Established companies should not undertake business-model innovation lightly. They can often create new products that disrupt competitors without fundamentally changing their own business model. Procter & Gamble, for example, developed a number of what it calls “disruptive market innovations” with such products as the Swiffer disposable mop and duster and Febreze, a new kind of air freshener. Both innovations built on P&G’s existing business model and its established dominance in household consumables. There are clearly times, however, when creating new growth requires venturing not only into unknown market territory but also into unknown business model territory. When? The short answer is “When significant changes are needed to all four elements of your existing model.” But it’s not always that simple. Management judgment is clearly required.
That said, we have observed five strategic circumstances that often require business model change:
1. The opportunity to address through disruptive innovation the needs of large groups of potential customers who are shut out of a market entirely because existing solutions are too expensive or complicated for them. This includes the opportunity to democratize products in emerging markets (or reach the bottom of the pyramid), as Tata’s Nano does.
2. The opportunity to capitalize on a brandnew technology by wrapping a new business model around it (Apple and MP3 players) or the opportunity to leverage a tested technology by bringing it to a whole new market (say, by offering military technologies in the commercial space or vice versa).
3. The opportunity to bring a job-to-bedone focus where one does not yet exist. That’s common in industries where companies focus on products or customer segments, which leads them to refine existing products more and more, increasing commoditization over time. A jobs focus allows companies to redefine industry profitability. For example, when FedEx entered the package delivery market, it did not try to compete through lower prices or better marketing. Instead, it concentrated on fulfilling an entirely unmet customer need to receive packages far, far faster, and more reliably, than any service then could. To do so, it had to integrate its key processes and resources in a vastly more efficient way. The business model that resulted from this job-to-be-done emphasis
gave FedEx a significant competitive advantage that took UPS many years to copy. 4. The need to fend off low-end disrupters. If the Nano is successful, it will threaten other automobile makers, much as minimills threatened the integrated steel mills a generation ago by making steel at significantly lower cost. 5. The need to respond to a shifting basis of competition. Inevitably, what defines an acceptable solution in a market will change over time, leading core market segments to commoditize. Hilti needed to change its business model in part because of lower global manufacturing costs; “good enough” low-end entrants had begun chipping away at the market for high-quality power tools. Of course, companies should not pursue business model reinvention unless they are confident that the opportunity is large enough to warrant the effort. And, there’s really no point in instituting a new business model unless it’s not only new to the company but in some way new or game-changing to the industry or market. To do otherwise would be a waste of time and money. These questions will help you evaluate whether the challenge of business model innovation will yield acceptable results. Answering “yes” to all four greatly increases the odds of successful execution: • Can you nail the job with a focused, compelling customer value proposition? • Can you devise a model in which all the elements—the customer value proposition, the profit formula, the key resources, and the key processes—work together to get the job done in the most efficient way possible? • Can you create a new business development process unfettered by
