Business model innovation is a powerfully relevant concept for businesses at almost every level today. Companies big and small have seen the damage done to P & Ls by global competition, disruptive technologies, accelerated convergence, increased commoditization and growing customer power.
Unfortunately, many business strategists have tended to approach business model innovation from a vision-centric standpoint that does not bore down to the details of execution. Yes, it’s true that a business model is just a “model” or a mere representation of a more complex reality, but every model worth the name must express every essential attribute of the system it purports to represent.
In today’s business environment, it has become clear to management executives that organizational capability for executing a strategic design must be reflected in the model – at the time of strategy development.
A full list of dimensions to be considered in constructing a new business model can be seen below, with some exceptions these elements were first articulated in this form by Adrian Slywotzky, one of the most innovative business thinkers of today.
1. Customer Selection
Who is the customer your business model will target and serve? Which customer or customer segment will allow you to make a profit?
These are some of the questions that have to be asked and thought about rigorously and persistently until the facts (or polished intuition) yield a direction that projects to yield sustainable profits.
2. Value Capture Model
This dimension concerns the scope of your profit extraction from the products and services you offer to your marketplace. How many ways will you make your business system and your customer connection work for your bottom line? Will you depend solely on product sales? Or will your profits come from after-sale transactions, continuity income, licensing, or equity stakes?
There are very many possible combination’s for making the transaction that results in a happy customer also yield a CFO (your CFO).
3. Differentiation and Strategic Control
Effective and relevant differentiation (especially in the form of a USP) is the only solid foundation for an effective strategic marketing system. Your business design must contribute to a narrative of “clear and beneficial difference” within the minds of prospects, customers, and influential stakeholders. Beyond your differentiation and branding, your business design must have profit-protection embedded in it through dominance of strategic control points like cost advantages, established brands, value chain management, ownership of customer relationship and ownership of industry standards.
4. Scope of Offerings
The scope of offerings your company provides and segments it operates in will have a lot to do with your subsequent profitability. This area gives executives more power to create innovative new business designs than any other.
5. Purchasing and Cost Systems
Locking down advantageous purchasing arrangements can be the difference between a struggling company and significant profitability. Companies like Wal-Mart and the leading oil companies continually show the effectiveness of well-integrated, long-term relationships with vendors and suppliers. Companies with clear advantages in this area often fare far better during economic storms.
Obviously the decisions of whether to fully outsource manufacturing or integrate fully between buyer and supplier have serious implications for the business model used by manufacturers. Some manufacturers (like Nike) have come to realize that the profitable areas of their business are in the “information-based” design and marketing segments, and have outsourced manufacturing as a result.
7. R & D and Innovation
Will continuous innovation be ensured through licensing arrangements or through strategic partnerships? What will are the costs-benefits of bringing R & D fully in-house? Will the company be the innovation leader or just plan to acquire companies with promising innovations?
8. Market Channel Mechanism
Hopefully your organization is customer-centric and this dimension is largely determined by customer realities and preferences. Companies have many choices ranging from a direct sales force, to direct marketing, internet and mass media channels.
9. Organizational Structure
The decision on organizational structure should also generally flow from the core processes that customer realities and priorities dictate. However, this is often not the case with organizational design considerations.
10. Hiring Strategies
Do you have an innovative model attracting the best talent? Will you be hiring mostly from within your company or industry? Or will you go outside your industry for leadership talent?
Do you have a well developed system for leadership development? What is your succession and retention risk management plan?
11. Incentive System.
Is your compensation and incentive system unique? Does it confer any advantages? Are you going with fixed (salaried) compensation? Fixed plus commission or will you offer full commission? Will employees get Equity (shares and options) stakes?
12. Execution Culture and Structures
Does your organizational communication system compress monitoring, reporting and accountability cycles? Do you have rigorous and persistent cultural norms of communication, problem-solving and accountability? How transparent is management information?
These 12 dimensions above are designed to help you put concrete thought and action to your business model design and innovation activities. As you ask and answer these types of questions, pull in parallels and examples from other companies and industries and align them to understood customer priorities, you greatly increase your chances to innovate a truly unique and effective business model.