IF ITS GOOD ENOUGH FOR APPLE

DRIVING INNOVATION THROUGH NEW BUSINESS MODELS

Innovation can bloom even in a grim economic climate. If anything, the slowdown may foster creativity.
–Wired Magazine

High energy prices, the tightening of commodity supply and the credit/housing crisis have caused US economic growth to slow to a crawl. Growth in GDP was an anemic 0.6% for the 4th quarter of 2007 and 0.9% for the first quarter of 2008.  As a result, small and medium size businesses are being advised to cut costs, reduce inventories and revamp marketing.

But astute business owners and senior executives recognize that, in fact, the recession presents an opportunity to test an enterprise’s most fundamental business assumptions in order to determine the most effective—and profitable—way forward.

Successful large companies have, for a number of years, approached this situation through the use of business modeling, and increasingly, smaller businesses are turning to this tool for innovation, which today empowers them to compete more effectively in a recession—and can do the same for you.

What is a Business Model?

The concept of business models is one of the most compelling in contemporary business thinking. It initially gained momentum in the 90s, as one of the most effective means of driving innovation. In their seminal book, Paradigm Shift, Don Tapscott and Art Gaston described the uses of business modeling, in particular, to take advantage of emerging technologies.

According to the 2006 IBM Global CEO study, Expanding the Innovation Horizon, CEOs believe that innovation through business models is becoming one of the most important strategic differentiators: “Companies that have grown their operating margins faster than their competitors were putting twice as much emphasis on business model innovation as underperformers.”

Innovation through the use of business models is, among other things, a method for companies to adapt to and manage change— particularly in a recession–and emerge from the process stronger, more profitable and with increased shareholder value.

A powerful example of how the development of a new business model drove innovation is Apple’s creation of the iPod and iTunes. Recently, Apple surpassed Wal-Mart as the largest music retailer in the U.S: four billion songs have been bought and downloaded from iTunes. During the same period, the four major music companies failed to innovate in any significant way regarding the distribution of music, despite their clearly floundering current business model: today they all face serious and profoundly threatening problems.

How Does Business Modeling Drive Innovation?

Let’s take the example of a hypothetical American manufacturing company called Newco, which has been negatively impacted by the recession.  As a result, the company’s management has decided to reexamine their basic assumptions by modeling the business using the powerful and influential methodology developed by Dr Alexander Osterwalder.

In 2004, Dr Osterwalder, of the University of Lausanne, synthesized the various nascent forms of business models then current into the structure now used by companies throughout the world.  Dr Osterwalder’s business model is composed of 9 elements:

1. Value Proposition
2. Customer Segments
3. Distributor/Communication Channels
4. Relationship Channels
5. Key Resources
6. Key Activities
7. Partner Networks
8. Cost Structures
9. Revenue Flows

In addition, Dr Osterwalder devised the classic formulation of the process involved in using a business model to drive innovation:

• Define
• Assess
• Improve

Define
Here is Newco’s current business model, which is expressed– using Dr Osterwalder’s design–as a one page visual representation of the fundamental logic and relationships that define and drive the company’s business.

Assess
Newco’s management team next assesses how and where the company should focus its efforts, through the use of best practices analytic tools, including a SWOT analysis, which evaluates Strengths and Weaknesses (internal), and Opportunities and Threats (external).
Here are the key results of the Newco SWOT analysis:

Strengths:                   Flexibility
Weaknesses:               Underutilization of assets
Opportunities:            New products; new markets
Threats:                       Low-priced imports; recession

Improve
As a result, Newco’s management team decides to actualize the SWOT analysis and move rapidly to improve the company, by enhancing the strengths, minimizing the weaknesses, acting on the opportunities, and blunting the threats.  Newco successfully innovates by developing a new strategy derived from the improved business model.  This process can be visually represented by breaking down the old business model, and identifying where changes are to be made:
(NB: Red represents additions to the original model; shaded areas are those that will be affected by the implementation of the changes.)

What results will Newco achieve from using its new business model to drive innovation?
A business model creates a holistic view of the entire company, thereby identifying the elements that must change in order to exploit strengths and opportunities, and to respond effectively to internal weaknesses and external threats—in this case, including the external threat of the recession.  The resulting innovation includes repositioning the company—through strategic planning, deployment, and execution derived from the model—which results in Newco developing new products and new markets, thereby increasing sales, and offsetting the loss of business due to low priced imports and the recession.
Your company can achieve the same impressive results!

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