Understanding Business Model Innovation

Business model innovation is at its core a methodology, bringing together innovation processes methodologies such as design thinking and lean startup and combining it with financial modelling techniques. Its ultimate goal is to help project teams understand, test & implement profitable business models able to sustain a product, service or an entire company.

Both methodologies have a positive and negative side to them.

Business model innovation brings together both methodologies.

1. using design research to uncover human needs (do people want what I am building? What is the real need I am solving?)
2. using financial modelling to uncover assumptions related to both willingness to pay (how much is someone going to pay for my product?)
3. analysing people’s behavior (How often will they use my product? In what context?).

There are varying definitions of what a business model is. One of the most accepted is that a business model is how an organization produces, captures & delivers value.

What is particular about business model innovations, is that they usually encompass 3 or more of Alex Osterwalder’s business model canvas’ subsections making them more complex to execute compared to other forms of innovations and involving multiple units within a same company.

We recently worked with a client launching a post-Covid B2B offering in the food delivery industry.

We started with the idea & intuition of the founder. In order to further explore it we started a qualitative research track in order to validate the user interest while in parallel already started exploring potential business models as well as crunching the numbers to have a rough first estimate of the sustainability of the business.

Furthermore, by crunching the numbers from step one we were able to extrapolate a number of assumptions - for example the cost of the meal, the frequency of order as well as how the pick-up moment was envisioned - and use such data input as assumptions to be tested during the validation interviews.

Once we conducted the user interviews with customers, we were able to refine many of the assumptions underlying the financial models, change them and understand better what model worked best before moving forward with it.

Hilti, a European company selling construction tools, surprised the market by successfully migrating from a standard selling model to a renting model. Next to their products, Hilti now offers many services for construction companies.

Hilti’s business transformation is a benchmark case for European companies from the mechanical and systems engineering sector. In such a sector, until recently, innovation was traditionally brought to market by gradually introducing improvements in small and reliable steps in close coordination with the customers. But the ever-increasing penetration of the industry with software is making tools increasingly intelligent, allowing them to communicate with each other and with the cloud. These technical possibilities are leading to an evolution and revolution in terms of business models.

Hilti’s step from being a seller of products to becoming a provider of complete solutions goes beyond additional service and traditional after sales services or spare part provision: it’s called fleet management. The fleet management idea at Hilti is derived from the automotive industry and comes as a one-stop package. Customers, and especially economically-savvy business customers, appreciate a one-stop service which is tailored to their individual needs and optimizes their own productivity. In return, they are prepared to pay a significantly higher price.

The returns for the company were staggering. As Harvard Business school case study shows, Hilti, which had about 22,000 employees and made about 4.5 billion Swiss Francs (or $4.589 billion USD) in sales in 2015, managed 1.5 million tools under fleet management contracts in 40 countries, resulting in a contract value of more than 1.2 billion Swiss Francs (approximately $1.4 billion USD).”

As a manager of a large company or organizations, your focus is usually on a specific part of your company’s or organization’s value chain. If for example you work in the pricing department, your interaction with a new product or service will be limited to one part of a chain of decisions. If on the other hand you are a technical R&D manager, you are usually working on specific technologies to improve existing products.

When you are working in a large organization you need to think of the development of the new product or service model as the tip of the tip of the iceberg of a much larger process of buy-in, internal lobbying and alignment of the different business units.

It would be naive - and likely lead to failure - if you just start experimenting with business model innovation without any internal prep work, especially if BMI is something new for your organization.