Is Business Model Innovation Just Another Name for Strategy?

by John Steen

If you have been following the posts over recent days you can probably guess that Tim and I have been talking a lot about business model innovation. To quote a phrase, we know business model innovation when we see it and some business model innovators such as Ryanair and Ikea have become global market leaders. Also, there is good evidence that business model innovators have superior performance compared to other forms of innovation.

I’m thinking about this because I am actually a strategy guy and in my MBA classes and corporate seminars I also talk about companies such as Ryanair and Ikea because they are examples of successful strategy. This leads to the question of whether business model innovation and strategy are really just the same thing? Certainly successful business models should also have sound strategic principles behind them and one of these is the central concept of ‘fit’. This is an old idea made popular by Michael Porter in the 1980s and it is really about lining up all of your business operations behind a central logic of value creation.

Using Ikea as an example of strategic fit, the fundamental logic of the business model is creating value through economies of scale. Large self-service stores in near wealthy population centers, products with shared components and flat-pack design all support the logic. Often when we see businesses getting into trouble it is because they are trying to mix different value propositions together or the established business model gets surpassed by others with better business models with superior value propositions. Saab is an example of business model failure with no clear value proposition. There was not enough scale to compete on costs and not enough differentiation through superior technology and design to command a price premium.

Hambrick-Fredrickson - Strategy DiamondIn my strategy seminars, I use a diamond model developed by two US academics, Hambrick and Fredrickson to talk about strategic fit. A good business model like Ikea can demonstrate how all of the components of the diamond fit together and reinforce each other. Ikea’s business vehicle is organic growth which gives them control over the operation. Their differentiators are well designed products at a competitive price and staging of growth has been rapid to capture scale. Fit can also be a source of competitive advantage because it is hard to replicate. Organizations are complex beasts and making everything work together takes time, effort and leadership.

To return to the original question, I think incremental business model innovation is the same as executing a good strategy. Apple has just posted a stellar 90% increase in profit and much of this growth is based on a suite of products closely related to each other and not to far from the business model that Apple has had for a few years now. The strategy is well thought out and successfully planned and implemented. However, I think that strategy and business model innovation diverges when we talk about radical business model innovation. Why? Because strategy is still based upon conventional thinking about planning, prediction and measurement. Moving to very different business models needs the tools and concepts from innovation management rather than predictions and plans from strategy textbooks. Tools such as real options and the three horizons will help stage the innovation process to reduce downside risk and capture the upside. Innovation jams and lead-users might be useful to get new ideas on other business models. Stage-gate methods might enable us to trial new business models and scale up as some models show signs of being successful.

The potential of business model innovation is enormous. One of the most basic definitions of innovation is doing something different in a way that creates value. Innovation managers have focused on the ‘doing something different’ part of the definition but we are a bit fuzzy about the value thing. When we take an innovation and build a reinforcing set of activities around it that are underpinned by a central customer value proposition then we really have the whole innovation thing working- and the observation that business model innovators top the class becomes perfectly understandable. I’m pretty excited to see how strategy and innovation can actually work together. They are two sides of the same coin.

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John SteenJohn Steen is a Lecturer in Innovation Management in the University of Queensland Business School. He blogs about innovation at the Innovation Leadership Network.

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  1. I love and write a lot about business model innovation. I think more often than not your business model is part of your overall strategy, not the other way around. But how much of your strategy is business model, and how much is execution?

    If you differentiate based on your business model, it could be the dominating factor that everything revolves around. If on the other hand you compete on price, or feature set, or something else, then business model might be a much smaller factor. With a company like Netflix, everything evolves around their business model innovation. But with someone like Ford, you’d expect a different outcome.

  2. Tim. You raise an important question. I think the half-life of business models is declining. No longer can a leader count on a single business model to last over his/her entire career. It is likely that 21st century leaders will have to significantly change their business models 2-3 times over a career. The strategic imperative is R&D for new business models. Innovation portfolios must have both incremental efforts to strengthen the current business model and discreet efforts to design and experiment with entirely new business models, even (maybe especially) those that are disruptive to the current business model.

    It may be semantics but I think of business model innovation as deploying new business models (new way to create, deliver, and capture value) and not incrementally improving the current one. Business model innovation must become an important element of the strategic planning process and all organizations should establish or link to a capability for ongoing exploration of potential new business models.

    Saul Kaplan
    Founder and Chief Catalyst
    Business Innovation Factory

  3. This post was written by John Steen, who is a co-author on my blog (so I wasn’t actually referring to myself in the third person in the first paragraph! 🙂 )

  4. Ooops! Sorry about that Tim and John. Corrected.

  5. This article (http://bit.ly/11bJNJ) shows a breakdown of the cost of a RyanAir airline ticket which they one day, hope to be free. The reason RyanAir continues to be profitable by selling near to free seats at the same time as British Airways has recently announced a annual loss of £531m is that it knows its customers and looks at the experience from the customer perspective (aka outside in), not from the airline’s perspective (inside out).

    British Airways still believes it’s purpose is to fly airplanes while RyanAir knows that it’s purpose is moving people. RyanAir has got to know its customers and what they want, so much so that a large portion of its revenue comes from gambling. As pointed out, smart organisations now find opportunity in the customer value chain (opportunities for business model innovation) and their success comes from making customers lives easier, simpler and more successful (their strategy).

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