Why Business Model Innovation Fails

Company Transformation Risks and Mitigating Strategies

Highlights

  • Business model innovation is an imperative for companies to stay relevant and viable in shifting markets.
  • Most company transformation efforts fail to achieve expectations. However, they most often fail for a short list of common reasons.
  • Knowing why business model innovations fail provides guidance and risk mitigation measures to do better.
Johnny Grow Revenue Growth Consulting

6 Business Model Innovation Risks and Mitigating Measures

For most executives, innovating the company has evolved from a good idea to a strategic imperative. It's needed to maintain or improve market share, financial margins and company viability. However, its increased necessity doesn't make it any easier to achieve.

Applying research and experience to reveal root causes for failed business model reinvention allows proactive mitigation to avoid the most common missteps. From our research and experience of doing this for just over two decades, here are the top 6 reasons business model innovation fails and the mitigating steps to succeed.

Business Model Innovation Risks
1

Resistance to Change

Cursed are the successful. For they are the least likely to accept the need for change.

Not only is resistance to change the number 1 reason for failed company transformation but it disproportionately impacts the most successful companies.

Companies have a natural tendency to hold on to things that have worked. However, markets shift, industries converge, startups erode market share and customers change behaviors. Continuing to do what worked before in a market that is not like before is a recipe for decline.

A big challenge with company transformation is seeking to change the constructs that the company has optimized over an extended period. Capabilities that have contributed to business success become the targets of transformation.

Any type of company reinvention realigns your management, resources, assets and processes to solve important customer problems. Those changes will have many cascading effects that impact many constituents.

When discussions are considered internal threats and not business growth opportunities, you've got inside-out thinking and a culture issue that stands in the way of success.

The best technique to remedy this issue is an organizational change management program.

2

Poor Strategy

A business model innovation strategy designs company reinvention and defines how success is measured by both customers and the company. It reorganizes the business model building blocks to deconstruct and reconstruct them differently to create new value. It defines the activities that matter and those that don't. Without strategy, any attempt to execute corporate reinvention will be haphazard and any measures of success will be arbitrary.

Strategy also closely correlates with executive sponsorship and management commitment.

It's not hard to tell the actual innovators from the wanna-be’s. The later are much more trepid and take a partial approach. They offload the responsibility to a department or subset of people. They are quick to highlight obstacles but reluctant to do the harder work of finding solutions. They treat transformation as a gamble. It will be great if it works. But it probably won't work.

On the flip side, real innovators recognize reinvention is not optional. It must work and it will work. Maybe not in the first few passes but with follow through and adaptation it will work. They are dogged in their pursuit. They are relentless in overcoming obstacles. They are all-in.

3

Weak Execution Framework

Failed business transformation is generally not the result of a bad idea but the poor implementation of a good idea.

Most companies have many innovation assets and processes. They include things like design thinking workshops, idea boards, Voice of the Customer programs, customer insights and collaboration tools. But they still don't achieve their goals. Each of these things makes sense, but they lack integration and synergy. They lack a holistic process that brings all the pieces together.

A business model innovation framework is needed to ensure the whole process is greater than the sum of its parts. It's needed to promote structure, learning and continuous process improvement. It's needed to be used as a roadmap that applies milestones, phase gates and benchmarks. It must calculate measurable progress throughout the journey, and bring visibility and predictability to business outcomes.

The best frameworks are built on the company’s competitive advantages and core competencies.

4

Poor Customer Intelligence

Customers are the single best source to identify business model improvements.

Most executives think they know what their customers want. And they are partially right. But their inaccuracy lies in subconsciously inflicting their own bias, believing unsupported assumptions, thinking customers are all the same, believing customer wants are static and all customer wants translate into willingness to pay. Small inaccuracies in customer intelligence create wild goose chases for transformative pursuits.

It's a mistake to rely on the limited customer data that is easily accessible but likely dated and incomplete. It’s better to start with the assumption you do not know latent customer demand but will find it using data-driven, fact-based customer engagement methods.

We are in the age of the social customer. Customers want to provide input to their suppliers. Customers will tell you their biggest problems with your company. But you have to ask them. Fortunately, much of the engagement process can be automated using Voice of the Customer tools for client satisfaction measurement, social engagement tools for public customer comments, crowd sourcing tools for target market collaboration and self-service help desks to understand the specifics of what's not working.

Voice of the Customer Data Transformation

If you not using these technologies to encourage customers to tell you how to design a better company, you're missing a big opportunity.

Companies that collaborate with customers during product design, manufacturing, distribution, sales, service and returns create more valuable business models.

5

Wrong Measurement System

Companies with young transformation programs often fail to recognize the types of business model innovation and the right performance metrics.

Instead of using measures that reflect a new revenue model with growth potential, they apply existing company measures. It's an unfair and unhelpful comparison. Mature business operation metrics have benefited from years of process refinements, economies of scale and a buildup of revenue streams.

This challenge is exacerbated when managers view a growth path as cannibalization. Instead of recognizing new customer behaviors and market shifts that are in play, they circle the wagons and react to new ideas as something that sacrifices existing sales.

This rationale is indicative of people living in the past and not accepting the future and must be treated with market insights. They must be shown how to view the market from the outside-in, not from the company's inside-out perspective. They must be shown how to view the market from the customers perspective. Only then will they understand the need to reinvent the business model to capitalize on a market opportunity.

Steve Jobs demonstrated market focus in the face of cannibalization. When iPod revenues were $5 billion per year, he proposed to put the capability on every smartphone. Many Apple executives begged him not to 'throw away' the iPod market as it was too big and profitable to dismiss. He rejected those requests.

To really assess a change in the business model you can't compare it to existing measures that benefit from a mature cost structure with few investment requirements. Instead, to assess the attractiveness of a new or complimentary business growth model, you need to account for some substitution of revenues and profits that may lower margins initially but will deliver sustained growth and improvements in margins over time.

Your financial planning and growth plan forecast will show if the lower returns earned in early years will become bigger returns in later years based on a growth factor that would otherwise not be achieved.

6

Exclusive Focus on Product Innovation

Pretty much all companies innovate their products on a continuous basis. Product innovation is essential, but when it becomes the only form of increasing value, it creates a missed opportunity for company reinvention.

It's also helpful to recognize that product and company innovation can be symbiotic. The company can create alliances that give product distribution global reach. The company can change its profit model to forego upfront sales and alter the product to a subscription model and annuity revenue stream. The company can bundle a service with the product to achieve a much higher value proposition.

Companies limited to product innovation should try innovating how they innovate, and consider company innovation.

See the 6 risks that most often tank company innovation, and the strategies to prevent them.

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