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.