What Is Business Model Innovation?

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Creating new business models can be just as effective and profitable as inventing a new product or technology.
Creating new business models can be just as effective and profitable as inventing a new product or technology. (Image: business image by peter Hires Images from Fotolia.com)

Business model innovation describes the innovative processes and rationale of how an organization creates, delivers and captures value as opposed to how to create a new product or service. For example, Google rose to power using business model innovation. Google didn’t invent the Internet and computers, it simply used the those tools to engineer new search engine business models. The new search engine business models created a new value proposition for the general and business public and, as a result, Google is one of the most profitable companies in history. Google is not the only company. According to Innosight.com in 2010, "over the last 10 years, 14 of the 19 new entrants into the Fortune 500 owe their success to business model innovations that have either transformed existing industries or created new ones."

Why Business Model Innovation

With the Internet and other collaborative technologies, remotely located independent contractors or consultants can interact and collaborate as if they were co-located in a downtown skyscraper. As a consequence, new business models are evolving and coming to life every day. Competition is now global, which requires companies to maximize the use of the Internet and collaborative technology to compete effectively in the new global market place. Companies must rise above old entrenched business processes and embrace new ways of thinking and doing business. The bottom line: Companies must embrace business model innovation

The Process

Business model innovation processes can be approached in any number of different ways as long as sound business principles remains intact. These sound business principles are framed by four core business principles:

Customer Value Proposition: Create new and unique value for the customer;

Profit Model: Make a profit

Key Resources: Secure the resources required to deliver the customer value proposition; and

Key Processes: Identify the core business processes required to deliver the value proposition.

Think of these four areas as a picture frame for the business model innovation process, where it's up to the company to paint the picture within the frame.

Facts

Over the years, business model innovation activities and processes have forced many companies to embrace "open business models." This is where companies share ideas and intellectual property, and collaborate with other companies in an effort to innovate fast and compete in the global marketplace. This fact changes the old paradigm of keeping ideas and intellectual property a secret. According to UC Berkeley, "companies that keep their intellectual property too close to the vest risk missing out on critical business innovations that idea-sharing could generate."

Conceptual Considerations

Most people naturally equate the word innovation to the word invention. The word invention is analogous to entrepreneurs in the garage or large corporations funding research and development projects toward inventing a new product, gadget or technology. If a company can increase sales and profits by changing the business model around an existing product or technology, that's innovation. Moreover, according to UC Berkeley, "it's about business model innovation as much as product." Understanding this distinction is critical in understanding business model innovation.

Cost and Profit Considerations

Cost considerations vary widely. However, in a general sense, business model innovation can be accomplished at much less cost compared with inventing a new product or technology. This is because business model innovation often involves changing a business process around an existing product or technology as opposed to the hard cost associated with having to invent and test a new product or technology. For example, inventing a product or technology often requires large amounts of capital to research, field test and distribute prior to generating a profit. On the other hand, business model innovation can be as simple as outsourcing the accounting department to India as opposed to employing and staffing it in-house.

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