The last article discussed the importance of a business model to success in the new economy and three functions of a business model, which are how a firm creates value, how it delivers value to customers, and how it captures revenue from those customers.
In “Not For Free”, Saul J. Berman next identifies three business model approaches, which do not necessarily directly correspond to the previously identified functions. Berman identified these approaches as part of the annual CEO study that he runs with his colleagues at IBM, these approaches include; industry innovation, enterprise innovation, and revenue innovation.
These approaches are shown in the IBM Framework for Business Model Innovation as reproduced from “Not For Free” above in the image for this article. Click the above image to enlarge.
The following descriptions are based upon the detailed description of each approach from “Not For Free”:
1. Industry Innovation: Industry innovation happens when a firm crosses the boundary from one industry to another. For instance, Virgin’s move from music retail into transportation and financial services, along with the focus on high-quality customer service it brought to those industries, was an industry innovation. Likewise, a company is engaging in industry innovation when it creates an entirely new industry, as Google has done with the search market and as Microsoft did by catalyzing the personal computer industry.
2. Enterprise Innovation: Enterprise innovation involves rethinking the way the firm defines its boundaries. Zara and Li & Fung offer good examples within the apparel industry. In the case of Zara, it expanded the boundaries of the typical apparel firm with its decision to own every aspect of the apparel value chain, so that it could respond quickly to emerging fashion trends. In contrast, Li & Fung dramatically shrank the boundaries of an apparel manufacturing firm by functioning as a service provider that links buyers with a vast network of independent apparel manufacturers. As a result, it offers clients a level of flexibility that it never could have if it owned factories.
3. Revenue Innovation: Revenue innovation focuses on how the firm captures revenues from the value it creates with its existing assets. Revenue innovation involves three distinct issues: how the value is priced, how the value is packaged, and who is paying for the value. While there have always been myriad approaches to these issues, the general trends of communications and computing ubiquity, along with the change in consumer expectations that has come about partly as a result of the former two trends and the availability of information, have rapidly expanded the possible approaches and therefore the opportunity for innovation.
Simply stated, business model innovation really involves – redefining yourself to participate in new industries or create new ones, evaluating your enterprise and rethinking its capabilities, and aligning your value offering to your customers perceptions.