Business Model: An Introduction
Definition of business model
In theory of business, Peter Drucker mentioned about business as assumptions about what a
company get paid for in 1994 (1). Actually business model simply means the way company works. There are numerous definitions in the literature for business model such as:
Tangible and intangible assets, providing an organization with the ability to create value (Boulton, 1997)
Architecture for products, services, and information streams, containing a description of various business activities and their roles (Timmers, 1998) and many more
The business model as describing a transaction element’s design, structure, and management in a way that allows for value creation based on the use of emerging business opportunities (Ammit and Zott, 2001) (2)
With the development of emerging markets and technology, business environments starts to change rapidly and intensively. This is why re-designing business models become a very popular topic and also we witnessed digital economy business models in startups.
Every year, magazines in business and finance category focused more on business model and innovation topic (5). Notice that, last couple of years business model got attention, especially in pandemics. However, we are all know that, innovation is directly related to business model. When we talk about innovation, generally we also talk about innovation in business models.
Like we mentioned above, business environment is dynamic and nearly for every industry barriers for entry getting lower and lower each year, thanks to internet and machine learning. We are using numerous startups’ products which are developed digital business models in last 20 years like Spotify, Twitch, AirBnB and many more. If you analyzed the literature and all the press media, probably you will see that, nearly all ideas and thoughts about business models/innovation is about new-gen companies or startups. Probably we should mention that business model innovation is not just for startups, it is also essential for all companies which are currently operating in the market. The main reason incumbents are not tempting for this topic is they are constantly failing when it comes to business model innovation. Core problem can be anything but we are all know that it is hard to define market trends and guessing the future consumer behavior. For every incumbents, no matter what their industry is, definition of future of market or change in the market is varies. Most of the time, incumbents are failing to recognize customer expectations but successful startups crate new expectations.
Business model meets with innovation
Let’s say again, business model and innovation has a strong link. Markets are dynamic and customer preferences is changing everyday. Artificial intelligence, machine learning (sub-field), internet of things, cloud computing, big data, blockchain…. Technology is evolving and we are facing with new solutions everyday. But one thing we can’t ignore is, creation of customer offers and services with those technologies. This is why, innovation is strongly related with business model. Many incumbent companies in various industries (financial services, consumer market, energy, etc.) are failing when it comes to innovation. Every company is talking about digital transformation, but let’s look at the most innovative companies in 2020.
In Figure.2, we can not see any financial services company or energy company. May be the Canon is the great example of truly successful digitally transformed company. But there is no light for incumbent companies from incumbent industries because of definition of digital innovation. Digital innovation is the creation of market offerings, business processes, or models that result from the use of digital technologies.
Incumbent companies seems lazy about disrupting their business model via digitalization. There are numerous argument about this topic. Such as:
Board members are happy with status-quo and does not want to create risky moves : Argument is lazy because most of the time, keeping your current analog business offering is more risky than digitalization.
Current business capability of the firm is not ready for digital transformation: Probably firm’s capability never gonna be ready for digitalization. With strong analysis, company can identify the capability gap and fill it with proper strategy and investment.
Industry is not mature for digitalization: From logistics to insurance every sector is disrupting with digital startups. Companies are looking for partnership with those startups and wait until the digital offering become a norm in the industry.
Roadmap for business model innovation
Roadmap for business model innovation has 4 phases.
Reality: Your business model is outlined. For every industry, based on customer requirements there is a way to create value-added activities.
Ambition: Based on digital reality, company needs to create digital transformation strategy and execute it along with appropriate know-how and culture.
Potential: Based on company’s ambition, along with best-practices and benchmarks, company should create the digital business model offering.
Fit & Execute: Since the company clearly defined its business model innovation with set of objectives, board should handle the capability gap and execute strategic and technologic operations.
Digital transformation process is the integral part of business model innovation. It is time to define and analyze digital transformation process.
Digital transformation is the process that is used to restructure economies, institutions and society on a system level (9). But how can we restructure institutions? If you are not a digital startup, just a traditional company what is the benefit of digital transformation? Let’s name some of them:
Increase in financial growth
Increase in productivity
Increase in efficiency
Optimization in resources and capabilities
and many more.
But those benefit comes with a price. Companies need to address their current strategies and company structures. You can not do whatever you do without any systematic change and expect a successful digital transformation or innovative digital product. Now, may be we can define the business model innovation. Business model innovation “as a change in a company’s business model that is new to the firm and results in observable changes in its practices towards customers and partners” (Bouwman et al., 2017).
Several possible transformation and business model change outcomes can tell us many things:
Quantitative Growth: Increase in the number of transactions or the frequency of transactions with existing customers. In this case, there are no innovative activities, thus quantitative changes do not cause a transformation in the business model architecture.
Incremental Innovation: Base components of the business model are smoothly modified, or mutual relations between its elements are evolutionary modified. Incremental innovation is an innovation of low novelty level, which usually translates into lower risk and lower costs, but also has lower effect on the financial result. Incremental changes are gradual and do not interfere deeply in the architecture of the business model. This remains in accordance with the overall characteristics of incremental innovation, which refer to relatively small adaptations of existing products, that is, only small changes in technology, design, product restart, and the line extension, adding an attribute to existing service.
Radical Innovation: Involves a constant internal revolutionized of existing technologies and production methods, continuous destruction of the old ones and creation of the new, more effective ones. Such an approach to innovation indicates their high novelty level and thus incorporates high risk and also great opportunities and challenges. When relating radical innovation to the business model, it should be stated that it causes fundamental transformations in the model elements or construction. Emphasize that overall radical changes in the business model usually include focusing on new markets, new customer segments, but also relate to the company response to new challenges. In addition, radical transformations of the business model may affect the competitiveness of the industry, resulting in the alteration of its existing principles of market conduct. (2)
CISCO defined digital transformation as the application of technology for building new business models, processes, software, and systems that result in more profitable revenue, greater competitive advantage, and greater efficiency. Many companies are struggling with business process re-engineering and digital transformation. Business process re-engineering focus is mainly on automating rule-based processes. Rule based processes are defined as clearly assigned rule-based processes which are automated by technologies. Instead of focusing on the rule-based processes like in BPR, the main objectives of digital transformation are obtaining new data and using this data to reimagine these old, rule-based processes. (10) Again, we have to give a well-known example: AirBnB. What is the traditional process of hospitality industry. First, own an hotel. AirBnB extract that element and transform it to more data-driven business. It’s a clear example of difference in business process re-engineering and digital transformation.
In Figure 3., you can find the main elements of digital transformation. End-to-end digitally transformed companies will touch every object in the end of their initiative. However, we should note that, transformation is a never ending journey for a company. There are many approaches in the World, but we liked to introduce combined digital transformation strategy and execution approach:
Further Readings & References
What is a business model?, HBR, Article, January 2015
Business Models: Innovation, Digital Transformation, and Analytics (Data Analytics Applications), Otala and Grabowska, Book, 2020
Call for Papers: Innovation management in incumbent companies and new ventures in the age of innovation ecosystems, Bagno, Article, February 2021
Digital Business Models: Driving Transformation and Innovation, Aagaard, Book, January 20
Digital Business Models, Wirtz, Book, 2019
Identify Innovative Business Models: Can Innovative Business Models Enable Players to React to Ongoing or Unpredictable Trends?, Pisano P., Pironti M., Rieple A., Article, June 2015
Business Model vs. Innovation, Google Trends, March 2021
Most Innovative Companies in The World, Data, Statista, 2020
Digitalization and Its Influence on Business Model Innovation, Rachinger M., Rauter R., Müller C., Vorraber W., Schirgi E., Article, June 2018
Digital Transformation Now Guiding the Successful Digitalization of Your Business Model, Daniel R. A. Schallmo, Christopher A. Williams, Book, 2018