Relevance and Concept
Business Model Innovation
The managerial challenge
The 21st century is characterized by unprecedented challenges. Technological advances and social developments, together with a high level of interconnectedness due to globalization and the rise of the Internet are dramatically changing the world’s dynamics. Change is happening faster, is more complex, and occurs on a more profound level. To gain sustainable competitive advantage in such an environment, firms need to go beyond developing new products or services: they need to re-think and re-design their entire business model.
Business Model Innovation matters
Global survey studies of CEOs reveal that they consider business model innovation as fundamental for their future business. A 2005 survey by the Economist Intelligence Unit revealed that over 50% of executives believe business model innovation will become even more important for success than product or service innovation. A 2008 IBM survey of corporate CEOs confirmed these results. Nearly all of the CEOs interviewed reported the need to adapt their business models; more than two-thirds reported that extensive changes were required. According to this survey, some CEOs are already looking to business model innovation to address permanent shifts in their market landscapes. Yet another study reveals that from those twenty-seven newly founded companies within the last twenty-five years that made it into the Fortune 500 within the last ten years, eleven realized this success via business model innovation (Johnson et al., 2008). Due to the high importance of the topic in corporate practice, academics have also become increasingly interested in the phenomenon of business model innovation as for example reflected in several special Issues in leading academic journals.
What is Business Model Innovation?
While prior research has produced rich knowledge on antecedents, consequences and the nature of various kinds of innovations such as incremental and radical innovation (both product and service), architectural innovation or social innovation, there is considerable lack of insight with respect to business model innovation. Despite a large variety of definitions on the term, researchers generally agree on the following characteristics of business model (innovation):
- A business model describes the logic of how a business creates and delivers value to users and converts payments received into profits. According to Teece (2010), business models “[…]outline the architecture of revenues, costs, and profits associated with the business enterprise delivering that value”. Furthermore, business models define the structure of the value chain required to create and distribute the company’s products and services (Chesbrough and Rosenbloom, 2002). Thus, they also state who performs which activities in the course of a company’s business processes.
- A business models consists of four interlocking elements that, taken together, create and deliver value. These elements are delivery of a new customer value proposition, a new profit formula, new key processes and new key resources (Amit and Zott, 2001; Baden-Fuller and Morgan, 2010; Johnson et al., 2008).
- Business model innovation is game changing for an entire industry. It has the potential to reshape markets and industries (Bonaccorsi et al., 2006; DiMaggio and Powell, 1983).
- Business model innovation is especially challenging for established firms which cannot afford to make any mistakes in redesigning their business models due to potential negative effects on their existing business (Amit and Zott, 2001;Chesbrough, 2010; Christensen, 2006).