Organisational Change Management Volume 1

Framework 46 Business Model Innovation

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" secret to maintaining a thriving business is to recognize when it needs fundamental change..."

Mark Johnson et al 2008

The concept behind this framework include

- breakthrough, game-changing products/services rarely emerge from established businesses

- most radical new products/services usually require a new business model

To handle this you need to

i) understand your existing model at a granular level, so that you are in a position to reinvent it

ii) develop a product/service that helps people get the job done

Some examples of these include

- Apple's iPod (its true innovation was to make downloading digital music easy and convenient by combining hardware, software and service, ie low margin iTunes music with high margin iPod)

- Gillette's blades-and-razor (virtually giving away the blades to lock in the purchase of the high margin razor)

- Wal-Mart and Target (retail discounting - they now account for 75% of the total valuation of the retail market)

- Southwest Airlines et al (low-cost airlines that now account for 55% of the market value of all air carriers)

"...11 out of the 27 companies born in the last quarter-century and which grew their way into the Fortune 500 in the past 10 years did so through business model innovation..."

Mark Johnson et al 2008

On the other hand,

" more than 10% of innovation investment in global companies is focused on developing new business models..."

Mark Johnson et al 2008

The reasons for the lack of new growth from business model innovation are lack of

- definition (little understanding of the dynamics and processes of business model development)

- understanding of current business model (the premise behind its development, its natural interdependencies, its strengths and weaknesses, etc.)

As a result, organisations don't know when they can leverage their core businesses and/or when success requires a new business model. Furthermore, at the outset a new business model can often look unattractive to internal and external stakeholders. Three simple steps can help overcome this

i. starting point is looking for opportunities to satisfy customers who need a job done (not thinking about business models)

ii. constructs a blueprint demonstrating how your organisation can fulfill that need and make a profit

iii. compare the new model with your existing model to determine how much you have to change to capture the new opportunity

"...every successful company is already fulfilling a real customer need with an effective business model..."

Mark Johnson et al 2008

Four Interlocking Elements

1. Customer value proposition (most important element)

2. Profit formula (only one piece of a business model)

3. Key resources

4. Key processes

organisational development change management


i) Rules, norms, metrics, etc can be divided into financial, operational and others




Gross margins

Opportunity size

Unit pricing

Unit margin

Time to break-even

Net present value calculations

Fixed cost investments

Credit terms





End-product quality

Supplier quality

Out-sourced manufacturing

Customer service


Lead times


Performance demands

Product-development lifecycles

Places for individuals' reports and incentives

Brand parameters

Training of staff

"...most useful to start by setting the price required to deliver the CVP and then work backwards from there to determine what the variable costs and gross margins must be. This then determines what the scale and resource velocity needs to be to achieve the desired profit......the four elements form the building blocks of any business. The customer value proposition and the profits formula define value for the customer and the company, respectively; the resources and key processes describe how the value will be delivered to both the customer and the company. As simple as this framework may appear, its power lies in the complex interdependencies of its parts. Major changes to any of these four elements affects the others and the whole. Successful businesses devise a more or less stable system in which these elements bond to one another in consistent and complementary ways...."

Mark W Johnson et al, 2008

In summary: when creating new growth requires entering into new market territory, generally a new business model needs to be developed. In other words, significant changes are needed to all 4 elements of your existing business model. There are 4 strategic circumstances that can dictate this:

i. existing solutions are too expensive or complicated so that a large group of potential customers are excluded, such as Tata's Nano small car

ii. new technology and/or opportunity to leverage a tested technology in a new market, eg military technology taken to commercial areas

iii. where products or customer segments become increasing commoditisation which creates an opportunity to focus on a specific job-to-be-done, such as FedEx's entrance into the package delivery market

iv. the need to handle low-end market disrupters, such as minimills that threatened integrated steel mills by making steel at a significantly lower cost

v. responding to a shifting basis of competition

Some questions to help evaluate the chance of success with business model innovation:

i. Can you nail the job with a focused, compelling customer value proposition?

ii. Can you devise a model in which all 4 elements (customer value proposition, profit formula, the key resources and processes) work together to get the job done in the most efficient way possible?

iii. Can you create a new business development process unfettered by the often negative influences of your core business?

iv. Will the new business model disrupt competitors?

If the answer is yes to the above 4 questions, the chance of successful execution is increased.

NB Creating a new business model does not necessary mean that the current model is threatened or should be changed. Sometimes a new model reinforces and/or complements the core business. On the other hand, the incumbent business model should not prevent the new model from being successful. The challenge is to leverage into the expertise of the old business model without importing the old framework's mindset (with its rules, regulations, processes, etc).


"...successful businesses typically revise their business models four times or so on the road to profitability......companies have to focus on learning and adjusting as much as on business models must be patient for growth (allow the market opportunity to unfold) but impatient for profit (as an early validation that the model works). A profitable business is the best early indication of a viable model..."

Mark W Johnson et al, 2008

(source: Mark W Johnson et al, 2008)


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