Implementation Of Innovative Business Models In An Organization

Even though the process of coming up with new business models is fairly straightforward, we do not often witness established firms cut new ground across industries. Established firms have on numerous occasions failed to capitalize on innovations from within their organization or have not correctly read the forces at play in their industry because they have been stuck in their ways of doing things. This is even more pronounced in established firms that have strong track records of sustained growth and success.

Why change something if our company is consistently winning? At the same time, we consistently observe startups or less established companies introduce new business models by rethinking the Who and then finding a new What and a new How or any other combination of these. In class we discussed several reasons why this might be the case. Some are simple like managers and decision makers being preoccupied with running business as usual that they do not have enough time or dedicate enough effort to evaluate new ways of conducting business. Big established firms have a set of processes and way of doing things that usually makes them slow moving, bureaucratic and rigid, what can be more broadly described as organizational inertia. Finally, innovative business models that break from the norm are usually unattractive to the established firm for a variety of reasons:

Reason 1: When an innovation first arrives, the firm’s customers do not really want it since it is not “good enough” for them. This leads to firms assessing the opportunity as not a market they should enter. We talked about how Yellow Tail entered the US market by appealing to consumers who are not regular wine drinkers.

Reason 2: At the beginning, innovation is of lower quality and seems less profitable than the core business, thereby creating asymmetry of motivation within the company to pursue such an opportunity. We discussed the example of the integrated US steel mills ended up moving up market multiple times until they were almost completely eliminated by mini mills who gradually took over.

Reason 3: New business models tend to conflict with the core business, for example they might cannibalize existing revenue streams, create friction in distribution channels, dilute the brand or reputation of the business or simply clash with the company’s culture.

Reason 4: Moreover, an innovation may seem very small relative to the core market and therefore it is difficult to generate employee entrepreneurial passion that will back it. The case of Nespresso illustrates this when originally the instant premium espresso market was deemed too small to warrant further investments by Nestle.

Reason 5: From a financial standpoint, innovations and new business models usually take a long time to break even and since managers like to get quick returns on their investments, they seem unattractive. Again, the example of Nespresso illustrates this characteristic.

To improve their capabilities of not only discovering but also implementing innovative business models, established firms can pursue various paths. A typical approach has been to create a separate business unit but there are numerous ways of doing that and choices need to be made, depending on the level of conflicts between the two business models and the amount of synergies that can be achieved between the two units. If the synergies are few and the conflicts are high, then a new separate unit should be formed. If synergies are low but conflicts are also low, then the new business model should start in house and then be span off. Finally, if there are potentially many synergies but high conflicts, then a firm can either start an innovation as a new business model and then re-integrate it or separate some activities and keep certain activities like back office common between the two.

A second solution is to adopt the so-called “Fast Second” strategy. By fast second, we discussed how firms do not necessarily need to be the company that discovers a new business model or innovative product. Instead, it means that once the first mover has begun to define a new market and it seems like it is gaining sufficient traction, for the established firm to move in decisively to either take over the market completely or establish itself as a force to be reckoned with. This does not mean simply coming up with a copycat product that is cheaper and trying to undercut the first mover, but it involves developing the necessary internal capabilities to establish a strong hold of the market (e.g. well thought out marketing strategy, completed product, planned distribution etc.).

Another strategy that companies like Google pursue if that of investing in hundreds if not thousands of startups with the hope that some of them will end up being the next big thing. By casting a wide net and looking at multiple opportunities, this strategy is essentially playing the numbers game by taking enough calculated small bets in the hope that a handful will be the next Uber. This strategy is not easy to adopt as it involves a lot of capital, and only companies that have vast amounts of it like Apple, Google or Amazon could pursue this without jeopardizing their core business.

Finally, in order to discover and implement innovative business models, such internal projects must not be assigned to managers of the core business. They must be kept at a distance to avoid creating something that appears new but is essentially the same if we examine it more closely. In class we discussed how Kodak managers developed the digital camera but because they were stuck in their old ways of thinking, they only allowed for photos to be printed physically. Their mental models got in the way of seeing the enormous opportunity of storing and saving photos digitally and as such they went from leaders to out of business in a matter of years.