I recently read a study conducted by St. Gallen University discussing business model innovation and how to tell when it is time to re-think your current business model. So what is a business model? In the study, a business model is defined as, “a unit of analysis to describe how the business of a firm works”. In simpler terms, your business model is a list of all of the various parts that make up your “secret sauce” and how that is transferred to customers as an item of value.
As a business strategist, my profession is to perform deep analysis on symptoms of errant business strategies, determine their origin, and rebuild strategies to get companies back on track. While we have been successful in accomplishing these goals, most solutions are built around concepts that were unknown or under-developed in our clients’ current core strategies, not business model innovation. This realization caused me to examine the difference between building better solutions and re-thinking business models to determine if my firm needed to re-think our business model.
Building Better Solutions
Building better solutions typically results when a current business measure has shown a trajectory other than what the business owners desires. This can includes employee turnover, slowing sales, loses in productivity and/or profitability, or team conflict, to name a few. In these scenarios, my team functions like forensic scientists, where they look at every possible cause of the trajectory change and systematically track its origin.
For example, we had a client whose sales were not meeting company expectation. While the natural assumption would be a problem in marketing and advertising, our team found that the problem was with the relationship between the sales manager and the sales team. After coaching sessions with the sales team alone, management alone, and one session with everyone, sales improved 15% in the next quarter. After reading the St. Gall study, I have to wonder if the improvements would have been greater if our solutions were used to help the business owner re-think his/her business model.
Business Model Innovation
While building better solutions usually results in changes in processes and practices, it does not require changes to the overall business model. Business model innovation (BMI) occurs when a business owners examines their target audience, value proposition, delivering the value, and the revenue model to capture customers seeking that value, and making changes to two of the four sections. As the study describes, BMI does not have to be an industry changing breakthroughs, it can start as simple as adopting proven strategies from corporations that have achieved the level of success the company desires.
For example, in the tire industry it is common to see sales that offers “buy three, get one free”. What if a retail company used the same method, but modified to fit their industry? Imagine the response if a retail store offered, “Spend $200 in one department, get a $50 gift card for any another department”? By making this change to the value proposition section of the business model, the business could expand their market reach within existing customers, increase sales in departments that are under performing, retarget customers if the $50 gift card is not redeemed the same day, and introduce an enticing concept to new customers.
To make the BMI complete, the business owners would also change the revenue model to one that makes the $200 purchase be in a department where profitability is high (i.e. clothing) and require all customers to register to receive the $50 gift card, to fortify the sales funnel. Further, using digital marketing and social media customers could be re-targeted based on the purchases in both departments and offered incentives for referring friends and family.
After my analysis I have concluded building better solutions is “a pound of cure” and business model innovation is “an ounce of prevention”. Our clients and business owners in general would be better served by looking at the totality of their business model in response to unwanted trending. Definitely make changes to processes and practices to get the business back on track, but use those strategies as a measure of the effectiveness of the related business model section. During the re-thinking process if changes are made, the business owner must also examine the effect of those changes on the other three sections and adjust accordingly.
Click here for a video summary of the study.
Click here for our BMI notes.