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 the Master of Science in Innovation program at 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.
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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.
Download our guide How to Introduce Innovation into Your Organization, to learn more about the role innovation can play in your career.
This article was originally published in December 2017. It has since been updated for accuracy and relevance.
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.What is an innovative business model? ›
What is an innovative business model? An innovative business model is a unique strategy that a company uses to streamline its operations. Some models focus on appealing to a target audience's distinct preferences, while others strive to reduce operational costs.What is the main objective of business model innovation? ›
The primary goal of business model innovation is to realize new revenue sources by improving product value and how products are delivered to customers.Why is business model innovation increasingly important in today's economy? ›
Businesses started moving away from the classic method of creating competitive advantage like a new product development. Thus, this influenced business activities as well as companies' business models into innovations of new products and services, a new ways of company relationships with customers and employees.What are the main elements of business model innovation? ›
A business model is made up of four elements: (1) a value proposition for customers; (2) resources, such as people, money, and technology; (3) the processes that the organization uses to convert inputs to finished products or services; and (4) the profit formula that dictates the margins, asset velocity, and scale ...What is innovation in simple words? ›
Simply put, innovation is about successfully implementing a new idea and creating value for your customers and stakeholders. Innovation starts with a new idea. It could be a plan for an improved product or service; it could be an updated method for running your operations; it could also be a new business model.What are the three most important objectives of innovation? ›
Creating new ideas for products and services. Performing better than competitors. Improving innovation process. Dominating the market.What are the most important innovation goals? ›
The innovation goal should be visionary and exciting. It should be something that has not seen before, measurable at least once per year (eventually more often), customer focused, and ultimately delivering value (top line, mid line and bottom line).How can you innovate with the business model? ›
- The “three A's” of how to innovate your business model. ...
- Aligned: creating internal and external consistency. ...
- Align internally to provide customer value. ...
- Align externally with partners through “open” business models. ...
- Use existing assets and capabilities.
Business model innovation is important for competitive advantage because it changes the rules of the game. When you are playing a different game, dancing to a different tune, then it is difficult for competitors to respond.
For many, the most appealing benefit of a business innovation strategy is its capacity to generate entirely new ideas. Innovation can birth new products and services to add to your existing lines, or it may open the doors to target new markets, or solve growing societal problems.What are the 4 types of innovation in business? ›
- Sustaining, or incremental innovation.
- Breakthrough innovation.
- Disruptive innovation.
- Basic research.
The four important approaches which are the reinventor approach, the adapter approach, the maverick approach and the adventurer approach are highlighted with the help of this PPT slideshow. It is always necessary to deal with the innovation of the business model.What are the three models of business innovation? ›
Although experts hardly agree on a definitive set of innovation types, there are generally three categories: product, process, and business model innovation.What is innovation best answer? ›
Innovation is the process of translating discoveries and ideas into technologies, processes, products and services and bringing these to market so that they can benefit society. As such, it is vital for consumers, citizens and companies of all types and investors in all sectors.What is a good example of innovation? ›
Process innovation: This refers to changes made to make a process more efficient. For example, assembly lines were a breakthrough in manufacturing. Business model innovation: This is when you transform business operations. Ride-sharing platforms, such as Uber or Lyft, are an example of this.What does innovation mean to you answer? ›
Innovation doesn't necessarily entail creating something new. It's not the same as invention. Rather, innovation usually involves a fresh perspective on something that already exists—taking an idea and considering how its use can create a positive impact in a new and better way.What are the benefits of innovation? ›
- improved productivity.
- reduced costs.
- increased competitiveness.
- improved brand recognition and value.
- new partnerships and relationships.
- increased turnover and improved profitability.
An important part is establishing the specifications of any given idea. Commercialization is the stage that involves the change of focus developments to persuasion. After the idea is clarified and a business plan is developed, it will be ready for diffusion and implementation.What are the key outcomes of innovation? ›
In general, the result of innovation should always be improvement. From the society's perspective, the fundamental outcomes of innovation are economic growth, increased well-being and communication, educational accessibility and environmental sustainability.
Disruptive innovation is often the most well-known type of innovation. It comes with effective uses of new technology and high-impact results. While disruptive innovation is extremely flashy and grabs headlines, it comes with many nuances and challenges.
It helps businesses understand the areas they need to improve for delivering value to their customers. At the same time, innovation also focuses on enabling businesses to empower their profits and long-term growth. The notable examples of this innovation show how efficient it can be for modern businesses.What are the three importance of a business model? ›
Importance of Business Models:
It helps in making marketing strategies, projection of revenues and expenses taking into account the type of Business models and clienteles. Every investor needs to review the business model in order to get knowledge about the company's competitive edge.
- Improve sales and customer relationships. Failing to improve your products and services can put you at risk of losing customers to more innovative competitors. ...
- Reduce waste and costs. ...
- Boost your market position. ...
- Improve employee relations.
Simply put, innovation can lead to higher productivity, meaning that the same input generates a greater output. As productivity rises, more goods and services are produced – in other words, the economy grows.How does innovation improve productivity? ›
The more innovative a company is, the more it can drive productivity. In turn, this increased productivity allows the workforce to be more creative and innovative. On and on the cycle goes as the company grows. Innovation is crucial for SMEs who need to do more with less.Why is business model innovation just as important as technological innovation? ›
Business models are fundamentally linked with technological innovation, yet the business model construct is essentially separable from technology. We define the business model as a system that solves the problem of sensing customer needs, engaging with those needs, delivering satisfaction and monetising the value.What is a business model canvas and why is it important? ›
"The Business Model Canvas helps visualize what is important and forces users to address key areas,” he says. “It can also be used by a team (employees and/or advisors) to understand relationships and reach agreements."What is a business model why is it important provide an example to illustrate your answer? ›
A business model is a framework for how a company will create value. Business models distill the potential of a business down to its essence. A business model answers fundamental questions about the problem you are going to solve, how you will solve it, and the growth opportunity within a given market.