Business Model Innovation: Literature Review and Propositions

Transcription

1 Business Model Innovation: Literature Review and Propositions Introduction Peter Yannopoulos Business models and their usefulness are greatly affected by innovation. This can be in the form of innovations in the external environment which affect the functionality of the business model and may cause it to fail or become obsolete either in part or in whole. It may also be in the form of the need to innovate the model itself and, in a sense, upgrade it to the best possible functionality. This study will explore the issues and concerns associated with business model innovation and seeks to establish why, when, and how a model should be modified. It was found that models needed to be innovated in order to sustain the business in the face of competition and an ever-changing environment. The innovation process must be continuous and managers must avoid waiting until failure in the form of losses are materialized. Organizations need to proactively invest resources and personnel into the experimentation stage of the innovation process in order to uncover threats and future changes in the environment and respond to them in time. Models can be modified in a variety of ways, but it is helpful to first determine the aims of the business and to clarify with what strategy the business will compete. This will allow for an organization to take the appropriate steps to maximize the creation of value through its business model and at the same time, design a model that complements its strategy. Innovation results in the uncovering of many opportunities for an organization but there are also many threats to the innovation process. These threats cause the process to be a difficult and risky one which adds to the uncertainty of those working within the organization. However, innovation is a necessity, and if an organization wants to be able to sustain itself, it must proactively pursue this endeavour. A business model is key to the successful operation of a business. The use of the term business model became widespread with the advancement of technology in the form of increased use of the personal computer by businesses due to the usefulness of the spreadsheet function (Magretta, 2002), increased use of the Internet and other speedy communication media (McGrath, 2010), and the globalization of business (Teece, 2010). The term has been defined in many ways such as stories (Magretta, 2002), recipes (Baden-Fuller & Morgan, 2010), and tools of innovation (Teece, 2010). This is because there is no clear consensus on what the concept actually construes and it serves a variety of different functions upon which different definitions are based. However, for the purposes of this study, it is best described as, a profit model, a business delivery system, and a learning system (Itami & Nishino, 2010) because profits can be used to measure the success of the business model, business models describe the core concept that the value creation in the business is based on, and one can learn from the business model and make improvements in order to achieve the best returns. There are many ways to classify business models based on their purpose and function. For example, Chaterjee (2013) classifies models into four generic types based on different sources of Goodman School of Business, Brock University, St. Catharines, Ontario, Canada.

2 value creation: Efficiency-Based, Perceived Value-Based, Loyalty-Based, and based on Network Efficiency. Efficiency-Based models describe models in which value lies in the optimum utilization of resources while Perceived Value-Based models describe value created in the minds of consumers. On the other hand, Loyalty-Based models describe value in the form of maintaining and expanding a core group of customers. Network Efficiency based models describe the value of finding the best methods of operating between suppliers and consumers. In the process of designing one s business model, choosing from these types can be the starting point that lays the foundation until the model is complete to its action plan (Chaterjee, 2013). Another way to classify business models is provided by Baden-Fuller and Morgan (2010), who describe how business models can be classified as either scale models or role models based on their purpose. The purpose of a scale model is to provide a scaled-down copy of something to be analyzed while a role model provides an ideal version of something to be copied from (Baden-Fuller & Morgan, 2010). A business model can either reflect what the main operations of a business are or provide the basis upon which the operations should be carried out. They further explain how a business model is meant to fulfill the role of three things, to provide means to describe and classify businesses; to operate as sites for scientific investigation; and to act as recipes for creative managers (Baden-Fuller & Morgan, 2010, p. 157). Thus, the classification of business models into types is heavily dependent on the function of the model and the purposes which it endeavours to achieve. Although often used interchangeably with the term strategy, business models differ in that they are more concerned with value creation whilst strategy is more concerned with competition (Fuller & Morgan, 2010; Magretta, 2002). The two are still very closely related to one another since a business model is formed to complement strategy (Casadesus-Masanell & Ricart, 2011) and it is concerned with the factors relevant to the strategy and how they relate with one another to affect the business. The business model provides the plan of how a business will create value for itself and its customers. In turn, the strategy provides the means by which it will capture the returns on the value provided to customers and also takes into consideration the need to differentiate from competitors who are also aiming to capture it. Two businesses may create value using the same model, but one s success over the other depends on its strategy (Magretta, 2002). Another way to differentiate between business models and strategy is provided by Teece (2010), who concludes that, A business model is more generic than a business strategy. Coupling strategy and business model analysis is needed to protect competitive advantage resulting from new business model design (p. 179). In other words, the business model and strategy depend upon one another and one needs to be considered when the other is being altered in order for the business to be successful. Business models must also be modified or upgraded when they do not produce the desired results. Although this is not the only situation in which innovation is necessary, this is the clearest and most agreed-upon situation for identifying the need to modify one s model. A model may not have this problem in the beginning, but as time goes on and the external environment changes due to innovations and technological advancements (and other causes), the model may outgrow its usefulness or become obsolete. A model that may have worked in the past may not continue to work or work as well as it did previously and this is the clearest sign that action needs to be taken to ensure success. According to Giesen et al. (2010), the need to modify one s business model is becoming

3 increasingly important as the environment is changing, and hence, causing disruption, more frequently than in the past. What a business considers as its desired results vary from organization to organization and it may not always refer to financial returns. For some organizations, maintaining core consumers is the desired result and although their business model is producing exceptional financial returns, it may not be good enough for the business in terms of customer loyalty. Thus, the purpose of the business model and its consistency with organizational objectives and strategy need to be analyzed in detail before determining whether a model is failing or not. There are many ways to modify a business model and this will be discussed in the next section as different authors have developed different strategies and standards to achieve this. Literature Review The literature reviewed on the topic of business model innovations can be divided into three sections. The first describes various explanations for business model failure and the importance of top management to be leaders in the innovation process for it to be successful. The second describes the widespread support by scholars for the use of experimentation and gradual implementation in the innovation process to avoid unnecessary losses. The third describes the options available to innovators when designing a new business model and what different scholars consider essential parts of the model. These will be described in greater detail below. Why Business Models Fail and the Role of Leadership in Innovation There have been many reasons attributed to business model failure which usually vary from organization to organization. Although the specific causes may differ, one of the major reasons a model fails is due to innovations in the external environment, especially the technological environment, which causes inefficiencies in the functioning of the original model. According to Giesen et al. (2010), business model failure can be caused when an external or environmental change triggers a disruption in the enterprise, causing either a gap in the pace of change within the company (it cannot keep up with the external change) or the demise of the original model. In other words, if the environment changes and the company does not adapt to these changes as they happen, its business model could either fail completely or become inefficient, causing competitors to overtake it. Complete failure may occur, for example, if the value creation mechanism of the business model is dependent on a certain technology which eventually goes out of use or is replaced by some other technology which fulfills the same purpose. Partial failure may occur if a newer version of the technology becomes available and the only way for the company to stay ahead of competitors is to adapt this technology. A second major cause of business model failure does not concern innovations in the external environment, but inefficiencies within the model itself. In other words, the model may have been faulty or inefficient to implement to begin with and failure is not caused by externalities. Zott and Amit (2010), Chesbrorough (2010), and Nunes and Breene (2011) hold that although there are many causes of business model failure, the main issue may come down to delays in fixing parts of the model that do not work and instead working too hard to salvage the original model. This occurs when managers create or are given an inefficient or failing business model to work with and instead of proactively working to uncover faults in order to correct them, they try to make the faulty model work by changing

4 other conditions, such as personnel. Unwillingness to change is common in most organizations and this is a contributing factor as to why this behaviour occurs. It is a major barrier to innovation which will prevent the business from achieving the best possible results in the long-run, or in the worst case scenario, complete failure of the business. In order to tackle the problem of resistance to business model innovation, scholars agree that top management must play an important role, even though they are the ones most likely to be the obstacles to innovation (Chesbrough, 2010; Doz & Kosonen, 2010; Nunes & Breene, 2011). Consistency with strategy is vital for any innovations to the original model to be successful. Doz and Kosonen (2010) argue that due to the close relationship between strategy and the business model, leaders who are ultimately responsible for overseeing strategy must be at the forefront of business model innovation. This will ensure that the innovations do not cause the model to be in conflict with strategic aims. In contrast, Chesbrough (2007) refers to the lack of a single person in the organization having the authority or capability to innovate the business model as the business model innovation leadership gap (p. 16). It is described as follows All this inertia is reinforced by the fact that the top managers of the organization reached their current level of responsibility by executing within the current business model. So that model is familiar and reassuring to them. They know in their bones what its strengths are, and how best to exploit those advantages. And they are less comfortable with anything that differs from this model. And the more radically different a potential new model is, the more data needs to be provided to justify its consideration. All too often, the result is that the established business model becomes unchallengeable (p. 16). Another factor as mentioned in the above quotation is the increased amount of data that needs to be collected during the innovation. This inevitably is associated with additional time, money, and effort being invested into the process investments that managers and subordinates may not be so willing to make. Thus, there are serious barriers to the innovation of business models and top management support is vital to overcome them. Support for Experimentation as a Key Component of the Innovation Process There is overwhelming support in the literature for the use of experimentation in the process of innovating one s business model (Chesbrough, 2007, 2010; Doz and Kosonen, 2010; Gambardella and McGahan, 2010; McGrath, 2010; Nunes & Breene, 2011; Sosna et al., 2010). Experimentation refers to the testing of innovative ideas in order to collect results and using these results to assess whether the innovation will result in success or failure. This requires a great amount of data collection and proper research design methods. The experiment should be conducted on a small scale at first. If it is successful, then it is deployed on a larger scale. However, some experiments that are successful on the small scale do not work as well (or at all) when implemented to the full extent. Thus, there always remains the risk of losing all of one s time, resources, and efforts even after successful experimentation a factor which may deter managers from investing in business model innovation. However, sometimes innovating one s business model becomes inevitable. One such circumstance in which innovation becomes inevitable is when the model has already been proven a failure, for any of the reasons mentioned in the previous section. In this scenario,

5 immediate action must be taken to alter or overhaul the original model and this must be done as quickly as possible to avoid any further losses. Despite this, it is widely held that innovations should not be immediately incorporated into one s business model as a response to failure. Instead, the innovation process should be well thought-out, systematic, and implemented gradually to avoid even greater problems and misuse of resources. Multiple Design Options when Innovating What is essential in a business model is another area in which scholars have differing opinions and this relates to the initial point made in this study where it was stated that there is no clear consensus among scholars on the definition of the term business model. Instead, the term is defined by and applies to whatever function it is fulfilling for that particular organization. Some of the opinions of different scholars regarding the key components of a business model will be described here and will be used further in the study to derive the common features in order to provide multiple design options to be used in the innovation process. According to Giesen et al. (2010) the key elements of a business model are 1. What value is delivered to customers: customer segments, the value proposition, the specific job to be done, what is sold and how it is sold. 2. How the value is delivered: critical internal resources and processes as well as external partnerships. 3. How revenue is generated: the pricing model and forms of monetization. 4. How the company positions itself in the industry: the company s role and relationships across the value chain (p.18) It can be noted that these elements revolve around the value creation process and this is consistent with the elements suggested by Chesbrough (2007) and Zott and Amit (2010) which will be described later in this section. Another key element to note is the expected returns one hopes to capture through the model. It is clear that there is no purpose of implementing a business model if the expected returns are not great enough to justify its use. In other words, an alternative purpose served by a business model is the justification of the existence of the business. It proves, in a way, that it is worthwhile to invest one s resources into creating and delivering value to customers if the business will receive something of value (and enough of it) in return. This also reinforces the point made in the previous section that experimentation is necessary before implementing a model. This is because the experimentation process will allow one to better determine whether a new model or innovation to the original model will produce the expected returns. If it does so, then the use of the model is justified and vice versa in case it does not. The model will provide the parameters of the returns that would validate the proposed innovations. According to Chesbrough (2007) there are four main elements of a successful business model: a strong Customer Value Proposition (CVP) (how a company creates value), a profit formula, and the key resources and key processes to deliver value. This is similar to the key elements of Giesen et al. (2010) presented above. It too, deals with the creation of value and emphasizes the resources that must be invested in the business and the expected returns. Chesbrough (2007) also discussed three

6 stages of innovation: incubation, acceleration, and transition. The incubation stage consisted of experimentation and problem-solving to create a new business model by testing it against different conditions. The acceleration stage involved the conversion of tested concepts into repeatable processes (Chesbrough, 2007, p. 11), while the transition stage involved reintegrating the new model innovations into the core business concept. These steps are also consistent with the need for experimentation in the business model innovation process. A slightly different presentation of the key business model design elements is presented by Zott and Amit (2010). They list the following design elements when describing business models as activity systems: 1. Activity system content: This describes what activities will be performed in order to create value for the business. 2. Activity system structure: This describes the relationships between the activities and their importance for the business model. 3. Activity system governance: This describes who will perform the activities. (Amit & Zott, 2010, p. 220) Describing business models as activity systems shows the emphasis on the process of value creation as opposed to the expected returns on investment. The following section will take into account the multiple design options presented here in order to formulate a checklist of important elements that should be included when innovating one s business model. Business Model Innovation This section will describe why a business model should be innovated, how it should be innovated, what to do after the design process, and the threats and opportunities of innovating a business model based on the literature. Why a Business Model should be innovated There are two main reasons to innovate one s business model: 1) The environment has changed, making the old business model obsolete or experience failures 2) The model itself is not exploiting every possible capability and opportunity and this is costing the business in terms of profit or other sources of value for it In the first scenario, the business model experiences failure because of external circumstances which cannot be controlled by the organization. Since the environment cannot be changed to suit the model, the only option left for the organization is to change the model. The model will require the introduction of innovations or a complete overhaul if the business is to continue to survive in the changed environment. If the old model is continued, the losses will eventually become so great that the business can no longer be sustained. Therefore, innovation becomes necessary. Continuous innovation also becomes an issue since the environment is changing rapidly and there is no guarantee that a model tailored to function in one environment will continue to be successful the moment it changes. One step to mitigate the effects of and ever-changing external environment is to be proactive in the innovation process and use research and development to help predict changes and tailor the organization s responses to these changes before they occur. On the other hand, a disruption in the environment might only affect a certain part of the value creation

7 process for an organization and not its business model in entirety. In this case, it is necessary to have a model that clearly identifies the market in which the organization is competing and with which products as mentioned in the key elements of Giesen et al. (2010). Markides and Oyon (2010) suggest using separate business models which cover separate value chains but still complement one another to deal with disruptions in the market. According to them, in order to best achieve synergy between multiple business models, one must concentrate within the organization and take advantage of opportunities in the organizational environment, which consists of the organizational culture, structure, incentives, and people (Markides & Oyon, 2010, p. 31). This is only one option for managers to consider and will work if the value chains are kept separate so as to prevent resources from being taken away from one process to support another. The main reason for the second scenario (having a weak business model to begin with) is because companies wait too long before innovating their business models. If something is not working with the model itself, they do not fix it. There are a variety of different reasons as to why this occurs and these will be mentioned in the section that deals with threats to innovation later in this study. The consequences of disallowing innovation to a business model will be reflected in the inability of the model to produce the highest possible returns for the organization and it will continue to function at a mediocre level. Its only chance of survival in the face of competition in its markets will be if its competitors are functioning at even lower levels of performance due to the same reason. However, this is unlikely, and the business would be beaten out of the market by competitors who actually do invest the resources, time, and effort to innovate their business models and gain exceptional returns. Thus, it is important to correct any deficiencies in one s business model even before competitors are able to overtake one s market position. How a Business Model should be innovated Innovating one s business model, in a way, is like designing a new business model. If one does not intend to completely overhaul the original model and replace it with a new one, then it must emulate the successes of the old one and address its failures as well. It can recycle what was working in the old model and discard the unfavorable or obsolete elements and processes, replacing these with upgraded, current, and workable methods. It must solve what went wrong with the older model, whether this be due to technological innovations in the external environment or failures of the model itself which had never worked properly to begin with. According to Cavalcante, Kesting, & Ulhoi (2011), there are four different types of business model change: creation, extension, revision, and termination. Creation refers to the initial materialization of a business concept into a definitive plan of how the business should operate in order to create value. When one adds to an existing business model, it is referred to as extension. On the other hand, when a part of an existing business model is replaced by a new process, it is referred to as revision. Termination occurs when a process is completely discarded (Cavalcante et al., 2011). Before an organization takes steps to change its business model, it must first determine what exactly needs to be changed and to what extent this will affect the rest of the business model. A clear indicator to determine what should be changed is tracing back from losses and using research to ascertain its causes. When it is clear at which stage of the value creation process the model is failing, then one can take appropriate steps to correct it.

8 One way in which innovation can take place is by identifying which of the four generic types that one s business model falls under and then proceeding to innovate using simple rules tailored specifically to meet the needs of such a type as suggested by Chaterjee (2013). For example, if one has an efficiency-based model to innovate, it would have to expand its value proposition, unlock capacity, and challenge pricing orthodoxies, among other things (Chaterjee, 2013). This could be a strong starting point in the innovation process. When one is determining the generic type of one s business model, strategy plays a major role. One must first determine what their strategic aims are and how the business model will complement them. This stage is labelled the Strategy Stage by Casadesus-Masanell and Ricart (2010). In this stage, the type of business model is affirmed and the way in which value will be created for the organization is determined. After this, the organization can move on to determine how the value can be captured. This is known as the Tactics Stage. In the Tactics Stage, the organization must choose from a variety of options available to it from which it can create and capture the value entailed in the business model. According to Casadesus- Masanell and Ricart (2010), tactics are choices. They are choices which are bound by their business models and affect how much value is created and captured by the organization. The specific strategy employed has a greater involvement in the capture of value, however, the choices made to accomplish this are part of the Tactics Stage and these influence the extent to which the strategy will be successful. Thus, after the business model has been altered, one s tactics or choices made in the creation and capture of value must be based on the business model and operate in terms of the overall strategy. Business model innovation is part of the Strategy Stage, however, and design elements of the business model will be focused on in this study. Although there are varying positions on what are essential components of a business model, the following will be recommended as musthaves in a business model, based on the literature reviewed: 1) A clarification of the market segment(s) within which the model will be in effect 2) The company s role and position in this market segment 3) How value will be created by the business i. What activities must be completed? ii. Who will carry out these activities? iii. What resources are required? iv. How will the business profit from these activities? 4) The value capture mechanism(s) or strategy 5) Isolating mechanisms to protect from competitors It will be held that the newly innovated model will be incomplete unless it contains descriptions of all of the above elements. After the Design Process (Issues & Evaluation) After the design process, the new model must be tested and then implemented. However, there are issues with implementation, which may cause the organization to re-evaluate the model. This section will describe some of the common issues associated with business model innovation and provide insights based on the literature as to how a model should be evaluated. Some important issues with business model innovation identified are: 1) Leadership: The organization must provide the relevant manager with the authority and resources required to experiment with business model innovation (Chesbrough, 2007; Doz & Kosonen, 2010).

9 2) Strategic Sensitivity: The organization must ensure that the model is adjusted accordingly with strategic developments to avoid a lag or disconnect between the model and strategy (Doz & Kosonen, 2010). 3) Protection of core activities: The organization must prevent the innovation process from taking resources away from core activities and it should be capable of redistributing resources as necessary in the quickest possible time (Chesbrough, 2007; Doz & Kosonen, 2010) 4) Expansion: Once tested, an innovated model needs to be widely deployed in order to determine how successful it will be on a large scale and where the established model stands in comparison (Chesbrough, 2007) 5) Coexistence: If it is found that more than one business model works in separate markets, then both can be used at the same time provided their sources of funding are kept separate (Chesbrough, 2007; Markides & Oyon, 2010) The quality of a business model can be determined by asking the following questions, based on the three A s of a good business model mentioned by Giesen at al. (2010, p. 20) and the three characteristics of a good business model mentioned by Casadesus-Masanell and Ricart (2011, p. 102): 1. Is it aligned with company goals? (Is it consistent with the business strategy?) 2. Is it analytical? (Does it use information to base its decision-making and prioritize actions when measuring performance?) 3. Is it self-reinforcing? (Is it free from conflict with the core activities of the business?) 4. Is it adaptable? (Is it easy to alter/innovate when the need arises?) 5. Is it robust? (Can it sustain its effectiveness over time and fend off threats?) In the last question, Casadesus-Masanell and Ricart (2011) identify the four specific threats as imitation, holdup, slack, and substitution (p. 102). Imitation refers to the ability of competitors to copy the business model. Holdup refers to the bargaining power of suppliers and customers to capture value created by the model. Slack refers to organizational complacency and substitution refers to the ability of other products to take perceived value away from one s product in the minds of the customers. A good business model should be able to counter all these threats. The Threats and Opportunities of Innovation Sosna et al. (2010) describe the difficulties of implementing a new business model as follows: new business models rarely work the first time around, since decision makers face difficulties at both exploratory and implementation stages. At the exploratory stage, when their new business model is being conceptualized, managers face the uncertainty and unpredictability of fast-evolving markets... At the implementation stage, new business models also require organizational realignment, requiring decision makers to mobilize scarce resources, develop unique competencies and adjust organizational structures to promote learning, change and adaptation (p. 384) In other words, the threats to business model innovation come from both external as well as internal sources. The threat of the environment changing before implementation is complete is an example of an external source while the necessity to change organizational processes is an internal source. Sustainability of a business model is never guaranteed; therefore, proactive innovation is the only way for an organization to counter external threats.

10 The internal threats to innovation, as mentioned earlier, include the leadership gap, which refers to a conflict of interest between management and the wellbeing of the business. Chesbrough (2010) describes this behaviour by managers as a response to innovations they fear will threaten their ongoing value to the company (Chesbrough, 2010, p. 358). In other words, if a manager s value to the firm lies in a certain method of operation, that manager will not be likely to explore new options that would replace that method. In this way, they believe they are protecting their position in the firm. For example, if a manager is responsible for marketing the organization s products, and he is asked to explore options which would allow an external contractor to carry out the company s marketing activities, the manager will be unwilling to actively pursue this as an opportunity. Thus, the responsibility for changing a business model should not be in the authority of someone whose position is dependent on the original model. Another barrier is described by Chesbrough (2010) and Amit and Zott (2001) as the conflict between the existing model and a model which can exploit the benefits of adapting disruptive technologies. In other words, organizations might be discouraged from investing in innovation because the process involves channelling resources towards experimentation and research when it could otherwise be invested in the original model by which the organization makes its profits. Since the existing model is what the returns of the firm is based on, more resources are channelled to it and away from innovating. The risk of failure in the experimentation stage (and even in the implementation stage, provided it passes the experimentation stage) contributes to this occurrence since all resources invested will have gone to waste. Despite these threats, there are numerous opportunities that are uncovered when a business model is innovated. The opportunities of innovating include uncovering hidden competition, hidden capabilities, and hidden talent (Nunes & Breene, 2011). According to Nunes and Breene (2011), the kind of competition a business model is based on will inevitably change over time. There will be new sources (e.g. new products) that will compete against one s business which did not exist when the original business model was formulated. Innovating the model allows these hidden competitors to be uncovered, so that an organization can adjust its model to respond appropriately. Innovation also expands what the business is able to achieve by uncovering its hidden capabilities which would not have otherwise been realized. In addition to this, hidden talent is uncovered through innovation in the form of improving the abilities of one s personnel by investing in their development. This way, an organization is able to perform better in the face of competition. The experimentation stage of the innovation process also uncovers opportunities for a business. This occurs due to the collection of newer, updated, data about the organization which did not exist when the original business model was created. Thus, it provides better insights into the position of the organization in its current environment and allows management to become aware of new opportunities. According to Chesbrough (2010), companies can model the uncertainties, and update their financial projections as their experiments create new data. Effectuation creates actions based on the initial results of experiments, generating new data which may point towards previously latent opportunity (p. 362). The continuous collection of data helps to mitigate the consequences of the uncertainty in an organization s environment as well and this is best achieved when management is proactive in the innovation process of its business model.

11 Discussion What Makes Business Models Effective? Business model effectiveness is dependent on its value creation mechanism and its ability to work well with the overall business strategy to prevent this value from being captured by competitors. An effective model has a thorough and functional plan to convert invested resources into value which will result in returns from customers that will profit the company. The greater the value that can be created from a limited set of resources, the better. However, simply having an effective system of value creation is not enough. More than one company can base its business model on the same principles of value creation, yet when competing with one another head-to-head, some clearly excel others. The difference, according to Magretta (2002), is in their strategies. Strategy is what causes certain companies to perform better than their competitors despite having similar business models. This is because strategy is concerned with capturing value for the company in the form of returns while the business model is concerned mainly with creating value for customers. One s strategy determines how they will go about the implementation of their business model and ensure its sustainability in the face of competition. Thus, it is very important that the business model complements one s strategy in order to be effective. What Makes Business Model Innovation Difficult? Business model innovation is difficult due to a variety of reasons. Business models can be very rigid because the entire operation of some organizations are dependent on it. If an organization uses one business model as the basis of its entire setup, it becomes very difficult to change it because this would require a complete overhaul of the organization s practices. Not only can this be expensive and time consuming, but there is also the unwillingness to change on a personal level as well as the risk and uncertainty associated with using an unfamiliar system of value creation and delivery. In addition to this, if the organization has been using a certain business model which had provided it with all its prior profits, making changes to this model unleashes the risk of losing future profits. In addition to this, even after innovating the business model, there is no guarantee that the external environment will remain stable and change will become inevitable in the near future. Innovation is also difficult due to its frequency. The environment is continuously changing and this causes the necessity for organizations to continuously innovate their business models. As a result, resources and effort must be invested into the innovation process repeatedly. This is a challenge that organizations must face in order to stay ahead of their competitors. As mentioned earlier, if a company chooses to ignore or delay the innovation process, it can only hope that its competitors are doing the same, otherwise it will be overcome in its market(s). The absence of a one-time solution to business model inefficiencies and the need for a continuous flow of resources to fund the innovation process only adds to the difficulties of business model innovation. Conclusion

12 Business model innovation is an important process that must be undertaken continuously by organizations. It is not enough for an organization to be satisfied with the business model it has. This is because the environment is changing rapidly and competitors who innovate accordingly will gain the upper hand in the market. There are many ways for an organization to innovate its model to best suit its needs, but at the end of the process, it can evaluate the quality of its innovated model based on certain parameters. The threats and opportunities associated with innovating serve as deterrents and incitements respectively. On one hand, innovating one s business model is difficult and risky. On the other, it uncovers opportunities and helps mitigate the effects of environmental change on the organization which would have otherwise not been possible. However, the innovation process must allow for the designing of a model that is consistent with the organizational strategy in order for it to be successfully implemented and serve the interests of the organization. In addition to this, the content of the model must have a strong value creation and delivery system so that the organization can realize the greatest possible returns on its investments. The innovation process can be difficult due the rigidity of the business model and the need to repeatedly change such a model. Even after one innovation is incorporated into a model, research and experimentation must be repeatedly carried out to predict future environmental changes and formulate the most appropriate responses to them. This causes the process to be time consuming, expensive, and requiring much effort, however, such investments are necessary in order to compete in a rapidlychanging, disruptive environment with an ever-growing pool of competitors. References Amit, R., and Zott, C. (2001). Value creation in e-business. Strategic Management Journal, 22, Baden-Fuller, C., and Morgan, M. (2010). Business models as models. Long Range Planning, 43, Casadesus-Masanell, R., and Ricart, J. (2010). From strategy to business models and onto tactics. Long Range Planning, 43, Casadesus-Masanell, R., and Ricart, J. (2011). How to design a winning business model. Harvard Business Review, R1101G, Cavalcante, S., Kesting, P., and Ulhoi, J. (2011). Business model dynamics and innovation: (Re)establishing the missing linkages. Management Decision, 49 (8), Chaterjee, S. (2013). Simple rules for designing business models. California Management Review, 55 (2), Chesbrough, H. (2007). Business model innovation: It s not just about technology anymore. Strategy & Leadership, 35 (6), Chesbrough, H. (2010). Business model innovation: Opportunities and barriers. Long Range Planning, 43, Doz, Y., and Kosonen, M. (2010). Embedding strategic agility: A leadership agenda for accelerating business model renewal. Long Range Planning, 43, Gambardella, A., and McGahan, A. (2010). Business-model innovation: General purpose technologies and their implications for industry structure. Long Range Planning, 43,

13 Giesen, E., Riddleberger, E., Christner, R., and Bell, R. (2010). When and How to Innovate your Business Model. Strategy & Leadership, 38 (4), Itami, H., and Nishino, K. (2010). Killing two birds with one stone: Profit for now and learning for the future. Long Range Planning, 43(2-3), Magretta, J. (2002). Why Business Models Matter. Harvard Business Review, R0205F, Markides, C., and Oyon, D. (2010). What to do against disruptive business models (when and how to play two games at once). MIT Sloan Management Review, 51413, McGrath, R. (2010). Business models: A discovery driven approach. Long Range Planning, 43, Nunes, P., and Breena, T. (2011). Reinvent your business model before it s too late. Harvard Business Review, R1101D, Sosna, M., Trevinyo-Rodriguez, R., and Velamuri, S. (2010). Business model innovation through trialand-error learning: The Naturhouse case. Long Range Planning, 43, Teece, D. (2010). Business models, business strategy and innovation. Long Range Planning, 43, Zott, C., and Amit, R. (2010). Business model design: An activity system perspective. Long Range Planning, 43,