On the sources of business model innovation

All existing business models will eventually become commoditized, uncompetitive or even obsolete. Even though the pace of change varies among different industries, all companies must invest in business model innovation. This is the reason why eight brave companies and Vectia decided to work together to dig deeper into business model innovation. The result was a project called the McC€aL, a six-month quest for the principles of a winning business model.

The project aimed at tackling two questions: how to design a new business model or refine the existing one, and what to consider when implementing the new or refined business model. Unfortunately we cannot yet share all our ideas, knowledge and tools generated in the two workshops, but here is a little sneak preview:

The discussion on business model innovation has suffered from lacking a common understanding of the business model concept. The word ‘Business model’ has been used for referring to almost anything related to action planning, revenue logics or strategy work. During the McC€aL project we created a comprehensive business model framework consisting of 12 building blocks related to market and customers the company wants to serve, the offering it wants to provide to these customers, the operations needed to realize this as well as a plan how to manage the whole thing.

A common belief in many industries has been that there is one superior business model for each industry that every company should copy and try to implement as well as they can. This has been the case e.g. in the airline industry. However, as the appearance of low-cost airlines along the traditional airlines has proved, it seems to be possible for companies with very different business models to survive and conduct flourishing business in the same industry. In line with this, according to the experience from the McC€aL project, the ‘goodness’ of the business model is not so much defined by the choice of the different building blocks of it, i.e. the target market, offering, operations and management themselves, but by how well these different building blocks fit together. This ‘configurational fit’ is the most vital aspect to consider when designing a business model.

Sometimes, instead of starting from scratch with business model innovation, new business models can be created or existing ones can be improved by studying business model innovations made by others and then adopting them to the suitable degree. In the project we identified 11 innovation directions that can act as a starting point for business model innovation. Some classic examples of such innovation patterns are e.g.:

• the now very popular as-a-service model adapted from the ‘power-by-the-hour’ idea of Rolls Royce and the cloud computing solutions of software business,
• the freemium model used by e.g. Spotify, which implies that in addition to a free version based on advertising revenues a paid premium version is provided where ads are absent, and
•  the so called razor-and-blades model by Gillette, where the razor can be acquired cheap but the blades needed for using it are the main money making machine. E.g. Apple uses the reversed version of the razor-and-blades model, where the product itself is expensive but made attractive to consumers by providing free or cheaply priced highly valued add-ons to it.

In addition to the well-known examples we identified several less used patterns such as:

• standardisation brought from industrial processes into other businesses like fast food and even health care, as Minute Clinic has done, and
• the fractionalization model used by YIT, selling its holiday chalets as fractions or pieces for several families instead of selling a whole chalet

My own favourite:

• the model of changing the payer of a service like Smartum has done for lunch eating and employee workout

After these intensive six months we have our heads full of ideas and a toolbox for taking a fresh look at existing business models and finding new ones. So I guess soon we will get to see the eight McC€aL participant companies shake up old beliefs about successful business models in their industries. So stay tuned!

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