The Hard Truth About Business Model Innovation
Many attempts at business model innovation fail. To change that, executives need to understand how business models develop through predictable stages over time — and then apply that understanding to key decisions about new business models.
Surveying the landscape of recent attempts at business model
innovation, one could be forgiven for believing that success is
essentially random. For example, conventional wisdom would suggest that
Google Inc., with its Midas touch for innovation, might be more likely
to succeed in its business model innovation efforts than a traditional,
older, industrial company like the automaker Daimler AG. But that’s not
always the case. Google+, which Google launched in 2011, has failed to
gain traction as a social network, while at this writing Daimler is
building a promising new venture, car2go, which has become one of the
world’s leading car-sharing businesses. Are those surprising outcomes
simply anomalies, or could they have been predicted?
To our eyes, the landscape of failed attempts at business model
innovation is crowded — and becoming more so — as management teams at
established companies mount both offensive and defensive initiatives
involving new business models. A venture capitalist who advises large
financial services companies on strategy shared his observation about
the anxiety his investors feel about the changes underway in their
industry: “They look at the fintech [financial technology] startups and
see their business models being unbundled and attacked at every point in
the value chain.” And financial services companies are not alone. A PwC
survey published in 2015 revealed that 54% of CEOs worldwide were
concerned about new competitors entering their market, and an equal
percentage said they had either begun to compete in nontraditional
markets themselves or considered doing so.1
For its part, the Boston Consulting Group reports that in a 2014 survey
of 1,500 senior executives, 94% stated that their companies had
attempted some degree of business model innovation.2
We’ve decided to wade in at this juncture because business model
innovation is too important to be left to random chance and guesswork.
Executed correctly, it has the ability to make companies resilient in
the face of change and to create growth unbounded by the limits of
existing businesses. Further, we have seen businesses overcome other
management problems that resulted in high failure rates. For example, if
you bought a car in the United States in the 1970s, there was a very
real possibility that you would get a “lemon.” Some cars were
inexplicably afflicted by problem after problem, to the point that it
was accepted that such lemons were a natural consequence of inherent
randomness in manufacturing. But management expert W. Edwards Deming
demonstrated that manufacturing doesn’t have to be random, and, having
incorporated his insights in the 1980s, the major automotive companies
have made lemons a memory of a bygone era. To our eyes, there are
currently a lot of lemons being produced by the business model
innovation process — but it doesn’t have to be that way.
In our experience, when the business world encounters an intractable
management problem, it’s a sign that business executives and scholars
are getting something wrong — that there isn’t yet a satisfactory theory
for what’s causing the problem, and under what circumstances it can be
overcome. This is what has resulted in so much wasted time and effort in
attempts at corporate renewal. And this confusion has spawned a welter
of well-meaning but ultimately misguided advice, ranging from
prescriptions to innovate only close to the core business to assertions
about the type of leader who is able to pull off business model
transformations, or the capabilities a business requires to achieve
successful business model innovation.
The hard truth about business model innovation is that it is not the
attributes of the innovator that principally drive success or failure,
but rather the nature of the innovation being attempted. Business models
develop through predictable stages over time — and executives need to
understand the priorities associated with each business model stage.
Business leaders then need to evaluate whether or not a business model
innovation they are considering is consistent with the current
priorities of their existing business model. This analysis matters
greatly, as it drives a whole host of decisions about where the new
initiative should be housed, how its performance should be measured, and
how the resources and processes at work in the company will either
support it or extinguish it.
This truth has revealed itself to us gradually over time, but our
thinking has crystallized over the past two years in an intensive study
effort we have led at the Harvard Business School. As part of that
research effort, we have analyzed 26 cases of both successful and failed
business model innovation; in addition, we have selected a set of nine
industry-leading companies whose senior leaders are currently struggling
with the issue of conceiving and sustaining success in business model
innovation. (See “About the Research.”) We have profiled these nine
companies’ efforts extensively, documented their successes and failures,
and convened their executives on campus periodically to enable them to
share insights and frustrations with each other. Stepping back, we’ve
made a number of observations that we hope will prove generally helpful,
and we also have a sense of the work that remains to be done.
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