We hear these questions often: What is business model innovation and how can my company do it? How can a company that already has a business model create a new one? Are there best practices for business model innovation?

We’ve also observed that while some leaders know their company's strategy, mission, financial model, etc., they don’t really understand their company's actual business model. Their employees certainly don’t know what it is.

Few companies know how to intentionally redesign their current business model, or design a new one — let alone create the capacity to do it on an ongoing basis. Even the few companies that have been successful at business model innovation are unlikely to have specific processes for it that other companies can learn from.

However, we've identified some best practices from our own work, and observed others from the few companies that have succeeded — or come close to succeeding — at innovating their business models.

You can’t innovate what you don’t know. So, before we share best practices, let’s define “business model.” We know there's more than one definition of the term, but in this post, we’ll use ours: 

Your business model is the story of how your business creates, delivers, and captures value. How do you successfully change that story, or create a new one? Here are some best practices:

1. Business model innovation must come from the leadership team.

Only C-level executives can envision and authorize the sort of combination and recombination of corporate capabilities required for business model innovation. The obvious example is Apple. Others at Apple may have designed the products and services that changed the business model along the way, but the vision and the drive to execute came from Steve Jobs. 

Why can’t your new Chief Innovation Officer lead business model innovation? The CINO role was created to drive innovation within an existing business model. Typically, CINO’s manage innovation portfolios and processes meant to create new products and services that are innovative on their own, may tweak the current business model a bit, but do not equate to business model innovation.

Similarly, business unit leaders are charged with the responsibility to make the current business model as successful and profitable as possible. All of this is necessary for the business, but not sufficient for business model innovation.

2. Business model innovation must be separated from the current business.

Companies need to separate business model innovation from the core of their business, just as companies have separated new product and service development into R&D labs and skunkworks. Business history includes a long list of companies that have used the skunkworks approach — among them Lockheed (where the term originated), IBM, Google, DuPont, Ford, and Nike.

R&D for new business model exploration and design happens in a separate place we call a “sandbox.” In this sandbox, away from your core business, you can combine and recombine core capabilities, technologies, possible new capabilities, and explore adjacent spaces. And because of the fear factor, only in a separate sandbox can you consider possibilities that may cannibalize your existing business.

[Update: Skunkworks isn't the best comparison, since it's completely separate from the core business. When we say "sandbox," we mean a connected adjacency. See more about that here.]

3. Business model innovation must be human-centered.

Successful businesses have always known that customers matter. Looking through the lens of the customer is even more critical in designing a new business model. Business models start with a compelling customer value proposition, and what better way to create that value proposition than looking through the lens of customers?

What you need to discover: How do customers view the world? What are they trying to get done? What matters to them? In what ways could your company create new value for them, deliver that value, and capture value in return?

4. Business model innovation requires a design approach.

We’ve just said business model design begins by viewing the world and your business’s capabilities through the customer’s lens. To succeed, you must use a design approach for the entire process.

Business model innovation requires an approach of experimentation → learning, rather than success → failure. The only thing you can really learn from failure is that you failed, while experiments are designed to result in learning. The design process works this way: Prototype, test, learn, evolve; prototype, test, learn, evolve; repeat as necessary.

5. Business model prototypes must be tested in the real world.

A focus group or a quant study won’t tell you whether your business model will work. They may not even tell you whether your product or service will work, but that’s another topic.

You need to expose your prototypes to real customers in the real world, and observe how they work and don’t work (often it’s not an either/or). Again, this is central to a design process.

6. Business model innovation requires different metrics.

You’ll need to be careful to measure the right things as you experiment and test business model prototypes. Most likely, you will create metrics to evaluate your hypotheses, because the metrics you need will not be the same metrics you would use to measure your current business performance. Instead, you'll need to figure out ways to measure how well your value proposition actually provides customer value and can be delivered successfully, while still returning enough value to your company.

7. Tell the story.

Remember, your business model is the story of how your business creates, delivers, and captures value.

A new business model recasts the narrative. Telling this new story helps people — your employees, your customers, your stakeholders — to see your company differently as it changes. So, before you launch your new business model, you’ll need to explore ways to tell the new story in different contexts and for different audiences.

The new story will pull people in. It may even prompt them to co-create the unfolding narrative of your business transformation along with you.

That's not required, but if it happens, it'll be a happy ending for your business model innovation process.

Image by Flickr user planzeichnen; some rights reserved

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