8 Business Model Innovation

Abstract

Why didn't Sony invent the iPod? The Japanese company had all of the technical elements needed, plus access to powerful music list through its Sony Music label and every bit of the design cachet now enjoys. As John Kay describes it in 2012 Financial Times article, the company had even developed vision of integration of devices and content long before dreamt of going into the music business, vision that drove its acquisition of content companies like CBS Records and Columbia Pictures. So what went wrong? The most common arguments blame siloed organizational structure, vast conglomerate grown too big to change direction, and culture that stifled innovation (commentator Michael Pascoe offers an overview of these arguments in his 2012 commentary for the Sydney Morning Herald). But all of these factors are only the context that enabled the real failure: Sony simply couldn't envision the business model that would make the seamless integration of content and device profitable. In other words, Apple's true innovation with the iPod was not technical or even aesthetic; it was spectacular reimagining of the business model around music. As Mark Johnson, Clayton Christensen, and Henning Kagermann put it in 2008 article in HBR, Apple did something far smarter than take good technology and wrap it in snazzy design. It took good technology and wrapped it in great business model. That model, as Johnson and colleagues describe it, was simple reversal of the razors-and-blades model: where Gillette made the razors cheap so it could sell blades at premium, Apple essentially gave away the 'blades' (low-margin iTunes music) to lock in purchase of the 'razor' (the high-margin iPod). The result was game-changing innovation. Indeed, the iPod and iTunes didn't just make force to be reckoned with, it changed the world: iTunes reshaped the way we all think about, interact with, and share music. And its younger sibling, the App Store, did the same thing for software. Johnson and colleagues noted rising interest in business model innovation in their 2008 article. That interest has become, if anything, more urgent in the intervening years. The Internet has enabled whole range of business models that would have been unimaginable just couple decades ago, from free-mium revenue structures to mass customization options. And the Internet of Things will likely kick off new wave of experimental business models. Advanced technologies and other forces are enabling wave of servitization, turning manufacturers (who receive revenue once--when product is sold) into service providers (who take in stream of revenue across the lifespan of product). Now more than ever, it's not sufficient to create great product; truly innovative companies have to think deeply about--and repeatedly rethink--what value they deliver and how they can capture portion of that value for themselves. As Henry Chesbrough suggests in 2010 article in Long Range Planning, a mediocre technology pursued within great business model may be more valuable than great technology exploited via mediocre business model. But like many necessary things, business model innovation is not simple. The complications begin with the most basic question: what is business model, exactly? What constitutes your business model? Depending on your perspective, the answer to that question may not be obvious. Xavier Pavie and colleagues offer good overview of the various business model concepts in their 2013 working paper for ESSEC. Alexander Osterwalder, in 2009 blog post, offers set of nine blocks beginning with the value proposition, market segments, and distribution channels and ending with the cost structure defined by the other eight elements. The building blocks, of course, are the elements of Osterwalder's business model canvas, described in his 2010 book with Yves Pigneur, Business Model Generation. …