Companies often make substantial efforts to innovate their processes and products to achieve revenue growth and to maintain or improve profit margins. Innovations to improve processes and products, however, are often expensive and time-consuming, requiring a considerable upfront investment in everything from research and development to specialized resources, new plants and equipment, and even entire new business units. Yet future returns on these investments are always uncertain. Hesitant to make such big bets, more companies now are turning toward business model innovation as an alternative or complement to product or process innovation.
A recent global survey of more than 4,000 senior managers by the Economist Intelligence Unit found that the majority (54%) favored new business models over new products and services as a source of future competitive advantage. EIU analysts concluded that “the overall message is clear: how companies do business will often be as, or more, important than what they do.”1 And in a similar global study conducted by IBM, in which over 750 corporate and public sector leaders were interviewed on the subject of innovation, researchers found that “competitive pressures have pushed business model innovation much higher than expected on CEOs’ priority lists.”2 However, this level of interest may not have been too surprising given that the IBM study also found that companies whose operating margins had grown faster than their competitors’ over the previous five years were twice as likely to emphasize business model innovation, as opposed to product or process innovation.3 One CEO explained why his company’s focus on business model innovation had grown:
In the operations area, much of the innovations and cost savings that could be achieved have already been achieved. Our greatest focus is on business model innovation, which is where the greatest benefits lie. It’s not enough to make a difference on product quality or delivery readiness or production scale. It’s important to innovate in areas where our competition does not act.
1. “Business 2010: Embracing the Challenge of Change,” white paper, Economist Intelligence Unit, New York, February 2005, p. 9.
2. G. Pohle and M. Chapman, “IBM’s Global CEO Report 2006: Business Model Innovation Matters,” Strategy & Leadership 34, no. 5 (2006): 34-40.
3. Ibid., 36.
5. “Business 2010,” Economist Intelligence Unit, 10.
6. R. Casadesus-Masanell and J.E. Ricart, “Competing Through Business Models,” working paper 713, IESE Business School, Barcelona, Spain, November 2007.
7. R. Amit and C. Zott, “Value Creation in e-Business,” Strategic Management Journal 22, no. 6-7 (June-July 2001): 493-520.
8. C. Zott and R. Amit, “The Fit Between Product Market Strategy and Business Model: Implications for Firm Performance,” Strategic Management Journal 29, no. 1 (January 2008): 1-26.
9. C. Loch, C. Zott, A. Guttman, P. Jokela and D. Nahmias, “FriCSo (A): How to Translate a New Technology into a Business (Model),” case no. 608-025-1 (Fontainebleau, France: INSEAD, 2008); C. Loch, C. Zott, A. Guttman, P. Jokela and D. Nahmias, “FriCSo (B): Designing the New Business Model,” case no. 608-026-1 (Fontainebleau, France: INSEAD, 2008); C. Loch, C. Zott, A. Guttman, P. Jokela and D. Nahmias, “FriCSo (C): Executing the New Business (Model),” case no. 608-027-1 (Fontainebleau, France: INSEAD, 2008); and C. Zott, B. Biren and I. Bancerek “Webraska: Evolving with the Wireless Market,” case no. 802-008-1 (Fontainebleau, France: INSEAD, 2003).
10. E. Brynjolfsson and L. Hitt, “Intangible Assets and the Economic Impact of Computers,” in “Transforming Enterprise,” ed. W. Dutton, B. Kahin, R. O’Callaghan and A.W. Wyckoff (Cambridge, Massachusetts: MIT Press, 2004), 27-48.
11. See L. Applegate, L. Schlesinger and D. Delong, “Taco Bell, Inc.: 1983-94,” case no. 9-398-129 (Boston: Harvard Business School, 2001).
12. J. Santos, B. Spector and L. Van Der Heyden, “Toward a Theory of Business Model Innovation Within Incumbent Firms,” working paper 2009/16/EFE/ST/TOM, INSEAD, Fontainebleau, France, 2009.
13. We note in this context that although the “what” of the business model may change (i.e., what activities are included), the “what” of the customer offering (i.e., what product or service the customer buys) may or may not remain unchanged.
14. Amit and Zott, “Value Creation.”
15. S. Banerjea, R. Kahn, C. Petit and J. White, “Dare to be Different: Why Banking Innovation Matters Now,” executive brief, IBM Institute for Business Value, Somers, New York, 2006.
16. H. Chesbrough, “Open Business Models” (Boston: Harvard Business Review Press, 2006).
17. K. Nagayama and P. Weill, “7-Eleven Japan Co. Ltd.: Reinventing the Retail Business Model,” CISR WP 338 and MIT Sloan WP no. 4485-04 (Cambridge, Massachusetts: MIT Sloan School of Management, January 2004).
18. B. Stelter, “Group of Magazine Publishers Is Said to Be Building an Online Newsstand,” New York Times, Nov. 25, 2009, sec. B, p. 3; also see www.nextissue.com.
19. Amit and Zott, “Value Creation.”
22. A. Brandenburger and H.W. Stuart, Jr., “Value-Based Business Strategy,” Journal of Economics and Management Strategy 5, no. 1 (March 1996): 5-24.
23. C. Zott and R. Amit, “Business Model Design and the Performance of Entrepreneurial Firms,” Organization Science 18, no. 2 (2007): 181-199.
24. M.E. Porter, “Competitive Advantage: Creating and Sustaining Superior Performance” (New York: The Free Press, 1985).
25. F. Santos, “Toward an Entrepreneurial Theory of Boundaries: The Scalability of Firms in Nascent Markets,” unpublished manuscript.
26. Zott and Amit, “Business Model Design”; Zott and Amit, “Fit Between Product Market Strategy and Business Model.”
27. The McGraw-Hill Companies are active in the financial services, education and business information markets through leading brands such as Standard & Poor’s, McGraw-Hill Education and J.D. Power and Associates.