Reframing Your Big Picture: Business Model Innovation
As I explain in my book Built to Innovate, the most important role that senior leaders can play in making their organizations into powerful innovators is to become “reframers in chief”—advocates, cheerleaders, and role models for the process of rethinking the way the organization operates. When C-level leaders publicly participate in questioning the basic assumptions that guide the company’s operations, they are giving permission to people throughout the organization to engage in the same kind of questioning. That can lead to some remarkable forms of innovation.
One of the most significant kinds of reframing that companies should be considering is business model innovation. This is a level of innovation that goes beyond simply creating new products and services to benefit your customers, or making your processes more efficient and productive —important as those forms of innovation are. Business model innovation involves rethinking the basic structure of your business—the customers you serve, the forms of value you create for them, the scope of your activities, and the ways in which you generate profits for yourself and your stakeholders.
In today’s world, changes driven by technological advances, demographic shifts, social and political trends, economic forces, and competitive challenges are happening more frequently and more quickly than ever. Many companies are finding that the effectiveness of their traditional business models is rapidly eroding. In such a world, business model innovation is not just a nice idea—it’s an imperative.
The first step in business model innovation is to understand the nature of your current business model as well as the alternative models you might consider adopting. The design of your business model determines how you make money, your key sources of competitive advantage, and your potential opportunities for growth. Analyzing these factors helps you understand the present status of your business as well as its future outlook—and helps you discover ways you might innovate to create a more powerful business model.
An organization that has made business model innovation into a science is BASF, the German-based chemicals giant. Strategists at BASF have studied their own operations as well as those conducted by dozens of other corporations in a wide range of industries. They’ve mapped the structures of some 45 different business models used by these businesses—of which about 30 are already in use by one or another division within BASF.
Business models vary widely. In some business models, the production and sale of high-quality products is the crucial form of value-creation; in others, specialized services tailored to the needs of particular customers represent a key source of competitive advantage; in still others, the core organization creates value primarily by managing a platform through which the goods and services of a wide range of outside organizations can be efficiently traded.
Which business model is best for your organization? That’s a complex question, whose answer depends on a host of factors, including your organization’s unique resources and capabilities, the emerging needs of customers, and the current shape of the competitive landscape.
Sometimes you can discover an opportunity for business model innovation by identifying a pain point in your current way of operating. BASF once provided paints and other coating materials to auto makers as a simple commodity business. Over time, the profit generated by this business steadily eroded under pressure from other companies, which found it a relatively easy matter to manufacture paints of equal quality and sell them at competitive prices to BASF’s existing customers.
To remedy the problem, BASF shifted its business model. Starting with one of its major customers—the auto maker Mercedes-Benz—BASF began developing a new array of competencies around optimizing the painting and coating processes for cars. They stationed employees at Mercedes factories and studied the strengths and weaknesses of their operations. Over time, they began offering ways to improve both the processes used in the factories and the characteristics of the coating products they provided, leading to gains in terms of efficiency, sustainability, durability, and price. The result—a win/win for both BASF and its customers.
Business model innovation, then, can be a major source of growth for almost any organization. But be aware that experts like those at BASF say that thoroughly transforming the business model of an existing company is a complicated process that can take five to ten years, or more.
Is it worth it? Yes! In some cases, the timely reimagining of a business model can take a company in long-term decline and give it a powerful new lease on life. So if your organization hasn’t recently taken a close look at its current business model with an eye toward identifying possibility opportunities to innovate, the time to get started is now.