There has been a growing interest in business model innovation (BMI). What exactly is BMI and how does one go about it?
 
Business model innovation is a new way the company creates and delivers value to a set of consumers and customers at a profit. For easier understanding, BMI has 3Vs and 4Cs.
 
The 3Vs refer to value creation (target market and value proposition), value capture (revenue model and cost) and value maneuvering (resources and processes, as well as value network), which all aim to attain superior economic value (profit and cash flow) for the firm.
 
Imagine a triangle with each of the 3Vs at each corner and their two elements mentioned above on each side. For the value proposition to reach its target market, the appropriate channel needs to be established. For the value proposition to reach sustainable revenue, customer bonding strategy is needed. A new configuration of process and resources may be needed to reduce cost, while complementors need to be identified in the value network to deliver the new value created.
 
Channel, customer bonding, configuration and complementors are the 4Cs in a business model.
BMI is needed by companies to attain a desired growth target beyond their existing offering level, beyond their operating system, beyond being limited to their core and adjacencies, and beyond resorting to mergers and acquisitions to meet target numbers.
 
Mansmith and Fielders, Inc. lists some situations when a BMI must be considered:
1.     when the company's offering level is being commoditized;
2.     when the company's revenue and market shares are falling;
3.     when the company is introducing a new, major product or relaunching an existing product, especially if using new technology;
4.     when there is an opportunity to reduce cost and/or increase revenue significantly;
5.     when there are huge unserved and underserved markets;
6.     when consumer needs are changing;
7.     when competition is fast catching up; and
8.     when a new disruptive competitor enters the industry
 
In Mansmith's 3Vs and 4Cs of business model innovation, firms must start to accept the need for new business assumptions to be different, not just better than current players. Then following the principle of selectivity, a series of experimentation can be done in each of the building blocks to come up with a business model that can create totally new combinations that will result in a superior way of providing customer bonding, which hopefully will lead to a superior financial result. This means firms must consider the following it may have overlooked and may have never done or tried before:
·  a new market;
·  a new value proposition that is relevant to the new target market;
·  a new distribution channel;
·  a new customer bonding strategy;
·  a new revenue model;
·  a new break-even point and duration;
·  a new business process and metrics;
·  a new cycle time and specifications;
·  a new asset and a new set of competencies; and
·  a new partner.
 
 


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Looking back at history, Xerox, then known as the Haloid Company, launched a new technology, the Xerox 914 in 1959 using a superior dry process instead of old wet chemicals. Unfortunately, the new machine cost $2,000 versus the prevailing $300 price tag then.
 
Xerox, instead of selling the machine to only a few companies, introduced the high-quality, high volume machine using the innovative lease method (value proposition) via direct sales (channel) to large private companies and government offices (target market). It offered parts and sales support (customer bonding), allowed companies to simply pay $95 a month and have as many copies as they want, with an extra charge of four cents a copy only if the output exceeded 2,000 copies a month (revenue model). The prevailing output at that time was only 15-20 copies a day.
 
Xerox invested in machines and maintenance (cost) but made a bigger profit from the supplies as a result of high usage. It patented its products (resources), and had to excel, among others, in service response time, machine usage monitoring and billing (process). While it developed everything internally (value network), it allowed plain papers made by others to fit the machine (complementors) and provided dry ink and parts at no extra cost (new configuration). Total sales of the Xerox 914, including rebuilt and upgrading reached a total of 600,000 units.
 
Josiah Go is chairman and chief marketing strategist of Mansmith and Fielders, Inc., the leading training company in marketing, sales, strategy and innovation. He will be speaking in the first-ever Business Model Innovation executive boot camp in the Philippines. For a free copy of Mansmith business model map, please e- mail josiah@mansmith.net for details.


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