What is Business Model :
A company’s business model is management’s story line for
how the strategy will be a moneymaker.
The story line sets forth the key components of the
enterprise’s business approach, indicates how revenues will be
generated, and make a case for why the strategy can deliver
value to customers in a profitable manner.
A company’s business model thus explains why its business
approach and strategy will generate ample revenues to cover
costs and capture a profit.
Business Model Innovation (BMI) refers to the creation,
or reinvention of a business itself.
A business model innovation results in an entirely
different type of company that competes not only on
the value proposition of its offerings, but aligns its
profit formula, resources and processes to enhance
that value proposition, capture new market segments
and alienate competitors.
By the late 1990’s , Apple’s initial pathway to growth was
running out of steam. The company’s proprietary approach to
designing both hardware and software limited it to being a niche
player and hampered its ability to compete on price.
In 2001, Apple began introducing a series of successful new
products and services – the IPOD, the ITunes online music
service, and the I Phone- that propelled the company to the top
of its industry. This was followed with the I Pad.
But the shift wasn’t only a matter of product innovation. Apple’s
success resulted from its ability to define a workable business
model for downloading music - something that had eluded the
music industry for years.
Clayton Christensen , a Professor at the Harvard
Business School , cites the need for business model
innovation as one of the core elements of a successful
A simplifying technology is needed to spark the
disruption , a new business model is then needed to
maximize the recall of the technology and a
comprehensive value network must finally evolve to
As Apple has demonstrated, innovation in a
business model is more than mere product,
service, or technological innovation. Innovation
becomes BMI when two or more elements of a
business model are reinvented to deliver value
in a new way. Because it involves a
multidimensional or orchestrated set of
activities, BMI is both challenging to execute and
difficult to imitate
A business model, from their point of view, consists of
four interlocking elements that taken together create
and deliver value. According to their construct,
Innovation can occur in one or more of these areas
Customer Value proposition :
Profit formula- Revenue model ( price X volume)
( Source- HBR Dec 2008 )
What necessitates a business model change :
1. The opportunity to address the needs of large groups of potential
customers who are shut out of a market entirely because existing solutions
are too expensive or complicated for them ( e.g. Tata Nano)
2. The opportunity to leverage a brand-new technology, wrapping the right
business model around it or the opportunity to leverage a tested technology
in a whole new market. ( South West Airlines leveraging the usage of
3. The opportunity to bring a job-to –be- done focus to a market -driven
industry. Such industries tend to make offerings into commodities. But a job
focus allows a company to redefine the industry profit formula.
E.g. L'Oreal , Unilever has brought the concept of a hair care, skin care
therapy centre to focus on its offerings.
4. The need to fend off low-end disruptors.
e.g. If Tata’s one lakh car Nano is successful it will
threaten other automobile makers.
5. The need to respond to a shifting basis of
competition. Inevitably, what defines an acceptable
solution in a market will change over time , leading
core market segments to commoditize.
E.g. GE selling off its consumer electronics business.
Examples of BMI where the business model is the core
Tata- Nano 1 lakh car
Apple-iTunes + IPod
Wal-Mart Discount retailing
Fed-Ex- Guaranteed overnight delivery
Southwest- Low cost regional air travel .
As CEOs navigate in today's rapidly changing global business
environment, their ability to introduce business model
innovations is proving to be a critical success factor.
The IBM 2006 Global CEO Study indicated that business
model innovation had a much stronger correlation with
operating margin growth than other types of innovation.
Based on IBM’s experience and research, they identified three
main types of business model innovation, which can be used
alone or in combination:
innovations in industry models,
innovation in revenue models
innovations in enterprise models
Anticipating massive change across diverse industries,
top-performing CEOs are focusing on business model
innovation as a path to competitive strength.
To accomplish this, business leaders can use three main
types of business model innovation: innovation in
industry models, revenue models or enterprise models.
These approaches can be used alone or in combination.
Because of its prevalence as a successful innovation
strategy, enterprise model innovation, emphasizing
collaboration and partnerships, should be a key
consideration for executives as they respond to