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).

6 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?

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