Many attempts at business model innovation fail. To change that, executives need to understand how business models develop through predictable stages over time — and then apply that understanding to key decisions about new business models.

Surveying the landscape of recent attempts at business model innovation, one could be forgiven for believing that success is essentially random. For example, conventional wisdom would suggest that Google Inc., with its Midas touch for innovation, might be more likely to succeed in its business model innovation efforts than a traditional, older, industrial company like the automaker Daimler AG. But that’s not always the case. Google+, which Google launched in 2011, has failed to gain traction as a social network, while at this writing Daimler is building a promising new venture, car2go, which has become one of the world’s leading car-sharing businesses. Are those surprising outcomes simply anomalies, or could they have been predicted?

To our eyes, the landscape of failed attempts at business model innovation is crowded — and becoming more so — as management teams at established companies mount both offensive and defensive initiatives involving new business models. A venture capitalist who advises large financial services companies on strategy shared his observation about the anxiety his investors feel about the changes underway in their industry: “They look at the fintech [financial technology] startups and see their business models being unbundled and attacked at every point in the value chain.” And financial services companies are not alone. A PwC survey published in 2015 revealed that 54% of CEOs worldwide were concerned about new competitors entering their market, and an equal percentage said they had either begun to compete in nontraditional markets themselves or considered doing so.1 For its part, the Boston Consulting Group reports that in a 2014 survey of 1,500 senior executives, 94% stated that their companies had attempted some degree of business model innovation.2

We’ve decided to wade in at this juncture because business model innovation is too important to be left to random chance and guesswork. Executed correctly, it has the ability to make companies resilient in the face of change and to create growth unbounded by the limits of existing businesses. Further, we have seen businesses overcome other management problems that resulted in high failure rates. For example, if you bought a car in the United States in the 1970s, there was a very real possibility that you would get a “lemon.

References

1. PwC, “2015 US CEO Survey: Top Findings — Grow and Create Competitive Advantage,” n.d., www.pwc.com.

2. Z. Lindgardt and M. Ayers, “Driving Growth with Business Model Innovation,” October 8, 2014, www.bcg.perspectives.com.

3. See D.A. Garvin, “The Processes of Organization and Management,” Sloan Management Review 39, no. 4 (summer 1998): 33-50. In discussing processes, we refer to all of the processes that Garvin identified in that article.

4. This business model framework was developed in 2008; see M.W. Johnson, C.M. Christensen, and H. Kagermann, “Reinventing Your Business Model,” Harvard Business Review 86, no. 12 (December 2008): 50-59.

5. For more information about organizational capabilities, see C.M. Christensen and S.P. Kaufman, “Assessing Your Organization’s Capabilities: Resources, Processes, and Priorities,” module note 9-607-014, Harvard Business School, Boston, Massachusetts, August 21, 2008, http://hbr.org.

6. See E.H. Schein, “Organizational Culture and Leadership” (San Francisco, California: Jossey-Bass, 1985).

7. It’s worth noting that startups typically begin with one business unit, which is the company. Then as the organization grows, companies typically create corporate offices and business units that separate responsibility for the administration of the organization from the specific business. Today, managers tend to operate lean corporate offices that often function as thin veneers between the business and investors, but we believe that there is a vital role for the corporate office in leading business creation and developing innovation.

8. P.F. Drucker, “The Practice of Management” (New York: Harper & Row, 1954).

9. For a more complete treatment of jobs to be done, see C.M. Christensen, T. Hall, K. Dillon, and D.S. Duncan, “Competing Against Luck: The Story of Innovation and Customer Choice” (New York: HarperCollins, in press).

10. W. Shih and M. Pierson, “Boeing 737 Industrial Footprint: The Wichita Decision,” Harvard Business School case no. 612-036 (Boston, Massachusetts: Harvard Business School Publishing, 2011, revised 2012).

11. S.C. Wheelwright and K.B. Clark, “Creating Project Plans to Focus Product Development,” Harvard Business Review 70, no. 2 (March-April 1992): 70-82.

12. Authors’ teleconference with David L. Morse, executive vice president and chief technology officer, Corning Inc., March 8, 2016.

13. J. Gans, “The Disruption Dilemma” (Cambridge, Massachusetts: MIT Press, 2016).

13 Comments On: The Hard Truth About Business Model Innovation

  • Rob Halkes | September 14, 2016

    Great article. and so applicable to the pharmaceutical industry!
    Thx!

  • Giovanni Bastidas | September 14, 2016

    Great Article, ideal for Strategic Planning in several industries..

  • SYUKRI LUKMAN | October 6, 2016

    This article adds to my understanding of the importance of business models and innovations in the formulation and execution of strategic planning. Good article and needs to be read by CEO and corporate planners

  • Mikko Ruohonen | October 7, 2016

    Thanks for this good article, but what about business model innovation in software product industry. We (KBC Saxena, Swanand Deodhar and me) recently published a book on that, see Springer

    http://www.springer.com/us/book/9788132236504

    In digital environment there are more opportunities to go for a bazaar-mode in which you can make hybrid versions of your previous and new business models.
    Cheers
    Mikko Ruohonen, prof.

  • Michal Kusak | October 11, 2016

    Great article indeed. I prefer business model scheme and its components presented in Allan Afuah’s Business Model Innovation – customer value proposition, market segments, revenue model, growth model and capabilities (resources and capabilities as a “glue” inside) – as it distinguishes the growth component that should be considered at the very beginning , but the principle is the same.

  • Jean Létourneau | November 4, 2016

    Very interesting article, thank you! I would have like that the authors would have gone a step deeper…to question why fundamentally are business model evolving this way? The real question is, is it the business model the real issue or is it the measurement system? How we measure success?
    It appears to me that by reading this, as managers are running out of creative ideas, they are going to easier and easier ways to find and get results… and improve financial ratios to stay as long as possible in the game! So, would the business model grow older, wiser, if it would not have to play a bunch of games to appear to please shareholders?
    If how we measure success would be based on the real value creation fundamentals, would these games would still have to be played or could the managers could be judged really by their skills at getting thejob to be done?

  • John Dobbs | December 16, 2016

    Excellent Article! It’s always nice to see concepts grounded in research. Our experience suggests that failure to objectively assess the strength (or weakness) of a firm’s business model(s) can be a critical failure in the process of strategic planning.

    In our book, “Strategic Planning – A Pragmatic Guide,” after defining what we believe constitutes a business model, we address the concept of business model balance. Our analysis of key players in a major industry leads us to conclude that business model success over time literally depends on the ability to balance between growth, repeatability and profitability — as these elements are in turn constrained by financial capacity, execution capacity and market opportunity. As it turns out, single firm in the studied industry was able to accomplish such business model balance.

    John H. Dobbs
    John F. Dobbs

  • pete randall | January 25, 2017

    Terrific article thankyou.

    I do have concerns with many articles obsessed with ‘efficiency,’ as though it is the ‘golden orb’ for winning customers.

    Many efficient businesses go out of business because they are no longer effective in pursuit of their expected outcomes.

    Efficiency is important in an end to end customer journey, but it isn’t very effective when competing for new customers.

    Effectiveness is the only measure of success if a company is to stay in business.

  • Colin Disley | January 29, 2017

    Excellent article, thank you, and one that has provided me with some very useful perspectives on some past failures and successes that I have been involved in. With regard to your statement that you have not yet found a company that has built an enduring business creation engine, could you help us understand why you believe Virgin has not achieved this?

  • Kheepe Moremi | April 19, 2017

    The strength of this piece on business model innovation is its dynamism and its visualization of business model innovation over time and across all the different phases of a business model’s evolutionary cycle.

  • curtis laird | April 27, 2017

    It seems telling that the authors admit that, “to date no company we know of has built an enduring capability like” a “business creation engine capable of turning out a steady stream of innovative new business models.”

    One wonders why not, in light of the ocean of theories, studies, and continuous business activity of countless businesses all over the world? Ecclesiastes wrote that there is nothing new under the sun. Could it be because the idea itself is not feasible or practical?

    Could it be that the idea is called variously a “business creation engine,” “event,” “process,” and “discipline,” which suggests that even the authors don’t know what it is they are trying to describe?

  • brucestarcher | May 2, 2017

    One of the better articles on Business Model Innovation I have read. There are however some gaps in the article based on my 15 years experience working with Business Models.

    Job to be done vs Customer Value Gap. The application of job to be done is best left to experience design as it lacks one significant component: Is the customer willing to pay for that job. The concept of Customer Value Gap that I use in my Business Model work looks for gaps in experience where the customer is willing to pay. The more intense the Customer Value Gaps, the more value can usually be extracted. I wrote an article entitled “No Customer Value Gap? No Business Model” to talk about this.

    https://www.linkedin.com/pulse/customer-value-gap-business-model-bruce-starcher

    Business Unit vs Business Model. In my 15 years of practicing Business Model work, it is more often the case that there are multiple Business Models within a Business Unit. One example company has 2 Business Units and 6 Business Models. And they are not well aligned. The challenge of course is that it is very difficult to manage multiple Business Models within a single Business Unit.

    Business Model Evolution. Business Models evolve over time, from inception to death. There are in fact more than 3 stages as there is a parallel between Business Lifecycles and Business Model lifecycles. And the Business Model has to be managed differently at each stage. One of the failures modes that I have seen and I coach many start ups as part of my volunteer work, is that there is no capability to evolve the Business Model and often no capability to define the starting Business Model. Hence the challenge. I wrote an article a while ago on Business Model Lifecycles …

    https://www.linkedin.com/pulse/manage-your-business-model-across-lifecycle-bruce-starcher

    The article touches on Business Model Innovation and Evolving the Business Model. I would like to provide some additional thoughts on what is really Business Model Innovation and what is Business Model Evolution. There is a big difference.

    https://www.linkedin.com/pulse/demystifying-business-model-innovation-bruce-starcher

    One area that was not discussed is metrics. How do you know that your Business Model is functioning at its peak and when is it not. The best metric I have found is Market Value. When Market Value is increasing, the Business Model is in the growth phase of its lifecycle. When Market Value is flat, you have reached the plateau and when Market Value is declining, the Business Model is losing its relevance. Here is some additional information:

    https://www.linkedin.com/pulse/what-your-market-value-story-ask-business-model-bruce-starcher

    Finally, there is a need to talk about the Context within which a Business Model exists. One shortcoming I see is looking at the industry vs the ecosystem. With globalization and digitization, industry boundaries have eroded and ecosystems have become more relevant. It is also ever more important to understand the full range of Business Games and Business Models that are played within an ecosystem. This work I call Market Context and here is an example in the Market Research Ecosystem.

    https://www.linkedin.com/pulse/business-market-research-bruce-starcher

    Great article though. Bruce

  • Kheepe Moremi | May 22, 2017

    Bruce,
    Same idea, different illustrations.

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