Why Business Model Innovation Matters More Than Ever

The coronavirus pandemic has been a roller coaster for business managers. Some are cresting high, others are in freefall, and many more are simply trying to hang on until the nightmare ride comes to a stop. Amid the panic, there are valuable lessons for leaders who can take a deep breath and step back. Wharton management professor Ra Amit and Christoph Zott, an entrepreneurship professor at the University of Navarra’s IESE Business School in Spain, have written a new book to guide businesses through the internal and external shocks caused by the pandemic and other disruptions.

 INNOVATION WhyBusinessModelInnovationMatters MoreThanEver 2/17/2021 Why Business Model Innovation Matters More Than Ever –  Before we dive into the book, could you give me a little background on your collaboration? Ra Amit: We’ve known each other since the mid-1990s, when we met at the University of British Columbia in Vancouver, Canada. Both Chris and I are strategy and entrepreneurship scholars with a very pragmatic orientation and very rich practical experiences. We observed in the mid- and late-1990s that there were all these e-businesses that were formed, and they are enormously valuable. We observed companies like eBay, for example, which was founded in 1995 and went public in 1998. It doesn’t have a product. The cost of goods sold is zero. Yet eBay is worth billions of dollars. Take Netix, another example of a company that was founded in 1997 and went public in 2002. There’s really nothing new about its product. You could have rented CDs at Blockbuster, yet Netix innovated in the way you rent a CD. Initially, it was mail order, and now it’s streaming. By innovating the way you rent a CD, it drove Blockbuster out of business. This allowed Chris and me to realize that there is a new form of innovation that is distinct from product innovation, that is distinct from process innovation, and which does not require mountains of R&D expenses and years of research. This new form of innovation centered on the way companies do business. Namely, their business model. We published over two dozen papers together, and we decided to write a book about business model innovation. Christoph Zott: The real answer is that because our last names t so well together — Amit and Zott. We’re the team that looks at something and tries to nd the answer from A to Z. If you go even beyond the internet and the focus on business models, what brought us together was our keen interest in entrepreneurship and everything that has to do with value creation. Ra and I share a passion for that subject. We really want to understand how value is created, how people create something from nothing. This is this magical formula that is typically attributed to entrepreneurs. They’re able to turn ideas into something tangible. [They build] companies that provide employment to people. They create products that customers want to buy. The relevant issue that we were observing, especially in the second part of the 1990s, was that there were a bunch of companies that were created very fast and made it to IPO really fast. Netscape, Yahoo, eBay. We asked ourselves, “What’s special about these businesses? Is there anything new here?” That led us to the realization that what these companies were doing and were really good at had nothing to do with our preconceived notions of products or services. But it was in how they did business, which we then called the business model.

Christoph Zott “Everything that we have learned in business school for the past decades is stilltrue. Butthe business model offers a new avenue for value creation.” There was something fundamentally new going on, and it didn’t really have to do with the digitization of business. We saw that digitization was an enabler for rms to go about business in a new way, in a dierent way. This got us o on our work on business models and business model innovation. We wrote our rst paper together in 2000, and it was published in the Strategic Management Journal. It’s still considered one of the seminal pieces on business models. It wasn’t that the business model was a brand-new idea for managers. But for academia, it was a new idea. We were interested in developing this idea and exploring it further because we thought it was a very, very rich idea. If you have companies that, within a matter of a few years, become worth billions of dollars, there must be something really to it. We’ve been at it now for a long time, and the book represents a summary of the insights that we and our colleagues have found and researched over the past 20 years. Knowledge@Wharton: Let’s talk about what business model innovation is. In this book, you help dene it by telling us what it is not. You wrote that, “Modifying an activity by making it faster, cheaper, or higher quality is not a business model innovation.” That statement seems to eliminate the traditional avenues of improvement that managers usually take. What should they be doing instead? Zott: I’d like to address this question in two ways. Yes, we do say in our book what a business model is not. And we do this deliberately, because we think it helps people understand better what a business model is in the rst place. In general, there is a lot of confusion about what a business model really is. If one person says A and another person thinks B, it’s very hard to think that they have a real conversation around this topic. So, we thought it would be very important rst to dene the concept clearly. The second thing is that we don’t believe that other ways of creating value have become less important and that the business model eliminates these traditional avenues. In contrast, the business model adds to these traditional avenues of improvement for business managers. It complements them. Everything that we have learned in business school for the past decades is still true. But the business model oers a new avenue for value creation. 2/17/2021 Why Business Model Innovation Matters More Than Ever – Knowledge@Wharton

Professor Amit, what is the framework for business model innovation? Amit: Now we know what the business model is not — it’s not the product, it’s not the rm, it’s not all-encompassing, and it’s not the same thing as a business plan. The way we think about the business model is as a system of interdependent and interconnected activities that are designed to capture market needs, or perceived market needs, and create value for all the stakeholders. It’s a holistic concept that requires the manager to take a step back and apply system-wide or system-level thinking. There are really four dimensions in a business model. First, what are the activities that need to be carried out as part of this business model? Second, how are these activities sequenced or connected to each other? Third, who carries out each of the activities? And fourth, why is this business model creating value for all stakeholders, and why does this business model enable the focal rm that innovates the business model to capture some of this value? The basic idea is, as Chris pointed out, if you just change and make the product a little bit better — you add a feature, for example, or make it work faster — it doesn’t change the system of activities. So, when we talk about business model innovation, it refers to a business model that is new to the industry in which the rm competes. And business model innovation strategy, which is the title of the book, refers to the design of a new activity system, namely, the design of a new business model. It refers to the processes by which that new system of activities is created and the implementation of the system within the context of the rm. And very, very importantly, [it includes] the ongoing adaptation of that business model to a changing ecosystem or environment within which the rm competes. Zott: I just wanted to repeat this very important observation — that a business model is not allencompassing. If it were all-encompassing, how would it then be dierent from a rm or an organization? We’re talking about the business model of a company, of an organization. This is distinct. In terms of the business model, it’s the activity system that we would like to highlight as the crucial underlying conceptual backbone. We could think of Apple, which is a very well-known example because Apple does both. Apple is brilliant with product innovation and design. They have innovated many gadgets that are household items today, which has made them one of the most valuable companies on the planet. The iPhone is one of the latest examples of that. 2/17/2021 Why Business Model Innovation Matters More Than Ever – Knowledge@Wharton

Raphael Amit “When we talk about business model innovation, it refers to a business modelthatis new to the industry in which the rm competes.” But they are also a very powerful business model innovator. With the introduction of their app store and iTunes and all of those innovations, what they have done is added a distribution platform to their hardware business, which makes their hardware business more valuable. They benet from the sale of the gadgets, but they also benet from the sale of the content that is played on these gadgets, so they benet twice. There is a mutually reinforcing relationship here between their product innovation and their business model innovation. Knowledge@Wharton: In the book, you stress the importance of adopting a business model mindset. That usually refers to startups and thinking like an entrepreneur, but it’s a little bit more than that for you. So, what is a business model mindset and why is it important? Zott: You mentioned entrepreneurial mindset. That is one type of mindset that’s certainly very helpful. But when we talk about business model mindset, we refer to what Ra has mentioned a little earlier as system-level thinking and holistic thinking. Entrepreneurs also need to think at the system level and holistically because they need to think about the entire business architecture. They need to think about all business functions. It’s the same thing with the business model [mindset]. In the business model mindset, you need to be able to take a step back, and this sometimes is very dicult for managers because they’re focused. They work in organizations, within certain functions, so they’re good at one thing. They’re good at strategy, they’re good at marketing. They may work in sales, or they may work in nance. But they rarely have this opportunity to take a step back and rethink the entire construction, the entire architecture of the business for which they’re working. How does it all hang together? How are all these activities connected to each other? That is what we believe requires a specic mindset — this ability to see the forest and not just the trees. That’s the rst requirement of a business model mindset. To be able to jump the level of analysis from a focus on activities or individual activities or products, to the system level. Amit: Think about a car manufacturer executive’s reaction to the entry of Tesla into the automotive market. The rst thing they are thinking about is, “Well, maybe what we should do is expand our product portfolio and have an electric car or a hybrid car,” because the focus is on the technology of the product.

Courtesy of Knowledge podcast at Wharton, Feb. 15, 2021 and Professors Raphael Amit and Christoph Zott  who discuss their new book, Business Model Innovation Strategy.

To read more from the podcast transcript please go to: https://knowledge.wharton.upenn.edu/article/business-model-innovation-mattersever/utm_source=kw_newsletter&utm_medium=email&utm_campaign=2021-02-16

Leave a Reply

Your email address will not be published. Required fields are marked *