Business models are important – they go a large part of the way towards determining how successful your organisation will be.  So here’s a question: where does innovation fit in your business model?

There are a number of different ways in which people describe and talk about business models – the common feature is that they describe how an organisation’s activities interact to create and deliver value for their stakeholders.  Today, I’ll use the Business Model Canvas version of the business model to illustrate the discussion:

The answer to the question of where innovation fits is not very satisfying.  The answer is: it depends.  On what?  On where you sit on The Innovation Matrix:

So let’s work through where innovation fits in a variety of business models.

The three boxes in green are the three categories where your innovation effort and your returns from innovation are in balance.  These are all reasonable places to be, depending on what you are trying to achieve.

If you are Not Innovating Very Much, then innovation doesn’t fit into your business model at all.  For this to be a stable strategy, you must be in a relatively stable market, with a strong competitive position.  In other words, your current business model is working well, and you don’t need to do anything very innovative.  You could even argue that attempting to innovate from this position is a waste of resources.

On the other hand, if your competitive position isn’t strong, or your market or environment are changing, then you’ll need to innovate. Which means that you’ll need to change your business model.

If you are a Fit for Purpose Innovator, then innovation needs to support your value proposition.  In this quadrant, your primary value is probably not based on innovating.  Here, your value proposition is probably based on being the lowest total cost provider, having the best product, or providing the best customised solutions.

In this situation, then innovation will mostly be focused on the back-end operations – it will be a key activity, which requires some resources, and possibly partnerships.  All of the innovation will need to support improving your primary value proposition.  Alex Osterwalder describes these firms as Business Model Masters – they are organisations that “outcompete others with a superior business model where every one of the business model building blocks reinforce each other.”

If you are a World Class Innovator, then innovation is central to your entire business model.  Your value proposition will be somehow based around your innovation capability.  Osterwalder calls these organisations Invincible – they “continuously disrupt themselves while their business models are still successful.”

As is the case with Business Model Masters, all of the business model building blocks reinforce each other, but in this case, innovation will be at the core of all of these blocks.  As I said, the value proposition will be innovation-based, key activities, resources and partnerships will also need to organised around innovation.

In these three cases, your business model is basically balanced with your innovation effort – that’s a big part of why these are three stable innovation strategies to follow.  The other six locations in the innovation matrix have some problems.

The three red squares are all situations where your business model is based on having some level of innovation, but you’re not delivering the level of innovation that you need to support that strategy.  The worst position to be in is Bewildered.  Organisations here have invested a lot in innovating, and it is likely that their value proposition is innovation-based.  An example here is Procter & Gamble in the late 1990s – their slogan was “Touching and improving lives” – which implies that they are innovating.  Yet, at the time, despite heavy investment in innovation efforts, they weren’t delivering that at all.

This is a sign of a business model that is not coordinated through all of the building blocks.  In the case of P&G, their key activities did not support getting innovative new ideas out the door, and they had to completely realign their cost structures, key partnerships and revenue streams to better support their innovation efforts.  As they did this, P&G evolved to become a World Class Innovator.

Organisations that are Thinking About Innovation are in a similar situation.  For them, it is likely that they are trying to become Fit for Purpose innovators – they want to use innovation to improve and support their core value proposition, which is not innovation-based.  But again, they have business model misalignment.  Most of the time, these organisations fail to organise their key activities and resources to support innovation.  So again the business model is not coordinated.

The organisations in the red squares tend to have customer-facing activities that require innovation to succeed, but their operational back-ends fail to support these aspirations.

The organisations in yellow are in a slightly different situation.  We won’t talk about Unicorns (firms that are great innovators without putting any effort into it), since they are mythical and don’t exist. But the other have business models that are often the opposite of the ones in the red squares: their operational back-ends are innovative, but their customer-facing activities are not built around innovation.

In other words, even though these firms are often very innovative, they do not necessarily think of themselves in that way.  So they are not differentiating their value propositions based on innovation.

Here are some of the key points:

• Your position on the Innovation Matrix will determine which parts of your business model need to be innovation oriented.  One of the key points with The Innovation Matrix is that your innovation activities need to be consistent with your strategy.  Similarly, your building blocks of your business model must reinforce each other.  If you do both of these things, then your business will be built to execute your strategy.  And innovation will support this.
• Your position on The Innovation Matrix is dynamic. The P&G case study shows firms evolve over time.  They started out Bewildered, but as they changed their innovation capabilities, and got their business model aligned, they turned into a World Class Innovator.  The Innovation Matrix is a tool for identifying where you currently sit – but where you are now isn’t where you’ll always be – you can change!
• Changing your innovation performance requires a change in business model. There is no one-size-fits-all approach to how much innovation you need.  One of the critical points with The Innovation Matrix is that it is not enough to just talk about being more innovative – if you do this, it leads you into the red zone.  Instead, to successfully change your innovation outcomes, you must change your innovation-oriented activities, and your investments in innovation.  Innovation requires a change in behaviour.