There are two basic types of innovation and of innovation management which we typically distinguish:
Innovations within the existing business model: Nintendo´s Wii is an example of this type of innovation. It is a typical (radical) product innovation within an existing business model.
Innovation through a new business model: Zara is an excellent example.
Publications on innovation and innovation management often are only concerned with product innovations, i.e. innovations within the existing business model. This is definitely too short-sighted. As a consequence of ignoring business model innovations, a major source of innovation would not be detected by the company´s radar screen. In the period from 1997 to 2007, 26 companies which were founded since 1984 have entered the American Fortune 500, and more than half of them, i.e. 14 companies did so through a business model innovation (Johnson 2010).
The meaning that people attribute to the term “business model” varies greatly. Frequently the term business model is used as an equivalent to profit model. But this definition is much too narrow. To explain why, I give you just one example.
When Southwest Airlines launched in 1960, it was successful against the established traditional airlines because its innovative business model diverged from that of its competitors in many respects, with differences in the profit or revenue model being only one part. At least as determining for the success of the Southwest Airlines business model was that Southwest Airlines offered its customers major time savings due to its direct point-to-point flights and a much friendlier service, and that Southwest Airlines built excellent relations with its employees which resulted in, for example, outstanding employee productivity which in turn allowed a generous employee compensation.
A business model is a description of how a business creates and delivers value, both for the customer and for the company. It is a short-hand description of the business of a company or business unit. The description is at a high level of aggregation and provides a quick “big picture” overview. If we describe the business model of a specific company we focus our description on those components that are the most important for the value creation of the company, and that set the business model apart from the others.
A business model consists of multiple components. I use a description with four main components (Johnson 2010). The first and most important component of a business model is the
· customer value proposition.
As the term indicates, value must and can only be judged from the customer´s or consumer´s perspective.
The other 3 main components are:
· key resources
· key processes, and
· profit formula.
These four main components of a business model can be broken down in sub-components. In the following I use nine sub-components.
This way of describing a business model lends itself very well to its practical use (see also Osterwalder, Pigneur 2010), as I will now illustrate by means of the Zara business model:.