One of the critical elements of managing innovation is linking your innovation efforts to your overall strategy. Over the weekend, I talked about how you can use the Strategy Diamond by Hambrick & Fredrickson to help achieve this coordination. Another tool that you can use is the Business Models idea, something that we’ve discussed here a few times.

Like the strategy diamond, the business model is an integrated analytical framework – but for assessing a particular innovation rather than an entire strategy. It is explicitly built around the proposition that having a good idea is insufficient – you have to execute the idea effectively. Henry Chesbrough developed the concept as a way to explain how to profit from open innovation. His contention is that when multiple organisations have access to similar ideas, the one with the best business model wins. While I really like Chesbrough’s system, there are others around with different elements that work in basically the same way.

This is another tool that we find useful when working with firms to improve their innovation process. There are several key ideas that come from using this framework:

The first is that, again, all elements of the business model are interconnected. This means that when one part of the model changes, the rest probably need to as well. For example, one of the key points that Mitch Joel makes in his book and on his blog Six Pixels of Separation is that because of the web, we are now connected to many more potential customers than we were previously. This means that our market has almost certainly changed from the local people that are interested in our services to potentially everyone. Trying to reach everyone is a fatal mistake, but this is still an important change in our possible market. Few business models scale up without requiring changing. If we decide to try to reach this market, it is likely that we will need to change our value proposition and our revenue generating mechanism.

The second point is that we often get locked in to using the first business model that works for us, even if that is not a good model as our business expands. The example that Chesbrough uses to illustrate this is Xerox. Their original model was built around providing high-volume photocopying services for very large corporate customers. So when they tried to bring all the great ideas coming out of their Palo Alto Research Center to market, they used the same model. However, this model was poorly suited for selling ideas with broader appeal, such as the graphical user interface, or ethernet systems. Consequently, these ideas failed for Xerox because they didn’t not fit in with their dominant business model logic. Innovative new products will often have a value proposition that differs from that of your current core products. If you are going to successfully bring them to market, you probably need different customers and possibly even a new value network.

A third point is that business model innovation can be extremely powerful. For example, the Apple iPod was as much a business model innovation as a design innovation. There were other mp3 players before the iPod – it wasn’t especially innovative as a product. However, it really took off when it was coupled with iTunes. By linking the mp3 player to a convenient, legal source of downloadable music, Apple created a new value network. Adding music, artists and distributors into the network made a new ecosystem for the iPod – and this innovation was more important to its success than any of the new ideas actually embedded within the product itself.

Innovation is not about having the best ideas – it is about having the best execution of new ideas. The business model framework is a tool that can help you improve your execution, and that is why I think that it plays a crucial role in linking innovation to your strategy.

(Figure from Henry Chesbrough, Open Innovation, Harvard Business School Press, 2006)