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Is Business Model Innovation Just Another Name for Strategy? | The Discipline of Innovation

Is Business Model Innovation Just Another Name for Strategy?

If you have been following the posts over recent days you can probably guess that Tim and I have been talking a lot about business model innovation. To quote a phrase, we know business model innovation when we see it and some business model innovators such as Ryan Air and Ikea have become global market leaders. Also, there is good evidence that business model innovators have superior performance compared to other forms of innovation.

I’m thinking about this because I am actually a strategy guy and in my MBA classes and corporate seminars I also talk about companies such as Ryan Air and Ikea because they are examples of successful strategy. This leads to the question of whether business model innovation and strategy are really just the same thing? Certainly successful business models should also have sound strategic principles behind them and one of these is the central concept of ‘fit’. This is an old idea made popular by Michael Porter in the 1980s and it is really about lining up all of your business operations behind a central logic of value creation.

Using Ikea as an example of strategic fit, the fundamental logic of the business model is creating value through economies of scale. Large self-service stores in near wealthy population centers, products with shared components and flat-pack design all support the logic. Often when we see businesses getting into trouble it is because they are trying to mix different value propositions together or the established business model gets surpassed by others with better business models with superior value propositions. Saab is an example of business model failure with no clear value proposition. There was not enough scale to compete on costs and not enough differentiation through superior technology and design to command a price premium.

In my strategy seminars, I use a diamond model developed by two US academics, Hambrick and Fredrickson to talk about strategic fit. A good business model like Ikea can demonstrate how all of the components of the diamond fit together and reinforce each other. Ikea’s business vehicle is organic growth which gives them control over the operation. Their differentiators are well designed products at a competitive price and staging of growth has been rapid to capture scale. Fit can also be a source of competitive advantage because it is hard to replicate. Organizations are complex beasts and making everything work together takes time, effort and leadership.
strategy diamond

To return to the original question, I think incremental business model innovation is the same as executing a good strategy. Apple has just posted a stellar 90% increase in profit and much of this growth is based on a suite of products closely related to each other and not to far from the business model that Apple has had for a few years now. The strategy is well thought out and successfully planned and implemented. However, I think that strategy and business model innovation diverges when we talk about radical business model innovation. Why? Because strategy is still based upon conventional thinking about planning, prediction and measurement. Moving to very different business models needs the tools and concepts from innovation management rather than predictions and plans from strategy textbooks. Tools such as real options and the three horizons will help stage the innovation process to reduce downside risk and capture the upside. Innovation jams and lead-users might be useful to get new ideas on other business models. Stage-gate methods might enable us to trial new business models and scale up as some models show signs of being successful.

The potential of business model innovation is enormous. One of the most basic definitions of innovation is doing something different in a way that creates value. Innovation managers have focussed on the ‘doing something different’ part of the definition but we are a bit fuzzy about the value thing. When we take an innovation and build a reinforcing set of activities around it that are underpinned by a central customer value proposition then we really have the whole innovation thing working- and the observation that business model innovators top the class becomes perfectly understandable. I’m pretty excited to see how strategy and innovation can actually work together. They are two sides of the same coin.

11 Responses to Is Business Model Innovation Just Another Name for Strategy?

  1. Patrick Stähler 28 April 2010 at 3:32 am #

    Dear John,
    thanks for your interesting post. The relation between business model and strategy is easy: The business model is just the model of a business, regardless if it works or not. The definition of a strategy I leave to you guys in academia. In a perfect world the business model should be the outcome of a deliberate strategy, but as Mintzberg pointed out, most strategies we see are not deliberate.

    The interesting part comes with the question you raised: business model innovation vs. strategy. I have argued some years ago that a business model innovation is the output of a strategy process. The interesting part of business model thinking is that we see many starting points for an innovation we usually do not consider in a world which is dominant by product or process innovation. So we have revenue model innovations, value innovations or architectural innovations.

    An other unsolved question at least in academy is: Is a business model innovation by nature disruptive or can we have sustaining business model innovations?

    Well, that depends from the standpoint. For IKEA, their business model was never revolutionary but for the incumbents it was. I separate in my daily work between business model optimization and business model innovation.

    I left academia almost 10 years ago but I am interested in publication since I only published my Ph.D. thesis with all the ideas we talk here in German. The only article I wrote was a paper you find here: http://blog.business-model-innovation.com/about/

  2. John Steen 28 April 2010 at 10:58 am #

    Hi Patrick:
    thanks for the comment. I think you are right in talking about business model innovation as being able to capture a broader variety of innovation processes and the way that they create value. The distinction between optimization and innovation is also very useful.
    Thanks for the link to your blog and the thesis. You were ahead of your time! Long Range Planning (a strategy journal) has just collected some nice papers for a special issue on business models. Do you still have access to the St Gallen library?

  3. Patrick Stähler 28 April 2010 at 6:54 pm #

    Thanks for the hint to the Long Range Planning. I will look it up here at the library of the University of Zurich. Unfortunately, I have no online access anymore. Stay in touch! Patrick

  4. Graham Horton 17 May 2010 at 7:34 pm #

    certainly business models and strategy are closely related. however, claiming that they are the same thing is overstating the case.

    strategy consists of two components:
    1. ends: where do we want to end up and why?
    2. means: how do we propose to get there?
    a business model only answers question 2. (a business model innovation means trying out a new answer to question 2.)

    incidentally, i was puzzled by your statement “strategy is still based upon conventional thinking about planning, prediction and measurement.” (and the implication that BMI is not.)

    i am not sure that either statement (explicit and implied) is true.

    regards

    graham

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