Business model innovation is the new strategic imperative-by now, this is becoming more generally acknowledged. But companies routinely fail at self-reinvention because they are so busy pedaling the bicycle of their current business models they leave no time, attention, or resources to design, prototype, and test new ones. Even where investments are made in innovation, those efforts are focused on new products and services delivered through today’s business models and on making the current models operate more efficiently. These are important to do, without doubt. But they are hardly sufficient in the highly networked 21st century, when business models don’t last as long as they used to and incumbents increasingly face the risk of disruption.
Having watched many companies over the years as they recognize the imperative to change, yet somehow stay stuck in their old grooves, I’ve noted some patterns in their experience. Here, I think, are five important reasons that companies fail at business model innovation:
1. CEOs don’t really want a new business model.
The most obvious reason companies fail at business model innovation is because CEOs and their senior leadership teams don’t want to explore new business models. They are content with the current one and want everyone in the organization focused on how to improve its performance. The clearest indication that a company and its leaders aren’t interested in business model innovation is when any discussion about emerging business models and disruptive technology is viewed and treated solely as a competitive threat.
2. Product is king. Nothing else matters.
The lines are blurring between product and service. Business models that are exclusively focused on products are vulnerable to being disrupted by models that blend both product and service to significantly change the value proposition. Think iPod. Apple didn’t bring the first mp3 player to the market. It changed the way we experienced music by delivering on a value proposition that bundled product (iPod) and service (iTunes). Industrial era thinking and NAICS industry codes reinforce the habit of characterizing a business model as being either product or service focused, but this is a false choice constraining business model innovation. Sometimes a proud product heritage can get in the way.
3. Cannibalization is off the table.
Part of the thinking by line executives in most organizations goes like this: “the last thing we want to do is risk any of our current business. It’s hard enough being at war with the competition in a battle for market share. Why would we want to compete against ourselves?” These sentiments tend to be voiced whenever new business model ideas threaten to cannibalize existing sales. When executives look at new opportunities they see them through the lens of the current business model and view them as competing with the current way the organization creates, delivers, and captures value. Organizations fail at business model innovation because they blindly take cannibalization off the table even if a new business model may have significant upside potential.
4. ROI hurdles are too aggressive for fledgling models.
There’s no easier way to prevent business model innovation than to assess potential new models using the same economics and financial metrics as projects to improve the performance of the current business model. Financial metrics utilized to assess alternative projects to improve the current business model reflect the cost structure and required returns to sustain and grow in the context of today’s model. New business models are likely to have very different economics and must be assessed in that context. Most new business models will be dismissed out of hand if judged by the economics and constrained by the ROI requirements of the current model. Organizations fail at business model innovation because they apply the wrong financial lens in assessing the attractiveness and feasibility of new business models.
5. Rogues and renegades get no respect.
Many organizations fail at business model innovation because they shoot their renegades. Or, if they don’t shoot them, they wear them down until they leave. Business model innovators go against the corporate grain. They see entirely new ways to create, deliver, and capture value. If those that are tasked with sustaining and growing today’s business models are allowed to reject those with the perspective and insight to help design the next one, business model innovation efforts will fail. Organizations must learn to celebrate and support people within the organization who are willing to challenge the status quo, to bring totally different perspectives on delivering value to the table, and to take experimental risks to explore new models.
There you have it: my version of the five reasons organizations fail at business model innovation. I’m interested to hear from readers, the managers of the world who fight this battle every day, if I’ve left any other big reasons out. Even more, I’m eager to stop admiring the problems and start exploring ways around them. Business model reinvention is the new imperative for all enterprises who want to stay relevant in a changing world. What can their leaders do to make success more likely?
You can also see this post here on the HBR Blog site.