Breakthrough with business model innovation


Many companies find themselves in situations where following the ‘same old strategy’ has little chance of reigniting growth.  Realistic CEOs will quickly come to the realization that when the going gets really tough, the tough innovate their business model.  Business model innovation is a high reward/high risk move that is normally preceded by a financial crisis, the emergence of a compelling market opportunity, or a fatal decline in competitive position. 

Some of the World’s most successful companies – IBM, Amazon, Apple and Google etc – have gained a sustainable competitive advantage and industry-leading shareholder returns by moving boldly away from their traditional business models.  To successfully navigate a shift, leadership needs a true picture of their current prospects, a vision for the future and the perseverance and courage to shepherd major change.

BMI is a fancy term to describe company-wide innovation around i) the value delivered to customers and ii) the operating model to deliver that value.  As compared to incremental product and operational innovation, BMI is a more encompassing and complex form of innovation.  It impacts the core beliefs around the business and market.  For example:    

  1. Do the targeted customer segments have unmet or emerging needs?
  2. What is the ideal product/service mix to satisfy these needs and maximize revenue?
  3. What is the most profitable operational model to deliver this value? 

Disruption is coming

Many factors can contribute to an environment where a company would seriously consider revamping its business model.  Markets can become commoditized, resulting in zero profitability for most of its players; a firm’s cost position can become untenable; a technological breakthrough can provide opportunities to serve users in a completely new and powerful fashion or;  a new regulation creates the potential for the industry structure to change.  Bold and visionary leaders who are prepared to make major moves can reap considerable benefits.

Superior returns are attainable

Properly designed and executed, BMI is a proven business-building strategy.  Research from the consultancy BCG has shown that total shareholder returns versus peers for BMI was five times higher than product or process innovation (8.5% vs 1.7%) over a 3 year period and over 55% higher (2.7% vs 1.7%) over a 10 year period. In many cases, BMI practitioners have leapfrogged competition and carved out new market space.   

Your move

Companies often pursue BMI for defensive reasons.  In many cases, however, leaders may choose this strategy in order to change the rules of the game.   BCG studied the implementation of BMI in a variety of industries.  Below are 3 success stories:

1.  Beating Back Competition

In an effort to compete with a successful low-cost airline, Virgin Blue, Qantas launched a new, ultra low cost airline, Jetstar.   Structured as a separate division with a business model designed from the ground up, Jetstar was effective in blunting Virgin Blue’s share growth while providing consumers with a unique and customizable flying experience.   

2.  Reigniting growth

By 2001, Apple’s proprietary and closed approach to hardware and software development had relegated the company’s PCs to niche shares.  By leveraging its unique and compelling core capabilities and brand, Apple was able to create entirely new categories of consumer electronics and smartphones through the iPod and iPhone platforms.  As well, Apple used its proprietary advantages and outsider status to establish the de facto standard for fee-based music downloading, a model that had evaded the music industry for years.

3.  Extending the business model

Ikea discovered, through its experience launching stores in Russia, that the land value surrounding its new outlets would appreciate markedly following a store opening.  The company decided to capitalize on this happenstance by leveraging its brand and real estate competencies to develop adjacent malls.  Ikea’s new division, Mega Mall, now makes more profit on building and managing malls than it does through its retail division.

Making BMI work

Organizations considering BMI need to ensure they have the capability to design, plan and implement a major transformation.  The challenge of pulling this off must not be underestimated.  Experience is usually scarce as firms do not often retool their businesses.  Moreover, BMI is typically undertaken in times of internal stress, limited resources and competitive pressure. For company’s considering BMI, they would be well served  to use a proven approach to transformation.  Our firm deploys this simplified 4-step process:

Know thyself

  • How urgent is the need for change?
  • What are our strengths and weaknesses?
  • Are there any assets that can be extended beyond the core business? 

Uncover opportunities

  • What gaps exist between the current value proposition and delivery model, and industry trends, underserved customers needs/preferences and relative industry competitiveness?
  • What new offering, value proposition and operating model can address the gaps?
  • How do you generate high margin revenues?

Align

  • How do you reorder the value chain?
  • What resources – capital, talent, assets, information – are needed?
  • What is the impact on the organizational structure and culture?

Implement

  • How do you mobilize the organization to change?
  • How do you deal with barriers and risks such as customer retention?

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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1 comment so far

  1. You Can Make a Difference! on

    Mitch great post. Many companies need to act on their BMI but do not know where to start. I will give you a call to discuss in more detail.

    Cheers,

    Kyle


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