Business model innovation is a specific kind of change. Some forms of innovation focus on particular features (like better picture quality on a television) or efficiencies (like a cost-saving program inside an organization). Business model innovation involves seeing the entire value creation system, assessing it, then removing, adjusting, or creating new elements necessary to develop new offerings or improve current ones.
Entrepreneurship comes from the idea of creating an enterprise—an endeavor such as a new organization or significant investment.
Entrepreneurs typically work from the beginning of an organization and specialize in founding businesses rather than their optimization (though they may do that too).
Intrapreneurship describes the work of creating an 'enterprise within an enterprise.' Usually, this is a fundamentally new initiative inside an existing corporation with a lot of inertia.
Intrapreneurial thinking considers an entire business model, looking for opportunities for change that are exponential and transformational rather than iterative.
Large organizations' inertia often means that entrepreneurial efforts struggle to get recognition, space, or funding. Therefore, forward-thinking organizations may have special departments or funding methods, like an innovation incubator, internal 'startup' funds, and/or strategic partnership groups which assess intrapreneurial activities differently than 'business as usual' projects and departments.
Many people are familiar with the concept of a CEO or Managing Director.
CEO refers to a Chief Executive Officer—someone who can execute the organization's mission and the directions of a governing board or owner.
Many innovation leaders (including Strategyzer group, creators of the well-known Business Model Canvas tool) have suggested the idea of a Chief Entrepreneurial Officer: a role and department focused less on executing business-as-usual and more focused on fundamentally new ventures. This complements and balances the Chief Executive Officer's focus on the present with a longer view of future opportunities. Many companies have created such roles, with names like Chief Innovation Officer, Director of Ventures, or similar. Responsibilities for these roles include managing a pipeline of strategic opportunities which extend an organization's existing business model and building new lines of business or even entirely separate entities.
Business model innovation doesn't have to start from a blank canvas. It can start from anywhere inside or outside an organization, at any stage of growth.
Business model innovation sets itself apart from other forms of innovation because the end goal is to model and evolve the whole organization, including the thinking, mindsets, and assumptions underpinning its operations.
Where business model innovation starts—such as a new value proposition or another component of the business model, or the environment around the organization, is less important than where it ends: a complete model of the business and its environment.
Sometimes business model innovation starts with a new digital value proposition about serving customers or users.
A new value proposition may reveal other changes or transformations that the business needs. For example, offering online grocery shopping may stress the resources and strategies of an existing brick-and-mortar grocery store.
Often business model innovation comes from updated thinking about the value models a company or organization wants to use. Value models refer to the primary strategies a company uses to provide benefit to customers:
Read more about value models here.
As a company adds or subtracts new value models—such as adding a subscription software offering or content products to a traditional business, like BMW did with their in-car infotainment systems, or when Netflix stopped offering DVD rentals to focus only on streaming—the entire business model needs to be re-examined and tested for desirability, feasibility, and viability.
Significant changes within one or more components of the business model, in addition to value propositions or value models, can prompt innovation, such as:
The business model environment refers to influences outside an organization's 'four walls.' These influences tend to fall into four categories:
These influences can prompt business model evaluation and innovation in established firms. Proactive organizations are constantly scanning the environment around them and updating their business model, but because changes outside an organization can be hard to spot at first, not every company adapts in time.
The effects of COVID lockdowns and related supply shortages caused many changes for automobile sellers.
Understandably, safety concerns and economic uncertainty, coupled with lockdowns, forced dealerships to change their expectations about demand—at first, it stagnated. The same lockdowns prompted changes in dealerships' key activities, channels, and customer relationships. For example, test drives were impossible in some situations or couldn't happen with a salesperson present.
As a result, dealerships had too much unsold inventory, and their cash and credit were consumed by maintaining that inventory.
Stagnating demand reverberated along the supply chain: lower demand resulted in the cancellation of orders for vehicles, which resulted in the cancellation of production of vehicles, which resulted in the cancellation of supplier contracts for automakers. In response, dealers and other auto sellers changed how they managed their businesses, moving to online showrooms and remote visits, bringing vehicles to customers' homes for test drives, and even delivering sight-unseen vehicles for sale.
Meanwhile, well-adapted or digitally-native entrants into the marketplace, like Carmax and Carvana (in the United States), thrived and scaled up and down more readily. Demand resumed, and in some cases, surged right as on-hand inventory started to decline—and upstream suppliers of vehicle components shut down their factories, sometimes permanently. Because of this, traditional dealers could not get sufficient stock to keep up with demand; even used vehicles were hard to find. As demand outstripped supply, prices increased, and many customers were hurt by massive markups on vehicle sales prices (with a select few benefitting from above-average trade-in values).
It remains to be seen if traditional vehicle dealerships will keep the new, digital adaptations to their business models or go back to old ways of working. However, it is clear that companies with new, digital ways of managing business responded more quickly to the marketplace than businesses that had not invested in Digital Fluency and easily-adapted capabilities.
An organization suited for entrepreneurship and/or intrapreneurship has many capabilities which may not be present in a traditional 'business as usual' organization.
Most organizations optimize their current business and extract as much value as possible from prior innovations or iterating smaller changes.
It can be helpful to think of this as similar to agriculture work in the fall season—the focus is on harvesting as much fruit and vegetables from plants that are already grown, minimizing the cost, and maximizing the selling price of that harvest.
In business terms, this often means a majority of a company's effort focuses on production and incremental innovation:
In contrast, entrepreneurial organizations tend to focus on the other seasons of innovation: imagining new crops during the winter, planting seeds in the spring, and rapidly growing during the summer season (before the harvest has begun).
In business terms, this often means:
One of the most useful things for a mindful and analytical entrepreneur is to reverse-engineer or extract beliefs and assumptions from existing ways of working—and then test them to see if they are still the best strategies.
Suppose these existing beliefs and assumptions prove not to be accurate. In that case, it's time to engage in unlearning: the practice of consciously letting go of limiting beliefs to create room for new ways of operating. This process is covered in more depth in Unlearning.
A common trait among entrepreneurs is, almost by necessity, an open mind and an understanding of the scientific method. Entrepreneurial organizations have learning and testing capabilities and, while they use their intuition to guide their ideas, they validate those ideas with well-constructed experiments. Conversely, learning and testing can be hard for established businesses because it's not often culturally accepted to challenge the norms and strategies of leaders.
Proactive leaders should assume that all business ideas and strategies, both new and those already in place, need to be tested and measured. As part of this, entrepreneurial organizations often have a more advanced and nuanced understanding of metrics and analytics. These organizations engage in 'instrumentation'—connecting measurement capabilities, not just to productivity and sales, but also to customer-centric objectives and key results (or OKRs) to make sure they see the bigger picture.
Many companies think of their 'learning stage' as something that happened long ago (or at least before most of their current employees were hired). Such learning may even have occurred at another company that later merged with or was acquired by a conglomerate.
When everything is going well and the environment around the business is mostly stable, this is not a big problem. However, when rapid change occurs, catastrophic failures (or significant missed opportunities) can happen quite quickly. It's as if some large organizations don't have a way to 'see' the big picture in time to change their ways of thinking and operating.
Entrepreneurs and intrapreneurs wishing to engage in business model innovation bring learning to the forefront through six key stages of making informed decisions about the business model and its various components.
Making Decisions with Data covers these stages in more detail.
Business model innovation benefits from creating a set of well-defined stages that clearly articulate what constitutes success. Different organizations and fields may have other names for these stages.
Rather than trying to understand everything about each stage, think in cycles or loops, or even 'seasons of innovation.' Generally, business model innovation stages start with:
Once these tests are complete, businesses make better-informed choices about moving forward. Smart organizations continue to validate the hypotheses in each part of their business models so that they can 1) identify problems and opportunities early and 2) make informed choices about how a potential new strategy compares to existing ways of working. Thus ensuring that good ideas don't 'sit on a shelf' because they can't be compared to the status quo of the business.
A modular approach to business functions and components allows for more rapid change when necessary. These modules can be big, like an accounting department, or relatively small, like a technology microservice that converts scanned receipt images into database entries.
To ensure rapid change occurs without disrupting interdependencies within the business, abstraction layers between departments, such as application program interfaces (APIs) and internal billing structures, are used. For example, Amazon is infamous for requiring all data to be passed between different parts of the organization via API.
As business ideas are further tested and validated, they come out of alpha or beta mode and are often then adopted by other parts of the business. Modularization can allow firms to change quickly when new opportunities or risks arise. However, modularization of the company is a mindset about interoperability and preparation for constant change and continuous improvement, not a one-size-fits-all approach. It can allow parts of the business to use different tools for the same problem based on their specific needs. Strategies like Development Operations (DevOps), Continuous Improvement, and Enterprise Service Architecture are all examples of attempts to modularize technological parts of a business, but they need to be paired with comparable business mindsets in order to be effective. Striking a balance between innovation and standardization is perhaps one of the biggest challenges for business leaders in companies of large scale.
When Amazon acquired Whole Foods Market, they did not 'absorb' all elements of the business and force the grocer to operate in the same way as other parts of the massive Amazon ecosystem. Instead, they worked with existing Whole Foods Market teams to carefully assess components within the business to see which might be updated, shared between the firms, de-commissioned, left as-is, or replaced with Amazon modules.
By using the strategic narrative of the Whole Foods brand and its associated decision principles to guide their choices, Amazon has so far been able to keep many of the best parts of the brand and its teams' long knowledge of customer service, colleague satisfaction, health, quality, and sustainability despite a massive influx of cash and new technologies.
Entrepreneurs and (entrepreneurial companies) are often noted for their focus on prototyping or creating early versions of products and services to test and de-risk potential shifts in the business model.
While the topic goes far beyond the scope of this chapter, rapid prototyping marries a learning mindset with modular capabilities to quickly build new products, services, content, and technologies in a basic form. Such prototypes may not have complete functionality (sometimes referred to as alpha products), or if they are functional, they may have compromises to be produced more quickly (sometimes referred to as beta products). The ability to quickly construct 'minimum viable products' and other forms of prototypes inside an organization or with a close partner is an indicator of a company's entrepreneurial readiness.