Business Model Innovation: What It Is And Why It’s Important

Industry Advice Business

Amazon launched in 1995 as the “Earth’s biggest bookstore.” Fast-forward 22 years, and that “bookstore” is now a leader in cloud computing, can deliver groceries to your doorstep, and produces Emmy Award-winning television series. 

The trillion-dollar organization has achieved this growth by being continuously willing to innovate upon its business model in order to address new challenges and pursue new opportunities. 

“Amazon is amazing at new business model development,” says Greg Collier, an academic specialist in Northeastern’s D’Amore-McKim School of Business and the director of international programs for the Center for Entrepreneurship Education. “They look at themselves from a customer-defined perspective.”

That approach has helped Amazon scale because rather than rely on one revenue stream or customer segment, the company continuously asks “What’s next?” This has allowed leadership to iterate on its business model accordingly, repeatedly experimenting with a process known as business model innovation.

As Amazon’s success demonstrates, this process can be incredibly exciting and impactful when you’re in control. However, when the need to innovate your business model is thrust upon you by outside forces, it can also feel quite disruptive. 

For instance, today, the novel coronavirus is causing tremendous shifts in both the national and global economy. Many companies are being forced to innovate and adapt their business models in order to meet these challenges, or else risk falling victim to these drastic changes.

Read on to explore what business model innovation is and why it is so important for businesses to be capable of change.

What Is Business Model Innovation?

A business model is a document or strategy which outlines how a business or organization delivers value to its customers. In its simplest form, a business model provides information about an organization’s target market, that market’s need, and the role that the business’s products or services will play in meeting those needs. 

Business model innovation, then, describes the process in which an organization adjusts its business model. Often, this innovation reflects a fundamental change in how a company delivers value to its customers, whether that’s through the development of new revenue streams or distribution channels.

Business Model Innovation Example: The Video Game Industry

Amazon is not the only company known for continuously innovating its business model.

The video game industry, for example, has gone through a number of periods of business model innovation in recent years, Collier says, by envisioning new ways in which to make money from customers.

When video games were first created, the consoles that housed them were expensive and bulky, which put them out of reach of most consumers. This gave rise to arcades, which would charge customers to essentially purchase credits needed to play the games. 

As manufacturing processes and technological advancements made it easier to create smaller, more economical units, however, companies like Atari took advantage of the demand by selling units directly to the customer—a massive departure from what had been the accepted practice.

More recently, game developers have had to undergo rapid business model innovation in order to meet the evolving demands of customers—many of whom want to be able to play their games right on their smartphones. 

Originally, many companies adjusted their practices in order to put their games in this format, charging consumers a subscription fee or making them pay to unlock new levels. Some of those businesses, however, were able to innovate their business models to make gameplay free to the end-user by incorporating in-app advertising or selling merchandise such as T-shirts and plush toys. This practice, they found, was able to dramatically increase their reach, while also bringing in substantial funds from consumers.

As Collier notes, “Competitors can easily change how they price.” That’s why it’s crucial for companies to consider how their products are being delivered.

The Importance of Business Model Innovation 

Business model innovation allows a business to take advantage of changing customer demands and expectations. Were organizations like Amazon and Atari unable to innovate and shift their business models, it is very possible that they could have been displaced by newcomers who were better able to meet the customer need.

Business Model Innovation Example: Blockbuster vs. Netflix

Take Blockbuster, for example. The video rental chain faced a series of challenges, particularly when DVDs started out selling VHS tapes. DVDs took up less shelf space, had higher quality video and audio, and were also durable and thin enough to ship in the mail—which is where Netflix founders Reed Hastings and Marc Randolph spotted an opportunity.

The pair launched Netflix in 1997 as a DVD-by-mail business, enabling customers to rent movies without needing to leave their house. The added bonus was that Netflix could stock its product in distribution centers; it didn’t need to maintain inventory for more than 9,000 stores and pay the same operating costs Blockbuster did.

It took seven years for Blockbuster to start its own DVD-by-mail service. By that point, Netflix had a competitive advantage and its sights set on launching a streaming service, forcing Blockbuster to play a game of constant catch-up. In early 2014, all remaining Blockbuster stores shut down.

“Blockbuster’s problem was really distribution,” Collier says. “DVDs inspired Netflix, and the technology change then drove a change in the business model. And those changes are a lot harder to copy. You’re eliminating key pieces in the way a business operates.”

For this reason, it’s often harder for legacy brands to innovate. Those companies are already delivering a product or service that their customers expect, making it more difficult for teams to strategize around what’s next or think through how the industry could be disrupted.

“Disruption is usually then done by new entrants,” Collier says. “Established organizations are already making money.”

Business Model Innovation Example: Kodak

By focusing solely on existing revenue streams, however, organizations could face a fate similar to Kodak. The company once accounted for 90 percent of film and 85 percent of camera sales. Although impressive, that was just the problem: Kodak viewed itself as a film and chemical business, so when the company’s own engineer, Steven Sasson, created the first digital camera, Kodak ignored the business opportunity. Executives were nervous the shift toward digital would make Kodak’s existing products irrelevant, and impact its main revenue stream. The company lost its first-mover advantage and, in turn, was later forced to file for bankruptcy.

Business Model Innovation Example: Mars

Mars started as a candy business, bringing popular brands like Milky Way, M&M’s, and Snickers to market. Over time, however, Mars started expanding into pet food and, eventually, began acquiring pet hospitals. In early 2017, Mars purchased VCA—a company that owns roughly 800 animal hospitals—for $7.7 billion. further solidifying its hold on the pet market.

“Mars looked at its core capabilities, which is what corporate entrepreneurship is all about,” Collier says. “It’s about looking at your products and services in new ways. Leverage something you’re really good at and apply it in new ways to new products.”

The Role of Lean Innovation

Implementing lean innovation is advantageous. Lean innovation enables teams to develop, prototype, and validate new business models faster and with fewer resources by capturing customer feedback early and often.

Collier recommends companies start with a hypothesis: “I have this new customer and here’s the problem I’m solving for him or her,” for example. From there, employees can start to test those key assumptions using different ideation and marketing techniques to gather customer insights, such as surveying. That customer feedback can then be leveraged to develop a pilot or prototype that can be used to measure the team’s assumptions. If the first idea doesn’t work, companies can more easily pivot and test a new hypothesis.

“This is a big part people forget to do,” Collier says. “Lean design allows us to rapidly test and experiment perpetually until we come to a model that works.”

Pursuing Innovation in Business

In addition to business model innovation, companies could also pursue other types of innovation, including:

  • Product Innovation: This describes the development of a new product, as well as an improvement in the performance or features of an existing product. Apple’s continued iteration of its iPhone is an example of this.
  • Process Innovation: Process innovation is the implementation of new or improved production and delivery methods in an effort to increase a company’s production levels and reduce costs. One of the most notable examples of this is when Ford Motor Company introduced the first moving assembly line, which brought the assembly time for a single vehicle down from 12 hours to roughly 90 minutes.

The choice to pursue product, process, or business model innovation will largely depend on the company’s customer and industry. Executives running a product firm, for example, need to constantly think about how they plan to innovate their product.

“When the innovation starts to slow down, that’s when firms should be thinking of and looking at next-generation capabilities,” Collier suggests.

If a company is trying to choose where to focus its efforts, however, the business model is a recommended place to start.

“Business model innovation is often more impactful on a business than product innovations,” Collier says. “It’s Amazon’s business model that’s disrupting the market.”

Innovation Doesn’t Always Come Easy

While the examples above demonstrate that innovation is an important part of running a business, it’s also clear that it doesn’t always come easy. Corporate history is littered with examples of companies that were unable to innovate when they needed to the most.

Luckily, there are steps that business owners, entrepreneurs, and professionals can take to become better suited to pursuing innovation when an opportunity appears. 

Learning the fundamentals of how businesses and industries change will prove to be instrumental in enabling you to carry out your own initiatives. Assess and dissect the successes and failures of businesses in the past, and learn how to apply these valuable lessons to your own challenges. 

This article was originally published in December 2017. It has since been updated for accuracy and relevance.