Don’t know much about the business model innovation? Don’t worry, here we bring the detailed guide to the steps in business model innovation.
The world’s biggest online shopping platform, Amazon, started off in 1995 with the identity of the “world’s biggest bookstore.” Today, Amazon leads the pack among online marketplaces, creates amazing television shows and movies while continuing to deliver groceries to your doorstep. So, what exactly supported the growth of Amazon to the trillion-dollar organization it is today? The only answer to this question points out the continuous efforts of Amazon to innovate its business model efficiently.
Now, leaders all over the world are eager to discover more about business model innovation steps. Business model innovation is not a simple approach like making few tweaks in the business model to cope with new changes. The following discussion helps you find a detailed guide on how to develop business model innovation in your concerned sector.
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Importance of Business Model Innovation
Before diving into an outline of the different steps involved in business model innovation, let us understand business model innovation. It is a unique approach focused on the delivery of existing products manufactured through existing technologies to the existing target markets. Generally, business model innovation includes changes that are not visible to the external world and could introduce prolific advantages.
However, the most prominent challenge emerges in context of defining the actual implications pertaining to business model innovation. The lack of a specific framework for identification of opportunities can create setbacks when you attempt to develop business model innovation.
Steps in Business Model Innovation
Managers need to discover business model innovation as a trustworthy and continuously improvable discipline. It is important to note that a business model basically involves a set of crucial decisions focused on collectively determining the ways in which businesses earn their revenue, incur costs, and manage their risks. Therefore, successful business model innovation paths would focus on changes to the decisions. The four distinct paths for business model innovation emphasize,
- Decisions on offerings of the business
- Time of making decisions
- Authorities for making the decisions
- Reasons for the decisions
The successful implementation of changes in these aspects could play a crucial role in enhancing the company’s bottom-line pertaining to risks, revenue, and costs. Let us dive into an in-depth explanation of the four distinct paths to develop business model innovation with productive results.
Step 1: Decisions on Product or Service Offerings
One of the foremost aspects in answers for “How do you innovate a business model?” focuses on the product or services that you will offer in the new business model. Almost all types of businesses encounter the challenges of uncertainty in demand, which is also one of the major sources of risk. The most probable approach for reducing the risk of uncertainty points to modifications in your existing assortment of products and services. Businesses seeking innovation in their business model could follow three distinct alternatives for recalibration of their product or service mix.
Focused business models are one of the promising options you can try out for defining the way you develop business model innovation in your product/service mix. With a focused business model, you need to look for specific target market segments with clearly outlined requirements.
Therefore, if a business currently addresses the needs of multiple segments, it needs to divide the segments. Then, the organization could work on each segment as a focused unit for applying one model. However, the focused model restricts a business to a specific product/service or customer segment while omitting key customer requirements.
You can also find business model innovation steps for optimizing your product/service mix with commonalities. In the basic sense, commonalities refer to the shared components in different products. Product commonalities could also refer to the capabilities required for addressing different product, market, and customer segments.
In addition, companies could also add products or services which showcase how the business has implemented new capabilities. On the other hand, commonality could lead to high costs when components have to be tailored for a varying range of models and makes.
The product/service mix definition to develop business model innovation could also follow the hedged portfolio approach. Businesses could select a specific collection of products or markets, which could reduce the overall risks associated with the business model.
The hedged portfolio approach is similar to the ones followed by financial organizations for creating investment portfolios with investments mutually hedging their risks. The hedged portfolio approach is suitable in the case of product and market combinations with negatively correlated demand fluctuations.
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Step 2: Time of Making Decisions
The second important entry among business model innovation paths would also point towards the timing of making decisions. The best practice for decision-making is to have adequate information to make the decisions with confidence. You can opt for three distinct strategies in this path for developing business model innovation. The strategies can help in enhancing business models by modifying the timing of decisions according to the circumstances. Let us take a look at how you can define the timing of a decision in an innovative business model.
Postponing the Decision
Companies in almost every industry are likely to make strong decisions regarding prices before they start to sell. As a result, such companies are easily vulnerable to risk. For example, it can be a risky move to set the prices for airplane seats in advance. Why? The demand for any specific route depends considerably on economic factors and other aspects, which can differ according to time.
Therefore, dynamic pricing is quite helpful for the airline industry. Another promising example of business model innovation by following the approach of postponing a decision refers to Uber. The riding service employs ‘surge pricing’ for periods of high demand, during which it increases the prices. As a result, the demand slows down, and supply increases productively.
Modifying the Order of Decisions
Certain companies looking for business model innovation steps do not have the flexibility to change the timeframe of their operations. In such cases, the companies could opt for rearranging or shuffling the order of making decisions for delaying investment commitments until the discovery of pertinent information.
You must have noticed that product development generally starts with a proposal of a technology or solution for customer needs. Companies work on initial investments in the solution and return back to ground zero if the solution fails. The plausible strategy for business model innovation here would refer to the prioritization of performance over investments.
Dividing the Significant Decisions
The concept of lean innovation has been one of the formidable aspects in defining new business model innovation paths. Lean innovation focuses on novel approaches for entrepreneurs responsible for making decisions regarding their business. The conventional approach for developing a new business venture was considered risky and focused on introducing a comprehensive business plan. At the same time, entrepreneurs would also have to work on all key decisions pertaining to the plan for ensuring its execution.
With the lean-startup approach, you can divide the significant decisions. The new venture would begin with considerably inaccurate and restricted assumptions regarding the possibilities of an opportunity. Subsequently, the approach focuses on data collection alongside pivoting to ensure that the model reaches a final, verified version. On the other hand, the effectiveness of splitting up key decisions depends on identifying the decisions which you can split.
Step 3: Authorities for Decision Making
The answers for “How do you innovate a business model?” also draw attention towards the selection of authorities for making decisions. Many businesses have discovered radical improvements in decision-making in their value chains by simply changing the people responsible for making decisions. If you want to innovate your business model, then you can use the following approaches to select authorities for decision making.
Better-informed Decision Makers
Allocation of decision rights to individuals or organizations with better knowledge and skills regarding the industry is beneficial. In addition, it is also important to note that the best-informed individuals are generally not found within the organization. External observers and, most recently, algorithms have been emerging as one of the prolific choices for making decisions. While you can notice prolific advantages in making decisions by leveraging better information, there are some hidden risks. You could encounter costs of empowering employees, customers, or suppliers alongside the collection of extensive data with more difficulties.
Select Decision Makers with the Best Possibility for Gains
In the case of various business models, the key decisions are tailored by people with the least to gain. The customers of a company generally feel that they would have limited possibilities of profit when they purchase the products of the company. Therefore, assigning decision-makers with the most to gain from the new business model could lead to better optimization.
Select Decision Makers Capable of Managing Consequences
The effectiveness of business model innovation steps in defining the authority for decision making could also improve by selecting decision-makers who can manage the consequences of change. If you shift the decision risk to parties capable of managing it effectively, then you have a productive strategy. However, it is also important to ensure that the incentives for the replacement decision-maker must align effectively with yours.
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Step 4: Reasons for Decisions
The final addition in business model innovation paths reflects on the possible reasons for which decision-makers take certain decisions. The collaboration of decision-makers for creating value should also involve a focus on how they work towards their private objectives. At the same time, the decision-makers must also safeguard the integrity of the value chain. Business model innovation, in most cases, focuses on the adjustment of motivations of decision-makers. You can follow three distinct alternatives for defining the motivation for decision-makers.
Integration of Incentives
Businesses looking to develop business model innovation without any trusted intermediary could work for the development of contractual agreements and management systems. These initiatives could direct independent agents towards maximizing a commonly agreed outcome. However, contractual arrangements could be highly complicated, thereby leading to better prospects for simpler integration of operations.
On the contrary, it is difficult to achieve complete integration with many organizations refraining from directly working on activities beyond their core competencies. Businesses could leverage the integration framework to ensure that the innovation processes are transparent and systematic.
Modification of Revenue Stream
The US Department of Defense agreed to a time-and-materials contract when it purchased aircraft. According to the contract, the suppliers were charged for materials and labor consumed in every maintenance event. However, the model does not offer customer-friendly incentives to suppliers. Now, the US DOD follows the performance-based contracting approach, which modified the revenue model for contractors.
Contractors would receive payment for the time for which the aircraft was in service with a specific threshold for availability. Business model innovation steps with modifications in the revenue stream could work effectively with a proper definition of performance. On the other hand, it is difficult to introduce effective performance standards alongside relevant metrics in some cases.
Synchronization of Time Horizons
The traditional approach for sourcing focused on competitive-bidding rituals focused on lower pricing and moderate quality. However, the growth in overseas sourcing resulted in a lot of flaws in the model. For example, quality control and material reliability could take a dip alongside other issues such as counterfeiting of goods, abusive labor practices, and product diversion making a mark.
This is where you need to develop business model innovation by blending the confidence with long-term relationships alongside flexibility available with competitive sourcing. For example, you can work on selection, verification, and approval for suppliers alongside the allocation of business operations among manufacturing clients. In addition, you should also work on managing the relationship of each client with each supplier. Suppliers must get incentives for investing in materials, facilities, and people.
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Business model innovation helps a business adapt effectively to new changes in customer expectations and demands. With many notable examples of companies working through the business model innovation paths effectively, you could also do it. However, it is important to identify the suitable strategies within each path for business model innovation.
The shift in the business model requires changes in decisions on how businesses capture and create value. If you can define the decisions for changing products or services or the authorities for decision making, you are starting off in the right direction. Business model innovation also emphasizes the timing of decisions and motivations of the selected decision-makers. Learn more about business model innovation and discover new avenues for competitive advantage right now!