Business Model Innovation (BMI)

Business Model Innovation is about fundamentally rethinking your business around a clear—though not always obvious—customer need, then realigning your resources, processes, and profit formula with this new value proposition. It's not easy and can take decision-makers out of their comfort zones. But the results can be dramatic.[1]

The Relevance of Business Model Innovation (BMI)[2]

Business Model Innovation is especially valuable in times of instability. BMI can provide companies with a way to break out of intense competition, under which product or process innovations are easily imitated, competitors' strategies have converged, and sustained advantage is elusive. It can help address disruptions - such as regulatory or technological shifts - that demand fundamentally new competitive approaches. BMI can also help address downturn-specific opportunities, enabling companies, for example, to lower prices or reduce the risk and cost of ownership for customers. In most cases, the companies that flourish in downturns do so by leveraging the crisis to reinvent themselves = rather than by simply deploying defensive financial and operational tactics. Moreover, during times of crisis, companies often find it easier to gain consensus around the bold moves required to reconfigure an existing business.

How does business model innovation differ from other types of innovation?[3]

Unlike other types of innovation, changes to the business model require changes to the foundational decisions upon which the business operates. Therefore, business model innovation will likely be radical, and in many cases, transformational. Most innovation is incremental, such as product innovation, where technology enhancements are routinely included in product updates as a way of increasing performance or reducing costs. Changing the business model design brings much higher risk due to the potential for disruption to the current business. For large businesses, recognizing and managing this kind of transition can be critical to long-term survival. Start-up businesses have the advantage since they can iterate and adapt their business model as they are in the process of an initial business model design. This suggests why many disruptive innovations may come from start-up businesses or small isolated teams in established businesses.

The Cambridge Business Model Innovation Process (CBMIP)[4]

The Cambridge Business Model Innovation Process (see figure below) is a framework developed to guide organizations’ business model innovation efforts and map the necessary activities and potential challenges. The CBMIP is both descriptive, in showing how business model innovation happens in practice, and prescriptive, in providing guidance on how sustainable business modeling should ideally be carried out in organizations. The process is typically cyclical or repetitive, i.e. once completed, most organizations will repeat it at some point to adapt or to react to changes in their industry and environment. The approach consists of eight sequential but iterative phases or steps; which means that while the organization is roughly following the process step by step, it may also go back and forth in the process, repeating and omitting stages according to its requirements and limitations. The steps are:

  1. Ideation: The purpose of the business model innovation and its key stakeholders are defined, and the value proposition and first conceptual ideas are ideated.
  2. Concept design: A first rough conceptualization of the key business model elements is developed and documented.
  3. Virtual prototyping: A range of prototypes is generated and revised to refine and communicate the business model concept. The phase also comprises benchmarking with solutions and concepts from other parties.
  4. Experimenting: Key assumptions and variables of the concept are tested in simulations and field experiments, ideally through randomized controlled trials.
  5. Detail design: An in-depth analysis and detailing of all the elements of the business model and interactions between these elements is conducted.
  6. Piloting: The entire concept is tested by running a first limited version of the business model in a subsection of the target market.
  7. Launch: The business model is rolled out across all responsible organizational units and the target market.
  8. Adjustment and diversification: The business model is revised according to initial plans, expectations, and strategic fit. Based on this evaluation, adjustments and diversifications are made, and depending on the comprehensiveness of the necessary changes, the entire business model innovation process may be repeated.

The Cambridge Business Model Innovation Process (CBMIP)
source: Procedia Manufacturing

Examples of Business Model Innovation[5]

  • Google: While Google is commonly viewed as a search company, what made Google Google was figuring out how to parlay its search technology into a highly disruptive advertising model by which companies bid to tie their advertising to specific search terms. In recent years the company’s free, flexible Android operating system – a stark contrast to the closed, proprietary systems that historically dominated the industry – has helped new competitors like Samsung from South Korea and ZTE from China offer devices that are both low-priced and highly functional.
  • Amazon: Amazon continues to be the world’s best example of a serial business model innovator. Its core e-retailing model, with its hyper-efficient supply chain, turned the retail world on its head. It has subsequently launched three successive disruptive business models. Its Prime subscription model now provides close to $1 billion in revenue. With its Kindle e-reading platform, the company happily sells low-cost devices and makes money on content. And through its Amazon Web Services business, it has built a multibillion-dollar business by turning its internal technology prowess into a powerful cloud-computing service.

For organizations looking to innovate or redefine their Business Models, applying principles from the AFI Strategy Framework can provide a structured approach to explore new opportunities. This framework supports the strategic analysis and formulation processes necessary for successful business model innovation.

See Also


Further Reading