business model innovation

There was an article in this weekend’s Australian Financial Review reviewing a book about myspace. The reviewer kept stressing that myspace did not invent any new technology, the implication being that the firm was not innovative. So how did it wipe out friendster? The answer, which wasn’t explored by AFR is that myspace developed a better business model.

I keep talking about the importance of business model innovation. The framework that I like to use for this comes from Henry Chesbrough in his books Open Innovation and Open Business Models. His basic argument is that in an open innovation regime, the firm that develops the best business model is the one that wins. I think this idea is basically correct. In the case of myspace v. friendster, myspace targeted a different segment of the market (kids, plus bands and their fans instead of ‘everyone’), and they had a different value proposition, particularly concerning the openness of the site and the amount of intervention undertaken by the site owners. At the time, both of these changes were innovative – and I believe that myspace won that particular battle due to a superior business model.

Today I stumbled across one of Chesbrough’s own talks on slideshare (what a great resource!), which explains the model beautifully:

The phrase ‘business model’ is kind of like ‘innovation’ or ‘network’ in that it is defined differently by nearly everyone that uses it. An example is the useful blog the Board of Innovation – which posted a nice tool for developing what they call a business model last week. In Chesbrough’s terms, the BoI business model is really a model of revenue generation. But since this is one of the key areas, and one that provides a lot of scope for innovation, the BoI tool is a pretty useful one.

I continue to think that business model innovation is one of the most important ones to focus on, particularly if you are trying to crack a market that is currently dominated by existing firms. Which is why I agree with this criticism of Microsoft’s bing – they’re essentially attacking google using a replica of google’s current business model. This will never work – you need to find a new angle on the business model, just like myspace did.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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2 thoughts on “business model innovation

  1. nice slides! I suppose I’ve always avoided the open innovation stuff because everything I’d heard seem to scream: drop what you’re doing, the whole game has changed! The world is flat! Which I don’t buy. But Chesbrough seems to have a much more nuanced argument. I like. A few questions:

    1) Was Facebook’s business model that different to Myspace? If not, then why did they manage to gain entry using what would seem to me to be a rather similar business model. The main difference seems to be the demographic focused on? Though I’ve never had much interaction with Myspace so maybe I am just misunderstanding it?
    2) While reading your above points about business model innovation a thought struck me: does the nature of the industry mean that it is more difficult for a mining/resources firm to create a new business model? What would this look like for BHP/Rio/CVRD et al? Examples might include the introduction of site level JVs to develop coal mines and that example of crowdsourcing exploration from Wikinomics….

    • The biggest difference Sam is the demographic target. There are some other more subtle differences too, but that’s the main one. I haven’t given much thought to the resource companies – there has to be a way to address this for them. One example is the one from wikinomics of Goldmark, that used open models to help find more gold. To me though the real action will come from redesigning distribution…

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