Business Model Innovation

There has been a lot of talk lately about companies needing to revamp or create a existing or new business model.  From the Big 3 automakers need to rearchitect their 50-year old business model to Procter & Gamble.  But this is easier said than done.  Reinventing a business model is a very time-consuming and complex endeavor.  With that said, it can be done and should be done to maintain and/or increase your company’s competitive advantage.

An interesting statistic I read recently was that “fully 11 of the 27 companies born in the last quarter century that grew their way into the Fortune 500 in the past ten years did so through business model innovation.”  That is an impressive fact.  So why aren’t more executives taking a harder look at their companies ability to maintain competitive advantage?  The fact is that most are.  A 2005 survey by the Economist Intelligence Unit found that over 50% of executives believe that “business model innovation will become even more important for success than product or service innovation.”

The big question I’ve been asking myself in the past few months has been “what is GM/Ford/Chrysler doing to rearchitect their antiquated business model?”  The more I think about it, the more I can understand that I think these companies are so big that they will have to be very creative in the way they build this new business model for the 21st century and beyond.  That is a completely different conversation that I’ll work on for a later post.

For everyone else in the world, why is it so difficult to rebuild or create a new business model?  Some of the reasons that it’s often very difficult to pull off a new business model is that there really isn’t a sense of the processes into business model creation.  Nobody has really sat down and done a true study into what it really takes or has defined it.  Secondly, is that most companies don’t have a good understanding of what their existing business model is.

There are three tenets that, I think, must be followed to create a new business model:

1. Your customer value proposition.  Every successful company creates value for customers.  They provide a way for their customers to get a “job” done.
2. Your profit formula:  the core of why people are in business.  This formula is how the company creates value for itself, while creating value for the customer.  The formula consists of models like, the revenue model, cost structures, margin models, and resource velocity.
3. Your key resources and key processes.  Key resources would be your people, technology, products, etc.  The key resources are the ones that would create value for the customer, not the generic resources.  Key processes are those managerial and operational processes that allow you to deliver value in ways that are repeatable and scalable, like training, planning, sales, etc.

With these elements you have the building blocks for any business.  Your customer value proposition and the profit formula will define the value for your customer and the company.  Key resources and key processess will describe how that value will be delivered to both the customer and the company.

This is a simple framework, but the real power lies in its complex interdependencies of all the parts.  Any successful business will devise a more or less stable system in which these elements bond to one another in consistent and complementary ways.

~ by Michael Keen on December 6, 2008.