If you have been following the posts over recent days you can probably guess that Tim and I have been talking a lot about business model innovation. To quote a phrase, we know business model innovation when we see it and some business model innovators such as Ryanair and Ikea have become global market leaders. Also, there is good evidence that business model innovators have superior performance compared to other forms of innovation.
I’m thinking about this because I am actually a strategy guy and in my MBA classes and corporate seminars I also talk about companies such as Ryanair and Ikea because they are examples of successful strategy. This leads to the question of whether business model innovation and strategy are really just the same thing? Certainly successful business models should also have sound strategic principles behind them and one of these is the central concept of ‘fit’. This is an old idea made popular by Michael Porter in the 1980s and it is really about lining up all of your business operations behind a central logic of value creation.
Using Ikea as an example of strategic fit, the fundamental logic of the business model is creating value through economies of scale. Large self-service stores in near wealthy population centers, products with shared components and flat-pack design all support the logic. Often when we see businesses getting into trouble it is because they are trying to mix different value propositions together or the established business model gets surpassed by others with better business models with superior value propositions. Saab is an example of business model failure with no clear value proposition. There was not enough scale to compete on costs and not enough differentiation through superior technology and design to command a price premium.
In my strategy seminars, I use a diamond model developed by two US academics, Hambrick and Fredrickson to talk about strategic fit. A good business model like Ikea can demonstrate how all of the components of the diamond fit together and reinforce each other. Ikea’s business vehicle is organic growth which gives them control over the operation. Their differentiators are well designed products at a competitive price and staging of growth has been rapid to capture scale. Fit can also be a source of competitive advantage because it is hard to replicate. Organizations are complex beasts and making everything work together takes time, effort and leadership.
To return to the original question, I think incremental business model innovation is the same as executing a good strategy. Apple has just posted a stellar 90% increase in profit and much of this growth is based on a suite of products closely related to each other and not to far from the business model that Apple has had for a few years now. The strategy is well thought out and successfully planned and implemented. However, I think that strategy and business model innovation diverges when we talk about radical business model innovation. Why? Because strategy is still based upon conventional thinking about planning, prediction and measurement. Moving to very different business models needs the tools and concepts from innovation management rather than predictions and plans from strategy textbooks. Tools such as real options and the three horizons will help stage the innovation process to reduce downside risk and capture the upside. Innovation jams and lead-users might be useful to get new ideas on other business models. Stage-gate methods might enable us to trial new business models and scale up as some models show signs of being successful.
The potential of business model innovation is enormous. One of the most basic definitions of innovation is doing something different in a way that creates value. Innovation managers have focused on the ‘doing something different’ part of the definition but we are a bit fuzzy about the value thing. When we take an innovation and build a reinforcing set of activities around it that are underpinned by a central customer value proposition then we really have the whole innovation thing working- and the observation that business model innovators top the class becomes perfectly understandable. I’m pretty excited to see how strategy and innovation can actually work together. They are two sides of the same coin.
John Steen is a Lecturer in Innovation Management in the University of Queensland Business School. He blogs about innovation at the Innovation Leadership Network.