How do we implement strategy and innovation in an organization? In this video, we discuss the role of the business model in bringing innovation and strategy to life.
Learning Objectives
Understand that business models are key to value creation and capture How do business models help companies create and capture value? Learn the differences between business models, strategies, and tactics How do these elements interrelate in a business context? Explore the robustness of business models against risk factors How do factors like imitation, slack, or substitution affect a business model? Sneaker Example
Consider a classic white sneaker. One can customize it with branding, colors, laces, or a different sole, but it remains a sneaker. From a producer’s perspective, every time a customer goes to buy a new white sneaker, they can choose another brand. This poses a loyalty problem: how do you keep customers from switching?
Business Model Innovation Example:
Cyclon, a running shoe advertised as “the first running shoe you will never own.” It uses a subscription model at roughly $30/month. The shoe is fully recyclable (made from beans) but only through a specialized process. Thus, customers return the shoe, receive a new pair, and the materials are reused. This innovation:
Solves the loyalty problem: Customers stay subscribed, always receiving the next shoe from the same company. Addresses waste: A fully sustainable, closed-loop process. What Is a Business Model?
David Teece defines a business model as “a management hypothesis about what customers want, how they want it, how an enterprise can meet those needs, and how the enterprise can get paid for doing so.” It is essentially a guess about how to create and capture value, answering four key questions:
How can we meet these wants/needs? How do we deliver on that promise? How do we get paid for doing it? Business Model Innovation
Business model innovation helps capture the value of a new product, service, or technology. It is different from product or process innovation in that it focuses on the way the company creates, delivers, and captures value rather than changing just the product itself.
Example:
Xerox invented the copy machine, priced at $30,000 in the early 1970s. Sales were minimal. Changing the revenue model to “rent for $95/month (includes 2,000 copies)” dramatically boosted returns from $30 million to $2.5 billion. This shift required not just a new pricing approach but a restructuring of operations (e.g., maintenance, service personnel, supply of paper/toner). Business Model Canvas
A tool to map and think through all components of a business model:
Completing this canvas helps identify how everything fits together and where innovations might be implemented.
Strategy, Business Model, and Tactics
Long-term plan; defines goals and a competitive position. Considers external environment and internal capabilities. Asks: “What do we want to stand for in the future?” Operational logic of how a company creates, delivers, and captures value. Specific actions used to achieve strategic goals. Less costly to change than the overall strategy. Allow operational adaptations. What Makes a Business Model Successful?
Alignment with Corporate Goals Must support the organization’s strategy, not contradict it. Components complement and reinforce each other, creating internal consistency. Resists imitation by competitors. Minimizes “holdups” or disruptions in the supply chain. Guards against “slack” (inefficient use of resources, lack of commitment). Survives “substitution,” where competitors find new ways to meet customer needs. Example: Ryanair
Strategy: Restructure from a traditional airline to a low-cost carrier (“no-frills”) in the 1990s. High volume of passengers -> bargaining power with airports -> lower fixed costs. High aircraft utilization -> reduced cost per passenger. Low service expectations -> no free meals, extra revenue from additional services. Uniform fleet, cost-cutting practices, secondary airports. Self-reinforcing cycles: low prices -> more passengers -> more bargaining power -> lower costs -> even lower prices. Key Takeaways
Business Model Innovation Helps organizations realize the economic value of newly developed resources, such as technologies or competencies. Must align with corporate strategy. Should be self-reinforcing and robust against imitation, slack, and substitution. Tactics Enable Adaptation Tactics are more flexible than strategy and allow companies to operationalize and sustain their business models. We hope you enjoyed this overview. We look forward to seeing you in our next video!
