Why business model innovation is critical

April 18, 2012 § 1 Comment

This is the 3rd of my Sunday Star Times articles on innovation that was published in March/em>

Markets and consumer trends are moving faster than ever before, and will continue to do so at an increasing pace. This places an enormous challenge on businesses to evolve or potentially die, and increasingly the response requires more than just traditional product, supply chain and cost innovations.

Business model innovation needs to be given a greater priority in management planning and in the boardroom than ever before, simply because consumers have more options and they are more discerning.

There are a number of high-profile examples of recent success through business model innovation that demonstrate how critical it is to apply this focus – and how dramatic the pay-offs can be. In the retail sector, Walmart in the US, The Warehouse in New Zealand and more recently Amazon world-wide have paved new operating models in relatively mature markets. Low-cost airlines were once thought of as foolhardy, yet in 2007 they made up more than half the US airline industry. And, of course, no one can ignore Apple with its variety of revenue streams, from music and app sales through iTunes to new products such as the iPhone and iPad – all of which have only been in the marketplace during the past decade.

The encouraging factor is that business model innovation is alive and well in New Zealand. In last year’s Deloitte Fast 50, business model innovation ruled the higher placings on the growth rate index, proving that challenging traditional models and being more responsive to consumer needs can transform growth levels, and ultimately the market environment.

Powershop, a supplier of domestic electricity, achieved record growth of 5,280% and it attributes much of this to giving consumers more choice and control over how they buy and use electricity. It showed that consumers wanted to understand more about their power usage patterns so they could make informed decisions about how they could reduce their electricity bills, rather than following the traditional model of using power in unknown qualities and hoping the monthly bill didn’t provide an unpleasant surprise.

But creating an alternative customer value proposition through new engagement models and quirky, catchy branding is not enough on its own. Powershop understood that successful business model innovation goes deeper than that; the organisation rearranged its key resources, business processes and reframed traditional profit metrics to allow an innovation culture to flourish and help it continue to grow.

This is a critical point for any company seeking a new business model. There are plenty of examples of innovation that has failed because the company thinks it can apply a new customer proposition across its traditional business systems. Too often these systems will not be appropriate for the new models, and more importantly, the organisation’s culture is not up to the task in the new environment; failure often comes down to having the wrong people. Again, Powershop understood this concept by physically detaching from its parent company, Meridian, and setting up in a new location with new people.

Another local example of business model success is online accounting software company Xero, which came fourth on the 2011 Fast 50 and seems to be maintaining its growth trajectory with a $20m capital injection from big name investors earlier this year. Xero not only provides great looking and easy to use software on a subscription model, as opposed to the traditional model of paying an upfront fee, but is also going to great lengths to ensure it makes life easier for accountants, who make up a critical part of its sales channel. The purchase of Workflow Max and a partnership with Spotlight, a start-up company that provides workpapers for accountants, continues to strengthen its relationship with and support of accountants, which in turn helps it maintain high growth rates as more customers switch to its software platforms.

For my mind, Xero and Powershop are great local exemplars of designing and executing business models using innovation. They haven’t just sat back and decided that they need to change the way they charge customers, but have developed entirely new business systems and processes, and built teams that understand a new way of doing business. This approach has been fundamentally critical to their respective successes.

However, business model innovation can be incredibly tricky and takes considerable time and effort. It also needs to evolve slowly, especially if you are working from an established business base, to enable your existing customers to come along the journey and not be scared off. What the examples outlined above highlight is that business model innovation requires a significant amount of analysis of the status quo, and detailed planning for the new model to ensure its success.

No one would be brave, or stupid, enough to change a business model overnight because the consequences of getting it wrong are potentially catastrophic. That said, in order to provide a platform that challenges the status quo, every business should undergo a regular exercise that evaluates its existing business model and observes changes within the sector that it trades to understand how these will impact on customer experiences. These reviews will be vital components of any process towards ultimately changing a business model.

As the Fast 50 index shows, and other high profile companies highlight, the art of successful business model innovation is capable of providing much greater returns than traditional models of innovation.

Post Script:

This photo highlights the consequences of failing to address business model evolution. The boarded up Virgin store next to the gleaming Apple store in San Francisco is a poignant reminder of what can happen if you don’t challenge and innovate your business model, especially in light of new technology and changing consumer access to information and products.

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§ One Response to Why business model innovation is critical

  • Karl Crawford says:

    Totally agree but not that easy to do. First step in my mind is to critically evaluate the dominant business model in any industry and look for opportunities to innovate. Having a reasonable handle on business models that are working in other industries and thinking how to apply them to your industry is a good start. One I like in the food and beverage sector is graze (http://www.graze.com/) a technology business model for food – very innovative!

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