The importance of transformative business models for innovation: How to create one and why14 min read

business model

The competition between businesses is growing stronger by the day as more and more enterprises enter diverse industries.

Other companies have drowned in the sea of new products and services, while new entrants dominate the market with continuous innovative efforts.

Technology aside, one of the factors that have pushed them to the forefront is revolutionary business models, which may also be considered a type of innovation in and of itself.

Today, you will understand the significance of transformative business models and how you can develop one for your organization. Let’s start.

What is a business model?

A business model depicts how a corporation develops and distributes value to customers while simultaneously generating value for itself. It’s a model that’s vital for every company.

Yet many businesses fail to effectively explain their business models, identify their advantages and drawbacks, or recognize when they require a new model to execute on a wonderful opportunity.

How a business model works

The elements and characteristics included in the business model illustrate the value that a business delivers to a customer in lieu of payment.

It implies how the organization structures itself and with whom it will collaborate to generate business value, explaining how the supply chain is coordinated.

Simply put, a business model is simply a structure in which several factors come into play to define how a company creates value for the organization and its customers.

Why is creating a transformative business model necessary for innovation?

In business, an industry’s evolution is normally identified with the development of new technologies.

However, while new technologies are frequently significant, they have never altered a sector on their own.

What achieves such a revolutionary change is a business model that can connect the company and its technology to a prominent and emerging market demand.

The benefits of innovating business models

Business model innovation is perhaps a very crucial instrument for creating an organization that maximizes value for all stakeholders: consumers, shareholders, and workers alike.

It also brings advantages for economic development such as:

1. Competitive advantage

Competitive advantage corresponds to variables that enable a business to provide products and services better or at a lower cost in comparison to its competitors. These elements enable the producing unit to create more sales or higher profits than its competitors in the market.

2. Higher returns

Business model innovation creates higher profits for the company. Advancements in business models are 5% to 8% more lucrative than product or process innovations. In these instances, the total shareholder return percentage outperforms the competitors.

As a result, the significance of continuous digital transformation and business innovation to outperform in the market is emphasized.

3. Brand recognition

Before they give you their confidence and money, customers need to know who you are and what value you provide. The appropriate business model can aid in overcoming business hurdles and building good brand recognition.

Once you distinguish yourself from the rest of your rivals, particularly in the delivery of business value, your brand will be recognized by a large number of people, which helps you gain more customers along the way.

4. Increased business growth

Higher value creation will lead to increased growth, especially in firms that are otherwise static.

Growth is critical to a company’s long-term sustainability. It aids in capitalizing on new possibilities, acquiring assets, attracting new personnel, and funding initiatives. It also influences corporate performance and profitability.

5. Better productivity and business performance

Business model innovation results in enhanced productivity. It promotes quicker production cycles, making processing parameters significantly less erratic and time-consuming, which in return improves an organization’s overall performance and efficiency.

What a transformed business model can do

Over time, a dominant business model emerges in each particular industry.

This model will represent the most effective approach to strategically distribute and use resources in the lack of economic inefficiencies.

Usual efforts to introduce a new model might fail. However, every now and again, one succeeds in displacing the existing paradigm, generally via the use of new technology.

If new entrants use this technique to push and topple incumbents away, or if competitors embrace it, then the industry will be altered.

The components of transformative business models

In a study conducted by Harvard regarding transformative businesses, the authors discovered six recurring characteristics found in companies whose business models have revolutionized their respective industries at some point.

According to this study, the components of transformative business models are as follows:

1. Personalization

Several new models provide items or services that are more targeted to the particular and urgent requirements of clients than the dominating models. Companies frequently use technology to do this at competitive pricing.

2. Closed-Loop Process

Numerous business models substitute a closed loop, in which old items are recycled, for a linear consumption process in which products are manufactured, utilized, and then discarded. This change lowers total resource expenditures.

3. Asset Sharing

Certain innovations flourish because they facilitate the sharing of expensive assets.  Commodities may be exchanged across a supply chain at times. Sharing is often done through two-sided markets that generate value for both parties.

It also minimizes regulatory burdens in several businesses since a newcomer does not need to acquire the resources in question. Instead, it may just function as a middleman.

4. Usage-Based Pricing

Rather than asking clients to pay anything directly, some models charge them when they use the product or service. Customers profit because they incur fees only when their services provide value, while the organization benefits as the number of users are likely to increase.

5. Collaborative Ecosystem

Several innovations are effective because a new technology enhances collaborative efforts with suppliers and supports in more correctly allocating business risks, allowing for scale economies.

6. Agility

Innovators may utilize technology to shift away from old-fashioned bureaucratic decision-making frameworks in order to produce choices that best represent market requirements and permit for real-time adaptation to alterations in those demands.

In consequence, the consumer frequently receives more value at a lower cost to the enterprise.

Why are these features effective in making up transformative business models?

All six characteristics are viable options for connecting market needs and technical functionalities.

Increased personalization in the value proposition, for instance, reacts to customer preference segmentation and the accompanying desire for more diversified alternatives.

Sensors that gather information from linked devices through the cloud enable this personalization.

Big data solutions process information and transform them into personalized services (such as suggestions and alerts) for every user.

Businesses with transformative business models

Here are examples of organizations with business models that have transformed their respective industries:

1. Uber

Uber has a system in which consumers review and evaluate drivers. A prospective client may examine the nearest drivers and their ratings on his or her mobile device using the big data platform.

transformative business models

The rating system encourages drivers to deliver clean cars and great service, and it also allows for some personalization.

Enabling the consumer to choose between the nearest car and the one with the best rating (maybe a little further out) may not seem like a lot to some, but it is still considered superior to standard taxi services.

2. Netflix

Netflix began as a DVD-by-mail rental service before becoming the streaming powerhouse that it is today.

Prior to its current business model, a billion-dollar video rental company named “Blockbuster” was extremely popular. It dominated the market until Netflix saw the internet’s possibilities and decided to change its approach and respond to technological developments.

Netflix Istanbul Office

Upon securing a big investment from a French organization, Netflix decided to focus on streaming.

Their newly-revamped business model gave customers access to a large selection of films and television shows in exchange for a low monthly fee. All that without leaving their homes.

Initially, this subscription-based business model only attracted online clients. But eventually, as time went on, customers grew to enjoy the fact that they no longer had to go to a store to reserve, rent, or return a DVD.

Fast forward today, Netflix now has 208 million customers globally and is widely recognized as the champion of streaming platforms.

3. Airbnb

Airbnb’s business model enables homeowners to rent out their houses to guests at a reasonable cost.

This unique platform has provided a less expensive alternative to hotels and has been acknowledged as a marketplace for global travel by many.

Airbnb Office

The range of rooms it offers has transformed the hospitality sector. Tents, boats, flats, villas, and treehouses were all provided as alternate sleeping arrangements.

It allows tourists to experience the location in the same way that locals do, while also offering access to everyday necessities such as washing and cooking equipment. Now, Airbnb boasts over 150 million users globally.

4. Spotify

Spotify is a popular music streaming service. What makes it transformative though is not the music that goes with it, but the business model that has propelled Spotify to where it is now.

Spotify Stockholm Office

Businesses that operate online are the most likely to use the freemium revenue model. Spotify lets its customers listen to music without paying a dime.

They must, however, put up with adverts and are unable to use the program offline unless they’ve paid for a premium version and have downloaded the songs on their playlist.

5. Amazon Prime

Amazon Prime has transformed traditional brick-and-mortar shopping. They’ve made internet shopping a breeze by constantly researching and refining warehousing facilities to ensure that things can be simply bought and transported.

Amazon Seattle Headquarters

It debuted in 2007 with unlimited two-day shipping for $79 a year. This move was fraught with danger because expedited shipping is expensive, and users may wind up abusing the service. However, Amazon founder Jeff Bezos believes it was a risk worth taking.

After 14 years, Amazon Prime now boasts over 200 million members worldwide who enjoy a range of privileges such as same-day delivery, streaming, reading, and shopping benefits for $119 per year.

How to determine whether your business model is transformative

If you want to assess whether your business model is transformative, you can try doing the five steps written below:

1. Based on the six components of transformative business models, define what every characteristic means for your business.

Just when performance is stated in industry-specific methods can a business establish measures to assess, analyze, and compare its business model on important attributes. As well as begin to consider how to differentiate itself through the use of new technology.

2. Rate your business model with the features included on the list.

Examine the six components of transformative business models listed above and compare them to the ones you presently have. Gather your team and solicit their feedback on this to evaluate which features of your company model are weak or strong.

3. Determine how many transformative elements you have.

In relation to the second step, identify all the transformative elements that your current business model has. According to Harvard’s study, business models with transformative potential tend to have three or more of the six features.

4. Compare this rating with that of the competition.

If you don’t surpass your competition in any of these, your chances of effectively revolutionizing the industry are minimal.

However, if your model significantly beats the current models on three or more qualities, then you have a strong chance of transforming the industry to which you belong.

5. Reflect. Find out what aspects you can improve and how.

This step only applies if you only have one or two features included on your list or if your side-by-side comparison with your competitors’ business models didn’t turn out well.

Now that you have comprehensively examined your business model, use the information that you’ve got and use it to apply any required modifications. Brainstorm ways on how you can do this and implement it when you’ve got everything you need to accomplish it.

Creating customer value through business models

Successful businesses have great business models that provide excellent value and convenience to their prospective clients.

Combined with the right revenue strategy and other sets of critical procedures and resources, their business models fueled their growth and development.

This means that beyond transformation, the goal of business models must be to create substantial customer value. It has to deliver the right product or service to the right people, in the right way.

This goes to show that In transformative business models, profit and purpose are intertwined, which tie their returns to their effect.

Lastly, while no innovation can be guaranteed to succeed, you may increase your chances by ensuring that your business strategy connects market demands with developing technology.

The more connections you can establish, the more potential you have to transform your industry.

Transform your business model today with our ebook on how to organize successful innovation campaigns, or download our innovation ebook to identify strategic issues to address and create optimum business value.

Published On: March 22nd, 2022Categories: Innovation strategy

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