Why Established Companies Struggle with Business Model Innovation

The Two Key Challenges

Why is it so difficult for established companies to pull off the new growth that business model innovation can bring? Here’s why: They don’t understand their current business model well enough to know if it would suit a new opportunity or hinder it, and they don’t know how to build a new model when they need it.

The Four Elements of a Business Model

Successful companies already operate according to a business model that can be broken down into four elements: a customer value proposition that fulfills an important job for the customer in a better way than competitors’ offerings do; a profit formula that lays out how the company makes money delivering the value proposition; and the key resources and key processes needed to deliver that proposition.

Game-Changing Opportunities

Game-changing opportunities deliver radically new customer value propositions: They fulfill a job to be done in a dramatically better way (as P&G did with its Swiffer mops), solve a problem that’s never been solved before (as Apple did with its iPod and iTunes electronic entertainment delivery system), or serve an entirely unaddressed customer base (as Tata Motors is doing with its Nano—the $2,500 car aimed at Indian families who use scooters to get around). Capitalizing on such opportunities doesn’t always require a new business model: P&G, for instance, didn’t need a new one to leverage its product innovation strengths to develop the Swiffer.

New Business Models Needed

A new model is often needed, however, to leverage a new technology (as in Apple’s case); is generally required when the opportunity addresses an entirely new group of customers (as with the Nano); and is surely in order when an established company needs to fend off a successful disruptor (as the Nano’s competitors may now need to do).

Conclusion

Established companies face a crucial challenge in business model innovation: understanding their current model well enough to know if it’s suitable for new opportunities, and knowing how to build a new model when needed. By identifying the four elements of a business model and recognizing when a new model is required, companies can better seize game-changing opportunities and thrive in a rapidly changing business landscape.

FAQs

• What are the two key challenges that established companies face in business model innovation?

They don’t understand their current business model well enough to know if it would suit a new opportunity or hinder it, and they don’t know how to build a new model when they need it.

• What are the four elements of a business model?

A customer value proposition, a profit formula, and the key resources and key processes needed to deliver that proposition.

• When is a new business model needed?

A new model is often needed to leverage a new technology, is generally required when the opportunity addresses an entirely new group of customers, and is surely in order when an established company needs to fend off a successful disruptor.