. This involves assessing ideas based on criteria such as feasibility, market potential, strategic alignment, technical requirements, and resource availability. Various evaluation methods such as SWOT analysis (Strengths, Weaknesses, Opportunities, Threats), scoring models, or expert reviews can be used to evaluate ideas.

Step 4. Concept Development

Once the most promising ideas are selected, they are further developed into concept proposals. This stage involves refining the ideas, conducting market research , creating prototypes, and assessing technical feasibility. The goal is to develop a clear concept that outlines the value proposition, target market, competitive advantage, and key features of the proposed innovation.

Step 5. Business Case Development

A business case is created to assess the viability and potential return on investment of the innovation. This involves conducting a detailed analysis of the market size, potential revenue, cost estimation, financial projections, risks, and benefits. The business case helps decision-makers evaluate whether the innovation aligns with the organization’s strategic goals and if it is worth pursuing.

Step 6. Development and Testing

If the business case is approved, the innovation moves into the development stage. This involves transforming the concept into a tangible product, service, or process. Prototypes or minimum viable products (MVPs) are created and tested to gather customer feedback , validate assumptions, and identify potential improvements. Iterative testing and refinement may be conducted to enhance the innovation.

Step 7. Implementation and Commercialization

Once the innovation is developed and tested, it is prepared for implementation and commercialization. This stage involves finalizing the product design, manufacturing, or development, setting up production processes, establishing supply chains, and creating marketing and sales strategies. Intellectual property protection, regulatory compliance, and partnerships or collaborations may also be considered during this stage.

Step 8. Launch and Post-launch Evaluation

The innovation is officially launched in the market, and marketing and sales efforts are executed. Post-launch evaluation involves monitoring the performance of the innovation, gathering customer feedback , measuring key performance indicators (KPIs), and assessing the success of the innovation in achieving its objectives. Based on the evaluation, improvements or adjustments may be made to enhance the innovation’s performance.

Step 9. Continuous Improvement and Scaling

Innovation management is an iterative process, and organizations need to continuously seek ways to improve and scale their innovations. Lessons learned from the launch and post-launch evaluation are incorporated into the innovation management process. Feedback is gathered from customers, employees, and stakeholders to drive further improvements and inform future innovation initiatives.

It’s important to note that innovation management is not a linear process, and the stages described above may overlap or iterate depending on the specific innovation and organizational context. Flexibility, adaptability, and a willingness to learn from both successes and failures are crucial for effective innovation management.

Learn more: What is Product Innovation?

Top 10 Innovation Management Best Practices

Innovation management is crucial for organizations to stay competitive and adapt to changing market dynamics. Here are some best practices for innovation management in 2023:

1. Foster a Culture of Innovation: Create an organizational culture of innovation that encourages and rewards innovation. Promote openness, collaboration, and a willingness to take risks. Encourage employees at all levels to contribute ideas and provide them with the necessary resources and support.

2. Embrace Emerging Technologies: Stay updated with the latest technological advancements and explore how they can be leveraged to drive innovation within your organization. Technologies such as artificial intelligence, blockchain, the Internet of Things (IoT), and virtual/augmented reality can open up new opportunities for growth and efficiency.

3. Build Strategic Partnerships: Collaborate with external partners, such as startups, universities, research institutions, and industry experts. These partnerships can bring fresh perspectives, and access to new technologies, and help you tap into a wider network of innovators.

4. Implement Agile Methodologies: Agile methodologies, such as Scrum or Kanban , can enhance innovation management by promoting iterative and flexible approaches to product development. These methodologies enable quick adaptation to changing requirements and customer feedback , resulting in faster innovation cycles.

5. Encourage Cross-Functional Collaboration: Break down silos within your organization and encourage collaboration across departments and teams. Foster interdisciplinary interactions to facilitate knowledge sharing, creative problem-solving, and the cross-pollination of ideas.

6. Invest in Continuous Learning: Promote a learning culture within your organization. Encourage employees to continuously develop their skills and knowledge through training programs, workshops, and conferences. Provide opportunities for employees to experiment, learn from failures, and share their learnings with others.

7. Develop a System for Idea Management: Implement a robust system to capture, evaluate, and prioritize ideas from employees, customers, and other stakeholders. Use a combination of methods such as idea management platforms, suggestion boxes, hackathons, or innovation challenges to gather and evaluate ideas effectively.

8. Allocate Dedicated Resources: Dedicate a budget, time, and personnel specifically for innovation activities. Create dedicated teams or innovation labs that can focus on researching, prototyping, and testing new ideas without distractions from day-to-day operations.

9. Embrace Design Thinking: Apply design thinking principles to identify unmet customer needs and develop innovative solutions. This human-centered approach involves empathizing with users, defining problem statements, generating ideas, prototyping, and testing to create products and services that truly resonate with customers.

10. Measure and Reward Innovation: Establish metrics to track and measure the success of innovation initiatives. Consider metrics such as the number of new ideas generated, successful implementation of ideas, revenue from new products/services, customer satisfaction, and employee engagement. Recognize and reward employees who contribute to the innovation process .

Remember, innovation management is an ongoing process. Continuously reassess and adapt your innovation strategies based on market trends, customer feedback , and internal insights to stay at the forefront of innovation in 2023 and beyond.

Learn more: What is Strategic Innovation?

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Circular economy: definition, importance and benefits

The circular economy: find out what it means, how it benefits you, the environment and our economy.

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The European Union produces more than 2.2 billion tonnes of waste every year . It is currently updating its legislation on waste management to promote a shift to a more sustainable model known as the circular economy.

But what exactly does the circular economy mean? And what would be the benefits?

What is the circular economy?

The circular economy is a model of production and consumption , which involves sharing, leasing, reusing, repairing, refurbishing and recycling existing materials and products as long as possible. In this way, the life cycle of products is extended.

In practice, it implies reducing waste to a minimum. When a product reaches the end of its life, its materials are kept within the economy wherever possible thanks to recycling. These can be productively used again and again, thereby creating further value .

This is a departure from the traditional, linear economic model, which is based on a take-make-consume-throw away pattern. This model relies on large quantities of cheap, easily accessible materials and energy.

Also part of this model is planned obsolescence , when a product has been designed to have a limited lifespan to encourage consumers to buy it again. The European Parliament has called for measures to tackle this practice.

Infographic explaining the circular economy model

Benefits: why do we need to switch to a circular economy?

To protect the environment.

Reusing and recycling products would slow down the use of natural resources, reduce landscape and habitat disruption and help to limit biodiversity loss .

Another benefit from the circular economy is a reduction in total annual greenhouse gas emissions . According to the European Environment Agency, industrial processes and product use are responsible for 9.10% of greenhouse gas emissions in the EU, while the management of waste accounts for 3.32%.

Creating more efficient and sustainable products from the start would help to reduce energy and resource consumption, as it is estimated that more than 80% of a product's environmental impact is determined during the design phase.

A shift to more reliable products that can be reused, upgraded and repaired would reduce the amount of waste. Packaging is a growing issue and, on average, the average European generates nearly 180 kilos of packaging waste per year . The aim is to tackle excessive packaging and improve its design to promote reuse and recycling.

Reduce raw material dependence

The world's population is growing and with it the demand for raw materials. However, the supply of crucial raw materials is limited.

Finite supplies also means some EU countries are dependent on other countries for their raw materials. According to Eurostat , the EU imports about half of the raw materials it consumes.

The total value of trade (import plus exports) of raw materials between the EU and the rest of the world has almost tripled since 2002, with exports growing faster than imports. Regardless, the EU still imports more than it exports. In 2021, this resulted in a trade deficit of €35.5 billion.

Recycling raw materials mitigates the risks associated with supply, such as price volatility, availability and import dependency.

This especially applies to critical raw materials , needed for the production of technologies that are crucial for achieving climate goals, such as batteries and electric engines.

Create jobs and save consumers money

Moving towards a more circular economy could increase competitiveness, stimulate innovation, boost economic growth and create jobs ( 700,000 jobs in the EU alone by 2030 ).

Redesigning materials and products for circular use would also boost innovation across different sectors of the economy.

Consumers will be provided with more durable and innovative products that will increase the quality of life and save them money in the long term.

What is the EU doing to become a circular economy?

  In March 2020, the European Commission presented the circular economy action plan,  which aims to promote more sustainable product design, reduce waste and empower consumers, for example by creating a right to repair ). There is a focus on resource intensive sectors, such as electronics and ICT , plastics , textiles and construction.

In February 2021, the Parliament adopted a resolution on the new circular economy action plan demanding additional measures to achieve a carbon-neutral, environmentally sustainable, toxic-free and fully circular economy by 2050, including tighter recycling rules and binding targets for materials use and consumption by 2030. In March 2022, the Commission released the first package of measures to speed up the transition towards a circular economy, as part of the circular economy action plan. The proposals include boosting sustainable products, empowering consumers for the green transition, reviewing construction product regulation, and creating a strategy on sustainable textiles.

In November 2022, the Commission proposed new EU-wide rules on packaging . It aims to reduce packaging waste and improve packaging design, with for example clear labelling to promote reuse and recycling; and calls for a transition to bio-based, biodegradable and compostable plastics.

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  1. What is Business Model Innovation? Definition, Framework, Examples and

    Business model innovation is defined as the process of creating, modifying, or defining the fundamental structure and components of a business model to create new value propositions, capture new market opportunities, and gain a competitive advantage. Learn more about business model innovation framework, examples and best practices.

  2. Business Model Innovation Delivers Competitive Advantage

    Business model innovation is the art of enhancing advantage and value creation by making simultaneous—and mutually supportive—changes both to an organization's value proposition to customers and to its underlying operating model. At the value proposition level, these changes can address the choice of target segment, product or service ...

  3. Business Model Innovation: What It Is And Why It's Important

    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 ...

  4. Four Paths to Business Model Innovation

    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 ...

  5. Business Model Innovation

    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 ...

  6. Innovation in Business: What It Is & Why It's So Important

    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.

  7. What Is a Business Model?

    Introducing a better business model into an existing market is the definition of a disruptive innovation, as written about by Clay Christensen. ... Rita McGrath offers that your business model is ...

  8. Business model innovation: a review and research agenda

    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 ...

  9. What is innovation?

    In a business context, innovation is the ability to conceive, develop, deliver, and scale new products, services, processes, and business models for customers. Successful innovation delivers net new growth that is substantial. As McKinsey senior partner Laura Furstenthal notes in an episode of the Inside the Strategy Room podcast, "However ...

  10. The eight essentials of innovation

    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 ...

  11. What is business innovation ?

    Business innovation is an organization's process for introducing new ideas, workflows, methodologies, services or products.

  12. Business model innovation: What it is and why it matters

    Business model innovation has become very important to many firms because it has the capacity of having a strong impact. We are talking about the profit margins and the service innovations that can disrupt established industries. By having the business model innovation definition, we can now also see why companies should consider it, and why ...

  13. Business Model Innovation: Strategies and Examples for Successful

    Business model innovation is the art of enhancing advantage and value creation by simultaneously changing an organization's value proposition to customers and its underlying operating model. Companies must constantly innovate to remain relevant and competitive in today's ever-changing business environment. Business model innovation can assist businesses in accomplishing this by generating ...

  14. Innovation In Business: 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.

  15. PDF Business Model Innovation: Creating Value in Times of Change

    business model innovation to complement, if not substitute (relatively costly) innovation in products or processes. Business model innovation can allow managers to resolve the apparent trade- ... within its business model. Our definition is broadly consistent with the various ways in which the term business model is

  16. Innovative Business Models

    Innovative Business Models (IBMs) can be interpreted as an advanced, comprehensive, and transformed approach explaining how firms create value (O'Riordan 2017, p. 399).IBMs comprise many of the characteristics of both Business Models (BMs) and New Business Models (NBMs). (For clarification, while IBMs undoubtedly signify many of the concepts inherent in the BM and NBM logic, the semantics ...

  17. 20 Definitions of Business Model Innovation

    Innosight. Business model innovation is the process of reinventing how you transform your organisation to more effectively compete. At the centre of business model innovation is the need to create new products, services or organisational models that improve your value proposition. Gary Fox.

  18. A guide to innovative business models (with examples)

    Business model innovation can be challenging for a company. Analysing the value proposition and operational strategies might lead to insights that recommend extensive changes to ensure the company has a chance of long-term success. ... Related: Innovative examples at work: definition and examples The role of lean innovation Lean innovation is ...

  19. Business Model Innovation: Is It A Good Move?

    The purpose of a business model is to guide a business to success. Or in simple terms, a business model is a plan that outlines how an organization will make money, which goes beyond just pricing.

  20. Business model innovativeness: designing a formative measure for

    Business model innovation is attracting increasing attention in corporate practice and academia. Despite strong interest in the phenomenon, no common understanding of the concept's meaning has yet been established, hindering dialogue and progress in this research field. This study seeks to build a definition of business model innovation, and to provide a measurement index for the extent of ...

  21. Business Model Innovation: Definition & Example

    Cite this lesson. Business model innovation is the enhancement of an organization's existing business model to adapt to consumer behavior and external factors. Look into the definition and ...

  22. 51 Innovative Business Models To Consider (Plus Benefits)

    Here are 10 innovative business models that companies can implement: 1. Bricks-and-clicks model. A bricks-and-clicks store, or a click-and-mortar store, is a business model where retailers have a physical store and an ecommerce website. It attracts customers with various shopping preferences, allowing the retailer's sales to increase.

  23. What is Innovation Management? Definition, Process and Best Practices

    Innovation management is defined as the process of systematic and strategic approach to generating, developing, and implementing new ideas, products, services, or processes that result in organizational value-addition. Learn more about innovation management process and best practices with examples.

  24. Circular economy: definition, importance and benefits

    What is the circular economy? The circular economy is a model of production and consumption, which involves sharing, leasing, reusing, repairing, refurbishing and recycling existing materials and products as long as possible.In this way, the life cycle of products is extended.. In practice, it implies reducing waste to a minimum. When a product reaches the end of its life, its materials are ...