Australia is now characterised as a high cost environment due to a number of factors, including increased labour costs, increased regulatory costs and the increased value of the Australian dollar. Many traditional businesses are struggling to survive in this competitive environment. For businesses to become more competitive and gain significant advantages in the current global environment, they must innovate their business models, not just focus on products and services.
According to Osterwalder, a business model describes the value an organization offers to various customers and portrays the capabilities and partners required for creating, marketing, and delivering this value and relationship capital with the goal of generating profitable and sustainable revenue streams.
Business model innovation involves the design and management of innovation at the organisational and systems levels of businesses. It involves re-thinking the business approach, focusing on the unique offering, servicing clients, re-designing the business and creating value. Innovation requires constant thinking, planning, experimentation and learning by doing, to create new capabilities and to successfully implement a new business model.
IBM’s global CEO study conducted in 2006 indicated that firms innovating their business model exceeded the growth of firms that were innovating their products, services, markets or operations. A summary of the results is outlined in the figure below:
A great example of business model innovation is Dell Computers. The computer hardware industry has become a highly competitive industry where we have seen a number of consolidations through mergers and acquisitions but also divestment of existing business, such as IBM making the decision to stop selling desktop and laptop computers. Dell however was willing to rethink its business model and develop a new approach to remain competitive in a highly dynamic business environment.
Dell’s business model was redesigned, refined and modified by focusing on the following components:
- Direct customer relationships
- Direct sales
- Customer segmentation for sales and service
- Build-to-order production
The Dell business model was refined by removing the elements and activities that did not create value for Dell or its customers. The following diagram campares the Dell business model with the traditional personal computer distribution model.
The business model innovation implemented by Dell has provided the following advantages for the company:
- Increased market share for personal computers
- Ability to deliver a “made-to-order” customised PC quickly to the customer
- Increased client satisfaction
- Reduced cost through minimising inventory
- Increased profit by utilising a direct sales strategy
Businesses should consider reviewing their existing business models and determining whether business model innovation can create competitive advantage.