We noted that curiosity about business model innovation among leaders of established businesses hit a new high in 2015. However, we saw more than curiosity. We saw confusion, too.

Throughout 2015, my Business Innovation Factory (BIF) colleague Saul Kaplan and I saw business leaders embrace the concept of business model innovation. Leaders have also begun to realize how difficult it will be to innovate a new business model while still operating the current one.

So we launched a set of business model design services for business leaders, as well as this blog about business model innovation. 

What did we see that convinced us 2016 would be the year of business model innovation?

Business models don't last as long as they used to.

As we’ve all seen, companies are increasingly vulnerable to being disrupted by an upstart new business model — exemplified by companies like Netflix, Uber and Airbnb — that plays by a completely different set of rules (see 'regulatory moats are springing leaks,' below). An 'upstart startup', like Netflix, Uber, or Airbnb, can swoop in and disrupt or totally destroy existing industry business models, including yours.

R&D for business models is the new strategic imperative. 

Companies need to establish the capability to do ongoing R&D for new business models, the same way they do R&D for new products and technologies. Here’s how R&D for new business models works: Create a sandbox — connected to but autonomous from your core business — in which to combine and recombine capabilities in new ways that are not constrained by the current business model. From this sandbox, conduct real-world business model experiments. At all times, companies should have a portfolio of business model explorations underway, including early-stage concepts, in-market prototypes, and later-stage, scalable models.

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Regulatory moats are springing leaks.

Upstart startups such as Airbnb and Uber operate business models that capitalize on the mismatch between their business models and the language of existing laws and regulations. These laws protect consumers, but they also create "regulatory moats" to protect existing industries. With new strategists and lobbyists, both companies have been winning more legal challenges than they lose.

CINOs and corporate innovation teams are not enough.

The rise of the Chief Innovation Officer and the phenomenon of building a "innovation capability" within a business does not equal a capacity for business model innovation. CINOs mainly work with product teams to strengthen and innovate the company's current business model, in order to make it more competitive. This is critical, since incremental innovation should be 75% to 80% of a company's innovation portfolio. But it's not business model innovation. Exploring new business models — especially those that might disrupt a company’s core business— requires a different sandbox, skills, resources, and authority than do innovation efforts to improve the core’s competitiveness.

Leaders have begun to realize that much of what they've understood about business models is wrong.

Corporate innovation has come into its own as a practice and a discipline. But much of the acknowledged 'gospel' and best practices of the discipline of innovation don't apply to business model innovation. Some of the biggest myths:

Myth: Business model innovation is a change management initiative.
Fact: Business model innovation is strategy development.

Exploring and testing new business models is strategy development before it becomes change management. There’s plenty of time for change management, once we’ve demonstrated new business models worth changing into. Business model innovation is a persistent and generative exploration of entire new ways to create, deliver, and capture value. When we treat business model exploration as change management, we are too likely to squash any concept that feels transformational or disruptive.

Myth: Business model innovation is too risky for an established business. 
Fact: It's too risky for an established business to hide from potential disruptive competition.

CEOs have to pedal the bicycle of today’s business model while simultaneously exploring a portfolio of new models for tomorrow. And the time for business model R&D is when the current business model is doing great; once any business model is under siege by a disruptive upstart, it’s too late to start exploring new models. Just ask anyone who used to be in the newspaper business.

Myth: New business models require new technologies. 
Fact: Business models make technologies transformative, not the other way around.

This is a common mistake. But think about our upstart startups, such as Netflix, Airbnb, and Uber. They didn’t invent anything or launch any new products. They've used common technologies enable their business models. They have deployed new business models that networked available capabilities differently, to create new ways to deliver customer value.

Myth: A new business model must have numbers to back it up, numbers from test marketing, market research, predictive analytics, etc. 
Fact: Business models must be designed, prototyped, and tested in the real world, using metrics that make sense for innovation.

We believe business model exploration starts by changing your lens to adopt the customer’s point of view. It requires a deep understanding of the customer’s experience, not as market research, but as a foundation for design.

Wait — how do you design business models?

We recommend, and use, a design process that leverages human-centered design and storytelling. Our process includes five steps:

  1. Shift: Look at the world through the eyes of customers and their jobs-to-be-done. Business model design is human-centered design.
  2. Create: Explore and imagine a new experience for customers that will create value for them.
  3. Deliver: Create a sandbox where you can combine and recombine capabilities.
  4. Capture: Develop a resource generator to fuel and grow your business model.
  5. Prototype and Test: Build a low-fidelity version of the new business model and test it in the real world. Learn, evolve, and test again. Repeat as needed.

We're ready for 2016, the year of business model innovation! Are you?

Burning Questions For Innovators: http://bit.ly/BIF2016Summit

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