What are the Best Practices for Developing New Business Models?

To answer this subscriber question on business model innovation, we reached out to InnoLead partner Saul Kaplan, the founder of Business Innovation Factory. A veteran of both Accenture and Arthur D. Little, Saul has a specific expertise in business model innovation, and is the author of the 2012 book The Business Model Innovation Factory.

Question: We’ve read a ton in InnoLead about product innovation, but we’re exploring new business models. Has anyone done any structured thinking about business model design, prototyping, testing, etc.? What does a sample process look like? Are there any “best practices” yet? Thanks.

Answer: Business model exploration is the new strategic imperative for most companies, because, quite frankly, business models don’t last as long as they used to. As we’ve all seen, companies are increasingly vulnerable to being disrupted by an upstart new business model – exemplified by companies like Netflix, Uber and Airbnb – that plays by a completely different set of rules.

Instead of playing defense, we’ve been advocating that it’s time for corporate leaders to play offense, by exploring and testing new models for themselves in the real world. In other words, companies need to establish the capability to do ongoing R&D for new business models the same way they do R&D for new products and technologies.

But exploring new business models – especially those that might disrupt a company’s core business – requires a different sandbox, skills, resources, and authority than do innovation efforts to improve the core’s competitiveness. (Click the image at right to download the PDF version.)

Today’s CEO’s have to pedal the bicycle of today’s business model while simultaneously exploring a portfolio of new models for tomorrow. And the time for business model R&D is when the current business model is doing great; once any business model is under siege by a disruptive upstart, it’s too late to start exploring new models (just ask anyone who used to be in the newspaper business.)

We believe business model exploration starts by changing your lens to adopt the customer’s point of view. It requires a deep understanding of the customer’s experience, not as market research, but as a foundation for design. We recommend utilizing a design process like the one we use below, which includes five steps and leverages human-centered design and storytelling: 

1. Shift: Look at the world through the eyes of customers and their jobs-to-be-done. Business model design is human-centered design.
2. Create: Explore and imagine a new experience for customers that will create value for them.
3. Deliver: Create a sandbox where you can combine and recombine capabilities.
4. Capture: Develop a resource generator to fuel and grow your business model.
5. Prototype and Test: Build a low-fidelity version of the new business model and test it in the real world. Learn, evolve, and test again. Repeat as needed.

You asked about best practices, so here are seven that we’ve developed for business model innovation: 

1. Business model innovation has to come from the leadership team. Only C-level executives can envision and authorize the sort of combination and recombination of corporate capabilities required for business model innovation. Chief Innovation Officers typically manage innovation portfolios and processes meant to create new products that usually just tweak the current business model. Business unit leaders have the same goal, which is to make the current business model as successful as possible.
2. Separate the business model exploration and design from the current business. You must create a sandbox away from your core business, a place where you can combine and recombine core capabilities and possible new capabilities, explore adjacent spaces, and consider possibilities that may even cannibalize your existing business.
3. Business model design is human-centered design. Customers matter: Business models start with a compelling customer value proposition, and the best way to create that is to look through the lens of customers. How do they view the world? What are they trying to get done? In what ways could your company create new value for them, deliver that value, and capture value in return?
4. Business model design requires a design approach. Specifically, business model innovation requires thinking in terms of experimentation/learning rather than success/failure. It’s a design process: Prototype, test, learn, evolve; prototype, test, learn, evolve; repeat as necessary.
5. Test business models in the real world. A focus group or a quant study won’t tell you whether your business model will work. You need to expose your prototypes to real customers in the real world, all through the design process.
6. Create appropriate metrics. You’ll need to create metrics to measure your tests, and you’ll need to be careful to measure the right things. These will not be the same metrics you would use in your current business, or even the metrics you would use to launch incremental innovations, such as purchase intent and projected sales. For example, you’ll need to figure out ways to measure how well your value proposition does the job the customer needs done.
7. Tell the story. Your business model is your company’s story, the story of how your business creates, delivers, and captures value. A new business model recasts the narrative. Telling the new story helps people see the world differently, and pulls people into the transformation. Perhaps the story even prompts people to co-create the narrative as it unfolds. So you’ll need to explore ways to tell the new story in different contexts and for different audiences.

Strategy & Governance