Four Paths to Business Model Innovation
July 2014 Issue (Harvard Business)
Business model innovation is a wonderful thing. At its simplest, it demands neither new technologies nor the creation of brand-new markets: It’s about delivering existing products that are produced by existing technologies to existing markets. And because it often involves changes invisible to the outside world, it can bring advantages that are hard to copy.
The challenge is defining what business model innovation actually entails. Without a framework for identifying opportunities, it is hard to be systematic about the process, which explains why it is generally done on an ad hoc basis. As a result, many companies miss out on inexpensive ways to improve their profitability and productivity.
In the following pages we present a framework to help managers take business model innovation to the level of a reliable and improvable discipline. Drawing on the idea that any business model is essentially a set of key decisions that collectively determine how a business earns its revenue, incurs its costs, and manages its risks, we view innovations to the model as changes to those decisions: what your offerings will be, when decisions are made, who makes them, and why. Successful changes along these dimensions improve the company’s combination of revenue, costs, and risks.
What Mix of Products or Services Should You Offer?
Uncertain demand is a challenge all businesses face and is in most cases their major source of risk. One way to reduce that risk is to make changes to your company’s mix of products or services. In finance, if you have two portfolios offering a 20% return, you choose the less risky one, because it will create more value over time. The same is true with product portfolios.
Companies looking to recalibrate their product or service mix have essentially three options:
In October 2010 Bloomberg Businessweek ran a cover story with the sensationalist title “What Amazon Fears Most.” The article profiled Quidsi, a relatively small New Jersey–based internet start-up cofounded by Marc Lore (a former student of ours) and best known for its main venture, the online retailer Diapers.com.
Diapers would appear to be a terrible product to sell on the internet. They are bulky and expensive to ship, and they have low margins because everyone—from convenience stores to Costco—sells them. But diapers have one thing going for them: Demand is highly predictable—birthrates are stable, and infants pee and poop constantly over an extended period of time. Also, product variety is limited, because there are only three or four major diaper manufacturers, and diapers come in just a few sizes. Given that every newly acquired customer will use the product repeatedly for two years or more, the company can count on a steady revenue stream with little or no risk for a long time to come…………….