Innovation can be a nebulous term – what is innovative to one person may be only clever marketing to someone else. A new technology may solve a problem and bring real value to users, or it may simply be another patent that sits in a drawer – but the company awarded the patent is still called innovative.

With such different definitions of innovation, it is no wonder that organizations are confused about what it is and how to apply it/leverage it/profit from it. It’s also not surprising that the phrase “business model innovation” engenders even more confusion and even fear. After all, if innovative products and services are so hard to conceive of, how can an organization be expected to innovate its business model, its raison d’être? And why should they go to such lengths?

What is Business Model Innovation?

A company’s business model is its plan for creating value, making a profit and differentiating itself from the competition. A business model includes the components and functions of the business, as well as the revenues it generates and the expenses it incurs. Using a business model framework – a way to understand your business model in terms of the complete value chain (customers, partners, suppliers, cost structure, etc.) – can help you better understand who your customers are, what value you provide to them and how you do it.

Understanding your current business model is the first step to reinventing it using business model innovation. Although a business model is meant to have more longevity than a strategic plan, that doesn’t mean it will remain relevant and optimized forever. Companies should periodically ask questions such as “Who are our customers? What value do we offer to them? How do we do this?” If the answers are different than before it may be time for business model innovation. [Read more...]