Business Model Innovation Strategy

A business model mindset, an astute knowledge of business model concepts, and an awareness about the value creation potential of business models are important prerequisites for business model innovation. Such know-how includes the ability to think holistically, to understand system dynamics, and to synthesize, i.e., to be able to put the various components of a business model together and make them function in concert.

- Raphael Amit & Christoph Zott

INTRODUCTION

While this book is more academic in nature than previous business books I've covered, it's increbily effective at conveying 2 primary objectives:

1. Tying together the landscape of disciplines, research & frameworks: from design, to the lean startup, to discovery-driven planning, to insights at both enterprise and startups research levels; the authors do an excellent job at building bridges between these elements. The result is the elegant proposition that a mix of strategies is the most effective way forward.

2. The importance of a Business Model Mindset: developing this mindset is the single most important idea communicated by this book. Either creating it for the first time, or further honing it through deliberate definition and refinement; the mindset is the result of several overlapping skills and frameworks; but ultimately being aware that this holistic unit of analysis exists and can be purposefully designed is the key to competing in a complex world.

business-model-innovation-strategy-book-cover

TAKEAWAYS

I've reordered these takeaways. For a chronological ordering - see my original Thread here.

GENERAL

A business model is about "how to do business, and business model innovation is about "how to do business in new ways.

Business model analysis refers to the set of practices and tools that enable managers to (i) define precisely how their current business model works; (ii) evaluate the current business model's strengths, weaknesses, and impact on firm performance; (iii) design, implement, and evaluate innovative new business models; and (iv) redesign existing business models.

Entrepreneurs and general managers often do not pay enough attention to the design of their business model, i.c., the What, How, Who, and Why of the activity system. Instead, they focus on more conventional strategic choices, such as what market segments to serve.

[...] every entrepreneur and entrepreneurial manager is a designer because, "everyone designs who devises courses of action aimed at changing existing situations into preferred ones".

[...] visual representations of business models and other tools inspired by designers, such as the stakeholder journey, that promote the application of design thinking to business models.

Based on the test outcomes, a decision needs to be made about whether to persevere (i.e., continue with the same business model), pivot (i.e., change the model), or perish (i.e., abandon the business model).

Most entrepreneurs are risk-averse. They are keenly interested in minimizing risks in order to increase the likelihood of survival (and success) of their ventures.

ON THE OVERLAP BETWEEN DESIGN THINKING & BMI

For many design thinkers, the process is the key to successful design: "What really matters for a modern company is building design processes - lightweight methods for problem-solving, creativity and iteration.

Design as a process broadly consists of two steps: an analytical step of finding and discovery, and a synthetic step of invention and making.

The rewards will go to the firms that find the smartest business model designs.

Design "is concerned with how things ought to be, with devising artifacts to attain goals. It is a problem-solving approach that often involves multiple players from a number of disciplines and has "recognizable phases, and these, while not always in the same order, nearly always include analytic phases of search and understanding, and synthetic phases of experimentation and invention." Design can therefore be "thought of as an integrated and disciplined innovation process that builds creative insight from deep knowledge.

Although its success cannot be guaranteed, design works particularly well for problems that can be characterized as "wicked."
Wicked problems do not have an obvious solution because of incomplete, contradictory, or changing requirements; complex interdependencies; and high (social) complexity.

A business model design should not only consider customers' needs, but the needs of all stakeholders chief among them the focal firm, but also suppliers and strategic partners - and satisfy their incentive compatibility constraints. Importantly, we note that much scholarship on strategy to date has focused on explaining value appropriation (e.g., firm profits), while entrepreneurship scholars have tended to focus more on value creation. A design perspective on business models strongly suggests, however, that it is important to emphasize both.

ON BUSINESS MODEL INNOVATION

Indeed, conceptualizing and defining the business model is one of the most fundamental strategic decisions that every founder needs to make. Furthermore, the possibility of adopting an innovative business model offers all founders a lever to create value.

Several technological trends have been converging that encourage companies to design new business models. Chief among these is the digitization of business, and the increasing numbers of digital natives who expect a brilliant and individualized digital customer experience. The shift to digitally enabled social interaction enables, and even requires, firms to transform the customer experience. As a result, business model innovations, undergirded by digital technologies, are becoming the norm.

Product design centers on the broad relationship between the focal firm and its customers, while business model design considers multiple stakeholders such as suppliers and partners (in addition to the firm and its customers).

Besides the general risks that any innovation carries (e.g., insufficient customer adoption, small market size, lack of feasibility, liability of newness, costs of organizational change, and other implementation risks), business model innovation involves a number of specific challenges inherent in its systemic and holistic nature.

The business model as a potential source of disruption also implies that new entrants can immediately target the most profitable, mainstream market segments rather than focusing only on less profitable niche segments, as Christensen's original theory would suggest.

As the competitive landscape evolves and/or as technologies evolve, new opportunities for business model innovation emerge.

The idea of searching for, considering, and testing various business models for the same opportunity in parallel represents a refinement of the basic discovery-driven process introduced earlier, which assumes the pursuit of a single preferred option. In a nascent market, however, business model designers should not commit too soon to a favorite design option due to the high uncertainty of the market environment.

The business model has thus become an important lever for enhancing the focal firm's "ecological fitness," i.e., for improving its fit with a continuously shifting technological and product-market environment.

The opportunities and threats presented by the emergence and growth of digitally enabled multisided platform business models, which enable digital interactions, exchanges, and commercial transactions among multiple parties, further strengthen the case for having a business model innovation strategy.

The conception, introduction into the marketplace, and ongoing management of your business model should not be left to chance; rather, it must be guided by a business model innovation strategy, which is anchored in a rigorous design process that combines organizational practices (e.g., regular brainstorming sessions) with creative insight at the individual managerial level (e.g., insight required for synthesizing the lessons learned from intense and comprehensive observation of stakeholders).

ON MINDSET

a business model mindset, an astute knowledge of business model concepts, and an awareness about the value creation potential of business models are important prerequisites for business model innovation. Such know-how includes the ability to think holistically, to understand system dynamics, and to synthesize, i.e., to be able to put the various components of a business model together and make them function in concert.

Business models are created by entrepreneurial leaders who' shape and design organizational activities as well as the links (transactions) that weave activities together into a system. Such purposeful design - within and across firm boundaries - is the essence of the business model.

That is why a business model mindset is needed in organizations. It denotes a state of mind, attitude, or inclination that helps someone consider the firm's entire activity system, along with its associated dimensions of content (What), structure (How), governance (Who), and value logic (Why), as a potential solution for a business problem or opportunity.

Two cognitive practices stand out that are used by founders of firms with highly innovative business models: industry-spanning search and complex system thinking. Together, they could be viewed as constituting elements of a "business model innovation mindset.

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