We need to switch to thinking in terms of a business model

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What happens when an opportunity arises outside a company’s core business? An opportunity to serve an entirely new customer, or to serve an existing customer in a radically new way? What happens when there is an opportunity to create an entirely new market or to significantly transform an existing one?

Many of these opportunities, even the ones that at first glance seem quite different from the current business, fit quite well with the existing business model and are thus called adjacencies. However, some require the company to fundamentally change its operations from the ground up, to adopt a different mechanism for monetizing, require a new set of resources and processes, new skills, and perhaps a new way of coordinating and controlling activities. When such an opportunity arises, when the delivery of new value to the marketplace requires us to rethink all or some of these components, we are potentially embarking on a business model innovation.

Business models, particularly business model innovations are important because they are a source of opportunities for established companies. They are also important because they have consequences for the bottom line. Business model innovation refers to the conceptualization and implementation of new ways of doing business to better address the improperly satisfied needs of customers and/or users, or other market stakeholders, such as providers.

The problem is that as a rule, managers often do not pay enough attention to business model design. Instead, they focus on more conventional strategic choices, such as which market segments to serve, how and when to penetrate selected markets, and how to compete in those markets. In fact, business model design is not always thought of as a key strategic option, as it is assumed to be a given. In other words, managers accept their industry’s business models without questioning them.

So, the business model as a concept is not the first thing that comes to a manager’s mind when thinking about the future. They tend to focus on what they are cognitively familiar with (such as the product market strategy options within well-known and established business models), simply because it is easier for the human brain to build a connection to this, yet this may potentially make room for mental blind spots. Since managers do not pay enough attention to these blind spots, they are unaware of their existence.

When talking about innovation in a company, company leaders must ensure that managers or employees who want to innovate do not just focus on their company’s products and services, or management processes, but also think about new creative ways of conceiving, producing, delivering, and consuming the company’s products and services. In short, managers and employees must adopt a business model mentality; they must think in business model terms to recognize and take advantage of the possibility that innovation can occur at the business model level, in addition to innovation at the product/service level.

As the term “mindset” implies, once a mind is fixed on something, it is fairly fixed and rarely subject to change. Mindsets are difficult to alter. This is not surprising because their mission is to make cognitive processes more efficient by simplifying a complex reality, filtering out information noise, and enabling connections with existing knowledge. Consequently, discrepancies in (even if potentially significant) information are ignored, data gaps are filled with standard information, and mental models are hardly ever reviewed. As a result, it is possible to fall into one of the following two traps:

  1. The trap of focusing on the product, technology, or process as the source of innovation, rather than on the business model, which requires a more holistic, system-level perspective.
  2. The trap of taking the business model as a “given” and following a dominant model, such as the most familiar and prevailing business model in an industry.

So far, it has been argued that adopting a business model mindset is crucial for successful business model innovation. A business model mindset often involves shifting away from thinking in terms of the product towards thinking in terms of the business model. This is not necessarily intuitive for managers and employees (like R&D workers) who have spent much of their working lives tackling product and technology-related problems.

A mindset shift can be facilitated through clear communication and targeted training. Top management must send a strong message to raises awareness on the importance of the issue.

Top management should also support specific training measures, such as workshops that explain and illustrate what a business model is, why it is important, and more. These workshops can also convey examples of business model innovations within the company’s own sector or in completely different industries.

Besides these immediate and tactical measures, leaders can also take longer-term strategic actions to foster and establish a business model mindset among their employees.

In short, business model innovations are a source of opportunity and have consequences for financial performance. However, to reap the benefits of this kind of innovation, it is essential to move beyond the logic inherited from the industrial revolution and think in terms of the business model.

Bibliography:

Amit, Raphael; Zott, Christoph. Business Model Innovation Strategy. Wiley.

Johnson, Mark W. Reinvent Your Business Model. Harvard Business Review Press.

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