Advantages of a business model innovation in competition
Companies invest large sums in research and development in order to be able to compete with innovative technologies and products. However, this is often no longer sufficient to differentiate oneself and to be among the best on the market. Business model innovations can play a key role here in making technological innovations sustainably profitable.
Business model innovation versus investment in research & development
Technology in itself does not create value. Only through commercialization through a sustainable business model can the value of new products and technologies be skimmed off. However, while generous budgets are made available for research and development of innovative ideas and technologies and corresponding structures and processes are available, innovations of the business model are neglected with an average of only 10 percent of the innovation budget (Gassmann et al. 2013).
However, business model innovations are becoming increasingly important due to strong competition. Many companies are facing this competitive pressure with increasing investments in research and development. A significantly positive correlation between R&D expenditure and sales growth confirms that this strategy makes sense.
However, if other companies are constantly developing new technologies, products and services, it will be difficult to improve the company's performance above average. Technological innovations as well as product, service and process innovations are important in order to survive in competition, but they are often no longer sufficient to differentiate themselves from the competition and to be at the forefront of the industry.
Business model innovation generates higher returns
Interesting in this context is the CEO study on "Innovation and Cooperation Management" (2006) conducted by IBM. The results of the study show a positive correlation between operating margin growth and efforts being made in a company to innovate its business model.
The study divided companies into outperformers and underperformers, depending on whether earnings growth over a period of five years was above or below the average of direct competitors. The comparison of the innovation focal points showed that companies with above-average success invest 30% of their innovation resources in business model innovation - twice as much as in the group of companies with below-average performance.
The Boston Consulting Group's innovation study comes to a similar conclusion. The industry comparison shows that business model innovations are 6 percentage points more profitable than product and process innovations over a 5-year period.
TSR premium (Total Shareholder Return): Percentage by which the innovator's average total return on shares exceeds that of the competition.
New technologies and products often require business model innovations
The results of these studies suggest that the success of innovative technologies and products can be enhanced by corresponding business model innovations. Thus, a mediocre technology combined with an excellent business model can be more profitable than an excellent technology combined with a mediocre or inappropriate business model. The same technology will therefore achieve different results when marketed across two different business models.
Technological innovations in themselves are therefore no guarantee for success on the market. Ideally, the existing business model is suitable for commercializing the new technology or new products and services developed from it. If this is not the case, companies are required to develop a suitable business model in order to generate value from the new technology.
Otherwise, the outcome will be far below what the company could generate in value added. Consider, for example, the changes brought about by machine-to-machine technology, which will require new business models in many companies in order to remain competitive.
Business model innovation without technological innovation
Business model innovation is not only a profitable strategy when it comes to bringing new technologies to market. A new business model combined with existing technologies, products or services can bring significant competitive advantages. Investments in research and development can often be significantly reduced in this case.
Companies that stick to outdated business models therefore run the risk of leaving the field to those companies that achieve significantly better results with a more suitable business model using the same technology. A well-known example of this is the business model innovation Apple´s. The technologies behind iTunes & Co, such as the MP3 audio format, were not invented by Apple, it was already there. Apple merely changed the benefits of the technology for the customer by creating a business model with a new product line and the launch of the iTunes Store that catapulted Apple to the top of the industry.
3Com's success story has a similar background. The founder of the company, Robert Metcalfe, was instrumental in the development of Ethernet technology during his time as a research associate at Xerox. However, the invention did not fit into Xerox's existing business model and Xerox wanted to save costs. The Ethernet technology was therefore transferred to Metcalfe for a one-time payment of 1,000 dollars, which subsequently built up an extremely successful company on the basis of an innovative business model.
Another example of how a company can make optimum use of existing innovative technologies through business innovation is the tool manufacturer Hilti. The company did not invest primarily in the development of new products, but developed an innovative business model that addressed the needs of customers by introducing fleet management. The business model innovation Hilti´s thus created the optimal conditions for generating higher earnings from the existing tool technology.
Conclusion: Why a business model innovation delivers competitive advantages
Many companies do not stumble over a lack of innovation activity. Their stumbling blocks are often rigid business models that are hardly questioned. Much of the investment in research and development flows into the creation of product, service or process innovation, while opportunities are overlooked by a new business model. However, the history of successful industry giants clearly shows that business model innovations in particular make the decisive difference.
If you don't start thinking differently, you won't start changing the rules.
Oliver Gassmann, Professor for innovation management at the University St. Gallen
Born in Ried im Innkreis. As former Head of Innovation, he was responsible for the entire project management and specializes in the areas of fuzzy front end and business model innovation.