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Business Model Innovation

Business model life cycles are shrinking across industries, creating an imperative to innovate.

In the past 50 years, the average business model lifespan has fallen from about 15 years to less than 5. Business model innovation is thus no longer one of many ways to gain a competitive edge, but it is a necessary core capability to respond to—and capitalize on—a changing world.

Whether seeking to drive breakout growth, reinvigorate a lagging core, or defend against industry disruption or decline, leaders need to ask themselves: Can our existing business model continue winning? Future success often hinges on rethinking the current model by defining a compelling new customer value proposition and supporting it with a sharp, efficient operating model. Potential moves include shifting from products to services, embracing open source, and establishing a trust premium.

Business model innovation is critical to transformation. Many organizations share a common set of concerns: What type of business model shift will help us achieve breakout performance? How do we avoid jeopardizing the core business? How do we build the capability to develop, rapidly test, and scale new models? Inspiring an organization to change is not a trivial undertaking, but given the current strategic environment, it’s a critical one.

When the Going Gets Tough, Change the Game

A business model consists of two essential elements—the value proposition and the operating model—each of which has three subelements.

The value proposition answers the question, what are we offering to whom? It reflects explicit choices along the following dimensions:

  • Target Segment(s). Which customers do we choose to serve? Which of their needs do we seek to address?
  • Product or Service Offering. What are we offering the customers to satisfy their needs?
  • Revenue Model. How are we compensated for our offering?

The operating model answers the question, how do we profitably deliver the offering? It captures the choices the business needs to make in the following critical areas:

  • Value Chain. How are we configured to deliver on customer demand? What do we do in-house? What do we outsource?
  • Cost Model. How do we configure our assets and costs to deliver on our value proposition profitably?
  • Organization. How do we deploy and develop our people to sustain and enhance our competitive advantage?

Business model innovation involves making simultaneous, coordinated, and internally consistent changes to multiple aspects of the business model to reignite growth, combat disruptions, or access new markets.

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