Systematically exploring alternative approaches to value creation can allow companies to find new opportunities for growth.

By systematically examining alternative business models, the tool manufacturer Kennametal was able to develop new service-based offerings.

Image courtesy of Kennametal.

Organizations traditionally pursue growth via one or more of three broad paths:

  • They invest heavily in product development so they can produce new and better offerings.
  • They develop deep consumer insights in order to offer new and better ways to satisfy customers’ needs.
  • They concentrate on strategy formulation to grow by acquisition or by moving into new or adjacent markets.

Each of these paths usually involves devoting considerable time and resources to developing a corresponding organizational competency. For example, to build product capability, companies typically invest in in-house research and development departments and/or technology-sourcing expertise. Establishing customer insight capability often requires creating in-house market research units and implementing robust feedback links between the sales force and the developers of product or service lines. And creating a strategy capability generally involves setting up dedicated corporate strategy units and merger and acquisition groups or engaging consultants.

Recently, a fourth path has emerged, one that we might label “business model experimentation”: the pursuit of growth through the methodical examination of alternative business models. At its heart, business model experimentation is a means to explore alternative value creation approaches quickly, inexpensively and, to the extent possible, through “thought experiments.” The process sheds new light on potential competitors and lowers the risk of taking the wrong or a lesser-potential road — all for an initial investment that is typically quite small relative to what can be gained.

The Leading Question

How can your company explore business model innovation?

Findings
  • Create a template that allows you to examine alternative answers to key business model questions.
  • Use the template to systematically consider alternative approaches to value creation.
  • Be clear upfront about what you don’t want to change about the way you do business.

Research conducted in the last 10 years has established a link between business model innovation and value creation.1 To our minds, this research points to the need for organizations to build a competency in business model innovation — that is, in the process of exploring possible business model alternatives that can be pursued to commercialize any given idea prior to going out into the market and expending resources.

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References

1. See T.W. Malone, P. Weill, R.K. Lai, V.T. D’Ursio, G. Herman, T.G. Apel and S.L. Woerner, “Do Some Business Models Perform Better Than Others? “Working paper 4615-06, MIT Sloan School of Management, (Cambridge, Massachusetts, 2006) May 16; S.M. Shafer, H.J. Smith and J.C. Linder, “The Power of Business Models,” Business Horizons 48, no. 3, (2005): 199-207; E. Giesen, S.J. Berman, R. Bell and A. Blitz, “Three Ways to Successfully Innovate Your Business Model,” Strategy & Leadership 35, no. 6 (2007): 27-33; and M.W. Johnson, C.M. Christensen and H. Kagermann, “Reinventing Your Business Model,” Harvard Business Review, 86, no. 12 December 2008: 51-59. In a study of 1,000 of the largest U.S. firms, for example, Malone et al. called attention to the link and mapped out a comprehensive classification system that can be employed both to categorize and to develop business models. Shafer et al. described the benefits General Motors gained by employing business model innovation in the development of OnStar, and contrasted this success story with the narrow and less innovative approach employed to define the business model for eToys in the late 1990s. Giesen et al. examined 35 financially successful enterprises and outlined three distinct paths to business model innovation — industry, revenue and enterprise model innovation — that were at the core of their success. Further, Johnson et al. explored the stories of P&G, Tata, Hilti and Dow Corning to emphasize the financial and long-term competitive differentiation benefits that companies can achieve through business model innovation.

2. Johnson et al., “Reinventing Your Business Model.”

3. Shafer et al., “The Power of Business Models”; and M. Morris, M. Schindehutte and J. Allen, “The Entrepreneur’s Business Model: Toward a Unified Perspective,” Journal of Business Research 58, no. 6 (June 2005): 726-735.

4. J.V. Sinfield and S.D. Anthony, “Constraining Innovation: How Developing and Continually Refining Your Organization’s Goals and Bounds Can Help Guide Growth,” Strategy & Innovation 4, no. 6 (November-December 2006): 1, 6-9.

5. For more on conducting research into discovering such needs see, for example, C.M. Christensen and M.E. Raynor, “The Innovator’s Solution: Creating and Sustaining Successful Growth” (Cambridge, Massachusetts: Harvard Business Press, 2003); and S.D. Anthony and J.V. Sinfield, “Product for Hire: Master the Innovation Life Cycle With a Jobs-to-be-done Perspective of Markets,” Marketing Management 16, no. 2 (March-April, 2007): 18-24.

 

8 Comments On: How to Identify New Business Models

  • jim.kalbach | January 8, 2012

    Thank you for this helpful article. As a designer/ethnographer-turned-innovation-consultant, I quite appreciate the practical nature of your text, as well as the customer focus. Your summary of the three traditional paths for exploring growth as a springboard into business model innovation is a great way to explain the “why” of it.

    It’s curious, however, that you don’t mention Alexander Osterwalder’s business model canvas (BMC) as a potential tool (See: http://www.businessmodelgeneration.com/canvas). It really brings a business model to the point–a reduction sauce of sorts–which in turn focuses attention in the right direction. I’ve used the canvas in successfully in many workshops and highly recommend it. (Note: I’m not associated with Mr Osterwalder or the canvas in any way).

    I’d like to hear what you think of the BMC.

  • patrick.staehler | January 9, 2012

    It is quite amazing how narrow minded the authors are of the development of the concept of the business model concept outside and inside their narrow academic world.

    Think about the business model generation book by Alex Osterwalder. A tip to the authors: Just google the term business model canvas or business model innovation.

  • cpicos@prodigy.net.mx | January 9, 2012

    There are several ways to approach to a business models, the most recognized and useful in my point of view is Alex Osterwalder Canvas approach, recognized and adopted for thousands all over the world.
    I´m sure is a must to include Osterwalder´s Canvas when you are a Business Model Innovation Pro.

  • fgiones | January 11, 2012

    Nice to see passionate followers of Osterwalder’s business model conceptualization defending their mantra. Nevertheless, it is sad to say that despite how much we might like the beautiful and useful design approach of business model generation this is just a management fad, meaning that we do not have yet a method for new business model generation that provides superior results (performance), we just have a nice tool that helps some of us.

    Therefore, the authors are free to cite articles that have been peer reviewed, and in which what is said is usually tested and contrasted. Osterwalder’s contribution to the advance of management is still in construction, some of us look forward providing more evidence-based support to otherwise subjective opinions.

  • karlburrow | January 12, 2012

    As a user and consultant, Osterwalder’s business model canvas provides a very simplistic and clear understanding of what a business model should focus on at a holistic view with some granular thought. Yes indeed as times passes more contribution in the advance management of this area is a work in progress. However we can hit the ground running with this concept/tool(BMC) and utilize it well as a management tool for thinking and visualization of business models. As well Mark Johnson’s concept on “Jobs to be Done” from the book Seizing the White Space”on Value Proposition for Customer Segments works well.

    I am sure over time recognition will follow.

    Just a thought.

    K

  • Kenneth Yu | February 2, 2012

    Yup. Agreed with Patrick and Jim, where’s the heck is the Business Model canvas? I find the business model identification outlined in the article far too academic and far less practical. I think business learning needs to be thrusted into the real world, don’t you think?

    And pretty pictures can help accomplish that. :)

    Best,
    Kenneth Yu
    http://www.spurpress.com

  • Shengzhou Wang | May 24, 2013

    I agree with the opinion of business model. Business model innovation is more important than product or technology innovation.

  • Ghislain Paradis | August 27, 2013

    Osterwalder’s proposal is very helpfull : It helps to have a global picture of the game. However, the academics’ contribution has to be included in our understanding of this “new” model. The general blocks proposed by Osterwalder are accurate, for sure. But the way he defines them has to be improved.

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