The 8 Steps of Business Model Innovation

In a previous post I suggested a definition of Business Model Innovation and described the process of 8 steps executives can use to understand the key drivers of business model innovation, and to apply them to develop business model innovations of their own. In this post I'll explain a little bit about these 8 steps.

1. The Business Model Universe
2. The External Drivers of Change
3. The Customer Experience Model
4. Core and Edge Markets Analysis
5. Market Leader Analysis
6. Competitor Analysis:  Jobs to Do
7. Who Innovates?
8. Putting it All Together: The Complete Business Model Innovation Master Plan

1.  The Business Model Universe

Perhaps surprisingly, there are only four possible approaches to business model innovation, and they can be mapped very nicely in a single diagram.  We use this diagram to explain the patterns of economic change and the structure of industry competition across a wide cross section of the economy, including air travel, autos, banking, entertainment, fashion, financial services, fmcg, media, retail, technology, and many other B2C and B2B industries.The model is extremely important when people develop new business model ideas because it gives them a simple way to test the essence of a concept and see if it actually makes sense.

2.  The External Drivers of Change

There are four key economic drivers upon which nearly every business model innovation of the last 30 years has been built:Digitization, the shift to the digital world for all forms of information and entertainment, as well as for product design, manufacturing, logistics management, communication, and collaboration.Commoditization, the use of technology to drive prices down across the entire spectrum of economic activity, affecting not only mass market products, but also luxury brands.Globalization, the sourcing of goods and services from the cheapest possible providers worldwide.Acceleration, the combination of the 3 previous factors to speed up the economy, and put tremendous pressure on the existing business models of every established firm.And now over the last five years a fifth new driver has emerged:Socialization, which has two dimensions.  First is the increasing prevalence of online social networking platforms that influence the needs, desires, attitudes, and choices of millions of people.  Second is the expansion of creative content production to everyone, and its accessibility through platforms such as YouTube.All successful new business models factor these five drivers into their plans.

3.  The Customer Experience Value Matrix

The design of a successful new business model is always based on one key factor:  the customer experience.It’s essential that innovators build a clear understanding of the customer experience into their designs, and to help them we have developed a way to visualize the value propositions that are embedded in any business model.

4.  Core and Edge Markets Analysis

Most executives are accustomed to looking for opportunities from the “inside out,” meaning that they come at the question of growth from the perspective of their current core business.  But that is rarely where new opportunities emerge.  Instead, they come from outside, from the edge, where entrepreneurs are experimenting with new ideas, new services, new products, and new kinds of offers.  Executives and innovation teams need to learn to search on the edge for their future business models, because 99 times out of 100, that’s where they’ll emerge first.Questions like these can stimulate the right kind of thinking:

• For your business, what’s the core, and what’s the edge?
• Identify the ten most significant innovations that have come to your industry in the last ten years, and pinpoint the source.  Was it core or edge?

5.  Market Leader Analysis

How did “they” do it?We have developed a series of worksheets to help executives understand what the market leaders have done to get where they are.  We look at companies such as Southwest Airlines, Apple, Home Depot, and Wal-Mart to learn from their experiences.

6.  Competitor Analysis:  Jobs to Do

Why hasn’t anyone else come up with this business model yet?  Perhaps because they’re busy running their existing business, and they haven’t recognized the threat.  The essence of what they don’t yet understand is that the customer’s definition of the “job to be done” may be changing, or it may be changeable, and this provides the opening that the innovator will exploit to articulate a better value proposition, gain market share, and grow profits.If the incumbent players in any market have lost sight of the real jobs to be done, and they focus excessively on their own particular solution, this leaves them vulnerable to innovation.

7.  Who Innovates?

Where do the insights come from that make business model innovation possible?  In most cases, it is neither the “insiders” not the “outsiders” who forge the insights that lead to a breakthrough business model.Instead, it’s the two groups working together.  Sometimes one individual can possess both viewpoints, but more commonly this is done by carefully designed innovation teams of insiders and outsiders who work together to create the innovation culture.

8.  Putting it All Together:  The Complete Business Model Innovation Master Plan

By working carefully through the steps described above, new business model concepts that are ready for presentation and analysis will emerge.When the concepts are compiled, the resulting Master Plan will address all three critical issues:The Economic Model will explain why the new business model offers significant advantages over existing ones.  It will show the old and new models in the Business Model Universe, and will address each of the 5 key drivers.The Operations Model will show how the organization is going to be designed and run to deliver a unique and differentiated experience to customers.The Brand Identity will convey the distinct advantages of the business model to customers.What’s the result?  What every senior management team and board of directors is asking for:  excellent investment options sourced from within.In this case, the intent is to develop robust new business model concepts, well thought out, fully articulated, and ready to be added to a vibrant Innovation Portfolio and evaluated as possibilities for investment.