The Business of Innovation

In order for your business to thrive you need to identify new revenue opportunities, reduce costs, grow margins, create new markets, build strong customer relationships, have a powerful company culture – these are the business of innovation. Face it – innovation is what will make your business better than your competitor, it defines what makes you different and makes you better.

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This article explores three models of innovation, Revenue Model Innovation, Business Model Innovation and Industry Model Innovation.

Revenue Model Innovation

Many organisations look at their revenue model and consider how to change that model to grow the gross yield. The concept of Freemium which has grown significantly in the last ten years is a perfect example, as is the move from outright purchase to subscription. A key aspect of revenue model innovation is to keep watching global trends and to model the impact of that change to your organisation. If the market is moving rapidly to a channel model and away from direct sales for example, you need to know when to diversify and when to hold strong with your current revenue model.

According to Saul J. Berman author of ‘Not for Free – Revenue Strategies for a New World‘ – “Large companies struggle with introducing and managing multiple business models”. He goes on to say that firms need to improve their ability to move quickly, using a consistent prioritisation framework to make rapid decisions, organise more around the customer, better understand consumption patterns. Organisations need to analyse and understand that data, using it to make calculated risks with existing business models and deal with the increased fragmentation of customer behaviour.

Business Model Innovation

Business Model Innovation is different to Revenue Model Innovation or Process Model Innovation both of which can require substantial upfront investment and risk. It describes the process in which an organization adjusts its business model. Often, this innovation reflects a fundamental change in how a company delivers value to its customers, whether that’s through the development of new revenue streams or distribution channels.

Often Business Model Innovation may move your organisation to a different position on the value chain, either closer to the end customer or building a deeper relationship with a channel partner. It may change the way a service is charged, it may change who pays for the service (ie Advertising paid content versus premium subscriber paid content).

A commonly used example is the transition from video rental to streaming (Blockbuster to Netflix), what is often lost is the steps that were trialled along the way, DVD Kiosks, DVD Mailing companies etc. (I personally had this experience when I led the engineering team to build the first Australian online DVD rental company Fetch Me Movies with my former employer in early 2003).

BCG refer to Business model innovation as the art of enhancing advantage and value creation by making simultaneous and mutually supportive changes, both to an organisations value proposition to customers and to its underlying operating model. The Value Proposition could be choice of target segment, product/service offering or the revenue model. The Operating model focus is to drive profitability, competitive advantage and value creation specifically looking at
1. Where to play on the value chain
2. What cost model is needed to ensure attractive returns
3. What organisational structure and capabilities are essential to success.

Industry Model Innovation

Though much less common, Industry model innovation follows opportunities where ambitious organisations choose to invest capital to expand into adjacent industries, suppliers or channels to create growth. Examples such as Amazon, moving from its online market place to cloud infrastructure follows the supplier model, where the opportunity of scale has not only provided Amazon with global differentiation for its primary service. Now it has used that footing to build a world class cloud service provider disrupting the industry and traditional suppliers.

A New Approach To Business Model Innovation (McKinsey)
Source: McKinsey Quarterly (2015)

As the illustration above from McKinsey points out you need to really pull apart your business if you are going to consider Industry Model Innovation. Every thing you believe you know about the company, its market differentiation, about what is driving customer loyalty and where the cost structures in organisation lie.

Industry Innovation has the greatest potential returns but it requires leadership from the top of the company to drive the change, to personally engage with transformation and to have a growth mindset to the potential opportunities.

Key Takeaways

  • Revenue Model Innovation is identifying different ways to generate income for the organisation.
  • Business Model Innovation looks at the whole business, its costs and processes to become more efficient. May involve moving up or down the supply chain.
  • Industry Model Innovation transforms the industry for others (think streaming media) and enables growth outside an organisations traditional industries.
Synopsis of articles from multiple sources:

MIT Sloan
Creating Value Through Business Model Innovation
by Raphael Amit and Christoph Zott
Published 20th March 2012

What is business innovation?
by Francesca Cassidy
Published 28th August 2018

Fast Company
Revenue Model Innovation: How to Generate Sales in a World of Free
By Adrian Ott
Published 18th March 2011

Northeastern University
Business Model Innovation: What it is and why it is important
By Lauren Landry
Published 2nd May 2020

Business Model Innovation Delivers Competitive Advantage
by Michael Deimler and Nicolas Kachaner

McKinsey Quarterly
Disrupting beliefs: A new approach to business-model innovation
By Marc de Jong and Menno van Dijk
Published 1st July 2015

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