In 1997, two entrepreneurs tested sending a DVD to their own home in California. When it arrived unscathed, they decided that the time was right to launch a DVD mail order rental business. In the beginning, customers could log on to the website, pick out a movie and rent it for $4 with a $2 postage fee. More people are watching Netflix than watch traditional cable TV, it accounts for 15% of internet bandwidth, terms like “Netflix and chill” have worked their way into common parlance, and a recent article by the NYPost even suggested that Netflix is contributing to the falling rates of sex…
This is the same company, but it’s evolved significantly since its start back before Y2K. First the business made money by renting DVDs, then they introduced subscriber pricing, then they shifted consumption and human behavior by introducing streaming services in 2010. And, more recently, they’ve opened up new revenue streams and customer segments by offering product placements to brands. This history of continuous evolution and openness makes Netflix an exemplar for positive business model innovation…
But business model innovation is not as easy as Netflix makes it appear. Ideas for Fostering innovation and growth is not simple for sure. Many companies attempt to shift their approach or tweak their offer for new customer segments, but businesses like Daimler’s Car2Go have already evaporated in North America and Encarta is long since displaced by Wikipedia. So why do so many new business models fail and how can idea management help?
What is business model innovation?
Business model innovation is the process of creating market advantage and new value by updating an organization’s value proposition and making changes to its operating model. This makes business model innovation highly attractive to organizations as it doesn’t necessarily require any new, cutting edge technology or the building of totally new markets. This makes it far more affordable than other forms of innovation… but for some reason these new business model innovations often fail. Why?
Why does business model innovation fail?
Lack of focus. Harvard Business Review suggests that “focused business models are most effective when they appeal to distinct market segments with clearly differentiated needs.” This means disruptors could be niche businesses with highly efficient models who are able to better address and tailor their value proposition and approach to their unique segment. HBR goes on to suggest that allowing different parts of a larger business to tailor their business model to their unique segment might even allow Fortune 500 companies to have more targeted success.
Cannibalizing the core business. The most common reason (especially in large companies) why new business models fail is that they produce new competition to an existing line of business. This leads to no increase in the company’s market share despite sales growth for the new product. However, this sort of cannibalization can be strategic as it drives others out of business or protects against future disruptors… as long as those big orgs can hold a longer view for success of new business models. This requires patience and cooperation between business units. Something not always easy to achieve.
Misaligned incentives. This problem occurs particularly when a core part of the existing business is experiencing cannibalization. Oftentimes businesses are assigned sales growth targets without regard for other business performance indicators (like audience growth, monthly average users, customer satisfaction, and product or service outcomes). When attention is only paid to top line sales growth numbers, it doesn’t offer innovators the runway or the broader view which will eventually lead to business model success.
Organizational alignment. Successful business model innovation requires a great deal of coordination between top level decision makers, middle managers, and the team members who will execute on the new business models. All of these key players need to understand not just the what, but the why and this sort of transparency is difficult to achieve in a large organization.
The wrong people are making the decision. Employee engagement is a powerful tool in today’s workplace with many organizations acknowledging that frontline employees are better informed about technologies and tastes than the company’s executives are. Furthermore, sometimes that collective intelligence exists outside of an organization as well: in customers, partners, and even competitors.
How can idea management help business model innovation?
Idea management is technology that allows large organizations to share their network intelligence in transparent and collaborative fashion. Anyone can share ideas and augment them with additional data: votes, linked concepts, reviews, business proposals, research, etc. System administrators for programs like IdeaScale can proactively ask questions about how a new business model might present risks to other parts of the business and proactively build cooperative strategies to prevent malignant cannibalization.
Some of the ideas that are suggested in an idea management system can be suggestions for new business models or tweaks to an existing business model and because the system is fully transparent, it not only creates organizational alignment, it puts the decision making and justification closer to those who are actually doing the work or experiencing the product (the employees… or sometimes even the public external to a company).
What does successful business model innovation look like?
When a company successfully launches an idea management system to their employees or public crowd, they have the ability to create alignment, bring decision making closer to those who will most directly experience the change, and create a long-view plan for success.
A well-known example of business model innovation are the boxed meal delivery services – an example of which is Purple Carrot – a meal kit service that focuses on plant-based meals. The products and services (like subscription revenue or grocery home delivery) are not radically new per se. However, Purple Carrot found differentiation by focusing their market on health and the environment and has come up with some new twists to their strategy that demonstrate their ability to innovate – like their partnership with Superbowl champion, Tom Brady, to create the TB12 Performance Meals which are higher in protein or offering health food samples proactively to customers. It even has a food incubator to nurture and explore new ideas. By focusing on their specific customer segment and looking beyond sales growth as their only business indicator, they’re able to share decision making with those who care, engage their workforce, and continue to find new ways to grow the business. Perhaps it’s this reason that their customer retention data is the strongest in the industry.
About the Author
Rob Hoehn is the co-founder and CEO ofIdeaScale: the largest idea management platform in the world with more than 35,000 communities and 4.5 million users. IdeaScale empowers organizations to crowdsource ideas from their employees or customers who then collaborate, evaluate, and further develop those ideas into products, processes, and new initiatives. IdeaScale’s client roster includes industry leaders, such as Citrix, Marriott Vacations Worldwide, NASA, the New York City Police Department, Princess Cruises and many others.
Prior to IdeaScale, Hoehn was VP of Client Services at QuestionPro, an insight technology company, where he helped launch the company in its early stages. He also speaks regularly about climate change and lives with his wife, two kids, and husky in Berkeley, CA.