BUSTING THE MYTHS OF BUSINESS MODEL INNOVATION.

Our current understanding of and approach to how established companies design and implement new business models are built upon three pillars.

First, the process of business model innovation and change follows the phases of, analysis, development, testing, and finally implementation. Developing a new business model is believed to start with a thorough review of the current situation, strengths, and weaknesses of the existing business model, understanding the customer, competitors, and your organization’s ecosystem. Following this phase of information gathering and understanding, various options for new business models need to be developed.

These multiple options then need to be tested and validated through experimentation to learn which one works best, the second pillar of our thinking. As no knowledge as to the potential success of the new business model options is available, knowledge needs to be created through testing them in real life. The prevailing assumption is that various options need to be tried and tested to learn which model works best.

Hand in hand with the need for experimentation goes the belief that you will fail, and that trial, error, and failure are not only unavoidable, but even necessary, and should be embraced, the third pillar. Only after having tested various options, you proceed with implementing the chosen one. Although it has been acknowledged that the process is likely to be iterative, we still assume it will follow the ‘natural’ sequence of analysis, planning, testing, and execution.

These three assumptions are the result of three flaws in our thinking

First, our knowledge about new business models comes primarily from startups and the online businesses world; domains, which were the first to adopt business model thinking, and, which have been studied extensively. We simply assume that what works in these domains does apply equally well to established companies. E.g., lean startup methodologies being tried in corporate settings.

Second, we think that what we know about product innovation and design, applies equally well to other types of innovation. E.g., the recent hype of trying to apply design-thinking approaches to the design of business models. As a large number of studies have demonstrated, we know that different types of innovation need to be treated differently, yet we are still stuck with wanting quick and easy fixes.

Third, although we know that the business model innovation process is iterative and not linear, we try to explain and describe it using our traditional linear process language, breaking it into phases of ‘analysis-planning-execution.’

Having learned from experience that these existing approaches do not work well in established companies, and cannot explain how established companies create and implement new business models, I set out to research how such companies really do it in practice.

How Established Companies Transform their Business Models

Over the course of five years, Klinik Hirslanden, one of the most exclusive private hospitals in Switzerland, developed and implemented a worldwide unique business model, moving from being a basic infrastructure provider for doctors, to being a system provider for patients and specialist surgeons. The new business model combines the traditional chief physician and the private practitioner systems, integrating the service of a five-star luxury hotel, and attracts the best doctors and VIP patients from around the world.

Although the new business model is hugely successful, renowned clinics like Mayo visit Hirslanden to learn how they do it, Hirslanden did not follow the above-described process, nor did it experiment with multiple options, and neither did it accept or focus on errors and failure.

If you think about it, the claims to follow a clear process, experiment with multiple options, and accepting failure, are highly unrealistic anyhow. We all know that life is not as linear and predictable as we would like it to be. How could a company with about 4000 employees experiment with multiple business models? In the case of Hirslanden this would have meant to experiment for example with a pure play chief physician model, a pure play private practitioner model, and the new hybrid model, all at the same time! Although the group Hirslanden belongs to could have done so in separate clinics, the individual clinic or business unit could not. And finally, no one likes to fail. Imagine telling your shareholders that you just sunk a couple hundred million experimenting, but, ‘Hey, all is OK, we need to accept failure!’ They would most certainly not be amused.

The Process of Business Model Innovation and Transformation

So how does the process of business model innovation work in established companies?

The process of designing and implementing a new business model consists of the three phases:

1. An inception phase, within which a trigger was identified, followed by the development of a first initial idea, and the validation of this idea;
2. An evolution phase, during which the details of the business model were designed and implemented simultaneously; and
3. A diffusion phase, during which the new business model was spread throughout the organization or scaled up in size.

The underlying principle: While it might seem paradox, designing a new business model requires operating it, while it is still being delineated and vice versa. Business models need refinements before working successfully, and cannot be designed on the drawing board, or behind closed doors, but only while engaging in action: A practice one of the research participants referred to as “crafting” business models. While a business model needs to be delineated while operating it, it also needs to be operated while still being formed, that is, “in statu nascendi” as another interview respondent put it.

The process of business model innovation is a practice of concurrently delineating the business model, while it is already being operated, as well as operating the new business model, while it is still being designed. Only while going through iterative cycles of doing, learning, and designing will the new business model gradually become more sophisticated, until it works sufficiently well to be scaled up.

Which challenges to expect: Two arrays of challenges encumber this process: Design related challenges, and implementation/operation related challenges.

How to cope with them: Learning and deployment activities underlie this process and are enacted to cope with these challenges, while process orchestration mechanisms guide the overall process.

The role of management: Top management has a vital role for initiating, orchestrating and participating in these learning and deployment activities, through enacting the process orchestration of providing top-down direction and guidance, while at the same time involving the organization. Business Model Transformation and Innovation cannot be delegated.

Conclusion

Business Model Innovation and Transformation are no easy undertaking. Yet, the urge to resort to simple, well-known, and proven solutions, which might have worked for other types of transformation and innovation, to decrease the complexity, should be resisted. Your approach needs to be adapted to the challenges at hand. Knowing what to expect will better prepare you to resolve these challenges successfully.