Excursion 62

Drivers of business model innovation

A key driver of business model change is often the recognition of underperformance that cannot be attributed to a single operational factor. At the same time, business model innovation may be driven by the recognition of opportunity. Anecdotally, almost anything might seem to spur efforts to adapt and innovate a business model.

The IBM data showed that specific factors spur business model.

First, we learned that BMI is entirely independent of sector or size. In other words, it does not matter how big you are or what you do. Business model innovation is relevant to every organisation around the world.

Second, we found a very unexpected link to geography. Firms in the EU and firms with global reach were less likely to implement BMI. Some might argue that this suggests that very large firms and EU firms are less innovative, but we suspect a very different interpretation. Firms with headquarters in the EU and firms with global reach share one key characteristic: highly heterogeneous customer and resource bases. In other words, these are firms that are more complex by necessity, addressing greater cultural diversity both internally and externally. What can we conclude from this? Organisations that are more homogeneous, with less complex operations and demographics, are more likely to initiate BM

Third, we found that firms facing global trends, rather than local market challenges were more likely to initiate BMI. This is a fascinating insight into the nature of BMI as a fundamentally opportunity-seeking activity. Companies that engage in BMI perceive globalization, environmental issues, and geopolitical challenges to be more significant than market or macroeconomic issues. These are organisations engaged in distant exploration for opportunities.

Not surprisingly, we learned that firms are more likely to initiate BMI when the effort is led by a senior executive, usually the CEO. Given that BMI is a high-risk, high-reward proposition, we would expect direct involvement of the executive team.

We learned that companies engaged in BMI tend not to emphasize product or process innovation, at least in the short term. This is mostly unsurprising, as we expect that organisations can only focus on a few major initiatives at a time.

Finally, we learned something fascinating and somewhat worrying. There was no link between prior change success and BMI effort. Just because a firm had implement BMI once was no predictor of whether it could do it again!

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What does all this mean?

It means that, to the best of our knowledge, the real drivers of business model innovation are challenges that engage the organisation’s long-term, core value propositions. On the one hand, this matches our expectations that small, specific changes in operations and strategy should not be called “business model change.” On the other, it reinforces that business model innovation is not for the faint of heart. The companies that initiate serious business model innovation efforts accept that the sustainability of the organisation will likely be tied to fundamental change.