Business model innovation: ever heard about it ?

This article aims at discussing why organizations have to go beyond product and service innovation with business model innovation if they want to establish sustainably on their marketplaces.

In a turbulent economy rocked by market disruptions, self-reinvention has become a matter of survival for organizations, which means that all businesses eventually have to reinvent themselves or suffer the consequences: if we look at the late 1990s and the turn of the decade, we saw the rate at which Fortune 500 companies (i.e. the top 500 U.S. closely held and public corporations as ranked by their gross revenue annually by Fortune magazine) either shifted dramatically, were acquired, or went into bankruptcy (Zook, in Davidson and Leavy, 2008). This phenomenon is redefining business frequencies: for most companies and in more industries, the strategy cycle of a business - which comprises how a business starts, expands, and redefines itself - has massively evolved and has gotten shorter, following in the macro-environment’s footsteps: indeed, building a great business, operating it well and making huge profits with innovative products or services no longer guarantees firms to be around in fifty years, or even twenty. This common thought about the era of business change we are living is proved by figures if we take a look at the S &P 500 index, i.e. a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States: in 1958, the average length of time a company remained on the S &P 500 index was 57 years; by 1983, it had dropped to 30 years; in 2008, it was just 18 years (Johnson, 2010a). Consequently, investing for the long term in the twenty-first century means continually building and rebuilding your organization beyond products and services you develop because shorter business cycles require more than new kinds of products and services to sustain a company: they require a new sort of management discipline capable of leading the organization through an ongoing process of transformation and renewal to thrive in today’s marketplaces (ibid).

The need for business model innovation has been recently underlined in many ways. Firstly, a 2005 survey by the Economist Intelligence Unit reported that over 50% of executives believe business model innovation will become even more important for success than product or service innovation (Johnson et al., 2008). Moreover, one can notice that groundbreaking business models innovations have reshaped entire industries and redistributed billions of dollars of value: over the last ten years, more than half of the twenty-six companies founded since 1984 that have entered the Fortune 500 ranking between 1997 and 2007 did so through business model innovation that have either transformed existing industries or created new ones (Cf. Appendix 1). For instance, retail discounters Wal-Mart and Target have entered the market with pioneering business models and now account for 75% of the total valuation of the retail sector (Johnson et al., 2008). Finally, the need for business model innovation has also been underlined by IBM and its CEO studies. Every two years, the IT company runs more than a thousand interviews with CEOs and public sectors leaders worldwide. If the 2010 study (IBM, 2010) identified the complexity as a new primary challenge, in the past three CEO studies, CEOs consistently said that coping with change was their most pressing challenge: especially in the 2008 study titled “The enterprise of the future”, nearly all of the CEOs surveyed reported that they were adapting their business models, and two-thirds were implementing extensive innovations (IBM, 2008).

Business model innovation is about being able to not only transform a company through innovating products and services but it is about something more fundamental: thinking about how a company delivers value to its customers and how it delivers value to itself through the profit made. Therefore, business model innovation can be seen as a fundamental part of a company and can represents the DNA of the company: it’s important to think not only about the products and services that generate values, but all the elements of the organization that create the final value, which elements are included in the business model. How companies are proactive with business model innovation has eventually implied the emergence or re-emergence of the concept “white space”, highlighted by Johnson (2010c, p.7).

White space, as a metaphor, is at once ubiquitous and frustratingly ambiguous because there may be as many definitions circulating as there are business thinkers, as explained by Johnson (2010b): some people define it as a place where there is no competition, others as an entirely new market, or sometimes as an uncharted territory or undeserved market. However, white space is undoubtedly a metaphor about opportunity and different thinkers define it differently because they take varying approaches to capturing opportunity (ibid). According to Johnson (2010c, p.7), it means the range of potential activities not defined or addressed by the company’s current business model, that is, the opportunities outside its core and beyond its adjacencies that require a different business model to exploit. More simply, the white space are the market opportunities a company may wish — or need — to pursue that it cannot address unless it develops a new business model (Johnson, 2010b). Another definition of the white space can be given by the 2x2 matrix used in Johnson’s book (2010c, p.8): the white space is the need to develop a new business model when new customers or existing customers have to be served in fundamentally different ways and when the nature of the opportunity has a poor fit with the current organization (Cf. Appendix 2).

This definition gives an understanding about how business model innovation is so important. A company that seizes its white space is able to focus on where the world is going and what the company needs to do to address a specific customer need, unencumbered by the company's existing systems and structure : the process outlined by Johnson for systematically engaging in business model innovation (in Hopkins, 2010) requires to start with and stay focused on where the customer is going, where company’s opportunity is, and then build the right business system to support that. Thus, innovating one’s business model is translated as the way to seize the white space: indeed, innovating one’s business model is seen as a necessity in a changing business environment with new opportunities and threats because companies realize that it is not enough to come up with the next big idea that will make possible the creation of new products and services. In order to satisfy the new customers ‘needs created by the environmental change, companies realize that they have to think about how they can organize differently to deliver on this change, filled with both opportunities and threats: this trend of opportunities and threats goes towards the definition of the white space since the white space can be seen as an era of opportunities where companies can leverage their business model, transform it fundamentally to build a new appropriate one.

However, seizing the white space may be scary: transforming a business model needs a structured approach whereas the idea of starting a new business model with the creation of something new is likely to be perceived as unstructured. To avoid companies’ reluctance to undertake the challenge to change their business model, Johnson (2010a) shows that while forays into one’s white space carry a high degree of uncertainty, they do not carry a high level of risk if organizations can make business model innovation a real management discipline : he lays out an eminently practical framework that identifies the four fundamental building blocks that make business models work and that leads to far-reaching implications for all organizations navigating the turbulent waters of twenty-first-century global business. The four requirements are: creating a customer value proposition, designing a profit formula, identifying key resources, identifying key processes (Johnson et al., 2008). Organizations that use business model innovation to seize their white space under the proposed framework should be able to meet many of the big challenges they face such as growth gaps, market shifts, revolutionary technologies, government policies or uncontrollable social forces. As a result, seizing the white space should be the path to achieve transformational growth by both facing the mentioned threats and fulfilling unmet customer needs in their current markets or serving entirely new customers and creating new markets (Johnson,2010a).

Nicolas Bassand

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Appendix 1 : Companies founded in the last quarter century that have entered the Fortune 500 in the last decade

Source: Johnson M. W., 2010c, Seizing the white space, p. 19, Watertown, Harvard Business Press.

Appendix 2 : The white space matrix

Source: Johnson M. W., 2010c, Seizing the white space, p.8, Watertown, Harvard Business Press.

Sources :

Davidson A., Leavy B., 2008, Interview with growth consultant Chris Zook: a less risky path to business model innovation, Strategy and Leadership, 36(1), pp.27-32.

Hopkins R., 2010, Stuck ? Take a look at your business model, Bloomberg Business Week [online], February 17^th 2010. Available at: http://www.businessweek.com/innovate/content/feb2010/id20100217_897247.htm

IBM, 2008, CEO Global Study executive summary, The enterprise of the future [online]. Available at : http://www-935.ibm.com/services/us/gbs/bus/pdf/ceo-study-executive-summary.pdf

IBM, 2010, CEO Global Study, Capitalizing on complexity [online]. Available at : http://public.dhe.ibm.com/common/ssi/ecm/en/gbe03297usen/GBE03297USEN.PDF

Johnson M. W., Christensen C. M., Kagermann H., 2008, Reinventing your business model, Harvard Business Review, 86(12), pp.50-59.

Johnson M. W., 2010a, Leading through business model innovation, Innosight [online]. Available at : http://www.innosight.com/innovation_resources/article.html?id=910

Johnson M. W., 2010b, Where is your white space ?, Mark W. Johnson’s HBR Blog Network [online], February 12^th 2010. Available at: http://blogs.hbr.org/cs/2010/02/where_is_your_white_space.html

Johnson M. W., 2010c, Seizing the white space, Watertown, Harvard Business Press.

Johnson M. W., 2010d, A new framework for business models, Bloomberg BusinessWeek [online], January 22th 2010. Available at: http://www.businessweek.com/managing/content/jan2010/ca20100122_888042.htm

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