BUSINESS MODEL INNOVATION
Business Model Innovation : Key to Growth and disruption in a crisis environment
In late 2019, a Chinese cosmetic company named Lin Qingxuan, was forced (like many others) to close 40% of its stores due to Covid-19, and lost 90% of its brick and mortar sales. Faced with the chilling prospect of bankruptcy, the company’s founder Sun Laichun decided to redeploy 100+ beauty advisors from the stores to become online influencers. They were tasked with leveraging digital tools to engage customers virtually & drive online sales. As a result, Lin Qingxuan’s sales in Wuhan achieved 200% growth compared to the prior year’s sales.
This success does not stem from a new technology, an improved product, or a new sales channel. No, such a stark re-definition of a business’ identity is an example of Business Model Innovation.
Instead of aiming to continuously improve few aspects of a value-creating process, Business Model Innovation seeks to create a clean break from an industry’s logic by helping a company identify and occupy untapped opportunities. It gives managers a holistic snapshot of their company and its objectives, thus giving them the ability to quickly identify interconnected levers of action. As such, this practice finds itself squarely between a company’s strategy (“Who are we”) and its Tactics (“How do we create value?”).
Business Model Innovation’s ambitious goals require an intuitive framework. Firstly, it is paramount to precisely understand which customer segment a new business model seeks to address. Secondly, we must identify the company’s target value proposition, be it a product or a service, and how it caters to this specific customer need. Thirdly, the value chain created to deliver a strong value proposition to customers must be mapped out. Finally, managers must identify an effective profit mechanism to ensure the new business will be viable commercially.
Put simply, we are here answering the who, what, how, and why of the soon-to-be-launched business. In order be truly innovative, a company should seek to differentiate itself using two or more of these levers (anything else would only strengthen the status quo).
We are keenly aware that this may sound too simple to be effective. Yet, several studies have backed up the fact that Business Model Innovation is key to unparalleled growth, as shown below.
As previously mentioned, Business Model Innovation is a particularly effective concept to use during crises. Times of turmoil bring a mix of attitudinal shifts, new policies, new ways of working, and new consumer behaviour, and only companies which have cultivated a culture of innovation have the scale and speed to efficiently address this changing world. The 2008 financial crisis, for example, helped Airbnb and Uber implement innovative business models, as people were forced to share assets in the form of spare rooms and car rides in order to cover for their dwindling finances. Both companies broke the status quo by targeting new customer segments (supply-side AND demand-side), offering a new value proposition (a faster, more authentic experience) and capitalising on a different profit mechanism (taking a cut out of their partners’ revenues).
It’s not only about innovation: it’s also about survival. History is full of companies that did not innovate their business model when they should have. Kodak, for example, invented the first digital camera in 1975 but held back instead of using this new technology. It was afraid of hurting its lucrative film business, even as digital products were reshaping the market. Similarly, Blockbuster failed to partner with Netflix in 2000. After realising its error, it invested heavily in digital solutions, eliminating late fees in the process. But instead of fully reinventing the company, managers doubled down on the existing model, and Blockbuster went bankrupt in 2010.
For many executives, creating a new business model will be a daunting task. Indeed, creativity is something we forget over time, and breaking the status quo requires a lot of it. Thankfully, we know that shortcuts to creativity exist. These shortcuts rest on a key characteristic of business models: they are archetypes. Not only this, but they are very limited in numbers (about 80 according to our research). As such, business models can be :
Transferred from one industry to another
Combined by putting together 2 or more models
Leveraged by adapting existing capabilities within the business.
Yet, even with these shortcuts, the task of reinventing a business from the ground up requires both hard work and a tested framework. Indeed, we are not discussing a once-in-a-lifetime change, but one that may be required of a company regularly as the world continues to change at an exponential rate. We recommend 3 highly flexible phases.
1. Initiation : Analyse the ecosystem
To know where we’re going, we must first know where we are. This phase concentrates on analysing the current model, and positioning it within its ecosystem (Players, change drivers…). If starting from scratch, a full analysis can take up to one month.
2. Ideation and Idea selection : adapt the patterns
As mentioned above, Business Model Innovation does not imply reinventing the wheel. Comparing a bank of existing model to one’s own to identify similarities and differences is often enough to generate new ideas that could lead to a breakthrough. This can be done through a 2-hour workshop, or over a few months to ensure that all stakeholders have a say on the new models being contemplated.
3. Integration : create a business plan
Many will be tempted to start their process with a business model canvas and a business plan. That is simply unwise as creativity takes time. It is nevertheless a key element of an efficient process : once a few ideas have been selected and feedback has been received, an in-depth internal and external analysis must be performed to ensure the model’s consistency with reality. This can take time (up to 3 months), but a company willing to take risks can start implementing much quicker by learning on the go.
At full speed, this exhaustive process can be completed in 3 months.
In an increasingly connected world, it is becoming harder and harder to identify clear industry boundaries. Not only are new actors rising to meet changing customer demands, but existing companies are continuing to grow vertically and horizontally, presenting a whole new array of threats. In such a world, it is important to make oneself free of industry norms and habits; they are more likely to become a risk than a strength.
Business Model Innovation offers such a freedom. As the coronavirus crisis rewrites the rules of many industry, now is the ideal time to consider a drastic change.