Embarking on its journey in 1995, Amazon was known as the “world’s biggest bookstore.” Today, it is the leading online marketplace, creates amazing television programs and movies, and delivers groceries to your doorstep. What exactly supported the growth of Amazon to the trillion-dollar organization it is today? The efforts of Amazon to innovate its business model point to the only answer to this question.
Nowadays, business model innovation is a hot topic among leaders worldwide. Business model innovation is a more complex approach that involves making significant changes to the way a business operates. This can include changes to the way products are produced, marketed, and sold, as well as changes to the overall structure of the business. The following discussion provides a detailed guide on how to develop business model innovation in your concerned sector.
Importance of Business Model Innovation
Before diving into an outline of the different steps involved in business model innovation, let us understand business model innovation. This approach is focused on delivering existing products to existing markets through existing technologies. Generally, business model innovation includes changes that are not visible to the external world and could introduce advantages.
The biggest challenge when it comes to business model innovation is figuring out what the consequences are. If you don’t have a specific framework for identifying opportunities, it can be difficult to develop new business models.
Steps in Business Model Innovation
Step 1: Decisions on Product or Service Offerings
One of the main aspects of creating a new business model is focused on the product or service that will be offered. The vast majority of businesses face the challenge of uncertainty when it comes to demand, which is also a primary source of risk. The most likely way to reduce the risk of uncertainty is to change your existing products and services. There are three different ways that businesses can change their product or service mix in order to be more innovative.
If you want to innovate your business model, one option you can try is focusing on a specific model. This could involve developing a new product or service, or improving an existing one. In order to be successful, you need to have a focused business model and look for target market segments that have clearly outlined requirements.
There are steps you can take to optimize your product/service mix by finding commonalities between them. Commonalities are the shared features in different products. Commonalities among products could also mean the skills needed to address various types of products, markets, and customers.
The development of a business model innovation could also follow the hedged portfolio approach in terms of the product/service mix definition. Instead of trying to be everything to everyone, businesses could focus on a specific niche, which would in turn reduce the risks associated with their business model.
Step 2: Time of Making Decisions
This business model innovation path would also suggest that decisions should be made in a timely manner. When making decisions, it is best to have enough information to do so confidently. There are three different strategies you can use to develop business model innovation. The strategies can help improve business models by making decisions at the right time according to the circumstances.
Postponing the Decision
Most companies will have a solid plan for pricing their products before they start selling them. This makes them susceptible to risk. For example, it can be risky to set airplane seat prices in advance. Why? Since different economic factors can affect demand for a particular route at different times, demand can fluctuate greatly.
Modifying the Order of Decisions
Even though companies may be interested in business model innovation, they may not have the ability to change their structures to fit the new model. When companies are unsure about a situation, they can delay investment decisions until they gather more information.
Dividing the Significant Decisions
One of the key aspects in defining new business model innovation paths is lean innovation. Lean innovation is a way of thinking for entrepreneurs who want to try new things in their business. Introducing a comprehensive business plan was considered risky under the old approach to developing new business ventures. Entrepreneurs would need to work on all key decisions related to the plan to ensure its execution.
You can break down the big decisions into smaller, more manageable pieces using the lean-startup approach. The new venture would have a lot of false and limited beliefs about what’s possible with this opportunity. After that, the data collection is the main focus with some occasional changes to make sure the model is correct.
Step 3: Authorities for Decision Making
The answers to the question “How do you innovate a business model?” also emphasize the importance of choosing the right people to make decisions. Many businesses have discovered that they can improve their decision-making processes by simply changing the people who are responsible for making decisions.
Better-informed Decision Makers
Giving decision-making power to individuals or groups who are more knowledgeable and experienced in the relevant industry is beneficial. It is also important to note that the individuals who are the most informed are generally not found within the organization. More and more, external observers and algorithms are being chosen to make decisions. There are some risks that are not immediately apparent when making decisions based on better information. If you empower your employees, customers, or suppliers, you may have to deal with increased costs and a lot of data.
Select Decision Makers with the Best Possibility for Gains
In business, the key decisions are made by those with the most to lose. The customers of a company generally believe that they would have limited earning potential if they purchase the products of the company. Assigning the decision-makers who stand to gain the most from the new business model could lead to better optimization.
Select Decision Makers Capable of Managing Consequences
The effectiveness of business model innovation could be improved by selecting decision-makers who can manage the consequences of change. If you shift the decision-making process to parties who are better equipped to handle it, then you will have a more productive strategy. It’s important that whoever makes the replacement decision has the same incentives as you.
Step 4: Reasons for Decisions
The final addition in business model innovation paths reflects on the possible reasons for which decision-makers might take certain decisions. Collaboration between decision-makers in order to create value should also take into account how they are working towards their own individual objectives. The decision-makers need to protect the value chain while also making decisions. AMBIENT INTELLIGENCE In most cases, business model innovation focuses on adjusting the motivations of decision-makers. There are three ways to define what motivates decision-makers.
Modification of Revenue Stream
Traditionally, when the U.S. The Department of Defense buys aircraft and agrees to a time-and-materials contract, where suppliers are charged for labor and materials consumed during each maintenance event—just as a mechanic does for car repairs. This model unfortunately does not incentivize suppliers to be friendly to customers; from the supplier’s perspective, the more problems the client has, the better. The government has estimated that it spends seven more dollars on a new airplane over its life for every one dollar spent to buy the airplane.
The Department of Defense gave suppliers a reason to care about engine reliability. In 2003, the department switched to performance-based contracting in order to save money and improve performance. This new system changed the way contractors were paid. They would be paid for the amount of time the aircraft was actually in service, with the DoD specifying, for example, that 95% availability is its threshold. The contractor earned more money the longer the jet went without needing maintenance or repair.
When decision makers collaborate, they must be able to pursue both their private objectives and the objective of creating value.
It is most effective to change the revenue stream to align the interests of a decision’s stakeholders when the performance of that decision can be clearly and definitively determined. It would be difficult to set reasonable performance standards and develop appropriate metrics for a new airplane that relied on advanced technologies and materials, because there would too many unknowns involved.
Synchronization of Time Horizons
Traditionally, sourcing has relied on competitive bidding in order to ensure low prices and moderate but acceptable quality. The provider that was chosen won the business for a short amount of time, and then the bidding process was started again.
But as overseas sourcing increased, this model developed flaws. Suppliers that are located far away often do not have adequate quality control or reliable materials. As more information came out, it became clear that the company was engaging in abusive labor practices, including making workers do excessive overtime, product diversion, and counterfeiting merchandise. Although most sourcing deals were one-time arrangements, vendors who provided poor products or services faced few consequences – that is, until multinational companies realized how repeated performance issues could damage their brands.
Li & Fung, a Hong Kong-based company, has created a new business model that combines the flexibility of competitive sourcing with the confidence of long-term relationships. This has changed the world of outsourcing. It chooses, checks, and approves vendors and assigns their business among its production clients, and it overseas each client’s association with every supplier—including execution, obeying the rules, and creating motivating forces for vendors to puts resources into people, places, and materials. Since there is the potential for a lasting relationship with Li & Fung, suppliers are more eager to do things that will create value for their manufacturing partners in the long run.
However, companies like Li & Fung are rare. If your organization sources in sectors or regions where there is no trusted intermediary, you will need to manage such relationships directly, which can be difficult.
Integration of Incentives
Companies that don’t have a reliable go-between can set up contractual agreements and management systems (like the well-known balanced scorecard) to get independent agents to concentrate on achieving an arranged goal. Under the bundled payments system, all parties involved in a patient’s treatment would be held accountable for the patient’s outcome. This is one of the most promising reforms to U.S. health care.
The complexities of some contractual arrangements can make it simpler to just integrate operations. Quad/Graphics is a printing company with about 25,000 employees and yearly revenue of more than $4 billion. It made its own health care system with doctors and hospitals, which lowered health care costs for its employees by about 30%. The rate of cesarean-section births among women in the Quad health care system is only 12%, which is a significant improvement compared to the 26% national average.
Although it is not easy to achieve full integration, many organizations are hesitant to take on activities that are not within their core competencies. We see mediation as a last resort that we turn to only when other methods have failed. The framework provides a way for managers to identify opportunities to improve their business models. The framework can be used by companies to make their innovation processes more systematized and transparent. Business model reinvention should become a continual and inclusive process, rather than a series of isolated events that are only focused internally. If companies invest in the right areas, they will have an edge over the competition that will last.
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