By the late 1990s, Apple’s initial pathway to growth was running out of steam. The company’s proprietary approach to designing both hardware and software limited it to being a niche player and hampered its ability to compete on price. In 2001, Apple began introducing a series of successful new products and services—the iPod, the iTunes online music service, and the iPhone—that propelled the company to the top of its industry. But the shift wasn’t only a matter of product innovation. Apple’s success resulted from its ability to define a workable business model for downloading music—something that had eluded the music industry for years.
This combination of product innovation and business model innovation (BMI) put Apple at the center of a market approximately 30 times larger than its original market. It also helped expand the company’s share of the traditional computer market, as new customers became so attached to their iPods that they took another look at Apple’s computers.1 Notes: 1 See Convergence 2.0: Will You Thrive, Survive, or Fade Away?, BCG Focus, April 2007; and Searching for Sustainability: Value Creation in an Era of Diminished Expectations, BCG report, October 2009.
The greater frequency of disruption and dislocation in many industries is shortening business model lifecycles. New global competitors are emerging. Assets and activities are migrating to low-cost countries. Systemic risk is growing as global business becomes increasingly interconnected. Social and ecological constraints on corporate action are emerging. All these factors require businesses to bolster and accelerate innovation. The discipline of BMI offers a fresh way to think about renewing competitive advantage and reigniting growth in this challenging environment.
Business model innovation means more than a brilliant insight coming at the right place and the right time. To confer a reliable competitive advantage, BMI must be systematically cultivated, sufficiently supported, and explicitly managed. In this paper, we will argue that BMI is highly relevant in the current business environment, describe some of the circumstances in which BMI has proved valuable, identify common pitfalls, and discuss how companies can develop a competitive capability in BMI.