The Four Types of Business Model Innovation
Highlights
- There are four types of business model innovation and each has different levels of investment, timeline, risk and reward.
- The business model is built on the four constructs of the company's customer markets, products and services, value proposition, and profit model.
- Business model innovation is the process of adapting, refining, combining or otherwise changing one of more of these constructs to achieve additional value.
In the prior post I shared the four building blocks that collectively define a company's business model innovation strategy. Business model innovation designs changes in how a company creates, delivers or captures value. But the magnitude of that value is determined by the type of innovation. In this post, I'll share the four types of innovation and how each delivers different results.
Each of these types is a unique form of business transformation and each offers a unique level of risk and reward.
Incremental Innovation
This type of iterative advancement is the norm for most companies. It is the gradual improvement of products, services or the company's operating model. These improvements are usually small and continuous and may include things like how the company acquires customers, distributes products, builds alliances or delivers customer service.
The upside is that it can be performed with small budgets, few resources and in short periods.
The downsize is that while it's possible a volume of relatively immaterial advancements may sum to something significant, most deliver minimal market impact. With few exceptions, this method does not deliver a noteworthy impact in company evolution, buyer behaviors or revenue growth.
One of the best sources to discover incremental improvement opportunities is customer insights. These are often sourced from Voice of the Customer (VoC) or other customer intelligence programs.
Disruptive Innovation
There is inconsistency about disruptive and radical innovation definitions and techniques. We're not really engaged in theoretical debates and more interested in practical and profit driven business transformation. So, for our context, disruptive innovation is all about disrupting an existing market.
Companies often use this method to solve existing customer problems in new and different ways. Sometimes they improve existing products or company services to customers. More often, they replace them.
It's most often achieved with new technologies that create new ways to source, produce, deliver and support products and services. Many times it's used to better serve the evolving needs of customers.
Consider the Fourth Industrial Revolution as an example of disruptive transformation. Companies are creating profound shifts throughout their value chain by applying advanced technologies such as artificial intelligence (AI), robotic process automation (RPA), blockchain, the Internet of Things (IoT) or 3d printing.
Clayton Christensen popularized this method in his book titled the Innovator’s Dilemma. His premise was that it creates a new value network within an existing market or creates a new ancillary market. Christensen suggests that this type of introduction usually enters a market at a lower price and performance point but offers new value, often as an alternative way to solve a problem. The market entry point then becomes a beachhead to scale the solution and disrupt the incumbents.
One of the best techniques to identify disruptive opportunities is white space mapping.
Architectural Innovation
This is the second most common type of company innovation and can be performed in short to medium cycles.
It's the redesign, reassembly or reconfiguration of company capabilities or services to create new value or accommodate new markets.
It changes the design of a company service or product by reassembling existing components in new ways to take the product or service to a new purpose or customer market.
Sometimes it's just the consolidation of separate business units. Or from a product perspective it may be either the combination of solutions (i.e., kitting or bundling) or the decoupling or disaggregation of components that were previously consolidated.
Because this method uses existing lines of business or product components, technology risk is low, but market acceptance risk may be high.
Incremental and architectural transformations extend the product, service or company life cycle. They generally use existing commercialization processes, which is different than disruptive and radical transformations which usually require new go-to-market processes.
One of the best methods to discover architectural opportunities is design thinking.
Radical Innovation
This method is most often created from a new company entity or new technology delivered to a new market. It creates a high market impact and completely replaces an existing solution.
It's designed to achieve groundbreaking advancements, completely leapfrog the competition or even advance societal goals. Sometimes is solves problems customers didn't know they had.
Radical transformation most often originates at the lower end of a market segment as a lower performance solution with a lower price point. It initially appeals to a small customer segment. However, as the company and technology mature it attracts more types of customers and steadily displaces established market leaders.
It's rare, requires long term cycles and is very high risk. Because it creates a solution that is different than the familiar, it typically incurs significant market resistance at first. However, after initial traction customer adoption skyrockets. When successful the payback is extraordinary.
Despite the high risk, many experienced innovators allocate some time and budget for this method. They often call this their moonshot.
Once you have determined the type of innovation that works with your timeline, aligns with your budget, suits your appetite for reward and your tolerance for risk, you can move from planning to execution. But such a move should be done pursuant to a Business Model Innovation Framework that brings measurability, visibility and predictability to the process.
See the four types of business model innovation.
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