Is It Time To Change Your Business Model?

On the surface, business model innovation seems to be something every business should consider. I mean, anything that has the chance to increase profitability or productivity should probably be at least considered by a business. But unlike developing new products or changing technology, business model innovation does not require changes to your current products or technologies. In fact, most of the changes would be invisible to your competitors or customers.

Sounds great right? So what exactly does it entail? This is where things can get tricky. It is not so easy to very clearly define and that makes it hard to be systematic about the process. But sometimes making changes to your business model is necessary. Apple had to change its business model to leverage a new technology when it came up with iTunes for its iPod and iPhones, for example.

Changes to your business model can run along a number of dimensions. Karan Girotra and Serguei Netessine in their article for Harvard Business Review, 'Four Paths to Business Model Innovation' describe those dimensions as:

 1. What mix of products / services should you offer?
 Girotra and Netessine discuss how uncertain demand is a huge risk for companies and advise a few possible courses of action. The business could look for commonalities among products, whether that's shared components or the capabilities needed to serve the products. It could also essentially "hedge its bets" by selecting an assortment of products or markets. This will serve to reduce the risk of the business model. Finally, it could narrow its focus, since focused business models can appeal to specific market segments with clearly differentiated needs. So if your business is targeting a number of segments, it could divide these into focused units, as opposed to simply trying to apply the same model to all of these.

2. When should you make your decisions?
Since decisions often must be made without necessarily having all the information,  Girotra and Netessine suggest a number of solutions, such as postponing the decision until later. In the hotel industry where I work, rooms are not set at a certain price and then sold (like they often were many years ago). Instead they are now sold at different prices depending on which customer is booking, the lead time and the overall demand. This allows the hotel to get the maximum yield for that room. Girotra and Netessine also suggest looking at the possibility of changing the order of your decisions, for example until more information is known about something that will help make the decision. Finally, another possibility suggested is to split up the key decisions. As with the product/market fit concept discussed HERE, a new business or new product could start with only an idea about where an opportunity may be. This will be followed by multiple changes or “pivots” follow before you have a final business model.

3. Who are the best decision makers?
Could your business improve by changing who makes the key decisions? Girotra and Netessine suggest that organisations should consider allowing better informed employees make the decisions, even if those employees are not executives. They also suggest exploring the possibility of shifting the decision risk to the party best able to bear it. In its early days, Amazon did not stock every book that it sold on its website so their network of publishers managed their inventories independently (and so bore the risk).

4. Why Do Key Decision Makers Choose as They Do?
Girotra and Netessine assert that many business model innovations come from adjusting the motivations of key decision makers. The organisation could change the revenue stream to align the interests of a decision’s stakeholders. A supplier should not benefit from their product or service not working or malfunctioning for example.

Using the dimensions outlined above, organisations can adjust their practises and create a more efficient business model and more profitable business.