Good business ideas have a simple elegance that can spur entrepreneurs to ask themselves, Why didn’t I think of that? Or maybe they did have a good idea but lacked the foresight to turn it into an effective business model.
Inspiration alone is not enough to succeed in business. Ideas must be accompanied by strategic action that profitably brings a product or service to market. And in today’s volatile business environment, this process may need to be repeated regularly. Companies that stand on past successes are likely to be left behind by those that continually improve their strategies.
From disruptive start-ups to small businesses to Fortune 500 companies, business model innovation is a key to sustained performance.
Business Model Innovation
Companies can learn a lot about survival from natural ecosystems. Charles Darwin stated in his book On the Origin of Species that it is not the strongest or most intelligent that survive but the most responsive to their changing environment. Echoing Darwin, Jeff Bezos said, “Those [companies] that don’t adapt will fail.”[1]
A business model is a strategy that outlines how a company delivers value, both externally and internally. Harvard Business Review identifies four elements of a business model[2]:
- Customer value proposition: how a company creates value for its customers
- Profit formula: the way a company creates value for itself
- Key resources: the assets (e.g., people, technology, brand, and equipment) that deliver the customer value proposition
- Key processes: managerial and operational processes including budgeting, manufacturing, training, sales, and service that provide value delivery in a repeatable and scalable manner
To remain competitive amid rapid change and complexity, companies must adapt by developing new ways of doing business. Digital transformation is all the rage. But if a company does not adjust its business model, the promise of new growth could be unfulfilled despite new technology and new thinking.
Business model innovation involves adjusting the business model to achieve a competitive advantage. Because the components of a business model are interlocking, a change in one element necessarily results in change in the others. Changes typically begin with a reevaluation of the customer value proposition, which leads to mutually supportive changes in resources, processes, and profit formula.
Business Model Innovation and Company Performance
The ability of a company to adjust its business model is closely tied to its performance. A recent study of business model innovation and small business performance found a statistically significant relationship between them.[3]
Real-world examples of business model innovation—such as Apple reinventing itself around the iPod and iTunes, or Walmart and Target capturing 75 percent of the retail sector with pioneering business models—are numerous.
Apple was not the first company to introduce a digital music player. But it was the first to invent a new business model that made downloading music easy and convenient using iTunes, which drove iPod sales. On the strength of this business model, Apple’s revenue increased from $7 billion in 2003 to $267 billion in 2010.[4]
Apple’s success shows how business model innovations and technological innovations are linked but distinct, with the former finding a way to unlock the latter’s potential. Henry Chesbrough, Executive Director at the Center for Open Innovation at UC Berkeley, believes a better business model will often beat a better technology.[5]
How and Why to Revisit Your Business Model
If your business is not adapting to market changes, it is not likely to have sustained success.
You do not have to wait until competitors are eclipsing you and your sales are in the red to revisit your business plan. You should observe shifts in technology and customer preferences and make continual adjustments to avoid falling behind.
Think about a real customer need and how to satisfy it. After that, work on a business model that lays out a blueprint for how to meet that need at a profit. The last step is to compare the new model to your existing model and determine the changes you need to make to capitalize on the opportunity.
All of this is, of course, much easier said than done. Before you can create a map for where you want to go, you need to take stock of where things stand and the current market opportunities. Only then can you intentionally move forward with a revamped business model that drives your next growth phase.
Schedule a Consultation
If your new business model creates a need for legal changes, we can help. To discuss business planning, contact us to schedule a meeting.
[1] 10 Digital Transformation Quotes That Will Change the Way You View It, Medium (Oct. 20, 2019), https://medium.com/@InnovexaSolutions/10-digital-transformation-quotes-that-will-change-the-way-you-view-it-c57fcc5fcd80.
[2] Mark W. Johnson et al., Reinventing Your Business Model, Harv. Bus. Rev. (Dec. 2008), https://hbr.org/2008/12/reinventing-your-business-model.
[3] Natnael Salfore et al., Business Model Innovation and Firm Performance: Evidence from Manufacturing SMEs, 9 Heliyon e16384 (2023), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10220359.
[4] Mark W. Johnson, Reinvent Your Business Model: How to Seize the White Space for Transformative Growth, Innosight (Jul. 2018), https://www.innosight.com/insight/reinvent-your-business-model.
[5] Henry Chesbrough, Business Model Innovation: Opportunities and Barriers, 43 Long Range Plan. 354 (Apr.–June 2010), https://www.sciencedirect.com/science/article/abs/pii/S0024630109000569.
